-----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, GOrBI+UmZH25GMQ5A+Kbc5ME4DQRaMrBp/eQ3xsFLJmW2Hh8o/8/5R0G1swvCMPT s8Sm99cxxd6qJB31IV1y3Q== 0000081371-99-000024.txt : 19991224 0000081371-99-000024.hdr.sgml : 19991224 ACCESSION NUMBER: 0000081371-99-000024 CONFORMED SUBMISSION TYPE: 11-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19991223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUAKER OATS CO CENTRAL INDEX KEY: 0000081371 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 361655315 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 11-K SEC ACT: SEC FILE NUMBER: 001-00012 FILM NUMBER: 99780071 BUSINESS ADDRESS: STREET 1: QUAKER TOWER STREET 2: PO BOX 049001 CITY: CHICAGO STATE: IL ZIP: 60604-9001 BUSINESS PHONE: 3122228503 MAIL ADDRESS: STREET 1: P.O. BOX 049001-STE 26-5 CITY: CHICAGO STATE: IL ZIP: 60604-9001 11-K 1 QUAKER 401(K) PLAN FOR SALARIED EMPLOYEES UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K [X] Annual Report Pursuant to Section l5(d) of the Securities Exchange Act of 1934 [ ] Transition Report Pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1999 Commission file number 1-12 Full title of the Plan and the address of the Plan, if different from that of the issuer named below: The Quaker 401(k) Plan for Salaried Employees Name of issuer of the securities held pursuant to the Plan and the address of its principal executive office: The Quaker Oats Company P.O. Box 049001 Chicago, Illinois 60604-9001 Item 1. See Item 4. Item 2. See Item 4. Item 3. See Item 4. Item 4. Financial Statements and Exhibits (a) Financial Statements The Quaker 401(k) Plan for Salaried Employees is subject to the Employee Retirement Income Security Act of 1974 (ERISA), and the report of Washington, Pittman & McKeever, LLC, independent public accountants, as prepared in accordance with the financial reporting requirements of ERISA is attached hereto and incorporated into this report. (b) Exhibit Consent of Independent Public Accountants - Washington, Pittman & McKeever, LLC. SIGNATURES The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the administrators of the Plan have duly caused this annual report to be signed on their behalf by the undersigned hereunto duly authorized. The Quaker 401(k) Plan for Salaried Employees (Name of Plan) /s/ PAMELA S. HEWITT (Pamela S. Hewitt) Senior Vice President - Human Resources /s/ DENNIS CORRY (Dennis Corry) Director - Employee Benefits /s/ JAMES BROWN (James Brown) Manager - Benefit Plans Date: December 22, 1999 <2> Exhibit Index Exhibit Paper (P) or Number Description Electronic (E) (a) The Quaker 401(k) Plan E for Salaried Employees Financial Statements as of June 30, 1999 and 1998 (b) Consent of Independent E Public Accountants <3> Exhibit (a) THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 TOGETHER WITH INDEPENDENT AUDITOR'S REPORT <4> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES AS OF JUNE 30, 1999 AND 1998 TABLE OF CONTENTS PAGE INDEPENDENT AUDITOR'S REPORT 6 STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS 7 STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS 8 NOTES TO FINANCIAL STATEMENTS 9-21 Note: Supplemental schedules are either inapplicable for the twelve months ended June 30, 1999, or are not required because they are filed as part of The Quaker Oats Company 401(k) Plans Master Trust (Quaker Master Trust), in which this Plan participates. <5> INDEPENDENT AUDITOR'S REPORT To the Plan Administrative Committee of THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES of The Quaker Oats Company We have audited the accompanying Statements of Net Assets Available for Benefits of The Quaker 401(k) Plan for Salaried Employees (Plan) as of June 30, 1999 and 1998, and the related Statement of Changes in Net Assets Available for Benefits with fund information for the year ended June 30, 1999. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of June 30, 1999 and 1998, and the changes in net assets available for benefits for the year ended June 30, 1999 in conformity with generally accepted accounting principles. /s/WASHINGTON, PITTMAN & McKEEVER, LLC WASHINGTON, PITTMAN & McKEEVER, LLC Chicago, Illinois December 21, 1999 <6> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS AS OF JUNE 30, 1999 AND 1998 (dollars in thousands) ASSETS June 30, 1999 June 30, 1998 Investment in Quaker Master Trust $ 857,778 $ 739,186 NET ASSETS AVAILABLE FOR BENEFITS $ 857,778 $ 739,186 See accompanying notes to financial statements. <7> THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED JUNE 30, 1999 (dollars in thousands)
