[Picture of Quaker logo goes here]
The Quaker Oats Company
Notice of
Annual Meeting,
Proxy Statement
And
Form 10-K
Six-Month Transition Period Ended December 31, 1995
[Picture of Quaker logo goes here]
The Quaker Oats Company P.O. Box 049001, Chicago, Illinois 60604-9001
March 13, 1996
Dear Quaker Shareholders:
This report signals the conclusion of our 1995 "stub year" and our
transition to a calendar fiscal year. We have, by design, gone through
the single greatest period of change in our Company's history. The result
is a product portfolio dominated by leading brands in growing categories
with the potential for higher margins and greater cash flow generation. Our
depressed financial results in this six-month period, however, do not
reflect the positive aspects of the significant changes we have made over
the last twelve months. We made acquisitions and divestitures, streamlined
management, and advanced our supply chain initiatives--all to focus on our
goal of creating economic value for our shareholders.
Clearly, in the first twelve months of owning Snapple beverages, we have
not proven the merits of this large acquisition. We recognize and share
your disappointment. We have identified the causes of Snapple's 1995
problems and have moved aggressively to correct them. In 1996, we are
determined to capitalize on Snapple's growth opportunities by introducing
new flavors, new labels, new package sizes and new points of distribution.
We have put together better merchandising programs and fresh new advertising
to revitalize the brand and get it growing again. We have enhanced
Snapple's supply chain processes and its product quality. We have
also improved distributor relations, added selling tools, improved product
availability, and acquired the distribution rights in underperforming,
high-potential beverage markets, such as Florida and Texas. We are also
in the process of building better information systems to track our
purchasing, manufacturing and distribution more efficiently. All told,
we plan to turn Snapple around from its 1995, $85-million operating loss
and get this brand back on the profitable growth track. We continue to
believe that Snapple is a high-potential brand that has the ability
to grow in a number of alternative beverage category segments including
teas, fruit juice drinks, lemonades and diet drinks.
For the total Company, sales in the stub period were $2.7 billion. But
because of the loss from Snapple and our restructuring actions, earnings were
only nine cents per share. We took a restructuring charge of $41 million,
or $.18 per share, to: 1)reconfigure the Snapple manufacturing network,
thereby removing excess contracted capacity; 2)realign the Company's
European beverage business to focus on areas with the greatest profitable
growth potential for Gatorade, namely the southern countries; and 3)re-
focus our expansion efforts in the Pacific foods business on the high-
growth opportunity of China. When restructuring charges are excluded,
earnings per share in the six-months were $.27 per share.
It is important to note that, during this six-month period, many of our
key businesses did quite well, led by 16 percent sales growth
worldwide for Gatorade thirst quencher. We also achieved sales growth in
our Golden Grain, Quaker hot cereal, rice cake, corn goods, Canadian and
Latin American food businesses. Operating margins expanded in several of
our core businesses, including ready-to-eat cereals and Gatorade, despite
aggressive competition. In our food service business, where operating
margins remained low, we are taking steps to remedy that situation by
making our coffee business profitable. Looking to 1996, we expect
further margin improvement across our U.S. and Canadian Grocery Products
businesses as a result of our continuing supply chain initiatives and
greater merchandising efficiency. In addition, we will continue to
bring meaningful innovation to our consumers through new products, packaging
and advertising. Some examples include our new four-pack of Gatorade's
successful sportbottle, and two new Gatorade flavors, Strawberry-kiwi and
Cherry Rush. For Snapple, we are introducing new 32-ounce and 64-ounce
plastic bottles, as well as 12-packs to encourage greater take-home
usage. We are also introducing a new line of Island Cocktail flavors and
have reformulated Diet Snapple teas and juice drinks for better taste.
In our grain-based snacks, we just introduced fat free Quaker Chocolate
Crunch rice cakes and Low-Fat Oatmeal Cookie Chewy granola bars to enhance
our low-fat line.
In our Golden Grain business, Near East is bringing out a new line of
Pastas with Delicate Sauces to extend its successful line of all-natural
side dishes. In short, we will keep our focus on innovation and aggressive
marketing across all our lines of business in 1996.
Our commitment to innovation does not stop with our products and
advertising. It involves our processes as well. In the last five years, we
have built a competitive advantage in our go-to-market processes. As a
result, we continue to be a grocery industry leader in the United States in
the areas of continuous replenishment and category management. As the
competitive environment and our customers keep changing, we will continue
to move closer to a truly demand-driven system that optimizes our use of
capital and information, and produces greater returns because of a more
efficient supply chain and better service to our customers.
On the international front, the divestitures and acquisitions of the last
year have significantly changed the mix of our business. Today, our greatest
growth opportunities are in Latin America and the Asia/Pacific region
with both Gatorade thirst quencher and our grain-based products.
Gatorade thirst quencher is marketed currently in over 35 countries around
the globe. Internationally, it has grown to over $300 million in annual sales
from less than $90 million in 1990. That record results from rapid
expansion in Latin America as well as opening new markets in Australia, the
Philippines and Indonesia. This has offset declines in Europe, where we are
scaling back our presence and concentrating on the higher-potential, warm-
weather Mediterranean countries. We expect to continue underwriting
Gatorade's growth in the Asia/Pacific region as we believe this area
contains great potential given the high density populations, emerging
economies and warm weather climates there.
On the food side, our grain-based products are growing in Latin America.
We are also pursuing new growth in the key, high-potential market of China,
where we are currently introducing a line of grain-based foods. While our
expansion efforts in China are not expected to deliver operating income
for several years, it is an important emerging market ripe with opportunities
for our brand name products.
We are convinced that the substantial portfolio restructuring of the past
year has made our brand-name product portfolio the strongest it has ever
been. Our core grain-based products continue to hold leading market share
positions in their relevant categories, including our Quaker cereals,
Quaker rice cakes, Chewy granola bars, Rice-A-Roni and Near East
flavored rice, Pasta Roni flavored pasta, and Aunt Jemima syrup and mixes.
We have two strong brands in Gatorade and Snapple that compete in the
fastest-growing beverage categories in the market place--sports drinks, teas,
juice drinks, lemonades and diet drinks-and our market positions are
strong. With these leading brands, we see a strong earnings recovery coming
off this transition period.
It is clear from our financial results that 1995 has been a year of significant
change and challenge. I assure you that I, our management team and our
employees around the world are all committed to driving the profitable growth
that will ultimately create greater value for you, our shareholders. Our
incentive bonus compensation continues to be linked to our economic value
creation measure--controllable earnings. Our goals are directly tied to yours.
As a result, our people, our portfolio and our capital investment are focused
on opportunities promising the greatest profitable growth.
In order to bring back the superior performance you have come to expect from
The Quaker Oats Company, we have much to accomplish. We are committed to
succeeding. We realize that we exist for one reason--to create value for
shareholders. I take personal responsibility for seeing that we do so.
/sic/William D. Smithburg
William D. Smithburg
Chairman, President and CEO
THE QUAKER OATS COMPANY
321 North Clark Street
Chicago, Illinois 60610
NOTICE
OF
ANNUAL MEETING OF SHAREHOLDERS,
PROXY STATEMENT
AND
FORM 10-K
SIX-MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1995
T A B L E O F C O N T E N T S
PAGE
Notice of Annual Meeting of Shareholders 7
Proxy Statement 8
General Information 8
Election of Directors 9
Ownership of Company's Securities 13
Executive Compensation 15
Compensation Committee Report 22
Performance Graph 24
Directors' Proposal 25
Shareholder Proposals 25
Shareholder Proposals for 1997 Annual Meeting 27
Other Business 27
Form 10-K 29
Cover Sheet 29
Management's Discussion and Analysis 30
Consolidated Statements of Income 40
Consolidated Balance Sheets 41
Consolidated Statements of Cash Flows 42
Consolidated Statements of Common Shareholders' Equity 43
Geographic Segment Information 44
Five-Year Selected Financial Data 46
Notes to the Consolidated Financial Statements 48
Report of Independent Auditors 68
Report of Management 69
Additional 10-K Information 70
Directors and Officers 72
Shareholder Information 74
Documents Incorporated by Reference 77
Cross-Reference Table of Contents 77
Signatures 78
Exhibit Index 79
[THIS PAGE INTENTIONALLY LEFT BLANK.]
6
THE QUAKER OATS COMPANY
321 North Clark Street
Chicago, Illinois 60610
NOTICE
OF
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 8,1996
April 1, 1996
To the Shareholders of The Quaker Oats Company:
Notice is hereby given that the Annual Meeting of Shareholders of The
Quaker Oats Company will be held on Wednesday, May 8, 1996 at Bremer
Conference Center/Theatre, Danville Area Community College, 2000 East
Main Street, Danville, Illinois at 9:30 a.m. (CDST), for the following
purposes:
To elect three directors in Class I to serve for three-year terms
expiring in May, 1999 or until their successors are elected and
qualified;
To ratify the Board of Directors' appointment of Arthur Andersen LLP
as independent public accountants for the Company for 1996; and
To transact such other business as may properly come before the Meeting
or any adjournment thereof, including shareholder proposals
concerning: 1) compensation disclosure of certain employees; and 2) the
retention of an investment banking firm to explore all alternatives
to enhance Company value.
