-----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, M9ucaTLYtzBj+K6L+xx+vaUHwIeDAaGfBRp2+UGSuUvaqpiVgg1epcqU9yr9dqtD Uy0qGHi0bfLDLKLDx9Gglg== 0000081371-99-000002.txt : 19990319 0000081371-99-000002.hdr.sgml : 19990319 ACCESSION NUMBER: 0000081371-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 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-K SEC ACT: SEC FILE NUMBER: 001-00012 FILM NUMBER: 99568243 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-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-12 THE QUAKER OATS COMPANY (Exact name of registrant as specified in its charter.) NEW JERSEY 36-1655315 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) QUAKER TOWER P.O. Box 049001 Chicago, Illinois 60604-9001 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 222-7111 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock ($5.00 Par Value) New York Stock Exchange Chicago Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Chicago Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X]No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Common Stock held by non-affiliates of the registrant as of the close of business on February 26, 1999 was $7,398,346,362. The liquidation value of Series B ESOP Convertible Preferred Stock, all of which is held in The Quaker 401(k) Plan for Salaried Employees, at the close of business on February 26, 1999 totaled $124,094,569, plus related dividends. The number of shares of Common Stock, $5.00 par value, outstanding as of the close of business on February 26, 1999 was 135,438,835. DOCUMENTS INCORPORATED BY REFERENCE. 1. Portions of The Quaker Oats Company Annual Report to Shareholders for the fiscal year ended December 31, 1998 (Annual Report) (Parts I, II and III of Form 10-K) 2. Portions of The Quaker Oats Company Notice of Annual Meeting and Proxy Statement (Proxy Statement) for the Annual Meeting to be held on May 12, 1999 (Part III of Form 10-K) PART I ITEM 1. BUSINESS. (a) General Development of Business The information set forth under the captions "Restructuring Charges," "Asset Impairments and Divestitures," and "Subsequent Event," found on pages 51-52, 52-53, and 64, respectively, of the Company's Annual Report, is incorporated herein by reference. (b) Financial Information About Operating Segments The information set forth under the captions "Operating Segment Information," "Operating Segment Data," "Enterprise Information," and "Geographic Information," found on pages 38-41, of the Company's Annual Report, is incorporated herein by reference. (c) Description of Business U.S. and Canadian Foods Description The Company is a major participant in the competitive packaged food industry in the United States and is a leading manufacturer of hot cereals, pancake syrups, grain-based snacks, cornmeal, hominy grits and value-added rice products. In addition, the Company is the second-largest manufacturer of pancake mixes and value-added pasta products and is among the four largest manufacturers of ready- to-eat cereals and five largest manufacturers of branded dry pasta products. The Company competes with a significant number of large and small companies on the basis of price, value, innovation, quality and convenience, among other attributes. The Company's food products are purchased by consumers through a wide range of food distributors. The Company utilizes both its own and broker sales forces and has distribution centers throughout the country, each of which carries an inventory of most of the Company's food products. Latin American Foods Description The Company manufactures and markets its products in many countries throughout Latin America and is broadly diversified by product line. It is the leading brand-name hot cereals producer in many countries and has other leading category positions for products in a number of countries. In Brazil, the Company is the leading producer of ready-to-drink chocolate beverages and the leading canned fish processor. Other Foods Description The Company is broadly diversified, both geographically and by product line, in the packaged food industry. The Company manufactures and markets its products in many countries throughout Europe and Asia. It is the leading brand-name cereals producer in many European countries and has other leading category positions for products in a number of countries. U.S. and Canadian Beverages Description The Company is the leading manufacturer and distributor of sports beverages in the United States and Canada and accounts for more than 80 percent of sales in the sports drink category. The Company uses both its own and broker sales forces to sell Gatorade thirst quencher and has distribution centers around the country. Over 60 percent of Gatorade sales occur in the second and third quarters during the spring and summer beverage season. <2> Latin American and Other Beverages Description The Company also manufactures and markets Gatorade in Latin America, Europe and Asia. Gatorade is sold in more than 45 countries outside of North America and is the leading sports drink distributor in Mexico, Argentina, Brazil, Venezuela, Colombia, the Philippine Islands and Italy. Gatorade is also one of the leading sports drink brands in Korea and Australia, where it is sold through license arrangements. Raw Materials Raw materials used in manufacturing include oats, wheat, corn, rice, sweeteners, almonds, fruit, cocoa, vegetable oil and fish, as well as a variety of packaging materials. These products are purchased mainly in the open market. Supplies of all raw materials have been adequate and continuous. Trademarks The Company and its subsidiaries own a number of trademarks and are not aware of any circumstances that could materially adversely affect the continued use of these trademarks. Among the most important of the domestic trademarks owned by the Company are Quaker, Cap'n Crunch, Quaker Toasted Oatmeal, Life, Quaker 100% Natural and Quaker Oatmeal Squares for breakfast cereals; Gatorade and Gatorade Frost for thirst-quenching beverages; Quaker and Quaker Chewy for grain-based snacks; Rice-A-Roni and Near East for value-added rice and grain products; Pasta Roni for value-added pasta; Golden Grain and Mission for pasta; Quaker and Aunt Jemima for mixes, syrups and corn goods. Many of the grocery product trademarks owned by the Company in the United States are registered in foreign countries in which the Company does substantial business. Internationally, key trademarks owned include: Quaker, Cruesli, Honey Monster, Sugar Puffs and Scott's for breakfast cereals; Coqueiro for fish; Toddy and ToddYnho for chocolate beverages; and Gatorade for thirst-quenching beverages. Other The information set forth under the captions "Management's Discussion and Analysis," "Six-Year Selected Financial Data," "Eleven-Year Selected Financial Data," "Lease and Other Commitments," "Supplementary Income Statement Information," and "Quarterly Financial Data," found on pages 25-31, 42-43, 44- 45, 61, 61, and 64, respectively, of the Company's Annual Report, is incorporated herein by reference. (d) Financial Information About Foreign and Domestic Operations and Export Sales The information set forth under the captions "Operating Segment Information," "Operating Segment Data," "Enterprise Information" and "Geographic Information," found on pages 38-41, of the Company's Annual Report, is incorporated herein by reference. ITEM 2. PROPERTIES. As of December 31, 1998, the Company operated 46 manufacturing plants in 13 states and 14 foreign countries and owned or leased distribution centers and sales offices in 22 states and 20 foreign countries.
Owned and Leased Owned and Leased Owned and Leased Manufacturing Locations Distribution Centers Sales Offices Operating U.S. and Latin U.S. and Latin U.S. and Latin Segment Canadian American Other Canadian American Other Canadian American Other Foods 13 12 5 1 2 -- 11 4 6 Beverages 8 3 4 -- 1 2 13 3 7 Shared -- 1 -- 8 16 -- 6 13 -- Total 21 16 9 9 19 2 30 20 13
The Company owns a research and development laboratory in Barrington, Illinois, and leases corporate office space in downtown Chicago, Illinois. Management believes manufacturing, distribution and office space owned and leased are suitable and adequate for the business. Production capacity is appropriately utilized. The Company is in the process of terminating certain sales office leases in light of its recent restructuring actions. <3> ITEM 3. LEGAL PROCEEDINGS. On November 10, 1994, two purported class actions were commenced in the United States District Court for the District of New Jersey (the "District Court") on behalf of all purchasers of the common stock of The Quaker Oats Company (the "Company") during the period between September 1, 1994 and November 2, 1994 (the "Weiner Action"). On January 20, 1995, plaintiffs filed an amended consolidated class action complaint, and on May 2, 1995, plaintiffs filed a second amended consolidated class action complaint. As amended, the Weiner Action purports to be brought on behalf of all purchasers of the Company's common stock during the period between August 4, 1994 and November 1, 1994. Named as defendants are the Company and William D. Smithburg. Plaintiffs allege, among other things, that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 in connection with the Company's disclosure concerning its earnings growth goals and indebtedness guideline. Damages in an unspecified amount are sought. On May 23, 1996, the District Court dismissed this action. On November 6, 1997, the United States Court of Appeals for the Third Circuit issued a decision in which it affirmed the District Court's dismissal of plaintiffs' claims relating to Quaker's earnings growth goals, and reversed the District Court's dismissal of plaintiffs' claims relating to Quaker's indebtedness guideline. The Court of Appeals remanded the action to the District Court for further proceedings in connection with plaintiffs' claims concerning Quaker's indebtedness guideline. On May 1, 1998, the case was transferred to the United States District Court for the Northern District of Illinois, where it is now pending. The Company believes it has strong defenses to the action described above. Although the ultimate outcome of the action described above cannot be ascertained at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of the management of the Company that the resolution of this action will not have a material adverse effect on the financial condition or the results of operations of the Company as set forth in the Consolidated Financial Statements contained in the Company's Annual Report. The Company is also a party to a number of other lawsuits and claims, which it is vigorously defending. Such matters arise out of the normal course of business. Certain of these actions seek damages in large amounts. While the results of litigation cannot be predicted with certainty, management believes that the final outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. Changes in assumptions, as well as actual experience, could cause the estimates made by management to change. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information set forth under the captions "Six-Year Selected Financial Data," "Eleven-Year Selected Financial Data," "Quarterly Financial Data" and "Corporate and Shareholder Information," found on pages 43, 46-47, 64 and 72- 73, respectively, of the Company's Annual Report, is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The information set forth under the captions "Six-Year Selected Financial Data," and "Eleven-Year Selected Financial Data," found on pages 42-43 and 44- 47, respectively, of the Company's Annual Report, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information set forth under the caption "Management's Discussion and Analysis," found on pages 25-31 of the Company's Annual Report, is incorporated herein by reference. <4> ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information set forth under the caption "Derivative Financial and Commodity Instruments," found on pages 29-30 of the Company's Annual Report, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following audited consolidated financial statements of The Quaker Oats Company and its subsidiaries, and the report of the independent public accountants thereon, found on the indicated pages in the Company's Annual Report, are incorporated herein by reference. 1.) Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 (page 32). 2.) Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 (page 33). 3.) Consolidated Balance Sheets as of December 31, 1998 and 1997 (pages 34-35). 4.) Consolidated Statements of Common Shareholders' Equity as of December 31, 1998, 1997 and 1996 (pages 36-37). 5.) Notes to the Consolidated Financial Statements for the years ended December 31, 1998, 1997 and 1996 (pages 48-64). 6.) Report of Independent Public Accountants (page 65). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Directors The information set forth under the caption "Election of Directors," found on pages 5-7 of the Company's Proxy Statement, is incorporated herein by reference. Executive Officers The information set forth under the caption "Officers," found on pages 70-71 of the Company's Annual Report, lists the executive officers of the registrant as of March 10, 1999, and is incorporated herein by reference. The information set forth under the caption "Compliance with Section 16(a)," found on page 13 of the Company's Proxy Statement, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the captions "Nonemployee Directors' Compensation and Benefits," "Executive Compensation," "Compensation Committee Report" and "Performance Graph," found on pages 9-11, 14-19, 20-21 and 22, respectively, of the Company's Proxy Statement, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the caption "Ownership of Company's Securities," found on pages 12-13 of the Company's Proxy Statement, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. <5> PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements. The audited consolidated financial statements of The Quaker Oats Company and its subsidiaries and the Report of Independent Public Accountants thereon are listed in Item 8 of this Form 10-K, and are incorporated therein by reference. (a)(2) Financial Statement Schedules. &(d) All required financial statement schedules are included in the audited consolidated financial statements or notes thereto as incorporated under Item 8 of this Form 10-K. (a)(3) Exhibits. &(c) The exhibits required to be filed are listed on the Exhibit Index attached hereto, which is incorporated herein by reference. (b) Reports on Form 8-K. No reports on Form 8-K were filed in the last quarter of the period covered by this report. <6> EXHIBIT INDEX ELECTRONIC (E) OR EXHIBIT INCORPORATED BY NO. DESCRIPTION REFERENCE (IBRF) 3(a) Restated Certificate of Incorporation (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1996, file number 1-12) IBRF 3(b) Bylaws of The Quaker Oats Company, as amended effective September 9, 1998 E 4(a) Shareholder Rights Plan effective May 8, 1996 (incorporated by reference to the Company's Form 8-K filed on May 20, 1996,file number 1-12) IBRF 4(b) Registrant undertakes to furnish to the Commission, upon request, a copy of any instrument defining the rights of holders of long-term debt of the registrant and all of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed IBRF 10(a)(1)* 1984 Long Term Incentive Plan, as restated effective September 1, 1996(incorporated by reference to the Company's Form 10-Q for the fiscal quarter ended September 30, 1996, file number 1-12) IBRF 10(a)(2)* The Quaker Long Term Incentive Plan of 1990 (incorporated by reference to the Company's Form 10-Q for the fiscal quarter ended September 30, 1996, file number 1-12) IBRF 10(a)(3)* The Quaker Long Term Incentive Plan of 1999, (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1997, file number 1-12) IBRF 10(b)* Deferred Compensation Plan for Executives of The Quaker Oats Company, as restated effective November 1, 1996 (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1996, file number 1-12) IBRF 10(c)* Management Incentive Bonus Plan of The Quaker Oats Company as amended September 8, 1993 (incorporated by reference to the Company's Form 10-K for the fiscal year ended June 30, 1994, file number 1-12) IBRF 10(d)* Executive Incentive Bonus Plan of The Quaker Oats Company, subject to shareholder approval at the Annual Meeting of Shareholders on May 12, 1999 E 10(e)(1)* Deferred Compensation Plan for Directors of The Quaker Oats Company, as restated effective November 1, 1996 (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1996, file number 1-12) IBRF 10(e)(2)* First Amendment to the Deferred Compensation Plan for Directors of The Quaker Oats Company effective May 13, 1998 E 10(e)(3)* Second Amendment to the Deferred Compensation Plan for Directors of The Quaker Oats Company effective January 1, 1999 E 10(f)(1)* Directors' Stock Compensation Plan, as restated effective November 1, 1996 (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1996, file number 1-12) IBRF 10(f)(2)* First Amendment to the Directors' Stock Compensation Plan effective May 13, 1998 E 10(f)(3)* Second Amendment to the Directors' Stock Compensation Plan effective January 1, 1999 E 10(g)* The Quaker Oats Stock Option Plan for Outside Directors effective January 1, 1999 E 10(h)(1)* Employment Agreement with Robert S. Morrison effective as of October 22, 1997 (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1997, file number 1-12) IBRF 10(h)(2)* Employment Agreement with Terence D. Martin, first effective for the fiscal quarter ended December 31, 1998 E <7> EXHIBIT INDEX CONTINUED ELECTRONIC (E) OR EXHIBIT INCORPORATED BY NO. DESCRIPTION REFERENCE (IBRF) 10(h)(3)* Termination Benefits Agreements with certain Executive Officers, first effective for the fiscal quarter ended September 30, 1998 (incorporated by reference to the Company's Form 10-Q for the fiscal quarter ended September 30, 1998, file number 1-12) IBRF 10(h)(4)* Termination Benefits Agreements with Robert S. Morrison and Terence D. Martin, first effective for the fiscal quarter ended December 31, 1998 and thereafter E 10(h)(5)* Agreement Upon Separation of Employment with Robert S. Thomason, first effective for the fiscal quarter ended December 31, 1998 E 10(i)* The Quaker Supplemental Executive Retirement Program, as restated effective November 1, 1996 (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1996, file number 1-12) IBRF 10(j)(1)* The Quaker Oats Company Benefits Protection Trust (incorporated by reference to the Company's Form 10-K for the fiscal year ended June 30, 1989, file number 1-12) IBRF 10(j)(2)* First Amendment to The Quaker Oats Company Benefits Protection Trust (incorporated by reference to the Company's Form 10-K for the fiscal year ended June 30, 1992, file number 1-12) IBRF 10(j)(3)* Second Amendment to The Quaker Oats Company Benefits Protection Trust (incorporated by reference to the Company's Form 10-K for the fiscal year ended June 30, 1992, file number 1-12) IBRF 10(k)* Quaker Salaried Employees Compensation and Benefits Protection Plan, as restated effective November 1, 1996 (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1996, file number 1-12) IBRF 10(l)* The Quaker Eligible Earnings Adjustment Plan, as restated effective November 1, 1996 (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1996, file number 1-12) IBRF 10(m)(1)* Quaker Officers Severance Program, as amended and restated, effective July 9, 1997(incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1997, file number 1-12) IBRF 10(m)(2)* First Amendment to the Quaker Officers Severance Program, as amended and restated, effective March 11, 1998 (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1997, file number 1-12) IBRF 10(n)* The Quaker 415 Excess Benefit Plan, as restated effective November 1, 1996 (incorporated by reference to the Company's Form 10-K for the fiscal year ended December 31, 1996, file number 1-12) IBRF 12 Statement re Computation of Ratios E 13 Annual Report to Shareholders of The Quaker Oats Company for the fiscal year ended December 31, 1998 E 21 List of Subsidiaries of the Registrant E 23 Consent of Auditors E 27 Financial Data Schedules E * Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. <8> SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE QUAKER OATS COMPANY By /s/ ROBERT S. MORRISON Robert S. Morrison, Chairman, President and Chief Executive Officer Date: March 10, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 10th day of March 1999, by the following persons on behalf of the registrant and in the capacities indicated. Signature Title /s/ ROBERT S. MORRISON Chairman, President and Chief Executive Officer Robert S. Morrison /s/ TERENCE D. MARTIN Senior Vice President and Chief Terence D. Martin Financial Officer /s/ RICHARD M. GUNST Vice President and Corporate Controller Richard M. Gunst /s/ FRANK C. CARLUCCI Director Frank C. Carlucci /s/ KENNETH I. CHENAULT Director Kenneth I. Chenault /s/ JOHN H. COSTELLO Director John H. Costello /s/ W. JAMES FARRELL Director W. James Farrell /s/ JUDY C. LEWENT Director Judy C. Lewent /s/ J. MICHAEL LOSH Director J. Michael Losh /s/ VERNON R. LOUCKS, JR. Director Vernon R. Loucks, Jr. /s/ WALTER J. SALMON Director Walter J. Salmon /s/ WILLIAM L. WEISS Director William L. Weiss <9> EX-3 2 Exhibit 3(b) B Y L A W S OF THE QUAKER OATS COMPANY AS AMENDED - SEPTEMBER 9, 1998 EFFECTIVE - SEPTEMBER 9, 1998 B Y L A W S OF THE QUAKER OATS COMPANY CORPORATE OFFICES AND SEAL Bylaw 1 - The principal and registered office of this Corporation shall be at 820 Bear Tavern Road, West Trenton, Mercer County, New Jersey. Bylaw 2 - The Corporation shall also have and maintain a general office and place of business at the City of Chicago in the State of Illinois, where it may keep all books, records, documents, and papers; it may also establish offices in such other states and foreign countries as the board shall from time to time determine. Bylaw 3 - The Corporate Seal shall have inscribed thereon the name of the Corporation, the state of its organization, and the words "Corporate Seal." CAPITAL STOCK AND TRANSFERS THEREOF Bylaw 4 - Certificates of stock in the Corporation shall be in the form adopted by the board, and be consecutively numbered; they shall be signed by the Chairman of the Board of Directors, the President or a Vice President and either the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, whose signatures may be facsimiles. The names of the owners of such shares, the dates of issue, and the certificate numbers thereof shall be entered upon the Corporation's books. The board shall appoint one or more transfer agents, and also one or more registrars of transfers, outside of the State of New Jersey, and shall require all valid certificates of stock in the Corporation to bear the countersignatures of one such agent, which may be a facsimile, and one such registrar. The same bank or trust company may act as both transfer agent and registrar. Bylaw 5 - Transfers of shares of stock in the Corporation upon the books of the Corporation shall be made only by the holders thereof in person or by attorney thereunto duly authorized in writing. Outstanding certificates for a like number of shares shall be surrendered and cancelled at the time of such transfers, except as provided in Bylaw 8. Bylaw 6 - For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or for the purpose of determining shareholders entitled to receive payment of any dividend or allotment of any right, or for the purpose of any other action, the board may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. Bylaw 7 - The Corporation shall be entitled to treat the record holder of any share or shares of stock, as shown by its books, as the sole legal and equitable owner and holder thereof, and shall not be bound to recognize any interest or claim on the part of others, whether it shall have notice thereof or not, save as expressly provided otherwise by the laws of New Jersey. Bylaw 8 - The board may issue or cause to be issued new certificates of stock to replace certificates of stock alleged to have been lost or destroyed, upon such reasonable terms and conditions as may be prescribed by the board to protect the interests of the Corporation. SHAREHOLDERS Bylaw 9 - Meetings of the shareholders of the Corporation shall be held at such place, within or without the State of New Jersey, as may be fixed by the board from time to time. Bylaw 10 - The annual meeting of the shareholders for election of directors and transaction of other business shall be held on the second Wednesday of May in each year at the hour of nine-thirty o'clock in the forenoon, or at such other time as may be fixed by the board. Directors shall be elected by ballot and a plurality vote. Written notice of the time, place, and purpose or purposes of every regular meeting of shareholders shall be given not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, to each shareholder of record entitled to vote at the meeting. Bylaw 11 - Special meetings of the shareholders for purposes allowed by law may be held at any time when called by the Chairman of the Board or President, or upon resolution or written request of a majority of the board or of a majority of the executive committee. If a special meeting of shareholders is duly called pursuant to this Bylaw 11 or by a court of competent jurisdiction pursuant to statute, then the board shall set the record and meeting date for such special meeting in accordance with applicable legal requirements. Written notice of the time, place, and purposes of every special meeting of shareholders shall be given not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, to each shareholder of record entitled to vote at the meeting. Only <2> those matters set forth in the notice of the special meeting may be considered or acted upon at such special meeting, unless otherwise provided by law. Bylaw 12 - If a shareholder desires to submit a proposal for consideration at an annual shareholders' meeting, written notice of such shareholder's intent to make such a proposal must be given and received by the Secretary of the Corporation at the principal executive offices of the Corporation either by personal delivery or by United States mail not later than 90 days prior to the anniversary date of the immediately preceding annual meeting. Each notice shall describe the proposal in sufficient detail for the proposal to be summarized on the agenda for the meeting and shall set forth (i) the name and address, as it appears on the books of the Corporation, of the shareholder who intends to make the proposal; (ii) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to present such proposal; and (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder. In addition, the notice shall set forth the reasons for conducting such proposed business at the meeting and any material interest of the shareholder in such business. The presiding officer of the annual meeting shall, if the facts warrant, refuse to acknowledge a proposal not made in compliance with the foregoing procedure, and any such proposal not properly brought before the meeting shall not be transacted. Nothing contained in this Section shall be deemed to decrease any time period set forth in the Securities Exchange Act of 1934, as amended, or any rule or regulation of the Securities and Exchange Commission thereunder. Bylaw 13 - Unless otherwise provided in the certificate of incorporation or the laws of New Jersey, the holders of shares entitled to cast a majority of the votes at a meeting shall constitute quorum at such meeting. The shareholders present in person or by proxy at a duly organized meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Less than a quorum may adjourn the meeting. Whenever the holders of any class or series of shares are entitled to vote separately on a specified item of business, the provisions of this section shall apply in determining the presence of a quorum of such class or series for the transaction of such specified item of business. Bylaw 14 - The Chairman of the Board shall act as chairman of each shareholders' meeting. If he is absent, the President or a Vice President shall so act. If all of the foregoing are absent, then the meeting itself by a majority vote in interest may select some shareholder present to preside, which vote shall be recorded in the minutes. The Secretary of the Corporation, if present, shall act as secretary of each shareholders' meeting. If the Secretary of the Corporation is absent, an Assistant Secretary shall so act. If all of the foregoing are absent, then <3> the chairman of the meeting shall designate a person to act as secretary. A declaration by the chairman that any resolution has been duly carried, and an entry to that effect in the minutes of the meeting, shall, in all cases where a poll in not demanded, be competent and sufficient evidence of the fact and legality of adoption of such resolution. Bylaw 15 - (a) At all elections of directors by the shareholders, two independent inspectors of election shall be chosen by the presiding officer of the meeting; they need not be shareholders, but in no case shall they be either employees of the Corporation or candidates for the office of director. Each inspector shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability, and shall perform such duties as are provided by the laws of New Jersey. (b) At all elections of directors by the shareholders, all proxies, ballots, and voting tabulations that identify how shareholders voted will be kept confidential and not be disclosed to any of the directors, officers or employees of the Corporation except when disclosure is mandated by law, expressly requested by a shareholder, or during a contested election for the board. (c) The same voting procedure shall be followed with regard to other matters submitted to shareholders for their vote. Bylaw 16 - The officer or agent having charge of the stock transfer books for shares of the Corporation shall make and certify a complete list of the shareholders entitled to vote at a shareholders' meeting or any adjournment thereof. Such list shall (a) be arranged alphabetically within each class and series, with the address of, and the number of shares held by, each shareholder; (b) be produced at the time and place of the meeting; (c) be subject to the inspection of any shareholder during the whole time of the meeting; and (d) be prima facie evidence as to who are the shareholders entitled to examine such list or to vote at any meeting. Bylaw 17 - Except as otherwise provided by law, if any shareholder desires to solicit written consents for action to be taken by shareholders of the Corporation without a meeting, prior written notice of any such solicitation must be given and received by the Secretary of the Corporation at the principal executive offices of the Corporation either by personal delivery or by United States mail not later than 45 days prior to the date such written consents, or soliciting material relating thereto, are <4> first published, sent or given to any shareholder. Such notice shall describe the matter for which written consent is being sought and shall set forth (i) the name and address, as it appears on the books of the Corporation, of the shareholder who seeks the written consent; (ii) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote on the matter for which written consent is being sought and intends to vote on the matter for which written consent is being sought; and (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder. In addition, the notice shall set forth the reasons for conducting such proposed business by means of the written consent and any material interest of the shareholder in such business. No action taken by written consent shall be valid unless taken in accordance with the foregoing procedures. BOARD OF DIRECTORS Bylaw 18 - The property, affairs, and business of the Corporation shall be managed and controlled by a board of directors. The number of directors shall be determined in accordance with the provisions of the certificate of incorporation. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as possible, of one-third of the total number of directors constituting the entire board of directors. At each annual meeting of shareholders beginning in 1984, successors to directors whose terms expire at that annual meeting shall be of the same class as the directors they succeed, and shall be elected for three- year terms. Bylaw 19 - A director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, or removal from office. Any newly created directorship resulting from an increase in the number of directors and any other vacancy on the board of directors, however caused, may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director; provided that if the number of directors is increased, not more than two such newly created directorships may be filled by the directors in any period between annual meetings of shareholders. Any director so elected to fill a vacancy shall, without regard to the class in which such vacancy occurred, hold office until the next succeeding annual meeting of shareholders and until his or her successor shall have been elected and qualified. The term of a director elected by shareholders to fill a newly created directorship or other vacancy shall expire at the same time as the terms of the other directors of the class in which the vacancy occurred. <5> Bylaw 20 - Regular meetings of the board shall be held six times each year at such time and place as the board may determine, subject to the right of the Chairman of the Board, the President, or the executive committee, by notice required for a special meeting of the board, to change the time or place of a regular meeting. Except as aforesaid, no notice of a regular meeting is required. Bylaw 21 - Special meetings of the board may be held at any time and place whenever called by the Chairman of the Board, the President, or any three of the directors. Notice to each director of the time and place of the meeting shall be mailed not less than three calendar days before the meeting, or telegraphed or telephoned or delivered to his office not less than 24 hours before the meeting. Bylaw 22 - A majority of the board shall constitute a quorum for the transaction of business, but any less number present may adjourn the meeting from time to time. Bylaw 23 - In addition to the powers specifically enumerated in these Bylaws, the board shall also have, and may exercise, all other and further powers, privileges, and authority expressly or impliedly conferred upon them by the Statues of New Jersey and the articles of incorporation of the Corporation. EXECUTIVE COMMITTEE Bylaw 24 - The board shall appoint from among its members an executive committee of not less than four and not more than 10 regular members. The board may also designate one or more of its members as alternates to serve as members of the executive committee in the absence of a quorum of that committee at any regular or special meeting. (a) The executive committee shall have the powers of the board in the management of the business, affairs, and property of the Corporation during the intervals between the meetings of the board, except that the executive committee shall not: (i) make, alter or repeal any Bylaw of the Corporation; (ii) elect or appoint any director, or remove any officer or director; (iii) submit to shareholders any action that requires shareholders' approval; or (iv) amend or repeal any resolution theretofore adopted by the board which by its terms is amendable or repealable only by the board. <6> (b) Regular meetings of the executive committee may be held without notice at such time and place as shall from time to time be determined by the executive committee or by the board. (c) Special meetings of the executive committee may be called by the President, or the Chairman of the Board, or by any two regular members of the committee by causing 24 hours' notice of the time and place thereof to be given to each regular member by mail or by telegram or by telephone, or by delivery to his office, but any regular member may waive such notice. The purpose of the meeting need not be stated in the notice or waiver of notice. (d) Whenever it appears that a quorum of regular members will not present at a meeting, the Secretary may request the attendance of an alternate member, who, if he attends, and if his attendance is necessary to obtain quorum, shall be deemed a regular member of the executive committee for the purposes of such meeting. (e) Any regular or special meeting of the executive committee may be adjourned and no notice need be given of the adjourned meeting whether or not a quorum shall be present. (f) A majority of members of the executive committee shall constitute a quorum. Actions taken at a meeting of the executive committee shall be reported to the board at its next meeting following such executive committee meeting; except that, when the meeting of the board is held within two days after the executive committee meeting, such report shall, if not made at the first meeting, be made to the board at its second meeting following such executive committee meeting. OTHER COMMITTEES Bylaw 25 - The board by resolution adopted by a majority of the entire board may appoint from among its members one or more other committees, each of which shall have one or more members. MEETINGS AND ACTION OF DIRECTORS WITHOUT A MEETING Bylaw 26 - Any or all directors may participate in a meeting of the board or executive committee by means of conference telephone or any means of communication by which all persons participating in the meeting are able to hear each other. <7> Any action required or permitted to be taken pursuant to authorization voted at a meeting of the board or executive committee may be taken without a meeting if, prior or subsequent to such action, all members of the board or of the executive committee, as the case may be, consent thereto in writing and such written consents are filed with the minutes of the proceedings of the board or executive committee. OFFICERS Bylaw 27 - The officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice Presidents, a Treasurer, and a Secretary, and such additional officers and such assistant officers as may be deemed necessary from time to time by the board or the executive committee. One or more Vice Presidents may be designated as Executive Vice Presidents or as Senior Vice Presidents or as other types of Vice Presidents. The Chairman of the Board, President, Treasurer, Secretary and any Vice President reporting directly to the Chairman of the Board or President shall either be elected by the board or the executive committee. Any other officers shall be elected by the board or the executive committee or be appointed by the Chairman of the Board. Each officer shall hold office for a term expiring at the first board meeting following the annual meeting of the shareholders and until his successor is elected, but subject to removal by the board, the executive committee or Chairman of the Board at any time. Salaries of officers who must be elected by the board or executive committee shall be fixed by the board or the executive committee. Salaries of other officers and assistant officers shall be fixed by the board, the executive committee, or the Chairman of the Board. Bylaw 28 - The Chairman of the Board shall be the Chief Executive Officer of the Corporation and shall have general supervision of its business and affairs, subject, however, to control of the board and the executive committee. He shall be a regular member of the executive committee and shall preside at all meetings of the shareholders, the board, and the executive committee. Bylaw 29 - The President shall serve as a regular member of the executive committee and shall have such other powers and duties as shall be assigned to him by the board or the executive committee or the Chairman of the Board. In the absence of the Chairman of the Board, he shall preside at meetings of the board and of the executive committee. Bylaw 30 - The Vice Presidents shall have such powers and duties as shall be assigned to them by the board, the executive committee, or the Chairman of the Board. The President or the Senior or Executive Vice President with the longest service with the Corporation who is a member of the executive committee and who is present and able to act shall have the powers and duties <8> of the Chairman of the Board during his absence or inability to act. Bylaw 31 - The Treasurer shall have custody of the corporate funds and securities. He shall keep full and accurate accounts of all receipts and disbursements and generally shall perform all the duties usually incident to the office of Treasurer and shall have such other powers and duties as shall be assigned to him by the board, the executive committee or the Chairman of the Board. Each Assistant Treasurer shall have power to act in the place and stead of the Treasurer in case of his absence or inability to act, and shall have such other powers and duties as shall be assigned to him by the board, the executive committee or the Chairman of the Board. Bylaw 32 - The Secretary shall have custody of the corporate seal and shall be present at and make a true record of the votes and proceedings of all meetings of the shareholders, the board, and the executive committee. He