Fidelity Quaker Pimco Retirement Fidelity Fidelity Fidelity Common ICAP Total Money Low-Priced Asset Asset Fidelity Stock Diversified Return Market Stock Manager: Manager: Asset Total Fund Fund Fund Fund Fund Growth Fund Income Fund Manager ADDITIONS Investment income: Dividends $ 19,560 $ 1,805 $ -- $ 2,455 $ 1,997 $ 107 $ 255 $ 81 $ 332 Interest 1,131 11 155 5 3 -- -- -- -- Total investment income 20,691 1,816 155 2,460 2,000 107 255 81 332 Net appreciation (depreciation) in the fair value of assets 132,278 18,514 18,163 (1,501) -- 269 135 (10) (52) Employee contributions 12,825 2,450 6,385 735 1,159 271 257 48 62 Employer contributions 28,614 -- -- -- -- -- -- -- -- Net transfers from other plans 2,221 55 208 181 582 102 312 46 82 Total additions 196,629 22,835 24,911 1,875 3,741 749 959 165 424 DEDUCTIONS Distributions to participants 67,617 6,745 14,439 2,477 6,946 139 139 152 191 Interest expense on notes payable 8,615 -- -- -- -- -- -- -- -- Dividends to participants 1,805 1,805 -- -- -- -- -- -- -- Total deductions 78,037 8,550 14,439 2,477 6,946 139 139 152 191 LOANS Participant loans -- (2,040) (2,888) (229) (661) (31) (84) (28) (24) Loans repaid -- 1,328 1,973 249 252 48 111 10 9 Net Loans -- (712) (915) 20 (409) 17 27 (18) (15) INTERFUND TRANSFERS -- (19,124) (27,340) 291 6,103 2,413 4,059 1,561 2,279 Increase (decrease) in net assets 118,592 (5,551) (17,783) (291) 2,489 3,040 4,906 1,556 2,497 Net assets available for benefits, beginning of period 739,186 91,079 206,779 24,765 40,165 1 1 -- -- NET ASSETS AVAILABLE FOR BENEFITS, END OF PERIOD $857,778 $85,528 $188,996 $24,474 $42,654 $3,041 $4,907 $1,556 $2,497 Fidelity Fidelity's Morgan Neuberger Quaker Quaker Diversified U.S. Equity Stanley & Berman Fidelity LESOP LESOP International Index Institutional Partners Brokerage Common Preferred Loan Fund Pool Fund Trust Link Fund Fund Fund ADDITIONS Investment income: Dividends $ 38 $ -- $ 22 $ 82 $ 6 $ 7,002 $ 5,378 $ -- Interest -- -- -- -- 4 180 65 708 Total investment income 38 -- 22 82 10 7,182 5,443 708 Net appreciation (depreciation) in the fair value of assets 233 2,732 252 751 653 69,827 22,312 -- Employee contributions 144 813 208 279 14 -- -- -- Employer contributions -- -- -- -- -- 20,761 7,853 -- Net transfers from other plans 42 374 177 60 -- -- -- -- Total additions 457 3,919 659 1,172 677 97,770 35,608 708 DEDUCTIONS Distributions to participants 177 1,086 37 78 74 26,819 7,726 392 Interest expense on notes payable -- -- -- -- -- 5,025 3,590 -- Dividends to participants -- -- -- -- -- -- -- -- Total deductions 177 1,086 37 78 74 31,844 11,316 392 LOANS Participant loans (13) (215) (24) (15) -- -- -- 6,252 Loans repaid 21 131 33 51 -- -- -- (4,216) Net Loans 8 (84) 9 36 -- -- -- 2,036 INTERFUND TRANSFERS 2,237 17,799 1,834 3,185 6,186 973 (2,456) -- Increase (decrease) in net assets 2,525 20,548 2,465 4,315 6,789 66,899 21,836 2,352 Net assets available for benefits, beginning of period -- 4 1 2 -- 288,254 81,905 6,230 NET ASSETS AVAILABLE FOR BENEFITS, END OF PERIOD $2,525 $20,552 $2,466 $4,317 $6,789 $355,153 $103,741 $8,582
See accompanying notes to financial statements. <8> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES The following brief description of the Plan provides only general information. The Plan document should be referred to for the complete Plan provisions. General The Plan covers salaried domestic employees of The Quaker Oats Company (Company or Quaker) and certain domestic subsidiaries. The Plan includes The Quaker LESOP Common Stock Fund and The Quaker LESOP Preferred Stock Fund (LESOP Funds) and 13 participant directed investment funds (non-LESOP Funds). Under the Plan, eligible salaried employees are awarded annual employer contributions to the LESOP funds and may contribute to non-LESOP Funds on a pretax basis for long-term retirement savings. The Plan is intended to qualify as a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code and is subject to the provisions of the Employee Retirement Income Security Act of 1974. Overall responsibility for administering the Plan rests with the Plan's Administrative Committee which is appointed by the Board of Directors of the Company. The Plan's trustee is responsible for the management and control of the Plan's assets and has certain discretionary authority