By Board of Directors' resolution, only shareholders of record as of the
close of business on March 20, 1996 are entitled to notice of and to vote
at the Meeting. To ensure your representation at the Meeting, whether or
not you are able to attend, please complete and return the enclosed proxy
card as soon as possible. If you do attend the Meeting, you may then
revoke your proxy and vote in person if you so desire.
To obtain an admittance card for the Meeting, please complete the
enclosed reservation form and return it with your proxy card. If your shares
are held by a bank or broker, you may obtain an admittance card by
returning the reservation form they forwarded to you. If you do not
receive a reservation form, you may obtain an admittance card by
sending a written request, accompanied by proof of share ownership (such
as your brokerage statement) to Shareholder Services, The Quaker Oats Company,
P.O. Box 049001, Suite 25-9, Chicago, Illinois 60604-9001. For your
convenience, we highly recommend that you bring your admittance card to
the Meeting so you can avoid the registration lines and proceed directly to
the Conference Center/Theatre. However, if you do not have an admittance
card by the time of the Meeting, please bring proof of share ownership
to the registration area located in the front of the Conference
Center/Theatre, where our staff will assist you.
The Form 10-K for the six-month transition period which ended December 31,1995
begins on page 29.
By order of the Board of Directors,
/sic/R. Thomas Howell, Jr.
R. Thomas Howell, Jr.
Corporate Secretary
7
THE QUAKER OATS COMPANY
321 North Clark Street
Chicago, Illinois 60610
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 8, 1996
April 1, 1996
GENERAL INFORMATION
This proxy statement is being mailed to shareholders on or about April 1,
1996 and is furnished in connection with the solicitation of proxies by the
Board of Directors of The Quaker Oats Company (Board and Company) for use at
the Annual Meeting of Shareholders to be held on May 8, 1996, including
any adjournment thereof (Annual Meeting or Meeting).
The Meeting is called for the purposes stated in the accompanying Notice
of Annual Meeting. All holders of the Company's $5.00 par value common stock
and Series B ESOP Convertible Preferred Stock (ESOP Preferred Stock) as
of the close of business on March 20, 1996 are entitled to vote at the
Meeting. As of that date, there were 135,214,137 outstanding shares of
common stock and 1,153,099 outstanding shares of ESOP Preferred Stock.
Treasury shares are not included in the totals. On each matter coming
before the Meeting, a common stock shareholder is entitled to one vote for
each share of stock held as of the record date and an ESOP Preferred
Stock shareholder is entitled to 2.2 votes for each share held as of the
record date.
Shares representing a majority of the eligible votes must be represented
in person or by proxy at the Meeting in order to constitute a quorum for
the transaction of business. A proxy marked "abstain" on a matter
will be considered to be represented at the Meeting, but not voted for
purposes of the election of directors and other matters put to a
shareholder vote at the Meeting, and therefore will have no effect on the
vote. Shares registered in the names of brokers or other "street name"
nominees for which proxies are voted on some, but not all, matters will be
considered to be voted only as to those matters actually voted, and will not
be considered for any purpose as to the matters with respect to which a
beneficial holder has not provided voting instructions (commonly referred to
as "broker non-votes").
If a proxy is properly signed and is not revoked by the shareholder, the
shares it represents will be voted at the Meeting by the Proxy Committee in
accordance with the instructions of the shareholder. If no specific
instructions are designated, the shares will be voted as recommended by the
Board.
A proxy may be revoked at any time before it is voted at the Meeting.
Any shareholder who attends the Meeting and wishes to vote in person may
revoke his or her proxy at that time. Otherwise, revocation of a
proxy must be communicated in writing to the Corporate Secretary of the
Company at its principal office, P.O. Box 049001, Suite 25-6, Chicago,
Illinois 60604-9001.
If a shareholder is a participant in the Company's Dividend Reinvestment
and Stock Purchase Plan, Investment Plan, Stock Bonus Savings Plan, or
Employee Stock Ownership Plan, the proxy card will represent the number
of shares registered in the participant's name and the number of whole and
fractional shares credited or allocated to the participant's account under the
plans. For those shares held in the plans, the proxy card will serve as a
direction to the trustee or voting agent under the various plans as to how
the shares in the accounts are to be voted. Fractional shares will not be
voted in the Dividend Reinvestment and Stock Purchase Plan.
8
Under the Company's Bylaws, for all matters submitted to the shareholders for
a vote, all proxies, ballots and voting tabulations that identify
how shareholders voted will be kept confidential and not be disclosed to any of
the Company's directors, officers or employees except when disclosure is
mandated by law, is expressly requested by a shareholder or during a
contested election for the Board.
The Company will bear the cost of the solicitation of proxies, including
the charges and expenses of brokerage firms and other custodians, nominees
and fiduciaries for forwarding proxy materials to the beneficial owners of
shares of stock. Solicitations will be made primarily by mail, but certain
directors, officers or regular employees of the Company may solicit proxies
in person or by telephone or telegram without special compensation. In
addition, the Company has retained Kissel-Blake Inc. to assist in soliciting
proxies from brokers, dealers, voting trustees, banks and other nominees
and institutional holders for a fee not to exceed $18,000 plus reimbursement
of reasonable out-of-pocket expenses.
ELECTION OF DIRECTORS
The Restated Certificate of Incorporation of the Company provides that
the members of the Board shall be divided into three classes with staggered
three year-terms. The terms of the directors in Class I expire this year.
The Board has nominated three persons for election as directors in Class I
to serve for three-year terms expiring in May, 1999 or until their successors
are elected and qualified. All nominees are currently serving as directors
and have consented to serve for the new term. Biographical information
(including principal occupations for the past five years and ages as of
April 1, 1996) follows for each person nominated and each director whose
term in office will continue after the Meeting.
It is the intention of those persons named in the accompanying proxy to vote
in favor of the nominees. Should any one or more of these nominees
become unavailable for election, the proxy will be voted for such other
persons, if any, as the Board may recommend.
The election of directors requires a plurality of the votes cast at
the Meeting. If all nominees are elected, the Board will be comprised of
ten members, eight nonemployee directors and two directors who are officers of
the Company.
Nominees for Director - Terms Expiring in 1999
Kenneth I. Chenault
Director since 1992
Age 44
Vice Chairman, American Express Company (financial and travel services)
since February 1995; formerly President - USA American Express Travel
Related Services Company, Inc. (1993 - February 1995); President -
Travel Related Services, USA American Express Travel Related Services
Company, Inc. (1993); and President - Consumer Card Group, USA American
Express Travel Related Services Company, Inc. (1989 - 1993). Also a
director of Brooklyn Union Gas Co.
Member of the Company's Audit, Compensation, Finance, and
Nominating Committees.
Thomas C. MacAvoy
Director since 1975
Age 68
Paul M. Hammaker Professor of Business Administration, Darden Graduate
School of Business Administration, University of Virginia. Also a director
of The Chubb Corporation and The Lubrizol Corporation.
Chairman of the Company's Public Responsibility Committee and Member of
the Audit and Nominating Committees.
9
Walter J. Salmon
Director since 1971
Age 65
Stanley Roth Sr., Professor of Retailing, Harvard Business School. Also
a director of Circuit City Stores, Inc.; Hannaford Bros. Co.;
Harrah's Entertainment, Inc.; Luby's Cafeterias, Inc.; and Neiman-Marcus
Group, Inc.
Member of the Company's Finance, Nominating and Public
Responsibility Committees.
Directors Continuing in Office - Terms Expiring in 1998
Frank C. Carlucci
Director 1983 - 1987 and then since 1989
Age 65
Chairman, The Carlyle Group (merchant banking). Also a director of
Ashland Oil, Inc.; Bell Atlantic Corporation; C.B. Commercial Real Estate
Group, Inc.; General Dynamics Corp.; Kaman Corporation; Neurogen Corp.;
Northern Telecom Limited; Pharmacia & Upjohn, Inc.; Sun Resorts Ltd. N.V.;
Texas Biotechnology Corporation; and Westinghouse Electric Corporation.
Chairman of the Company's Audit Committee and Member of the Nominating
and Public Responsibility Committees.
Silas S. Cathcart
Director 1964 - 1987 and then since 1989
Age 69
Retired Chairman of Illinois Tool Works Incorporated (fasteners,
components, assemblies and systems). Also a director of Baxter International
Inc.; General Electric Company; Illinois Tool Works Incorporated; and
Montgomery Ward and Co.; Chairman, Board of Trustees, Northern Funds Mutual
Funds; and a trustee of the Bradley Trust, Milwaukee and the Buffalo Bill
Memorial Association.
