-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RVqs5FVQunOz7IvfrlkXjeeNAEs64j3A+YT87KPcvcmuwd4+1i2iOxT7fEkzdlU6 M4mgm7sCcLxyehx8G8p9GQ== 0000081371-97-000001.txt : 19970320 0000081371-97-000001.hdr.sgml : 19970320 ACCESSION NUMBER: 0000081371-97-000001 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 24 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970319 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUAKER OATS CO CENTRAL INDEX KEY: 0000081371 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 361655315 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-00012 FILM NUMBER: 97559095 BUSINESS ADDRESS: STREET 1: QUAKER TOWER STREET 2: PO BOX 049001 CITY: CHICAGO STATE: IL ZIP: 60604-9001 BUSINESS PHONE: 3122228503 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-12 THE QUAKER OATS COMPANY (Exact name of registrant as specified in its charter.) NEW JERSEY 36-1655315 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) QUAKER TOWER P.O. Box 049001 Chicago, Illinois 60604-9001 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (312) 222-7111 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock ($5.00 Par Value) New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange The Stock Exchange, London Preferred Stock Purchase Rights New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Common Stock held by non-affiliates of the Registrant as of the close of business on February 28, 1997 was $4,892,229,265. The liquidation value of Series B ESOP Convertible Preferred Stock, all of which is held in The Quaker Employee Stock Ownership Plan, at the close of business on February 28, 1997 totaled $84,497,946, plus related dividends. The number of shares of Common Stock, $5.00 par value, outstanding as of the close of business on February 28, 1997 was 136,368,760. DOCUMENTS INCORPORATED BY REFERENCE. 1. Portions of The Quaker Oats Company Annual Report to Shareholders for the fiscal year ended December 31, 1996 (Annual Report) (Parts I, II and III of Form 10-K) 2. Portions of The Quaker Oats Company Notice of Annual Meeting and Proxy Statement (Proxy Statement) dated April 2, 1997 (Part III of Form 10-K) CROSS-REFERENCE TABLE OF CONTENTS The Annual Report and the Proxy Statement include all information required in Parts I, II and III of Form 10-K, except as otherwise indicated in the following Cross-Reference Table of Contents. The Cross-Reference Table of Contents identifies the source of information for each of the Form 10-K items included in Parts I, II and III. Only those sections of the Annual Report and the Proxy Statement cited in the Cross-Reference Table of Contents are incorporated in the Form 10-K and filed with the Securities and Exchange Commission. 10-K Item No. Source of Information PART I. Item 1. Business (a) General Development of Business Annual Report, pages 46-47 (b) Financial Information About Industry Annual Report, pages 25, 42-44 Segments (c) Description of Business Annual Report, pages 25-29, 30-35, 55, 57, 59 (d) Financial Information About Foreign Annual Report, pages 42-44 and Domestic Operations and Export Sales (e) Executive Officers of Registrant Annual Report, pages 60-61 Item 2. Properties. Annual Report, page 59 Item 3. Legal Proceedings. Annual Report, page 57 Item 4. Submission of Matters to a Vote of (Not Applicable) Security Holders. PART II. Item 5. Market for the Registrant's Common Annual Report, pages 31, 34-35, Equity and Related Stockholder 57, 64-65 Matters. Item 6. Selected Financial Data. Annual Report, pages 30-35 Item 7. Management's Discussion and Annual Report, pages 25-29 Analysis of Financial Condition and Results of Operations. Item 8. Financial Statements and Annual Report, pages 36-58 Supplementary Data. Item 9. Changes in and Disagreements with (Not Applicable) Accountants on Accounting and Financial Disclosure. PART III. Item 10. Directors and Executive Officers of Notice of Annual Meeting and Proxy the registrant. Statement, pages 5-8; Annual Report, pages 60-61 Item 11. Executive Compensation. Notice of Annual Meeting and Proxy Statement, pages 12-19 Item 12. Security Ownership of Certain Notice of Annual Meeting and Proxy Beneficial Owners and Management. Statement, pages 10-11 Item 13. Certain Relationships and Related (Not Applicable) Transactions. PART IV. Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) Financial Statements. Consolidated financial statements of The Quaker Oats Company and its subsidiaries are incorporated under Item 8 of this Form 10-K. (a)(2)& (d) Financial Statement Schedules. All required financial statement schedules are included in the consolidated financial statements or notes thereto as incorporated under Item 8 of this Form 10-K. (a)(3)& (c) Exhibits. See Exhibit Index attached hereto, which is incorporated herein by reference. SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE QUAKER OATS COMPANY By /s/WILLIAM D. SMITHBURG William D. Smithburg, Chairman, President and Chief Executive Officer Date: March 12, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 12th day of March 1997, by the following persons on behalf of the Registrant and in the capacities indicated. Signature Title /s/ WILLIAM D. SMITHBURG William D. Smithburg Chairman, President and Chief Executive Officer /s/ ROBERT S. THOMASON Robert S. Thomason Senior Vice President Finance and Chief Financial Officer /s/ THOMAS L. GETTINGS Thomas L. Gettings Vice President and Corporate Controller /s/ FRANK C. CARLUCCI Frank C. Carlucci Director /s/ SILAS S. CATHCART Silas S. Cathcart Director /s/ KENNETH I. CHENAULT Kenneth I. Chenault Director /s/ JUDY C. LEWENT Judy C. Lewent Director /s/ VERNON R. LOUCKS, JR. Vernon R. Loucks, Jr. Director /s/ THOMAS C. MacAVOY Thomas C. MacAvoy Director /s/ LUTHER C. McKINNEY Luther C. McKinney Director /s/ WALTER J. SALMON Walter J. Salmon Director /s/ WILLIAM L. WEISS William L. Weiss Director EXHIBIT INDEX EXHIBIT NO. DESCRIPTION PAPER (P), ELECTRONIC (E) OR INCORPORATED BY REFERENCE (IBRF) 3(a) Restated Certificate of Incorporation (as of September 11, 1996) E 3(b) Bylaws of The Quaker Oats Company (as of November 13, 1996) E 4 Registrant undertakes to furnish to the Commission, upon request, a copy of any instrument defining the rights of holders of long- term debt of the registrant and all of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed IBRF 10(a) 1984 Long-Term Incentive Plan, as restated effective September 1, 1996 (incorporated by reference to the Company's Form 10-Q for the fiscal quarter ended September 30, 1996, file number 1-12) IBRF 10(b) Deferred Compensation Plan for Directors of The Quaker Oats Company, as restated effective November 1, 1996 E 10(c) Deferred Compensation Plan for Executives of The Quaker Oats Company, as restated effective November 1, 1996 E 10(d) Management Incentive Bonus Plan of The Quaker Oats Company as amended September 8, 1993 (incorporated by reference to the Company's Form 10-K for the fiscal year ended June 30, 1994, file number 1-12) IBRF 10(e) Directors' Stock Compensation Plan, as restated effective November 1, 1996 E 10(f)(1) Termination Benefits Agreement with William D. Smithburg, first effective for the fiscal quarter ended December 31, 1996 E 10(f)(2) Termination Benefits Agreements with certain Executive Officers, first effective for the fiscal quarter ended December 31, 1996 E 10(f)(3) Agreement upon separation of employment with Michael B. Schott effective August 12, 1996 (incorporated by reference to the Company's Form 10-Q for the fiscal quarter ended September 30, 1996, file number 1-12) IBRF 10(g) The Quaker Supplemental Executive Retirement Program, as restated effective November 1, 1996 E 10(h)(1) The Quaker Oats Company Benefits Protection Trust (incorporated by reference to the Company's Form 10-K for the fiscal year ended June 30, 1989, file number 1-12) IBRF 10(h)(2) First Amendment to The Quaker Oats Company Benefits Protection Trust (incorporated by reference to the Company's Form 10-K for the fiscal year ended June 30, 1992, file number 1-12) IBRF 10(h)(3) Second Amendment to The Quaker Oats Company Benefits Protection Trust (incorporated by reference to the Company's Form 10-K for the fiscal year ended June 30, 1992, file number 1-12) IBRF 10(i) The Quaker Eligible Earnings Adjustment Plan, as restated effective November 1, 1996 E 10(j) Quaker Officers Severance Program, as restated effective November 1, 1996 E 10(k) The Quaker Long Term Incentive Plan of 1990 (incorporated by reference to the Company's Form 10-Q for the fiscal quarter ended September 30, 1996, file number 1-12) IBRF 10(l) The Quaker 415 Excess Benefit Plan, as restated effective November 1, 1996 E 10(m) Quaker Salaried Employees Compensation and Benefits Protection Plan, as restated effective November 1, 1996 E 11 Statement re Computation of Per Share Earnings E 12 Statement re Computation of Ratios E 13 Annual Report to Shareholders of The Quaker Oats Company for fiscal year ended December 31, 1996 E 21 List of Subsidiaries of the Registrant E 23 Consent of Auditors E EX-3.1 2 Exhibit 3(a) AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THE QUAKER OATS COMPANY SEPTEMBER 11, 1996 THE QUAKER OATS COMPANY Certificate of Incorporation Organized Under the Laws of the State of New Jersey Authorized Capital Stock Preference, without par value, 1,000,000 shares Preferred, without par value, 10,000,000 shares Common, $5 par value 400,000,000 shares Original Certificate Filed September 21, 1901 Amendment Filed March 31, 1906 Increasing preferred capital stock from $8,000,000 to $9,000,000 and common capital stock from $4,000,000 to $4,500,000. Amendment Filed April 25, 1910 Increasing common capital stock from $4,500,000 to $5,500,000. Amendment Filed November 25, 1912 Increasing common capital stock from $5,500,000 to $10,000,000. Amendment Filed April 7, 1917 Increasing preferred capital stock from $9,000,000 to $15,000,000 and common capital stock from $10,000,000 to $15,000,000. Amendment Filed July 14, 1919 Increasing preferred capital stock from $15,000,000 to $25,000,000 and common capital stock from $15,000,000 to $25,000,000. Amendment Filed March 14, 1925 No change in preferred capital stock. Changing common capital stock to 600,000 shares without par value. Amendment Filed March 20, 1930 No change in preferred capital stock. Increasing common capital stock to 800,000 shares without par value. Amendment Filed January 19, 1951 No change in preferred capital stock. Changing Common Stock to 4,000,000 shares, $5 par value. Amendment Filed November 14, 1958 No change in preferred capital stock. Changing Common Stock to 6,000,000 shares, $5 par value. Amendment Filed November 3, 1967 No change in preferred capital stock. Changing Common Stock to 12,000,000 shares, $5 par value. Amendment Filed November 1, 1968 Eliminating 6% Preferred Capital Stock, $100 par value. Authorizing 169,022 shares of $3 Cumulative Convertible Preferred Stock, $50 par value. Authorizing 1,500,000 shares Preference Stock without par value. Changing Common Stock to 15,000,000 shares, $5 par value. Amendment Filed November 7, 1969 No change in Preferred or Preference Stock. Changing Common Stock to 22,500,000 shares, $5 par value. Amendment Filed December 10, 1971 No change in Preferred or Preference Stock. Elimination of preemptive rights on Common Stock. Amendment Filed November 16, 1972 No change in Preferred or Preference Stock. Changing Common Stock to 35,000,000 shares, $5 par value. Amendment Filed May 21, 1975 No change in Common or Preferred Stock. Providing for issue of a series of Preference Stock without par value, designated "$9.56 preference stock," consisting of 500,000 shares. Amended and Restated November 28, 1978 No change in Common or Preference Stock. Elimination of $3 Preferred Stock. Amendment Filed November 22, 1983 No change in Common or Preference Stock. Amended Article Sixth of, and added Article Seventh to, the Certificate. Amendments Filed November 15, 1984 No change in Preference Stock. Changing Common Stock to 100,000,000 shares, $5 par value, and authorizing 10,000,000 shares of Preferred Stock without par value. Added Article Eighth to the Certificate. Principal Office in New Jersey: The Corporation Trust Company 28 West State Street Trenton, New Jersey 08608 General Offices: 321 N. Clark Street, Chicago, Illinois 60610 Amendment Filed May 5, 1986 No Change in Common or Preferred Stock. Elimination of $9.56 Preference Stock. Amendment Filed September 18, 1986 No change in Common or Preference Stock. Provided for series of Preferred Stock without par value designated "Series A Junior Participating Preferred Stock." Amendment Filed November 12, 1986 No change in Preference or Preferred Stock. Changing Common Stock to 200,000,000 shares, $5 par value. Amendment Filed November 11, 1987 No change in Common, Preference or Preferred Stock. Amended Certificate to add a new Article Ninth. Amendment Filed November 9, 1988 No change in Common, Preference or Preferred Stock. Amended Certificate to add a new Article Fourth, Paragraph C. Amendment Filed June 19, 1989 No change in Common, Preference or Preferred Stock. Amended Certificate to add a New Series B ESOP Convertible Preferred Stock. Amendment Filed January 13, 1993 No change in Common, Preference or Preferred Stock. Amended Certificate to amend Article Eighth. Amendment Filed November 9, 1994 No change in Preference or Preferred Stock. Changing Common Stock to 400,000,000 shares, $5 par value. Registered Office in New Jersey: The Corporation Trust Company 820 Bear Tavern Road West Trenton, NJ 08628 Amendment Filed September 11, 1996 No change in Common or Preference Stock. Retired Series of Preferred without par value designated "Series A Junior Participating Preferred Stock" and provided for Series of Preferred Stock without par value designated "Series C Junior Participating Preference Stock". AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THE QUAKER OATS COMPANY SEPTEMBER 11, 1996 Pursuant to the provisions of Section 14A:9-5 of the New Jersey Business Corporation Act, The Quaker Oats Company, a corporation organized and existing under the laws of the State of New Jersey, restates and integrates its Certificate of Incorporation, as heretofore amended, to read in full as herein set forth: First. The name of the Corporation is: The Quaker Oats Company. Second. The address of the Corporation's current registered office is 820 Bear Tavern Road, West Trenton, New Jersey 08628. The name of the Corporation's current registered agent at such address, upon whom process against the Corporation may be served, is The Corporation Trust Company. Third. The purposes for which the Corporation is organized are to engage in any or all activities within the purposes for which corporations now or at any time hereafter may be organized under the New Jersey Business Corporation Act and under all amendments and supplements thereto, or any revision thereof or any statute enacted to take the place thereof. Fourth. The aggregate number of shares which the Corporation shall have authority to issue is 411,000,000 shares divided into 400,000,000 shares of common stock of the par value of $5.00 per share, 1,000,000 shares of preference stock without par value and 10,000,000 shares of preferred stock without par value. The designations, rights, preferences, privileges and limitations of the shares of common stock, shares of preference stock and shares of preferred stock, and the manner of determining the designations, and number of series of preference stock and preferred stock and the relative voting, dividend, liquidation and other rights, preferences and limitations of each such series are as follows: A. Preference Stock (1) The Board of Directors is hereby empowered to cause the preference stock to be issued from time to time for such consideration as it may from time to time fix, and to cause such preference stock to be issued in series with variations as to: (a) the rates of dividends payable thereon, (b) the terms on which the same may be redeemed, (c) the amount which may be paid to the holders thereof, (d) the terms or amount of any sinking fund provided for the purchase or redemption thereof, and (e) the terms upon which the holders thereof may convert the same into stock of any other class or classes or of any one or more series of the same class or of another class or classes. All shares of preference stock shall be identical in all respects except as above provided; and shares of preference stock of any one series shall be identical in all respects. If the stated dividends or the amounts payable in any other distribution of assets on all shares of preference stock are not paid in full, the holders of shares of all series of preference stock shall share ratably in the payment of dividends, including arrearages, if any, and in any amounts payable in any other distribution of assets in accordance with the sums that would be payable on such shares if all dividends and distributions were paid in full. The holders of each series of preference stock shall be entitled to receive, when and as declared by the Board of Directors, dividends, payable quarterly, at the rate designated by the Board of Directors in the resolution providing for the issue of such series, and no more. Such dividends on each series of preference stock shall be cumulative whether or not earned. No dividends (other than dividends payable in common stock) shall be declared or paid or set apart for payment on the common or preferred stock unless and until dividends payable for all past quarterly dividend periods on the outstanding shares of each series of preference stock shall have been paid, or declared and set apart for payment, in full. The holders of each series of preference stock shall be entitled to receive, in case of dissolution or any distribution of assets in liquidation, the amount specified for payment in such case, as fixed by the Board of Directors in the resolution providing for the issue of such series, and no more. No payment or distribution shall be made in respect of the common or preferred stock, in case of dissolution or any distribution of assets in liquidation, unless and until the amount specified for payment in such case to the holder of each series of preference stock shall have been paid in full. (2) The shares of each series of preference stock may be made subject to redemption in whole or in part, at the option of the Corporation, at such time or times and at such price or prices and upon such terms as may be prescribed by the Board of Directors in the resolution providing for the issue of such series. If less than all of the outstanding shares of any series of preference stock are to be redeemed at a particular time, the shares of such series to be so redeemed shall be chosen by lot or pro rata in such manner as the Board of Directors may determine. The Corporation may create a sinking fund for the purchase, redemption or retirement of any series of preference stock of such amount or proportion of net profit and upon such terms as may be prescribed by the Board of Directors in the resolution providing for the issue of such series. Preference shares redeemed by the Corporation shall be retired by resolution of the Board of Directors and shall not be reissued, and the authorized stock and capital represented by such preference shares shall be deemed to be reduced accordingly. (3) The Board of Directors, with respect to each series of preference stock, shall decide whether the stock of such series shall be convertible, and if so shall designate in the resolution providing for the issue of such series the terms upon which such stock may be converted into stock of any other series of preference stock or into stock of any other class or classes. Upon the conversion of shares of preference stock, the preference shares so converted shall be deemed to be retired and shall not be reissued, and the authorized stock and capital represented by such preference shares shall be deemed to be reduced accordingly. (4) Subject to the provisions of law and of this Certificate of Incorporation as in effect from time to time, every holder of preference stock of any series shall be entitled to one vote in person or by proxy for each share of such stock held by him. If at any time the Corporation shall have failed to pay, or declare and set apart for payment, dividends on all outstanding shares of preference stock in an amount equal to six quarterly dividends upon such shares, the number of directors of the Corporation shall be increased by two at the first annual meeting of the shareholders of the Corporation held thereafter; and at such meeting and at each subsequent annual meeting until dividends payable for all past quarterly dividend periods on all outstanding shares of preference stock shall have been paid, or declared and set apart for payment, in full, the holders of the shares of preference stock shall have the right, voting as a class, to elect such two additional members of the Board of Directors to hold office for a term of one year and until their successors are elected and qualified; provided, that the right to vote as a class upon the election of such two additional directors shall not limit the right of holders of preference stock to vote upon other matters when permitted by other provisions of this Certificate. Upon such payment, or such declaration and setting apart for payment, in full, the terms of the two additional directors so elected shall forthwith terminate, and the number of directors of the Corporation shall be reduced by two and such additional voting right of the holders of shares of preference stock shall cease, subject to increase in the number of directors as aforesaid and to revesting of such voting right in the event of each and every additional failure in the payment of dividends in an amount equal to six quarterly dividends as aforesaid. So long as any shares of the preference stock shall be outstanding, the Corporation shall not, without the affirmative vote of the holders of at least two-thirds of the aggregate number of shares