and control over such assets. The Plan's administrative committee appointed The Fidelity Management Trust Company (FMTC) as the trustee and Fidelity Institutional Retirement Services Company as the record keeper for the Plan, effective June 1, 1998. Prior to June 1, 1998, The Northern Trust Company (Northern Trust) was the trustee and Hewitt Associates was the record keeper for the Plan. Plan Expenses The Company pays administrative record keeping expenses as well as expenses for operation and management of LESOP Funds. Participants' account balances are deducted for investment management fees and other direct expenses of the non-LESOP Funds in which the participant invests. Eligibility Under the current terms of the Plan, designated salaried employees of the Company are eligible to participate in the Plan on their first day of service. Vesting Participants are immediately vested in both their voluntary contributions and the Company's allocations as well as the actual earnings thereon. <9> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (CONTINUED) LESOP Funds (Non-participant Directed) FMTC must invest all LESOP Funds assets, including earnings thereon, primarily in Quaker stock, except as otherwise directed by the Plan committee. The assets of the LESOP Funds may not be commingled with the assets of the non-LESOP Funds. Participants over age 55 with 10 or more years of participation in the Plan may elect to diversify their investments by transferring certain amounts out of the LESOP Funds, into other Plan investment funds once a year. Non-LESOP Funds (Participant Directed) Effective June 1, 1998, participants could invest in one or more of the following 13 investment funds: Fidelity Retirement Money Market Portfolio This fund invests in high quality, short-term, U.S. dollar denominated money market securities of domestic and foreign issuers. The fund seeks to maintain a stable net asset value of $1 per share, but there is no guarantee it will do so. PIMCO Total Return Fund - Administrative Class This fund invests in a variety of bonds, including U.S. government, corporate, mortgage and foreign. The fund seeks to provide high total return that exceeds general bond market indices. Fidelity's U.S. Equity Index Commingled Pool This fund primarily invests in the common stocks of the 500 companies that comprise the Standard and Poor's 500 Index (S&P 500). The fund seeks to approximate the composition and total return of the S&P 500. ICAP Diversified Fund This fund primarily invests in large capitalization stocks. The fund seeks to achieve a total return greater than the S&P 500 with an equal or lesser degree of risk than the S&P 500. <10> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (CONTINUED) Neuberger & Berman Partners Trust This fund invests in common stocks of established medium to large capitalization companies, using a value-oriented investment approach. The fund seeks to provide capital growth. Fidelity Low-Priced Stock Fund This fund primarily invests in stocks of companies that the fund manager considers undervalued or out of favor with other investors and that could offer the possibility for significant growth. This fund seeks long-term capital appreciation. Fidelity Diversified International Fund This fund primarily invests in stocks of larger companies located outside the United States. The fund manager seeks stocks that are undervalued compared to industry norms for their countries. This fund seeks long-term capital growth. Morgan Stanley Institutional Fund, Inc. - Global Equity Portfolio Class B This fund invests in a diversified mix of stocks throughout the world. The fund may have some exposure to emerging markets, which pose greater risks due to less developed political and economic situations and less liquid markets. This fund seeks long-term capital growth. Quaker Common Stock Fund This fund pools a participant's money with that of other participants to buy shares of Quaker common stock. The fund also holds an amount of short-term investments to allow participants to buy or sell every business day without the usual trade settlement period for individual stock transactions. Ownership is measured in units of the fund instead of shares of stock. The fund seeks to increase the investment value over the long term by investing in the common stock of the Company. The Quaker Common Stock Fund is an employee stock ownership plan and, as such, participants may be paid