Chairman of the Company's Compensation Committee and Member of the
Executive and Nominating Committees.
Vernon R. Loucks, Jr.
Director since 1981
Age 61
Chairman and Chief Executive Officer, Baxter International Inc. (health
care products). Also a director of Anheuser-Busch Companies, Inc.; Dun &
Bradstreet Corporation; and Emerson Electric Co.
Chairman of the Company's Nominating Committee and Member of the
Compensation and Executive Committees.
William D. Smithburg
Director since 1978
Age 57
Chairman, President and Chief Executive Officer of the Company since
November, 1995; formerly Chairman and Chief Executive Officer (1993 -
November, 1995); and Chairman, President and Chief Executive Officer (1990
- - 1993). Also a director of Abbott Laboratories; Corning
Incorporated; Northern Trust Corporation; and Prime Capital Corp.
Member of the Company's Executive Committee and ex-officio member of
the Nominating Committee.
10
William L. Weiss
Director since 1985
Age 66
Chairman Emeritus, Ameritech Corporation (telecommunications) since
1994; formerly Chairman and Chief Executive Officer (1984 - 1994). Also a
director of Abbott Laboratories; Merrill Lynch & Co.; and Tenneco Inc.
Chairman of the Company's Finance Committee and Member of the
Compensation, Executive and Nominating Committees.
Directors Continuing in Office - Terms Expiring in 1997
Judy C. Lewent
Director since 1994
Age 47
Senior Vice President and Chief Financial Officer, Merck & Co.,
Inc. (pharmaceuticals) since 1992; and formerly Vice President for Finance
and Chief Financial Officer (1990 - 1992). Also a director of Astra Merck,
Inc.; The DuPont Merck Pharmaceutical Company; Johnson & Johnson
Merck Consumer Pharmaceuticals Company; Motorola, Inc.; and Rockefeller &
Co. Inc.
Member of the Company's Audit, Finance, Nominating and Public
Responsibility Committees.
Luther C. McKinney
Director since 1978
Age 64
Senior Vice President - Law and Corporate Affairs of the Company since
November 1994; formerly Senior Vice President - Law and Corporate Affairs
and Corporate Secretary (1982 - 1994).
Member of the Company's Executive Committee.
Attendance
During the six-month transition period which began July 1, 1995 and
ended December 31, 1995 and which was used for financial reporting
purposes in connection with the Company's change from a fiscal year end
of June 30 to December 31 (transition period), the Board held three
regular meetings and one special meeting and executed one action by
unanimous written consent. The rate of attendance of directors at all Board
meetings was 96%. In addition to Board membership, each nonemployee
director serves on one or more standing Board committees. The rate of
attendance of directors at all Board and committee meetings was 93%.
Compensation and Benefits
Directors who are full-time salaried employees of the Company are
not compensated for their service on the Board or any committee.
Nonemployee directors receive an annual retainer of $45,000. They are also
paid a fee of $1,000 per day for each Board meeting attended, $1,000
for each committee meeting attended and $1,000 for each action taken by
written consent, plus travel and lodging expenses where appropriate. A
committee chairman receives an additional annual retainer of $5,000.
Under the Deferred Compensation Plan for Directors of The Quaker Oats
Company each nonemployee director may elect to defer receipt of all or a
portion of his or her compensation until the individual ceases to be a
director. The deferred amounts may be carried at the option of the
director as Cash Units, and credited with interest; Common Stock
Units, which are deferred amounts converted into whole units on a
quarterly basis by dividing the deferred amount by the fair market value
of the Company's common stock, and credited with amounts equivalent to
dividends as paid on
11
the Company's common stock, which are converted into additional Common Stock
Units; or a combination of Cash Units and Common Stock Units. The
accumulated deferred amounts will be distributed in cash as of the next
January 1 after the director leaves the Board, or in equal annual installments
(not exceeding 15) commencing as of the next January 1 after the director leaves
the Board pursuant to the director's election, with Common Stock Units valued
at the fair market value of the Company's common stock immediately prior to
the payment date. If the director has not attained age 55 at the time of
leaving the Board, payments in accordance with the foregoing will be made or
commence on the January 1 next following the director's attainment of age 55.
Under The Quaker Oats Company Stock Compensation Plan for Outside
Directors (formerly known as The Quaker Oats Company Stock Retirement Plan
for Outside Directors) separate accounts are opened by the Company for
each nonemployee director. On January 1 of each year, each account is
credited with Common Stock Units representing 800 shares of the
Company's common stock. In addition, the account is credited with
Common Stock Units with a value equivalent to cash dividends payable
on the shares represented by Units in the account. All accrued common
stock represented by Units in a director's account will be distributed
in kind as of the next January 1 after the director leaves the Board, or in
equal annual installments (not exceeding 15) commencing as of the next
January 1 after the director leaves the Board pursuant to the director's
election.
Committees
The Board has appointed six standing committees from among its members
to assist it in carrying out its obligations. Committee membership
and responsibilities are reviewed by the Board in May of each year and
committee appointments are made by the Board in May of every fourth year.
The principal responsibilities of each committee are described in the
following paragraphs.
The Audit Committee, comprised entirely of nonemployee directors, is
primarily concerned with the effectiveness of the Company's accounting
policies and practices, financial reporting and internal controls.
Specifically, the Committee recommends to the Board the firm to be
appointed as the Company's independent public accountants, subject to
ratification by the shareholders; reviews and approves the scope of the
annual examination of the books and records of the Company and its
subsidiaries; reviews the audit findings and recommendations of the
independent public accountants; considers the organization, scope and
adequacy of the Company's internal auditing function; monitors the extent to
which the Company has implemented changes recommended by the independent
public accountants, the internal audit staff or the Committee; reviews the
Company's program to monitor compliance with its Code of Ethics; and
provides oversight with respect to accounting principles to be employed
in the Company's financial reporting. The Committee met two times during
the transition period.
The Compensation Committee, comprised entirely of nonemployee
directors, oversees the Company's compensation and benefit policies
and programs, including administration of the Management Incentive Bonus
Plan, Long Term Incentive Plan of 1990 and 1984 Long-Term Incentive Plan.
It also recommends to the Board annual salaries, bonuses and stock option
awards for elected officers and certain other key executives. The Committee
met four times during the transition period.
The Executive Committee, comprised of two directors who are also officers
of the Company and three nonemployee directors, exercises all the powers
and authority of the Board in the management of the business and affairs
of the Company during the intervals between meetings of the Board,
subject to the restrictions set forth in the Bylaws. The Committee did
not meet or act by written consent during the transition period.
The Finance Committee, comprised entirely of nonemployee directors, is
charged with reviewing the Company's annual financing plan, including its
projected financial condition and requirements for funds; approving
certain long-term debt borrowing arrangements; advising the Board
on all financial recommendations requiring Board approval, including
dividend payments; and monitoring the investment performance of the
Company's pension funds and participant-directed investment accounts. The
Committee met three times during the transition period.
12
The Nominating Committee, comprised of all the nonemployee directors and
Mr. Smithburg as an ex-officio member, develops and recommends to the
Board guidelines with respect to the size and composition of the Board and
criteria for the selection of candidates for director. It also recommends
the slate of director nominees to be included in the proxy statement
and recommends candidates to fill any vacancies that may occur, including
any vacancy created by an increase in the total number of directors.
The Committee will entertain nominees for directorships recommended
by shareholders. A shareholder recommendation should be sent to the
Committee in care of the Corporate Secretary of the Company, accompanied by
a statement of the nominee indicating willingness to serve if elected. The
nomination should also state the shareholder's reasons for the recommendation
and should disclose the principal occupations the nominee has held over the
past five years and a list of all publicly held companies for which the
individual serves as a director. The Committee met one time during the
transition period.
The Public Responsibility Committee, comprised entirely of
nonemployee directors, provides guidance on the Company's policies and
programs in major areas of social responsibility and corporate
citizenship, including product quality and safety and other consumer
issues, environmental protection, equal employment opportunity and employee
health and safety. It also reviews and approves policy guidelines and
budgets for the Company's corporate contributions program. The
Committee met one time during the transition period.
OWNERSHIP OF COMPANY'S SECURITIES
Beneficial Owners of More Than 5 Percent
As of March 1, 1996, each person or entity known to have beneficial
ownership of more than 5% of the Company's outstanding common stock
based upon information furnished to the Company is set forth in the
following table.
