The Quaker Oats Company (NYSE: OAT) yesterday reported earnings per share of $1.24 for its second quarter ended June 30, 2001, excluding unusual items. This compares to $1.11 per share, on the same basis, in the second quarter of 2000, an increase of 12 percent.

Including unusual items in both years, second-quarter earnings were $1.22 per share in 2001, versus $1.10 per share in 2000. (See section entitled “Unusual






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Robert S. Morrison, chairman, president and chief executive officer, said, “Quaker delivered exceptionally strong results in the second quarter — especially in light of tough year-ago comparisons. Foods and Beverages both achieved 8 percent sales growth. Gross margin and operating margin each expanded over 100 basis points, and operating income grew 15 percent. Every region of the world contributed to these strong operating income results — the United States and Canada, Europe, Latin America and Asia.”

Morrison noted that earnings-per-share growth was strong despite the cancellation of Quaker’s share repurchase program — a result of the pending merger with PepsiCo — and the fact of an increased number of shares outstanding. In addition, net financing expenses (interest and foreign exchange) were greater than the prior year.

TOTAL COMPANY

Operating income for the quarter was $291.3 million, versus $253.5 million in the second quarter of 2000, an increase of 15 percent. Advertising and merchandising spending increased 12 percent. Sales in the quarter were $1.51 billion, versus $1.40 billion last year, an increase of 8 percent. Excluding the impact of foreign currency exchange rate changes, sales would have increased 10 percent versus the second quarter last year. Total Company volume, as measured in pounds, increased 5 percent in the second quarter.

TOTAL FOODS

Operating income for worldwide Foods was $114.7 million, versus $101.0 million in the year-ago quarter, a 14 percent increase. Total Foods sales in the quarter were $697.9 million, versus $646.9 million last year, an increase of 8 percent. Worldwide Foods reported a 6 percent increase in volume. The operating margin for the Foods business expanded to 16.4 percent in 2001, from 15.6 percent in the second quarter of 2000.

Foods: U.S. and Canada

Operating income for U.S. and Canadian Foods was $97.0 million, versus $86.8 million in the year-ago quarter, an increase of 12 percent. This double-digit increase was on top of 21 percent growth in the second quarter last year. Second-quarter sales were $550.0 million, versus $515.7 million last year, a 7 percent increase. Every major line of business in the United States experienced sales growth.

Volume for the U.S. and Canadian Foods portfolio increased 4 percent. Hot cereals volume increased 14 percent, grain-based snacks increased 9 percent, ready-to-eat cereals increased 8 percent, flavored rice and pasta increased 5 percent and mixes and syrups increased 3 percent.

“Every one of our major foods businesses contributed to sales growth in the quarter, most notably our hot and ready-to-eat cereals businesses. Although well over 100-years-old, Quaker oatmeal continues to be on trend with consumers, thanks to innovative new products and its heart-health benefits,” noted Morrison. “Quaker ready-to-eat cereals showed solid growth in the quarter as well — in volume, sales and category share — rebounding from a difficult period last year.”

Foods: Latin America, Europe and Asia/Pacific

Operating income from Quaker’s international foods businesses was $17.7 million, versus $14.2 million in the year-ago quarter, an increase of 25 percent. Sales for international foods were $147.9 million, versus $131.2 million in the year-ago quarter, an increase of 13 percent.

Volume for the Latin American foods business grew 9 percent over the prior year, reflecting strong sales of hot cereals across the region, and Toddy beverage powder in Brazil. Volume for European foods rose a strong 31 percent, as cereals and snacks posted exceptionally strong results. European sales increased 37 percent, despite a weakening of European currencies versus the U.S. dollar. Volume for the Asia/Pacific foods division declined 10 percent in the quarter, although sales were virtually even with the prior year.