quarterly cash dividends from the Quaker Common Stock Fund and, when paid, the Company is eligible for a corresponding tax deduction. <11> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (CONTINUED) Fidelity Asset Manager: Income This fund invests all basic types of U.S. and foreign investments: stocks, bonds, and short-term and money market instruments. The benchmark allocation for this fund is 20% in stocks, 50% in bonds and 30% in the short-term/money market class. The fund seeks to provide high current income, with some potential for capital appreciation. Fidelity Asset Manager This fund invests in a variety of U.S. and foreign investments: stocks, bonds, and short-term and money market instruments. The benchmark allocation for this fund is 50% in stocks, 40% in bonds and 10% in the short-term/money market class. This fund seeks to provide high total return with reduced risk over the long term. Fidelity Asset Manager: Growth This fund invests in a variety of U.S. and foreign investments: stocks, bonds, and short-term and money market instruments. The benchmark allocation for this fund is 70% in stocks, 25% in bonds and 5% in the short-term/money market class. This fund seeks to provide maximum total return over the long term. Fidelity BrokerageLink BrokerageLink is a service that allows the participant to open a Fidelity brokerage account with the assets in the participant's Plan account. Through this account, participants have access to a wide range of additional investments. Employer Contributions The Company has made cash contributions to the LESOP Funds to make payments of principal and/or interest on the notes payable. All cash dividends received and interest income of the LESOP Funds are available to make payments on maturing obligations on the LESOP loans. Refer to Notes 5 and 6 for further discussion of the notes payable issued by the LESOP Funds. <12> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (CONTINUED) Employee Contributions Participants in the Plan were allowed to defer receipt of, and have placed in the non-LESOP Funds, up to 15 percent of their base salary, subject to the Internal Revenue Service (IRS) dollar amounts allowed. Participants with a base salary of less than $70,000 were able to contribute up to 15 percent. Those participants with a base salary of $70,000 or more were limited to 7 percent. The Plan allowed employees the option to deposit excess funds from The Quaker Flex Plan to the Plan. Effective July 1, 1999, all participants in the Plan are allowed to contribute up to 10 percent of their base salary, subject to the IRS dollar amounts allowed. Also, the Plan will no longer allow participants the option to deposit excess funds from The Quaker Flex Plan to the Plan. Contributions are not subject to federal income tax until distributed to the participants or their beneficiaries. The Plan allows participants to transfer their accounts among non-LESOP Funds in increments of one percent or in specific dollar amounts. Participants may also change the percentage of their future earnings contributed to the Plan. The Plan also allows a participant to contribute to the Plan a lump-sum distribution received from other qualified plans when the contribution qualifies as a tax-free rollover. Distributions Participants may elect in writing to receive all or a portion of their non-LESOP accounts if they are at least age 59 1/2 years or if they are totally and permanently disabled as determined by the Company with the advice of a medical doctor. The participant's account will then be valued as of the latest available valuation date before distribution. If only a portion of the account is distributed, the remaining balance will continue to be adjusted for contributions, net earnings, gains and losses as of each valuation date. Participants may receive a distribution of a portion of their non- LESOP accounts in the event of a hardship. Hardship withdrawals occur when funds are required for purchasing or making capital expenditures for a primary residence, financing the post- secondary education of the participant or the participant's family or alleviating existing financial hardship. If a participant's employment with the Company is terminated, the Plan may distribute the participant's account balance to the participant or the participant's beneficiary. A participant may elect to defer the lump-sum distribution or the start of installment payments until age 70 