Name and
address of Amount and nature Percent of
beneficial owner of beneficial ownership class
The Quaker Employee Stock 10,186,816 (1) 7.40% (2)
Ownership Plan
321 North Clark Street
Chicago, Illinois 60610
Southeastern Asset Management, Inc. 8,567,706 6.34% (3)
6075 Poplar Avenue, Suite 900
Memphis, Tennessee 38119
(1)This amount includes 2,498,699 shares of common stock based on
the conversion of 1,156,805 shares of ESOP Preferred Stock (at the
conversion rate of 2.16 shares of common stock for each share of ESOP
Preferred Stock) representing 100% of the issued and outstanding stock of
that class.
(2)In accordance with applicable rules of the Securities and
Exchange Commission ("SEC"), this percentage is based upon the
total of the 135,211,962 shares of common stock and the conversion of
2,498,699 shares of ESOP Preferred Stock (at the 2.16 conversion rate)
that were outstanding on March 1, 1996.
(3)In accordance with applicable rules of the SEC, this percentage is
based upon only the 135,211,962 shares of common stock that were
outstanding on March 1, 1996.
13
Directors and Management
As of March 1, 1996, each director, each nominee, each Named Executive
(see page 15) and all directors and executive officers of the Company as a
group beneficially owned the number of shares of the Company's common stock
set forth in the following table. Shares subject to acquisition within 60
days through the exercise of stock options are included in the first column
and are shown separately in the second column.
Shares subject
to acquisition
Name of individual Amount and nature within
or persons in group of beneficial ownership (a) 60 days (a)
Frank C. Carlucci 7,571 (b)(c) 0
Silas S. Cathcart 24,799 (c)(d) 0
Kenneth I. Chenault 3,811 (c) 0
James F. Doyle 235,891 (e)(f) 211,412
Judy C. Lewent 2,053 (c) 0
Vernon R. Loucks, Jr. 12,094 (c) 0
Thomas C. MacAvoy 12,094 (c) 0
Philip A. Marineau 419,271 (e)(f)(h) 334,800
Luther C. McKinney 411,782 (e)(f)(g) 320,944
Douglas W. Mills 257,231 (e)(f) 143,312
Walter J. Salmon 18,676 (c) 0
William D. Smithburg 1,275,378 (e)(f)(g) 981,364
Robert S. Thomason 232,217 (e)(f)(g)(i) 159,152
William L. Weiss 10,956 (c)(j) 0
All directors and executive
officers as a group 3,849,996 (e)(f)(g) 2,879,708
(a)Unless otherwise indicated, each named individual and each person in
the group has sole voting and investment power with respect to the
shares shown. These shares represent less than 1% for every
person and approximately 3% for the group of the total shares outstanding,
including shares subject to acquisition within 60 days after March 1,
1996.
(b)Of these shares, 300 are held in a custodial account for Mr.
Carlucci's daughter, through which he shares voting and investment
power with his wife.
(c)The figures shown for these directors include an aggregate of 63,950
common stock units credited to them under The Quaker Oats
Company Stock Compensation Plan for Outside Directors.
(d)Of these shares, 13,560 are held in a trust of which Mr. Cathcart is a
co-trustee and has a contingent beneficial interest and shares voting
and investment power.
(e)The figures shown for these executive officers include an aggregate
of 91,366 shares (which includes 13,709 shares on the basis of the
conversion of 6,347 shares of ESOP Preferred Stock at the conversion
rate of 2.16) allocated to them under The Quaker Employee Stock
Ownership Plan. The Named Executives hold the following numbers of
shares under this Plan: Mr. Smithburg, 13,202; Mr. Mills, 7,666; Mr.
Marineau, 7,459; Mr. McKinney, 8,565; Mr. Thomason, 3,183; and Mr.
Doyle, 6,302.
(f)The figures shown for these executive officers include an aggregate
of 87,384 shares granted to them under The Quaker Long Term Incentive
Plan of 1990 for which the restricted period has not lapsed. The Named
Executives hold the following numbers of shares under this Plan:
Mr. Smithburg, 6,915; Mr. Mills, 2,058; Mr. Marineau, 64,416; Mr.
McKinney, 710; Mr. Thomason, 1,877; and Mr. Doyle, 2,907.
(g)The figures shown for these executive officers include an aggregate
of 48,792 shares representing their proportionate interests in the
Quaker Stock Fund of The Quaker Investment Plan. The Named Executives
hold the following numbers of shares under this Plan: Mr.
Smithburg, 982; Mr. McKinney, 41,978; and Mr. Thomason, 664.
(h)Of these shares, 3,612 are held in trust of which Mr. Marineau's
children have beneficial interest.
(i)Of these shares, 15,000 are held directly by Mr. Thomason's wife and
Mr. Thomason and each of his children own 800 jointly.
(j)Of these shares, 800 are held in a trust of which Mr. Weiss' wife is
income beneficiary.
14
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who beneficially own more
than 10% of a registered class of the Company's equity securities to file
reports of ownership and changes in ownership with the SEC and the New York
Stock Exchange (the "NYSE"). To the best of the Company's knowledge, all
such required reports were timely filed.
EXECUTIVE COMPENSATION
The following table details annual and long term compensation paid during
the Company's three most recent fiscal years and the transition period to:
the Company's Chairman, President and Chief Executive Officer; the four most
highly compensated executive officers for the transition period who were
serving as executive officers as of the end of this period; and Philip A.
Marineau, whose last date of active employment was on November 30, 1995
(Named Executives).
<TABLE> SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term
Annual Compensation Compensation
Other Restricted Securities All
Fiscal Annual Stock Underlying Other
Year Salary Bonus Compensation Awards Options Compensation
Name (1) ($) ($)(2) ($)(3) ($)(4) (#)(5) ($)(6)
<S> <C> <C> <C> <C> <C>
William D. Smithburg 1995.5 $430,008 $ -0- $ 13,421 $ -0- 500,000 $ -0-
Chairman, President and 1995 $855,014 $ -0- $ 3,419 $ 76,010 340,000 $171,627
Chief Executive Officer 1994 $825,006 $570,000 $ 2,607 $ 83,316 340,000 $165,520
1993 $795,000 $748,800 $ 2,208 $ 79,944 200,000 $175,074
Douglas W. Mills 1995.5 $173,004 $143,000 $ -0- $ -0- 90,000 $ -0-
Executive Vice President 1995 $323,550 $ 29,700 $ -0- $ 28,517 36,000 $ 59,321
U.S. and Canadian 1994 $278,332 $169,000 $ -0- $ 25,579 40,000 $ 53,666
Quaker Food Products 1993 $268,078 $206,600 $ -0- $ 521,770 48,000 $ 46,174
Philip A. Marineau 1995.5 $260,420 $ -0- $ 12,470 $ -0- 180,000 $ 69,376
President and Chief 1995 $620,840 $ -0- $ 3,248 $ 55,353 120,000 $124,755
Operating Officer 1994 $595,834 $415,000 $ 3,261 $ 56,673 120,000 $116,530
1993 $533,500 $500,700 $ -0- $1,973,675 120,000 $110,481
Luther C. McKinney 1995.5 $185,508 $ -0- $ 2,262 $ -0- 65,000 $ -0-
Senior Vice President 1995 $368,682 $ -0- $ -0- $ -0- 44,000 $ 68,406
Law and Corporate 1994 $354,678 $199,300 $ -0- $ -0- 44,000 $ 64,984
Affairs 1993 $340,500 $255,700 $ -0- $ 21,102 60,000 $ 67,730
Robert S. Thomason 1995.5 $180,012 $ -0- $ 1,588 $ 7,872 70,000 $ -0-
Senior Vice President 1995 $358,520 $ 42,700 $ 3,216 $ 21,786 42,000 $ 62,835
Finance and Chief 1994 $349,168 $163,200 $121,795 $ 31,958 48,000 $ 67,210
Financial Officer 1993 $325,017 $249,400 $ 31,444 $ 9,411 42,000 $ 48,941
James F. Doyle 1995.5 $173,004 $ -0- $ 592 $ 19,610 90,000 $ -0-
Executive Vice President 1995 $332,760 $217,600 $ -0- $ 42,449 48,000 $ 70,764
Worldwide Beverages 1994 $299,208 $254,800 $ -0- $ 25,247 48,000 $ 55,753
1993 $270,790 $221,100 $ -0- $ 18,953 60,000 $ 54,938
15
<FN>
(1)The transition period is identified as Fiscal Year 1995.5 for purposes
of this Table.
(2)Amounts include the cash awards that have been paid under the
Management Incentive Bonus Plan ("MIB" Plan) based on the
Company's financial performance and the Named Executive's personal
performance for the transition period, Fiscal Years 1995, 1994 and
1993, respectively. Amounts for Fiscal Year 1993 also include the
portions of the MIB awards for Fiscal Year 1992 which were withheld from
the Fiscal Year 1992 MIB award pool and put at risk, subject to
achievement of certain Company financial objectives during the first
half of Fiscal Year 1993. The financial objectives were achieved in
Fiscal Year 1993, and the withheld 1992 MIB awards were paid in Fiscal
Year 1993 along with the 1993 MIB awards as follows: Mr. Smithburg,
$123,800 and $625,000; Mr. Mills, $14,800 and $191,800; Mr.