shall supervise the giving and mailing of all notices of shareholders' and directors' meetings; shall have charge of the certificate books, transfer books, and capital stock ledgers; and generally shall perform all the duties and have charge of all other books and papers usually incident to the office of Secretary. He shall have such other powers and duties as shall be assigned to him by the board, the executive committee or the Chairman of the Board. Each Assistant Secretary shall have power to act in the place and stead of the Secretary in case of his absence or inability to act, and shall have such other powers and duties as shall be assigned to him by the board, the executive committee or the Chairman of the Board. Bylaw 33 - Unless otherwise ordered by the board or the executive committee, the Secretary, and in case of his absence or inability to act an Assistant Secretary, shall have the power, and it shall be his duty, to vote in the name and behalf of the Corporation all stock held by it in other companies; and the Chairman of the Board, President, or a Vice President, and the Secretary or an Assistant Secretary, shall have the power to execute an deliver proxies for the purpose of voting such stock; but the board or the executive committee may by resolution confer such power to vote and to execute proxies upon any other person or persons, and in all cases may instruct how such stock shall be voted at any meeting or election. Bylaw 34 - The board or the executive committee shall by resolution designate one or more banks as authorized principal depositories of the funds and securities of the Corporation and appoint and authorize officers of other persons to sign checks thereon and otherwise control and dispose of such funds and securities. The Treasurer or any two other elected officers of the Corporation may designate other banks as secondary <9> depositories in connection with the business of the Corporation, and appoint and authorize officers or other persons to sign checks thereon or otherwise control and dispose of funds therein. All notes payable issued by the Corporation shall be signed in its behalf by such officer or officers of the Corporation authorized for that purpose by the board or the executive committee. FISCAL YEAR AND DIVIDENDS Bylaw 35 - The fiscal year of the Corporation shall begin on the first day of January in each year. Bylaw 36 - Dividends may be declared by the board, from the profits, at any regular or special meeting of the board, whenever in their judgment it shall be consistent with the best interests of the Corporation. The executive committee shall also have power, between sessions of the board, to declare the usual quarterly dividends on all classes of stock. AMENDMENTS Bylaw 37 - These Bylaws may be amended, altered or repealed, and new Bylaws may be enacted, only by the affirmative vote of the holders of not less than two-thirds of the outstanding shares of capital stock of the Corporation or by a vote of not less than two-thirds of the entire board of directors. INDEMNIFICATION Bylaw 38 - The Corporation shall indemnify any person who is or was a director, officer, employee or agent of the Corporation or of any constituent corporation absorbed by the Corporation in a consolidation or merger, and any person who is or was a director, officer, trustee, employee or agent of any other domestic or foreign corporation and any partnership, joint venture, sole proprietorship, trust or other enterprise, whether or not for profit, served by a person covered by this Bylaw, serving at the request of the Corporation, or of any such constituent corporation, or the legal representative of any such director, officer, trustee, employee or agent, against his reasonable costs, disbursements and counsel fees and amounts paid or incurred in satisfaction of settlements, judgments, fines and penalties in connection with any pending, threatened or completed civil, criminal administrative or arbitrative action, suit or proceeding, and any appeal therein and any inquiry, or investigation which could lead to such action, suit or proceeding, to the fullest extent now or hereafter permitted by New Jersey law. <10> The Corporation shall pay expenses as they are incurred by any person covered by this Bylaw in connection with any proceeding covered by this Bylaw in advance of the final disposition of the proceeding to the fullest extent now or hereafter permitted by New Jersey law. Any determination required to be made pursuant to Section 14A3-5(5) of the New Jersey Business Corporation Act shall be made only by either (a) the Board or a committee thereof, acting by a majority vote of a quorum consisting of directors who were not parties to or otherwise involved in the proceeding, or (b) if such a quorum is not obtainable, or even if obtainable and such quorum of the Board or committee by a majority vote of the disinterested directors so directs, by independent legal counsel in a written opinion, such counsel to be designated by the Board and reasonably satisfactory to the person who is being indemnified. <11> EX-10.1 3 Exhibit 10(d) THE QUAKER OATS COMPANY EXECUTIVE INCENTIVE BONUS PLAN (To be effective as of January 1, 1999, subject to shareholder approval on May 12, 1999) ARTICLE I PURPOSE The purposes of the Plan are to promote the success of the Company; to provide designated Executive Officers with an opportunity to receive incentive compensation dependent upon that success; to attract, retain and motivate such individuals; and to provide Awards that are "performance-based compensation" under Code Section 162(m). ARTICLE II DEFINITIONS 2.1 General Definitions (a) Adjusting Operating Income. Operating Income adjusted for rent on leased assets and certain costs and/or benefits of international businesses, as defined by the Company's Policies and Procedures Manual, which are not included in Operating Income. (b) Award. An incentive award made pursuant to the Plan. (c) Award Schedule. The Award Schedule established pursuant to Section 4.1. (d) Beneficiary. The person(s) designated by the Participant, in writing on a form provided by the Committee, to receive payments under the Plan in the event of his death while a Participant or, in the absence of such designation, the Participant's estate. (e) Board. The Board of Directors of the Company. (f) Cause. Cause as defined in a Participant's employment agreement with the Company, as in effect at the applicable time or if there is no such contract in effect at the applicable time, (i) a felony conviction of a Participant or (ii) the willful misconduct or gross negligence materially detrimental to the Company. (g) Code. The Internal Revenue Code of 1986, as amended. (h) Committee. The Compensation Committee of the Board. (i) Company. The Quaker Oats Company and its successors. (j) Controllable Earnings. Controllable Earnings is equal to Adjusted Operating Income minus Capital Usage Charge. The Capital Usage Charge is calculated by multiplying the Average Invested Capital, as defined by the Company's Policies and Procedures Manual, by the Capital Usage Rate, which is the Company's pre-tax Cost of Capital. Controllable Earnings will exclude any unusual one-time items (such as restructuring charges, asset impairments, and/or gains or losses from divestitures). (k) Covered Employee. A covered employee within the meaning of Code Section 162(m)(3). (l) Disability. Total disability within the meaning of the Company's long-term disability plan as in effect at the applicable time or if there is no such plan at the applicable time, physical or mental incapacity as determined solely by the Committee. (m) Earnings Per Share. Basic or diluted earnings per common share of the Company, as set forth in the audited consolidated financial statements of the Company and its subsidiaries,adjusted to exclude the effects of extraordinary items, restructuring and tax and/or accounting changes,as set forth therein. (n) Executive Officer. A person who is an executive officer of the Company for purposes of the Securities Exchange Act of 1934, as amended. (o) Net Sales. Net sales as set forth in the audited consolidated financial statements of the Company and its subsidiaries. (p) Operating Income. The consolidated operating income of the Company and its subsidiaries, as determined in accordance with generally accepted accounting principles consistently applied by the Company and reported to its shareholders. (q) Participant. An Executive Officer selected from time to time by the Committee to participate in the Plan. (r) Performance Adjustment. The percentage, as set forth in an Award Schedule, with respect to a Performance Measure, used for purposes of determining an Award based on the extent to which the applicable Performance Goal has been achieved. (s) Performance Measure. One or more of the following selected by the Committee to measure performance for a Plan Year: Adjusted Operating Income; Controllable Earnings; Earnings Per Share; Net Sales; Operating Income; Return on Assets; and Total Shareholder Return. The Performance Measure(s) selected by the Committee may vary from Plan Year to Plan Year and from Participant to Participant. Performance Measures for a Plan Year may be established on a stand-alone basis, in tandem or in the alternative. (t) Performance Goal. The level of performance established as the Performance Goal. With respect to a Performance Measure, Performance Goals may vary from Plan Year to Plan Year and from Participant to Participant. <2> (u) Plan. The Quaker Oats Company Executive Incentive Bonus Plan. (v) Plan Year. The calendar year. (w) Retirement. Retirement from the employ of the Company (other than for Cause) at or after the age 65 or, with the advance consent of the Committee, at or after age 55. (x) Return on Assets. Operating Income divided by the average of the identifiable consolidated assets of the Company and its subsidiaries (excluding corporate) as of the end of the applicable Plan Year and as of the end of the then immediately preceding Plan Year. (y) Target Award. An amount established by the Committee as a Participant's Target Award for purposes of the Plan. Target Awards may vary from Plan Year to Plan Year and from Participant to Participant. (z) Total Shareholder Return. Total dividends per common share of the Company for the Plan Year, plus the closing price of a common share of the Company on the last day of the Plan Year; divided by the closing price of a common share of the Company on the last day of the preceding Plan Year. (aa) Weighting. The percentage, as set forth in an Award Schedule, that a Performance Measure is weighted for purposes of determining an Award. Weightings may vary from Plan Year to Plan Year and from Participant to Participant. ARTICLE III PARTICIPATION The Committee shall select Participants from among the Executive Officers. The selection of an Executive Officer as a Participant for a Plan Year shall not entitle such individual to be selected as a Participant with respect to any other Plan Year. Each Participant selected for the Plan Year shall not be eligible for the Company's Management Incentive Bonus Plan for that Plan Year and shall not receive payment of a bonus thereunder, regardless of the provisions thereof, or any prior written or oral agreement made with the Participant. ARTICLE IV AWARDS <3> 4.1 Performance Measures and Goals, Target Awards and Award Schedules. On or before the 90th day of each Plan Year, the Committee shall establish in writing for such Plan Year; (a) one or more Performance Measures; (b) a Performance Goal and Weighting for each such Performance Measure; and (c) a Target Award and an Award Schedule for each Participant. The Award Schedule shall set forth the Participant's Target Award and Performance Measure(s) and shall include: (i) for each such Performance Measure, the Performance Goal, Weighting and Performance Adjustments at specified levels of performance; and (ii) such other information as the Committee may determine. Once established for a Plan Year, such items shall not be amended or otherwise modified. 4.2 Determination of Awards. As soon as practicable after the close of the Plan Year for which it is made, the actual Award payable to a Participant shall be determined in accordance with the Participant's Award Schedule based on the extent to which the Performance Goals have been achieved. The determination of Awards and the achievement of the Performance Goals shall be certified in writing by the Committee, which, in its discretion, may decrease but not increase the amount of the Award otherwise payable based on such performance. Anything in this Plan to the contrary notwithstanding, the maximum Award payable to any Participant for any Plan Year is $5,000,000. 4.3 Payment of Awards. Awards shall be paid in a lump sum cash payment, as soon as practicable, after the amount thereof has been determined and certified in accordance with Section 4.2. Except as otherwise provided in ARTICLE V, no Award will be payable to any Participant who is not an employee of the Company on the last day of such Plan Year. The Committee may, subject to such terms and conditions and within such limits as it may from time to time establish, (a) permit one or more Participants to defer the receipt of amounts due under the Plan or (b) defer the payment of amounts due under the Plan to the extent that and for so long as payment thereof would not be, in the opinion of counsel to the Company, deductible by the Company for income tax purposes. ARTICLE V TERMINATION OF EMPLOYMENT 5.1 Death, Disability, Retirement and Other Than Cause. If a Participant's employment with the Company terminates due to death, Disability or Retirement, or if the Participant is terminated by the Company other than for Cause, the Participant or his Beneficiary, as the case may be, will be paid a prorated Award in cash at the same time that Awards are otherwise paid under the Plan. For purposes of the foregoing, a prorated Award will be determined by multiplying the amount of the Award that would otherwise have been payable to the Participant (determined in accordance with Section 4.2) if such Participant's employment had not so terminated by a fraction, the numerator of which is the number of days in the period commencing with the start of the applicable Plan Year and ending with the date as of which the Participant's employment with the Company so terminated, and the denominator of which is 365. <4> 5.2 Cause. If a Participant's employment with the Company is terminated for Cause, his right to the payment of an Award and all other rights under this Plan will be forfeited, and no amount will be paid or payable hereunder to or in respect of such Participant. <5> ARTICLE VI ADMINISTRATION 6.1. In General. The Committee shall have full and complete authority, in its sole and absolute discretion, (a) to exercise all of the powers granted to it under the Plan, (b) to construe, interpret and implement the Plan and any related document, (c) to prescribe, amend and rescind rules relating to the Plan, (d) to make all determinations necessary or advisable in administering the Plan, and (e) to correct any defect, supply any omission and reconcile any inconsistency in the Plan. 6.2 Determinations. The actions and determinations of the Committee or others to whom authority is delegated under the Plan on all matters relating to the Plan and any Awards shall be final and conclusive. Such determinations need not be uniform and may be made selectively among persons who receive, or are eligible to receive, Awards under the Plan, whether or not such persons are similarly situated. 6.3 Appointment of Experts. The Committee may appoint such accountants, counsel, and other experts as it deems necessary or desirable in connection with the administration of the Plan. 6.4 Delegation. The Committee may delegate to others the authority to execute and deliver such instruments and documents, to do all such acts and things, and to take all such other steps deemed necessary, advisable or convenient for the effective administration of the Plan in accordance with its terms and purposes, except that the Committee shall not delegate any authority with respect to decisions regarding Plan eligibility or the amount, timing or other material terms of Awards. 6.5 Books and Records. The Committee and others to whom the Committee has delegated such duties shall keep a record of all their proceedings and actions and shall maintain all such books of account, records and other data as shall be necessary for the proper administration of the Plan. 6.6 Payment of Expenses. The Company shall pay all reasonable expenses of administering the Plan, including, but not limited to, the payment of professional and expert fees. 6.7 Code Section 162(m). It is the intent of the Company that this Plan and Awards satisfy the applicable requirements of Code Section 162(m) so that the Company's tax deduction for remuneration in respect of this Plan for services performed by Participants who are or may be Covered Employees is not disallowed in whole or in part by the operation of such Code Section. If any provision of this Plan or if any Award would otherwise frustrate or conflict with such intent, that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict, and, to the extent of any remaining irreconcilable conflict with such intent, that provision shall be deemed void as applicable to such Covered Employees. <6> ARTICLE VII MISCELLANEOUS 7.1. Nonassignability. No Award shall be assignable or transferable (including pursuant to a pledge or security interest) other than by will or by laws of descent and distribution. 7.2 Withholding Taxes. Whenever payments under the Plan are to be made or deferred, the Company will withhold therefrom, or from any other amounts payable to or in respect of the Participant, an amount sufficient to satisfy any applicable governmental withholding tax requirements related thereto. 7.3 Amendment or Termination of the Plan. The Plan may be amended or terminated by the Board in any respect except that: (a) no amendment may be made after the date on which an Employee is selected as a Participant for a Plan Year that would adversely affect the rights of such Participant with respect to such Plan Year; and (b) no amendment shall be effective without the approval of the stockholders of the Company to increase the maximum Award payable under the Plan or if, in the opinion of counsel to the Company, such approval is necessary to satisfy the intent set forth in Section 6.7. 7.4 Payments to Other Persons. If payments are legally required to be made to any person other than the person to whom any amount is payable under the Plan, such payments will be made accordingly. Any such payment will be a complete discharge of the liability of the Company under the Plan. 7.5 Unfunded Plan. Nothing in this Plan will require the Company to purchase assets or place assets in a trust or other entity to which contributions are made or otherwise to segregate any assets for the purpose of satisfying any obligations under the Plan. Participants will have no rights under the Plan other than as unsecured general creditors of the Company. 7.6 Limits of Liability. Neither the Company nor any other person participating in any determination of any question under the Plan, or in the interpretation, administration or application of the Plan, will have any liability to any party for any action taken or not taken in good faith under the Plan. 7.7 No Right of Employment. Nothing in this Plan will be construed as creating any contract of employment or conferring upon any Employee or Participant any right to continue in the employ or other service of the Company or limit in any way the right of the Company to terminate the employment or other service of such person with or without Cause. 7.8 Section Headings. The section headings contained herein are for convenience only, and in the event of any conflict, the text of the Plan, rather than the section headings, will control. <7> 7.9 Invalidity. If any term or provision contained herein is to any extent invalid or unenforceable, such term or provision will be reformed so that it is valid, and such invalidity or unenforceability will not affect any other provision or part hereof. 7.10 Applicable Law. The Plan will be governed by the laws of the State of Illinois, as determined without regard to the conflict of law principles thereof. 7.11 Effective Date. The Plan shall be effective as of January 1, 1999, subject to approval by the Company's shareholders. Date: March 17, 1999 By: /s/Pamela S. Hewitt Senior Vice President EX-10.2 4 Exhibit 10(e)(2) FIRST AMENDMENT TO THE DEFERRED COMPENSATION PLAN FOR DIRECTORS OF THE QUAKER OATS COMPANY (As Amended and Restated Effective as of November 1, 1996) WHEREAS, the Deferred Compensation Plan for Directors of The Quaker Oats Company, as amended and restated effective as of November 1, 1996 (the "Plan"), was established by The Quaker Oats Company (the "Company") for the benefit of its eligible directors; and WHEREAS, amendment of the Plan is desirable; NOW, THEREFORE, the Plan is hereby amended effective as of May 13, 1998, by substituting the following for Section 7 of the Plan: "7. CHANGE IN CONTROL A 'Change in Control' shall be deemed to have occurred if: (a) any 'Person,' which shall mean a 'person' as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the 'Exchange Act') (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the 'beneficial owner' (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; (b) during any period of 24 consecutive months (not including any period prior to May 13, 1998), individuals, who at the beginning of such period constitute the Board, and any new director (other than a Director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c) (2) or (d) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs (d) (1) or (d) (2) of this Section or (d) the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph (d), 'surviving entity' shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase 'Directors of the Company who were Directors immediately prior thereto' shall include only individuals who were Directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger or consolidation, or who were new Directors (other than any Director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c) (2), (d) (1) or (d) (2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the Directors before the beginning of such period." IN WITNESS WHEREOF, this Amendment is executed below by a duly authorized officer of the Company. THE QUAKER OATS COMPANY Dated: March 17, 1999 By: /s/ John G. Jartz Its Senior Vice President EX-10.3 5 Exhibit 10(e)(3) SECOND AMENDMENT TO THE DEFERRED COMPENSATION PLAN FOR DIRECTORS OF THE QUAKER OATS COMPANY (As Amended and Restated Effective as of November 1, 1996) WHEREAS, the Deferred Compensation Plan for Directors of The Quaker Oats Company, as amended and restated effective as of November 1, 1996, (the "Plan"), was established by The Quaker Oats Company (the "Company") for the benefit of its eligible directors; and WHEREAS, certain amendments to the Plan are necessary in order to implement changes to the compensation package for nonemployee directors previously approved by the Board; NOW, THEREFORE, the Plan is hereby amended effective January 1, 1999, as follows: 1. By substituting the following for the last sentence of Section 3 of the Plan: "Any election for deferrals effective on and after January 1, 1999 shall result in Deferred Amounts being carried as Common Stock Units during the period of deferral." 2. By substituting the following for Section 4.c. of the Plan: "c. Transfer Between Accounts. Participants may transfer Deferred Amounts within their account from Cash Units into Common Stock Units upon application to the Secretary of the Company and approval by the Company's legal advisors. Participants with Common Stock Units credited to their account as of December 31, 1998, may transfer such Deferred Amounts to Cash Units on or prior to December 31, 1999, upon application to the Secretary of the Company and approval by the Company's legal advisors. With respect to a Participant whose Termination of Service has occurred before January 1, 1999, Deferred Amounts may be transferred within their account from Cash Units to Common Stock Units or from Common Stock Units to Cash Units upon application to the Secretary of the Company and approved by the Company's legal advisors. Any such transfers normally shall be made during the ten business days commencing on the third and ending on the twelfth business day following the release of quarterly and annual summary statements of the Company's sales and earnings." 3. By substituting the following for the second paragraph of Section 5 of the Plan: "All payments of Deferred Amounts carried as Cash Units under this Plan shall be made in cash out of the general assets of the Company. The amount of each annual installment payment to a Participant shall be determined by dividing the Cash Units in the Participant's account by the number of installments remaining to be paid. All payments of Deferred Amounts carried as Common Stock Units under this Plan shall be made in shares of the Company's Common Stock. The number of shares of each annual installment payment to a Participant shall be determined by dividing the Common Stock Units in the Participant's account by the number of installments remaining to be paid." IN WITNESS WHEREOF, this Amendment is executed below by a duly authorized officer of the Company. THE QUAKER OATS COMPANY Date: March 17, 1999 By: /s/ John G. Jartz Its Senior Vice President EX-10.4 6 Exhibit 10(f)(2) FIRST AMENDMENT TO THE QUAKER OATS COMPANY STOCK COMPENSATION PLAN FOR OUTSIDE DIRECTORS (As Amended and Restated Effective as of November 1, 1996) WHEREAS, The Quaker Oats Company Stock Compensation Plan for Outside Directors, as amended and restated effective as of November 1, 1996 (the "Plan"), was established by The Quaker Oats Company (the "Company") for the benefit of its eligible directors; and WHEREAS, amendment of the Plan is desirable; NOW, THEREFORE, the Plan is hereby amended effective as of May 13, 1998, by substituting the following for Section 7 of the Plan "7. Change in Control: A 'Change in Control' shall be deemed to have occurred if: (a) any 'Person,' which shall mean a 'person' as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the 'Exchange Act') (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the 'beneficial owner' (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities: (b) during any period of 24 consecutive months (not including any period prior to May 13, 1998), individuals, who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c) (2) or (d) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in paragraphs (d) (1) or (d) (2) of this Section; or (d) the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph (d), 'surviving entity' shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase 'directors of the Company who were directors immediately prior thereto' shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger or consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c) (2), (d) (1) or (d) (2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period." IN WITNESS WHEREOF, this Amendment is executed below by a duly authorized officer of the Company. THE QUAKER OATS COMPANY Dated: March 17, 1999 By: /s/ John G. Jartz Its Senior Vice President EX-10.5 7 Exhibit 10(f)(3) SECOND AMENDMENT TO THE QUAKER OATS COMPANY STOCK COMPENSATION PLAN FOR OUTSIDE DIRECTORS (As Amended and Restated Effective as of November 1, 1996) WHEREAS, The Quaker Oats Company Stock Compensation Plan for Outside Directors, as amended and restated effective as of November 1, 1996 (the "Plan"), was established by The Quaker Oats Company (the "Company") for the benefit of its eligible directors; and WHEREAS, certain amendments to the Plan are necessary in order to implement changes to the compensation package for nonemployee directors previously approved by the Board; NOW, THEREFORE, the Plan is hereby amended effective January 1, 1999, by substituting the following for Section 2 of the Plan: "2. Common Stock Units. (a) The Company shall establish and maintain a Deferred Stock Account in the name and for the benefit of each outside director of the Company. On the first Trading Day of each calendar year, the Company shall allocate an Annual Award of Common Stock Units to the Deferred Stock Account of each outside director then serving on the Board. Such Annual Award shall consist of the number of Common Stock Units determined by dividing $35,000 (or $40,000 in the case of a Board Committee chairperson that has elected to receive his/her chair fees under the Plan) by the Fair Market Value of the Company's Common Stock on such Trading Day. Each director may elect in advance of the allocation date for an Annual Award to forego all or a portion of such award and to receive in lieu thereof stock options of equivalent value under the terms of The Quaker Oats Company Stock Option Plan for Outside Directors. For purposes of this Section 2(a), the term "Trading Day" shall mean a day on which shares of the Company's Common Stock are traded on the New York Stock Exchange, and the term "Fair Market Value" shall mean the average of the high and low share prices of the Company's Common Stock as reported by the New York Stock Exchange - Composite Transaction Reporting System for a particular day. (b) In the event a new outside director is elected to the Board, the Company shall establish and maintain a Deferred Stock Account in the name and for the benefit of such director. As of such outside director's election date, his/her Deferred Stock Account shall be credited with the number of Common Stock Units equal to one-twelfth of the Annual Award allocated to other outside directors during such calendar year (as determined under (a) above), multiplied by the number of full or partial calendar months which remain in such year. (c) In the event an outside director leaves the Board for any reason, the number of Common Stock Units credited to such director's Deferred Stock Account shall be reduced by the number of Common Stock Units equal to one-twelfth of the Annual Award allocated during the calendar year of his/her departure from the Board (as determined under (a) above), multiplied by the number of full calendar months which remain in such year following such director's last date of service." IN WITNESS WHEREOF, this Amendment is executed below by a duly authorized officer of the Company. THE QUAKER OATS COMPANY Dated: March 17, 1999 By: /s/ John G. Jartz Its Senior Vice President EX-10.6 8 Exhibit 10(g) THE QUAKER OATS COMPANY STOCK OPTION PLAN FOR OUTSIDE DIRECTORS ARTICLE I NAME AND PURPOSE 1.1 Name. The Quaker Oats Company Stock Option Plan for Outside Directors is established by The Quaker Oats Company. 1.2 Purpose. The Company has established the Plan to promote the interests of the Company and its shareholders by providing nonemployee members of the Board of Directors with additional incentive and the opportunity, through stock ownership, to increase their proprietary and personal interest in its continued success and progress through stock ownership. ARTICLE II DEFINITIONS 2.1 General Definitions. The following words and phrases, when used herein, unless the context clearly indicates otherwise, shall have the following meanings: (a) Agreement. The document which evidences the grant of any Option hereunder and sets forth the terms, conditions, provisions and restrictions of such Option. (b) Board. The Board of Directors of the Company. (c) Change in Control. Occurrence upon events describe in Section 6.2. (d) Code. The Internal Revenue Code of 1986, as amended, and including the regulations promulgated pursuant thereto. (e) Common Stock. The Company's $5.00 par value common stock. (f) Company. The Quaker Oats Company. (g) Director. A member of the Board who is not an Employee. (h) Effective Date. January 1, 1999. (i) Employee. Any person employed by the Company or its controlled group of businesses. (j) Exchange Act. The Securities Exchange Act of 1934, as amended. (k) Fair Market Value. The average of the high and low sales price of shares on the New York Stock Exchange (composite transactions) on a given date, or, in the absence of sales on a given date, the closing price on the New York Stock Exchange on the last previous day on which a sale occurred prior to such date. (l) Immediate Family. The Participant, the Participant's spouse, parents, children, stepchildren, sisters, brothers and grandchildren, including adoptive relationships. (m) ISO. An Option that meets the requirements of Section 422 of the Code. (n) NSO. An Option that does not qualify as an ISO. (o) Option. An option to purchase Shares granted under ARTICLE IX of the Plan. (p) Participant. A Director who is granted an Option under the Plan. (q) Plan. The Quaker Oats Company Stock Option Plan for Outside Directors, and all amendments and supplements thereto. (r) Share. A share of Common Stock. (s) Trading Day. A day on which Shares are traded on the New York Stock Exchange. 2.2 Other Definitions. In addition to the above definitions, certain words and phrases used in the Plan and any Agreement may be defined elsewhere in the Plan or in such Agreement. ARTICLE III SHARES AND COMMON STOCK 3.1 Shares Available Under Plan. Shares delivered to Participants under the Plan may be authorized but unissued Shares, Shares held in the treasury, or both. 3.2 Adjustments. In the event of any change in the Common Stock through stock dividends, splits, spin-offs, recapitalizations, reclassifications, or otherwise, or in the event that any other stock shall be substituted for the Common Stock as the result of any merger, consolidation, or reorganization, then the Board shall make appropriate adjustment or substitution in the number, kind, and price of shares subject to outstanding Options. ARTICLE IV ADMINISTRATION 4.1 Authority and Administration. The Plan shall be administered by the Board and, subject to the terms of the Plan, the Board shall have complete authority to: (a) determine the terms, conditions and provisions of, and restrictions relating to, each option granted; (b) interpret and construe the Plan and all Agreements; (c) prescribe, amend and rescind rules and regulations relating to the Plan; (d) determine the content and form of all Agreements; (e) determine all questions relating to Options; (f) maintain accounts, records and ledgers relating to Options; (g) maintain records concerning its decisions and proceedings; (h) employ agents, attorneys, accountants or other persons for such purposes as the Board considers necessary or desirable; (i) take, at any time, any action permitted by Section 6.1, irrespective of whether any Change in Control has occurred or is imminent; and (j) do and perform all acts which it may deem necessary or appropriate for the administration of the Plan and carry out the purposes of the Plan. 4.2 Determinations. All determinations of the Board shall be final. 4.3 Delegation. The Board may delegate all or any part of its authority under the Plan to any Employee, Employees or committee. ARTICLE V TERMINATION AND AMENDMENT 5.1 General. The Plan shall commence as of the Effective Date and may be terminated or amended at any time by the Board. Subject to the provisions of Section 5.2, the termination or amendment of the Plan shall not adversely affect a Participant's right to any Option granted prior to such termination or amendment. 5.2 Board's Right. Except as hereinafter provided, any Option granted may be converted, modified, forfeited, surrendered, replaced or canceled, in whole or in part, by the Board if and to the extent permitted in the Plan or applicable Agreement or with the consent of the Participant to whom such Option was granted. The Board may not cancel or permit the surrender of Options and reissue new Options, or reprice Options, at a lower purchase price. ARTICLE VI CHANGE IN CONTROL 6.1 Option Cancellation and Payment. Upon the occurrence of a Change in Control, Options outstanding on the date on which the Change in Control occurs shall be canceled, and an immediate lump sum cash payment shall be paid to the Participant equal to the product of (1) the amount by which the higher of (i) the closing price of the Common Stock as reported on the New York Stock Exchange Composite Index on or nearest the date of payment (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume in the Common Stock is highest), or (ii) the highest per Share price for the Common Stock actually paid in connection with the Change in Control, exceeds the per Share Option price of each such Option held (whether or not then fully exercisable), times (2) the number of Shares covered by each such Option. 6.2 Change in Control. A Change in Control shall be deemed to have occurred if: (a) any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; (b) during any period of 24 consecutive months (not including any period prior to the Effective Date), individuals, who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2) or (d) of this Section) whose election by the Board, or whose nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; (c) the shareholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs (d) (1) or (d) (2); or (d) the shareholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph (d), "surviving entity" shall mean only an entity in which all of the Company's shareholders immediately before such merger or consolidation become shareholders by the terms of such merger or consolidation, and the phrase "directors of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger or consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2), (d)(1) or (d)(2) of this Section) whose election by the Board, or whose nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. ARTICLE VII AGREEMENTS AND PROVISIONS 7.1 Grant Evidenced by Agreement. The grant of any Option under the Plan may be evidenced by an Agreement which shall describe the specific Option granted and the terms and conditions of the Option. The granting of any Option may be subject to, and conditioned upon, the recipient's execution of any Agreement required by the Board. Except as otherwise provided in an Agreement, all capitalized terms used in the Agreement shall have the same meaning as in the Plan, and the Agreement shall be subject to all of the terms of the Plan. 7.2 Provisions of Agreement. Each Agreement shall contain such provisions that the Board shall determine to be necessary, desirable and appropriate for the Option granted. Each Agreement may include, but shall not be limited to, the following with respect to any Option: description of the type of Option; the Option's duration; its transferability; the exercise price; the exercise period; the person or persons who may exercise the Option; the effect upon such Option of the Participant's death or termination of service; the Option's conditions; when, if and how any Option may be forfeited, converted into another benefit, modified, exchanged for another benefit, or replaced. ARTICLE VIII PAYMENT AND WITHHOLDING 8.1 Payment. Upon the exercise of an Option, the amount due the Company is to be paid: (a) in cash; (b) by the tender to the Company of Shares owned by the Participant having a Fair Market Value equal to the amount due to the Company; (c) in other property, rights and credits, including the Participant's promissory note; or (d) by any combination of the payment methods specified in (a), (b) and (c) above. Notwithstanding the foregoing, any method of payment other than (a) may be used only with the consent of the Board, or if and to the extent so provided in the applicable Agreement. 8.2 Withholding. The Company, at the time any distribution is made under the Plan, whether in cash or in Shares, may withhold from such distribution any amount necessary to satisfy federal, state and local tax withholding requirements with respect to such distribution. Such withholding may be in cash or in Shares. ARTICLE IX OPTIONS 9.1 Grant and Option Price. (a) Annual Grant. On the first Trading Day of each calendar year, each Director shall be granted an Option to purchase the number of Shares determined by dividing $105,000 by the Fair Market Value of the Shares on such Trading Day. In the event a New Director is elected to the Board after the annual Option grant has been awarded for the year of such Director's election, such Director shall be granted an Option to purchase the number of shares determined by dividing $8,750 by the Fair Market Value of the Shares on the Director's election date (if a Trading Day, or if not, the first Trading Day following such date of election); multiplied by the number of full or partial calandar months which remain in such year. The purchase price for Shares under any Option shall equal the Fair Market Value of the Shares on the grant date of the Option. Each Option may not have a term that exceeds 10 years from the date of grant and may only be granted to a Director. (b) Annual Election. Each calendar year, in accordance with procedures established by the Board, each Director may elect to have additional Options granted to him in lieu of any or all of the following: (i) the Director's annual cash retainer as established by the Board from time to time; (ii) the Director's Board committee chair fee; (iii) the Director's annual common stock unit award under The Quaker Oats Company Stock Compensation Plan for Outside Directors; or (iv) any other Director compensation established by the Board. Based on the Director's election, such awards shall be converted into an Option to purchase the number of Shares determined by dividing three times the dollar value of the converted award by the Fair Market Value of the Shares on the grant date of the Option. All terms of such elected Options shall be the same as Options granted and described in (a) above on the same grant date. 9.2 Early Termination of Option. If a Participant terminates service as a Director for any reason, including death, all rights to exercise an Option terminate within a period not exceeding five years following his death or termination, but not later than the date the Option expires pursuant to its terms. The terms of Options outstanding may also be amended at any time by the Board to extend the Option's duration period following a Participant's death or termination, subject to the limitations stated in the preceding sentence. In the meantime, the Option may be exercised subject to the limitations in the applicable Agreement. 