of preference stock then outstanding, amend this Certificate to: (a) increase the authorized preference stock of the Corporation; (b) authorize any new class of stock ranking equal to or prior to the preference stock, either as to payment of dividends or distribution of assets; (c) adversely change the rights, preferences or powers of the preference stock with respect to dividends, voting, conversion, liquidation or redemption. (5) Shares of preference stock of any series shall not entitle any holder thereof to any preemptive right to purchase or subscribe for any shares of that or any other class. B. Preferred Stock (1) The Board of Directors is hereby empowered to cause the preferred stock to be issued from time to time for such consideration as it may from time to time fix, and to cause such preferred stock to be issued in series with variations as to rights, preferences, privileges and limitations as designated by the Board of Directors in the resolution providing for the issue of such series, except that no series of preferred stock shall rank equal to or prior to any of the preference stock, either as to payment of dividends or distribution of assets. Shares of preferred stock of any one series shall be identical in all respects. (2) Subject to the priority of holders of the preference stock, the holders of each series of preferred stock shall be entitled to receive cumulative, noncumulative or partially cumulative dividends at the rate and on the terms designated by the Board of Directors in the resolution providing for the issue of such series, and no more. No dividends (other than dividends payable in common stock) shall be declared or paid or set apart for payment on the common stock unless and until all dividends payable on the outstanding shares of each series of preferred stock shall have been paid, or declared and set apart for payment, in full. Subject to the priority of holders of the preference stock, the holders of each series of preferred stock shall be entitled to receive, in case of dissolution or any distribution of assets in liquidation, the amount specified for payment in such case, as fixed by the Board of Directors in the resolution providing for the issue of such series, and no more. No payment or distribution shall be made in respect of the common stock, in case of dissolution or any distribution of assets in liquidation, unless and until the amount specified for payment in such case to the holder of each series of preferred stock shall have been paid in full. (3) The shares of each series of preferred stock may be made subject to redemption in whole or in part, at the option of the Corporation, at such time or times and at such price or prices and upon such terms as may be prescribed by the Board of Directors in the resolution providing for the issue of such series. The Corporation may create a sinking fund for the purchase, redemption or retirement of any series of preferred stock of such amount or proportion of net profits and upon such terms as may be prescribed by the Board of Directors in the resolution providing for the issue of such series. Preferred shares redeemed by the Corporation shall be restored to the status of authorized but unissued shares of preferred stock not constituting part of any series thereof, unless the Board of Directors elects to retain such redeemed shares as Treasury shares. (4) The Board of Directors, with respect to each series of preferred stock, shall decide whether the stock of such series shall be convertible, and if so shall designate in the resolution providing for the issue of such series the terms upon which such stock may be converted into stock of any other series of preferred stock or into stock of any other class or classes. Upon the conversion of shares of preferred stock, the preferred share so converted shall be restored to the status of authorized but unissued shares. (5) Subject to the provisions of law and of this Certificate of Incorporation as in effect from time to time, the holders of preferred stock of any series shall be entitled to such voting rights, limited voting rights, or special or multiple voting rights as may be prescribed by the Board of Directors in the resolution providing for the issue of such series. (6) Shares of preferred stock of any series shall not entitle any holder thereof to any preemptive right to purchase or subscribe for any shares of that or any other class. (7) The Board of Directors shall have all other powers and rights with respect to the preferred stock which are not inconsistent with the New Jersey Business Corporation Act or this Certificate of Incorporation as in effect from time to time. (8) The relative voting, dividend, liquidation and other rights, preferences and limitations of the shares of the series of preferred stock designated "Series C Junior Participating Preferred Stock" are as set forth in the resolution of the Board of Directors contained in the document filed in the office of the Secretary of State of New Jersey pursuant to which such series was created, which resolution, marked "Exhibit A," is attached to this Certificate of Incorporation and made a part hereof as if set forth in full. (9) The relative voting, dividend liquidation and other rights, preferences and limitations of the shares of the series of preferred stock designated "Series B ESOP Convertible Preferred Stock" are as set forth in this Paragraph Fourth B and in Exhibit B to this Restated Certificate of Incorporation, which document has been filed with the Secretary of State of New Jersey together with the resolution pursuant to which the series was created, and which are both made a part hereof as if set forth in full. C. Common Stock The common stock shall be subject to the prior rights of the holders of the preference stock and preferred stock as above declared. Subject to such prior rights, the Board of Directors may declare and pay dividends out of funds legally available therefor. In the event of the dissolution of the Corporation or of a distribution of the assets or any portion thereof by way of return of capital, the holders of the common stock shall, after the holders of the preference stock and preferred stock have received the preferential amounts to which they are entitled, be entitled to receive the balance of the assets of the Corporation so distributed. Shares of common stock shall not entitle the holder thereof to any preemptive right to purchase or subscribe of the shares of that or any other class. Fifth. The number of Directors constituting the Corporation's current Board of Directors is 10. The names and business addresses of the persons currently serving as said Directors are: The Honorable Frank C. Carlucci Chairman The Carlyle Group 1001 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2505 Mr. Silas S. Cathcart Retired Chairman Illinois Tool Works, Inc. 222 Wisconsin Ave. Suite 103 Chicago, IL 60645 Mr. Kenneth I. Chenault Vice Chairman American Express Company American Express Tower 40th Floor World Financial Center 200 Vesey Street New York, NY 10285-4000 Ms. Judy C. Lewent Senior Vice President & Chief Financial Officer Merck & Co., Inc. One Merck Drive P.O. Box 100 Whitehouse Station, NJ 08889-0100 Mr. Vernon R. Loucks, Jr. Chairman and Chief Executive Officer Baxter International Inc. One Baxter Parkway Deerfield, IL 60015 Dr. Thomas C. MacAvoy Paul M. Hammaker Professor of Business Administration Darden Graduate School of Business Administration University of Virginia Charlottesville, VA 22906 Mr. Luther C. McKinney Senior Vice President - Law and Corporate Affairs The Quaker Oats Company Quaker Tower, 27-10 P.O. Box 049001 Chicago, IL 60604-9001 Dr. Walter J. Salmon Stanley Roth Sr. Professor of Retailing Harvard Business School Morgan Hall - Room 175 Soldiers Field Road Boston, MA 02163 Mr. William D. Smithburg Chairman, President and CEO The Quaker Oats Company Quaker Tower, 27-13 P.O. Box 049001 Chicago, IL 60604-9001 Mr. William L. Weiss Chairman Emeritus Ameritech Corporation One First National Plaza 21 S. Clark Street Suite 2530 C Chicago, IL 60603-2006 Sixth. The business and affairs of the Corporation shall be managed by a Board of Directors. The number of directors (exclusive of directors, if any, elected by the holders of one or more classes of preference stock, voting separately as a class pursuant to the provisions of the Certificate of Incorporation applicable thereto) shall be not less than 6 or more than 24 directors, the exact number of directors to be determined from time to time by resolution adopted by affirmative vote of a majority of the entire Board of Directors. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as possible, of one-third of the total number of directors constituting the entire Board of Directors. At the 1983 Annual Meeting of Shareholders, Class I directors shall be elected for a one-year term, Class II for a two-year term and Class III directors for a three-year term. At each succeeding annual meeting of shareholders beginning in 1984, successors to directors whose terms expire at that annual meeting shall be of the same class as the directors they succeed, and shall be elected for three-year terms. If the number of directors is changed by resolution of the Board of Directors pursuant to this Article Sixth, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, or removal from office. Any newly created directorship resulting from an increase in the number of directors and any other vacancy on the Board of Directors, however caused, may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director; provided that if the number of directors is increased, not more than two such newly created directorships may be filled by the directors in any period between annual meetings of shareholders. Any director so elected to fill a vacancy shall, without regard to the class in which such vacancy occurred, hold office until the next succeeding annual meeting of shareholders and until his or her successor shall have been elected and qualified. The term of a director elected by shareholders to fill a newly created directorship or other vacancy shall expire at the same time as the terms of the other directors of the class in which the vacancy occurred. Exclusive of directors, if any, elected by the holders of one or more classes of preference stock, one or more or all the directors of the Corporation may be removed for cause by the shareholders by the affirmative vote of two-thirds of the votes cast by the holders of shares entitled to vote at a meeting of shareholders for which proper notice of such proposed removal has been given. No person shall be eligible for election as a director at any annual or special meeting of shareholders unless a written request that his or her name be placed in nomination is received from a shareholder of record by the Secretary of the Corporation not less than 30 days prior to the date fixed for the meeting, together with the written consent of such person to serve as a director. Where such a request for nomination and such consent have been timely received, but such nominee is unable or declines to serve, the person who placed the individual's name in nomination may request that an alternate name be placed in nomination at the meeting. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preference stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of shareholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation applicable thereto. Directors so elected shall not be divided into classes unless expressly provided by such terms, and during the prescribed terms of office of such directors, the Board of Directors shall consist of such directors in addition to the number of directors determined as provided in the first paragraph of this Article Sixth. Seventh. Notwithstanding any other provisions of this Certificate of Incorporation or the Bylaws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law), the Bylaws may be amended, altered or repealed, and new Bylaws may be enacted, only by the affirmative vote of the holders of not less that two-thirds of the outstanding shares of capital stock of the Corporation or by a vote of not less than two- thirds of the entire Board of Directors. Eighth. The affirmative vote of the holders of two-thirds of all Voting Shares (as defined herein) of the Corporation considered for the purposes of this Article Eighth as one class, shall be required for the adoption or authorization of any Combination as defined herein with any person if, as of the record date for the determination of shareholders entitled to notice thereof and to vote thereon, such person is an Interested Shareholder or an affiliate of an Interested Shareholder; provided, that such two-thirds voting requirement shall not be applicable if all of the conditions specified in either of the following paragraphs (1) or (2) are met: (1) If the Combination shall have been approved by a majority of the Disinterested Directors (as defined herein) who were directors prior to the time that such person became an Interested Shareholder, but only if the Disinterested Directors were a majority of the Board of Directors before such person became an Interested Shareholder. (2) (a) The cash, or fair market value of other consideration (determined by the experts provided for in Subparagraph (iii) below of this Article Eighth), to be received per share in the Combination by holders of common stock of the Corporation is not less than the greatest of: (i) the highest per-share price (including brokerage commissions, transfer taxes, and soliciting dealer's fees) paid during the preceding twelve months by the Interested Shareholder in acquiring the beneficial ownership, directly or indirectly, of any of its holdings of the common stock of the Corporation. (In making this computation, appropriate adjustments shall be made for any stock splits, stock dividends, stock combinations and other similar events.); (ii) the closing price per share of the common stock of the Corporation as listed on the New York Stock Exchange on the business day immediately preceding the date that the meeting of the shareholders of the Corporation is held for the purpose of voting on the Combination; (iii) a price that is approved as being fair to the holders of outstanding common stock of the Corporation not owned by such Interested Shareholder, as determined by at least two independent experts selected by at least three Disinterested Directors. (This determination shall be based on the value of the total Corporation in an arm's-length sale.) The Corporation shall pay the reasonable fees and expenses associated with the retention of these experts; and (b) A proxy statement which complies with the requirements of the Securities Exchange Act of 1934, as amended, shall be mailed to the holders of common stock for the purpose of soliciting shareholder approval of such Combination. The proxy statement shall contain (as exhibits or otherwise) the entire opinions of the independent experts required by this Article Eighth. The requirements of this Article Eighth are in addition to, and do not supersede, amend, alter, change or eliminate any board approval, shareholder vote or consent or other conditions required by the laws of New Jersey in effect at the time a Combination is proposed. The following definitions shall apply for the purposes of this Article Eighth: A. "Combination" means a merger or consolidation of the Corporation or any subsidiary of the Corporation with any other corporation, or the sale or lease of all or a substantial part of the assets of the Corporation or any subsidiary of the Corporation to any other person, or any other transaction which has achieved substantially the same effect. B. An "Interested Shareholder" is any person who owns ten percent or more of the outstanding Voting Shares of the Corporation. C. A "person" includes a natural person, corporation, partnership, association, joint stock company, trust, unincorporated association or other entity. When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, voting, or disposing of Voting Shares, they shall be deemed a single person for purposes of this Article Eighth. D. "Voting Shares" means the issued and outstanding shares of any class of stock of the Corporation which is entitled to vote generally in the election of directors. E. Ownership of Voting Shares includes beneficial ownership. A beneficial owner of Voting Shares includes any person who, directly or indirectly, through any contract, options, warrants, convertible securities or other contract rights to acquire Voting Shares, arrangement, understanding, relationship or otherwise, has or shares (i) voting power, which includes the power to vote, or to direct the voting of, the Voting Shares, or (ii) investment power, which includes the power to dispose of, or to direct the disposition of, the Voting Shares. F. A "subsidiary" of the Corporation is any company a majority or more of the voting securities of which is owned by the Corporation. G. A "Disinterested Director" is a director of the Corporation who (i) is not and never has been an officer or director of an Interested Shareholder or any affiliate or associate of such Interested Shareholder and is not and has not been for the past five years an employee of an Interested Shareholder or any affiliate or associate of such Interested Shareholder; (ii) does not own more than one percent or 10,000 shares, whichever is the lesser of any class of equity securities of an Interested Shareholder or any affiliate or associate of such Interested Shareholder; (iii) is not the settlor of any trust, and does not serve as the trustee, executor or in a similar capacity for any trust or estate, which owns more than one percent or 10,000 shares, whichever is the lesser, of any class of equity securities of any Interested Shareholder or any affiliate or associate of such Interested Shareholder; (iv) is not the relative of any person or of the spouse of such person who could not be a Disinterested Director because of any of the provisions of the clauses (i), (ii), or (iii) above who has the same home as such person; (v) is not the spouse, brother, sister, son, daughter, father or mother of any person who could not be a Disinterested Director because of any of the provisions of clauses (i), (ii), or (iii) above; and (vi) is not otherwise by reason of past, present or anticipated circumstances unable to act solely in the interest of the Corporation with respect to the Combination, provided that no officer or employee of the Corporation shall be disqualified from being a Disinterested Director solely by reason of being an officer or employee of the Corporation. H. An "affiliate" of a specified person is a person who directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person. I. An "associate" of a specified person is (i) any person of which such specified person is an officer or partner or is the owner of ten percent or more of any class of equity securities, (ii) any trust or other estate in which such specified person owns ten percent or more of the total beneficial interest or as to which such specified person serves as trustee or in a similar fiduciary capacity, (iii) any relative or spouse of such specified person, or any relative of such spouse, who has the same home as such specified person, (iv) any person who is a director or officer of such specified person or any corporation which controls or is controlled by such specified person, or (v) any other member or partner in a partnership, limited partnership, syndicate or other group, formal or informal, of which such specified person is a member or partner and which is acting together for the purpose of acquiring, holding or disposing of securities of the Corporation. Enforcement. The Board of Directors is specifically authorized to seek equitable relief, including an injunction, to enforce the provisions of this Article Eighth. Amendment. No amendment to this Certificate of Incorporation shall amend, alter, change or repeal any of the provisions of this Article Eighth unless such amendment, in addition to receiving any shareholder vote or consent required by the laws of the State of New Jersey in effect at the time, shall receive the affirmative vote of the holders of two-thirds of all Voting Shares. Ninth. A. Limitation of Liability To the full extent from time to time permitted by New Jersey law, no director or officer of the Company shall be personally liable to the Company or its shareholders for damages for breach of any duty owed to the Company or its shareholders. Neither the amendment or repeal of this Article, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article, shall eliminate or reduce the protection afforded by this Article to a director or officer of the Company with respect to any matter which occurred, or any cause of action, suit or claim which, but for this Article, would have accrued or arisen, prior to such amendment, repeal or adoption. B. Indemnification (1) The Company shall indemnify any person who is or was a director, officer, employee or agent of the Company or of any constituent corporation absorbed by the Company in a consolidation or merger, and any person who is or was a director, officer, trustee, employee or agent of any other corporation (domestic or foreign) or of any partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise (whether or not for profit), serving as such at the request of the Company or at the request of any such constituent corporation, or the legal representative of any such director, officer, trustee, employee or agent, against such person's reasonable costs, disbursements and counsel fees and amounts paid or incurred in satisfaction of settlements, judgments, fines and penalties in connection with any pending, threatened or completed civil, criminal, administrative or arbitrative action, suit or proceeding, whether brought in the right of the Company or otherwise, and any appeal therein and any inquiry or investigation which could lead to such action, suit or proceeding, to the fullest extent now or hereafter