1/2. A participant may elect in writing to receive the distribution in one of the following ways: (a) in a lump sum; (b) in a partial distribution; or (c) in approximately equal annual installments over a chosen period. The period chosen, however, must be no longer than the participant's life expectancy when distributions begin as determined by the IRS regulations. <13> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 1 - THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES (CONTINUED) If the distribution is made through installment payments, the participant's remaining account balance will continue to be adjusted for net earnings and gains and losses as of each valuation date. If a participant's account value is $5,000 or less, an automatic lump-sum distribution may be made as soon as practicable after the end of the Plan year in which termination occurs. Participant Loans Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to 50 percent of their account balance or $50,000. Loan transactions are treated as a transfer to (from) the investment from (to) the Participant Loan Fund. Loan terms range from one year to five years, or up to 15 years for the purchase of a primary residence. Loan amounts may not be deducted from the LESOP Funds; as such, in no event can a participant borrow more than their combined balance in all of the non-LESOP Funds. The loans are secured by the balance in the participant's account and bear interest at a rate commensurate with local prevailing rates as determined by the Plan's administrator. Interest rates during the year ended June 30, 1999 (Fiscal 1999), ranged from 8.75 percent to 9.50 percent. Principal and interest are paid ratably according to a regular payment schedule, directly through payroll deductions for active employees. Plan Termination While the Company has not expressed intent to terminate the Plan, the Plan may be terminated at any time by action of the Company's Board of Directors. In the event of the Plan's termination, the value of the accounts determined as of the effective date of such termination shall be held for the benefit of participants, former participants or their beneficiaries. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The accompanying financial statements have been prepared on the accrual basis of accounting. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires the Plan's management to use estimates and assumptions that affect the accompanying financial statements and disclosures. Actual results could differ from those estimates and assumptions. Certain previously reported amounts have been reclassified to conform to the current presentation. <14> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Pending Accounting Change In September 1999, Statement of Position (SOP) No. 99-3, "Accounting for and Reporting of Certain Defined Contribution Plan Investments and Other Disclosure Matters," was issued. This SOP will require changes to the financial statement presentation and disclosures for the Plan and must be adopted for plan years ending after December 15, 1999. Investment Valuation and Income Recognition Investments are included in the accompanying Statements of Net Assets Available for Benefits at fair market value. Fair market value is based on published market prices. The purchase and sale of investments, including related gains and losses, are recognized on the transaction trade date. Brokerage commissions and investment management fees increase the cost or decrease the sale proceeds on the transactions. Interest income is recorded as earned and dividend income is recorded as of the record date. NOTE 3 - FEDERAL INCOME TAXES The Quaker Investment Plan (QIP) merged into The Quaker Employee Stock Ownership Plan (ESOP) which was renamed The Quaker 401(k) Plan for Salaried Employees at the close of business May 31, 1998. The QIP obtained its latest determination letter on October 9, 1997, in which the IRS stated that the QIP, as then designed, was in compliance with the applicable requirements of the Code. The ESOP obtained its latest determination letter on May 22, 1996. The Plan has not received a determination letter from the IRS since October 9 1997; however, the Plan administrator believes that the merged plan is currently designed and being operated in compliance with the applicable requirements of the Code, and therefore, qualifies as tax exempt as of June 30, 1999. NOTE 4 - PARTICIPATION IN A MASTER