Marineau, $75,700 and $425,000; Mr. McKinney, $41,100 and $214,600;
Mr. Thomason, $9,700 and $239,700; and Mr. Doyle, $31,900 and $189,200.
(3)Of the amounts shown for Mr. Thomason, $99,549 and $9,198
represent additional payments relating to his overseas assignment for
Fiscal Years 1994 and 1993, respectively.
(4)Restricted stock award values reflect the fair market value of
the Company's common stock on the date of each grant. With the
exception of Mr. Marineau's and Mr. Mills' restricted stock awards in
Fiscal Year 1993, and Company matching awards of restricted stock under
a broad-based long term incentive program, the Incentive Investment
Program, no awards of restricted stock have been made to any Named
Executive in the transition period, Fiscal Years 1995, 1994 and 1993.
In December 1993, vesting was accelerated by one month from January
1994 for the pro-rata portion of restricted stock awards granted in
Fiscal Year 1991 for Messrs. Smithburg and Marineau: respectively, 80,000
shares of the Company's common stock and 20,400 shares of Mattel Inc.
common stock; and 13,336 shares of the Company's common stock and 3,401
shares of Mattel Inc. common stock. The primary purpose for this
acceleration was for the Company to save approximately $60,000 in
taxes.
Dividends on restricted shares were and continue to be paid on an on-
going basis at the same rate as paid to all shareholders of common
stock. The numbers and values of restricted shares for the Named
Executives as of the last day of the transition period (December
31, 1995) are as follows: William D. Smithburg, 7,174 and $246,606;
Douglas W. Mills, 2,089 and $71,809; Philip A. Marineau, 64,574 and
$2,219,731; Luther C. McKinney, 710 and $24,406; Robert S. Thomason,
1,897 and $65,209; and James F. Doyle, 2,974 and $102,231.
Upon a change in control (see "Pension Plans"), restricted
shares outstanding on the date of the change in control will be cancelled and
an immediate lump sum cash payment will be paid which is equal to the
product of: (1) the higher of (i) the closing price of common stock as
reported on the NYSE Composite Index on or nearest to 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 common
stock actually paid in connection with the change in control; and (2)
the number of shares of such restricted stock.
(5)All stock option awards in the transition period, Fiscal Years 1995
and 1994 were granted with an exercise price that is equal to the fair
market value of the Company's common stock on the date of the
grant. Fifty percent of the stock option awards in Fiscal Year 1993
were granted with an exercise price that is equal to the fair market
value of the Company's common stock on the date of the grant. The
remaining 50% were granted with an exercise price that is 125% of
the fair market value of the Company's common stock on the date of
grant.
(6)For Fiscal Years 1995, 1994 and 1993, amounts shown are the total of
the value of the stock allocations to the Named Executives under The
Quaker Employee Stock Ownership Plan (ESOP), and cash awards to
the Named Executives based on earnings in excess of the Internal Revenue
Code limits on the amount of earnings deemed eligible for purposes of
the annual stock allocations made directly under the ESOP.
Mr. Marineau received payments during Fiscal Year 1995.5 under the
Quaker Officers Severance Program following his last date of active
employment, November 30, 1995 (see page 21).
16
</TABLE>
The following table contains information covering the grant of stock options
to the Named Executives during the transition period under the Company's Long
Term Incentive Plan. The exercise price for options granted is equal to
the fair market value of the Company's common stock on the date of the
grant.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants (1) for Option Term (2)
Number % of Total
of Options
Securities Granted to
Underlying Employees
Options in Fiscal Exercise Expiration
Name Granted (#) Year Price ($/Sh) Date 5% 10%
<S> <C> <C> <C>
William D. Smithburg 500,000 12.4% $33.13 07/20/05 $10,417,639 $26,400,344
Douglas W. Mills 90,000 2.2% $33.13 07/20/05 $ 1,875,175 $ 4,752,062
Philip A. Marineau 180,000 4.5% $33.13 07/20/05 $ 3,750,350 $ 9,504,124
Luther C. McKinney 65,000 1.6% $33.13 07/20/05 $ 1,354,293 $ 3,432,045
Robert S. Thomason 70,000 1.7% $33.13 07/20/05 $ 1,458,470 $ 3,696,048
James F. Doyle 90,000 2.2% $33.13 07/20/05 $ 1,875,175 $ 4,752,062
<FN>
(1) All options were granted on July 21, 1995. One-third of the
options granted will vest on each of the three anniversaries
following the date of grant. The options will be cancelled
and a lump sum cash payment will be paid for realizable value
upon the occurrence of a change in control. (See "Pension
Plans".)
(2) Based on fair market value on the date of grant and an annual
appreciation at the rate stated (compounded annually) of such
fair market value through the expiration date of such options.
The dollar amounts under these columns are the result of
calculations at the 5% and 10% stock price appreciation rates
set by the SEC and therefore do not forecast possible future
appreciation, if any, of the Company's stock price. However,
the total of the "Potential Realizable Value" for the Named
Executives would represent less than 0.8% of the incremental
increase of approximately $3 billion and $7 billion
respectively, in the Potential Realizable Value that
shareholders would realize under both the prescribed 5% and
10% stock price appreciation rates.
17
</TABLE>
The following table contains information covering the exercise of
options by the Named Executives during the transition period and
unexercised options held as of the end of the transition period.
[CAPTION] AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
<TABLE> AND FISCAL YEAR END OPTION VALUES
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year End (#) at Fiscal Year End ($) (2)
Shares
Acquired On Value
Name Exercise(#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C>
William D. Smithburg -0- -0- 1,060,676 896,200 $5,123,686 $622,500
Douglas W. Mills -0- -0- 143,312 127,720 $ 213,194 $112,050
Philip A. Marineau 253,178 $3,417,235 334,800 301,200 $ 155,700 $224,100
Luther C. McKinney -0- -0- 360,624 65,000 $2,084,123 $ 80,925
Robert S. Thomason -0- -0- 204,764 114,460 $1,467,037 $ 87,150
James F. Doyle -0- -0- 211,412 138,480 $ 846,865 $112,050
<FN>
(1)Represents the difference between the option exercise price and
the fair market value of the Company's common stock on the date
of exercise.
(2)Represents the difference between the option exercise price and
the fair market value of the Company's common stock on the last
day of the transition period (December 31, 1995).
</TABLE>
Pension Plans
The Company and its subsidiaries maintain several pension plans.
The Quaker Retirement Plan (Retirement Plan), which is the
principal plan, is a noncontributory, defined benefit plan covering
eligible salaried and hourly employees of the Company who have
completed one year of service as defined by the Retirement Plan.
Under the Retirement Plan, the participant accrues a benefit based
upon the greater of a Years-of-Service Formula and an
Earnings/Service Formula. Under the Years-of-Service Formula,
participants accrue annual benefits equivalent to credited years of
service times $216. Under the Earnings/Service Formula, a
participant's benefit is the sum of two parts:
1.Past Service Accrual -- Benefits accrued through December 31,
1993 are set at the greater of (a) those earned or (b) 1% of Five-
Year Average earnings to $22,700 plus 1.65% of earnings above
$22,700, times credited years of service; and
2.Future Service Accrual -- For each year beginning January 1,
1994 and after, participants accrue benefits of 1.75% of annual
earnings to 80% of the Social Security wage base plus 2.5% of
annual earnings above 80% of the Social Security wage base.
Eligible earnings used to calculate retirement benefits include
wages, salaries, bonuses, contributions to The Quaker Investment
Plan (a 401(k) Plan) and allocations under The Quaker Employee
Stock Ownership Plan. Normal retirement age under the Retirement
Plan is age 65. The Retirement Plan provides for early retirement
benefits.
18
Benefit amounts payable under the Retirement Plan are limited to
the extent required by the Employee Retirement Income Security Act
of 1974 ("ERISA"), as amended, and the Internal Revenue Code of
1986, as amended. If the benefit formula produces an amount in
excess of those limitations, the excess will be paid out of general
corporate funds in accordance with the terms of The Quaker 415
Excess Benefit Plan, and The Quaker Eligible Earnings Adjustment
Plan. The Quaker Eligible Earnings Adjustment Plan also provides
for payment out of general corporate funds, based upon benefit
amounts which would otherwise have been payable under the
Retirement Plan and The Quaker 415 Excess Benefit Plan, if the
executive had not previously elected to defer compensation under
the Executive Deferred Compensation Plan.