permitted by New Jersey law. (2) The Company shall pay expenses as they are incurred by any person covered by this Article in connection with any proceeding, as defined above, in advance of the final disposition of the proceeding to the fullest extent now or hereafter permitted by New Jersey law. (3) The foregoing indemnification and advancement of expenses shall not be deemed exclusive of any other rights to which any person indemnified may be entitled. (4) The rights provided to any person under this Article Ninth shall be enforceable against the Company by such person, who shall be presumed to have relied upon it in serving or continuing to serve as a director or in any of the other capacities set forth in this Article Ninth. No elimination of or amendment to this Article Ninth shall deprive any person of rights hereunder arising out of alleged or actual occurrences, acts or failures to act occurring prior to notice to such person of such elimination or amendment. Dated this 11th day of September, 1996 THE QUAKER OATS COMPANY By Vice President (Name and full title) EXHIBIT A By resolution of the Board of Directors there is created a series of preferred stock, no par value, of the Company (such preferred stock being herein referred to as "Preferred Stock," which term shall include any additional shares of preferred stock of the same class heretofore or hereafter authorized to be issued by the Company), consisting of 4,000,000 shares, which shall be identical in all respects to the preferred stock described in Paragraph Fourth B of the Corporation's Certificate of Incorporation, with such variations as may be contained in this Exhibit A, and hereby fixes the designation and the voting powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, as follows: Section 1. Designation and Amount. There shall be a series of Preferred Stock of the Corporation which shall be designated as "Series C Junior Participating Preferred Stock," no par value (hereinafter called "Series C Preferred Stock"), and the number of shares constituting such series shall be 4,000,000. Such number of shares may be increased or decreased by resolution of the Board of Directors and by the filing of a certificate pursuant to the provisions of the Business Corporation Act of the State of New Jersey stating that such increase or reduction has been so authorized; provided, however, that no decrease shall reduce the number of shares of Series C Preferred Stock to a number less than that of the shares then outstanding plus the number of shares of Series C Preferred Stock issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. Section 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series C Preferred Stock with respect to dividends, the holders of shares of Series C Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash to holders of record on the last business day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series C Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock (hereinafter defined) or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $5.00 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series C Preferred Stock. In the event the Corporation shall at any time following July 31, 1996 (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series C Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying each such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series C Preferred Stock as provided in paragraph (A) above at the time it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock). (C) No dividend or distribution (other than a dividend payable in shares of Common Stock) shall be paid or payable to the holders of shares of Common Stock unless, prior thereto, all accrued but unpaid dividends to the date of such dividend or distribution shall have been paid to the holders of shares of Series C Preferred Stock. (D) Dividends shall begin to accrue and be cumulative on outstanding shares of Series C Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series C Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series C Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series C Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series C Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series C Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each one one-hundredth of a share of Series C Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time following July 31, 1996 (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series C Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series C Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (C) (i) Whenever, at any time or times, dividends payable on any share or shares of Series C Preferred Stock shall be in arrears in an amount equal to at least six full quarterly dividends (whether or not declared and whether or not consecutive), the holders of record of the outstanding Preferred Stock shall have the exclusive right, voting separately as a single class, to elect two directors of the Corporation at a special meeting of shareholders of the Corporation or at the Corporation's next annual meeting of shareholders, and at each subsequent annual meeting of shareholders, as provided below. At elections for such directors, the holders of shares of Series C Preferred Stock shall be entitled to cast one vote for each one one-hundredth of a share of Series C Preferred Stock held. (ii) Upon the vesting of such right of the holders of the Preferred Stock, the maximum authorized number of members of the Board of Directors shall automatically be increased by two and the two vacancies so created shall be filled by vote of the holders of the outstanding Preferred Stock as hereinafter set forth. A special meeting of the shareholders of the Corporation then entitled to vote shall be called by the Chairman or the President or the Secretary of the Corporation, if requested in writing by the holders of record of not less than 10% of the Preferred Stock then outstanding. At such special meeting, or, if no such special meeting shall have been called, then at the next annual meeting of shareholders of the Corporation, the holders of the shares of the Preferred Stock shall elect, voting as above provided, two directors of the Corporation to fill the aforesaid vacancies created by the automatic increase in the number of members of the Board of Directors. At any and all such meetings for such election, the holders of a majority of the outstanding shares of the Preferred Stock shall be necessary to constitute a quorum for such election, whether present in person or by proxy, and such two directors shall be elected by the vote of at least a plurality of shares held by such shareholders present or represented at the meeting. Any director elected by holders of shares of the Preferred Stock pursuant to this Section may be removed at any annual or special meeting, by vote of a majority of the shareholders voting as a class who elected such director, with or without cause. In case any vacancy shall occur among the directors elected by the holders of the Preferred Stock pursuant to this Section, such vacancy may be filled by the remaining director so elected, or his successor then in office, and the director so elected to fill such vacancy shall serve until the next meeting of shareholders for the election of directors. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be further increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series C Preferred Stock. (iii) The right of the holders of the Preferred Stock, voting separately as a class, to elect two members of the Board of Directors of the Corporation as aforesaid shall continue until, and only until, such time as all arrears in dividends (whether or not declared) on the Preferred Stock shall have been paid or declared and set apart for payment, at which time such right shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above-mentioned. Upon any termination of the right of the holders of the shares of the Preferred Stock as a class to vote for directors as herein provided, the term of office of all directors then in office elected by the holders of Preferred Stock pursuant to this Section shall terminate immediately. Whenever the term of office of the directors elected by the holders of the Preferred Stock pursuant to this Section shall terminate and the special voting powers vested in the holders of the Preferred Stock pursuant to this Section shall have expired, the maximum number of members of the Board of Directors of the Corporation shall be such number as may be provided for in the By-laws of the Corporation, irrespective of any increase made pursuant to the provisions of this Section. (D) Except as set forth herein, holders of Series C Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series C Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series C Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series C Preferred Stock, except dividends paid ratably on the Series C Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series C Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series C Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series C Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series C Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any voluntary liquidation, dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock unless, prior thereto, the holders of shares of Series C Preferred Stock shall have received $1.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series C Liquidation Preference"). Following the payment of the full amount of the Series C Liquidation Preference, no additional distributions shall be made to the holders of shares of Series C Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series C Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph C below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series C Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series C Preferred Stock and Common Stock, respectively, holders of Series C Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio, on a per share basis, of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series C Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series C Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. (C) In the event the Corporation shall at any time following July 31, 1996 (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series C Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series C Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. Redemption. The shares of a Series C Preferred Stock shall not be redeemable by the Corporation. The preceding sentence shall not limit the ability of the Corporation to purchase or otherwise deal in such shares of stock to the extent permitted by law. Section 9. Ranking. The Series C Preferred Stock shall rank junior to all other series of the Corporation's preferred stock (whether with or without par value) as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series C Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series C Preferred Stock, voting separately as a class. Section 11. Fractional Shares. Series C Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series C Preferred Stock. EXHIBIT B By unanimous written consent of the Board of Directors of The Quaker Oats Company dated June 16, 1989, there is created a series of Preferred Stock designated "Series B ESOP Convertible Preferred Stock" which shall be identical in all respects to the preferred stock described in Paragraph Fourth 3 of the Corporation's Restated Certificate of Incorporation, with such variations as may be contained in the following description: Section 1. Designation and Amount; Special Purpose Restricted Transfer Issue. (A) The shares of such series shall be designated as "Series B ESOP Convertible Preferred Stock"("Series B Preferred Stock") and the number of shares constituting such series shall be 1,750,000. (B) Shares of Series B Preferred Stock shall be issued only to The Northern Trust Company, as trustee (the "Trustee") of The 1989 Quaker Employee Stock Ownership Trust under The Quaker Employee Stock Ownership Plan, as amended (the "Plan"). All references to the holder of shares of Series B Preferred Stock shall mean the Trustee or any successor or trustee under the Plan. In the event of any transfer of record ownership of shares of Series B Preferred Stock to any person other than any successor trustee under the Plan, the shares of Series B Preferred Stock so transferred, upon such transfer and without any further action by the Corporation or the holder thereof, shall be automatically converted into shares of common stock of the Corporation (the "Common Stock") pursuant to Section 5 hereof and no such transferee shall have any of the voting powers, preferences and relative, participating, optional or special rights ascribed to shares of Series B Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which such shares of Series B Preferred Stock shall be so converted. In the event of such a conversion, the transferee of the shares of Series B Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock into which such shares of Series B Preferred Stock have been automatically converted as of the date of such transfer. Certificates representing shares of Series B Preferred Stock shall bear a legend to reflect the foregoing provisions. Notwithstanding the foregoing provisions of this paragraph (B) of Section 1, shares of Series B Preferred Stock (i) may be converted into shares of Common Stock as provided by Section 5 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Corporation upon the terms and conditions provided by Sections 6, 7 and 8 hereof. Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of any stock of the Corporation ranking senior to the Series B Preferred Stock in respect of dividends and subject to the provisions for adjustment hereinafter set forth, the holders of shares of Series B Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available therefor, cumulative cash dividends ("Preferred Dividends") in an amount per share equal to $5.46 per share per annum, and no more, payable quarterly in arrears, one-fourth on each fifteenth day of January, April, July and October of each year (each a "Dividend Payment Date") commencing on July 15, 1989, to holders of record at the start of business on such Dividend Payment Date. In the event that any Dividend Payment Date shall fall on any day other than a "Business Day" (as hereinafter defined), the dividend payment due on such dividend Payment Date shall be paid on the Business Day immediately succeeding such Dividend Payment Date. Preferred Dividends shall begin to accrue on outstanding shares of Series B Preferred Stock from the date of issuance of such shares of Series B Preferred Stock. Preferred Dividends shall accrue on a daily basis, but Preferred Dividends accrued after issuance on the shares of Series B Preferred Stock for any period less than a full quarterly period between Dividend Payment Dates shall be computed on the basis of a 360- day year of 30-day months. Accrued but unpaid Preferred Dividends shall cumulate as of the Dividend Payment Date on which they first became payable, but no interest shall accrue on accumulated but unpaid Preferred Dividends. (B) So long as any shares of Series B Preferred Stock shall be outstanding, no dividend shall be declared or paid or set apart for payment on any other series of stock ranking on a parity with the Series B Preferred Stock as to dividends, unless there shall also be or have been declared and paid or set apart for payment on the Series B Preferred Stock dividends for all dividend payment periods of the Series B Preferred Stock ending on or before the dividend payment date of such parity stock, ratably in proportion to the respective amounts of dividends accumulated and unpaid through such dividend period on the Series B Preferred Stock and accumulated and unpaid on such parity stock through the dividend payment period on such parity stock next preceding such dividend payment date. In the event that full cumulative dividends on the Series B Preferred Stock have not been declared and paid or set apart for payment when due, the Corporation shall not declare or pay or set apart for payment any dividends or make any other distributions on, or make any payment on account of the purchase, redemption or other retirement of any other class of stock or series thereof of the Corporation ranking, as to dividends or as to distributions in the event of a liquidation, dissolution or winding-up of the Corporation, junior to the Series B Preferred Stock until full cumulative dividends on the Series B Preferred Stock shall have been paid or declared and set apart for payment; provided, however, that the foregoing shall not apply to (i) any dividend payable solely in any shares of any stock ranking, as to dividends and as to distributions in the event of a liquidation, dissolution or winding-up of the Corporation, junior to the Series B Preferred Stock or (ii) the acquisition of shares of any stock ranking as to dividends or as to distributions in the event of a liquidation, dissolution or winding-up of the Corporation, junior to the Series B Preferred Stock in exchange solely for shares of any other stock ranking, as to dividends and as to distributions in the event of a liquidation, dissolution or winding-up of the Corporation junior to the Series B Preferred Stock. Section 3. Voting Rights. The holders of shares of Series B Preferred Stock shall have the following voting rights: (A) The holders of Series B Preferred Stock shall be entitled to vote on all matters submitted to a vote of the stockholders of the Corporation, voting together with the holders of Common Stock as one class. The holder of each share of Series B Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which such share of Series B Preferred Stock could be converted on the record date for determining the stockholders entitled to vote, rounded to the nearest one-tenth of a vote; it being understood that whenever the "Conversion Price" (as defined in Section 5 hereof) is adjusted as provided in Section 9 hereof, the voting rights of the Series B Preferred Stock shall also be similarly adjusted. (B) Except as otherwise required by law or set forth herein, holders of Series B Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action; provided, however, that the vote of at least 66-2/3% of the outstanding shares of Series B Preferred Stock, voting separately as a series, shall be necessary to adopt any alteration, amendment or repeal of any provision of the Restated Certificate of Incorporation of the Corporation (including any such alteration, amendment or repeal effected by any merger or consolidation in which the Corporation is the surviving or resulting corporation), if such amendment, alteration or repeal would alter or change the powers, preferences, or special rights of the shares of Series B Preferred stock so as to affect them adversely. Section 4. Liquidation, Dissolution or Winding Up. (A) Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of Series B Preferred Stock shall be entitled to receive out of assets of the Corporation which remain after satisfaction in full of all valid claims of creditors of the Corporation and which are available for payment to stockholders, and subject to the rights of the holders of any stock of the Corporation ranking senior to or on a parity with the Series B Preferred Stock in respect of distribution upon liquidation, dissolution or winding up of the Corporation, before any amount shall be paid or distributed among the holders of Common Stock or any other shares ranking junior to the Series B Preferred Stock in respect of distributions upon liquidation, dissolution or winding up of the Corporation, liquidating distributions in the amount of $78.00 per share (the "Liquidation Preference"), plus an amount equal to all accrued and unpaid dividends thereon to the date fixed for distribution, and no more. If upon any liquidation, dissolution or winding up of the Corporation, the amounts payable with respect to the Series B Preferred Stock and any other Stock ranking as to any such distribution on a parity with the Series B Preferred Stock are not paid in full, the holders of the Series B Preferred Stock and such other stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled. After payment of the full amount to which they are entitled as provided by the foregoing provisions of this Section 4(A), the holders of shares of Series B Preferred Stock shall not be entitled to any further right or claim to any of the remaining assets of the Corporation. (B) Neither the merger or consolidation of the Corporation with or into any other corporation, nor the merger or consolidation of any other corporation with or into the Corporation, nor the sale, lease, exchange or other transfer of all or any portion of the assets of the Corporation, shall be deemed to be a dissolution, liquidation or winding up of the affairs of the Corporation for purposes of this Section 4, but the holders of Series B Preferred Stock shall nevertheless be entitled in the event of any such merger or consolidation to the rights provided by Section 8 hereof. (C) Written notice of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, stating the payment date or dates when, and the place or places where, the amounts distributable to holders of Series B Preferred Stock in such circumstances shall be payable, shall be given by first-class mail, postage prepaid, mailed not less than twenty (20) days prior to any payment date stated therein, to the holders of Series B Preferred Stock, at the address shown on the books of the Corporation or any transfer agent for the Series B Preferred Stock. Section 5. Conversion into Common Stock. (A) A holder of shares of Series B Preferred Stock shall be entitled, at any time prior to the close of business on the date fixed for redemption of such shares pursuant to Sections 6, 7 and 8 hereof, to cause any or all of such shares to be converted into shares of Common Stock, initially at