TOTAL BEVERAGES

Worldwide Beverages operating income was $176.6 million, versus $152.5 million in the year-ago quarter, a 16 percent increase. Sales for worldwide Beverages were $816.0 million, versus $751.0 million for the year- ago quarter, an increase of 9 percent. Worldwide Beverages reported a 5 percent increase in volume. Operating margin for worldwide Beverages expanded to 21.6 percent, from 20.3 percent in the year-ago quarter.

In the U.S. and Canada, beverage operating income was $155.8 million, versus $138.8 million in the year-ago quarter, an increase of 12 percent. U.S. and Canadian Beverages sales in the quarter were $689.5 million, versus $629.3 million last year, an increase of 10 percent. Volume in the U.S. and Canada increased 6 percent in the second quarter, on top of a 15 percent increase in the prior year. “New flavors like Passion Fruit, Starfruit and High Tide Gatorade Frost, our multi-packs and strong marketing support all contributed to Gatorade’s strong performance,” said Morrison, noting that growth was achieved despite a cooler, wetter spring than in 2000.

Outside of the United States and Canada, Gatorade operating income was $20.8 million, compared to $13.7 million in the second quarter of last year, a 52 percent increase. Latin American operating income increased 27 percent, and European and Asian operating income more than tripled to $5.3 million in the quarter, from $1.5 million last year.

International beverage sales grew 4 percent in total. Sales in Latin America grew 12 percent in the quarter. However, sales in Europe and the Asia/Pacific region were 9 percent below the second quarter a year ago, primarily reflecting a weakening of foreign currencies versus the U.S. dollar in those regions.

UNUSUAL ITEMS

Unusual items in the second quarter of 2001 totaled $3.0 million after tax ($5.0 million pretax), or 2 cents per share. This net charge included restructuring charges of $5.5 million ($9.2 million pretax), or 4 cents per share; and income from the adjustment of prior-period restructuring reserves of $2.5 million ($4.2 million pretax), or 2 cents per share.

In the second quarter of 2000, Quaker recorded unusual items totaling $1.9 million of after-tax expense ($3.7 million pretax), or 1 cent per share. The $1.9 million was comprised of $3.8 million ($6.2 million pretax), or 2 cents per share from U.S. and Canadian restructuring charges; and $1.9 million of after-tax income ($2.5 million pretax), or 1 cent per share, from prior-year restructuring and divestiture reserve adjustments.

FINANCING AND OTHER

Net financing costs (net interest expense and foreign exchange losses) were $16.8 million in the quarter, compared to $9.8 million in 2000. Net foreign exchange losses were $2.5 million in 2001, compared to a $2.1 million gain in 2000, as hedge gains in 2000 were replaced by hedge losses in 2001. Net interest expense increased $2.4 million, relating primarily to a reduction in capitalized interest versus the prior year. Excluding unusual items, the Company’s effective tax rate in the second quarter was 36.0 percent, compared to 36.1 percent in the second quarter of 2000.

YEAR-TO-DATE RESULTS

For the six months ended June 30, 2001, sales increased 7 percent, and operating income increased 10 percent. Diluted earnings per share, excluding unusual items, were $2.04, versus a comparable $1.88 in the prior year, a 9 percent increase.

The average number of common shares outstanding was 132.3 million, compared to 131.7 million a year ago. Average diluted shares in 2001 were 138.8 million, versus 137.0 million in 2000.

OUTLOOK

For 2001, the Company’s financial outlook — as an independent company — is unchanged from previous guidance. For the full year, the Company expects to deliver mid-single-digit sales growth, high-single-digit operating income growth and low-double-digit earnings-per-share growth. The Company intends to continue its strategy of using cost-savings to help fund brand-building activities.

For the third quarter, the Company expects to achieve mid-to-high single- digit sales, operating income and earnings-per-share growth.

The Company and PepsiCo, Inc., are continuing discussions with the Federal Trade Commission on their proposed merger.

The Quaker Oats Company is an international marketer of foods and beverages. Its major brands include: Gatorade thirst quencher; Quaker cereals and grain-based snacks; Rice-A-Roni, Pasta Roni and Near East side dishes; and Aunt Jemima mixes and syrups.