The Quaker Supplemental Executive Retirement Program (the "SERP"),
may also provide retirement benefits for officers of the Company
designated as participants by the Compensation Committee. Benefit
amounts payable under the SERP are intended to provide a minimum
base retirement benefit and are therefore offset by amounts payable
under the Retirement Plan, The Quaker 415 Excess Benefit Plan and
The Quaker Eligible Earnings Adjustment Plan. The SERP benefit is
based upon a participant's average annual earnings for the five
consecutive calendar years during which earnings were highest
within the last ten years of service multiplied by a percentage
based upon the participant's age at his termination date. For the
Chief Executive Officer this percentage ranges from 40% (for a
termination from ages 50 to 55) to 60% (for a termination at age 65
or later), and for other participants from 35% to 50% (based upon
such ages at termination).
The total estimated annual retirement benefits that the Named
Executives would receive under the Retirement Plan, The Quaker 415
Excess Benefit Plan, The Quaker Eligible Earnings Adjustment Plan,
and the SERP are as follows: William D. Smithburg, $856,175;
Douglas W. Mills, $309,970; Philip A. Marineau, $332,238; Luther C.
McKinney, $283,980; Robert S. Thomason, $308,896; and James F.
Doyle, $291,601. The amounts assume that the Named Executives,
with the exception of Mr. Marineau, will continue to work for the
Company until their normal retirement dates, that their earnings
will remain the same as in calendar 1995 and that each will elect a
straight-lifetime benefit without survivor benefits. Mr.
Marineau's estimated annual retirement benefit assumes benefit
commencement at age 55 and on the basis he will elect a straight-
lifetime benefit without survivor benefits. Payment options such
as a 50% joint and survivor annuity or other annuities are
available.
The Retirement Plan assures active and retired employees that, to
the extent of sufficient plan assets, it will continue in effect
for a reasonable period following a change in control of the
Company without a reduction of anticipated benefits, and under
certain circumstances may provide increased benefits. Generally,
under the Retirement Plan, a change in control shall be deemed to
have occurred in any of the following circumstances:
(a) An acquisition of 30% or more of Quaker stock unless such
acquisition is pursuant to an agreement with the Company
approved by the Board before the acquiror becomes the beneficial
owner of 5% of the Company's outstanding voting power;
(b) A majority of the Board is comprised of persons who were
not nominated by the Board for election as directors;
(c) A plan of complete liquidation of the Company; or
(d) A merger, consolidation or sale of all or substantially all
of the Company's assets unless thereafter: (i) directors of
Quaker immediately prior thereto continue to constitute at least
50% of the directors of the surviving entity or purchaser; or
(ii) Quaker's securities continue to represent, or are converted
to securities which represent, more than 70% of the combined
voting power of the surviving entity or purchaser.
For a five-year period following a change in control of the
Company, the accrual of benefits for service during such period
cannot be decreased while there are excess assets (as defined in
the Retirement Plan). For a two-year period following such a
change in control, the accrued benefits of members who meet
specified age and service requirements and who are terminated will
be increased. For so long as there are excess assets during that
five-year period, if the Retirement Plan is merged with any other
plan, the accrued benefit of each member and the amount payable to
retired
19
or deceased members shall be increased until there are no
excess assets. If during that five-year period the Retirement Plan
is terminated, to the extent that assets remain after satisfaction
of liabilities, the accrued benefits shall be increased such that
no assets of the Retirement Plan will directly or indirectly revert
to the Company.
Termination and Change in Control Benefits
The Company has entered into Executive Separation Agreements
(Separation Agreements) with the Named Executives and other
executive officers. The Separation Agreements provide for
separation pay should a change in control of the Company occur (as
described for the Retirement Plan). The Separation Agreements were
unanimously approved by the nonemployee directors.
Under the Separation Agreements, the executive's employment must be
terminated involuntarily, without cause, whether actual or
"constructive" (demotion, relocation, loss of benefits, or other
changes in the executive's terms of employment short of actual
termination) following a change in control, for separation pay to
be available. Under the Separation Agreement for Mr. Smithburg,
separation pay is also available upon voluntary termination
occurring during the thirteenth month following a change in
control.
Under the Separation Agreements, separation pay equals two years'
annualized base salary and bonuses awarded pursuant to the MIB Plan
and the value of life and health insurance coverage and pension
credited service extended for each executive for a period of two
years. The Separation Agreements provide that the amount of tax
penalties under the Internal Revenue Code to be paid by any person
shall be reimbursed to the executive officer by the Company. The
Separation Agreements terminate three years from their date of
execution and are subject to renewal by the Board.
The officers of the Company also participate in The Quaker Salaried
Employees Compensation and Benefits Protection Plan (Protection
Plan). Under the Protection Plan, severance pay and benefits are
provided should a change in control occur (as described for the
Retirement Plan) and an employee's employment is terminated within
two years thereafter for any reason other than death, physical or
mental incapacity, voluntary resignation, retirement or gross
misconduct. Severance payments may be paid in a lump sum or
monthly installments (as determined by the Protection Plan's
Administrative Committee). Severance payments shall be based on
the amount of nine months pay, plus two weeks pay for each year of
service over 20 years.
Pay is to be based on an employee's current salary plus bonus, if
any. Severance benefits are to be continued for a minimum of nine
months, plus two weeks for each year of service over 20 years, and
include all health and medical benefits, and life insurance
coverage at the time of termination.
The Board believes that the Separation Agreements and the
Protection Plan assure fair treatment of the covered employees
following a change in control. Furthermore, by assuring the
executive of some financial security, the Separation Agreements and
the Protection Plan protect the shareholders by neutralizing any
bias of these employees in considering proposals to acquire the
Company. The Board believes that these advantages outweigh the
disadvantage of the cost of the benefits.
The officers of the Company also participate in the Quaker Officers
Severance Program (Program). Under the Program, severance benefits
are payable if an officer's employment is terminated for any reason
other than death, physical or mental incapacity, voluntary
resignation, retirement or gross misconduct. Severance benefits
will continue for a period based on years of service (nine months
continuation for less than ten years of service and 12 months
continuation for ten or more years of service). Severance benefits
to be continued are the executive's base salary at the time of
termination, the average bonus for the past two years under the MIB
Plan, and medical and life insurance coverage as in effect at the
time of severance. Only the greater of the severance payment and
benefits to be provided under the Program or the Protection Plan
will be provided to an officer eligible under both, following a
change in control.
Under The Quaker Long Term Incentive Plan of 1990 (Incentive Plan),
upon the occurrence of a change in control (as described for the
Retirement Plan), options and restricted stock outstanding on the
date on which the change in control occurs shall be cancelled, and
an immediate lump sum cash payment shall be paid to the participant
equal to the
20
product of: (1) the higher of (a) the closing price of the Company's
common stock as reported on the NYSE 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 Company's common stock is highest), or (b) the highest
per share price for the Company's common stock actually paid in
connection with the change in control (and with respect to options,
reduced by the per share option price of each such option held,
whether or not then fully exercisable); and (2) the number of shares
covered by each such option, or shares of restricted stock.
Upon the occurrence of a change in control, performance shares,
performance units and other stock based awards provided for under
the Incentive Plan, and still outstanding, shall also be cancelled,
and any profit and/or performance objective with respect to
performance shares and performance units shall be deemed to have
been attained to the full and maximum extent. An immediate lump
sum cash payment relating thereto shall be paid to the participant
in an amount determined in accordance with the terms and conditions
set forth in the applicable agreement.
If making of payments pursuant to a change in control would subject
the participant to an excise tax under Section 4999 of the Internal
Revenue Code or would result in the Company's loss of a federal
income tax deduction for those payments (either of these
consequences is referred to individually as a Tax Penalty), then
the Company shall reduce the number of benefits to be cancelled to
the extent necessary to avoid the imposition of such Tax Penalty.
In addition, the Company shall establish procedures necessary to
maintain for the participants a form of benefit which may be
provided under the Incentive Plan so that such participant will be
in the same financial position with respect to those benefits not
cancelled as he would have been in the ordinary course, absent a
change in control and assuming his continued employment, except
that the foregoing with respect to the cancellation of benefits,
shall not apply if such participant (a) is entitled to a tax
reimbursement for such Tax Penalty under any other agreement, plan
or program of the Company, or (b) disclaims any portion of or all
payments to be made pursuant to or under any other agreement, plan
or program of the Company in order to avoid such Tax Penalty.
Disagreements as to whether such payments would result in the
imposition of a Tax Penalty shall be resolved by an opinion of
counsel chosen by the participant and reasonably satisfactory to
the Company.
The Company entered into a trust agreement, known as The Quaker
Oats Company Benefits Protection Trust (Trust or Trust Agreement).
The Trust is to be used to set aside funds necessary to satisfy the
Company's obligations to present and former executives and
directors under deferred compensation programs and agreements, and
with respect to certain retirement and termination benefits, in the
event of a change in control (as described for the Retirement
Plan). Following a change in control, the Trust Agreement becomes
irrevocable, and the Trust shall be funded to provide for the
payment of such obligations accrued at the time of a change in
control. The Trust may also be funded for the purpose of paying
legal expenses incurred by executives in pursuing benefit claims
under such programs and agreements following a change in control.