a conversion rate equal to the ratio of: (i) $78.00; to (ii) the amount which initially shall be $78.00, and which shall be adjusted as hereinafter provided (and, as so adjusted, rounded to the nearest ten-thousandth, is hereinafter sometimes referred to as the "Conversion Price") (that is, a conversion rate initially equivalent to one share of Common Stock for each share of Series B Preferred Stock so converted, which is subject to adjustment as the Conversion Price is adjusted as hereinafter provided). (B) Any holder of shares of Series B Preferred Stock desiring to convert such shares into shares of Common Stock shall surrender the certificate or certificates representing the shares of Series B Preferred Stock being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Corporation or the offices of the transfer agent for the Series B Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the Series B Preferred Stock by the Corporation or the transfer agent for the Series B Preferred Stock, accompanied by written notice of conversion. Such notice of conversion shall specify (i) the number of shares of Series B Preferred Stock to be converted and the name or names in which such holder wishes the certificate or certificates for Common Stock and for any shares of Series B Preferred Stock not to be so converted to be issued and (ii) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion. (C) Upon surrender of a certificate representing a share or shares of Series B Preferred Stock for conversion, the Corporation shall issue and send by hand delivery (with receipt to be acknowledged) or by first class mail, postage prepaid, to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion. In the event that there shall have been surrendered a certificate or certificates representing shares of Series B Preferred Stock, only part of which are to be converted, the Corporation shall issue and deliver to such holder or such holder's designee a new certificate or certificates representing the number of shares of Series B Preferred Stock which shall not have been converted. (D) The issuance by the Corporation of shares of Common Stock upon a conversion of shares of Series B Preferred Stock into shares of Common Stock made at the option of the holder thereof shall be effective as of the earlier of (i) the delivery to such holder or such holder's designee of the certificates representing the shares of Common Stock issued upon conversion thereof or (ii) the commencement of business on the second business day after the surrender of the certificate or certificates for the shares of Series B Preferred Stock to be converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto) as provided by this Resolution. On and after the effective day of conversion, the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to holders of Common Stock in respect of any period prior to such effective date. The Corporation shall not be obligated to pay any dividends which shall have been declared and shall be payable to holders of shares of Series B Preferred Stock on a Dividend Payment Date if such Dividend Payment Date for such dividend is subsequent to the effective date of conversion of such shares. (E) The Corporation shall not be obligated to deliver to holders of Series B Preferred Stock any fractional share of a share of Common Stock issuable upon any conversion of such shares of Series B Preferred Stock, but in lieu thereof may make a cash payment in respect thereof in any manner permitted by law. (F) The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of Series B Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of Series B Preferred Stock then outstanding. Nothing contained herein shall preclude the Corporation from issuing shares of Common Stock held in its treasury upon the conversion of shares of Series B Preferred Stock into Common Stock pursuant to the terms hereof. The Corporation shall prepare and shall use its best efforts to obtain and keep in force such governmental or regulatory permits or other authorizations as may be required by law, and shall comply with all requirements as to registration or qualification of the Common Stock, in order to enable the Corporation lawfully to issue and deliver to each holder of record of Series B Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series B Preferred Stock then outstanding and convertible into shares of Common Stock. Section 6. Redemption At the Option of the Corporation. (A) The Series B Preferred Stock shall be redeemable, in whole or in part, at any time after the date of issuance, to the extent permitted by paragraphs 6(D) and 8(C), at the following percentages of the Liquidation Preference: During the Twelve Percentage of Month Period Liquidation Beginning June 15 Preference 1989 107.0% 1990 106.3% 1991 105.6% 1992 104.9% 1993 104.2% 1994 103.5% 1995 102.8% 1996 102.1% 1997 101.4% 1998 100.7% and thereafter at the Liquidation Preference, plus, in each case, an amount equal to all accrued and unpaid dividends thereon to the date fixed for redemption. Payment of the redemption price shall be made by the Corporation in cash or shares of Common Stocks or a combination thereof, as permitted by paragraph (E) of this Section 6. From and after the date fixed for redemption, dividends on shares of Series B Preferred Stock called for redemption will cease to accrue, such shares will no longer be deemed to be outstanding and all rights in respect of such shares of the Corporation shall cease, except the right to receive the redemption price. If less than all of the outstanding shares of Series B Preferred Stock are to be redeemed, the Corporation shall either redeem a portion of the shares of each holder determined pro rata based on the number of shares held by each holder or shall select the shares to be redeemed by lot, as may be determined by the Board of Directors of the Corporation. (B) Unless otherwise required by law, notice of any redemption effected pursuant to Sections 6 or 7 hereof will be sent to the holders of Series B Preferred Stock at the address shown on the books of the Corporation or any transfer agent for the Series B Preferred Stock by first class mail, postage prepaid, mailed not less than thirty (30) days nor more than sixty (60) days prior to the redemption date. Each such notice shall state: (i) the redemption date; (ii) the total number of shares of the Series B Preferred stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iii) the redemption price; (iv) the place or places where certificates for such shares are to be surrendered for conversion or payment of the redemption price; (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vi) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised, and the Conversion Price and number of shares of Common Stock issuable upon conversion of a share of Series B Preferred Stock at the time. Upon surrender of the certificate for any shares so called for redemption and not previously converted (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the date fixed for redemption and at the redemption price set forth in paragraph (A) of this Section 6. (C) In the event of a change in the federal tax law of the United States of America which has the effect of precluding the Corporation from claiming any of the tax deductions for dividends paid on the Series B Preferred Stock when such dividends are used as provided under Section 404(k)(2) of the Internal Revenue Code of 1986, as amended, as in effect on the date shares of Series B Preferred Stock are initially issued, or if the Plan is determined by the Internal Revenue Service not to be initially qualified within the meaning of Sections 401(a) and 4975(e)(7) of the Internal Revenue Code of 1986, as amended, the Corporation may, in its sole discretion, and notwithstanding anything to the contrary in paragraph (A) of this Section 6, within 60 days of such event, elect to redeem any or all of such shares for the greater of (A) the Fair Market Value of the shares of Series B Preferred Stock to be so redeemed or (B) the amount payable in respect of the shares upon liquidation of the Corporation pursuant to Section 4 hereof. (D) In the event that the Plan is terminated in accordance with its terms, and notwithstanding anything to the contrary in paragraph (A) of this Section 6, the Corporation shall, as soon thereafter as practicable, call for redemption all then outstanding shares of Series B Preferred Stock for an amount equal to the greater of the Fair Market Value or the redemption price, as calculated pursuant to Section 6(A). The Corporation shall give 30 Business Days' notice to all record holders of Preferred Stock prior to any such termination, provided, however, that the failure to give any such notice shall not affect the validity of such corporate action. (E) The Corporation, at its option, may make payment of the redemption price required upon redemption of shares of Series B Preferred Stock in cash or in shares of Common Stock or in a combination of such shares and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph (G) of Section 9 hereof). Section 7. Other Redemption Rights. Shares of Series B Preferred Stock shall be redeemed by the Corporation for cash or, if the Corporation so elects, in shares of Common Stock, or a combination of such shares and Cash, any such shares of Common Stock to be valued for such purpose as provided by paragraph (E) of Section 6, at the redemption price as set forth in the following sentence, at the option of the holder at any time and from time to time upon notice to the Corporation given not less than five (5) Business Days prior to the date fixed by the holder in such notice for such redemption, upon certification by such holder to the Corporation of the following events: (i) when and to the extent necessary for such holder to provide for distributions required to be made to participants under, or to satisfy an investment election provided to participants in accordance with, the Plan, or any successor plan; (ii) when and to the extent necessary for such holder to make any payments of principal, interest or premium due and payable (whether as scheduled or upon acceleration) under (a) the Loan Agreement between the Trustee and the lenders, (b) any refinancing of or substitution for either of the foregoing; or (c) any other indebtedness incurred by the holder for the benefit of the Plan; or ( iii ) in the event that the Plan is not initially determined by the Internal Revenue Service to be qualified within the meaning of Sections 401(a) and 4975(e) (7) of the Internal Revenue Code of 1986, as amended. The redemption price for shares of Series B Preferred Stock to be redeemed under this Section 7 shall be equal to: (I) in the case of clause (i) next above, the Fair Market Value of the shares of Series B Preferred Stock to be so redeemed; (II) in the case of clause (ii) next above, the greater of (A) the Fair Market Value of the shares of Series B Preferred Stock to be so redeemed or (B) the redemption price set forth in paragraph (A) of Section 6 hereof; or (III) in the case of clause (iii) next above, the greater of (A) the Fair Market Value of the shares of Series B Preferred Stock to be so redeemed or (B) the amount payable in respect of the shares upon liquidation of the Corporation pursuant to Section 4 hereof. Section 8. Consolidation, Merger, etc. (A) In the event that the Corporation shall consummate any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Corporation) that constitutes "employer securities" with respect to a holder of Series B Preferred Stock within the meaning of Section 409(1) of the Internal Revenue Code of 1986, as amended. and "qualifying employer securities" within the meaning of Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, the shares of Series B Preferred Stock of such holder shall, in connection with such consolidation, merger or similar business combination, be converted into and exchanged for preferred stock of such successor or resulting corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and relative, participating, optional or other special rights (including the redemption rights provided by Sections 6, 7 and 8 hereof), and the qualifications, limitations or restrictions thereon, that the Series B Preferred Stock had immediately prior to such transaction, except that after such transaction each share of the Series B Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 5 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to such transaction; provided, however, that if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the Series B Preferred Stock, then the shares of Series B Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election to receive any kind or amount of stock, securities, cash or other property (other than such qualifying employer securities and a cash payment, if applicable, in lieu of fractional shares) receivable upon such transaction (provided that, if the kind or amount of qualifying employer securities receivable upon such transaction is not the same for each nonelecting share, then the kind and amount so receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by the plurality of the non- electing shares). The rights of the Series B Preferred Stock as preferred stock of such successor or resulting corporation shall successively be subject to adjustments pursuant to Section 9 hereof after any such transaction as nearly equivalent as practicable to the adjustment provided for by such section prior to such transaction. The Corporation shall not consummate any such merger, consolidation or similar transaction unless the successor or resulting corporation shall have agreed to recognize and honor the rights of the holders of shares of Series B Preferred Stock as set forth in this paragraph (A). (B) In the event that the Corporation shall consummate any consolidation or merger or similar business combination, pursuant to which the outstanding shares of Common Stock are by operation of law exchanged for or changed, reclassified or converted into other stock or securities or cash or any other property, or any combination thereof, other than any such consideration which is constituted solely of qualifying employer securities (as referred to in paragraph (A) of this Section 8) and cash payments, if applicable, in lieu of fractional shares, outstanding shares of Series B Preferred Stock shall, without any action on the part of the Corporation or any holder thereof (but subject to paragraph (C) of this Section 8), be deemed to have been automatically converted immediately prior to the consummation of such merger, consolidation or similar transaction into the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted at such time so that each share of Series B Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to such transaction; provided, however, that if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction. which election cannot practicably be made by the holders of the Series B Preferred Stock, then the shares of Series B Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be converted into or exchanged for the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction (provided that, if the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non- electing shares). (C) In the event the Corporation shall enter into any agreement providing for any consolidation or merger or similar business combination described in paragraph (3) of this Section 8, then the Corporation shall as soon as practicable thereafter (and in any event at least 10 Business Days before the closing of such transaction) give notice of such agreement and the material terms thereof to each holder of Series B Preferred Stock and each such holder shall have the right to elect, by written notice to the Corporation, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Corporation or the successor of the Corporation, in redemption and retirement of such Series B Preferred Stock, a cash payment equal to the higher of the redemption price as determined in accordance with paragraph 6(A) or the Fair Market Value of shares of Series B Preferred Stock. No such notice of redemption shall be effective unless given to the Corporation prior to the close of business on the second Business Day prior to the closing of such transaction, unless the Corporation or the successor of the Corporation shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Corporation prior to the close of business on the second Business Day prior to the closing of such transaction. Section 9. Anti-dilution Adjustments. (A) In the event the Corporation shall, at any time or from time to time while any of the shares of the Series B Preferred Stock are outstanding, (i) pay a dividend or make a distribution in respect of the Common Stock in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, in each case whether by reclassification of shares, recapitalization of the Corporation (including a recapitalization effected by a merger or consolidation to which Section B hereof does not apply) or otherwise, the Conversion Price in effect immediately prior to such action shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately before such event, and the denominator of which is the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this paragraph 9(A) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of stockholders entitled to receive such dividend or distribution (on a retroactive basis) and in the case of a subdivision or combination shall become effective immediately as of the effective date thereof. (B) In the event that the Corporation shall, at any time or from time to time while any of the shares of Series B Preferred Stock are outstanding, issue to holders of shares of Common Stock as a dividend or distribution, including by way of a reclassification of shares or a recapitalization of the Corporation, any right or warrant to purchase shares of Common Stock (but not including as such a right or warrant (i) any security convertible into or exchangeable for shares of Common Stock and (ii) any rights issued pursuant to the Rights Agreement dated as of May 8, 1996 between the Corporation and Harris Trust & Savings Bank, as the same may be amended from time to time) at a purchase price per share less than the Fair Market Value (as hereinafter defined) of a share of Common Stock on the date of issuance of such right or warrant, then, subject to the provisions of paragraphs (E) and (F) of this Section 9, the Conversion Price shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased at the Fair Market Value of a share of Common Stock at the time of such issuance for the maximum aggregate consideration payable upon exercise in full of all such rights or warrants, and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock that could be acquired upon exercise in full of all such rights and warrants. (C) In the event the Corporation shall, at any time or from time to time while any of the shares of Series B Preferred Stock are outstanding, issue, sell or exchange shares of Common Stock (other than pursuant to (i) any right or warrant to purchase or acquire shares of Common Stock for which adjustment has been made pursuant to paragraph (B) of this Section 9 (including as such a right or warrant any security convertible into or exchangeable for shares of Common Stock) and (ii) any employee or director incentive or benefit plan or arrangement, including any employment, severance or consulting agreement, of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted) for a consideration having a Fair Market Value, on the date of such issuance, sale or exchange, less than the Fair Market Value of such shares on the date of issuance, sale or exchange, then, subject to the provisions of paragraphs (E) and (F) of this Section 9, the Conversion Price shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which shall be the sum of (i) the Fair Market Value of all the shares of Common Stock outstanding on the day immediately preceding the first public announcement of such issuance, sale or exchange plus (ii) the Fair Market Value of the consideration received by the Corporation in respect of such issuance, sale or exchange of shares of Common Stock, and the denominator of which shall be the product of (a) the Fair Market Value of a share of Common Stock on the day immediately preceding the first public announcement of such issuance, sale or exchange multiplied by (b) the sum of the number of shares of Common Stock outstanding on such day plus the number of shares of Common Stock so issued, sold or exchanged by the Corporation. In the event the Corporation shall, at any time or from time to time while any shares of Series B Preferred Stock are outstanding, issue, sell or exchange any right or warrant to purchase or acquire shares of Common Stock (including as such a right or warrant any security convertible into or exchangeable for shares of Common Stock), other than any such issuance to holders of shares of Common Stock as a dividend or distribution (including by way of a reclassification of shares or a recapitalization of the corporation) and other than pursuant to any employee or director incentive or benefit plan or arrangement (including any employment, severance or consulting agreement) of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted, for a consideration having a Fair Market Value, on the date of such issuance, sale or exchange, less than the Non- Dilutive Amount (as hereinafter defined), then, subject to the provisions of paragraphs (E) and (F) of this Section 9, the Conversion Price shall be adjusted by multiplying such Conversion Price by a fraction the numerator of which shall be the sum of (I) the Fair Market Value of all the shares of Common Stock outstanding on the day immediately preceding the first public announcement of such issuance, sale or exchange plus (II) the Fair Market Value of the consideration received by the Corporation in respect of such issuance, sale or exchange of such right or warrant plus (III) the Fair Market Value at the time of such issuance of the