9.3 Transferability. Except as otherwise provided in this Section 9.3, an Option is not transferable other than as designated by the Participant by will or by the laws of descent and distribution, and during the Participant's life, may be exercised only by the Participant. However, the Participant may transfer an Option for no consideration to or for the benefit of the Participant's Immediate Family (including, without limitation, to a trust for the benefit of the Participant or the Participant's Immediate Family or to a partnership or limited liability company for the Participant or one or more members of the Participant's Immediate Family), subject to such limits as the Board may establish, and the transferee shall remain subject to all the terms and conditions applicable to the Option prior to such transfer. 9.4 Other Requirements. It is intended that only NSOs may be granted under the Plan. The terms of each Option shall provide that such Option will not be treated as an ISO. 9.5 Determination by Board. Except as otherwise provided in Section 9.1 through Section 9.4, all Option terms shall be determined by the Board. ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Underscored References. The underscored references contained in the Plan are included only for convenience, and shall not be construed as a part of the Plan or in any respect affecting or modifying its provisions. 10.2 Number and Gender. The masculine and neuter, wherever used in the Plan, shall refer to either the masculine, neuter or feminine; and, unless the context otherwise requires, the singular shall include the plural and the plural the singular. 10.3 Governing Law. This Plan shall be construed and administered in accordance with the laws of the State of Illinois. 10.4 Purchase for Investment. The Board may require each Participant purchasing Shares pursuant to an Option to represent to and agree with the Company in writing that such Participant is acquiring the Shares for investment and without a view to distribution or resale. The certificates for such Shares may include any legend which the Board deems appropriate to reflect any restrictions on transfer. All certificates for Shares delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Board may deem advisable under all applicable laws, rules and regulations, and the Board may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 10.5 No Service Contract. The adoption of the Plan or the granting of an Option shall not confer upon any Participant any right to continued service as a Director nor shall it interfere in any way with the right of the Company or Board to terminate the service of any Director at any time. 10.6 No Effect on Other Benefits. Except as specified herein, the receipt of Options under the Plan shall have no effect on any compensation or benefits to which a Participant may be entitled from the Company, under another plan or otherwise, or preclude a Participant from receiving any such compensation or benefits. IN WITNESS WHEREOF, this Plan is executed by a duly authorized officer of the Company. THE QUAKER OATS COMPANY Dated: March 17, 1999 By: /s/ John G. Jartz Its Senior Vice President EX-10.7 9 Exhibit 10(h)(2) Employment Agreement This Employment Agreement ("Agreement") is made and entered into by and between Terence D. Martin ("Martin") and The Quaker Oats Company ("Quaker"), collectively the "parties." The "Effective Date" of this Agreement shall be Martin's first day of active service with Quaker, which is presently expected to be November 11, 1998. 1. Position: On the Effective Date, Martin will commence employment with Quaker as Senior Vice President and Chief Financial Officer ("CFO"). 2. Relocation Expenses: To reimburse Martin for the expense of moving his primary residence to Chicago, Quaker shall provide Martin with the relocation benefits described in the Quaker Relocation Policy For Transferring Employees, and shall reimburse him for any other reasonable expenses approved by Quaker's Chief Executive Officer ("CEO"). 3. Base Salary: From the Effective Date through December 31, 1999, Martin's annual base salary shall be four hundred seventy five thousand dollars ($475,000), paid in accordance with Quaker's standard payroll practices. After that date, his salary shall be determined by Quaker through its normal compensation practices; provided, during active service, his salary cannot be reduced below four hundred seventy five thousand dollars ($475,000). Whenever used in this Agreement, the phrase "normal compensation practices" refers to practices in effect on the date a decision is made; this phrase is not intended to freeze Quaker's current practices. 4. Bonuses: Martin is eligible to receive an annual performance bonus based on the terms and provisions of Quaker's Management Incentive Bonus Plan (the "MIB" plan). A. 1998 & 1999 MIB Bonuses: For 1998 and 1999, Martin's target bonus shall be seventy percent (70%) of his annualized base salary, and the maximum award will be two hundred percent (200%) of his target. The actual amount of any bonus award shall be determined by applying the terms of the MIB plan; provided, any award for 1998 shall be prorated based on the percentage of the year that Martin was employed by Quaker in active service. B. Subsequent MIB Bonuses: Any bonus targets and awards for years after 1999 shall be determined by Quaker in its discretion through its normal compensation practices and the terms of the MIB and/or any other applicable plan. C. Additional Bonuses: Quaker shall have discretion to award additional bonuses to Martin, as it may deem appropriate. 5. Group/Executive Benefits: Except as specifically provided herein, and subject to its normal compensation practices and the terms and conditions of any applicable plans, Quaker shall provide Martin and his family with benefits comparable to those enjoyed by other Quaker officers at a similar level, such as group and/or executive life, hospitalization and disability insurance; health program; pension, 401(k), and similar benefit plans; perquisite allowance; financial counseling reimbursement; and similar programs. All waiting periods shall be waived except with respect to the pension plan, where waiver of the one year waiting period is not permitted. 6. Supplemental Retirement Benefit: Subject to the terms and conditions described below, including vesting requirements, upon termination of his employment with Quaker, Martin will receive a supplemental retirement benefit pursuant to this Agreement. A. Amount Of Supplemental Benefit: This supplemental retirement benefit is expressed as an annualized figure. The annualized amount of this benefit shall be calculated by taking the Base Amount and subtracting the Setoff from it. i. Base Amount: The Base Amount shall be an annualized figure equal to the greater of three hundred thousand dollars ($300,000.00) or the amount Martin would receive under the formula in The Quaker Supplemental Executive Retirement Program ("SERP"), were he eligible for SERP benefits; provided, this figure may be prorated or actuarially reduced, as described below. It is understood that under the SERP's present terms, for an executive who retired at age 60 after 5 years of active service, the SERP formula would produce a benefit equal to average annual earnings (as defined in the SERP) times forty five percent (45%) times five divided by fifteen (5/15). ii. Setoff: The Setoff shall be an amount equal to the annualized value of any and all other retirement benefits to which Martin is entitled (or which he receives) under any defined benefit plan(s) (qualified or non-qualified), including Quaker's plans and those of Martin's former employers. iii. "Annualized" Value: All annualized calculations of this supplemental retirement benefit and of other retirement benefits shall assume that Martin elects to receive each benefit on a straight line annuity basis, without regard to the form of payment he actually elects or elected (including any lump sum payment), and without regard to any actuarial reduction that may apply based on the date he elects to commence receiving a benefit. B. Form Of Payment: Martin may elect to take this supplemental benefit in any form permitted under either the SERP or The Quaker Retirement Plan, subject to the applicable actuarial adjustment prescribed by the plan in question for electing such an alternative form of payment instead of a straight life annuity. C. Actuarial Reduction: If Martin commences receipt of this supplemental retirement benefit before reaching age 60, the Base Amount shall be actuarially reduced to adjust for this early receipt, in accordance with the terms of the SERP. D. Vesting: i. Full Vesting: This supplemental retirement benefit shall vest when Martin completes sixty (60) months of active service with Quaker. ii.Prorated Vesting: If, before Martin completes sixty (60) months of active service with Quaker, his employment terminates for any reason that triggers the payment of supplemental separation benefits and/or benefits under The Quaker Officers' Severance Program ("Program"), or due to his death or his retirement immediately following an approved long term disability leave, then this supplemental retirement benefit shall vest on Martin's last day of employment with Quaker (i.e., at the end of his inactive service period, if applicable), but shall be prorated based on the number of months he was actively employed. To prorate this benefit, both the Base Amount and the Setoff shall be multiplied by a fraction: (a) whose numerator is the number of full months Martin was employed in active service by Quaker or thirty (30) months, whichever is lower; and (b) whose denominator is thirty (30) months. iii. No Vesting: If Martin's employment with Quaker terminates before he completes sixty (60) months of active service with Quaker for any reason that does not result in a prorated benefit under subsection (D)(ii), this supplemental retirement benefit shall not vest. E. Survivor Benefit: If Martin dies before payment of this supplemental retirement benefit commences, then subject to the vesting and proration rules in subsections (D)(i) and (D)(ii), and commencing on the first day of the month following the date of death, his wife will receive a survivor annuity for the rest of her life equal in amount to seventy five percent (75%) of the straight life annuity which would have been payable to Martin if, on the date immediately before his death, he had terminated his employment for Good Reason, taking into account all setoffs that would have applied to his benefit, except that if his spouse only receives a reduced survivor annuity under The Quaker Retirement Plan, then that amount, rather than the full straight life annuity which would have been payable to Martin, shall be setoff with respect to The Quaker Retirement Plan. 7. Equity Based Incentive Compensation: A. Signing Bonus: As of the Effective Date, and pursuant to the terms of The Quaker Long Term Incentive Plan of 1999 (the "LTIP"), Quaker shall grant Martin a 10-year option with respect to two hundred fifty thousand (250,000) shares of Quaker common stock. In accordance with the terms of the LTIP, the exercise price for these shares will be equal to the fair market value on the Effective Date. The following vesting rules shall apply to these options: i.While Martin is employed in active service or on an approved disability leave, or if his active service terminates due to his death, one-fifth (1/5) of these options shall vest each year for five years, on the first five anniversaries of the Effective Date (e.g., the first 50,000 options will vest on November 11, 1999, and the last 50,000 options will vest on November 11, 2003, based on the expected Effective Date); ii. If Martin's employment terminates in circumstances that trigger an award of Program benefits and/or supplemental separation benefits, a prorated number of these options shall vest (the "Prorated Award"). The Prorated Award will be calculated by multiplying two hundred fifty thousand (250,000) options by a fraction: (a) whose numerator is the number of full months Martin was employed in active service by Quaker or thirty (30) months, whichever is lower; and (b) whose denominator is thirty (30) months. These options shall vest according to the schedule in subsection (A)(i) (i.e., in increments of up to 50,000, and on anniversaries of the Effective Date) until the Prorated Award is exhausted; iii. If Martin's employment terminates in circumstances not covered by subsection (A)(ii), then any of these options that have not yet vested by his last day of active service shall not vest. B. Subsequent Stock Option Awards: Martin shall be eligible to receive an award of options under the LTIP commencing in 1999. In 1999, Martin shall be awarded at least fifty thousand (50,000) options, so long as he is actively employed by Quaker on the date when Quaker grants options to its executives. In subsequent years, the actual number of options granted to Martin shall be determined by Quaker pursuant to its normal compensation practices. C. ESOP: Martin shall immediately be eligible to participate in any award of stock under The Quaker Employee Stock Ownership Plan ("ESOP"). The size, terms, and conditions of any award to him shall be determined by the provisions of the ESOP. Martin's first award, to be allocated as of June 1999, will be prorated in accordance with the terms of the ESOP. D. Other: Quaker may, in its discretion, grant Martin additional equity incentive compensation, pursuant to its normal compensation practices and the terms and conditions of any applicable plans. 8. Vacation: Beginning in 1999, Martin shall be entitled to four (4) weeks of vacation per calendar year. He is subject to Quaker's standard plans and policies regarding related issues, such as unused vacation days. 9. Events Triggering Supplemental Separation Benefits: The employment relationship between Quaker and Martin may be terminated at-will by either party (i.e., at any time, for any reason). The following rules shall determine whether, upon termination, Martin qualifies for supplemental separation benefits: A. Eligibility: Martin shall qualify for supplemental separation benefits under this Agreement if, but only if, he qualifies for severance benefits under the Program; provided, if he resigns within six (6) months following any event that constitutes "Good Reason" (as defined below), then for purposes of the Program and this Agreement, Quaker shall treat him as involuntarily terminated due to job elimination. The determination as to whether Martin qualifies for Program benefits shall be made by the Committee that administers the Program ("Committee"), pursuant to its regular procedures and practices; provided, if the Committee denies benefits based on gross misconduct, then the CEO and the Compensation Committee of Quaker's Board of Directors ("Compensation Committee") shall review that decision, and benefits will be denied only if the CEO and a majority of the Compensation Committee vote to deny benefits; and further provided, this internal review process shall not eliminate Martin's right to judicial review of the Committee's decision, so long as he first allows a reasonable time for the CEO and the Compensation Committee to review it. Martin understands that based on the current terms of the Program, eligibility is contingent not only on the reason for termination (e.g., not discharged for "gross misconduct"), but also on executing a waiver and release of claims, among other conditions. Martin is not hereby committing to execute such a waiver and release in the future; rather, if terminated, he will have the option of doing so to qualify for Program benefits and for supplemental separation benefits. Nothing in this provision, including its non-exhaustive summary of the Program's eligibility rules, shall be construed as modifying, superseding or limiting the Program's terms, except that the procedure for deciding claims under the Program is modified by adding the internal review process described above. B. Termination Due To Change In Control: i. Notwithstanding any other provision in this Agreement, if Martin qualifies for benefits under his ESA, he will not receive supplemental separation benefits under this Agreement. In that event, his separation benefits would be limited to what is provided under the ESA and the Program. ii. Notwithstanding anything to the contrary in section 9(A), Martin shall be paid double (2 times) the separation benefit described in section 10(A) if, but only if, all of the following occur: (a) there is a change in control of Quaker (as that term, or any similar term, is defined under his ESA); and (b) Martin fails to qualify for benefits under both his ESA and the Program; and (c) he resigns or retires for any reason during the thirteenth (13th) month following the change in control. C. Definition Of "Good Reason": "Good Reason" for Martin to resign shall exist if any of the following events occur without his consent: (i) Quaker intentionally fails to pay or provide required compensation, and does not cure the situation despite a reasonable opportunity after Martin calls the omission to Quaker's attention in writing; (ii) Quaker reduces Martin's title, duties or authority (compared to what they were on the Effective Date) so significantly that his position is materially diminished; or (iii) Quaker materially breaches the terms of this Agreement and fails or refuses to cure the situation, provided that Martin calls the breach to Quaker's attention in writing and allows a reasonable opportunity to cure it. 10. Supplemental Separation Benefits: If, due to an involuntary termination, Martin qualifies for supplemental separation benefits under section 9 of this Agreement, then the following terms and conditions shall apply: A. One Additional Year Of Benefits: In addition to benefits under the Program, and subject to section 11(E), Quaker shall pay Martin an amount equal to one (1) year of Program payments. This sum shall be paid in a lump sum within thirty (30) days following his last day of active service or within thirty (30) days following a determination of his eligibility for Program benefits, whichever is later. This payment is consideration for the covenants and other provisions in section 11, not for anything else. B. Calculating His Annual Compensation: Both under the Program and under this Agreement, in calculating the bonus component of Martin's annual compensation, Quaker shall use his MIB bonus target at the time of termination or his most recent MIB bonus payment, whichever is greater. C. Pro-Rata Bonus For Final Year: Within thirty (30) days after Martin's last day of active service, Quaker shall pay him a lump sum that represents a pro-rated annual bonus for the year of termination. This amount shall be calculated by taking his bonus target for the year of termination and multiplying it times a fraction: (i) whose numerator is the number of days elapsed in the fiscal year during which Martin is terminated, from the first day of that fiscal year through his final day of active service; and (ii) whose denominator is 365 (e.g., based on Quaker's current fiscal year, which is the same as the calendar year, if Martin's last day of active service was February 5, then this fraction would be 0.10, calculated as follows: 36 days elapsed in current fiscal year divided by 365 days). D. Five Days Of Salary: Within thirty (30) days following Martin's termination from active service, Quaker shall pay him an amount equal to five (5) days of pay at his then-current base salary rate. 11. Prohibited Conduct: A. Covenants: Martin covenants and agrees that during the periods specified below, he shall not engage in any of the following activities anywhere in the world: i. Non-competition. During the two (2) year period immediately following the termination of Martin's employment in circumstances that qualify him for supplemental separation benefits under sections 9 and 10, or during the one (1) year period immediately following his termination in any other circumstances, Martin shall not undertake any employment, consulting position or ownership interest which involves his Participation in the management of a business entity that markets, sells, distributes, licenses or produces Covered Products, unless that business entity's sole involvement with Covered Products is that it makes retail sales or consumes Covered Products, without competing in any way against Quaker. ii. Raiding Employees. During the three (3) year period immediately following the termination of Martin's employment in circumstances that qualify him for supplemental separation benefits under sections 9 and 10, or during the two (2) year period immediately following his termination in any other circumstances, Martin shall not in any way, directly or indirectly (including through someone else acting on Martin's recommendation, suggestion, identification or advice), facilitate or solicit any Existing Quaker Employee to leave the employment of Quaker or to accept any position with any other company or corporation. iii. Non-disclosure. During the three (3) year period immediately following the termination of Martin's employment in circumstances that qualify him for supplemental separation benefits under sections 9 and 10, or during the two (2) year period immediately following his termination in any other circumstances, Martin shall not use or disclose to anyone any Confidential Information. B. Definitions: For purposes of section 11 of this Agreement, the following definitions shall apply: i. "Participation" shall be construed broadly to include, without limitation: (1) holding a position in which he directly manages such a business entity; (2) holding a position in which anyone else who directly manages such a business entity is in Martin's reporting chain or chain-of-command (regardless of the number of reporting levels between them); (3) providing input, advice, guidance, or suggestions regarding the management of such a business entity to anyone responsible therefor; (4) providing a testimonial on behalf of such an operation or the product it produces; or (5) doing anything else which falls within a common sense definition of the term "participation," as used in the present context. ii. "Covered Products" mean any product which falls into one or more of the following categories, so long as Quaker is producing, marketing, distributing, selling or licensing such product anywhere in the world: sports beverages; thirst quenching beverages; hot cereals; ready-to-eat cereals; pancake mixes; grain-based snacks; value-added rice products; pancake syrup; value-added pasta products; dry pasta products; and items Quaker produces for the food service market. In addition, if Quaker adds to its portfolio a new business or category of products with annual sales exceeding fifty million dollars ($50,000,000) worldwide, such product(s) shall be included within this definition. iii. "Existing Quaker Employee" means someone: (1) who is employed by Quaker on or before the date when Martin's employment terminates; (2) who is still employed by Quaker as of the date when the facilitating act or solicitation takes place; and (3) who holds a manager, director or officer level position at Quaker (or an equivalent position based on job duties and/or Hay points, regardless of the employee's title). iv. "Confidential Information" shall be construed as broadly as Illinois law permits and shall include all non-public information Martin acquired by virtue of his relationship with Quaker which might be of any value to a competitor or which might cause any economic loss (directly or via loss of an opportunity) or substantial embarrassment to Quaker or its customers, distributors or suppliers if disclosed. Examples of Confidential Information include, without limitation, non-public information about Quaker's customers, suppliers, distributors and potential acquisition targets; its business operations and structure; its product lines, formulas and pricing; its processes, machines and inventions; its research and know-how; its financial data; and its plans and strategies. C. Injunctive Relief: In the event of a breach, threatened breach or situation that creates an inevitable breach by Martin of any covenant in section 11(A), Quaker shall be entitled to an injunction compelling specific performance, restraining any future violations and/or requiring affirmative acts to undo or minimize the harm to Quaker, in addition to damages for any actual breach that occurs. The parties stipulate and represent that breach of any covenant in section 11(A) would cause irreparable injury to Quaker, for which there would be no adequate remedy at law, due among other reasons to the inherent difficulty of determining the precise causation for loss of customers, confidential information and/or employees and of determining the amount and ongoing effects of such losses. D. Other Remedies: In the event Martin breaches any covenant contained in section 11(A), Quaker shall have the option of seeking injunctive relief or cancelling the supplemental separation payments due under sections 9 and 10 of this Agreement. Quaker's right to terminate Program benefits is spelled out in the Program, and is not affected by this provision. E. Repayment Of Supplemental Separation Benefit: If Martin breaches any covenant(s) set forth in section 11(A), then in addition to any injunctive relief or actual damages awarded by a court, Martin shall repay to Quaker an amount equal to the lump sum payment he received under section 10(A). Martin shall make this repayment within thirty (30) days following a final judgment against him. For purposes of this provision, a judgment shall not be considered final until all potential appeals are exhausted or waived (expressly or by expiration of the time for filing an appeal). F. Recitals: Martin acknowledges that by virtue of the positions he will hold, he will acquire Confidential Information, including without limitation knowledge of financial details and plans, operational plans, strategic long range plans, new product development, marketing plans, sales plans, and distribution plans. Martin also acknowledges that by virtue of his positions, he will learn which Existing Quaker Employees are critical to Quaker's success and will develop relationships he otherwise would not have had with such employees. 12. Advance Determination Of Permitted/Prohibited Conduct: Martin may request an advance written determination from Quaker's Chief Executive Officer as to whether taking a proposed action or job would, in Quaker's opinion, constitute a breach of any covenant in section 11(A). In that event, and provided that Martin discloses in writing all material facts about the proposed action or job, Quaker shall make a reasonable effort to respond to the request for an advance written determination within ten (10) business days; PROVIDED, if circumstances materially change after the advance determination is made (e.g., if the duties of a job change after Martin accepts it), the determination may be reconsidered and revised or reversed upon thirty (30) days advance written notice to Martin. Quaker shall treat as confidential any non-public information that Martin communicates as part of a request for an advance determination. 13. Choice Of Law And Forum A. Law: This Agreement shall be governed by and construed in accordance with the laws of Illinois, without regard to choice of law principles. B. Forum: In any litigation over this Agreement, both parties consent to submit to the personal jurisdiction of any court, state or federal, in the State of Illinois. Such courts in Illinois shall be the exclusive jurisdiction for any litigation over this Agreement or an alleged breach thereof. 14. Attorney Fees And Other Expenses: A. For This Agreement: Quaker will pay all reasonable legal fees and related expenses Martin incurred in connection with the negotiation and preparation of this Agreement. B. Subsequent Litigation: If Martin and Quaker become involved in litigation regarding the terms of his employment with Quaker or the termination thereof, the party which prevails shall be entitled to reimbursement of all reasonable litigation costs and expenses, including attorney fees. If each party prevails on one or more litigated issues, the court shall exercise its equitable judgment to determine which, if either, should be considered the prevailing party and the percentage of that party's expenses which should be reimbursed, taking into account such factors as the significance and number of the issue(s) on which each party prevailed, the reasonableness of each party's position(s), and ability to pay. 15. Indemnification: To the fullest extent permitted by law and Quaker's by-laws, Quaker shall indemnify Martin (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and/or reasonable expenses, including attorneys' fees, incurred by Martin in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being an officer, director or employee of Quaker or any of its subsidiaries. 16. Gross-Up Payment for Golden Parachute Taxes: If it is determined that any payment Quaker makes to or for the benefit of Martin, under this Agreement or otherwise, is subject to the federal excise taxes imposed on golden parachute payments, then regardless of whether Martin has declared his ESA effective, Quaker will make an additional payment to him (a "gross-up" payment) in accordance with the terms of his ESA (presently Section 8 of the ESA), as determined by the terms of the ESA on the Effective Date or on the date of the payment in question, whichever is more favorable to Martin. 17. Representation By Martin: Martin represents that he is not presently subject to any non-competition agreement or employment agreement that prevents him from accepting this job with Quaker and performing the duties of Chief Financial Officer. 18. Scope of Agreement: A. This Agreement supersedes any other document or oral agreement that conflicts with it regarding any of the matters set forth herein. However, it is not intended to pre-empt or supersede other documents, including plan documents, that provide additional, non-conflicting rules or terms. Without limitation, nothing in this Agreement shall eliminate or reduce Martin's obligation to comply with Quaker's Code Of Ethics. B. No promises or inducements have been made other than those reflected herein. This Agreement cannot be amended except by a written agreement signed by both parties, and only Quaker's highest ranking Human Resources officer or his/her direct superior has authority to sign such an amendment on behalf of Quaker. 19. Severability: Each term of this Agreement is deemed severable, in whole or in part, and if any provision of this Agreement or its application in any circumstance is found to be illegal, unlawful or unenforceable, the remaining terms and provisions shall not be affected thereby and shall remain in full force and effect; in addition, a court may re-write the invalid provision(s) so as to be consistent with applicable law and still, to the extent possible, achieve the intended effect of this Agreement. Date: November 11, 1998 /s/ Robert S. Morrison The Quaker Oats Company, by an authorized signing officer Date: November 11, 1998 /s/ Terence D. Martin Terence D. Martin EX-10.8 10 Exhibit 10(h)(4) Schedule of Termination Benefit Agreements with Certain Executive Officers The attached Termination Benefit Agreement is identical in all material respects to the executive Termination Benefit Agreement for the executive employee listed below and which has been omitted from this filing: Name Execution Date Terence D. Martin December 31, 1998 EXECUTIVE SEPARATION AGREEMENT THIS AGREEMENT is made between The Quaker Oats Company, a New Jersey corporation (the "Company"), and Robert S. Morrison (the "Executive"), dated this 6th day of January, 1999. WITNESSETH THAT: WHEREAS, the Company wishes to attract and retain well-qualified executive personnel and to assure both itself and the Executive of continuity of management in the event of any actual or threatened change in control of the Company; NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. Operation of Agreement. The "effective date of this Agreement" shall be the date on which the Executive declares it effective, by notice to the Company in writing, but only if a change in control of the Company (as defined in Section 2) has occurred on or before the date of the notice. 2. Change in Control. A "change in control of the Company" shall be deemed to have occurred if: a. any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; b. during any period of 24 consecutive months (not including any period prior to November 11, 1998), individuals, who at the beginning of such period constitute the Company's Board of Directors (the "Board"), and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph a., c. (2) or d. of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; c. the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs d. (1) or d. (2) of this Section; or d. the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph d., "surviving entity" shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "directors of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger or consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph a., c. (2), d. (1) or d. (2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, for the period commencing on the effective date of this Agreement and ending on the earlier to occur of the third anniversary of such effective date or the 65th birthday of the Executive (the "employment period"), to exercise such authorities and powers, and perform such duties and functions, as are commensurate with the authorities and powers being exercised, and duties and functions being performed, by the Executive immediately prior to the effective date of this Agreement, which services shall be performed at the current location where the Executive was employed immediately prior to the effective date of this Agreement or at such other location within a 30-mile radius of such current location. The Executive shall not be required to accept any other location. The Executive agrees that during the employment period he shall devote his full business time exclusively to his executive duties as described herein and perform such duties faithfully and efficiently. <2> 4. Compensation, Compensation Plans, Benefit Plans, Perquisites. During the employment period and prior to termination (as defined in Section 5) of the Executive, the Executive shall be compensated as follows: a. He shall receive an annual salary which is not less than his annual salary immediately prior to the effective date of this Agreement, with the opportunity for increases, from time to time thereafter, which are in accordance with the Company's regular practices. b. He shall be eligible to participate on a reasonable basis in bonus, stock option, restricted stock and other incentive compensation plans, which shall provide benefits comparable to those to which he was provided immediately prior to the effective date of this Agreement. c. He shall be eligible to participate on a reasonable basis in tax- qualified employee benefit plans (including but not limited to pension, profit sharing and employee stock ownership plans), and supplemental non-qualified employee benefit plans relating thereto, which shall provide benefits comparable to those to which he was provided immediately prior to the effective date of this Agreement. d. He shall be entitled to receive employee welfare benefits (currently elected medical, dental and life insurance benefits) and perquisites which are comparable to those to which he was provided immediately prior to the effective date of this Agreement. 5. Termination. "Termination" shall mean either (a) termination by the Company of the employment of the Executive with the Company for any reason other than death, physical or mental incapacity, or cause (as defined below) or (b) resignation of the Executive, which, notwithstanding anything else herein to the contrary, may only be declared by the Executive during the 30-day period following the first anniversary of the effective date of this Agreement; or, (c) resignation of the Executive upon the occurrence of any of the following events: (1) a significant change in the nature or scope of the Executive's authorities, powers, functions, or duties from those described in Section 3; (2) a reduction in total compensation from that provided in Section 4; (3) the breach by the Company of any other provision of this Agreement; or (4) a reasonable determination by the Executive that, as a result of a change in control of the Company his position is significantly affected so that he is unable to exercise the authorities, powers, functions or duties attached to his position as described in Section 3. "Cause" means gross misconduct or willful and material breach of this Agreement by the Executive. No act, or failure to act, on the Executive's part shall be deemed "willful" <3> unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interest of the Company. For purposes of clarification, a mere transfer of the Executive to an entity created in a Company initiated spin-off or reorganization, without a subsequent Termination, shall not be treated as a Termination of the employment of the Executive with the Company for purposes of eligibility under this Agreement. The Company shall cause the newly created entity to provide to the Executive an Executive Separation Agreement substantially similar to this Agreement. 6. Confidentiality. The Executive agrees that during and after the employment period, he will not divulge or appropriate to his own use or the use of others any secret or confidential information or knowledge pertaining to the business of the Company, or any of its subsidiaries, obtained during his employment by the Company or any of its subsidiaries. 7. Severance and Benefit Payments. a. In the event of termination of the Executive during the employment period, the Company shall pay the Executive a lump-sum severance allowance equal to salary and bonus payments for the following 24 calendar months. The initial salary rate shall not be less than his annual salary immediately prior to termination, or if greater, not less than his annual salary immediately prior to the change in control of the Company; such salary shall be increased every March 1, thereafter, according to the then current Hewitt Associate's projection for movement in executive base salaries. The initial bonus amount shall not be less than the annual equivalent of the incentive bonus calculated under Section 4(a)(1) of the Salaried Employees Compensation and Benefits Protection Plan; such bonus amount shall be increased every January 1, thereafter, according to the then current Hewitt Associates' projection for movement in executive total cash compensation. The lump-sum severance allowance shall not be adjusted on a present value basis. b. In the event of termination of the Executive during the employment period, the Company shall also pay the Executive a lump-sum benefit payment in an amount equivalent to (1) the benefits he would have accrued or been allocated under any tax- qualified employee benefit plan (including but not limited to pension, profit sharing and employee stock ownership plans) and any non-qualified supplemental benefit plan relating thereto, maintained by the Company as if he had remained in the employ of the Company for 24 calendar months after his termination, which benefits will be paid in addition to the benefits provided under such plans and (2) employee welfare benefits (currently elected coverage under the medical, dental and life insurance programs) to which he would have been entitled under all such employee benefit plans, programs or arrangements maintained by the Company as if he had remained in the employ of the company for 24 calendar months after his termination. Such a benefit payment shall be adjusted to include expected increases to the Executive's <4> salary, bonus and other compensation as specified in paragraph a. of this Section having an effect on such benefits for such period. The lump-sum benefit payment shall not be adjusted on a present value basis (except for benefits accrued in a defined benefit pension plan). c. The amount of the severance allowance and benefit payment described in this Section shall be determined and such payment shall be made as soon as it is reasonably practicable. d. The severance allowance and benefit payment to be provided pursuant to this Section 7 shall be in addition to, and shall not be reduced by, any other amounts or benefits provided by separate agreement with the Executive, or plan or arrangement of the Company or its subsidiaries, unless specifically stipulated in an agreement which constitutes an amendment to this Agreement as provided in Section 14. 