TRUST Effective June 1, 1998, the investments of the Plan and the investments of The Quaker 401(k) Plan for Hourly Employees were combined in the Quaker Master Trust in order to realize certain administrative efficiencies. Investment income, investment management fees and other direct expenses relating to the Quaker Master Trust are allocated to the individual plans based on the average daily balances of each plan. A separate account is maintained reflecting the equitable share of each plan's participation in each investment fund. As of June 30, 1999 and 1998, the Plan's interest in the Quaker Master Trust was approximately 86 percent and 87 percent, respectively. As of December 31, 1998, the fiscal year end of the Quaker Master Trust, the Plan's interest was approximately 86 percent of the total $885,591,000. <15> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 (dollars in thousands) NOTE 4 - PARTICIPATION IN A MASTER TRUST (CONTINUED) Investments Held in the Quaker Master Trust The Fair Value of the investments held by the Quaker Master Trust as of June 30, are as follows: 1999 1998 Quaker common stock $ 591,206 $ 544,460 Common stock investments 186,272 188,229 Quaker preferred stock 142,832 129,408 Short-term investments 144,013 103,059 Participant loans receivable 14,568 6,230 Accrued income 2,966 1,880 Employer contributions receivable 25,500 13,680 Miscellaneous receivables 3,543 105 Assets held in the Quaker Master Trust $ 1,110,900 $ 987,051 Leveraged ESOP notes payable $ (105,550) $ (135,300) Leveraged ESOP interest payable (3,868) (4,961) Miscellaneous payable (2,983) (213) Accrued expenses (3,773) -- Liabilities in the Quaker Master Trust $ (116,174) $ (140,474) Net assets held in the Quaker Master Trust $ 994,726 $ 846,577 A summary of the Quaker Master Trust income for the period from July 1, 1998 through June 30, 1999 was as follows: 1999 Interest $ 641 Interest - participant loans 982 Dividends 22,067 Net realized and unrealized gain on investments: Quaker common stock 108,493 Other common stock investments 19,063 Quaker preferred stock 22,298 Short-term investments 3,918 Quaker Master Trust net investment income $ 177,462 <16> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 5 - THE QUAKER LESOP COMMON STOCK FUND Effective June 1, 1998, the common shares within The 1988 Quaker Employee Stock Ownership Trust and the common shares within The 1989 Quaker Employee Stock Ownership Trust were combined to form The Quaker LESOP Common Stock Fund. The 1988 and 1989 Trusts issued certain notes pursuant to one or more loan agreements, and used the proceeds of such notes to acquire, for the future allocation to Plan participants, shares of common stock of the Company. Investments in Company Stock The Quaker LESOP Common Stock Fund investments, at June 30, were as follows:
1999 1998 Allocated Unallocated Allocated Unallocated Quaker common shares: Number of Shares 4,301,823 1,629,977 4,145,094 2,209,790 Cost $ 101,029,872 $ 40,761,727 $ 96,061,552 $ 55,262,449 Market $ 285,533,502 $ 108,189,723 $ 227,721,102 $ 121,400,338
During Fiscal 1999, 579,813 shares of the Company's common stock were allocated. 503,713 shares were allocated to participants' accounts based on participants' compensation pursuant to the terms of the Plan. The remaining 76,100 shares were allocated to participants' accounts to replace dividend earnings on allocated shares. Notes Payable In January 1989, The Quaker LESOP Common Stock Fund (then known as The Quaker Employee Stock Ownership Trust) issued $150,000,000 Senior ESOP Notes at an interest rate of 8.07 % with principal due in annual installments through July 15, 2001. Under the terms of the note agreement of The Quaker LESOP Common Stock Fund, if there is a change in the federal tax rate or the inclusion rate (the percentage of income received by the lenders that is not excludable from gross income pursuant to Section 133 of the Code), the interest rate of the loan will be adjusted effective on the date the change in rates occurs. The new interest rate is determined by multiplying the old interest rate by an adjustment fraction. Effective January 1, 1993, under the new tax bill, the federal tax rate increased. Thus, the interest rate paid by The Quaker LESOP Common Stock Fund declined from 8.07% to 8.00%. Interest is payable semiannually on January 15th and July 15th. Payment of the notes payable and interest is unconditionally guaranteed by Quaker. Northern