The Trust is currently funded only to a nominal extent.
The Trust assets relating to Company contributions are always
subject to the claims of the general creditors of the Company. No
executive with any right or interest to any benefit or future
payment under the Trust Agreement shall have any right or security
interest in any specific asset of the Trust, nor shall he have any
right to alienate, anticipate, commute, pledge, encumber, or assign
any of the benefits or rights which he may expect to receive from
the Trust or otherwise.
The Company entered into an Agreement Upon Separation of Employment
(Agreement) with Mr. Marineau on November 20, 1995 which became
effective immediately following his last date of active employment,
November 30, 1995. Mr. Marineau is eligible for severance pay
(based upon salary and bonus) and benefits (medical, dental,
disability and life insurance) under the Quaker Officers Severance
Program through November 30, 1996, based upon Mr. Marineau's salary
and benefits as an active employee as of November 30, 1995. The
Agreement provides for continuance of severance pay and benefits
through November 30, 1997. The Agreement also modifies Mr.
Marineau's Restricted Stock Award of 60,000 shares of the Company's
common stock (Award), which was originally granted on January 13,
1993 with 100% vesting on January 13, 1997, so that 50% of the
Award continues to vest on January 13, 1997 and 50% of the Award is
delayed and will vest on November 30, 1997, the last day of the
term of the Agreement. The Agreement also provides for waiver and
release, non-compete, non-raiding and non-disclosure restrictions
for Mr. Marineau during the term of the Agreement.
21
COMPENSATION COMMITTEE REPORT
The Company's executive compensation program is administered by the
Compensation Committee of the Board (Committee). The Committee
reviews and considers the recommendations of management and
compensation consultants, and then determines the compensation of
all executive officers, including the Named Executives. The
Committee's determinations are reviewed with all nonemployee
directors, who constitute a majority of the Board.
Overall Policy
The Company's compensation programs have long been tied closely to
Company performance leading to creation of shareholder value. The
Company's compensation programs are therefore aimed at enabling it
to attract and retain the best possible executive talent, and
rewarding those executives commensurately with their ability to
achieve increases in shareholder value.
At least once each year, the Committee conducts a comprehensive
review of the company's executive compensation programs. The
purpose of the review is to insure that the programs are meeting
their objective of creation of shareholder value, and that the
Company's executive compensation programs remain consistent with
competitive practice. In its review, the Committee considers data
provided by management and by leading compensation consultants,
with whom the Committee meets privately.
The Internal Revenue Service has recently issued final regulations
covering tax deductibility of compensation in excess of $1 million
to the Named Executives, which provide guidance as to what would
put companies in compliance. After reviewing these alternatives,
Mr. Smithburg has elected to defer payment of any portion of his
compensation which exceeds $1 million until after his retirement
from the Company, at which time the deferred compensation would not
be subject to the limitation on tax deductibility.
The Company's compensation programs consist of base salary, a short-
term cash incentive program (the "MIB" Plan), and a long-term
incentive program consisting primarily of a broad-based stock
option program and selective use of restricted stock. For
executive officers, the mix of compensation is weighted more toward
the performance-based elements of compensation (short-term and long-
term incentive programs) rather than the more fixed elements of
compensation (salary and benefits).
Base Salary
Salary guidelines for executive officers are established by
comparing the responsibilities of the individual's position to
similar positions in other comparable companies. Salary increases
are determined by comparing the person's actual performance to
personal performance objectives, as well as the Company's
performance versus its objectives.
Merit increases awarded to salaried employees in 1995 averaged 3%.
Vice Presidents and above (including all executive officers and
Named Executives) did not receive any merit increases during 1995.
Annual Incentive
The Company's key managers, including the executive officers, are
eligible to receive an annual award under the MIB Plan. Under the
MIB Plan, individual targets are established based on position
level. Participants may receive more, or less, than the targets
depending upon their performance.
Prior to the transition period, the annual incentive award was
based on a combination of business unit and Company performance
compared to financial objectives, with business unit performance
weighted more than Company performance. In the transition period,
the Committee decided to increase the weighting on business unit
performance so that participant's awards would be based to a much
larger extent on factors within their direct control. Personal
objectives are also considered in judging total compensation.
22
Company and unit financial performance is measured primarily by
Controllable Earnings ("CE") targets. CE is calculated as
operating income adjusted for certain financing costs, less a
capital usage charge. This capital usage charge holds all our key
managers accountable for the Company's investment in their
businesses. CE thus requires managers to make an economic
valuation of every business decision, helping build long-term
shareholder value. The Committee also considers performance
against other key financial measures such as sales, earnings per
share, return on assets, return on equity and operating income. In
order for the full financial portion of the target bonuses to be
paid, the Company must meet its internal financial targets and the
Committee also considers how that performance relates to other
comparable companies. Based upon these objectives and measurements
applied to actual performance, certain senior managers were not
awarded bonuses for the transition period by the Committee.
Long-Term Incentive
The Company has long believed in the importance of stock ownership
by all employees. Consequently, its long-term incentive plans are
focused on stock-based vehicles. The Company has adopted share
ownership guidelines for all vice presidents and above who will be
expected to hold Company stock commensurate with their organization
level.
The primary long-term incentive vehicle is a broad-based stock
option program for key managers, including the executive officers.
Participants are considered for annual awards of stock options,
based upon an assessment of each person's job level, performance,
potential, past award history and competitive practice. Stock
options currently become exercisable one-third per year over three
years, have a ten-year term, and are priced at or above the stock's
fair market value on the grant date.
In July 1995 an award of stock options was made to provide a
transition to the Company's new fiscal year. The July 1995 award
was approximately one and one-half times the normal annual award
levels, and the next scheduled general award of stock options was
delayed until March 1997. As a result, option recipients received
a comparable number of options on an annualized basis.
A second broad-based long-term incentive program applying to the
same group of key managers is the Incentive Investment Program (the
"IIP"). Under the IIP, participants may elect to invest a
percentage of their MIB awards in Company stock. Amounts invested
are matched with either one or two shares of restricted stock for
each three shares of stock purchased by the participant, depending
on the percent of the MIB award invested. The vesting of the
restricted stock occurs over a five-year period, contingent upon
the participant's continued employment and retaining the purchased
shares.
Restricted stock is also periodically used to motivate and retain
selected key employees. No restricted stock awards have been made
to an executive officer since fiscal 1993, except for matched
shares under the IIP.
CEO Compensation
In determining Mr. Smithburg's compensation, the Committee
considers the Company's financial and nonfinancial performance, as
well as an analysis of Mr. Smithburg's total compensation in
relation to that of CEOs in comparable companies. The primary
financial objective considered is the Company's performance in CE.
Other financial measures such as sales, earnings per share, return
on assets, return on equity, and operating income are also
considered.
The Committee considered that the Company did not achieve its
financial objectives in the transition period due primarily to the
difficulties in Snapple beverages. Although consideration was also
given to Mr. Smithburg's timely actions in addressing and working
to correct the issues that arose in the Snapple business during the
year and his vision in restructuring the Company for future growth,
after considering all the relevant information, the Committee
determined that Mr. Smithburg should not receive a bonus for the
transition period. Like other senior managers of the Company (see
discussion above), Mr. Smithburg also did not receive a merit
increase in 1995.
23
The Committee approved an award of 500,000 stock options to Mr.
Smithburg in July 1995, which vest one-third per year over three
years, at the fair-market value of the common stock on the grant
date. The award is consistent with the guidelines applied to other
option participants, and further aligns Mr. Smithburg's interests
with those of shareholders.
The Committee considers Mr. Smithburg's total compensation to be
appropriate in light of the Company's transition period
performance.
MEMBERS OF THE COMMITTEE
Silas S. Cathcart, Chairman
Kenneth I. Chenault
Vernon R. Loucks, Jr.
William L. Weiss
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total
shareholder return on the Company's common stock against the
cumulative total return of the Standard & Poor's 500 Stock Index
and the Standard & Poor's Food Index for the period of five and one-
half years commencing June 30, 1990 and ending December 31, 1995.
Comparison of Cumulative Five-Year Total Return*
Quaker Oats, S&P 500, S&P Foods
Transition
Fiscal Year Ending Period Ending
6/90 6/91 6/92 6/93 6/94 6/95 12/95
Quaker Oats 100 134 135 186 177 172 183
S&P 500 100 107 122 138 140 177 202
S&P Foods 100 122 137 136 137 176 200
*Assumes $100 invested on June 30, 1990 with reinvestment of dividends.