8. Make-Whole Payments. If any amount payable to the Executive by the Company or any subsidiary or affiliate thereof, whether under this Agreement or otherwise (a "Payment"), is subject to any tax under section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code"), or any similar federal or state law (an "Excise Tax"), the Company shall pay to the Executive an additional amount (the "Make Whole-Amount")which is equal to (I) the amount of the Excise Tax, plus (II) the aggregate amount of any interest, penalties, fines or additions to any tax which are imposed in connection with the imposition of such Excise Tax, plus (III) all income, excise and other applicable taxes imposed on the Executive under the laws of any Federal, state, or local government or taxing authority by reason of the payments required under clause (I) and clause (II) and this clause (III). a. For purposes of determining the Make-Whole Amount, the Executive shall be deemed to be taxed at the highest marginal rate under all applicable local, state, federal and foreign income tax laws for the year in which the Make-Whole Amount is paid. The Make- Whole Amount payable with respect to an Excise Tax shall be paid by the Company coincident with the Payment with respect to which such Excise Tax relates. b. All calculations under this Section 8 shall be made initially by the Company and the Company shall provide prompt written notice thereof to the Executive to timely file all applicable tax returns. Upon request of the Executive, the Company shall provide the Executive with sufficient tax and compensation data to enable the Executive or his tax advisor to independently make the calculations described in subparagraph a. above and the Company shall reimburse the Executive for reasonable fees and expenses incurred for any such verification. c. If the Executive gives written notice to the Company of any objection to the results of the Company's calculations within 60 days of the Executive's receipt of written notice thereof, the dispute shall be referred for determination to tax counsel selected by the independent auditors of the Company ("Tax Counsel"). The Company shall pay all <5> fees and expenses of such Tax Counsel. Pending such determination by Tax Counsel, the Company shall pay the Executive the Make-Whole Amount as determined by it in good faith. The Company shall pay the Executive any additional amount determined by Tax Counsel to be due under this Section 8 (together with interest thereon at a rate equal to 120% of the Federal short-term rate determined under section 1274(d) of the Code) promptly after such determination. d. The determination by Tax Counsel shall be conclusive and binding upon all parties unless the Internal Revenue Service, a court of competent jurisdiction, or such other duly empowered governmental body or agency (a "Tax Authority") determines that the Executive owes a greater or lesser amount of Excise Tax with respect to any Payment than the amount determine by Tax Counsel. e. If a Tax Authority makes a claim against the Executive which, if successful, would require the Company to make a payment under this Section 8, the Executive agrees to contest the claim on request of the Company subject to the following conditions: (1) The Executive shall notify the Company of any such claim within 10 days of becoming aware thereof. In the event that the Company desires the claim to be contested, it shall promptly (but in no event more than 30 days after the notice from the Executive or such shorter time as the Tax Authority may specify for responding to such claim) request the Executive to contest the claim. The Executive shall not make any payment of any tax which is the subject of the claim before the Executive has given the notice or during the 30-day period thereafter unless the Executive receives written instructions from the Company to make such payment together with an advance of funds sufficient to make the requested payment plus any amounts payable under this Section 8 determined as if such advance were an Excise Tax, in which case the Executive will act promptly in accordance with such instructions. (2) If the Company so requests, the Executive will contest the claim by either paying the tax claimed and suing for a refund in the appropriate court or contesting the claim in the United States Tax Court or other appropriate court, as directed by the Company; provided, however, that any request by the Company for the Executive to pay the tax shall be accompanied by an advance from the Company to the Executive of funds sufficient to make the requested payment plus any amounts payable under this Section 8 determined as if such advance were an Excise Tax. If directed by the Company in writing the Executive will take all action necessary to compromise or settle the claim, but in no event will the Executive compromise or settle the claim or cease to contest claim without the written consent of the Company; provided, however, that the Executive may take any such action if the Executive waives in writing his right to a payment under this Section 8 for any amounts payable in connection with such claim. The Executive agrees to cooperate in good faith with the Company in contesting the claim and to comply with any reasonable request from the Company concerning the contest of the <6> claim, including the pursuit of administrative remedies, the appropriate forum for any judicial proceedings, and the legal basis for contesting the claim. Upon request of the Company, the Executive shall take appropriate appeals of any judgment or decision that would require the Company to make a payment under this Section 8. Provided that the Executive is in compliance with the provisions of this section, the Company shall be liable for and indemnify the Executive against any loss in connection with, and all costs and expenses, including attorney's fees, which may be incurred as a result of, contesting the claim, and shall provide the Executive within 30 days after each written request therefor by the Executive cash advances or reimbursement for all such costs and expenses actually incurred or reasonably expected to be incurred by the Executive as a result of contesting the claim. f. Should a Tax Authority finally determine that an additional Excise Tax is owed, then the Company shall pay an additional Make-Up Amount to the Executive in a manner consistent with this Section 8 with respect to any additional Excise Tax and any assessed interest, fines, or penalties. If any Excise Tax as calculated by the Company or Tax Counsel, as the case may be, is finally determined by a Tax Authority to exceed the amount required to be paid under applicable law, then the Executive shall repay such excess to the Company, but such repayment shall be reduced by the amount of any taxes paid by the Executive on such excess which are not offset by the tax benefit attributable to the repayment. 9. Mitigation and Set Off. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. The Company shall not be entitled to set off against the amounts payable to the Executive under this Agreement any amounts owed to the Company by the Executive, any amounts earned by the Executive in other employment after termination of his employment with the Company, or any amounts which might have been earned by the Executive in other employment had he sought such other employment. 10. Arbitration of All Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof, except with respect to Section 8, shall be settled by arbitration in the City of Chicago in accordance with the laws of the State of Illinois by three arbitrators appointed by the parties. If the parties cannot agree on the appointment, one arbitrator shall be appointed by the Company and one by the Executive, and the third shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States Court of Appeals for the Seventh Circuit. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 10. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel or incur other costs and expenses in connection with enforcement of his rights under this Agreement, Executive shall be <7> entitled to recover from the Company his reasonable attorneys' fees and costs and expenses in connection with enforcement of his rights (including the enforcement of any arbitration award in court). Payment shall be made to the Executive by the Company at the time these attorneys' fees and costs and expenses are incurred by the Executive. If, however, the arbitrators should later determine that under the circumstances the Executive could have had no reasonable expectation of prevailing on the merits at the time he initiated the arbitration based on the information then available to him, he shall repay any such payments to the Company in accordance with the order of the arbitrators. Any award of the arbitrators shall include interest at a rate or rates considered just under the circumstances by the arbitrators. 11. Notices. Any notices, requests, demands, and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal executive offices. 12. Non-Alienation. The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law. Nothing in this paragraph shall limit the Executive's rights or powers which his executor or administrator would otherwise have. 13. Governing Law. The Agreement shall be construed and enforced according to the Employee Retirement Income Security Act of 1974 ("ERISA"), and the laws of the State of Illinois, other than its laws respecting choice of law, to the extent not pre-empted by ERISA. 14. Amendment. This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 15. Term. Unless the Executive has declared this Agreement effective, pursuant to Section 1 of this Agreement, this Agreement shall terminate prior to a change in control of the Company when the Executive has terminated employment or been placed on inactive service by the Company, or, if later, May 14, 2001. 16. Successors to the Company. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company. 17. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. <8> 18. Prior Agreement. Any prior Executive Separation Agreement between the Executive and the Company which has not yet terminated pursuant to its terms, is canceled by mutual consent of the Executive and the Company pursuant to execution of this Agreement, effective as of the day and year first above written. IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board, the Company has caused these presents to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Assistant Secretary, all as of the day and year first above written. ATTEST: THE QUAKER OATS COMPANY /s/ Gerald A. Cassioppi /s/ Pamela S. Hewitt Assistant Secretary Its Senior Vice President EXECUTIVE /s/ Robert S. Morrison EX-10.9 11 Exhibit 10(h)(5) AGREEMENT UPON SEPARATION OF EMPLOYMENT This Agreement Upon Separation Of Employment ("Agreement") is made and entered into by and between Robert S. Thomason, his successors, heirs, administrators, executors, personal representatives and assigns ("Thomason") and The Quaker Oats Company, its officers, directors, shareholders, employees, agents, assigns, subsidiaries, divisions, parents, affiliates and successors ("Quaker"), collectively "the parties." The Agreement shall become effective seven (7) days after it is executed by Thomason. 1. Economic Consideration to Thomason Upon becoming effective, this Agreement shall satisfy the Quaker Officers Severance Program's (the "Program") prerequisites that in order to qualify for Program benefits, an officer must execute a valid waiver and release of all potential claims and must sign an agreement containing several covenants, including a non-competition provision. In addition, Thomason shall receive the following consideration, to which he would not be entitled in the absence of this Agreement: A. Thomason's active employment with Quaker is terminating on December 15, 1998. After severance payments under the Program have expired, and subject to the provisions in Paragraph 5, Quaker shall pay Thomason an amount equal to one year of Program payments (i.e., final salary plus average bonus). This sum shall be paid in equal semi-monthly installments commencing as soon as payments to him under the Program expire, and terminating on December 15, 2000. Payments under this paragraph 1(A) are consideration for the covenants in paragraph 5, not for anything else. B. As soon as Program benefits end and continuing through December 15, 2000, Quaker shall provide Thomason with the same insurance coverage as is provided under the Program. This benefit is part of the consideration for the Waiver and Release in paragraph 3, and the Miscellaneous Agreements in paragraph 4. 2. Termination of Employment Thomason understands and agrees that his active employment relationship with Quaker, its parent companies, affiliates and successors, will be permanently and irrevocably severed as of December 15, 1998. Thomason agrees he shall not apply or otherwise seek reinstatement or reemployment by Quaker at any time, and that Quaker has no obligation, contractual or otherwise, to rehire, reemploy or recall him in the future. Thomason further stipulates that this agreement is sufficient cause for Quaker to deny any request for rescission, rehire, reemployment or recall. Thomason agrees that prior to the effective date of his termination from active employment, he will return all Quaker property, including but not limited to keys, office pass, credit cards, computers, office equipment, sales records and data. Thomason further agrees that within sixty (60) days after his termination date, he will submit all outstanding expenses and clear all advances and his personal advance account, if any. 3. Waiver & Release A. Thomason waives, releases and discharges Quaker from any and all claims and liabilities, demands, actions and causes of action, including attorneys' fees and costs and participation in a class action lawsuit, whether known or unknown, fixed or contingent, that he may have or claim to have against Quaker as of the date this Agreement becomes effective. Thomason further covenants not to file a lawsuit or participate in a class action lawsuit to assert such claims. Without limitation, Thomason specifically waives all claims for back pay, future pay or any other form of compensation or income, except as provided below. This waiver includes but is not limited to claims arising out of or in any way related to Thomason's employment or termination of employment with Quaker, including age discrimination claims under the Age Discrimination In Employment Act (as amended), discrimination claims under Title VII of the Civil Rights Act of 1964 (as amended) or the Americans with Disabilities Act, claims for breach of contract, and any other statutory or common law cause of action under state, federal or local law. However, Thomason does not waive, release, discharge or covenant not to sue for enforcement of any rights or claims under this Agreement, nor ones that arise out of conduct or omissions which occur entirely after the date this Agreement becomes effective. In addition, he does not waive any rights he may have as an employee on inactive status and/or as a former employee, as the case may be, under any of Quaker's fringe benefit or incentive plans (e.g., its pension plan, the Program, the Long Term Incentive Plan of 1990, etc.), nor does he waive his right to payment for unused vacation, if any, pursuant to Quaker's vacation policy. Notwithstanding anything to the contrary in Paragraph 8 of this Agreement, such benefits shall continue to be governed by the ERISA plans, contracts and/or Quaker policies that exist independent of this Agreement. B. Quaker waives, releases and discharges Thomason from any and all claims and liabilities, demands, actions and causes of action, including attorneys'fees and costs, that it may have or claim to have against Thomason as of the date this Agreement becomes effective; provided, this waiver, release and discharge only apply to claims as to which Quaker's senior officers were aware, on or before the effective date of this Agreement, of all material facts necessary to establish Thomason's liability; and further provided, Quaker does not waive, release, discharge or covenant not to sue for enforcement of any rights or claims that arise out of conduct or omissions which occur entirely after the date this Agreement becomes effective. C. The parties stipulate that nothing contained in this Agreement shall be construed as an admission by either of them of any liability, wrongdoing or unlawful conduct. It is understood that both Quaker and Thomason deny any liability, wrongdoing or unlawful conduct, and each is providing consideration for this waiver and release in order to resolve any potential disputes between them amicably and to avoid the expense of potential litigation. 4. Miscellaneous agreements The covenants and agreements set forth in this paragraph shall remain in effect until December 15, 2001. Covenants 4(A) and 4(B) are material parts of this Agreement, so a material breach of either of them by Thomason would entitle Quaker, at its discretion, to rescind this Agreement, in addition to any other legal or equitable remedies it might have for breach: A. Thomason shall provide accurate information or testimony or both in connection with any legal matter if so requested by Quaker. He shall make himself available upon request to provide such information and/or testimony, in a formal and/or an informal setting in accordance with Quaker's request, subject to reasonable accommodation of his schedule and reimbursement of reasonable expenses, including reasonable and necessary attorney fees (if independent legal counsel is reasonably necessary). B. Thomason shall cooperate with media requests for interviews regarding his termination and/or Quaker, unless directed otherwise by Quaker in a particular instance. He shall not disparage The Quaker Oats Company,its products, or any of its directors, officers or employees in these interviews, nor in any other private or public setting; provided, if Thomason is compelled to provide testimony under oath, he shall testify truthfully without regard to whether his testimony is favorable or unfavorable to Quaker, and such testimony shall be protected against claims under this Agreement by the same privilege that would apply to a defamation claim. C. The Quaker Oats Company, and any officer or director acting on its behalf, shall answer all reference inquiries directed to The Quaker Oats Company regarding Thomason by stating only his positions held, compensation and dates of employment. No additional information shall be provided unless authorized in advance, in writing, by Thomason. Thomason agrees to direct all requests for references from Quaker to the highest ranking Human Resources officer within Quaker. 5. Prohibited Conduct A. Thomason covenants and agrees that through the dates set forth below, he shall not engage in any of the following activities anywhere in the world: i. Non-competition. Thomason shall not undertake any employment, consulting position or ownership interest which involves his Participation in the management of a business entity that markets, sells, distributes, licenses or produces Covered Products, unless that business entity's sole involvement with Covered Products is that it makes retail sales or consumes Covered Products, without competing in any way against Quaker. This covenant shall remain in effect until December 15, 2000. a. "Participation" shall be construed broadly to include, without limitation: (1) holding a position in which he directly manages such a business entity; (2) holding a position in which anyone else who directly manages such a business entity is in Thomason's reporting chain or chain-of- command (regardless of the number of reporting levels between them); (3) providing input, advice, guidance, or suggestions regarding the management of such a business entity to anyone responsible therefor; (4) providing a testimonial on behalf of such an operation or the product it produces; or (5) doing anything else which falls within a common sense definition of the term "participation," as used in the present context. b. "Covered Products" means any product which falls into one or more of the following categories, so long as Quaker is producing, marketing, distributing, selling or licensing such product anywhere in the world: sports beverages; thirst quenching beverages; hot cereals; ready-to- eat cereals; pancake mixes; grain-based snacks; value-added rice products; pancake syrup; value-added pasta products; dry pasta products; and items Quaker produces for the food service market. ii. Raiding Employees. Thomason shall not in any way, directly or indirectly (including through someone else acting on Thomason's recommendation, suggestion, identification or advice), facilitate or solicit any existing Quaker employee to leave the employment of Quaker or to accept any position with any other company or corporation. This covenant shall remain in effect until December 15, 2001. For purposes of this provision, the following definitions apply: a. "Existing Quaker employee" means someone: (1) who is employed by Quaker on or before the date when Thomason's employment terminates; (2) who is still employed by Quaker as of the date when the facilitating act or solicitation takes place; and (3) who holds a manager, director or officer level position at Quaker (or an equivalent position based on job duties and/or Hay points, regardless of the employee's title). b. The Terms "solicit" and "facilitate" shall be given the ordinary, common sense meaning appropriate in the present context. iii. Non-disclosure. Thomason shall not use or disclose to anyone any confidential information regarding Quaker. For purposes of this provision, the term "confidential information" shall be construed as broadly as Illinois law permits and shall include all non-public information Thomason acquired by virtue of his positions with Quaker which might be of any value to a competitor or which might cause any economic loss (directly or via loss of an opportunity) or substantial embarrassment to Quaker or its customers, distributors or suppliers if disclosed. Examples of such confidential information include, without limitation,non-public information about Quaker's customers, suppliers, distributors and potential acquisition targets; its business operations and structure; its product lines, formulas and pricing; its processes, machines and inventions; its research and know-how; its financial data; and its plans and strategies. This covenant shall remain in effect until December 15, 2001. B. In the event of a breach, threatened breach, or situation that creates an inevitable breach of any term of this paragraph by Thomason, Quaker shall be entitled to an injunction compelling specific performance, restraining any future violations and/or requiring affirmative acts to undo or minimize the harm to Quaker,in addition to damages for any actual breach that occurs.The parties stipulate and represent that breach of any provision of this paragraph would cause irreparable injury to Quaker, for which there would be no adequate remedy at law, due among other reasons to the inherent difficulty of determining the precise causation for loss of customers, confidential information and/or employees and of determining the amount and ongoing effects of such losses. C. In the event Thomason breaches any term of this Paragraph 5,Quaker shall have the option of seeking injunctive relief or canceling the remaining payments due under paragraph 1(A) of this Agreement. Quaker's right to terminate Program benefits is spelled out in the Program, and is not affected by this provision. D. In the event Quaker elects to pursue injunctive relief, then the following rules shall apply: i. While litigation over the requested injunction is pending, Quaker may, in its discretion, withhold payments otherwise due to Thomason under paragraph 1(A); provided, Quaker's right to terminate or suspend Program benefits,which are separate from the benefits described in paragraph 1(A), is spelled out in the Program and is not affected by this provision. ii. If, at the conclusion of the litigation, Quaker successfully obtains full injunctive enforcement of all provisions in this paragraph 5 that it attempts to enforce, then Quaker shall pay Thomason all amounts otherwise due under paragraph 1(A) that were withheld and shall resume making all payments required under paragraph 1(A), and shall likewise pay all Program payments that were withheld. iii. If, at the conclusion of the litigation, Quaker obtains some, but not all, of the injunctive relief it seeks under this paragraph, then Quaker shall make an election. It may either accept the injunction and proceed as specified in subparagraph (ii) above, or it may elect to voluntarily vacate and/or not enforce the injunction, in which event it shall have no obligation to resume paying Thomason under paragraph 1(A), nor to pay withheld amounts. iv. If a court entirely declines to enforce paragraph 5 of this Agreement or holds it invalid or void, then Quaker shall have no further obligation to pay Thomason under paragraph 1(A), including sums withheld while litigation was pending. v. If a court holds that the provisions of paragraph 5 are enforceable, but further finds that Thomason did not breach any of them,then Quaker shall pay all amounts otherwise due under paragraph 1(A) that were withheld,and shall resume making all payments required under paragraph 1(A). vi. Thomason shall have no claim for damages based on any delay in the payments due under Paragraph 1(A) that results from a suspension of payments or withholding in accordance with the preceding provisions; PROVIDED, if payment of withheld amounts subsequently is required, then along with such payment Quaker shall pay Thomason interest at an annualized rate of 6.0%. vii. For purposes of this paragraph,litigation shall not be deemed to have concluded, and no payment shall be due, until all potential appeals by all parties are waived or exhausted. E. Recitals: Thomason stipulates and represents that the following facts are true, and further understands and agrees that they are material representations upon which Quaker is relying in entering into this Agreement: i. Thomason has been Senior Vice President - Finance and Chief Financial Officer for several years, and in that capacity has been a member of Quaker's Senior Leadership Team and Operating Committee. In these positions, he participated in forming and/or was informed about the details of operational plans and strategic long range plans for all of Quaker's businesses. Without limitation, he has detailed knowledge financial plans and data, business plans, new product development, pricing structure, marketing plans, sales plans, distribution plans, and supply chain plans for all of Quaker's products. This is: (1) information Thomason gained by virtue of his employment at Quaker; (2) highly confidential and secret information from which Quaker derives economic value, actual or potential, from its not being generally known to other persons outside Quaker who might obtain economic value from its disclosure or use;(3)information known within Quaker only to key employees and those who need to know it to perform their jobs; (4) information regarding which Quaker has taken reasonable measures to preserve its confidentiality; (5) information that could not easily be duplicated by others, and which Quaker required considerable time and effort to develop; and (6)information which is likely to remain valuable and secret for at least three years. ii. By virtue of his employment at Quaker, Thomason has developed personal and business relationships with existing Quaker employees, which he otherwise would not have had. By virtue of his position as Quaker's most senior financial officer,he also has acquired detailed knowledge as to which existing Quaker employees are critical to Quaker's success and future plans, and which ones have skills or contacts that would be valuable to a competitor. 6. Advance Determination of Permitted/Prohibited Conduct Thomason may request an advance written determination from Quaker's Chief Executive Officer as to whether taking a proposed action or job would, in Quaker's opinion, constitute a breach of this Agreement. In that event, and provided that Thomason discloses in writing all material facts about the proposed action or job, Quaker shall make a reasonable effort to respond to Thomason's request for an advance written determination within ten (10) business days after receiving it; PROVIDED, that if circumstances materially change after the advance determination is made (e.g., if the duties of a job change after Thomason accepts it), the determination may be reconsidered and revised or reversed upon thirty days advance written notice to Thomason. Quaker shall treat as confidential any non-public information Thomason communicates as part of a request for an advance determination. 7. Choice Of Law And Forum; Attorney Fees A. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without giving effect of choice of law principles. B. In the event of any litigation over this Agreement or an alleged breach thereof, Thomason consents to submit to the personal jurisdiction of any court, state or federal, in the State of Illinois. The parties agree that the Illinois courts, state or federal, shall be the exclusive jurisdiction for any litigation over this Agreement or an alleged breach thereof. C. In the event of litigation between Thomason and Quaker regarding any provision of this Agreement, the party which prevails in such contest shall be entitled to receive from the other party, in addition to any damages, injunction, or other relief awarded by a court,reimbursement of all litigation costs and expenses, including reasonable attorney fees, which the prevailing party reasonably incurred as a result of such litigation, plus interest at the applicable federal rate provided for in 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended. If,in a particular contest, each party prevails on one or more issues, the court shall exercise its equitable judgment to determine which, if either, should be considered the prevailing party and the percentage of that party's expenses which should be reimbursed, taking into account inter alia the significance of the issue(s) on which each party prevailed and the reasonableness of each party's position(s). 8. Full Agreement This written document contains the entire understanding and agreement of the parties on the subject matter set forth herein, and supercedes any prior agreement relating to these matters. No promises or inducements have been made other than those reflected herein, and no party is relying on any statement or representation by any person except those set forth herein, including without limitation oral or written summaries of this Agreement. This Agreement cannot be modified or altered except by a subsequent written agreement signed by the parties, and only Quaker's highest ranking Human Resources officer or his direct superior shall have authority to sign such an amendment on behalf of Quaker. Without limitation, nothing in this document shall eliminate or reduce Thomason's obligation to comply with the Quaker Oats Code of Ethics, to the extent that certain provisions in the Code (such as non-disclosure rules) remain applicable to employees after termination. Likewise, nothing in this document shall eliminate or reduce Quaker's obligation to indemnify Thomason in certain situations, pursuant to Quaker's by-laws or applicable law. 9. Severability Each term of this Agreement is deemed severable, in whole or in part, and if any provision of this Agreement or its application in any circumstance is found to be illegal, unlawful or unenforceable, the remaining terms and provisions shall not be affected thereby and shall remain in full force and effect, except as expressly provided below. Unless Quaker consents, the provisions in paragraph 5 of this Agreement are not severable from each other or from Paragraph 1(A). If any provision or aspect of paragraph 5 is held invalid, illegal, unlawful or unenforceable in litigation between Thomason and Quaker, then there is no consideration for payments under paragraph 1(A); PROVIDED, if any provision in paragraph 5 is invalid or broader than the law allows, a court is authorized to award the broadest injunctive relief permitted by law, and Quaker shall thereafter make its election pursuant to paragraph 5(D)(iii) - if Quaker elects to accept the limited injunctive relief, then it shall consent to sever the invalid provision(s). Quaker's consent to sever one or more provisions in paragraph 5 may be given at any time: before, during, or after litigation, in Quaker's sole discretion. The Quaker Oats Company /s/ Pamela S. Hewitt By one of its officers Thomason has been advised in writing, via this notice, to consult with an attorney before signing this Agreement. He acknowledges that he originally received it on November 19, 1998; subsequently, after Thomason consulted with his attorney, several revisions were made at his request, and he was given a revised draft containing those changes. Thomason understands that he has twenty one (21) days from November 19, 1998 to consider and decide whether to sign the Agreement, and that he may revoke the Agreement within seven (7) days after signing it. Thomason further understands that he has the right to request a different waiver, release and separation agreement, which contains shorter non-compete, anti-raiding and non-disclosure periods. Execution of such a document would satisfy the Program's prerequisites and entitle him to Program benefits, but would not entitle him to the additional benefits provided under this Agreement, nor entail the additional obligations. Thomason affirms that he has carefully read and fully understands all provisions of this Agreement, that the consideration he is receiving is fair and adequate, and that he has not been threatened or coerced into signing it. November 25, 1998 /s/ Robert S. Thomason Robert S. Thomason EX-12 12 EXHIBIT 12 STATEMENTS RE COMPUTATION OF RATIOS THE QUAKER OATS COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions) Year Ended Dec. 31, 1998 Dec. 31, 1997 Earnings: Income (Loss) Before Income Taxes $ 396.6 $(1,064.3) Add Fixed Charges - net of capitalized interest 82.4 97.0 Earnings $ 479.0 $ (967.3) Fixed Charges: Interest on Indebtedness $ 72.0 $ 88.3 Portion of rents representative of the interest factor 12.8 12.7 Fixed Charges $ 84.8 $ 101.0 Ratio of Earnings to Fixed Charges (a) 5.65 (9.58)
(a) For purposes of computing the ratio of earnings to fixed charges, earnings represent pretax income (loss) from continuing operations plus fixed charges (net of capitalized interest). Fixed charges represent interest (whether expensed or capitalized) and one-third (the portion deemed representative of the interest factor) of rents. EX-13 13 MANAGEMENT'S DISCUSSION AND ANALYSIS Operating Results The following discussion addresses the operating results and financial condition of the Company for the years ended December 31, 1998 (current year) and 1997 (prior year). In these years, the Company divested several businesses, including Snapple beverages, five food service businesses and a soup-cup business. As a result of these divestitures, the year-to-year financial comparisons do not easily provide the reader with an understanding of the operating results of ongoing businesses. To assist in the understanding of operating results, this discussion will address the total Company results as reported, describe the impact of divested businesses and review the results of ongoing businesses by operating segment. Previously reported amounts have been restated to conform to the current presentation. The discussion of business results by operating segment has been modified to reflect the Company's December 1998 adoption of Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement requires that operating segments are reported consistent with how management assesses segment performance. As a result, the Company will separately report information on the following seven operating segments: U.S. and Canadian Foods; Latin American Foods; Other Foods; U.S. and Canadian Beverages; Latin American Beverages; Other Beverages; and Total Divested Businesses. U.S. and Canadian Foods includes hot and ready-to-eat cereals, mixes, syrups, snacks and flavored rice and pasta. Other Foods and Other Beverages include businesses in the European and Asia/Pacific regions. In determining the operating income or loss of each segment, restructuring charges, asset impairment losses and certain other expenses such as income taxes, general corporate expenses and financing costs, are not allocated to operating segments. Comparative segment data is presented in tabular form on page 38. 