Trust purchased 5,626,304 shares of Quaker common stock with the proceeds of the notes at a cost of $149,624,972. These shares were placed in the fund's unallocated account pending future allocation to Plan participants. <17> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 5 - THE QUAKER LESOP COMMON STOCK FUND (CONTINUED) In July 1995, 1,861,286 shares of Quaker common stock were transferred from a 1985 trust into The 1988 Quaker Employee Stock Ownership Trust. The Company's cash contributions, plus cash received from dividends and interest, were used to make regularly scheduled note payments on July 15, 1998 of $23,698,915 (principal and interest in the amount of $20,400,000 and $3,298,915, respectively), and January 15, 1999 of $2,483,183 (interest only). The outstanding balance of the notes payable as of June 30, 1999, was $62,100,000 with maturing principal balances as follows: Fiscal 2000 $ 23,100,000 Fiscal 2001 25,800,000 Fiscal 2002 13,200,000 $ 62,100,000 Contributions The Company is obligated to make contributions in cash to the fund which, when aggregated with the fund's dividends and interest earnings, equal the amount necessary to enable the Plan to make its regularly scheduled payments of principal and interest due on its notes payable. As of June 30, 1999, employer contributions receivable were $21,479,498. The Company's cash contributions, plus cash received from dividends and interest, were used to make the regularly scheduled payment on July 15, 1999 of $25,583,183 (principal and interest in the amount of $23,100,000 and $2,483,183, respectively), on the notes payable. In association with this payment, 607,627 shares of the Company's common stock were released from the trust's unallocated account, and 591,493 shares were allocated to participants' accounts based on participants' compensation pursuant to the terms of the Plan. The remaining 16,134 shares were allocated by the Company to replace dividend earnings on the allocated shares. NOTE 6 - THE QUAKER LESOP PREFERRED STOCK FUND Effective June 1, 1998, the common shares within The 1989 Quaker Employee Stock Ownership Trust were transferred to The Quaker LESOP Common Stock Fund. The remaining preferred shares formed The Quaker LESOP Preferred Stock Fund. The 1989 Trust issued certain notes pursuant to one or more loan agreements, and used the proceeds of such notes to acquire, for the future allocation to Plan participants, shares of common stock of the Company. <18> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 6 - THE QUAKER LESOP PREFERRED STOCK FUND (CONTINUED) Investments in Company Stock The Quaker LESOP Preferred Stock Fund investments, at June 30, were as follows:
1999 1998 Allocated Unallocated Allocated Unallocated Quaker Common Shares: Number of Shares 5,738 -- 5,396 -- Cost $ 371,059 -- $ 300,841 -- Market $ 380,860 -- $ 296,443 -- Quaker Series B ESOP Convertible Preferred shares: Number of Shares 527,388 419,394 468,705 542,687 Cost $ 38,196,166 $ 36,666,528 $ 33,241,250 $ 47,872,975 Market $ 79,561,754 $ 63,269,779 $ 59,970,805 $ 69,436,801 During Fiscal 1999, 123,293 of the Company's ESOP Preferred stock shares were allocated to participants. 102,213 shares were allocated to participants' accounts based on participants' compensation pursuant to the terms of the Plan. The remaining 21,080 shares were allocated to participants' accounts to replace dividend earnings on allocated shares. As of June 30, 1999, 32,325 shares were released but unallocated as a result of the January 15, 1999 principal payment on the notes payable. (See "Contributions" on page 20.) Notes Payable In June 1989, The Quaker LESOP Preferred Stock Fund (then known as The 1989 Quaker Employee Stock Ownership Trust) issued $100,000,000 Senior ESOP Notes at an interest rate of 7.83% due July 15, 2001. Under the terms of the note agreement of The Quaker LESOP Preferred Stock Fund, if there is a change in the federal tax rate or the inclusion rate (the percentage of income received by the lenders that is not excludable from gross income pursuant to Section 133 of the Code), the interest rate of the loan will be adjusted effective on the date the change in rates occurs. The new interest rate is determined by multiplying the old interest rate by an adjustment fraction. Effective January 1, 1993, under the new tax bill, the federal tax rate increased. Thus, the interest rate paid by The Quaker LESOP Preferred Stock Fund