Forward-looking statements, within the meaning of Section 21E of the Securities and Exchange Act of 1934, are made in this document. The Company’s results may differ materially from those suggested by the forward-looking statements for a variety of reasons, including actions of competitors; changes in laws and regulations (including changes in governmental interpretations of regulations and changes in accounting standards); customer and consumer demand, including customer and consumer response to marketing; effectiveness of spending, investments or programs, including cost reduction projects; changes in market prices or rates; fluctuations in the cost and availability of supply chain resources; foreign economic conditions, including currency rate fluctuations; weather; and the ability of the Company to effect manufacturing, distribution and outsourcing initiatives and plant consolidations. Additional expenditures and cash dividends may be affected by the amount of cash flow from operating activities. These factors are more fully described in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. The forward-looking statement in this document concerning the Company’s proposed merger with PepsiCo, Inc., is subject to the inability to obtain, or meet conditions imposed for, regulatory or governmental approval; and customary closing conditions.

The Quaker Oats Company press releases are available on the Company’s Internet web site: www.quakeroats.com.







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                   THE QUAKER OATS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND REINVESTED EARNINGS (UNAUDITED)

Dollars in Millions (Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000

Net Sales $1,513.9 $1,397.9 $2,740.5 $2,570.0
Cost of goods sold 668.4 637.5 1,218.0 1,160.4
Gross profit 845.5 760.4 1,522.5 1,409.6
Selling, general and
administrative expenses 558.6 511.1 1,046.3 978.7
Restructuring charges and asset
impairments (a) 5.0 3.7 9.0 177.4
Interest expense 15.2 13.0 30.0 26.9
Interest income (0.9) (1.1) (2.2) (2.9)
Foreign exchange loss (gain) — net 2.5 (2.1) 3.4 1.5
Income before income taxes 265.1 235.8 436.0 228.0
Provision for income taxes 95.2 84.7 156.6 75.1
Net Income $169.9 $151.1 $279.4 $152.9
Preferred dividends — net of tax 0.9 1.0 2.0 2.1
Net Income Available for Common $169.0 $150.1 $277.4 $150.8
Per Common Share:
Net Income — basic $1.28 $1.13 $2.10 $1.14
Income before unusual charges
— diluted $1.24 $1.11 $2.04 $1.88
Unusual charges — diluted (a) (0.02) (0.01) (0.04) (0.77)
Net Income — diluted (b) $1.22 $1.10 $2.00 $1.11
Dividends declared $0.285 $0.285 $0.57 $0.57
Average Number of Common Shares
Outstanding (in thousands) 132,516 131,871 132,251 131,732
Reinvested Earnings:
Balance — beginning of
period $1,132.5 $818.1 $1,061.7 $854.6
Net income 169.9 151.1 279.4 152.9
Dividends (38.6) (38.4) (77.3) (76.7)
Balance — end of period $1,263.8 $930.8 $1,263.8 $930.8

(a) The three months ended June 30, 2001, includes restructuring charges
of $9.2 million pretax ($5.5 million after tax), or $0.04 per share,
and income to reduce prior restructuring reserves of $4.2 million
pretax ($2.5 million after tax), or $0.02 per share. The six months
ended June 30, 2001, includes restructuring charges of $14.0 million
pretax ($8.4 million after tax), or $0.06 per share, and income to
reduce prior restructuring reserves of $5.0 million pretax
($3.0 million after tax), or $0.02 per share. The three months ended
June 30, 2000, includes restructuring charges of $6.2 million pretax
($3.8 million after tax), or $0.02 per share, and income to reduce
prior restructuring and divestiture reserves of $2.5 million pretax
($1.9 million after tax), or $0.01 per share. The six months ended
June 30, 2000, includes restructuring charges of $63.0 million pretax
($37.9 million after tax), or $0.27 per share; income to reduce prior
restructuring and divestiture reserves of $5.7 million pretax
($3.9 million after tax), or $0.03 per share; and asset impairment
losses of $120.1 million pretax ($72.1 million after tax), or $0.53
per share, related to a supply chain reconfiguration project.