1998 Compared with 1997 Consolidated net sales decreased 3 percent because of the absence of divested businesses. For ongoing businesses, volume and net sales were up 10 percent and 4 percent, respectively, primarily driven by the U.S. and Canadian and Latin American Beverages segments. Weaker exchange rates affected sales, particularly in the Canadian, Latin American and Asia/Pacific businesses. Price changes did not significantly affect the comparison of current and prior year net sales. The consolidated gross profit margin was 51.0 percent in 1998 compared to 48.9 percent in 1997, reflecting improvements across all ongoing segments and the divestiture of lower-margin businesses in 1998. Selling, general and administrative (SG&A) expenses decreased $66.4 million due to the absence of divested businesses. For ongoing businesses, SG&A increased $57.3 million, or 3 percent, driven by a 6 percent increase in advertising and merchandising (A&M) expenses, partly offset by lower general corporate expenses. Total Company A&M expenses were 25.6 percent of sales, up from 24.5 percent in the prior year, reflecting increased spending levels to support new snacks growth and competitive pressures in ready-to-eat cereals in the U.S. and Canadian Foods segment. During 1998, the Company initiated numerous actions to improve future profitability. These actions resulted in $89.7 million in restructuring charges and are divided into three categories: organization alignment, plant consolidations and Asian reorganization. Charges for organization alignment activities totaled $41.5 million. The Company aligned its foods and beverages businesses, combining sales, supply chain and certain administrative functions to realize synergies and maximize scale. These actions resulted in the elimination of approximately 550 positions worldwide, as a layer of executive management was removed and sales and administrative offices and functions were consolidated. Plant consolidations in the United States and Latin America resulted in $19.2 million in charges. These actions will result in the elimination of approximately 300 positions. In light of disappointing performance and a weak economic environment, the Company revised its operational strategy for the Asia/Pacific region. The focus going forward is on building the Gatorade business in China. Asia/Pacific restructuring resulted in $29.0 million in charges for plant and sales and administrative office closures, restructuring of certain joint ventures and the elimination of approximately 450 positions. The 1998 restructuring charges are composed of severance and other termination benefits, asset write-offs, losses on leases and other shut-down costs. Savings from these actions are estimated to be $65 million annually, primarily beginning in 1999, with approximately 90 percent of the savings in cash. 1998 and 1997 restructuring charges by operating segment were as follows: Dollars in Millions 1998 1997 U.S. and Canadian Foods $ 38.4 $ 49.2 Latin American Foods 9.3 10.7 Other Foods 17.8 -- U.S. and Canadian Beverages 8.9 4.9 Latin American Beverages 2.8 -- Other Beverages 12.5 1.1 Total Charges $ 89.7 $ 65.9 <25> In 1998,the Company recognized $38.1 million of asset impairment losses related to ongoing businesses. In conjunction with the Company's ongoing review of underperforming businesses, certain assets are reviewed for impairment pursuant to the provisions of SFAS No. 121. During 1998, the China foods and Brazilian pasta businesses were determined to be impaired. Accordingly, pretax losses of $15.1 million and $23.0 million on these impaired Chinese and Brazilian businesses, respectively, were recorded in order to adjust the carrying value of the long-lived assets of these businesses to fair value. The estimated fair value of these assets was based on various methodologies, including a discounted value of estimated future cash flows and liquidation analyses. The Company continues to review its business strategies and pursue cost-reduction activities, some of which could result in future charges. Charges for asset impairment losses related to divested businesses were also recorded in 1998. The Company divested the following U.S. food businesses in 1998 for a total of $192.7 million and realized a combined pretax loss of $0.7 million, including related impairment losses: (Gains) Total Divestiture Impairment Losses (Gains) Dollars in Millions Date Losses on Sale Losses Ardmore Farms juice August 1998 $ -- $ (2.5) $ (2.5) Continental Coffee September 1998 40.0 (5.1) 34.9 Nile Spice soup cup December 1998 25.4 3.1 28.5 Liqui-Dri biscuit December 1998 -- (60.2) (60.2) Total Losses (Gains) $ 65.4 $(64.7) $ 0.7 Net financing costs (net interest expense and foreign exchange losses) decreased $19.4 million in 1998, due to lower interest expense and higher interest income as a result of lower debt levels and higher cash balances. Debt levels declined by $125.4 million and cash balances increased by $242.4 million from December 31, 1997, due mainly to proceeds from divestitures, a $240.0 million tax recovery related to the 1997 divestiture of the Snapple beverages business and cash flow from operations. Excluding the impact of restructuring and impairment charges and losses and gains on divestitures, the effective tax rate was 36.3 percent in 1998 versus 38.1 percent in 1997. The decrease primarily was due to lower non-deductible goodwill amortization as a result of business divestitures and a reduction in effective state tax rates in 1998. Operating Segment Results Foods U.S. and Canadian Foods - Volume and net sales decreased 1 percent as increases in ready-to-eat cereals, granola bars and new snacks sales were offset by declines in hot cereals and rice cakes. The sales decline in hot cereals was driven by unusually mild winter weather and a change in merchandising strategy. Competitive pressure in the snacks category continued to adversely affect rice cakes sales, although profitability improved due to lower A&M expenses and supply chain efficiencies. In addition, sales in Canada were adversely affected by a weaker exchange rate. The sales increase in new snacks reflects the introduction of a new snacks product, Quaker Fruit & Oatmeal bars. Operating income decreased 5 percent from the prior year due to the sales decline and increased A&M spending, reflecting support of new snacks growth and competitive pressures in ready-to-eat cereals. Latin American Foods - Volume was up 4 percent and net sales were down slightly, reflecting sales increases in Brazilian canned fish and ready-to- drink beverages, partly offset by a weaker exchange rate. Operating income increased 19 percent, or $4.0 million, reflecting lower supply chain and overhead costs, largely the result of restructuring actions. The recent currency devaluation and anticipated slowdown in the Brazilian economy are expected to negatively affect the Company's near-term financial results, while the volatility in the Brazilian economy makes the long-term outlook uncertain. Other Foods - Volume and net sales were down 7 percent and 1 percent, respectively, primarily due to declines in Asia/Pacific Foods, particularly in China. Operating losses decreased $8.7 million, reflecting improved profitability in the European cereals business while losses continued in the Asia/Pacific region. As a result of the restructuring actions, the Company expects a reduced level of operating losses from its food business in the Asia/Pacific region going forward. While restructuring actions have lowered the Company's currency and economic exposure in the Asia/Pacific region, the long-term outlook for the region remains uncertain. Beverages U.S. and Canadian Beverages - Volume and net sales increased 17 percent and 13 percent, respectively. New packaging and flavors and strong growth outside the traditional retail market, along with more favorable weather versus the prior year, contributed to the volume and sales increase, resulting in market share gains. Strong sales growth and supply chain efficiencies drove an 18 percent increase in operating income. <26> Latin American Beverages - Volume and net sales increased 22 percent and 15 percent, respectively, reflecting improved cold-channel distribution and the successful new product launch of Gatorade X-plosive. Operating income increased $6.3 million, driven by strong volumes and lower supply chain costs. The recent currency devaluation and anticipated slowdown in the Brazilian economy are expected to negatively affect the Company's near-term financial results, while the volatility in the Brazilian economy makes the long-term outlook uncertain. Other Beverages - Volume was up 5 percent on nearly flat sales. Warmer weather contributed to a sales gain in Europe, while lower volumes, particularly in China, and weaker exchange rates led to lower sales in the Asia/Pacific region. An operating income increase in Europe was more than offset by continued losses in the Asia/Pacific region. Divested 1998 operating results from divested businesses reflect the operating results for the Ardmore Farms, Continental Coffee, Nile Spice and Liqui-Dri businesses through their divestiture dates, compared to a full year of operating results in 1997. For operating results from divested businesses see page 38. 1997 Compared with 1996 Consolidated net sales decreased 4 percent due to the absence of divested businesses. For ongoing businesses, sales were up 7 percent driven by increases in Gatorade thirst quencher in all beverages operating segments, Latin American Foods and U.S. and Canadian Foods, particularly ready-to-eat and hot cereals and flavored rice and pasta. With the exception of a ready-to-eat cereals price reduction in June 1996, price and currency exchange rate changes did not significantly affect the comparison of 1997 and 1996 net sales. Consolidated gross profit margin was 48.9 percent in 1997 compared to 46.0 percent in 1996, reflecting lower costs in most businesses and the divestiture of the lower-margin Snapple beverages business in 1997. SG&A expenses decreased $42.1 million, primarily due to the absence of divested businesses. For ongoing businesses, SG&A increased $185.7 million, or 12 percent, driven by a 14 percent increase in A&M expenses. Total Company A&M expenses were 24.5 percent of sales, up from 23.1 percent in 1996, driven, in part, by increased media support for Gatorade Frost and spending for new snacks. In 1997, the Company initiated several restructuring actions resulting in charges of $65.9 million. Three foods plants were closed, two in the U.S. and one in Latin America. Combined with other manufacturing consolidation activities in the U.S. and Canadian businesses, restructuring charges totaled $58.1 million. Other actions taken included an office closure in the Asia/Pacific region and staff reductions in the U.S. and Canadian businesses, resulting in charges of $1.1 million and $6.7 million, respectively. In 1996, the Company recorded restructuring charges of $23.0 million including $16.6 million related to the divested Snapple beverages business and $6.4 million for plant consolidations in the U.S. and Canadian Foods businesses. Savings realized from the 1997 and 1996 restructuring actions have been in line with expectations. However, there are no recurring savings to be realized from restructuring activities related to the divested Snapple beverages business. Restructuring charges for 1997 and 1996 by operating segment were as follows: Dollars in Millions 1997 1996 U.S. and Canadian Foods $ 49.2 $ 6.4 Latin American Foods 10.7 -- U.S. and Canadian Beverages 4.9 -- Other Beverages l.1 -- Divested Businesses -- 16.6 Total Charges $ 65.9 $ 23.0 The Company also took numerous actions in 1997 relative to its Brazilian pasta business in light of the continuing operating losses of this business. During the Company's operating planning process, an updated review of the strategies, actions taken to date and the expected financial prospects of this business was performed. As a part of this review, the Company evaluated the recoverability of the long-lived assets of this business pursuant to SFAS No. 121 and recorded a non-cash charge of $39.8 million to reduce the carrying value of the net assets of the Brazilian pasta business to fair market value. The Company's estimate of fair market value was based on various methodologies including a discounted value of estimated future cash flows and a fundamental analysis of the business' value. Separately, the Company received a $35.0 million cash litigation settlement related to this business. The combined charge of $4.8 million was not included in the operating segment results of Latin American Foods. <27> Consolidated 1997 operating results include a pretax loss of $1.41 billion on the sale of the Snapple beverages business in May 1997. As a result of this transaction, the Company recognized a tax benefit and recorded an income tax receivable of $250.0 million related to the expected recovery of taxes paid on previous capital gains from divestitures. In December 1997, the Company completed the sale of the Richardson toppings and condiments business and signed a definitive agreement to sell its food service bagel businesses. These transactions resulted in a combined pretax charge of $5.8 million, reflecting the sale and a write-down of assets to fair market value. Consolidated 1996 operating results included $136.4 million in gains on divestitures. See Note 3 to the consolidated financial statements for further discussion of the Company's divestiture activities. Net financing costs (net interest expense and foreign exchange losses) decreased $18.4 million in 1997. Debt levels declined by over $500 million from December 31, 1996, due mainly to proceeds from the Snapple beverages divestiture and cash flow from operations, resulting in lower interest expense. Excluding the impact of restructuring charges and losses and gains on divestitures in both years, and a non-recurring foreign tax benefit of $7.2 million in 1996, the effective tax rate was 38.1 percent in 1997 versus 41.0 percent in 1996. The decrease primarily was due to lower non-deductible goodwill amortization in 1997, resulting from the Snapple beverages divestiture. Operating Segment Results Foods U.S. and Canadian Foods - Volume and net sales increased 6 percent and 5 percent, respectively. Sales increased in ready-to-eat and hot cereals, flavored rice and pasta, mixes, syrup and new snacks. An 11 percent increase in ready-to-eat cereals sales was driven by volume growth in bagged and boxed cereals. These sales increases more than offset lower sales in rice cakes, as well as the adverse effect of the June 1996 ready-to-eat cereals price reduction. Competitive pressure in the snacks category continued to adversely affect rice cakes sales and profitability. Plant consolidation and new snack product development were among the Company's actions taken to address this issue. Operating income increased 4 percent from 1996, as the favorable effect of the sales gains and lower costs was partly offset by increases in A&M expenses. Higher A&M expenses reflect increased trade and media spending to support hot cereals, grain-based snacks and flavored rice and pasta. Latin American Foods - Volume and net sales were up 4 percent and 8 percent, respectively, driven by increases in Brazilian chocolate powder and ready-to- drink beverages. Operating income increased $7.3 million, reflecting strong sales growth and improved supply chain costs driven by the Brazilian pasta plant consolidation, partly offset by increased A&M spending. Other Foods - Volume and net sales decreased 2 percent and 1 percent, respectively. Improved profitability in the European cereals business was more than offset by continued losses in the Asia/Pacific business, resulting in a $2.4 million increase in operating losses. Beverages U.S. and Canadian Beverages - Volume and net sales increased 9 percent and 8 percent, respectively, reflecting incremental sales from a new product, Gatorade Frost, and strong execution of retail in-store initiatives, resulting in market share gains. Operating income increased 4 percent as sales growth and lower packaging costs were partly offset by a 15 percent increase in A&M expenses and the allocation of overhead costs previously allocated to the Snapple beverages business. Higher A&M expenses were driven, in part, by media spending for Gatorade Frost. Latin American Beverages - Volume and net sales increased 24 percent reflecting gains across all regions. As a result of the sales gains and lower supply chain costs, operating profitability increased by $13.4 million. Other Beverages - Volume decreased 3 percent, while net sales increased 8 percent reflecting a change in product mix. Operating losses were reduced by $11.5 million due to improved profitability in Europe and less underwriting in the Asia/Pacific business. Divested 1997 operating results from divested businesses include: the Snapple beverages business through its May divestiture; the operating results of the food service businesses divested in December 1997; and the full-year operating results of businesses divested in 1998. For operating results from divested businesses see page 38. <28> Liquidity and Capital Resources Net cash provided by operating activities was $513.5 million in 1998, an increase of $23.5 million compared to 1997, reflecting improvements in operating segment profitability. Net cash provided by operating activities in 1997 and 1996 was $490.0 million and $410.4 million, respectively. Operating cash flow in 1997 was favorably affected by a $35.0 million non-recurring cash litigation settlement and improved profitability of ongoing businesses compared to 1996. Capital expenditures were $204.7 million, $215.7 million and $242.7 million for 1998, 1997 and 1996, respectively. Capital expenditures are expected to continue in the low $200 million range in 1999, as the Company plans to continue to invest in cost-reduction projects and expand its production capacity in the United States and Canada. The Company expects capital expenditures and cash dividends to be financed through cash flow from operating activities. Cash proceeds from business divestitures in 1998, 1997 and 1996 were $265.9 million, $300.0 million and $174.4 million, respectively. Over the last three years, cash proceeds from business divestitures were primarily used to reduce short-term debt and repurchase shares of the Company's outstanding common stock. Cash proceeds of $73.2 million from the 1997 sale of certain food service businesses and $240.0 million from the recovery of Federal income taxes paid on previous capital gains related to the 1997 divestiture of the Snapple beverages business were received in 1998. Financing activities used cash of $556.6 million, $593.4 million and $331.3 million in 1998, 1997 and 1996, respectively, primarily reflecting the use of business divestiture proceeds to reduce short-term debt in all three years and to repurchase shares in 1997 and 1998. Short-term and long-term debt (total debt) as of December 31, 1998, was $931.6 million, a decrease of $125.4 million from December 31, 1997. Total debt at December 31, 1996, was $1.56 billion. The total debt-to-total-capitalization ratio was 84.4 percent, 81.0 percent and 55.6 percent as of December 31, 1998, 1997 and 1996, respectively. The loss on the Snapple beverages divestiture and share repurchase activity in 1998 and 1997 were the main reasons for the ratio changes. In 1998, the Company reduced the level of its revolving credit facilities by a total of $175.0 million. The Company now has a $335.0 million annually extendible five-year revolving credit facility and a $165.0 million 364-day extendible revolving credit facility which may, at the Company's option, be converted into a two-year term loan. Both facilities are with various banks. Amounts available under credit facilities obtained by the Company have decreased significantly over the last three years as commercial paper borrowings supported by the revolving credit facilities were reduced. Credit facilities are also available for direct borrowings. The Company's levels of revolving credit facilities at December 31, 1997 and 1996, were $675.0 million and $900.0 million, respectively. In April 1998, the Fitch Rating Agency upgraded the Company's long-term debt rating from BBB to BBB+. The improved debt rating reflects the significant reduction in debt levels compared to the prior year. Other debt and commercial paper ratings were unchanged. The Company's current debt and commercial paper ratings are as follows: Standard & Poor's (BBB+ and A2); Fitch (BBB+ and F2); and Moody's (Baal and P2). During 1998, the Company repurchased 6.9 million shares of its outstanding common stock for $386.7 million, completing its 10 million share repurchase program announced in August 1993 and initiating the $1 billion repurchase program announced in March 1998. As of December 31, 1998, the Company repurchased approximately $265 million under the $1 billion share repurchase program. Derivative Financial and Commodity Instruments The Company actively monitors its exposure to commodity price, foreign currency exchange rate and interest rate risks and uses derivative financial and commodity instruments to manage the impact of certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use instruments with the objective of earning financial gains on the commodity price, exchange rate or interest rate fluctuations alone, nor does it use instruments where there are not underlying exposures. Complex instruments involving leverage or multipliers are not used. Management believes that its use of these instruments to manage risk is in the Company's best interest. The Company has estimated its market risk exposures using sensitivity analyses. Market risk exposure has been defined as the change in fair value of a derivative commodity or financial instrument assuming a hypothetical 10 percent adverse change in market prices or rates. Fair value was determined using quoted market prices, if available. The results of the sensitivity analyses are summarized on page 30. Actual changes in market prices or rates may differ from hypothetical changes. <29> Commodities - The Company uses commodity futures and options to manage price exposures on commodity inventories or anticipated commodity purchases. The Company typically purchases certain commodities such as oats, corn, corn sweetener and wheat. The commodity instruments sensitivity analysis excludes the underlying commodity positions that are being hedged by derivative commodity instruments, which have a high degree of inverse correlation with changes in the fair value of the commodity instruments. Based on the results of the sensitivity analysis, the estimated quarter-end market risk exposure on an average, high and low basis was $4.0 million, $6.7 million and $1.2 million during 1998 and $2.9 million, $4.2 million and $1.4 million during 1997, respectively. Foreign Exchange - The Company uses foreign currency forwards and options contracts and currency swap agreements to manage foreign currency exchange rate risk related to projected operating income from foreign entities and net investments in foreign subsidiaries. The Company's market risk exposure to foreign currency exchange rates exists primarily with the following currencies versus the U.S. dollar: Italian lira, Brazilian real, Chinese renmimbi and Canadian dollar. The foreign exchange sensitivity analysis included currency forward and option contracts and other financial instruments affected by foreign exchange risk, including cash and foreign currency-denominated debt. The sensitivity analysis excluded the underlying projected operating income and net investment exposures, which have a high degree of inverse correlation with the financial investments used to hedge them. Based on the results of the sensitivity analysis, the estimated quarter-end market risk exposure on an average, high and low basis was $2.1 million, $2.9 million and $0.9 million during 1998 and $5.9 million, $8.9 million and $2.5 million during 1997, respectively. Interest Rates - The Company occasionally uses interest rate swap agreements to manage its exposure to fluctuations in interest rates. The Company's interest rate-related financial instruments consist primarily of debt. No derivative financial instruments related to interest rate risk were outstanding as of December 31, 1998. Based on the results of the sensitivity analysis, the estimated market risk exposure for interest rate-related financial instruments was approximately $42 million and $44 million as of December 31, 1998 and 1997, respectively. Current and Pending Accounting Changes and Other Matters In July 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income." This Statement established standards for reporting comprehensive income in the financial statements. The Company adopted this standard in January 1998 and has elected to disclose comprehensive income, which for the Company includes net income, foreign currency translation adjustments and unrealized gains on investments, in the consolidated statements of common shareholders' equity. As previously discussed, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," in December 1998. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement revises employers' disclosures about pensions and other postretirement benefit plans. It does not change the measurement or recognition of those plans in the financial statements. The Company's adoption of this new standard in December 1998 did not result in material changes to previously reported amounts. In January 1998, Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued. This SOP provides guidance on the accounting for computer software costs. In April 1998, SOP No. 98-5, "Reporting on the Costs of Start-Up Activities," was issued. This SOP provides guidance on accounting for the cost of start-up activities. The Company is not required to adopt these Statements until January 1999 and these standards are not expected to materially affect the Company's financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that all derivative instruments (including certain derivative instruments imbedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The accounting provisions for qualifying hedges allow a derivative's gains and losses to offset related results of the hedged item in the income statement, and require that the Company must formally document, designate and assess the effectiveness of transactions that qualify for hedge accounting. The Company has not determined its method or timing of adopting this Statement, but will be required to adopt it by January 2000. When adopted, this Statement could increase volatility in reported earnings and other comprehensive income of the Company. <30> The Company's Mexican operations were treated as a highly inflationary economy through December 31, 1998. Thereafter, the Company will treat Mexico as non- highly inflationary and accordingly, change the functional currency from the U.S. dollar to the Mexican peso. The impact of this change is not expected to have a material effect on the Company's financial statements. Year 2000 The Company uses software and other related technologies throughout its business that will be affected by the date change in the year 2000. The three areas where year 2000 issues may affect the Company include: (1) the computer systems, both hardware and software; (2) imbedded systems, such as computer chips in machinery and process controls; and (3) third parties with material relationships with the Company, such as vendors, customers and suppliers. To address the year 2000 issue, the Company has developed and is executing a detailed comprehensive readiness plan. The first phase of the readiness plan, the assessment of the Company's internal systems, has been completed. The second phase involves the remediation, replacement and testing of computer systems (90 percent complete) and imbedded systems (85 percent complete) and is scheduled for completion by mid-l999. The third phase will continue through mid-l999 and includes the Company taking steps to assess the year 2000 plans of its material third parties. These steps include contacting the Company's major service providers, vendors, suppliers and customers who are believed to be critical to the business operations after January 1, 2000, to determine their stage of year 2000 compliance through questionnaires, interviews, on-site visits, testing and other available means. The fourth phase involves the development of contingency plans in the event of year 2000 non-compliance and is also expected to be completed by mid-1999. While the Company's year 2000 readiness plans are under way, the consequences of non-compliance by the Company, its major service providers, vendors, suppliers or customers, could have a material adverse effect on the Company's operations. Although the Company does not anticipate any major non-compliance issues, it currently believes that the greatest risk of disruption in its business exists in the event of non-compliance by its material third parties. Some of the possible consequences of non-compliance by the Company or its material third parties include, among other things: temporary plant closings; delays in the delivery and receipt of products and supplies; invoice and collection errors; and inventory obsolescence. Given these risks, the Company is developing contingency plans intended to mitigate the possible disruption in business operations that may result from year 2000 non-compliance. Contingency plans may include stockpiling raw and packaging materials, increasing finished goods inventory levels, securing alternate suppliers or other appropriate measures. It is currently estimated that the aggregate cost of the Company's year 2000 efforts will be approximately $ 12 million to $15 million, of which approximately $9 million has been incurred to date. All of these costs are being funded through operating cash flow. These amounts do not include any costs associated with the implementation of contingency plans, which are in the process of being developed. The Company's year 2000 readiness plan is an ongoing process and the estimates of costs and completion dates for various components of the program as described above are subject to change. Subsequent Event In February 1999, the Company announced it had reached a definitive agreement to sell its Brazilian pasta business. The sale of this business is not expected to have a material impact on the Company's operating results. Cautionary Statement on Forward-Looking Statements Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis. Statements that are not historical facts, including statements about expectations or projected results, are forward-looking statements. The Company's results may differ materially from those in the forward-looking statements. Forward-looking statements are based on management's current views and assumptions, and involve risks and uncertainties that could significantly affect expected results. For example, operating results may be affected by factors such as: actions of competitors; changes in laws and regulations, including changes in governmental interpretations of regulations and changes in accounting standards; customer demand; effectiveness of spending or programs; fluctuations in the cost and availability of supply chain resources; foreign economic conditions, including currency rate fluctuations; weather; and the ability of the Company, its major service providers, vendors, suppliers and customers, to adequately address the year 2000 issue. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them. <31> THE QUAKER OATS COMPANY AND SUBSIDIARIES
Dollars in Millions (Except Per Share Data) Consolidated Year Ended December 31 1998 1997 1996 Statements of Income Net Sales $ 4,842.5 $ 5,015.7 $ 5,199.0 Cost of goods sold 2,374.4 2,564.9 2,807.5 Gross profit 2,468.1 2,450.8 2,391.5 Selling, general and administrative expenses 1,872.5 1,938.9 1,981.0 Restructuring charges, asset impairments and losses (gains) on divestitures - net 128.5 1,486.3 (113.4) Interest expense 69.6 85.8 106.8 Interest income (10.7) (6.7) (7.4) Foreign exchange loss - net 11.6 10.8 8.9 Income (Loss) Before Income Taxes 396.6 (1,064.3) 415.6 Provision (benefit) for income taxes 112.1 (133.4) 167.7 Net Income (Loss) 284.5 (930.9) 247.9 Preferred dividends - net of tax 4.5 3.5 3.7 Net Income (Loss) Available for Common $ 280.0 $ (934.4) $ 244.2 Per Common Share: Net income (loss) $ 2.04 $ (6.80) $ 1.80 Net income (loss) - assuming dilution $ 1.97 $ (6.80) $ 1.78 Dividends declared $ 1.14 $ 1.14 $ 1.14 Average Number of Common Shares Outstanding (in thousands) 137,185 137,460 135,466 See accompanying notes to the consolidated financial statements. <32> Dollars in Millions Consolidated Year Ended December 31 1998 1997 1996 Statements of Cash Flows Cash Flows from Operating Activities: Net income (loss) $ 284.5 $ (930.9) $ 247.9 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 132.5 161.4 200.6 Deferred income taxes (31.1) (12.0) 14.3 (Gains) losses on divestitures - net of tax of $(27.4), $(269.0) and $54.6 in 1998,1997 and 1996, respectively (26.7) 1,151.4 (81.8) Restructuring charges 89.7 65.9 23.0 Asset impairment losses 38.1 39.8 -- Loss on disposition of property and equipment 11.9 41.6 29.0 Decrease (increase) in trade accounts receivable 5.6 (61.0) 62.6 (Increase) decrease in inventories (32.8) (24.5) 19.6 (Increase) decrease in other current assets (15.1) (11.6) 65.1 Decrease in trade accounts payable (20.0) (3.2) (53.7) Increase (decrease) in other current liabilities 21.3 9.8 (164.2) Change in deferred compensation 32.2 20.1 21.5 Other items 23.4 43.2 26.5 Net Cash Provided by Operating Activities 513.5 490.0 410.4 Cash Flows from Investing Activities: Capital gains tax recovery 240.0 -- -- Additions to property, plant and equipment (204.7) (215.7) (242.7) Business divestitures - net of tax of $54.6 in 1996 265.9 300.0 174.4 Purchase of marketable securities (165.5) -- -- Proceeds from sale of marketable securities 143.1 -- -- Proceeds from sale of property, plant and equipment 7.7 -- -- Change in other assets -- -- 0.2 Net Cash Provided by (Used in) Investing Activities 286.5 84.3 (68.1) Cash Flows from Financing Activities: Cash dividends (159.7) (159.4) (157.0) Change in short-term debt (17.2) (452.9) (124.5) Proceeds from long-term debt 1.9 8.3 2.4 Reduction of long-term debt (108.7) (54.4) (77.7) Issuance of common treasury stock 112.0 121.2 31.0 Repurchases of common stock (377.3) (50.0) -- Repurchases of preferred stock (7.6) (6.2) (5.5) Net Cash Used in Financing Activities (556.6) (593.4) (331.3) Effect of Exchange Rate Changes on Cash and Cash Equivalents (1.0) (7.2) 6.3 Net Increase (Decrease) in Cash and Cash Equivalents 242.4 (26.3) 17.3 Cash and Cash Equivalents - Beginning of Period 84.2 110.5 93.2 Cash and Cash Equivalents - End of Period $ 326.6 $ 84.2 $ 110.5 See accompanying notes to the consolidated financial statements. <33> THE QUAKER OATS COMPANY AND SUBSIDIARIES Consolidated December 31 1998 1997 Balance Sheets Assets Current Assets Cash and cash equivalents $ 326.6 $ 84.2 Marketable securities 27.5 -- Trade accounts receivable - net of allowances 283.4 305.7 Inventories Finished goods 189.1 172.6 Grains and raw materials 48.4 59.0 Packaging materials and supplies 23.9 24.5 Total inventories 261.4 256.1 Other current assets 216.1 487.0 Total Current Assets 1,115.0 1,133.0 Property, Plant and Equipment Land 24.1 29.1 Buildings and improvements 390.2 417.2 Machinery and equipment 1,404.5 1,466.8 Property, plant and equipment 1,818.8 1,913.1 Less: accumulated depreciation 748.6 748.4 Property - Net 1,070.2 1,164.7 Intangible Assets - Net of Amortization 245.7 350.5 Other Assets 79.4 48.8 Total Assets $ 2,510.3 $ 2,697.0 See accompanying notes to the consolidated financial statements. <34> Dollars in Millions (Except Per Share Data) December 31 1998 1997 Liabilities and Shareholders' Equity Current Liabilities Short-term debt $ 41.3 $ 61.0 Current portion of long-term debt 95.2 108.4 Trade accounts payable 168.4 191.3 Accrued payroll, benefits and bonus 131.4 132.3 Accrued advertising and merchandising 125.6 123.0 Income taxes payable 63.7 73.8 Other accrued liabilities 383.5 255.9 Total Current Liabilities 1,009.1 945.7 Long-term Debt 795.1 887.6 Other Liabilities 533.4 578.9 Deferred Income Taxes -- 36.3 Preferred Stock, Series B, no par value, authorized 1,750,000 shares; issued 1,282,051 of $5.46 cumulative convertible shares (liquidating preference of $78 per share) 100.0 100.0 Deferred Compensation (48.4) (57.2) Treasury Preferred Stock, at cost, 302,969 and 245,147 shares, respectively (29.9) (22.3) Common Shareholders' Equity Common stock, $5 par value, authorized 400 million shares 840.0 840.0 Additional paid-in capital 78.9 29.0 Reinvested earnings 555.8 431.0 Accumulated other comprehensive income (80.1) (82.4) Deferred compensation (67.6) (91.0) Treasury common stock, at cost (1,176.0) (898.6) Total Common Shareholders' Equity 151.0 228.0 Total Liabilities and Shareholders' Equity $ 2,510.3 $ 2,697.0
<35> THE QUAKER OATS COMPANY AND SUBSIDIARIES
Consolidated Statements of Common Shareholders'Equity Common Stock Issued Common Shares Shares Amount Outstanding Balance as of December 31, 1995 167,978,792 $ 840.0 134,806,055 Net income Other comprehensive income: Foreign currency translation adjustments - net of allocated income tax benefits of $1.1 Total comprehensive income Cash dividends declared on common stock Cash dividends declared on preferred stock Common stock issued for stock purchase and incentive plans 1,287,010 Deferred compensation Other Balance as of December 31, 1996 167,978,792 840.0 136,093,065 Net loss Other comprehensive income: Foreign currency translation adjustments - net of allocated income tax provision of $0.4 Total comprehensive income Cash dividends declared on common stock Cash dividends declared on preferred stock Common stock issued for stock purchase and incentive plans 3,707,667 Repurchases of common stock (987,632) Deferred compensation Other Balance as of December 31, 1997 167,978,792 840.0 138,813,100 Net income Other comprehensive income: Foreign currency translation adjustments - net of allocated income tax benefits of $0.3 Unrealized gain on investments (b) Total comprehensive income Cash dividends declared on common stock Cash dividends declared on preferred stock Common stock issued for stock purchase and incentive plans 3,375,088 Repurchases of common stock (6,865,680) Deferred compensation Other Balance as of December 31, 1998 167,978,792 $ 840.0 135,322,508
(a) Cumulative translation adjustment as of December 31, 1995, 1996, 1997 and 1998 were $(77.8) million, $(68.2) million, $(82.4) million and $(80.5) million, respectively. (b) Reflects the Company's investment in preferred stock that is classified as marketable securities in the balance sheet. Estimated income taxes were not material. See accompanying notes to the consolidated financial statements. <36>
Dollars in Millions Additional Accumulated Other Paid-In Reinvested Deferred Treasury Common Stock Comprehensive Capital Earnings Compensation Shares Amount Income (a) Total $ -- $ 1,433.6 $ (118.1) 33,172,737 $ (998.4) $ (77.8) $ 1,079.3 247.9 247.9 9.6 9.6 257.5 (153.3) (153.3) (3.7) (3.7) (3.0) (3.2) (1,287,010) 38.6 32.4 14.7 14.7 3.0 3.0 -- 1,521.3 (103.4) 31,885,727 (959.8) (68.2) 1,229.9 (930.9) (930.9) (14.2) (14.2) (945.1) (155.9) (155.9) (3.5) (3.5) 11.2 (3,707,667) 111.2 122.4 987,632 (50.0) (50.0) 12.4 12.4 17.8 17.8 29.0 431.0 (91.0) 29,165,692 (898.6) (82.4) 228.0 284.5 284.5 1.9 1.9 0.4 0.4 286.8 (155.2) (155.2) (4.5) (4.5) 15.7 (3,375,088) 109.3 125.0 6,865,680 (386.7) (386.7) 23.4 23.4 34.2 34.2 $ 78.9 $ 555.8 $ (67.6) 32,656,284 $(1,176.0) $ (80.1) $ 151.0
<37> THE QUAKER OATS COMPANY AND SUBSIDIARIES
Dollars in Millions (Except Per Share Data) Operating Segment Net Sales (a) Operating Income (Loss) (b) Information Year Ended December 31 1998 1997 1996 1998 1997 1996 Foods U.S. and Canadian $ 2,274.1 $ 2,287.8 $ 2,184.5 $ 369.8 $ 390.3 $ 375.3 Latin American 449.8 451.4 418.3 25.4 21.4 14.1 Other (c) 202.9 205.7 207.2 (1.2) (9.9) (7.5) Total Foods 2,926.8 2,944.9 2,810.0 394.0 401.8 381.9 Beverages U.S. and Canadian 1,338.2 1,183.3 1,095.4 214.9 182.7 176.3 Latin American 267.7 232.2 187.4 25.6 19.3 5.9 Other (c) 103.1 103.0 95.1 (7.4) (15.0) (26.5) Total Beverages 1,709.0 1,518.5 1,377.9 233.1 187.0 155.7 Total Ongoing Businesses 4,635.8 4,463.4 4,187.9 627.1 588.8 537.6 Total Divested Businesses(d) 206.7 552.3 1,011.1 0.4 (22.0) (85.1) Total Sales/Operating Income $ 4,842.5 $ 5,015.7 $ 5,199.0 $ 627.5 $ 566.8 $ 452.5 Less: Restructuring charges, asset impairments, losses (gains) on divestitures and other - net (e)(f)(g)(h) 128.5 1,491.1 (113.4) General corporate expenses 31.9 50.1 42.0 Interest expense - net 58.9 79.1 99.4 Foreign exchange loss - net 11.6 10.8 8.9 Income (Loss) before income taxes 396.6 (1,064.3) 415.6 Provision (benefit) for income taxes 112.1 (133.4) 167.7 Net Income (Loss) $ 284.5 $ (930.9) $ 247.9 Per Common Share: Net income (loss) $ 2.04 $ (6.80) $ 1.80 Net income (loss) - assuming dilution $ 1.97 $ (6.80) $ 1.78
(a) Intersegment revenue is not material. (b) Operating results exclude restructuring and impairment charges, losses and gains on divestitures and certain other expenses not allocated to operating segments such as income taxes, general corporate expenses and financing costs. (c) Other includes European and Asia/Pacific businesses. (d) 1998 includes net sales and operating results (through the divestiture date) for the Ardmore Farms, Continental Coffee, Nile Spice and Liqui-Dri businesses. 1997 includes net sales and operating results (through the divestiture date) for the Snapple beverages and certain food service businesses and the businesses divested in 1998. 1996 includes net sales and operating results (through the divestiture date) for the U.S. and Canadian frozen foods and Italian products businesses and the businesses divested in 1998 and 1997. (e) 1998 includes pretax restructuring charges of $89.7 million, or $0.38 per share, pretax asset impairment losses of $38.1 million, or $0.18 per share, and a combined pretax divestiture loss of $0.7 million, or a gain of $0.20 per share due to certain tax benefits. (f) 1997 includes pretax restructuring charges of $65.9 million, or $0.27 per share, a pretax net charge of $4.8 million, or $0.02 per share, for an asset impairment loss partly offset by a cash litigation settlement, and a combined pretax loss of $1.42 billion, or $8.41 per share, for business divestitures. (g) 1996 includes pretax restructuring charges of $23.0 million, or $0.14 per share, and pretax gains of $136.4 million, or $0.60 per share, for business divestitures. (h) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1996 through 1998 restructuring and impairment charges and losses and gains on divestitures. <38>
Dollars in Millions Operating Segment Data Identifiable Capital Depreciation and Assets Expenditures Amortization Year Ended December 31 1998 1997 1996 1998 1997 1996 1998 1997 1996 Foods U.S. and Canadian $ 1,187.0 $ 1,056.9 $ 1,089.1 $ 102.7 $ 76.6 $ 90.4 $ 65.2 $ 69.4 $ 66.6 Latin American 205.2 207.4 255.9 13.4 15.7 14.8 9.5 13.4 14.1 Other (a) 92.1 121.5 128.5 5.7 18.0 17.3 6.3 5.7 6.7 Total Foods 1,484.3 1,385.8 1,473.5 121.8 110.3 122.5 81.0 88.5 87.4 Beverages U.S. and Canadian 464.2 364.5 368.2 57.6 55.1 81.3 31.5 28.7 23.8 Latin American 94.6 81.9 83.7 12.1 5.6 5.4 5.8 6.5 4.7 Other (a) 109.5 98.2 85.9 5.5 24.2 10.6 4.7 4.2 3.7 Total Beverages 668.3 544.6 537.8 75.2 84.9 97.3 42.0 39.4 32.2 Total Ongoing Businesses 2,152.6 1,930.4 2,011.3 197.0 195.2 219.8 123.0 127.9 119.6 Total Divested Businesses (b) -- 250.9 2,162.3 7.7 20.5 22.9 8.6 31.8 79.5 Total Operating Segments 2,152.6 2,181.3 4,173.6 204.7 215.7 242.7 131.6 159.7 199.1 Corporate (c) 357.7 515.7 220.8 -- -- -- 0.9 1.7 1.5 Total Consolidated $ 2,510.3 $ 2,697.0 $ 4,394.4 $ 204.7 $ 215.7 $ 242.7 $ 132.5 $ 161.4 $ 200.6
(a) Other includes European and Asia/Pacific businesses. (b) Includes the following Divested Businesses: 1998 (Ardmore Farms, Continental Coffee, Nile Spice and Liqui-Dri); 1997 (Snapple, certain food service businesses and the businesses divested in 1998); 1996 (U.S. and Canadian frozen foods and Italian products businesses, and the businesses divested in 1998 and 1997). (c) Includes corporate cash and cash equivalents, short-term investments and miscellaneous receivables and investments. <39> THE QUAKER OATS COMPANY AND SUBSIDIARIES
Dollars in Millions Enterprise Information Year Ended December 31 1998 1997 1996 Net Sales (a) U.S. Hot Cereals $ 430.8 $ 462.0 $ 439.9 U.S. Ready-to-Eat Cereals 711.9 692.9 626.3 U.S. Grain-based Snacks 290.8 268.5 284.6 U.S. Flavored Rice and Pasta 340.5 343.1 315.5 U.S. Other Foods 318.3 327.6 325.4 Total U.S. Foods 2,092.3 2,094.1 1,991.7 Canadian Foods 181.8 193.7 192.8 Latin American Foods 449.8 451.4 418.3 European and Asia/Pacific Foods 202.9 205.7 207.2 Total Foods 2,926.8 2,944.9 2,810.0 U.S. Beverages 1,306.8 1,153.2 1,066.0 Canadian Beverages 31.4 30.1 29.4 Latin American Beverages 267.7 232.2 187.4 European and Asia/Pacific Beverages 103.1 103.0 95.1 Total Beverages 1,709.0 1,518.5 1,377.9 Total Ongoing Businesses 4,635.8 4,463.4 4,187.9 U.S. Divested 206.7 545.5 975.6 Foreign Divested -- 6.8 35.5 Total Divested Businesses 206.7 552.3 1,011.1 Total Consolidated $ 4,842.5 $ 5,015.7 $ 5,199.0 (a) Represents net sales to unaffiliated customers.