consideration which the Corporation would receive upon exercise in full of all such rights or warrants, and the denominator of which shall be the product of (i) the Fair Market Value of a share of Common Stock on the day immediately preceding the first public announcement of such issuance, sale or exchange multiplied by (ii) the sum of the number of shares of Common Stock outstanding on such day plus the maximum number of shares of Common Stock which could be acquired pursuant to such right or warrant at the time of the issuance, sale or exchange of such right or warrant (assuming shares of Common Stock could be acquired pursuant to such right or warrant at such time). (D) In the event the Corporation shall, at any time or from time to time while any of the shares of Series B Preferred Stock are outstanding, make an Extraordinary Distribution (as hereinafter defined) in respect of the Common Stock, whether by dividend, distribution, reclassification of shares or recapitalization of the Corporation (including a recapitalization or reclassification effected by a merger or consolidation to which Section 8 hereof does not apply) or effect a Pro Rata Repurchase (as hereinafter defined) of Common Stock, the Conversion Price in effect immediately prior to such Extraordinary Distribution or Pro Rata Repurchase shall, subject to paragraphs (E) and (F) of this Section 9, be adjusted by multiplying such Conversion Price by the fraction the numerator of which is (i) the Fair Market Value of all the shares of Common Stock outstanding on the day before the ex-dividend date with respect to an Extraordinary Distribution which is paid in cash and on the distribution date with respect to an Extraordinary Distribution which is paid other than in cash, or on the applicable expiration date (including all extensions thereof) of any tender offer which is a Pro Rata Repurchase, or on the date of purchase with respect to any Pro Rata Repurchase which is not a tender offer, as the case may be, minus (ii) the Fair Market Value of the Extraordinary Distribution or the aggregate purchase price of the Pro Rata Repurchase, as the case may be, and the denominator of which shall be the product of (a) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase minus, in the case of a Pro Rata Repurchase, the number of shares of Common Stock repurchased by the Corporation multiplied by (b) the Fair Market Value of a share of Common Stock on the day before the exdividend date with respect to an Extraordinary Distribution which is paid in cash and on the distribution date with respect to an Extraordinary Distribution which is paid other than in cash, or on the applicable expiration date (including all extensions thereof) of any tender offer which is a Pro Rata Repurchase or on the date of purchase with respect to any Pro Rata Repurchase which is not a tender offer, as the case may be. The Corporation shall send each holder of Series B Preferred Stock (i) notice of its intent to make any dividend or distribution and (ii) notice of any offer by the Corporation to make a Pro Rata Repurchase, in each case at the same time as, or as soon as practicable after, such offer is first communicated (including by announcement of a record date in accordance with the rules of any stock exchange on which the Common Stock is listed or admitted to trading) to holders of Common Stock. Such notice shall indicate the intended record date and the amount and nature of such dividend or distribution, or the number of shares subject to such offer for a Pro Rata Repurchase and the purchase price payable by the Corporation pursuant to such offer, as well as the Conversion Price and the number of shares of Common Stock into which a share of Series B Preferred Stock may be converted at such time. (E) Notwithstanding any other provisions of this Section 9, the Corporation shall not be required to make any adjustment to the Conversion Price unless such adjustment would require an increase or decrease of at least one percent (1%) in the Conversion Price. Any lesser adjustment shall be carried forward and shall be made no later than the time of, and together with, the next subsequent adjustment which, together with any adjustment or adjustments so carried forward, shall amount to an increase or decrease of at least one percent (1%) in the Conversion Price. (F) If the Corporation shall make any dividend or distribution on the Common Stock or issue any Common Stock, other capital stock or other security of the Corporation or any rights or warrants to purchase or acquire any such security, which transaction does not result in an adjustment to the Conversion Price pursuant to the foregoing provisions of this Section 9, the Board of Directors of the Corporation shall consider whether such action is of such a nature that an adjustment to the Conversion Price should equitably be made in respect of such transaction. If in such case the Board of Directors of the Corporation determines that an adjustment to the Conversion Price should be made, an adjustment shall be made effective as of such date, as determined by the Board of Directors of the Corporation (which adjustment shall in no event adversely affect the powers, preferences, or special rights of this Series B Preferred Stock as set forth herein). The determination of the Board of Directors of the Corporation as to whether an adjustment to the Conversion Price should be made pursuant to the foregoing provisions of this paragraph 9(F), and, if so, as to what adjustment should be made and when, shall be final and binding on the Corporation and all stockholders of the Corporation. The Corporation shall be entitled to make such additional adjustments in the Conversion Price, in addition to those required by the foregoing provisions of this Section 9, as shall be necessary in order that any dividend or distribution in shares of capital stock of the Corporation, subdivision, reclassification or combination of shares of stock of the Corporation or any recapitalization of the Corporation shall not be taxable to the holders of the Common Stock. (G) For purposes of this Resolution, the following definitions shall apply: "Business Day" shall mean each day that is not a Saturday, Sunday or a day on which state or federally chartered banking institutions in Chicago, Illinois or New York, New York are not required to be open. "Current Market Price" of publicly traded shares of Common Stock or any other class of capital stock or other security of the Corporation or any other issuer for any day shall mean the last reported sales price, regular way, or, in the event that no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange Composite Tape or, if such security is not listed or admitted to trading on the New York Stock Exchange on the principal national securities exchange on which such security is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the NASDAQ National Market System or, if such security is not quoted on such National Market System, the average of the closing bid and asked prices on each such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on each such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in such security selected for such purpose by the Board of Directors of the Corporation or a committee thereof, in each case, on each trading day during the Adjustment Period. "Adjustment Period" shall mean the period of five (5) consecutive trading days preceding, and including, the date as of which the Fair Market Value of a security is to be determined. "Extraordinary Distribution" shall mean any dividend or other distribution to holders of Common Stock (effected while any of the shares of Series B Preferred Stock are outstanding) (i) of cash, where the aggregate amount of such cash dividend or distribution together with the amount of all cash dividends and distributions made during the preceding period of 12 months, when combined with the aggregate amount of all Pro Rata Repurchases (for this purpose, including only that portion of the aggregate purchase price of such Pro Rata Repurchase which is in excess of the Fair Market Value of the Common Stock repurchased as determined on the applicable expiration date (including all extensions thereof) of any tender offer or exchange offer which is a Pro Rata Repurchase, or the date of purchase with respect to any other Pro Rata Repurchase which is not a tender offer or exchange offer made during such period), exceeds 12 1/2% of the aggregate Fair Market Value of all shares of Common Stock outstanding on the day before the ex-dividend date with respect to such Extraordinary Distribution which is paid in cash and on the distribution date with respect to an Extraordinary Distribution which is paid other than in cash, and/or (ii) of any shares of capital stock of the Corporation (other than shares of Common Stock), other securities of the Corporation (other than the securities of the type referred to in paragraph (B) or (C) of this Section 9), evidences of indebtedness of the Corporation or any other person or any other property (including shares of any subsidiary of the Corporation) or any combination thereof. The Fair Market Value of an Extraordinary Distribution for purposes of paragraph (D) of this Section 9 shall be equal to the sum of the Fair Market Value of such Extraordinary Distribution plus the amount of any cash dividends which are not Extraordinary Distributions made during such 12-month period and not previously included in the calculation of an adjustment pursuant to paragraph (D) of this Section 9. "Fair Market Value" shall mean the amount of cash received or, as to shares of Common Stock or any other class of capital stock or securities of the Corporation or any other issuer which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period. The "Fair Market Value" of any security which is not publicly traded or of any other property shall mean the fair value thereof as determined by an independent commercial or investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board of Directors of the Corporation or a committee thereof, or, if no such commercial or investment banking or appraisal firm is in the good faith judgment of the Board of Directors or such committee available to make such determination, as determined in good faith by the Board of Directors of the Corporation or such committee. "Non-Dilutive Amount" in respect of an issuance, sale or exchange by the Corporation of any right or warrant to purchase or acquire shares of Common Stock (including any security convertible into or exchangeable for shares of Common Stock) shall mean the remainder of (i) the product of the Fair Market Value of a share of Common Stock on the day preceding the first public announcement of such issuance, sale or exchange multiplied by the maximum number of shares of Common Stock which could be acquired on such date upon the exercise in full of such rights and warrants (including upon the conversion or exchange of all such convertible or exchangeable securities), whether or not exercisable (or convertible or exchangeable) at such date, minus (ii) the aggregate amount payable pursuant to such right or warrant to purchase or acquire such maximum number of shares of Common Stock; provided, however, that in no event shall the Non-Dilutive Amount be less than zero. For purposes of the foregoing sentence, in the case of a security convertible into or exchangeable for shares of Common Stock, the amount payable pursuant to a right or warrant to purchase or acquire shares of Common Stock shall be the Fair Market Value of such security on the date of the issuance, sale or exchange of such security by the Corporation. "Pro Rata Repurchase" shall mean any purchase of shares of Common Stock by the Corporation or any subsidiary thereof, whether for cash, shares of capital stock of the Corporation, other securities of the Corporation, evidences of indebtedness of the Corporation or any other person or any other property (including shares of a subsidiary of the Corporation), or any combination thereof, effected while any of the shares of Series B Preferred Stock are outstanding, pursuant to any tender offer or exchange offer subject to Section 13(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision of law, or pursuant to any other offer available to substantially all holders of Common Stock; provided, however, that no purchase of shares by the Corporation, or any subsidiary thereof made in open market transactions shall be deemed a Pro Rata Repurchase. For purposes of this paragraph 9(G), shares shall be deemed to have been purchased by the Corporation or any subsidiary thereof "in open market transactions" if they have been purchased substantially in accordance with the requirements of Rule lOb-18 as such rule is in effect under the Exchange Act on the date shares of Series B Preferred Stock are initially issued by the Corporation, or on such other terms and conditions as the Board of Directors of the Corporation or a committee thereof shall have determined are reasonably designed to prevent such purchases from having a material effect on the trading market for the Common Stock. (H) Whenever an adjustment to the Conversion Price and the related voting rights of the Series B Preferred Stock is required, the Corporation shall forthwith place on file with the transfer agent(s) for the Common Stock and for the Series B Preferred Stock, if any, and with the Secretary of the Corporation, a statement signed by two officers of the Corporation stating the adjusted Conversion Price determined as provided herein, and the resulting conversion ratio, and the voting rights (as appropriately adjusted), of the Series B Preferred Stock. Such statement shall set forth in reasonable detail such facts as shall be necessary to show the reason for and the manner of computing such adjustment, including any determination of Fair Market Value involved in such computation. Promptly after each adjustment to the Conversion Price and the related voting rights of the Series B Preferred Stock, the Corporation shall mail a notice thereof and of the then prevailing conversion rate to each holder of shares of the Series B Preferred Stock. Section 10. Ranking; Retirement of Shares. (A) The Series B Preferred Stock shall rank senior to the Series A Junior Participating Preferred Stock and the Common Stock as to the payment of dividends and the distribution of assets on liquidation, dissolution and winding up of the Corporation, and, unless otherwise provided in the Restated Certificate of Incorporation of the Corporation, as the same may be amended, the Series B Preferred Stock shall rank pari passu with all future series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up. (B) Any shares of Series B Preferred Stock acquired by the Corporation by reason of the conversion or redemption of such shares, or otherwise so acquired, shall be restored to the status of authorized but unissued shares of Preferred Stock, with no par value per share, of the Corporation, undesignated as to series, and may thereafter be reissued as part of a new or existing series of such Preferred Stock as permitted by law. Section 11. Miscellaneous. (A) All notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon the earlier of receipt thereof or three (3) Business Days after the mailing thereof if sent by registered mail (unless first-class mail shall be specifically permitted for such notice elsewhere herein) with postage prepaid, addressed: (i) if to the Corporation, to its office at P.O. Box 049001, Chicago, Illinois 60604-9001 (Attention: Secretary), or to the transfer agent for the Series B Preferred Stock, or other agent of the Corporation designated as permitted herein or (ii) if to any holder of the Series B Preferred Stock or Common Stock, as the case may be, to such holder at the address of such holder as listed in the stock record books of the Corporation (which may include the records of any transfer agent for the Series B Preferred Stock or Common Stock, as the case may be) or (iii) to such other address as the Corporation or any such holder, as the case may be, shall have designated by notice similarly given. (B) The Corporation shall give 15 Business Days' notice to all record holders of Series B ESOP Convertible Preferred Stock prior to the record date to be established with respect to any Extraordinary Event, setting forth the material provisions relating to such Extraordinary Event, provided, however, that the failure to give any such notice shall not affect the validity of any such corporate action. "Extraordinary Event" as used herein means (i) any non-cash dividend payable with respect to the Common Stock, (ii); any cash dividend in an amount exceeding 10% of the Conversion Price on the date the dividend is declared, (iii) any recapitalization, reclassification, consolidation, merger or similar event as a result of which shares of Common Stock are converted into or exchanged for any other securities or property, (iv) any sale of all or substantially all of the assets of the Corporation, or (v) the adoption of any repurchase program under which the Corporation may purchase more than 15% of the Corporation's then outstanding Common Stock. (C) The term "Common Stock" as used in this Resolution means the Corporation's Common Stock, par value $5.00 per share (as the same exists at the date of amendment of the Restated Certificate of Incorporation of the Corporation in respect of the Series B Preferred Stock), or any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that, at any time as a result of an adjustment made pursuant to Section 9 hereof, the holder of any share of the Series B Preferred Stock upon thereafter surrendering such shares for conversion, shall become entitled to receive any shares or other securities of the Corporation other than shares of Common Stock, the Conversion Prize in respect of such other shares or securities so receivable upon conversion of shares of Series B Preferred Stock shall thereafter be adjusted, and shall be subject to further adjustment from time to time, in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in Section 9 hereof, and the provisions of Sections 1 through 8, 10 and 11 hereof with respect to the Common Stock shall apply on like or similar terms to any such other shares or securities. (D) The Corporation shall pay any and all stock transfer and documentary stamp taxes that may be payable in respect of any issuance or delivery of shares of Series B Preferred Stock or shares of Common Stock or other securities issued on account of Series B Preferred Stock pursuant hereto or certificates representing such shares or securities. The Corporation shall not, however, be required to pay any such tax which may be payable in respect of any transfer involved in the issuance or delivery of shares of Series B Preferred Stock or Common Stock or other securities in a name other than that in which the shares of Series B Preferred Stock with respect to which such shares or other securities are issued or delivered were registered, or in respect of any payment to any person with respect to any such shares or securities other than a payment to the registered holder thereof, and shall not be required to make any such issuance, delivery or payment unless and until the person otherwise entitled to such issuance, delivery or payment has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid or is not payable. (E) In the event that a holder of shares of Series B Preferred Stock shall not by written notice designate the name in which shares of Common Stock to be issued upon conversion of such shares should be registered or to whom payment upon redemption of shares of Series B Preferred Stock should be made or the address to which the certificate or certificates representing such shares, or such payment, should be sent, the Corporation shall be entitled to register such shares, and make such payment, in the name of the holder of such Series B Preferred Stock as shown on the records of the Corporation and to send the certificate or certificates representing such shares, or such payment, to the address of such holder shown on the records of the Corporation. (F) Unless otherwise provided in the Restated Certificate of Incorporation, as the same may be amended, of the Corporation, all payments in the form of dividends, distributions on voluntary or involuntary dissolution, liquidation or winding up or otherwise made upon the shares of Series B Preferred Stock and any other stock ranking on a parity with the Series B Preferred Stock with respect to such dividend or distribution shall be pro rata, so that amounts paid per share on the Series B Preferred Stock and such other stock shall in all cases bear to each other the same ratio that the required dividends, distributions or payments, as the case may be, then payable per share on the shares of the Series B Preferred Stock and such other stock bear to each other. (G) The Corporation may appoint, and from time to time discharge and change, a transfer agent for the Series B Preferred Stock. Upon any such appointment or discharge of a transfer agent, the Corporation shall send notice thereof by first-class mail, postage prepaid, to each holder of record of Series B Preferred Stock. EX-3.2 3 Exhibit 3(b) B Y L A W S OF THE QUAKER OATS COMPANY AS AMENDED - NOVEMBER 13, 1996 EFFECTIVE - NOVEMBER 13, 1996 B Y L A W S OF THE QUAKER OATS COMPANY CORPORATE OFFICES AND SEAL Bylaw 1 - The principal and registered office of this Corporation shall be at 820 Bear Tavern Road, West Trenton, Mercer County, New Jersey. Bylaw 2 - The Corporation shall also have and maintain a general office and place of business at the City of Chicago in the State of Illinois, where it may keep all books, records, documents, and papers; it may also establish offices in such other states and foreign countries as the board shall from time to time determine. Bylaw 3 - The Corporate Seal shall have inscribed thereon the name of the Corporation, the state of its organization, and the words "Corporate Seal." CAPITAL STOCK AND TRANSFERS THEREOF Bylaw 