24
DIRECTORS' PROPOSAL
Ratification of Appointment of Independent Public Accountants
Upon the recommendation of the Audit Committee, the Board has
appointed Arthur Andersen LLP as independent public accountants for
1996, and is requesting ratification by the shareholders. Arthur
Andersen LLP has examined the financial statements of the Company
each fiscal year since 1970.
In the event the resolution is defeated, the adverse vote will be
considered as a direction to the Board to select other independent
public accountants for the next fiscal year. However, because of
the difficulty and expense of making any substitution of
independent public accountants after the beginning of a fiscal
period, it is contemplated that the appointment for 1996 will be
permitted to stand unless the Board finds other reasons for making
a change.
During the transition period, Arthur Andersen LLP performed
recurring audit services including the examination of annual
financial statements and pension plans and limited reviews of
quarterly financial information. Fees for these services
aggregated approximately $1.6 million. Arthur Andersen LLP also
performed services for the Company in other business areas,
including tax and accounting related services, for which transition
period fees aggregated approximately $1.6 million.
Representatives of Arthur Andersen LLP will attend the Annual
Meeting and will have an opportunity to make a statement, if they
desire to do so, and to respond to appropriate questions.
Ratification of the appointment of Arthur Andersen LLP as
independent public accountants requires the affirmative vote of a
majority of votes cast thereon.
The Board unanimously recommends a vote FOR this proposal.
SHAREHOLDER PROPOSALS
Compensation Disclosure
Mrs. Evelyn Y. Davis, Watergate Office Building, 2600 Virginia
Avenue, N.W. Suite 215, Washington, D.C. 20037, record holder of
200 shares of common stock of the Company, has given notice that
she will introduce the following resolution and supporting
statement at the Meeting:
RESOLVED: "That the shareholders recommend that the Board take the
necessary step that Quaker Oats specifically identify by name and
corporate title in all future proxy statements those executive
officers, not otherwise so identified, who are contractually
entitled to receive in excess of $100,000 annually as a base
salary, together with whatever other additional compensation
bonuses and other cash payments were due them."
REASONS: "In support of such proposed Resolution it is clear that
the shareholders have a right to comprehensively evaluate the
management in the manner in which the Corporation is being operated
and its resources utilized." "At present only a few of the most
senior executive officers are so identified, and not the many other
senior executive officers who should contribute to the ultimate
success of the Corporation." "Through such additional
identification the shareholders will then be provided an
opportunity to better evaluate the soundness and efficacy of the
overall management."
"Last year the owners of 11,896,817 shares, representing
approximately 12% of shares voting, voted FOR this proposal."
"If you AGREE, please mark your proxy FOR this proposal."
Approval of the foregoing shareholder proposal requires the
affirmative vote of a majority of the votes cast thereon.
25
The Board unanimously recommends a vote AGAINST this proposal for
the following reasons:
The proposal is not currently relevant to the Company since it
calls for disclosure only of contractual employment obligations and
the Company does not maintain employment contracts for any of its
executive officers.
Moreover, the Company already provides extensive disclosure on
compensation of executive officers in accordance with the rules and
regulations of the SEC that apply to all public companies. The
proposal attempts to impose disclosure obligations beyond what is
required by the SEC and beyond what is reported by other public
companies.
The SEC's compensation disclosure rules were significantly revised
in 1992 after comprehensive review and comment from numerous
reporting companies, investors and other interested persons. In
accordance with these rules, this proxy statement discloses the
compensation of the Company's six highest paid executive officers,
as well as a Compensation Committee Report disclosing the Company's
policies with respect to compensation for executive officers. The
Board believes that the existing disclosure provides stockholders
with a clear overview of the compensation structure for executive
officers and provides an adequate basis for stockholders to
evaluate the Company's use of resources for compensation.
If the Company were to provide additional and specific disclosure
related to a broader group of employees, the Board believes that
the Company would be at a competitive disadvantage because it would
have to provide more extensive compensation information than other
companies. This could impair the Company's recruiting and
compensation programs. Except when disclosure is required under
SEC rules applicable to all public companies, the Company treats
each employee's salary as a private matter. Compensation levels
within the Company vary based on factors such as performance,
experience, job classification and differences in geographic
location. Disclosure of compensation information for a broad group
of employees would invade employee privacy, compromise employee
security and harm employee morale.
Retention of Investment Banking Firm
Mr. Leland R. Chalmers, 2390 Castillian Circle, Northbrook, IL
60062, record holder of 50,732 shares of common stock of the
Company, has given notice that he will introduce the following
resolution and supporting statement at the Meeting:
Resolved: That the shareholders of The Quaker Oats Company
recommend that the Board of Directors immediately retain a
nationally prominent investment banking firm to explore all
alternatives to enhance the value of the Company including, but not
limited to, a plan to separate the Foods and Beverages Businesses
into two separate and independent publicly owned corporations, or
possible sale to or merger with another corporation.
Reasons: The Snapple acquisition has been criticized by many
analysts as being overpriced and the product category is
experiencing slower growth rates. The Company's major competitors
in both the foods and beverages sectors are all currently selling
at substantially higher price earnings multiples than the Company's
blended ratio.
A separation of these two businesses would be in line with similar
actions taken by many major companies in the United States (AT&T,
Baxter, General Mills, General Motors, Pet, Inc., Ralston Purina,
Sears Roebuck, Tenneco, 3M, and W. R. Grace to name but a few).
Several analysts have expressed their opinion that Quaker should do
the same, as have others in the foods industry. It is hoped this
action would produce share value appreciation and allow Quaker to
hire broadly experienced beverage industry management as was done
when the decision was made to spin off Fisher-Price.
Alternatively, the investment banking firm analysis may conclude
there are better shareholder alternatives than the spin off. A
review and recommendation should be discussed at the shareholders'
meeting.
Approval of the foregoing shareholder proposal requires the
affirmative vote of a majority of the votes cast thereon.
26
The Board unanimously recommends a vote AGAINST this proposal for
the following reasons:
The Company already maintains close relationships with several
nationally prominent investment banking firms and obtains
professional advice on the subjects mentioned by the Proponent.
Moreover, as a matter of course, the Board regularly reviews all
the businesses of the Company. Management evaluates the
contribution of each business unit to the Company's performance and
reports about them frequently to the Board. As a result, the
Company has made significant changes to its portfolio of business
units through divestitures, acquisitions or spin-offs when it has
found them appropriate in relation to the Company's strategic
plans.
The Board believes that it can function most effectively when its
strategic planning is conducted confidentially. In this way, ideas
can be developed and debated without the fear that they will lead
to rumors or public debate that could harmfully restrict the
Board's choices or disrupt the public market for the Company's
stock.
Therefore, the Board believes that adoption of the Proposal could
actually diminish shareholder value.
SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
Shareholders may submit proposals appropriate for shareholder
action at the Company's annual meetings consistent with regulations
adopted by the SEC. To be considered for inclusion in the
Company's proxy statement and proxy for the 1997 Annual Meeting a
proposal must be received by the Company no later than December 2,
1996. Proposals should be directed to R. Thomas Howell, Jr.,
Corporate Secretary, The Quaker Oats Company, P.O. Box 049001,
Suite 25-6, Chicago, Illinois 60604-9001.
OTHER BUSINESS
The Board is not aware of any matters requiring shareholder action
to be presented at the Meeting other than those stated in the
Notice of Annual Meeting. Should other proper matters be introduced
at the Meeting, those persons named in the enclosed proxy have
discretionary authority to act on such matters and will vote the
proxy in accordance with their best judgment.
By order of the Board of Directors,
/sic/R. Thomas Howell, Jr.
R. Thomas Howell, Jr.
Corporate Secretary
27
This Notice of Annual Meeting
Proxy Statement and Form 10-K
is printed on recycled paper.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH SPECIFICATIONS MADE, OR IF NO
CHOICES ARE INDICATED, FOR ITEMS 1 AND 2 AND AGAINST ITEMS 3 AND 4.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [ ]
[Quaker logo and "1996 PROXY" appears down the left margin]
A vote FOR items 1 and 2 is recommended
by the Board of Directors.
1. Election of Directors - For [ ] Withheld [ ] For all Except [ ] ________
Nominees: K.I. Chenault, T.C. MacAvoy and
W.J. Salmon
2. Ratification of Appointment of Independent For [ ] Against [ ] Abstain [ ]
Public Accountants
1996
P
R
O
X
Y
A vote AGAINST items 3 and 4 is recommended
by the Board of Directors.
3. Shareholder Proposal - For [ ] Against [ ] Abstain [ ]
Compensation
Disclosure
4. Shareholder Proposal - For [ ] Against [ ] Abstain [ ]
Retention of Investment
Banking Firm
Total Shares Dated__________________, 1996
x_________________________________
Signature
x_________________________________
Signature
NOTE: Please sign exactly as name appears hereon. For joint accounts, both
owners should sign. When signing as executor, administrator, attorney, trustee,
or guardian, etc., please sign your full title.