<40>
Dollars in Millions Geographic Information Year Ended December 31 1998 1997 1996 Net Sales (a) Total U.S. $ 3,605.8 $ 3,792.8 $ 4,033.3 Total Foreign 1,236.7 1,222.9 1,165.7 Total Consolidated $ 4,842.5 $ 5,015.7 $ 5,199.0 Year Ended December 31 1998 1997 1996 Long-lived Assets (b) Total U.S. $ 1,078.1 $ 1,227.2 $ 3,110.8 Total Foreign 237.8 288.0 327.1 Total Consolidated $ 1,315.9 $ 1,515.2 $ 3,437.9 (a) Represents net sales to unaffiliated customers. (b) Long-lived assets include net intangible assets and net property, plant and equipment. 1997 assets include assets related to businesses divested in 1998; 1996 assets include assets related to businesses divested in 1997 and 1998.
<41> THE QUAKER OATS COMPANY AND SUBSIDIARIES
Six-Year Year Ended December 31 1998 1997 1996 1995 1994 1993 Selected Operating Results (a)(b)(c)(d)(e)(f)(g)(h) Financial Data Net sales $ 4,842.5 $ 5,015.7 $ 5,199.0 $ 5,954.0 $ 6,211.1 $ 5,791.9 Gross profit 2,468.1 2,450.8 2,391.5 2,659.6 3,088.4 2,920.0 Income (loss) before income taxes and cumulative effect of accounting changes 396.6 (1,064.3) 415.6 1,220.5 320.4 495.0 Provision (benefit) for income taxes 112.1 (133.4) 167.7 496.5 127.3 190.4 Income (loss) before cumulative effect of accounting changes 284.5 (930.9) 247.9 724.0 193.1 304.6 Cumulative effect of accounting changes - net of tax -- -- -- -- (4.1) -- Net income (loss) $ 284.5 $ (930.9) $ 247.9 $ 724.0 $ 189.0 $ 304.6 Per common share: Income (loss) before cumulative effect of accounting changes $ 2.04 $ (6.80) $ 1.80 $ 5.39 $ 1.41 $ 2.14 Cumulative effect of accounting changes -- -- -- -- (0.03) -- Net income (loss) $ 2.04 $ (6.80) $ 1.80 $ 5.39 $ 1.38 $ 2.14 Net income (loss) - assuming dilution $ 1.97 $ (6.80) $ 1.78 $ 5.23 $ 1.36 $ 2.09 Dividends declared: Common stock $ 155.2 $ 155.9 $ 153.3 $ 150.8 $ 145.8 $ 138.2 Per common share $ 1.14 $ 1.14 $ 1.14 $ 1.14 $ 1.10 $ 1.01 Convertible preferred and redeemable preference stock $ 4.5 $ 3.5 $ 3.7 $ 4.0 $ 4.0 $ 4.1 Average number of common shares outstanding (in thousands) 137,185 137,460 135,466 134,149 133,709 139,833
(a) 1998 operating results include pretax restructuring charges of $89.7 million, or $0.38 per share, pretax asset impairment losses of $38.1 million, or $0.18 per share, and a combined pretax divestiture loss of $0.7 million, or a gain of $0.20 per share due to certain tax benefits. (b) 1997 operating results include pretax restructuring charges of $65.9 million, or $0.27 per share, and a combined pretax loss of $1.42 billion, or $8.41 per share, for business divestitures. (c) 1996 operating results include pretax restructuring charges of $23.0 million, or $0.14 per share, and pretax gains of $136.4 million, or $0.60 per share, for business divestitures. (d) 1995 operating results include pretax restructuring charges of $117.3 million, or $0.53 per share, and pretax gains of $1.17 billion, or $5.20 per share, for business divestitures. (e) 1994 operating results include pretax restructuring charges of $118.4 million, or $0.55 per share, and a pretax gain of $9.8 million, or $0.07 per share, for a business divestiture. (f) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1996 through 1998 restructuring and impairment charges and losses and gains on divestitures. (g) 1994 cumulative effect of accounting changes includes an after-tax charge of $4.1 million for the adoption of SFAS No. 112. (h) Per share data and average number of common shares outstanding reflect the 1994 two-for-one stock split-up. <42>
Dollars in Millions (Except Per Share Data) Year Ended December 31 1998 1997 1996 1995 1994 1993 Financial Statistics Current ratio 1.1 1.2 0.7 0.6 0.5 0.9 Working capital $ 105.9 $ 187.3 $ (465.0) $ (621.6) $(1,616.9) $ (89.4) Property, plant and equipment - net $ 1,070.2 $ 1,164.7 $ 1,200.7 $ 1,167.8 $ 1,333.1 $ 1,222.0 Depreciation expense $ 116.3 $ 122.0 $ 119.1 $ 115.3 $ 133.1 $ 132.3 Total assets $ 2,510.3 $ 2,697.0 $ 4,394.4 $ 4,620.4 $ 5,061.1 $ 2,805.2 Long-term debt $ 795.1 $ 887.6 $ 993.5 $ 1,051.8 $ 1,025.9 $ 708.4 Convertible preferred stock (net of deferred compensation) and redeemable preference stock $ 21.7 $ 20.5 $ 19.0 $ 17.7 $ 17.0 $ 13.1 Common shareholders' equity $ 151.0 $ 228.0 $ 1,229.9 $ 1,079.3 $ 452.7 $ 437.4 Net cash provided by operating activities $ 513.5 $ 490.0 $ 410.4 $ 407.1 $ 415.8 $ 506.6 Operating return on assets (a) 29.0% 17.8% 10.6% 7.9% 16.0% 23.6% Gross profit as a percentage of sales 51.0% 48.9% 46.0% 44.7% 49.7% 50.4% Advertising and merchandising as a percentage of sales 25.6% 24.5% 23.1% 24.6% 27.2% 25.9% Income (loss) before cumulative effect of accounting changes as a percentage of sales 5.9% (18.6%) 4.8% 12.2% 3.1% 5.3% Total debt-to-total-capitalization ratio (b) 84.4% 81.0% 55.6% 61.7% 86.3% 69.9% Common dividends per share as a percentage of income (loss) available for common shares (excluding cumulative effect of accounting changes) 55.9% (16.8%) 63.3% 21.2% 78.0% 47.2% Number of common shareholders 26,352 27,838 29,690 30,353 28,142 28,237 Number of employees worldwide 11,860 14,123 14,800 16,100 20,753 20,207 Market price range of common stock: High (c) $ 65 9/16 $ 55 1/8 $ 39 1/2 $ 37 1/2 $ 42 1/2 $ 38 1/2 Low (c) $ 48 1/2 $ 34 3/8 $ 30 3/8 $ 30 1/4 $ 29 3/4 $ 30 3/16
(a) Operating income divided by average identifiable assets of the consolidated total (excluding corporate). (b) Total debt divided by total debt plus total shareholders' equity including convertible preferred stock (net of deferred compensation) and redeemable preference stock. (c) Per share data reflect the 1994 two-for-one stock split- up. <43> THE QUAKER OATS COMPANY AND SUBSIDIARIES
Eleven-Year Selected Financial Data Year Ended December 31 1998 1997 1996 Operating Results(a)(b)(c)(d)(e)(f)(g)(h)(i)(j)(k)(l) Net sales $ 4,842.5 $ 5,015.7 $ 5,199.0 Gross profit 2,468.1 2,450.8 2,391.5 Income (loss) from continuing operations before income taxes and cumulative effect of accounting changes 396.6 (1,064.3) 415.6 Provision (benefit) for income taxes 112.1 (133.4) 167.7 Income (loss) from continuing operations before cumulative effect of accounting changes 284.5 (930.9) 247.9 (Loss) income from discontinued operations - net of tax -- -- -- Cumulative effect of accounting changes - net of tax -- -- -- Net income (loss) $ 284.5 $ (930.9) $ 247.9 Per common share: Income (loss) from continuing operations before cumulative effect of accounting changes $ 2.04 $ (6.80) $ 1.80 (Loss) income from discontinued operations -- -- -- Cumulative effect of accounting changes -- -- -- Net income (loss) $ 2.04 $ (6.80) $ 1.80 Net income (loss) - assuming dilution $ 1.97 $ (6.80) $ 1.78 Dividends declared: Common stock $ 155.2 $ 155.9 $ 153.3 Per common share $ 1.14 $ 1.14 $ 1.14 Convertible preferred and redeemable preference stock $ 4.5 $ 3.5 $ 3.7 Average number of common shares outstanding (in thousands) 137,185 137,460 135,466
(a) 1998 operating results include pretax restructuring charges of $89.7 million, or $0.38 per share, pretax asset impairment losses of $38.1 million, or $0.18 per share, and a combined pretax divestiture loss of $0.7 million, or a gain of $0.20 per share due to certain tax benefits. (b) 1997 operating results include pretax restructuring charges of $65.9 million, or $0.27 per share, and a combined pretax loss of $1.42 billion, or $8.41 per share, for business divestitures. (c) 1996 operating results include pretax restructuring charges of $23.0 million, or $0.14 per share, and pretax gains of $136.4 million, or $0.60 per share, for business divestitures. (d) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1996 through 1998 restructuring and impairment charges and losses and gains on divestitures. (e) 1995 transition period reflects only six months of operating results. (f) 1995 transition period operating results include pretax restructuring charges of $40.8 million, or $0.18 per share. <44>
Dollars in Millions (Except Per Share Data) Transition Fiscal Year Period Ended Ended December 31 June 30 1995 1995 1994 1993 1992 1991 1990 1989 1988 $ 2,733.1 $ 6,365.2 $ 5,955.0 $ 5,730.6 $ 5,576.4 $ 5,491.2 $ 5,030.6 $ 4,879.4 $ 4,508.0 1,203.8 2,983.7 3,028.8 2,860.6 2,745.3 2,652.7 2,350.3 2,229.0 2,114.6 25.6 1,359.9 378.7 467.6 421.5 411.5 382.4 239.1 314.6 11.9 553.8 147.2 180.8 173.9 175.7 153.5 90.2 118.1 13.7 806.1 231.5 286.8 247.6 235.8 228.9 148.9 196.5 -- -- -- -- -- (30.0) (59.9) 54.1 59.2 -- (4.1) -- (115.5) -- -- -- -- -- $ 13.7 $ 802.0 $ 231.5 $ 171.3 $ 247.6 $ 205.8 $ 169.0 $ 203.0 $ 255.7 $ 0.09 $ 6.00 $ 1.68 $ 1.96 $ 1.63 $ 1.53 $ 1.47 $ 0.94 $ 1.23 -- -- -- -- -- (0.20) (0.40) 0.34 0.37 -- (0.03) -- (0.79) -- -- -- -- -- $ 0.09 $ 5.97 $ 1.68 $ 1.17 $ 1.63 $ 1.33 $ 1.07 $ 1.28 $ 1.60 $ 0.09 $ 5.80 $ 1.65 $ 1.14 $ 1.59 $ 1.30 $ 1.05 $ 1.25 $ 1.57 $ 75.7 $ 150.8 $ 140.6 $ 136.1 $ 128.6 $ 118.7 $ 106.9 $ 95.2 $ 79.9 $ 0.57 $ 1.14 $ 1.06 $ 0.96 $ 0.86 $ 0.78 $ 0.70 $ 0.60 $ 0.50 $ 2.0 $ 4.0 $ 4.0 $ 4.2 $ 4.2 $ 4.3 $ 3.6 -- -- 134,355 133,763 135,236 143,948 149,762 151,808 153,074 158,614 159,670
(g) Fiscal 1995 operating results include pretax restructuring charges of $76.5 million, or $0.35 per share, and pretax gains of $1.17 billion, or $5.20 per share, for business divestitures. (h) Fiscal 1994 operating results include pretax restructuring charges of $118.4 million, or $0.55 per share, and a pretax gain of $9.8 million, or $0.07 per share, for a business divestiture. (i) Fiscal 1995 cumulative effect of accounting changes includes an after-tax charge of $4.1 million for the adoption of SFAS No. 112. (j) Fiscal 1993 cumulative effect of accounting changes includes an after-tax charge of $125.4 million for the adoption of SFAS No. 106 and a $9.9 million tax benefit for the adoption of SFAS No. 109. (k) Fiscal 1989 operating results include pretax restructuring charges of $124.3 million, or $0.50 per share, for plant consolidations and overhead reductions, and a pretax charge of $25.6 million, or $0.10 per share, for a change to the LIFO method of accounting for the majority of U.S. Foods and Beverages inventories. (l) Per share data and average number of common shares outstanding reflect the fiscal 1995 two-for-one stock split-up. <45> THE QUAKER OATS COMPANY AND SUBSIDIARIES
Eleven-Year Selected Financial Data Year Ended December 31 1998 1997 1996 Financial Statistics (a)(b)(c) Current ratio 1.1 1.2 0.7 Working capital $ 105.9 $ 187.3 $ (465.0) Property, plant and equipment - net $ 1,070.2 $ 1,164.7 $ 1,200.7 Depreciation expense $ 116.3 $ 122.0 $ 119.1 Total assets $ 2,510.3 $ 2,697.0 $ 4,394.4 Long-term debt $ 795.1 $ 887.6 $ 993.5 Convertible preferred stock (net of deferred compensation) and redeemable preference stock $ 21.7 $ 20.5 $ 19.0 Common shareholders' equity $ 151.0 $ 228.0 $ 1,229.9 Net cash provided by operating activities $ 513.5 $ 490.0 $ 410.4 Operating return on assets (d) 29.0% 17.8% 10.6% Gross profit as a percentage of sales 51.0% 48.9% 46.0% Advertising and merchandising as a percentage of sales 25.6% 24.5% 23.1% Income (loss) from continuing operations before cumulative effect of accounting changes as a percentage of sales 5.9% (18.6%) 4.8% Total debt-to-total-capitalization ratio (e) 84.4% 81.0% 55.6% Common dividends per share as a percentage of income (loss) available for common shares (excluding cumulative effect of accounting changes) 55.9% (16.8%) 63.3% Number of common shareholders 26,352 27,838 29,690 Number of employees worldwide 11,860 14,123 14,800 Market price range of common stock: High (f) $ 65 9/16 $ 55 1/8 $ 39 1/2 Low (f) $ 48 1/2 $ 34 3/8 $ 30 3/8
(a) Income-related statistics exclude the results of businesses reported as discontinued operations. Balance sheet amounts and related statistics have not been restated for discontinued operations, other than Fisher-Price, due to materiality. (b) 1995 transition period reflects only six months of results. (c) Effective fiscal 1991, common shareholders' equity and the number of employees worldwide were reduced as a result of the Fisher-Price spin-off. <46>
Dollars in Millions (Except Per Share Data) Transition Fiscal Period Ended Year Ended December 31 June 30 1995 1995 1994 1993 1992 1991 1990 1989 1988 0.6 0.7 1.0 1.0 1.2 1.3 1.3 1.8 1.4 $ (621.6) $ (496.3) $ (5.5) $ (37.5) $ 168.7 $ 317.8 $ 342.8 $ 695.8 $ 417.5 $ 1,167.8 $ 1,113.4 $ 1,214.2 $ 1,228.2 $ 1,273.3 $ 1,232.7 $ 1,154.1 $ 959.6 $ 922.5 $ 59.2 $ 125.4 $ 133.3 $ 129.9 $ 129.7 $ 125.2 $ 103.5 $ 94.2 $ 88.3 $ 4,620.4 $ 4,826.9 $ 3,043.3 $ 2,815.9 $ 3,039.9 $ 3,060.5 $ 3,377.4 $ 3,125.9 $ 2,886.1 $ 1,051.8 $ 1,103.1 $ 759.5 $ 632.6 $ 688.7 $ 701.2 $ 740.3 $ 766.8 $ 299.1 $ 17.7 $ 18.8 $ 15.3 $ 11.4 $ 7.9 $ 4.8 $ 1.8 -- -- $ 1,079.3 $ 1,128.8 $ 445.8 $ 551.1 $ 842.1 $ 901.0 $ 1,017.5 $ 1,137.1 $ 1,251.1 $ 84.3 $ 475.5 $ 450.8 $ 558.2 $ 581.3 $ 543.2 $ 460.0 $ 408.3 $ 320.8 3.3% 12.4% 23.9% 21.8% 18.8% 19.1% 19.8% 19.5% 19.6% 44.0% 46.9% 50.9% 49.9% 49.2% 48.3% 46.7% 45.7% 46.9% 24.1% 26.3% 26.6% 25.7% 26.0% 25.6% 23.8% 23.4% 24.9% 0.5% 12.7% 3.9% 5.0% 4.4% 4.3% 4.6% 3.1% 4.4% 61.7% 59.0% 68.8% 59.0% 48.7% 47.4% 52.3% 44.2% 33.8% 633.3% 19.0% 63.1% 48.9% 52.9% 58.9% 65.1% 46.9% 31.3% 30,353 29,148 28,197 33,154 33,580 33,603 33,859 34,347 34,231 16,100 17,300 20,000 20,200 21,100 20,900 28,200 31,700 31,300 $ 37 3/8 $ 42 1/2 $ 41 $ 38 1/2 $ 37 7/8 $ 32 7/16 $ 34 7/16 $ 33 1/8 $ 28 11/16 $ 30 3/4 $ 29 3/4 $ 30 15/16 $ 28 1/16 $ 25 1/8 $ 20 7/8 $ 22 9/16 $ 21 5/16 $ 15 1/2
(d) Operating income divided by average identifiable assets of the consolidated total (excluding corporate). (e) Total debt divided by total debt plus total shareholders' equity including convertible preferred stock (net of deferred compensation) and redeemable preference stock. (f) Per share data reflect the fiscal 1995 two-for-one stock split-up. <47> THE QUAKER OATS COMPANY AND SUBSIDIARIES Notes to the Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies Consolidation - The consolidated financial statements include The Quaker Oats Company and all of its subsidiaries (the Company). All significant intercompany transactions have been eliminated. Divested businesses are included in the results of operations until their divestiture dates. Cash and Cash Equivalents - Cash equivalents are composed of all highly liquid investments with an original maturity of three months or less. As a result of the Company's cash management system, checks issued but not presented to the banks for payment may create negative book cash balances. Such negative balances are included in trade accounts payable and totaled $40.8 million and $45.1 million as of December 31, 1998 and 1997, respectively. Inventories - Inventories are valued at the lower of cost or market, using various cost methods, and include the cost of raw materials, labor and overhead. The percentages of year-end inventories valued using each of the methods were as follows: December 31 1998 1997 Last-in, first-out (LIFO) 52% 65% Average quarterly cost 46% 30% First-in, first-out (FIFO) 2% 5% If the LIFO method of valuing these inventories was not used, total inventories would have been $5.9 million and $8.6 million higher than reported as of December 31, 1998 and 1997, respectively. Long-lived Assets - Long-lived assets are comprised of intangible assets and property, plant and equipment. Long-lived assets, including certain identifiable intangibles and goodwill related to those assets to be held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists, pursuant to the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows and fundamental analysis. The Company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value. Intangibles - Intangible assets consist principally of excess purchase price over net tangible assets of businesses acquired (goodwill) and trademarks. Intangible assets are amortized on a straight-line basis over periods ranging from two to 40 years. Intangible assets, net of amortization and their estimated useful lives consist of the following at December 31, 1998 and 1997: Estimated Useful Dollars in Millions Lives (In Years) 1998 1997 Goodwill 10 to 40 $385.3 $500.6 Trademarks and other 2 to 40 25.4 20.4 Intangible assets 410.7 521.0 Less: accumulated amortization 165.0 170.5 Intangible assets - net of amortization $245.7 $350.5 Property and Depreciation - Property, plant and equipment are carried at cost and depreciated primarily on a straight-line basis over their estimated useful lives. Useful lives range from 20 to 50 years for buildings and improvements and from three to 17 years for machinery and equipment. Software Costs - The Company defers significant software development project costs. No software costs were deferred during 1998 or 1997. Amounts deferred are amortized over a three-year period beginning with a project's completion. Net deferred software costs as of December 31, 1997, were $0.1 million. As of December 31, 1998, all deferred software costs were fully amortized. Derivative Financial and Commodity Instruments - The Company uses a variety of futures, swaps, options and forward contracts in its management of foreign currency exchange rate, commodity price and interest rate exposures. Instruments used as hedges must be effective at reducing the risks associated with the underlying exposure and must be designated as a hedge at the inception of the contract. <48> Accordingly, changes in the market value of the instruments must have a high degree of inverse correlation with changes in the market value or cash flows of the underlying hedged item. Summarized below are the specific accounting policies by market risk category. Foreign Currency Exchange Rate Risk - The Company uses forward contracts, purchased options and currency swap agreements to manage foreign currency exchange rate risk related to projected operating income from foreign operations and net investments in foreign subsidiaries. The fair value method is used to account for these instruments. Under the fair value method, the instruments are carried at fair value in the consolidated balance sheets as a component of other current assets (deferred charges) or other accrued liabilities (deferred revenue). Changes in the fair value of derivative instruments that are used to manage exchange rate risk in foreign currency denominated operating income and net investments in highly inflationary economies are recognized in the consolidated statements of income as foreign exchange loss or gain. Changes in the fair value of such instruments used to manage exchange rate risk on net investments in economies that are not highly inflationary are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income in common shareholders' equity. To the extent an instrument is no longer effective as a hedge of a net investment due to a change in the underlying exposure, losses and gains are recognized currently in the consolidated statements of income as foreign exchange loss or gain. Commodity Price Risk - The Company uses commodity futures and options to reduce price exposures on commodity inventories or anticipated purchases of commodities. The deferral method is used to account for those instruments that effectively hedge the Company's price exposures. For hedges of anticipated transactions, the significant characteristics and terms of the anticipated transaction must be identified, and the transaction must be probable of occurring to qualify for deferral method accounting. Under the deferral method, gains and losses on derivative instruments are deferred in the consolidated balance sheets as a component of other current assets (if a loss) or other accrued liabilities (if a gain) until the underlying inventory being hedged is sold. As the hedged inventory is sold, the deferred gains and losses are recognized in the consolidated statements of income as a component of cost of goods sold. Derivative instruments that do not meet the above criteria required for deferral treatment are accounted for under the fair value method, with gains and losses recognized currently in the consolidated statements of income as a component of cost of goods sold. Interest Rate Risk - The Company has used interest rate swap agreements to reduce its exposure to changes in interest rates and to balance the mix of its fixed and floating rate debt. Currently, there are no interest rate swap agreements outstanding. The settlement costs of terminated swap agreements are reported in the consolidated balance sheets as a component of other assets and are being amortized over the life of the original swap agreements. The amortization of the settlement amounts is reported in the consolidated statements of income as a component of interest expense. Foreign Currency Translation - Assets and liabilities of the Company's foreign subsidiaries, other than those located in highly inflationary countries, are translated at current exchange rates, while income and expense are translated at average rates for the period. For entities in highly inflationary countries, a combination of current and historical rates is used to determine foreign currency gains and losses resulting from financial statement translation. Translation gains and losses are reported as a component of common shareholders' equity, except for those associated with highly inflationary countries, which are reported directly in the consolidated statements of income. Advertising Costs - In accordance with SOP No. 93-7, "Reporting on Advertising Costs," the Company expenses all advertising expenditures as incurred except for production costs which are deferred and expensed when advertisements run for the first time. The amount of production costs deferred and included in the consolidated balance sheets as of December 31, 1998 and 1997, was $5.6 million and $5.4 million, respectively. Income Taxes - The Company uses an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes are provided when tax laws and financial accounting standards differ with respect to the amount of income for a year and the bases of assets and liabilities. Current deferred tax assets and liabilities are netted in the consolidated balance sheets as are long-term deferred tax assets and liabilities. Income taxes have been provided on $207.8 million of the $219.6 million of unremitted earnings from foreign subsidiaries. Taxes are not provided on earnings expected to be indefinitely reinvested. Income taxes have also been provided for potential tax assessments and the related tax accruals are in the consolidated balance sheets. To the extent tax accruals differ from actual payments or assessments, the accruals will be adjusted through the provision for income taxes. <49> Segment Reporting - In December 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The adoption of this standard requires that reportable segments are reported consistent with how management assesses segment performance. As a result, the Company will separately report information on the following seven operating segments: U.S. and Canadian Foods; Latin American Foods; Other Foods; U.S. and Canadian Beverages; Latin American Beverages; Other Beverages; and Total Divested Businesses. U.S. and Canadian Foods includes hot and ready-to-eat cereals, mixes, syrups, snacks and flavored rice and pasta. Other Foods and Beverages include businesses in the European and Asia/Pacific regions. In determining the operating income or loss of each segment, restructuring charges, asset impairment losses and certain other expenses,such as income taxes, general corporate expenses and financing costs, are not allocated to operating segments. Comparative segment data is presented in tabular form on page 38. Other Current and Pending Accounting Changes - In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This Statement established standards for reporting comprehensive income in the financial statements. The Company adopted this standard in January 1998, and has elected to disclose comprehensive income, which for the Company includes net income, foreign currency translation adjustments and unrealized gains on investments, in the consolidated statement of common shareholders' equity. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement revises employers' disclosures about pensions and other postretirement benefit plans. It does not change the measurement or recognition of those plans in the financial statements. The Company's adoption of this new standard in December 1998 did not result in material changes to previously reported amounts. See Note 10 for further discussion. In January 1998, SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued. This SOP provides guidance on the accounting for computer software costs. In April 1998, SOP No. 98-5, "Reporting on the Costs of Start-Up Activities," was issued. This SOP provides guidance on accounting for the cost of start-up activities. The Company is not required to adopt these Statements until January 1999, and these standards are not expected to materially affect the Company's financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that all derivative instruments (including certain derivative instruments imbedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The accounting provisions for qualifying hedges allow a derivative's gains and losses to offset related results on the hedged item in the income statement and require that the Company must formally document, designate and assess the effectiveness of transactions that qualify for hedge accounting. The Company has not determined its method or timing of adopting this Statement, but will be required to adopt it by January 2000. When adopted, this Statement could increase volatility in reported earnings and other comprehensive income of the Company. Estimates and Assumptions - The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. <50> Note 2 Restructuring Charges During 1998, the Company initiated numerous actions to improve future profitability. These actions resulted in $89.7 million in restructuring charges and are divided into three categories: organization alignment, plant consolidations and Asian reorganization. Charges for organization alignment activities totaled $41.5 million. The Company aligned its foods and beverages businesses, combining sales, supply chain and certain administrative functions to realize synergies and maximize scale. These actions resulted in the elimination of approximately 550 positions worldwide, as a layer of executive management was removed and sales and administrative offices and functions were consolidated. Plant consolidations in the United States and Latin America resulted in $19.2 million in charges. These actions will result in the elimination of approximately 300 positions. In light of disappointing performance and a weak economic environment, the Company revised its operational strategy for the Asia/Pacific region. The focus going forward is on building the Gatorade business in China. This Asia/Pacific restructuring resulted in $29.0 million in charges for plant and sales and administrative office closures, restructuring of certain joint ventures and the elimination of approximately 450 positions. The 1998 restructuring charges are composed of severance and other termination benefits, asset write-offs, losses on leases and other shut-down costs. Savings from these actions are estimated to be $65 million annually, primarily beginning in 1999, with approximately 90 percent of the savings in cash. In 1997, the Company initiated several restructuring actions resulting in charges of $65.9 million. Three foods plants were closed, two in the United States and one in Latin America. Combined with other manufacturing consolidation activities in the U.S. and Canadian businesses, restructuring charges for these actions totaled $58.1 million. Other actions taken included an office closure in the Asia/Pacific region and staff reductions in the U.S. and Canadian businesses, resulting in charges of $1.1 million and $6.7 million, respectively. In 1996, the Company recorded restructuring charges of $23.0 million including $16.6 million related to the divested Snapple beverages business and $6.4 million for plant consolidations in the U.S. and Canadian Foods business. Savings realized from the 1997 and 1996 restructuring actions have been in line with expectations. However, there are no recurring savings to be realized from restructuring activities related to the divested Snapple beverages business. 1998, 1997 and 1996 restructuring charges by operating segment were as follows: Dollars in Millions 1998 1997 1996 U.S. and Canadian Foods $ 38.4 $ 49.2 $ 6.4 Latin American Foods 9.3 10.7 -- Other Foods 17.8 -- -- U.S. and Canadian Beverages 8.9 4.9 -- Latin American Beverages 2.8 -- -- Other Beverages 12.5 1.1 -- Divested Businesses -- -- 16.6 Total Charges $ 89.7 $ 65.9 $ 23.0 Restructuring provisions were determined based on estimates prepared at the time the restructuring actions were approved by management and the Board of Directors. The 1998 and 1997 restructuring reserve balances are considered adequate to cover committed restructuring actions. <51> The restructuring charges and utilization to date were as follows:
As of December 31, 1998 Amounts Charged Amounts Remaining Dollars in Millions Cash Non-Cash Total Utilized Reserve 1998 Severance and termination benefits $ 41.3 $ -- $ 41.3 $ 12.6 $ 28.7 Asset write-offs -- 29.6 29.6 1.7 27.9 Loss on leases and other 17.8 1.0 18.8 -- 18.8 Subtotal 59.1 30.6 89.7 14.3 75.4 1997 Severance and termination benefits 12.6 -- 12.6 8.8 3.8 Asset write-offs -- 49.1 49.1 44.4 4.7 Loss on leases and other 4.2 -- 4.2 2.3 1.9 Subtotal 16.8 49.1 65.9 55.5 10.4 1996 Severance and termination benefits 1.4 -- 1.4 1.4 -- Asset write-offs -- 18.9 18.9 18.9 -- Loss on leases and other 2.6 0.1 2.7 2.7 -- Subtotal 4.0 19.0 23.0 23.0 -- Total $ 79.9 $ 98.7 $ 178.6 $ 92.8 $ 85.8