4 - Certificates of stock in the Corporation shall be in the form adopted by the board, and be consecutively numbered; they shall be signed by the Chairman of the Board of Directors, the President or a Vice President and either the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, whose signatures may be facsimiles. The names of the owners of such shares, the dates of issue, and the certificate numbers thereof shall be entered upon the Corporation's books. The board shall appoint one or more transfer agents, and also one or more registrars of transfers, outside of the State of New Jersey, and shall require all valid certificates of stock in the Corporation to bear the countersignatures of one such agent, which may be a facsimile, and one such registrar. The same bank or trust company may act as both transfer agent and registrar. Bylaw 5 - Transfers of shares of stock in the Corporation upon the books of the Corporation shall be made only by the holders thereof in person or by attorney thereunto duly authorized in writing. Outstanding certificates for a like number of shares shall be surrendered and cancelled at the time of such transfers, except as provided in Bylaw 8. Bylaw 6 - For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or for the purpose of determining shareholders entitled to receive payment of any dividend or allotment of any right, or for the purpose of any other action, the board may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. Bylaw 7 - The Corporation shall be entitled to treat the record holder of any share or shares of stock, as shown by its books, as the sole legal and equitable owner and holder thereof, and shall not be bound to recognize any interest or claim on the part of others, whether it shall have notice thereof or not, save as expressly provided otherwise by the laws of New Jersey. Bylaw 8 - The board may issue or cause to be issued new certificates of stock to replace certificates of stock alleged to have been lost or destroyed, upon such reasonable terms and conditions as may be prescribed by the board to protect the interests of the Corporation. SHAREHOLDERS Bylaw 9 - Meetings of the shareholders of the Corporation shall be held at such place, within or without the State of New Jersey, as may be fixed by the board from time to time. Bylaw 10 - The annual meeting of the shareholders for election of directors and transaction of other business shall be held on the second Wednesday of May in each year at the hour of nine-thirty o'clock in the forenoon, or at such other time as may be fixed by the board. Directors shall be elected by ballot and a plurality vote. Written notice of the time, place, and purpose or purposes of every regular meeting of shareholders shall be given not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, to each shareholder of record entitled to vote at the meeting. Bylaw 11 - Special meetings of the shareholders for purposes allowed by law may be held at any time when called by the Chairman of the Board or President, or upon resolution or written request of a majority of the board or of a majority of the executive committee. Written notice of the time, place, and purposes of every special meeting of shareholders shall be given not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, to each shareholder of record entitled to vote at the meeting. Only those matters set forth in the notice of the special meeting may be considered or acted upon at such special meeting, unless otherwise provided by law. Bylaw 12 - If a shareholder desires to submit a proposal for consideration at an annual shareholders' meeting, written notice of such shareholder's intent to make such a proposal must be given and received by the Secretary of the Corporation at the principal executive offices of the Corporation either by personal delivery or by United States mail not later than 90 days prior to the anniversary date of the immediately preceding annual meeting. Each notice shall describe the proposal in sufficient detail for the proposal to be summarized on the agenda for the meeting and shall set forth (i) the name and address, as it appears on the books of the Corporation, of the shareholder who intends to make the proposal; (ii) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to present such proposal; and (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder. In addition, the notice shall set forth the reasons for conducting such proposed business at the meeting and any material interest of the shareholder in such business. The presiding officer of the annual meeting shall, if the facts warrant, refuse to acknowledge a proposal not made in compliance with the foregoing procedure, and any such proposal not properly brought before the meeting shall not be transacted. Nothing contained in this Section shall be deemed to decrease any time period set forth in the Securities Exchange Act of 1934, as amended, or any rule or regulation of the Securities and Exchange Commission thereunder. Bylaw 13 - Unless otherwise provided in the certificate of incorporation or the laws of New Jersey, the holders of shares entitled to cast a majority of the votes at a meeting shall constitute quorum at such meeting. The shareholders present in person or by proxy at a duly organized meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Less than a quorum may adjourn the meeting. Whenever the holders of any class or series of shares are entitled to vote separately on a specified item of business, the provisions of this section shall apply in determining the presence of a quorum of such class or series for the transaction of such specified item of business. Bylaw 14 - The Chairman of the Board shall act as chairman of each shareholders' meeting. If he is absent, the President or a Vice President shall so act. If all of the foregoing are absent, then the meeting itself by a majority vote in interest may select some shareholder present to preside, which vote shall be recorded in the minutes. The Secretary of the Corporation, if present, shall act as secretary of each shareholders' meeting. If the Secretary of the Corporation is absent, an Assistant Secretary shall so act. If all of the foregoing are absent, then the chairman of the meeting shall designate a person to act as secretary. A declaration by the chairman that any resolution has been duly carried, and an entry to that effect in the minutes of the meeting, shall, in all cases where a poll in not demanded, be competent and sufficient evidence of the fact and legality of adoption of such resolution. Bylaw 15 - (a) At all elections of directors by the shareholders, two independent inspectors of election shall be chosen by the presiding officer of the meeting; they need not be shareholders, but in no case shall they be either employees of the Corporation or candidates for the office of director. Each inspector shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability, and shall perform such duties as are provided by the laws of New Jersey. (b) At all elections of directors by the shareholders, all proxies, ballots, and voting tabulations that identify how shareholders voted will be kept confidential and not be disclosed to any of the directors, officers or employees of the Corporation except when disclosure is mandated by law, expressly requested by a shareholder, or during a contested election for the board. (c) The same voting procedure shall be followed with regard to other matters submitted to shareholders for their vote. Bylaw 16 - The officer or agent having charge of the stock transfer books for shares of the Corporation shall make and certify a complete list of the shareholders entitled to vote at a shareholders' meeting or any adjournment thereof. Such list shall (a) be arranged alphabetically within each class and series, with the address of, and the number of shares held by, each shareholder; (b) be produced at the time and place of the meeting; (c) be subject to the inspection of any shareholder during the whole time of the meeting; and (d) be prima facie evidence as to who are the shareholders entitled to examine such list or to vote at any meeting. Bylaw 17 - Except as otherwise provided by law, if any shareholder desires to solicit written consents for action to be taken by shareholders of the Corporation without a meeting, prior written notice of any such solicitation must be given and received by the Secretary of the Corporation at the principal executive offices of the Corporation either by personal delivery or by United States mail not later than 45 days prior to the date such written consents, or soliciting material relating thereto, are first published, sent or given to any shareholder. Such notice shall describe the matter for which written consent is being sought and shall set forth (i) the name and address, as it appears on the books of the Corporation, of the shareholder who seeks the written consent; (ii) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote on the matter for which written consent is being sought and intends to vote on the matter for which written consent is being sought; and (iii) the class and number of shares of the Corporation which are beneficially owned by the shareholder. In addition, the notice shall set forth the reasons for conducting such proposed business by means of the written consent and any material interest of the shareholder in such business. No action taken by written consent shall be valid unless taken in accordance with the foregoing procedures. BOARD OF DIRECTORS Bylaw 18 - The property, affairs, and business of the Corporation shall be managed and controlled by a board of directors. The number of directors shall be determined in accordance with the provisions of the certificate of incorporation. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as possible, of one-third of the total number of directors constituting the entire board of directors. At each annual meeting of shareholders beginning in 1984, successors to directors whose terms expire at that annual meeting shall be of the same class as the directors they succeed, and shall be elected for three- year terms. Bylaw 19 - A director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, or removal from office. Any newly created directorship resulting from an increase in the number of directors and any other vacancy on the board of directors, however caused, may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director; provided that if the number of directors is increased, not more than two such newly created directorships may be filled by the directors in any period between annual meetings of shareholders. Any director so elected to fill a vacancy shall, without regard to the class in which such vacancy occurred, hold office until the next succeeding annual meeting of shareholders and until his or her successor shall have been elected and qualified. The term of a director elected by shareholders to fill a newly created directorship or other vacancy shall expire at the same time as the terms of the other directors of the class in which the vacancy occurred. Bylaw 20 - Regular meetings of the board shall be held six times each year at such time and place as the board may determine, subject to the right of the Chairman of the Board, the President, or the executive committee, by notice required for a special meeting of the board, to change the time or place of a regular meeting. Except as aforesaid, no notice of a regular meeting is required. Bylaw 21 - Special meetings of the board may be held at any time and place whenever called by the Chairman of the Board, the President, or any three of the directors. Notice to each director of the time and place of the meeting shall be mailed not less than three calendar days before the meeting, or telegraphed or telephoned or delivered to his office not less than 24 hours before the meeting. Bylaw 22 - A majority of the board shall constitute a quorum for the transaction of business, but any less number present may adjourn the meeting from time to time. Bylaw 23 - In addition to the powers specifically enumerated in these Bylaws, the board shall also have, and may exercise, all other and further powers, privileges, and authority expressly or impliedly conferred upon them by the Statues of New Jersey and the articles of incorporation of the Corporation. EXECUTIVE COMMITTEE Bylaw 24 - The board shall appoint from among its members an executive committee of not less than four and not more than 10 regular members. The board may also designate one or more of its members as alternates to serve as members of the executive committee in the absence of a quorum of that committee at any regular or special meeting. (a) The executive committee shall have the powers of the board in the management of the business, affairs, and property of the Corporation during the intervals between the meetings of the board, except that the executive committee shall not: (i) make, alter or repeal any Bylaw of the Corporation; (ii) elect or appoint any director, or remove any officer or director; (iii) submit to shareholders any action that requires shareholders' approval; or (iv) amend or repeal any resolution theretofore adopted by the board which by its terms is amendable or repealable only by the board. (b) Regular meetings of the executive committee may be held without notice at such time and place as shall from time to time be determined by the executive committee or by the board. (c) Special meetings of the executive committee may be called by the President, or the Chairman of the Board, or by any two regular members of the committee by causing 24 hours' notice of the time and place thereof to be given to each regular member by mail or by telegram or by telephone, or by delivery to his office, but any regular member may waive such notice. The purpose of the meeting need not be stated in the notice or waiver of notice. (d) Whenever it appears that a quorum of regular members will not present at a meeting, the Secretary may request the attendance of an alternate member, who, if he attends, and if his attendance is necessary to obtain quorum, shall be deemed a regular member of the executive committee for the purposes of such meeting. (e) Any regular or special meeting of the executive committee may be adjourned and no notice need be given of the adjourned meeting whether or not a quorum shall be present. (f) A majority of members of the executive committee shall constitute a quorum. Actions taken at a meeting of the executive committee shall be reported to the board at its next meeting following such executive committee meeting; except that, when the meeting of the board is held within two days after the executive committee meeting, such report shall, if not made at the first meeting, be made to the board at its second meeting following such executive committee meeting. OTHER COMMITTEES Bylaw 25 - The board by resolution adopted by a majority of the entire board may appoint from among its members one or more other committees, each of which shall have one or more members. MEETINGS AND ACTION OF DIRECTORS WITHOUT A MEETING Bylaw 26 - Any or all directors may participate in a meeting of the board or executive committee by means of conference telephone or any means of communication by which all persons participating in the meeting are able to hear each other. Any action required or permitted to be taken pursuant to authorization voted at a meeting of the board or executive committee may be taken without a meeting if, prior or subsequent to such action, all members of the board or of the executive committee, as the case may be, consent thereto in writing and such written consents are filed with the minutes of the proceedings of the board or executive committee. OFFICERS Bylaw 27 - The officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice Presidents, a Treasurer, and a Secretary, and such additional officers and such assistant officers as may be deemed necessary from time to time by the board or the executive committee. One or more Vice Presidents may be designated as Executive Vice Presidents or as Senior Vice Presidents or as other types of Vice Presidents. The Chairman of the Board, President, Treasurer, Secretary and any Vice President designated as a Senior or Executive Vice President shall be elected by the board. Any other officers shall be elected by the board or the executive committee. Each officer shall hold office for a term expiring at the first board meeting following the annual meeting of the shareholders and until his successor is elected, but subject to removal by the board at any time. Salaries of officers elected by the board or who are directors shall be fixed by the board. Salaries of other officers and assistant officers shall be fixed by the board or the executive committee. Bylaw 28 - The Chairman of the Board shall be the Chief Executive Officer of the Corporation and shall have general supervision of its business and affairs, subject, however, to control of the board and the executive committee. He shall be a regular member of the executive committee and shall preside at all meetings of the shareholders, the board, and the executive committee. Bylaw 29 - The President shall serve as a regular member of the executive committee and shall have such other powers and duties as shall be assigned to him by the board or the executive committee or the Chairman of the Board. In the absence of the Chairman of the Board, he shall preside at meetings of the board and of the executive committee. Bylaw 30 - The Vice Presidents shall have such powers and duties as shall be assigned to them by the board, the executive committee, or the Chairman of the Board. The President or the Senior or Executive Vice President with the longest service with the Corporation who is a member of the executive committee and who is present and able to act shall have the powers and duties of the Chairman of the Board during his absence or inability to act. Bylaw 31 - The Treasurer shall have custody of the corporate funds and securities. He shall keep full and accurate accounts of all receipts and disbursements and generally shall perform all the duties usually incident to the office of Treasurer and shall have such other powers and duties as shall be assigned to him by the board, the executive committee or the Chairman of the Board. Each Assistant Treasurer shall have power to act in the place and stead of the Treasurer in case of his absence or inability to act, and shall have such other powers and duties as shall be assigned to him by the board, the executive committee or the Chairman of the Board. Bylaw 32 - The Secretary shall have custody of the corporate seal and shall be present at and make a true record of the votes and proceedings of all meetings of the shareholders, the board, and the executive committee. He shall supervise the giving and mailing of all notices of shareholders' and directors' meetings; shall have charge of the certificate books, transfer books, and capital stock ledgers; and generally shall perform all the duties and have charge of all other books and papers usually incident to the office of Secretary. He shall have such other powers and duties as shall be assigned to him by the board, the executive committee or the Chairman of the Board. Each Assistant Secretary shall have power to act in the place and stead of the Secretary in case of his absence or inability to act, and shall have such other powers and duties as shall be assigned to him by the board, the executive committee or the Chairman of the Board. Bylaw 33 - Unless otherwise ordered by the board or the executive committee, the Secretary, and in case of his absence or inability to act an Assistant Secretary, shall have the power, and it shall be his duty, to vote in the name and behalf of the Corporation all stock held by it in other companies; and the Chairman of the Board, President, or a Vice President, and the Secretary or an Assistant Secretary, shall have the power to execute an deliver proxies for the purpose of voting such stock; but the board or the executive committee may by resolution confer such power to vote and to execute proxies upon any other person or persons, and in all cases may instruct how such stock shall be voted at any meeting or election. Bylaw 34 - The board or the executive committee shall by resolution designate one or more banks as authorized principal depositories of the funds and securities of the Corporation and appoint and authorize officers of other persons to sign checks thereon and otherwise control and dispose of such funds and securities. The Treasurer or any two other elected officers of the Corporation may designate other banks as secondary depositories in connection with the business of the Corporation, and appoint and authorize officers or other persons to sign checks thereon or otherwise control and dispose of funds therein. All notes payable issued by the Corporation shall be signed in its behalf by such officer or officers of the Corporation authorized for that purpose by the board or the executive committee. FISCAL YEAR AND DIVIDENDS Bylaw 35 - The fiscal year of the Corporation shall begin on the first day of January in each year. Bylaw 36 - Dividends may be declared by the board, from the profits, at any regular or special meeting of the board, whenever in their judgment it shall be consistent with the best interests of the Corporation. The executive committee shall also have power, between sessions of the board, to declare the usual quarterly dividends on all classes of stock. AMENDMENTS Bylaw 37 - These Bylaws may be amended, altered or repealed, and new Bylaws may be enacted, only by the affirmative vote of the holders of not less than two-thirds of the outstanding shares of capital stock of the Corporation or by a vote of not less than two-thirds of the entire board of directors. INDEMNIFICATION Bylaw 38 - The Corporation shall indemnify any person who is or was a director, officer, employee or agent of the Corporation or of any constituent corporation absorbed by the Corporation in a consolidation or merger, and any person who is or was a director, officer, trustee, employee or agent of any other domestic or foreign corporation and any partnership, joint venture, sole proprietorship, trust or other enterprise, whether or not for profit, served by a person covered by this Bylaw, serving at the request of the Corporation, or of any such constituent corporation, or the legal representative of any such director, officer, trustee, employee or agent, against his reasonable costs, disbursements and counsel fees and amounts paid or incurred in satisfaction of settlements, judgments, fines and penalties in connection with any pending, threatened or completed civil, criminal administrative or arbitrative action, suit or proceeding, and any appeal therein and any inquiry, or investigation which could lead to such action, suit or proceeding, to the fullest extent now or hereafter permitted by New Jersey law. The Corporation shall pay expenses as they are incurred by any person covered by this Bylaw in connection with any proceeding covered by this Bylaw in advance of the final disposition of the proceeding to the fullest extent now or hereafter permitted by New Jersey law. Any determination required to be made pursuant to Section 14A3-5(5) of the New Jersey Business Corporation Act shall be made only by either (a) the Board or a committee thereof, acting by a majority vote of a quorum consisting of directors who were not parties to or otherwise involved in the proceeding, or (b) if such a quorum is not obtainable, or even if obtainable and such quorum of the Board or committee by a majority vote of the disinterested directors so directs, by independent legal counsel in a written opinion, such counsel to be designated by the Board and reasonably satisfactory to the person who is being indemnified. SENIOR LEADERSHIP TEAM (SLT) COMMITTEE Bylaw 39 - The Chairman of the Board shall appoint such officers of the Corporation who, together with the Chairman of the Board, shall constitute the Senior Leadership Team (SLT)Committee of the Corporation. Members of the SLT Committee shall serve at the discretion of the Chairman of the Board and shall advise regarding management of the Corporation and otherwise assist the Chairman as requested. The SLT Committee shall meet at such places and times as are designated by the Chairman of the Board. EX-10.1 4 Exhibit 10(b) DEFERRED COMPENSATION PLAN FOR DIRECTORS OF THE QUAKER OATS COMPANY (As Amended and Restated Effective as of November 1, 1996) 1. PURPOSE The purpose of this Plan is to offer non-employee members of the Board of Directors ("Directors") the opportunity to defer receipt of their directors' compensation, under terms advantageous to both the Director and The Quaker Oats Company ("Company"), until termination of the Director's service with the Company. 