declined from 7.83% to 7.76%. Interest and principal is payable semiannually on January 15th and July 15th. Payment of the notes payable and interest is unconditionally guaranteed by Quaker. <19> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 6 - THE QUAKER LESOP PREFERRED STOCK FUND (CONTINUED) Northern Trust purchased 1,282,051 shares of the Company's Series B ESOP Convertible Preferred Stock with the proceeds of the note at a cost of $99,999,978. These shares were placed in the fund's unallocated account pending future allocation to Plan participants. The conversion rate of convertible preferred stock to common stock is 1:2.1576. The Company's cash contributions, plus cash received from dividends and interest, were used to make regularly scheduled note payments on July 15, 1998 of $6,619,360 (principal and interest in the amount of $4,400,000 and $2,219,360, respectively), and January 15, 1999 of $6,827,920 (principal and interest in the amount of $4,950,000 and $1,877,920, respectively). The outstanding balance of the notes payable as of June 30, 1999, was $43,450,000 with maturing principal balances as follows: Fiscal 2000 $ 10,600,000 Fiscal 2001 19,250,000 Fiscal 2002 13,600,000 $ 43,450,000 Contributions The Company is obligated to make contributions in cash to the fund which, when aggregated with the fund's dividends and interest earnings, equal the amount necessary to enable the Plan to make its regularly scheduled payments of principal and interest due on its notes payable. As of June 30, 1999, employer contributions receivable were $4,020,463. The Company's cash contributions, plus cash received from dividends and interest, were used to make a regularly scheduled payment on July 15, 1999 of $6,635,860 (principal and interest in the amount of $4,950,000 and $1,685,860, respectively), on the notes payable. In association with this payment, 51,903 shares of the Company's preferred stock were released from the unallocated account. These shares combined with 32,325 shares released on January 15, 1999, (a total of 84,228 shares) were allocated to participants' accounts in July 1999 based on participants' compensation pursuant to the Plan. <20> THE QUAKER OATS COMPANY THE QUAKER 401(k) PLAN FOR SALARIED EMPLOYEES NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND 1998 NOTE 7 - YEAR 2000 (UNAUDITED) To address the year 2000 issues, the Company has developed and is executing a detailed four-phase comprehensive readiness plan. The first and second phases included the assessment, replacement and remediation of the Company's internal computer and imbedded systems and have been completed. The third phase, the assessment of the year 2000 readiness plans of the Company's material third parties, will continue through 1999. All of the Company's major service providers, vendors, suppliers and customers who are believed to be critical to the business operations after January 1, 2000, have been contacted to determine their stage of year 2000 compliance, with approximately 80 percent indicating that they are fully compliant. All but a few of the remaining 20 percent have plans in place to achieve compliance before the end of the year. In particular to the Plan, the Company has been in close contact with the trustee and record keeper of the Plan and has been informed that they are on schedule with their internal deadlines to achieve year 2000 compliance. The fourth phase, the completion of contingency plans in the event of year 2000 non- compliance, was also completed and includes, among other things, ongoing monitoring through the year-end date change. The Company's year 2000 readiness plan is an ongoing process and the estimates of the completion dates for various components of the program as described above are subject to change. The Company does not expect year 2000 projects discussed above to have a significant effect on Plan operations. <21> Exhibit (b) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated December 21, 1999 (and all references to our Firm) included in or made a part of this Form 11-K. It should be noted that we have not audited any financial statements of The Quaker 401(k) Plan for Salaried Employees subsequent to June 30, 1999 or performed any audit procedures subsequent to the date of our report. /s/WASHINGTON, PITTMAN & McKEEVER,LLC WASHINGTON, PITTMAN & McKEEVER,LLC Chicago, Illinois December 22, 1999 <22>
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