Note 3 Asset Impairments and Divestitures In 1998, the Company recorded $38.1 million of asset impairment losses related to ongoing businesses. In conjunction with the Company's ongoing review of underperforming businesses, certain assets are reviewed for impairment, pursuant to the provisions of SFAS No. 121. During 1998, the China foods and Brazilian pasta businesses were determined to be impaired. Accordingly, pretax losses of $15.1 million and $23.0 million on these impaired Chinese and Brazilian businesses, respectively, were recorded in order to adjust the carrying value of the long-lived assets of these businesses to fair value. The estimated fair value of these assets was based on various methodologies, including a discounted value of estimated future cash flows and liquidation analyses. The Company continues to review its business strategies and pursue other cost-reduction activities, some of which could result in future charges. The Company took numerous actions in 1997 relative to its Brazilian pasta business. During the Company's operating planning process, an updated review of the strategies, actions taken to date and the expected financial prospects of this business was undertaken. As a part of this review, the Company evaluated the recoverability of the long-lived assets of this business pursuant to SFAS No. 121 and recorded a non-cash charge of $39.8 million to reduce the carrying value of the net assets of the Brazilian pasta business to fair market value. The Company's estimate of fair market value was based on various methodologies, including a discounted value of estimated future cash flows and a fundamental analysis of the business' value. Separately, the Company received a $35.0 million cash litigation settlement related to this business. The combined charge of $4.8 million was not included in the operating segment results of Latin American Foods. Charges for asset impairment losses related to divested businesses were also recorded in 1998. The Company divested the following U.S. food businesses in 1998 for a total of $192.7 million and realized a combined pretax loss of $0.7 million, including related impairment losses:
Divestiture Impairment (Gains) Losses Total Dollars in Millions Date Losses on Sale (Gains) Losses Ardmore Farms juice August 1998 $ -- $ (2.5) $ (2.5) Continental Coffee September 1998 40.0 (5.1) 34.9 Nile Spice soup cup December 1998 25.4 3.1 28.5 Liqui-Dri biscuit December 1998 -- (60.2) (60.2) Total Losses (Gains) $ 65.4 $(64.7) $ 0.7
<52> During 1997, the Company divested the Snapple beverages, Richardson toppings and condiments and food service bagel businesses for a total of $373.2 million and realized a combined pretax loss of $1.42 billion. Divestiture Impairment Losses Total Dollars in Millions Date Losses on Sale Losses Snapple beverages May 1997 $ 1,404.0 $ 10.6 $ 1,414.6 Richardson/Bagels December 1997 -- 5.8 5.8 Total Losses $ 1,404.0 $ 16.4 $ 1,420.4 In 1996, the Company completed the sale of its frozen foods business for $185.8 million and realized a gain of $133.6 million. The Company also sold its Italian products business in 1996 and recorded a pretax gain of $2.8 million. For operating results from divested businesses, see page 38. Note 4 Trade Accounts Receivable Allowances Dollars in Millions 1998 1997 Balance at beginning of year $ 22.3 $ 29.3 Provision for doubtful accounts 4.0 4.2 Provision for discounts and allowances 30.0 25.0 Write-offs of doubtful accounts - net of recoveries (3.6) (5.5) Discounts and allowances taken (31.0) (26.5) Effect of divestitures (0.3) (3.8) Effect of exchange rate changes and other (0.2) (0.4) Balance at end of year $ 21.2 $ 22.3 Note 5 Financial Instruments The Company uses various financial instruments in the course of its operations, including certain components of working capital such as cash and cash equivalents, trade accounts receivable and trade accounts payable. In addition, the Company uses short-term and long-term debt to fund operating requirements and derivative financial and commodity instruments to manage its exposure to foreign currency exchange rate, commodity price and interest rate risk. The counterparties to the Company's financial instruments are primarily major financial institutions. The Company continually evaluates the creditworthiness of these major financial institutions and has never experienced, nor does it anticipate, nonperformance by any of these institutions. Marketable Securities - During 1998, the Company made investments in marketable securities. These marketable securities are available for sale and consisted of investments in mutual funds and preferred stock. As of December 31, 1998, only investments in preferred stock were outstanding. These investments are expected to be held less than 12 months and are classified as marketable securities in the consolidated balance sheet. In 1998, the Company recorded a net unrealized gain of $0.4 million on its investments in preferred stock to adjust the carrying value of this investment to fair value. This gain is classified as a component of shareholders' equity and is included in comprehensive income. The Company's investments in mutual funds were sold during the fourth quarter of 1998, resulting in a realized gain of $4.7 million included in selling, general and administrative expenses. Debt Instruments - Revolving Credit Facilities and Short-term Debt - In 1998, the Company reduced the level of its revolving credit facilities by a total of $175.0 million. The Company now has a $335.0 million annually extendible five-year revolving credit facility and a $165.0 million 364-day extendible revolving credit facility which may, at the Company's option, be converted into a two-year term loan. Both facilities are with various banks. Amounts available under credit facilities obtained by the Company have decreased significantly over the last three years as commercial paper borrowings supported by the revolving credit facilities were reduced. Credit facilities are also available for direct borrowings. There were no direct borrowings in 1998 or in 1997. The revolving credit facilities require the Company and certain domestic subsidiaries to maintain certain financial ratios. <53> Short-term debt consists primarily of notes payable to banks in foreign countries and commercial paper borrowings in the United States. Notes payable to banks were $41.3 million and $56.0 million as of December 31, 1998 and 1997, respectively. Commercial paper borrowings outstanding as of December 31, 1997 were $5.0 million. The carrying value of short-term debt approximates fair value due to the short-term maturity of the instruments. Weighted average interest rates on all short-term debt outstanding as of December 31, 1998 and 1997, were 9.6 percent and 7.2 percent, respectively. This increase in rates was due primarily to an increase in international borrowing rates. Nominal interest rates in highly inflationary countries have been adjusted for currency devaluation to express interest rates in U.S. dollar terms. Long-term Debt - The carrying value of long-term debt, including current maturities, as of December 31, 1998 and 1997, is summarized below. Dollars in Millions 1998 1997 7.76% Senior ESOP notes due through 2001 $ 48.4 $ 57.2 8.0% Senior ESOP notes due through 2001 62.1 82.5 7.75%-7.9% Series A medium-term notes due through 2000 25.5 41.5 8.63%-9.34% Series B medium-term notes due through 2019 166.4 178.7 6.5%-7.48% Series C medium-term notes due through 2024 200.0 200.0 6.45%-7.78% Series D medium-term notes due through 2026 350.0 400.0 11.7% Chinese renmimbi notes due 2001 4.8 4.8 5.7%-6.63% Industrial Revenue Bonds due through 2009, tax-exempt 19.4 19.4 Non-interest bearing installment note due 2014 7.9 7.0 Other 5.8 4.9 Subtotal 890.3 996.0 Less: current portion of long-term debt 95.2 108.4 Long-term debt $ 795.1 $ 887.6 The fair value of long-term debt, including current maturities, was $1.01 billion and $1.06 billion as of December 31, 1998 and 1997, respectively, and was based on market prices for the same or similar issues, or on the current rates offered to the Company for similar debt of the same maturities. The non-interest bearing installment note for $55.5 million had an unamortized discount of $47.6 million and $48.5 million as of December 31, 1998 and 1997, respectively, based on an imputed interest rate of 13 percent. Aggregate required payments for long-term debt maturing over the next five years are as follows: Dollars in Millions 1999 2000 2001 2002 2003 Required payments $95.2 $82.1 $53.3 $46.7 $28.1 Derivative Instruments - The primary derivative instruments used by the Company are foreign exchange forward contracts, purchased foreign currency options and commodity options and futures contracts. The Company actively monitors its exposure to foreign currency exchange rate, commodity price and interest rate risks and uses derivative financial and commodity instruments to manage the impact of certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use these instruments with the objective of earning financial gains on the exchange rate, commodity price or interest rate fluctuations alone, nor does it use instruments where there are not underlying exposures. Complex instruments involving leverage or multipliers are not used. Management believes that its use of these instruments to manage risk is in the Company's best interest. During 1998, the Company executed certain hedging instruments to manage exposure to Canadian, European and Brazilian currency movements. The Company will continue to use foreign currency hedge instruments, where appropriate, to manage exposure to potentially significant currency movements. Where hedging opportunities are not available, the exposures are addressed through managing net asset positions and borrowing or investing in a combination of local currency and U.S. dollars. <54> Balance Sheet Hedges - Net Investment Hedges - The Company's significant net investment hedges and the related foreign currency net investments and net exposures as of December 31, 1998, were as follows: Dollars in Millions Net Investment Net Hedge Net Exposure Currency: Brazilian real $ 26.9 $ 3.0 $ 23.9 British pounds $ 26.0 $ 5.0 $ 21.0 Dutch guilders $ 16.5 $ 12.4 $ 4.1 German marks $ 19.9 $ 13.9 $ 6.0 Italian lira $ 31.1 $ 4.1 $ 27.0 The Company actively monitors its net exposures and adjusts the hedge amounts as appropriate. The net hedges above are stated on an after-tax basis. The net exposures are subject to gain or loss if foreign currency exchange rates fluctuate. As of December 31, 1998, the Company had net foreign exchange forward contracts to sell various European currencies and Brazilian real for $18.9 million to hedge its net investments. These contracts will mature in 1999. As of December 31, 1997, the Company had such contracts to sell various European and Canadian currencies for $14.4 million, which matured in 1998. Unrealized (gains) losses as of December 31, 1998 and 1997, were $(0.2) million and $0.1 million, respectively. The carrying value of these contracts approximated fair value, except for the Brazilian real contracts, which have a fair value of $0.8 million less than the book value at December 31, 1998. Foreign Currency Swaps - In 1987, the Company swapped $15.0 million of long-term debt for 27.9 million in deutsche mark (DM) denominated long-term debt, effectively hedging part of the German net investment. The DM swap agreement required the Company to re-exchange DM 27.9 million for $15.0 million in August 1997 and to make semiannual interest payments of DM 0.9 million through August 1997. Income Statement Hedges - Foreign Currency Hedges - The Company uses foreign currency options and forward contracts to manage the impact of foreign currency fluctuations recognized in the Company's operating results. Included in the consolidated statements of income were (gains) losses from foreign currency hedge instruments of $(0.8) million, $2.5 million and $1.0 million in 1998, 1997 and 1996, respectively. Commodity Options and Futures - The Company uses commodity options and futures contracts to manage price exposures on commodity inventories or anticipated purchases of commodities. The Company regularly hedges purchases of oats, corn, corn sweetener and wheat. Of the $2.37 billion in cost of goods sold, approximately $140 million to $190 million is in commodities that may be hedged. The Company's strategy is typically to hedge certain production requirements for various periods up to 12 months. As of December 31, 1998 and 1997, approximately 28 percent and 36 percent, respectively, of hedgeable production requirements for the next 12 months were hedged. Deferred unrecognized losses related to commodity options and futures contracts as of December 31, 1998 and 1997, were $0.2 million and $0.1 million, respectively. Realized losses (gains) charged to cost of goods sold in 1998, 1997 and 1996 were $13.5 million, $(6.6) million and $(5.1) million, respectively. The fair values of these commodity instruments as of December 31, 1998 and 1997, based on quotes from brokers, were net losses of $2.2 million and $0.8 million, respectively. Interest Rate Hedges - The Company actively monitors its interest rate exposure. In 1995, the Company entered into interest rate swap agreements with a notional value of $150.0 million. The swap agreements were used to hedge fixed interest rate risk related to anticipated issuance of long-term debt. The swap agreements were subsequently terminated at a cost of $11.9 million as long-term debt was issued. Included in the consolidated balance sheets as of December 31, 1998 and 1997, were $5.7 million and $7.1 million, respectively, of prepaid interest expense as settlement of all the interest rate swap agreements. Prepaid interest expense is recognized in the consolidated statements of income on a straight-line basis over the original term of the swap agreements, which ranged from three to 10 years. The carrying value of the settled interest rate swap agreements approximates the fair value of the swap at the settlement date less amortized interest. Included in interest expense was $1.4 million, $1.8 million and $1.9 million related to the interest rate swap agreements in 1998, 1997 and 1996, respectively. <55> Note 6 Capital Stock During 1998, the Company repurchased 6.9 million shares of its outstanding common stock for $386.7 million completing its 10 million share repurchase program announced in August 1993 and initiating the $1 billion repurchase program announced in March 1998. As of December 31, 1998, the Company repurchased approximately $265 million under the $1 billion share repurchase program. The Company is authorized to issue 10 million shares of preferred stock in series, with terms fixed by resolution of the Board of Directors. Four million shares of Series C Junior Participating Preferred Stock have been reserved for issuance in connection with the Shareholder Rights Plan. See Note 9 for further discussion. An additional 1,750,000 shares of Series B Employee Stock Ownership Plan (ESOP) Convertible Preferred Stock (Series B Stock) have been reserved for issuance in connection with the Company's ESOP. As of December 31, 1998, 1,282,051 shares of the Series B Stock had been issued and are each convertible into 2.1576 shares of the Company's common stock. The Series B Stock will be issued only for the ESOP and will not be traded on the open market. The Company is also authorized to issue one million shares of redeemable preference stock, none of which had been issued as of December 31, 1998. Note 7 Deferred Compensation The ESOP was established to issue debt and to use the proceeds of such debt to acquire shares of the Company's stock for future allocation to ESOP participants. The ESOP borrowings are included in long-term debt in the Company's consolidated balance sheets. See Note 5 for further discussion of ESOP notes. Deferred compensation of $116.0 million as of December 31, 1998, primarily represents the Company's payment of future compensation expense related to the ESOP. As the Company makes annual contributions to the ESOP, these contributions, along with the dividends accumulated on the common and preferred stock held by the ESOP, are used to repay the outstanding loans. As the loans are repaid, common and preferred stock are allocated to ESOP participants, and deferred compensation is reduced by the amount of the principal payments on the loans. The following table presents the ESOP loan payments: Dollars in Millions 1998 1997 Principal payments $ 29.2 $ 25.5 Interest payments 10.9 12.9 Total ESOP payments $ 40.1 $ 38.4 As of December 31, 1998, 4,528,701 shares of common stock and 538,608 shares of preferred stock were held in the accounts of ESOP participants. Note 8 Employee Stock Option and Award Plans In May 1998, the Company's shareholders adopted The Quaker Long Term Incentive Plan of 1999 (Plan) to replace The Quaker Long Term Incentive Plan of 1990. The purpose of the Plan is to promote the interests of the Company and its shareholders by providing the officers and other key employees with additional incentives and the opportunity, through stock ownership, to increase their proprietary interest in the Company and their personal interest in its continued success. The Plan provides for benefits to be awarded in a variety of ways, with stock options being used most frequently. Approximately 12 million shares of common stock have been authorized for grant under the Plan. Stock options may be granted for the purchase of common stock at a price not less than the fair market value on the date of grant. Generally, the exercise price of each stock option equals the market price of the Company's stock on the date of grant. Options are generally exercisable after one or more years and expire no later than 10 years from the date of grant. As of December 31, 1998, 669 persons held such options. <56> The Company has elected to disclose the pro forma effects of SFAS No. 123, "Accounting for Stock-Based Compensation." As allowed under the provisions of the Statement, the Company will continue to apply APB Opinion No. 25 and related Interpretations in accounting for the stock options awarded under the Plan. Accordingly, no compensation cost has been recognized for these stock options. Had compensation cost for the Plan been determined consistent with SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been the pro forma amounts indicated below: Dollars in Millions 1998 1997 1996 Net income (loss): As reported $284.5 $(930.9) $247.9 Pro forma $272.5 $(940.7) $242.0 Net income (loss) per share: As reported $ 2.04 $ (6.80) $ 1.80 Pro forma $ 1.95 $ (6.87) $ 1.76 Net income (loss) per share - assuming dilution: As reported $ 1.97 $ (6.80) $ 1.78 Pro forma $ 1.89 $ (6.87) $ 1.74 The fair value of each option granted during the year is estimated on the date of grant using the Black-Scholes option-pricing model with the following range of assumptions: 1998 1997 1996 Dividend yield 1.9% - 2.0% 2.4% - 3.1% 3.3 % - 3.4 % Expected volatility 18.6% - 20.8% 16.3% - 22.5% 14.4 % - 20.1 % Risk-free interest rates 4.7% - 5.7% 5.9% - 6.7% 5.7 % - 6.8 % Expected lives 3 to 8 years 3 to 8 years 2 to 8 years A summary of the status of the Company's option activity is presented below:
1998 1997 1996 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 13,017,621 $36.25 14,264,030 $34.42 16,724,814 $33.99 Granted 2,399,000 $57.16 3,205,250 $40.61 152,150 $33.93 Exercised 3,326,292 $33.88 3,661,269 $33.00 1,260,977 $24.66 Forfeited 481,435 $45.13 790,390 $36.05 1,351,957 $38.14 Outstanding at end of year 11,608,894 $40.88 13,017,621 $36.25 14,264,030 $34.42 Exercisable at end of year 7,842,314 $36.44 9,403,675 $35.70 10,947,837 $34.33 Weighted-average fair value of options granted during the year $13.84 $ 9.03 $ 5.97
The following summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable Average Weighted- Weighted- Range of Remaining Average Average Exercise Contractual Exercise Exercise Prices Shares Life Price Shares Price $22.79-$34.53 4,096,066 5.19 Years $32.23 4,084,544 $32.23 $35.35-$40.35 3,830,858 6.15 Years $38.49 2,713,800 $39.00 $44.18-$60.41 3,681,970 8.33 Years $52.99 1,043,970 $46.25 $22.79-$60.41 11,608,894 6.50 Years $40.88 7,842,314 $36.44
Under the Plan, restricted stock awards grant shares of the Company's common stock to key officers and employees. These shares are subject to a restriction period from the date of grant, during which time they may not be sold, assigned, pledged or otherwise encumbered. The number of shares or stock units of the Company's common stock awarded in 1998, 1997 and 1996 were 55,981, 178,475 and 55,600, respectively. Restrictions on these awards lapse after a period of time designated by the Compensation Committee of the Board of Directors. <57> Note 9 Shareholder Rights Plan The Company's Shareholder Rights Plan is designed to deter coercive or unfair takeover tactics and to prevent a person or group from gaining control of the Company without offering a fair price to all shareholders. Under the terms of Plan, all common shareholders own one "Right" per outstanding share of common stock entitling them to purchase from the Company one one-hundredth of a share of Series C Junior Participating Preferred Stock at an exercise price of $150. The Rights become exercisable 10 days after a public announcement that a person or group has acquired shares representing 15 percent or more of the outstanding shares of common stock, or 15 business days following commencement of a tender offer for 15 percent or more of such outstanding shares of common stock. The Company can redeem the Rights for $0.01 per Right at any time prior to their becoming exercisable. The Rights will expire on July 31, 2006, unless redeemed earlier by the Company or exchanged for common stock. If after the Rights become exercisable the Company is involved in a merger or other business combination at any time when there is a holder of 15 percent or more of the Company's stock, the Rights will then entitle holders, upon exercise of the Rights, to receive shares of common stock of the acquiring or surviving company with a market value equal to twice the exercise price of each Right. There is an exemption for any issuance of common stock by the Company directly to any person, even if that person would become the beneficial owner of 15 percent or more of the common stock, provided that such person does not acquire any additional shares of common stock. The Rights described in this paragraph shall not apply to an acquisition, merger or consolidation which is determined by a majority of the Company's independent directors, after consulting one or more investment banking firms, to be fair and otherwise in the best interest of the Company and its shareholders. Note 10 Pension and Postretirement Plans The Company has various pension plans covering substantially all U.S. employees and certain foreign employees. Plan benefits (Pension Benefits) are based on compensation paid to employees and their years of service. Company policy is to make contributions to its U.S. plans within the maximum amount deductible for Federal income tax purposes. Plan assets consist primarily of equity securities and government, corporate and other fixed-income obligations. The Company also has various postretirement health care plans covering substantially all U.S. employees and certain foreign employees. The plans provide for the payment of certain health care and life insurance benefits (Postretirement Benefits) for retired employees who meet certain service-related eligibility requirements. The Company funds only the plans' annual cash requirements. The following discussion has been modified and expanded to reflect the Company's adoption of SFAS No. 132, "Employers' Disclosures about Pensions and Postretirement Benefits." This Statement revises employers' disclosures about pensions and other postretirement benefit plans. It allows for combined disclosures for those benefits and requires more detailed information about the changes in employers' obligations and funded assets than was previously reported. It does not change the measurement or recognition of those benefits in the financial statements. The Company's adoption of this new standard in December 1998 did not result in material changes to previously reported amounts. Total Company Benefit Costs - The components of net periodic benefit costs for the plans were as follows: Pension Benefits Dollars in Millions 1998 1997 1996 Components of net periodic benefit costs: Service cost $ 33.7 $ 28.9 $ 31.4 Interest cost 76.3 74.5 69.5 Expected return on plan assets (102.5) (86.3) (72.3) Amortization of prior service cost 4.2 4.2 4.0 Amortization of transitional asset (0.9) (10.7) (12.6) Recognized net actuarial gain (0.8) (0.1) (0.1) Multi-employer plans 0.3 0.5 0.5 Loss from curtailment 1.1 -- -- Net periodic benefit costs $ 11.4 $ 11.0 $ 20.4 Postretirement Benefits Dollars in Millions 1998 1997 1996 Components of net periodic benefit costs: Service cost $ 7.2 $ 6.3 $ 6.7 Interest cost 19.5 18.6 17.3 Amortization of prior service cost 0.6 0.5 0.5 Recognized net actuarial gain (0.1) (0.1) (0.1) Gain from curtailment (0.1) -- -- Net periodic benefit costs $ 27.1 $ 25.3 $ 24.4 <58> The decline in the Company's pension expense from 1996 to 1997 was primarily due to an increase in the rate of return on the plans' net assets and a reduction in the number of active employees. The Company incurred $5.3 million, $5.5 million and $4.5 million in costs in 1998, 1997 and 1996, respectively, for defined contribution benefit plans. These costs are not included in the net periodic benefit costs summarized on page 58. Domestic Obligations and Funded Status - The changes in the benefit obligations and the reconciliations of the funded status of the Company's domestic plans to the statement of financial position were as follows:
Pension Benefits Postretirement Benefits Dollars in Millions 1998 1997 1998 1997 Change in benefit obligations: Benefit obligation at beginning of year $ 993.0 $ 869.6 $ 271.3 $ 238.5 Service cost 25.6 22.6 6.8 6.0 Interest cost 65.8 64.2 18.9 17.9 Benefits paid (48.6) (43.7) (15.0) (14.8) Actuarial loss 14.0 80.3 9.2 22.5 Plan participant contributions -- -- 1.3 1.2 Benefit obligation at end of year $ 1,049.8 $ 993.0 $ 292.5 $ 271.3 Change in plan assets: Fair value of plan assets at beginning of year $ 1,075.1 $ 907.3 $ -- $ -- Actual return on assets 109.9 209.5 -- -- Company contributions 5.0 2.0 13.7 13.6 Benefits paid (48.6) (43.7) (15.0) (14.8) Plan participant contributions -- -- 1.3 1.2 Fair value of plan assets at end of year $ 1,141.4 $ 1,075.1 $ -- $ -- Fair value of plan assets greater (less) than benefit obligation $ 91.6 $ 82.1 $ (292.5) $ (271.3) Unrecognized net actuarial (gain) loss (199.7) (195.6) 4.9 (4.4) Unrecognized prior service cost 14.3 18.2 3.8 4.3 Unrecognized net liability at transition 0.6 0.8 -- -- Net amounts recognized $ (93.2) $ (94.5) $ (283.8) $ (271.4) Net amounts recognized consist of: Accrued benefit liability $ (93.2) $ (94.5) $ (283.8) $ (271.4) Net amounts recognized $ (93.2) $ (94.5) $ (283.8) $ (271.4)
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the defined benefit pension plans with accumulated benefit obligations in excess of plan assets were $95.2 million, $82.1 million and $31.4 million, respectively, as of December 31, 1998, and $87.1 million, $76.8 million and $29.7 million, respectively, as of December 31, 1997.
Pension Benefits Postretirement Benefits Weighted average assumptions as of December 31 1998 1997 1998 1997 Discount rate 6.75% 7.00% 6.75% 7.00% Expected long-term rate of return on plan assets 9.75% 9.75% N/A N/A Rate of future compensation increases 4.50% 4.50% N/A N/A N/A: Not applicable
For measurement purposes, a 7.0 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 4.0 percent for 2005 and remain at that level beyond. If the health care trend rate was increased one percentage point, postretirement benefit costs for the year ended December 31, 1998, would have been $4.1 million higher, and the accumulated postretirement benefit obligation as of December 31, 1998, would have been $42.1 million higher. If the health care trend rate was decreased one percentage point, postretirement benefit costs for the year ended December 31, 1998, would have been $3.3 million lower, and the accumulated postretirement benefit obligation as of December 31, 1998, would have been $34.6 million lower. <59> Foreign Obligations and Funded Status - The changes in the benefit obligations and the reconciliations of the funded status of the Company's foreign plans to the statement of financial position were as follows:
Pension Benefits Postretirement Benefits Dollars in Millions 1998 1997 1998 1997 Change in benefit obligations: Benefit obligation at beginning of year $ 139.6 $ 138.4 $ 9.4 $ 10.6 Service cost 8.1 6.3 0.4 0.3 Interest cost 10.5 10.3 0.6 0.7 Benefits paid (10.9) (13.5) (0.2) (0.2) Actuarial loss (gain) 23.2 3.5 0.1 (1.6) Plan participant contributions 0.6 0.6 -- -- Plan amendments -- 1.7 0.6 -- Foreign currency exchange rate change (2.9) (7.7) (0.7) (0.4) Plan curtailments 0.8 -- (0.1) -- Benefit obligation at end of year $ 169.0 $ 139.6 $ 10.1 $ 9.4 Change in plan assets: Fair value of plan assets at beginning of year $ 144.1 $ 139.1 $ -- $ -- Actual return on assets 20.3 14.7 -- -- Company contributions 7.4 9.5 0.2 0.2 Benefits paid (10.9) (13.5) (0.2) (0.2) Plan participant contributions 0.5 0.5 -- -- Foreign currency exchange rate changes (3.1) (6.2) -- -- Fair value of plan assets at end of year $ 158.3 $ 144.1 $ -- $ -- Fair value of plan assets (less) greater thanbenefit obligation $ (10.7) $ 4.4 $ (10.1) $ (9.4) Unrecognized net actuarial loss (gain) 5.8 (6.3) (1.3) (1.5) Unrecognized prior service cost 3.4 4.1 0.9 0.4 Unrecognized net asset at transition (4.9) (6.2) -- -- Net amounts recognized $ (6.4) $ (4.0) $ (10.5) $ (10.5) Net amounts recognized consist of: Accrued benefit liability $ (13.9) $ (10.9) $ (10.5) $ (10.5) Prepaid benefit costs 7.5 6.9 -- -- Net amounts recognized $ (6.4) $ (4.0) $ (10.5) $ (10.5)
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the defined benefit pension plans with accumulated benefit obligations in excess of plan assets were $28.5 million, $27.9 million and $19.0 million, respectively, as of December 31, 1998, and $7.8 million, $7.1 million and $0.2 million, respectively, as of December 31, 1997.