2. DEFINITIONS a. "Beneficiary" shall mean the person or persons designated from time to time in writing by a Participant to receive payments under the Plan after the death of such Participant, or, in the absence of any such designation or in the event that such designated person or persons shall predecease such Participant, the Participant's estate. b. "Cash Unit" shall mean a Deferred Amount and any interest carried over the deferral period and which shall be credited with interest as set forth in Section 4, during the period of deferral. c. "Common Stock Unit" shall mean a Deferred Amount which is converted into a unit for purposes of this Plan by dividing a dollar amount by the Fair Market Value of a share of the Company's common stock. d. "Compensation" shall mean payments which the Director receives from the Company for services as a member of its Board of Directors. Such payments may include directors' fees, retainers, meeting fees, fees for chairing committees or undertaking special projects directed by the Board of Directors, but shall exclude direct reimbursement of expenses. e. "Deferred Amount" shall mean an amount of Compensation deferred under this Plan and carried during the deferral period as either Common Stock Units or Cash Units. f. "Dividend Equivalent" shall mean an amount equal to the cash dividend paid on a share of the Company's common stock credited to a Common Stock Unit as if such a Unit were an actual share of common stock issued and outstanding. g. "Fair Market Value" shall mean the average of the closing prices of a share of the Company's common stock as reported by the New York Stock Exchange - Composite Transactions Reporting System for the ten business days commencing on the third and ending on the twelfth business day following the release of quarterly and annual summary statements of the Company's sales and earnings. h. "Termination of Service" shall mean the termination (by death, retirement or otherwise) of a Participant's service as a Director of the Company. 3. DEFERRAL OF COMPENSATION Each Director may elect to have all or a portion of his Compensation for any calendar year, commencing with the calendar year beginning January 1, 1997, deferred under this Plan. Such election shall be executed in writing by the Director, prior to the start of the calendar year during which such Compensation is earned, on a form prescribed by the Secretary of the Company. An election, once made, shall be irrevocable for the next calendar year, and it shall continue in effect for subsequent calendar years until changed prospectively by the Participant. The election may specify that the Participant desires to have all or a specified percentage of his Compensation for the year deferred under the Plan. Any election for deferral shall specify that the Participant desires to have such Deferred Amounts carried as Common Stock Units, or Cash Units, or a combination, during the period of deferral. 4. TREATMENT OF DEFERRED AMOUNTS The Company shall establish on its books the necessary account to accurately reflect the Company's liability to each Director who has deferred Compensation under this Plan. To this account shall be credited Deferred Amounts, Dividend Equivalents on Common Stock, and interest on Cash Units. Payments to the Participant following Termination of Service shall be debited to the account. Rights and interests under this Plan may not be assigned. a. Cash Units. A Participant who has elected to defer Compensation in Cash Units shall have the amount of such Compensation credited to his account on the same date that it would otherwise be payable to him. Deferred Amounts carried as Cash Units shall earn interest from the date of credit to the date of payment. At the end of each month, interest at the new issue 10-year "A" rated industrial bond rate quoted by Salomon Brothers in its Bond Market Roundup, or by such other recognized source as the Secretary of the Company may designate, for the week in which the preceding month ends shall be credited to the cash units accrued in each account. b. Common Stock Units. A Participant who has elected to defer Compensation in Common Stock Units shall have the amount of such Compensation credited to his account on the same date that it would otherwise be payable to him. Such Deferred Amount shall be converted into a whole number of Common Stock Units once a fiscal quarter (during the last month thereof) by dividing the Deferred Amount by the Fair Market Value of the Company's common stock, as defined in Section 2g. No fractional Common Stock Units shall be credited, but such amounts shall be carried forward to the next quarter without interest. If Common Stock Units exist in a Participant's account on a dividend declaration date for the Company's common stock, Dividend Equivalents shall be credited to the Participant's account on the following dividend payment date. Such amounts shall be carried forward without interest until the next quarterly date when they may be converted into Common Stock Units. In the event of any change in the outstanding shares of the Company's common stock by reason of any stock split or dividend, recapitalization, merger, consolidation, combination or exchange of stock or similar corporate change, the Secretary of the Company shall make such equitable adjustments, if any, by reason of any such change, deemed appropriate in the number of Common Stock Units credited to each Participant's account. c. Transfers Between Accounts. Participants may transfer Deferred Amounts within their account from one investment medium (e.g., Cash Units) into the other (e.g., Common Stock Units) upon application to the Secretary of the Company and approval by the Company's legal advisors. Such transfers normally shall be made during the ten business days commencing on the third and ending on the twelfth business day following the release of quarterly and annual summary statements of the Company's sales and earnings. 5. PAYMENT OF DEFERRED AMOUNTS At the time a Director first elects to defer Compensation under this Plan, the Participant shall irrevocably specify, on a form prescribed by the Secretary of the Company, the number of annual installments (not exceeding 15) that the Participant desires to receive payment of the Deferred Amount. Payments shall be made in the manner elected by the Participant, commencing as of the January 1 immediately following the Participant's Termination of Service, except as provided in Section 6 below. A Beneficiary shall also be designated on such form; and such Beneficiary may be changed by the Participant at anytime. If no effective election has been made at the time of Termination of Service, payment of the entire Deferred Amount shall be made to a Participant (or a Beneficiary, if the Participant shall have died) on the January 1 immediately following the Participant's Termination of Service. Regardless of when Termination of Service occurs, however, no payment of a Deferred Amount may commence until the Participant has attained age 55. All payments of Deferred Amounts under this Plan shall be made in cash out of the general assets of the Company. The payment value of each Common Stock Unit shall be the Fair Market Value just prior to the payment date. The amount of each annual installment payment to a Participant shall be determined by dividing the Cash Units and/or Common Stock Units in the Participant's account by the number of installments remaining to be paid, and, in the case of Common Stock Units, multiplying the result by the payment value. As of the date on which the last payment with respect to Common Stock Units is to be made to any director or his beneficiary under this Section 5, the Company shall pay the director or beneficiary (a) the net amount of any Dividend Equivalents carried over to the year in accordance with Section 4b; and (b) the amount which would be determined in accordance with Section 4b, for any dividend payment date following the actual last transfer date, if such transfer follows the record date relating to such dividend payment date. 6. ACCELERATION OF PAYMENTS The Compensation Committee of the Board of Directors (the "Compensation Committee" and the "Board") is empowered to accelerate the payment of Deferred Amounts to a Participant or to all Participants or to a Beneficiary, whether before or after the Participant's Termination of Service, for reasons of individual hardship, death, changes in the tax laws or accounting principles, or other reasons which negate or diminish the continued value of Deferred Amounts to Participants or to the Company; provided however that following a Change in Control, as defined in Section 7, such acceleration may be carried our for any reason deemed appropriate by the Compensation Committee. 7. CHANGE IN CONTROL A "Change in Control" shall be deemed to have occurred if: (a) any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that this paragraph (a) shall not apply to any Person who becomes such a beneficial owner of such Company securities pursuant to an agreement with the Company approved by the Board, entered into before such Person has become such a beneficial owner of Company securities representing 5% or more of the combined voting power of the Company's then outstanding voting securities; (b) during any period of 24 consecutive months (not including any period prior to November 13, 1996), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who has entered into an agreement with he Company to effect a transaction described in paragraph (a), (c)(2) or (d) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs (d)(1) or (d)(2); or (d) the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph (d), "surviving entity" shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "director of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger on consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2), (d)(1) or (d)(2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. 8. AMENDMENT OR TERMINATION The Board or the Executive Committee may amend or terminate this Plan at any time. No amendment or termination shall adversely affect any then existing Deferred Amounts or rights under this Plan. IN WITNESS WHEREOF, this Plan, as stated, is effective as of November 1, 1996, and is executed by a duly authorized officer of the Company. THE QUAKER OATS COMPANY March 5, 1997 By: /s/Douglas J. Ralston Its: Senior Vice President EX-10.2 5 Exhibit 10(c) DEFERRED COMPENSATION PLAN FOR EXECUTIVES OF THE QUAKER OATS COMPANY (As Amended and Restated Effective as of November 1, 1996) 1. PURPOSE The purpose of this Deferred Compensation Plan (the "Plan") is to offer certain senior-level employees (the "Executives") of The Quaker Oats Company (the "Company") the opportunity to defer receipt of their salary and bonus payments until termination of their service with the Company. 2. DEFINITIONS a. "Beneficiary" shall mean the entity or person designated from time to time in writing by a Participant to receive payments under the Plan after the death of such Participant, or in the absence of an effective designation or the event that such designated person shall predecease such Participant, the Participant's estate. b. "Bonus" shall mean the amount of money which the Executive shall be awarded periodically under the Management Incentive Bonus program of the Company. c. "Cash Unit" shall mean a Deferred Amount and any interest carried over for the deferral period, which shall be credited with interest, as set forth in Section 5, during the period of deferral. d. "Compensation" shall mean (i) the Salary and Bonus payments which the Executive is eligible to receive from the Company for services and (ii) any amount credited under Section 4 of this Plan. e. "Deferred Amount" shall mean an amount of Compensation deferred under this Plan and carried during the deferral period as Cash Units. f. "ESOP" shall mean The Quaker Employee Stock Ownership Plan. g. "Participant" shall mean an Executive who has elected to participate in this Plan. h. "Salary" shall mean the annual base salary earned from the Company by the Executive. i. "Termination of Service" shall mean the termination (by death, retirement or otherwise) of a Participant's service with the Company as an employee. 3. DEFERRAL OF COMPENSATION Each Executive may elect to have any portion of Salary earned for any year and any portion of Bonus awarded in any year deferred under this Plan; provided, however, that only Compensation in excess of the maximum amount of earnings taxable under the Old-Age, Survivors, and Disability Insurance program of the Federal Social Security Act, as it exits in each calendar year, may be deferred under this Plan. Such election shall (subject to the foregoing limitation) specify the percentage or amount of the Participant's Salary and/or Bonus to be deferred under the Plan and shall be executed by the Executive on a form prescribed by the Secretary of the Company as follows: a) for Salary, prior to the beginning of the month in which such salary is earned; and b) for Bonus, prior to September 1st of the year for which Bonus is being awarded. An election, once made, shall continue in effect until changed prospectively by the Participant; provided, however, that an election with respect to Salary may be changed no more than one time each month, effective as of the beginning of the next month and an election with respect to a Bonus is irrevocable after the September 1st referred to in the prior sentence. 4. ADDITIONAL CREDIT AMOUNTS The Company may elect, at its option, to credit to each Participant's account certain amounts, or the cash equivalent amounts of any in-kind contributions, that would have been contributed to the Participant's account under ESOP, but for a Participant's participation in this Plan. Such amounts, if credited, shall be credited as of the dates such amounts would have otherwise been contributed to the Participant's account under the ESOP. Amounts credited under this Plan pursuant to this section shall not be made available in cash to the Participant, except pursuant to this Plan. These amounts shall be in addition to the amounts described in Section 3 above and shall be considered "Compensation" for purpose of this Plan. 5. TREATMENT OF DEFERRED AMOUNTS The Company shall establish on its books the necessary account to accurately reflect the Company's liability to each Executive who has deferred Compensation under this Plan. To this account shall be credited Deferred Amounts and interest on Cash Units. Payments to the Participant following Termination of Service shall be debited to the account. Rights and interests under this Plan may not be assigned. A Participant who has elected to defer Compensation shall have the amount of such Compensation credited to the Participant's account as of the same date that it would otherwise be payable to him. Cash Units (including Deferred Amounts) shall earn interest from the date of credit to the date of payment. Interest on Cash Units shall be credited to each Participant's account as of the last calendar day of each month; the intent of this being that interest on Cash Units shall be compounded monthly. The interest rate credited on Cash Units shall be the rate for the new issue 10-year "A"-rated industrial bonds listed in the Salomon Brothers Bond Market Roundup, or by such other recognized source as the Treasurer of the Company may designate, for the week in which the preceding month ends. 6. PAYMENT OF DEFERRED AMOUNTS At the time an Executive first elects to defer Compensation under this Plan, the Participant shall irrevocably specify, on a form prescribed by the Secretary of the Company, the number of annual installments (not exceeding 15) that the Participant desires to receive payment of the Deferred Amount, and how soon after Termination of Service the Participant wishes to have payment begin. Payments shall be made in the manner elected by the Participant, except as provided in Section 7 below. A Beneficiary shall also be designated on such form; and such Beneficiary may be changed by the Participant at any time prior to Termination of Service. If no effective election has been made at the time of Termination of Service, payment of the entire deferred amount shall be made to a Participant (or a Beneficiary, if the Participant shall have died) six months after Termination of Service. All payments of Deferred Amounts under this Plan shall be made in cash out of the general assets of the Company, and shall constitute an unfunded and unsecured promise to pay by the Company. The amount of each annual installment payment to a Participant shall be determined by dividing the Cash Units in the Participant's account by the number of installments remaining to be paid. 7. ACCELERATION OF PAYMENTS The Compensation Committee of the Company's Board of Directors (the "Compensation Committee" and the "Board") is empowered to accelerate the payment of Deferred Amounts to a Participant or to all Participants or to a Beneficiary, whether before or after the Participant's Termination of Service, for reasons of individual hardship, death, changes in the tax laws or accounting principles, or other reasons which negate or diminish the continued value of Deferred Amounts to Participants or to the Company; provided, however that following a Change in Control, such acceleration may be carried out for any reason deemed appropriate by the Compensation Committee. 8. A "Change in Control" shall be deemed to have occurred if: (a) any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that this paragraph (a) shall not apply to any Person who becomes such a beneficial owner of such Company securities pursuant to an agreement with the Company approved by the Board, entered into before such Person has become such a beneficial owner of Company securities representing 5% or more of the combined voting power of the Company's then outstanding voting securities; (b) during any period of 24 consecutive months (not including any period prior to November 13, 1996), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2) or (d) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs (d)(1) or (d)(2); or (d) the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph (d), "surviving entity" shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "director of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger on consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2), (d)(1) or (d)(2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. 9. WITHHOLDING The Company may withhold taxes, and any other required amounts, including the Hospital Insurance portion of the Federal Social Security Act, from the payment of Deferred Amounts or other amounts paid to the Executive. 