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(b) For the six months ended June 30, 2001, adjustments to income and
shares for the calculation of diluted EPS were approximately
$0.9 million and 6.5 million shares, respectively. For the six months
ended June 30, 2000, adjustments to income and shares for the
calculation of diluted EPS were approximately $1.0 million and
5.3 million shares, respectively.

THE QUAKER OATS COMPANY AND SUBSIDIARIES
SIX MONTHS NET SALES AND OPERATING
INCOME (LOSS) BY SEGMENT (UNAUDITED)

Dollars in Millions
Net Sales Operating Income (Loss)
Six Months Ended Percent Six Months Ended Percent
June 30, Inc(Dec) June 30, (Dec)Inc
2001 2000 2001 2000

Foods:
U.S. and
Canadian $1,188.7 $1,148.5 3.5% $226.0 $227.0 (0.4%)
Latin American 171.9 170.7 0.7% 13.7 15.2 (9.9%)
Other (a) 121.5 100.9 20.4% 17.0 12.8 32.8%
Total Foods $1,482.1 $1,420.1 4.4% $256.7 $255.0 0.7%

Beverages:
U.S. and
Canadian $1,043.3 $948.2 10.0% $202.7 $173.6 16.8%
Latin American 157.3 139.3 12.9% 25.0 15.3 63.4%
Other (a) 57.8 62.4 (7.4%) 3.4 (1.1) N/M
Total Beverages $1,258.4 $1,149.9 9.4% $231.1 $187.8 23.1%

Total Sales/
Operating
Income $2,740.5 $2,570.0 6.6% $487.8 $442.8 10.2%

Less:
Restructuring charges and asset impairments 9.0 177.4
General corporate expenses 11.6 11.9
Interest expense — net 27.8 24.0
Foreign exchange loss — net 3.4 1.5

Income before income taxes $436.0 $228.0

(a) Other includes European and Asia/Pacific results.

N/M = Not Meaningful

THE QUAKER OATS COMPANY AND SUBSIDIARIES
THREE MONTHS NET SALES AND OPERATING
INCOME BY SEGMENT (UNAUDITED)

Dollars in Millions
Net Sales Operating Income
Three Months Three Months
Ended Percent Ended Percent
June 30, Inc(Dec) June 30, Inc
2001 2000 2001 2000
Foods:
U.S. and Canadian $550.0 $515.7 6.7% $97.0 $86.8 11.8%
Latin American 84.6 83.3 1.6% 9.6 7.6 26.3%
Other (a) 63.3 47.9 32.2% 8.1 6.6 22.7%
Total Foods $697.9 $646.9 7.9% $114.7 $101.0 13.6%

Beverages:
U.S. and Canadian $689.5 $629.3 9.6% $155.8 $138.8 12.2%
Latin American 84.8 75.7 12.0% 15.5 12.2 27.0%
Other (a) 41.7 46.0 (9.3%) 5.3 1.5 253.3%
Total Beverages $816.0 $751.0 8.7% $176.6 $152.5 15.8%

Total Sales/Operating
Income $1,513.9 $1,397.9 8.3% $291.3 $253.5 14.9%

Less:
Restructuring charges 5.0 3.7
General corporate expenses 4.4 4.2
Interest expense — net 14.3 11.9
Foreign exchange loss (gain) — net 2.5 (2.1)

Income before income taxes $265.1 $235.8

(a) Other includes European and Asia/Pacific results.


CONTACT: Media Contact, Mark Dollins, Director, Corp. Comm., +1-312-222-7399, or Investor Contact, Margaret M. Eichman, V.P., Investor Relations & Corp. Affairs, +1-312-222-7818, both of The Quaker Oats Company.