Pension Benefits Postretirement Benefits Weighted average assumptions as of December 31 1998 1997 1998 1997 Discount rate 5.50% 7.50% 6.25% 7.00% Expected long-term rate of return on plan assets 7.60% 8.00% N/A N/A Rate of future compensation increases 4.00% 6.00% N/A N/A N/A: Not applicable
For measurement purposes, a 7.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 4.5 percent for 2002 and remain at that level beyond. If the health care trend rate was increased one percentage point, postretirement benefit costs for the year ended December 31, 1998, would have been $0.3 million higher, and the accumulated postretirement benefit obligation as of December 31, 1998, would have been $1.7 million higher. If the health care trend rate was decreased one percentage point, postretirement benefit costs for the year ended December 31, 1998, would have been $0.3 million lower, and the accumulated postretirement benefit obligation as of December 31, 1998, would have been $1.7 million lower. <60> Note 11 Lease and Other Commitments Certain equipment and operating properties are rented under non-cancelable and cancelable operating leases. Total rental expense under operating leases was $38.5 million, $38.0 million and $36.4 million for the years ended December 31, 1998, 1997 and 1996, respectively. The following is a schedule of future minimum annual rentals on non-cancelable operating leases, primarily for sales offices, distribution centers and corporate headquarters, in effect as of December 31, 1998. Dollars in Millions 1999 2000 2001 2002 2003 Thereafter Total Total payments $25.1 $23.5 $22.3 $17.1 $13.5 $30.4 $131.9 The Company enters into executory contracts to obtain inventory and promote various products. As of December 31, 1998, future commitments under these contracts were $348.5 million. Note 12 Supplementary Income Statement Information Dollars in Millions 1998 1997 1996 Advertising, media and production $ 281.9 $ 292.7 $ 289.8 Merchandising 959.9 933.7 913.5 Total advertising and merchandising $ 1,241.8 $ 1,226.4 $ 1,203.3 Depreciation expense $ 116.3 $ 122.0 $ 119.1 Amortization of intangibles $ 12.8 $ 35.6 $ 78.5 Research and development $ 31.0 $ 34.9 $ 33.0 Note 13 Interest Expense Dollars in Millions 1998 1997 1996 Interest expense $ 72.0 $ 89.8 $ 113.0 Interest expense capitalized (2.4) (4.0) (6.2) Subtotal 69.6 85.8 106.8 Interest income (10.7) (6.7) (7.4) Interest expense - net $ 58.9 $ 79.1 $ 99.4 Interest paid in the years ended December 31, 1998, 1997 and 1996, was $68.8 million, $83.2 million and $109.0 million, respectively. Note 14 Income Taxes The Company uses an asset and liability approach to financial accounting and reporting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Income tax provisions (benefits) were as follows: Dollars in Millions 1998 1997 1996 Currently payable (receivable): Federal $ 147.4 $ (140.1) $ 99.4 Foreign 21.2 21.9 10.2 State 27.0 4.2 26.6 Total currently payable (receivable) 195.6 (114.0) 136.2 Deferred - net: Federal (62.7) (3.0) 15.9 Foreign (12.6) (13.6) 10.4 State (8.2) (2.8) 5.2 Total deferred - net (83.5) (19.4) 31.5 Income tax provision (benefit) $ 112.1 $ (133.4) $ 167.7 As a result of the loss on the divestiture of Snapple in 1997, the Company recovered $240.0 million in Federal taxes paid on previous capital gains from business divestitures and expects to recover an additional $10.0 million in state taxes. Included in other current assets as a tax receivable related to these recoveries is $10.0 million and $250.0 million as of December 31, 1998 and 1997, respectively. <61> Income taxes (refunded) paid during 1998, 1997 and 1996 were $(110.4) million, $92.9 million and $161.1 million, respectively. The net amount refunded in 1998 includes the $240.0 million recovery of Federal taxes paid on previous capital gains. The components of the deferred income tax (benefit) provision were as follows: Dollars in Millions 1998 1997 1996 Accelerated tax depreciation $ (10.9) $ 12.8 $ 3.7 Postretirement benefits (3.9) (8.4)* 0.6 Accrued expenses including restructuring charges (34.6) -- 40.6 Loss carryforwards, net of valuation allowances 4.4 (4.6) (7.1) Foreign gain deferral (3.7) (4.3) 9.8 Impairment losses (39.8) (1.6)* -- Other 5.0 (13.3)* (16.1) (Benefit) provision for deferred income taxes $ (83.5) $ (19.4) $ 31.5 * Restated to conform to current presentation. Total income tax provisions (benefits) were allocated as follows: Dollars in Millions 1998 1997 1996 Continuing operations $ 112.1 $ (133.4) $ 167.7 Items charged directly to common shareholders' equity $ (43.8) $ (21.0) $ (8.4) The sources of pretax income (loss) were as follows: Dollars in Millions 1998 1997 1996 U.S. sources $ 435.3 $(1,087.7) $ 362.8 Foreign sources (38.7) 23.4 52.8 Income (loss) before income taxes $ 396.6 $(1,064.3) $ 415.6 Reconciliations of the statutory Federal income tax rates to the effective income tax rates were as follows:
Dollars in Millions 1998 1997 1996 % of % of % of Pretax Pretax Pretax Amount Income Amount Loss Amount Income Tax provision (benefit) based on the Federal statutory rate $ 138.8 35.0% $ (372.5) 35.0% $ 145.5 35.0% State and local income tax Provision (benefit) - net of Federal income taxes 9.2 2.3 (7.1) 0.7 20.7 5.0 Repatriation of foreign earnings (2.9) (0.7) 1.9 (0.2) (11.3) (2.7) Foreign tax rate differential 3.5 0.9 0.1 -- 2.1 0.5 Capital loss valuation allowance (25.4) (6.4) 253.1 (23.8) -- -- Miscellaneous items (11.1) (2.8) (8.9) 0.8 10.7 2.6 Income tax provision (benefit) $ 112.1 28.3% $ (133.4) 12.5% $ 167.7 40.4% Deferred tax assets and deferred tax liabilities were as follows: Dollars in Millions 1998 1997 Assets Liabilities Assets Liabilities Depreciation and amortization $ 37.4 $ 183.2 $ 20.3 $ 218.9 Postretirement benefits 118.4 -- 114.5* -- Other benefit plans 62.8 5.8 65.5* 5.7* Accrued expenses including restructuring charges 122.5 9.7 92.5 11.5 Loss carryforwards 316.7 -- 328.5 -- Other 12.0 9.0 4.1 15.9 Subtotal 669.8 207.7 625.4 252.0 Valuation allowance (314.0) -- (319.2) -- Total $ 355.8 $ 207.7 $ 306.2 $ 252.0 *Restated to conform to current presentation.
Included in other current assets were deferred tax assets of $116.6 million and $90.5 million as of December 31, 1998 and 1997, respectively. Included in other assets were deferred tax assets of $31.5 million as of December 31, 1998. <62> As of December 31, 1998 and 1997, the Company had approximately $760 million and $790 million, respectively, of capital loss carryforwards available to reduce future capital gains in the United States. The capital loss carryforwards are primarily the result of Quaker's 1997 loss on divestiture of Snapple. Therefore, the majority of those capital loss carryforwards expire in 2002. During 1998, the amount of available capital loss carryforwards decreased as a result of business divestitures. A valuation allowance has been provided for the full value of the deferred tax assets related to these carryforwards. As of December 31, 1998, the Company had $41.2 million of operating and capital loss carryforwards available to reduce future taxable income of certain international subsidiaries. These loss carryforwards must be utilized within the carryforward periods of these international jurisdictions. The majority of international loss carryforwards have no expiration restrictions. Those with restrictions expire primarily in five years. A valuation allowance has been provided for approximately 50 percent of the deferred tax assets related to the loss carryforwards. Note 15 Litigation The Company is a party to a number of lawsuits and claims, which it is vigorously defending. Such matters arise out of the normal course of business and relate to the Company's past acquisition activity and other issues. Certain of these actions seek damages in large amounts. While the results of litigation cannot be predicted with certainty, management believes that the final outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. Changes in assumptions, as well as actual experience, could cause the estimates made by management to change. Note 16 Earnings per Share Reconciliations of basic earnings per share (EPS) to diluted EPS were as follows:
Dollars in Millions (Except Per Share Data) For the year ended December 31, 1998 1997 1996 Income Shares Income Shares Income Shares Net income (loss) $ 284.5 $ (930.9) $ 247.9 Less: Preferred dividends 4.5 3.5 3.7 Net income (loss) available for common $ 280.0 137,185 $ (934.4) 137,460 $ 244.2 135,466 Net income (loss) per common share $ 2.04 $ (6.80) $ 1.80 Net income (loss) available for common for common $ 280.0 137,185 $ (934.4) 137,460 $ 244.2 135,466 Effect of dilutive securities: Stock options -- 3,613 -- -- -- 1,000 ESOP Convertible Preferred Stock 2.0 2,180 -- -- 2.9 2,441 Non-vested awards -- 219 -- -- -- 83 $ 282.0 143,197 $ (934.4) 137,460 $ 247.1 138,990 Net income (loss) per common share - assuming dilution $ 1.97 $ (6.80) $ 1.78
As of December 31, 1998 and 1996, certain stock options were excluded from the computation of diluted EPS because the exercise prices were higher than the average market price. At the end of 1997, all exercise prices were lower than the average market price. See Note 8 for more information on outstanding options. Historical adjustments for potentially dilutive securities are not necessarily indicative of future trends. As the Company incurred a net loss for the year ended December 31, 1997, there was no adjustment for potentially dilutive securities as the adjustment would have been antidilutive. Adjustments to income and shares for such potentially dilutive securities in 1997, had the Company earned net income, would have resulted in a $2.9 million increase to net income available for common and an increase of 5.1 million shares. <63> Note 17 Quarterly Financial Data (Unaudited)
Dollars in Millions (Except Per Share Data) First Second Third Fourth 1998 Quarter (a) Quarter (b) Quarter (c) Quarter (d) Net sales $ 1,092.3 $ 1,381.7 $ 1,405.2 $ 963.3 Cost of goods sold 552.2 676.5 663.4 482.3 Gross profit $ 540.1 $ 705.2 $ 741.8 $ 481.0 Net income $ 47.0 $ 56.5 $ 107.8 $ 73.2 Per common share: Net income $ 0.33 $ 0.41 $ 0.78 $ 0.52 Net income - assuming dilution $ 0.32 $ 0.40 $ 0.75 $ 0.50 Cash dividends declared $ 0.285 $ 0.285 $ 0.285 $ 0.285 Market price range: High $ 60 3/8 $ 58 7/16 $ 63 $ 65 9/16 Low $ 48 1/2 $ 50 5/8 $ 51 3/4 $ 55 1/8
(a) Includes pretax restructuring charges of $9.1 million ($5.5 million after- tax or $0.04 per share) for organization alignment. (b) Includes pretax impairment losses of $63.0 million ($39.4 million after-tax or $0.28 per share) related to the Continental Coffee and Brazilian pasta businesses, and pretax restructuring charges of $15.6 million ($11.1 million after-tax or $0.08 per share) for organization alignment. (c) Includes pretax impairment losses of $40.5 million ($24.3 million after-tax or $0.18 per share) related to the Nile Spice and China Foods businesses, a combined pretax gain of $7.6 million ($7.6 million after-tax or $0.05 per share) for the sale of the Ardmore Farms and Continental Coffee businesses and pretax restructuring charges of $9.0 million ($5.4 million after-tax or $0.04 per share) for organization alignment. (d) Includes pretax restructuring charges of $56.0 million ($30.1 million after- tax or $0.22 per share) for organization alignment, plant consolidations and Asian reorganization, a pretax loss of $3.1 million ($1.9 million after-tax or $0.01 per share) for the sale of the Nile Spice business and a pretax gain of $60.2 million ($60.2 million after-tax or $0.44 per share) for the sale of the Liqui-Dri business.
Dollars in Millions (Except Per Share Data) First Second Third Fourth 1997 Quarter (a) Quarter (b) Quarter (c) Quarter (d) Net sales $ 1,201.7 $ 1,395.5 $ 1,370.7 $ 1,047.8 Cost of goods sold 627.7 704.1 674.1 559.0 Gross profit $ 574.0 $ 691.4 $ 696.6 $ 488.8 Net (loss) income $ (1,109.8) $ 75.8 $ 77.5 $ 25.6 Per common share: Net (loss) income $ (8.15) $ 0.57 $ 0.58 $ 0.20 Net (loss) income - assuming dilution $ (8.15) $ 0.57 $ 0.58 $ 0.20 Cash dividends declared $ 0.285 $ 0.285 $ 0.285 $ 0.285 Market price range: High $ 40 3/8 $ 45 1/8 $ 53 $ 55 1/8 Low $ 34 3/8 $ 35 7/8 $ 44 3/8 $ 42 1/16
(a) Includes a $1.40 billion pretax impairment loss ($1.14 billion after-tax or $8.39 per share) for the Snapple beverages business. (b) Includes a $10.6 million pretax loss ($5.5 million after-tax or $0.02 per share) for the sale of the Snapple beverages business and pretax restructuring charges of $11.8 million ($7.9 million after-tax or $0.06 per share) for plant consolidations in the Latin American Foods business and the closing of a Singapore beverages office. (c) Includes a $4.8 million pretax net charge ($3.4 million after-tax or $0.02 per share) for an impairment loss partly offset by a litigation settlement in the Latin American Foods business and pretax restructuring charges of $46.9 million ($28.2 million after-tax or $0.19 per share) for plant consolidations in the U.S. and Canadian Foods business and staffing reductions. (d) Includes a $5.8 million combined pretax loss ($1.9 million after-tax or an immaterial per share impact) for the sale of certain food service businesses and pretax restructuring charges of $7.2 million ($4.3 million after-tax or $0.02 per share) for manufacturing reconfigurations in the U.S. and Canadian Foods and Beverages businesses. Note 18 Subsequent Event In February 1999, the Company announced it had reached a definitive agreement to sell its Brazilian pasta business. The sale of this business is not expected to have a material impact on the Company's operating results. <64> REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of The Quaker Oats Company: We have audited the accompanying consolidated balance sheets of The Quaker Oats Company (a New Jersey corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, common shareholders' equity and cash flows for the years ended December 31, 1998, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Quaker Oats Company and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998, 1997 and 1996 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois February 2, 1999 REPORT OF MANAGEMENT Management is responsible for the preparation and integrity of the Company's financial statements. The financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include some amounts that are based on management's estimates and judgment. To fulfill its responsibility, management's goal is to maintain strong systems of internal controls, supported by formal policies and procedures that are communicated throughout the Company. Management regularly evaluates its systems of internal controls with an eye toward improvement. Management also maintains a staff of internal auditors who evaluate the adequacy of and investigate the adherence to these controls, policies and procedures. Our independent public accountants, Arthur Andersen LLP, have audited the financial statements and have rendered an opinion as to the statements' fairness in all material respects. During the audit, they obtain an understanding of the Company's internal control systems and perform tests and other procedures to the extent required by generally accepted auditing standards. The Board of Directors pursues its oversight role with respect to the Company's financial statements through the Audit Committee, which is composed solely of non-management directors. The Audit Committee meets periodically with the independent public accountants, internal auditors and management to assure that all are properly discharging their responsibilities. The Audit Committee approves the scope of the annual audit and reviews the recommendations the independent public accountants have for improving internal accounting controls. The Board of Directors, on recommendation of the Audit Committee, engages the independent public accountants, subject to shareholder approval. Both Arthur Andersen LLP and the internal auditors have unrestricted access to the Audit Committee. <65> ADDITIONAL 10-K INFORMATION Description of Property As of December 31, 1998, the Company operated 46 manufacturing plants in 13 states and 14 foreign countries and owned or leased distribution centers and sales offices in 22 states and 20 foreign countries.
Foods Beverages Shared Total Owned and Leased Manufacturing Locations: U.S. and Canadian 13 8 -- 21 Latin American 12 3 1 16 Other 5 4 -- 9 Owned and Leased Distribution Centers: U.S. and Canadian 1 -- 8 9 Latin American 2 1 16 19 Other -- 2 -- 2 Owned and Leased Sales Offices: U.S. and Canadian 11 13 6 30 Latin American 4 3 13 20 Other 6 7 -- 13
The Company owns a research and development laboratory in Barrington, Illinois, and leases corporate office space in downtown Chicago, Illinois. Management believes manufacturing, distribution and office space owned and leased are suitable and adequate for the business. Production capacity is appropriately utilized. The Company is in the process of terminating certain sales office leases in light of its recent restructuring actions. Trademarks The Company and its subsidiaries own a number of trademarks and are not aware of any circumstances that could materially adversely affect the continued use of these trademarks. Among the most important of the domestic trademarks owned by the Company are Quaker, Cap'n Crunch, Quaker Toasted Oatmeal, Life, Quaker 100% Natural and Quaker Oatmeal Squares for breakfast cereals; Gatorade and Gatorade Frost for thirst-quenching beverages; Quaker and Quaker Chewy for grain-based snacks; Rice-A-Roni and Near East for value-added rice and grain products; Pasta Roni for value-added pasta; Golden Grain and Mission for pasta; and Quaker and Aunt Jemima for mixes, syrups and corn goods. Many of the grocery product trademarks owned by the Company in the United States are registered in foreign countries in which the Company does substantial business. Internationally, key trademarks owned include: Quaker, Cruesli, Honey Monster, Sugar Puffs and Scott's for breakfast cereals; Coqueiro for fish; Toddy and ToddYnho for chocolate beverages; and Gatorade for thirst-quenching beverages. U.S. and Canadian Foods Description The Company is a major participant in the competitive packaged food industry in the United States and is a leading manufacturer of hot cereals, pancake syrups, grain-based snacks, cornmeal, hominy grits and value-added rice products. In addition, the Company is the second-largest manufacturer of pancake mixes and value-added pasta products and is among the four largest manufacturers of ready- to-eat cereals and five largest manufacturers of branded dry pasta products. The Company competes with a significant number of large and small companies on the basis of price, value, innovation, quality and convenience, among other attributes. The Company's food products are purchased by consumers through a wide range of food distributors. The Company utilizes both its own and broker sales forces and has distribution centers throughout the country, each of which carries an inventory of most of the Company's food products. <66> Latin American Foods Description The Company manufactures and markets its products in many countries throughout Latin America and is broadly diversified by product line. It is the leading brand-name hot cereals producer in many countries and has other leading category positions for products in a number of countries. In Brazil, the Company is the leading producer of ready-to-drink chocolate beverages and the leading canned fish processor. Other Foods Description The Company is broadly diversified, both geographically and by product line, in the packaged food industry. The Company manufactures and markets its products in many countries throughout Europe and Asia. It is the leading brand-name cereals producer in many European countries and has other leading category positions for products in a number of countries. U.S. and Canadian Beverages Description The Company is the leading manufacturer and distributor of sports beverages in the United States and Canada and accounts for more than 80 percent of sales in the sports drink category. The Company uses both its own and broker sales forces to sell Gatorade thirst quencher and has distribution centers around the country. Over 60 percent of Gatorade sales occur in the second and third quarters during the spring and summer beverage season. Latin American and Other Beverages Description The Company also manufactures and markets Gatorade in Latin America, Europe and Asia. Gatorade is sold in more than 45 countries outside of North America and is the leading sports drink distributor in Mexico, Argentina, Brazil, Venezuela, Colombia, the Philippine Islands and Italy. Gatorade is also one of the leading sports drink brands in Korea and Australia, where it is sold through license arrangements. Raw Materials Raw materials used in manufacturing include oats, wheat, corn, rice, sweeteners, almonds, fruit, cocoa, vegetable oil and fish, as well as a variety of packaging materials. These products are purchased mainly in the open market. Supplies of all raw materials have been adequate and continuous. <67> DIRECTORS Members of the Board of Directors Frank C. Carlucci 1*,4,5 Chairman The Carlyle Group (Banking) Washington, D.C. Kenneth I. Chenault 1,3 President and Chief Operating Officer American Express Company (Financial and Travel Services) New York, New York John H. Costello 1,2,4 President Republic Industries, Inc. (Automotive Retailing and Rental) Fort Lauderdale, Florida W. James Farrell 1,3,4 Chairman and Chief Executive Officer Illinois Tool Works, Inc. (Component Manufacturer) Glenview, Illinois Judy C. Lewent 1,3,5 Senior Vice President and Chief Financial Officer Merck & Co., Inc. (Pharmaceuticals) Whitehouse Station, New Jersey J. Michael Losh 1,2,5 Executive Vice President and Chief Financial Officer General Motors Corporation (Automotive Manufacturing) Detroit, Michigan Vernon R. Loucks, Jr. 2,3*,5 Chairman Baxter International Inc. (Medical Care Products) Deerfield, Illinois Robert S. Morrison 2,4 Chairman, President and Chief Executive Officer Walter J. Salmon 2*,5 Stanley Roth, Sr. Professor of Retailing Emeritus Harvard Business School Boston, Massachusetts William L. Weiss 2,3,4*,5 Chairman Emeritus Ameritech Corporation (Telecommunications) Chicago, Illinois Board Committees 1 Audit 2 Board Affairs (Robert S. Morrison Ex Officio Member) 3 Compensation 4 Executive 5 Finance * Denotes Committee Chairman OFFICERS Operating Committee Robert S. Morrison+ Age 56 Chairman, President and Chief Executive Officer Joined Quaker in October 1997. Elected to present office in October 1997. Cassian K.S. Cheung+ Age 43 Vice President and President Quaker Asia Joined Quaker in 1994. Elected to present office in March 1998. Harry M. Dent+ Age 41 Vice President and President Ready-to-Eat Cereals Joined Quaker in 1983. Elected to present office in March 1998. Margaret M. Eichman+ Age 40 Vice President Investor Relations and Corporate Affairs Joined Quaker in 1980. Elected to present office in July 1997. Pamela S. Hewitt+ Age 46 Senior Vice President Human Resources Joined Quaker in 1992. Elected to present office in May 1998. John G. Jartz+ Age 45 Senior Vice President General Counsel, Business Development and Corporate Secretary Joined Quaker in 1980. Elected to present office in July 1997. Polly B. Kawalek+ Age 44 Vice President and President Hot Breakfast Joined Quaker in 1979. Elected to present office in March 1998. <70> Charles I. Maniscalco+ Age 45 Vice President and President Snacks Joined Quaker in 1980. Elected to present office in March 1998. Terence D. Martin+ Age 55 Senior Vice President and Chief Financial Officer Joined Quaker in 1998. Elected to present office in November 1998. Terrence B. Mohr+ Age 55 Senior Vice President Customer Organization Joined Quaker in 1987. Elected to present office in March 1998. David L. Morton Age 54 President and Chief Executive Officer The Quaker Oats Company Of Canada, Ltd. George F. Sewell Age 52 President Cereals, Europe Mark A. Shapiro+ Age 43 Vice President and President Golden Grain Company The Quaker Oats Company of Canada, Ltd. Joined Quaker in 1983. Elected to present office in March 1998. Susan D. Wellington+ Age 40 Vice President and President U.S. Beverages Joined Quaker in 1981. Elected to present office in March 1998. Bernardo Wolfson+ Age 45 Vice President and President Quaker Latin America Joined Quaker in 1983. Elected to present office in March 1998. Russell A. Young+ Age 50 Senior Vice President Supply Chain Joined Quaker in 1971. Elected to present office in March 1998. Corporate Staff Officers Michael D. Annes Vice President Business Development and Counsel Law Penelope C. Cate Vice President Public Affairs Thomas L. Gettings+ Age 42 Vice President Treasurer and Tax Joined Quaker in 1987. Elected to present office in May 1998. Richard M. Gunst+ Age 42 Vice President and Corporate Controller Joined Quaker in 1992. Elected to present office in May 1998. Douglas A. James Assistant Treasurer James E. LeGere Vice President Information Systems I. Charles Mathews Vice President Organization Effectiveness Kenneth W. Murray Vice President Audit Services and Chief Ethics Officer Edward H. Stassen Vice President Planning, Analysis and Controls Michael T. Welch Vice President Legal Services + also Executive Officers as defined by Securities and Exchange Commission regulations. Such Executive Officers serve at the pleasure of the Board of Directors. All Executive Officers (except Robert S. Morrison, who joined the Company in October 1997, and was formerly the Chairman and CEO of Kraft Foods, Inc. of Philip Morris Companies, Inc. [1994-1997] and President of General Foods U.S.A. of Philip Morris Companies, Inc. [1991- 1994], and Terence D. Martin, who joined the Company in November 1998, and was formerly the Executive Vice President and Chief Financial Officer of General Signal Corporation [1995-1998] and Chief Financial Officer of American Cyanamid Company [1991-1995]) have been employed by The Quaker Oats Company in an executive capacity for five years or more. <71> CORPORATE AND SHAREHOLDER INFORMATION Consumer Affairs Inquiries regarding our products should be addressed to: Consumer Affairs The Quaker Oats Company P.O. Box 049003 Chicago, Illinois 60604-9003 or call (800) 494-7843 Media Relations Copies of press releases are available at no charge through PR Newswire's Company News On-Call fax service, (800) 758-5804, extension 103689 News media-related inquiries should be addressed to: Corporate Communications Suite 27-6 or call (312) 222-7399 Investor Relations Security analysts, investment professionals and shareholders should direct their business-related inquires to: Investor Relations - Suite 27-7 or call (312) 222-7818 Shareholder Services Harris Trust and Savings Bank acts as transfer agent and registrar for Quaker stock and maintains all primary shareholder records. Shareholders may obtain information relating to their share positions, dividends, stock transfer requirements, lost certificates and other related matters by telephoning the Shareholder Hotline toll-free at (800) 344-1198. Harris DOCS (Direct Ownership of Corporate Shares) Program Quaker common stock may be purchased through automatic dividend reinvestment, automatic checking/savings account debits and/or optional cash investments through the Harris DOCS Program. This program replaced the Quaker Dividend Reinvestment and Stock Purchase Plan in January 1998. A brochure describing the Program and an enrollment form are available by calling (800) 524-8580. Current shareholders should call Harris Bank directly at (800) 344-1198. Harris DOCS The Quaker Oats Company Administrator P.O. Box A33090 Chicago, Illinois 60690-3309 (800) 344-1198 Form 10-K This Annual Report includes all financial statements and notes required by Form 10-K. If you request a Form 10-K, you will receive the annual report, proxy statement and the Form 10-K cover page, exhibit list and conformed signature page. Annual Meeting Shareholders are cordially invited to attend the Annual Meeting, which will be held at the Rosemont Convention Center, 5555 North River Road, in Rosemont, Illinois, at 9:30 a.m. (CDT), on May 12, 1999. Dividends Cash dividends on Quaker common stock have been paid for 93 consecutive years. Dividends are generally declared on a quarterly basis, with holders as of the record date being entitled to receive the cash dividend on the payable date. <72> Corporate Headquarters Mailing Address: The Quaker Oats Company P.O. Box 049001 Chicago, Illinois 60604-9001 Street Address: Quaker Tower 321 North Clark Street Chicago, Illinois 60610-4714 (312)222-7111 Internet Web Site Address www.quakeroats.com Shares Listed New York Stock Exchange Chicago Stock Exchange Ticker Symbol: OAT The Quaker Oats Company was incorporated in 1901 under the laws of the State of New Jersey. EX-21 14 EXHIBIT 21 State of Subsidiary Incorporation THE QUAKER OATS COMPANY ACTIVE DOMESTIC SUBSIDIARIES AS OF 12/31/98 SUBSIDIARY STATE OF INCORPORATION The Gatorade Company Delaware Gatorade Puerto Rico Company Delaware Golden Grain Company California Grocery International Holdings, Inc. Delaware QO Coffee Holdings Inc. Delaware Quaker Oats Asia, Inc. Delaware Quaker Oats Europe, Inc. Illinois Quaker Oats Holdings, Inc. Delaware Quaker Oats Music, Inc. Delaware Quaker Oats Philippines, Inc. Delaware Quaker South Africa, Inc. Delaware Quaker Spain, Inc. Delaware Stokely-Van Camp, Inc. Indiana SVC Equipment Company Delaware SVC Latin America, Inc. Delaware SVC Latin America, LLC Delaware ACTIVE FOREIGN SUBSIDIARIES AS OF 12/31/98 SUBSIDIARY COUNTRY Elaboradora Argentina de Cereales, S.A. Argentina The Gatorade Company of Australia Pty. Ltd. Australia Quaker Oats Australia, Pty. Ltd. Australia Quaker Oats Foreign Sales Corp. Barbados QUIC Ltd. Bermuda Quaker Brasil, Ltda. Brazil Fester Industria Alimenticia Ltda. Brazil The Quaker Oats Company of Canada Limited Canada Quaker de (Chile) Ltda. Chile Guangzhou Quaker Oats Food and Beverage Co. Ltd. China Productos Quaker, S.A. Colombia Quaker Oats Limited England Quaker Trading Limited England The Quaker Beverages GmbH Germany Quaker Beverages Italia, S.p.A. Italy Quaker Oats Japan, Ltd. Japan Quaker Products (Malaysia) Sdn. Bhd. Malaysia Productos Quaker de Mexico, S.A. de C.V. Mexico Quaker de Mexico, S.A. de C.V. Mexico Quaker Oats B.V. The Netherlands QO Puerto Rico, Inc. Puerto Rico Quaker Bebidas, S.L. Spain Productos Quaker, C.A. Venezuela DOMESTIC JOINT VENTURES Rhone Poulenc The Quaker Oats Company 50% Rhone Poulenc 50% Uni-Quaker Ltd. South Africa Quaker South Africa, Inc. 50% Uni-mill Pty. Ltd. 50% FOREIGN JOINT VENTURES P.T. Gatorade Indonesia The Quaker Oats Company 90% P.T. AdeS Alfinda Putrasetia 10% Shanghai Guan Sheng Yuan Quaker The Quaker Oats Company 70% Oats Co. Ltd. Guan Sheng Yuan 30% Shanghai Quaker Oats Beverages Co. The Quaker Oats Company 80% Ltd. Shanghai Bomy Foodstuffs Co. Ltd. 10% Chou Chin Industrial (H.K.) Ltd. 10% EX-23 15 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated February 2, 1999, included in this Form 10-K for the year ended December 31, 1998 into the Company's previously filed Registration Statement File Nos. 33-13980, 33-13981, 33-32970, 2-79503 and 33-33253. /s/ Arthur Andersen LLP Chicago, Illinois March 17, 1999 EX-27 16
5 1,000,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 327 28 304 21 261 1115 1819 749 2510 1009 795 0 100 840 767 2510 4843 4843 2374 2374 0 4 70 397 112 285 0 0 0 285 2.04 1.97
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