10. AMENDMENT OR TERMINATION The Company reserves the right, at any time or from time to time, by action of its Board or Executive Committee thereof, to amend or modify, in whole or in part, or terminate the Plan. No amendment or termination shall adversely affect any then existing Deferred Amounts or rights under this Plan. IN WITNESS WHEREOF, this Plan, as stated, is effective as of November 1, 1996, and is executed by a duly authorized officer of the Company. THE QUAKER OATS COMPANY March 5, 1997 By: /s/ Douglas J. Ralston Its: Senior Vice President EX-10.3 6 Exhibit 10(e) THE QUAKER OATS COMPANY STOCK COMPENSATION PLAN FOR OUTSIDE DIRECTORS (As Amended and Restated Effective as of November 1, 1996) 1. Purpose. The Quaker Oats Company (the "Company") has amended and restated this Stock Compensation Plan (the "Plan"), effective as of November 1, 1996, to promote the interests of the Company and its shareholders by causing a portion of the total compensation payable to its outside directors to be deferred and paid in the form of Company stock, thereby increasing the director's beneficial ownership of Company stock and their proprietary interest in the Company. 2. Common Stock Units. In addition to the cash compensation otherwise payable to its outside directors, the Company shall establish and maintain a Deferred Stock Account in the name of each outside director. Subject to the provisions of Section 10, as of the first day of each fiscal year or period, the Company shall credit 800 Common Stock Units to the Deferred Stock Account of each person who was an outside director of the Company on the last day of the immediately preceding fiscal year or period or who ceased to be a director during such preceding fiscal year or period by reason of his retirement, disability or death. In the event such immediately preceding fiscal period is less than twelve months, the number of Common Stock Units to be credited as stated above shall be pro rated based upon the number of months in such fiscal period. 3. Dividend Equivalents. As of each dividend payment date declared with respect to the Company's common stock, the Company shall credit the Deferred Stock Account of each director with an additional number of Common Stock Units equal to: a) the product of (I) the dividend per share of the Company's common stock which is payable as of the dividend payment date, multiplied by (II) the number of Common Stock Units credited to the director's Deferred Stock Account as of the applicable dividend record date; DIVIDED BY b) the closing price of a share of the Company's common stock on the dividend payment date (or if such stock was not traded on that date, on the next preceding date on which it was traded), as reported by the New York Stock Exchange - Composite Transactions Reporting System; provided, however, that in lieu of crediting fractional Common Stock Units, the value thereof shall be carried forward, without interest, and treated as an additional dividend on the next following dividend payment date. 4. Transfer of Shares of Common Stock. Each director, or in the event of his death his beneficiary, shall be entitled to receive one share of the Company's common stock for each Common Stock Unit credited to his Deferred Stock Account. Unless otherwise elected by the director or beneficiary in accordance with the following provisions of this Section 4, all such shares shall be transferred to the director or beneficiary as of the January 1 next following the date on which the director ceases to be a director for any reason. At any time prior to the first day of the first fiscal year that the Company is to credit Common Stock Units to the Director's Deferred Stock Account, the director shall irrevocably elect to have such shares of common stock transferred to him (or in the event of his death his beneficiary) in fifteen or fewer annual installments commencing as of the January 1 next following such cessation. The number of shares of common stock to be distributed with each installment shall be equal to the whole number obtained by dividing the number of Common Stock Units then credited to the director's Deferred Stock Account by the number of unpaid installments. Common Stock Units with respect to which no transfer of stock has yet occurred shall continue to be credited with dividend equivalents in accordance with Section 3. As of the date on which the last transfer of shares of common stock is made to any director or his beneficiary under this Section 4, the Company shall pay the director or beneficiary (a) the net amount of any dividend equivalents carried over to the year in accordance with Section 3; and (b) the amount which would be determined in accordance with Section 3, paragraph (a), for any dividend payment date following the actual last transfer date, if such transfer follows the record date relating to such dividend payment date. 5. Beneficiary. Each director may, from time to time, in writing filed with the Secretary of the Company, designate any legal or natural person or persons (who may be designated contingently or successively) to whom shares of the Company's common stock attributable to his Common Stock Units are to be transferred if the director dies prior to his receipt of all such shares. A beneficiary designation will be effective only if the signed form is filed with the Secretary of the Company while the director is alive and will cancel all beneficiary designation forms filed earlier. If a director fails to designate a beneficiary as provided above, or if all designated beneficiaries die before the director or before transfer of all shares of common stock attributable to the director's Common Stock Units, all remaining shares attributable to such Common Stock Units shall be transferred to the estate of the last to die of the director and his designated beneficiaries as soon as practicable after such death. 6. Acceleration. The Compensation Committee of the Company's Board of Directors (the "Compensation Committee" and the "Board") may accelerate the transfer of shares of common stock with respect to Common Stock Units credited to the Deferred Stock Account of any director or directors for reasons of individual hardship, death, changes in tax laws or accounting principles or any other reason which negates or diminishes the continued value of the Deferred Stock Account to the Company or its directors; provided however that following a Change in Control, as defined in Section 7 hereof, such acceleration may be carried out for any reason deemed appropriate by the Compensation Committee. 7. Change in Control. A "Change in Control" shall be deemed to have occurred if: (a) any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that this paragraph (a) shall not apply to any Person who becomes such a beneficial owner of such Company securities pursuant to an agreement with the Company approved by the Board, entered into before such Person has become such a beneficial owner of Company securities representing 5% or more of the combined voting power of the Company's then outstanding voting securities; (b) during any period of 24 consecutive months (not including any period prior to November 13, 1996), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2) or (d) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs (d)(1) or (d)(2); or (d) the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph (d), "surviving entity" shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "director of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger on consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2), (d)(1) or (d)(2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. 8. Nontransferability. The interests of any director of beneficiary under the Plan are not subject to the claims of his creditors and may not otherwise be voluntarily or involuntarily assigned, alienated or encumbered. 9. Shareholder Status. As of the date of transfer, a director or beneficiary shall have all rights of the shareholder with respect to shares of common stock transferred in accordance with Section 4. Prior to such date, the Company's obligation under this Plan is an unsecured promise to deliver shares of the Company's common stock. The Company shall not hold any such shares in trust or as a segregated fund. 10. Changes in Stock. In the event of any change in the outstanding shares of the Company's common stock by reason of any stock dividend, split up, recapitalization, merger, consolidation, exchange of shares or other similar corporate change, the number of Common Stock Units to be credited in accordance with Section 2 and the shares of common stock to be transferred in accordance with Section 4 shall be adjusted proportionately. 11. Successors. This Plan shall be binding upon any assignee or successor in interest to the Company whether by merger, consolidation or sale of all or substantially all of the Company's assets. 12. Amendment and Termination. The Board may, from time to time, amend or terminate the Plan; provided, however, that no such amendment or termination shall adversely affect the rights of any director or beneficiary without his consent with respect to Common Stock Units credited prior to such amendment or termination. IN WITNESS WHEREOF, this Plan, as stated, is effective as of November 1, 1996 and is executed by a duly authorized officer of the Company. THE QUAKER OATS COMPANY March 5, 1997 By: /s/Douglas J. Ralston Its: Senior Vice President EX-10.4 7 Exhibit 10(g) THE QUAKER SUPPLEMENTAL EXECUTIVE RETIREMENT PROGRAM (As Amended and Restated Effective as of November 1, 1996) The Quaker Supplemental Executive Retirement Program (the "Program") is amended and restated effective as of November 1, 1996, by The Quaker Oats Company. The Program is intended to be an unfunded plan maintained primarily to provide deferred compensation for a select group of highly compensated employees within the meaning of Sections 201(2), 301(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 and to comply with Department of Labor Reg. Section 2520.104-23 thereunder. The Program is intended to provide benefits to certain senior executives of The Quaker Oats Company to ensure that the overall effectiveness of its executive compensation program will attract, retain and motivate qualified senior executives. SECTION I DEFINITIONS When used herein, the following words shall have the meanings below unless the context clearly indicates otherwise: 1.1 "Administrator" means the Senior Vice President - Human Resources of the Company. 1.2 "Affiliated Company" means any trade or business entity, or a predecessor company of such entity, if any, which is a member of a controlled group of corporations of which the Company is also a member. 1.3 "Average Annual Earnings" means the amount equal to the sum of the Participant's Earnings for the five consecutive calendar years during which Earnings were highest occurring within the Participant's last ten Years of Service, divided by five. 1.4 "Basic Retirement Benefit" means the annual benefit to which a Participant is entitled in total from the Retirement Plan, The Quaker 415 Excess Benefit Plan, The Quaker Eligible Earnings Adjustment Plan, any qualified defined benefit pension plan maintained by the Company or an Affiliated Company, including but not limited to the Fisher-Price Pension Plan, and any nonqualified defined benefit pension plan maintained by the Company or an Affiliated Company, which purpose is to provide benefits not permitted under a qualified defined benefit pension plan pursuant to limits on benefits or earnings imposed by the Internal Revenue Code of 1986, as amended, including but not limited to, Section 404(1) thereof. In addition to the foregoing, the Administrator may specify that the pension benefit equivalent (based upon lump sum-annuity factors consistent with those under the Retirement Plan) of any defined contribution plan account balance to which a Participant is entitled shall be included as part of the Participant's Basic Retirement Benefit. The preceding sentence may not be applied following a Change in Control. The Basic Retirement Benefit shall be based upon payments to a Participant in the form of a single life annuity commencing on his Retirement Date under the Program, with applicable reductions for early commencement based upon such adjustment factors as are applied under the Retirement Plan. 1.5 "Beneficiary" means the beneficiary of a Participant (other than a Surviving Spouse) entitled to receive the Participant's death benefit pursuant to a form of benefit elected by the Participant under the Retirement Plan, if any. 1.6 "Board" shall mean the Board of Directors of the Company. 1.7 "Change in Control" shall mean any of the following events occurring when: (a) any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14 (d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that this paragraph (a) shall not apply to any Person who becomes such a beneficial owner of such Company securities pursuant to an agreement with the Company approved by the Board, entered into before such Person has become such a beneficial owner of Company securities representing 5% or more of the combined voting power of the Company's then outstanding voting securities; (b) during any period of 24 consecutive months (not including any period prior to November 13, 1996), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2) or (d) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs (d)(1) or (d)(2); or (d) the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph (d), "surviving entity" shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "directors of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger or consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2), (d)(1), or (d)(2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. 1.8 "Company" means The Quaker Oats Company and any successor thereto. 1.9 "Compensation Committee" shall mean the Compensation Committee of the Board. 1.10 "Earnings" means the Participant's earnings as that term is defined for purposes of determining the Participant's Basic Retirement Benefit. 1.11 "Effective Date" means the Participant's effective date of participation in the Program as specified by the Compensation Committee as described in Section II. 1.12 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.13 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 1.14 "Management Committee" shall mean the Management Committee of the Company as provided for and described in its Bylaws. 1.15 "Participant" means any employee of the Company or an Affiliated Company who meets the eligibility requirements of Section II, and is designated and approved by the Compensation Committee for participation in the Program as described in Section II. 1.16 "Program" means The Quaker Supplemental Executive Retirement Program. 1.17 "Retirement Date" means a Participant's Retirement Date as described in Section III. 1.18 "Retirement Plan" means The Quaker Retirement Plan as amended from time to time or any successor thereto. In the event that a Participant does not have any accrued retirement benefit under The Quaker Retirement Plan as of his Termination Date, the Administrator may designate another qualified defined benefit pension plan maintained by the Company or an Affiliated Company as the Retirement Plan for such Participant for purposes of the Program. 1.19 "Supplemental Program Benefit" means the annual benefit payable in accordance with the Program. 1.20 "Surviving Spouse" means the spouse of a Participant who is entitled to receive the Participant's death benefit under the Retirement Plan, if any. 1.21 "Termination Date" means the date the Participant terminates employment with the Company and its Affiliated Companies. 1.22 "Years of Service" means the Participant's years of Service as credited to him in the Retirement Plan (for purposes of vesting). For purposes of determining a Participant's or Surviving Spouse's eligibility for benefits as described in Sections 3.1, 3.3, and 3.4, the Compensation Committee may designate in writing at any time additional Years of Service to be credited to the Participant as of his Termination Date (to be made a part hereof in Schedule A). SECTION II ELIGIBILITY TO PARTICIPATE The Compensation Committee shall designate in writing any employee who is to be a Participant and such employee's Effective Date as a Participant (to be made a part hereof in Schedule A). Only employees of the Company or an Affiliated Company who are members of the Management Committee, or are officers of the Company or an Affiliated Company, are eligible to become Participants and may be designated by the Compensation Committee as a Participant. Once an employee becomes a Participant, he shall remain a Participant until his Termination Date and thereafter until all benefits to which he, his Surviving Spouse and Beneficiary are entitled under the Program have been paid. SECTION III ELIGIBILITY FOR AND AMOUNT OF BENEFITS 3.1 Eligibility. A Participant shall be eligible for and receive his Supplemental Program Benefit beginning on his Retirement Date if either: (a) as of his Termination Date he has attained age 50 or more and has completed 15 or more Years of Service; or (b) his Termination Date coincides with or follows a Change in Control, regardless of his age or Years of Service as of his Termination Date. With respect to such a Participant whose Termination Date is on or before age 55, the Participant's Retirement Date shall be the first day of the month following the date on which the Participant reaches age 55. With respect to such a Participant whose Termination Date is after age 55, the Participant's Retirement Date shall be the first day of the month following the Participant's Termination Date. 3.2 Retirement Benefit. The Supplemental Program Benefit of a Participant payable at his Retirement Date shall be an annual amount, based upon a single life annuity over the life of the Participant, equal to (a) less (b) as follows: (a) The amount equal to the Participant's Average Annual Earnings multiplied by the percentage determined in accordance with the following table; and if the Participant has been credited with any additional Years of Service by the Compensation Committee in accordance with Section 1.22 and as designated in Schedule A, further multiplied by the Participant's actual Years of Service (without taking into account such Additional Years of Service) divided by 15: (i) For a Participant who at anytime during the five-year period ending on his Termination Date has been the Chief Executive Officer of the Company: Age at Termination Date Percentage 55 or less 40% 56 42% 57 44% 58 46% 59 48% 60 50% 61 52% 62 54% 63 56% 64 58% 65 or greater 60% (ii) For all other Participants: Age at Termination Date Percentage 55 or less 35% 56 37% 57 39% 58 41% 59 43% 60 45% 61 46% 62 47% 63 48% 64 49% 65 or greater 50% (b) The amount equal to the Participant's Basic Retirement Benefit. 3.3 Death Prior to Termination of Employment. If a Participant who has reached age 50 and has completed 15 Years of Service dies while actively employed by the Company or any Affiliated Company, his Surviving Spouse, if any, shall be entitled to a Supplemental Program Benefit commencing on the first day of the month next following the Participant's death. Such Supplemental Program Benefit shall be determined in accordance with Section 3.2 by using the Participant's date of death as his Termination Date; by multiplying the amount determined under paragraph (a) thereof by 50%; and by using the Surviving Spouse's benefit relating to the Participant's Basic Retirement Benefit at his date of death for purposes of paragraph (b) thereof. 3.4 Death Prior to Benefit Commencement. If a Participant who has reached age 50 and has completed 15 Years of Service dies after his Termination Date, but prior to his Retirement Date, his Surviving Spouse, if any, shall be entitled to a Supplemental Program Benefit commencing on what would have been the Participant's Retirement Date. Such Supplemental Program Benefit shall be determined as described in Section 3.3 for the Surviving Spouse, subject to any additional adjustment factors as are applicable under the Retirement Plan with respect to such a Surviving Spouse's benefit. SECTION IV FORM AND PAYMENT OF BENEFITS 4.1 Form of Benefits. Except as provided in Section 4.3, Supplemental Program Benefits payable to a Participant or Surviving Spouse pursuant to Section III will be payable in the same form as is applicable to the Basic Retirement Benefit or Surviving Spouse's benefit payable to the Participant or Surviving Spouse under the Retirement Plan. If the Participant's Basic Retirement Benefit is payable in a form other than a single life annuity over the life of the Participant in accordance with the terms of, or the Participant's election under, the Retirement Plan, then his Supplemental Program Benefit shall be subject to adjustment by the same adjustment factors as are applied under the Retirement Plan with respect to the Basic Retirement Benefit of the Participant. Notwithstanding the foregoing provisions of this Section, an election made by a Participant under the Retirement Plan with respect to the form of payment of his Basic Retirement Benefit shall not be effective with respect to the form of payment of his Supplemental Program Benefit unless such election is expressly approved in writing by the Administrator with respect to his Supplemental Program Benefit. If the Administrator shall not approve such election in writing, then the form of payment of the Participant's Supplemental Program Benefit shall be selected by the Administrator in his sole discretion. 4.2 Payment of Benefits. A Supplemental Program Benefit payable to a Participant pursuant to Section 3.2 will commence on his Retirement Date. A Supplemental Program Benefit payable to a Surviving Spouse pursuant to Section 3.3 will commence on the first day of the month next following the Participant's death. A Supplemental Program Benefit payable to a Surviving Spouse pursuant to Section 3.4 will commence on what would have been the Participant's Retirement Date. Payment of a Supplemental Program Benefit will continue to be paid to the Participant, his Surviving Spouse or Beneficiary in the same form and manner as if such benefits were being paid under the Retirement Plan. Notwithstanding any other provision of this Plan to the contrary, the Administrator may delay payment of any Participant's benefit (or any portion thereof) under this Section IV (including Section 4.3) to preserve the Company's full tax deduction under applicable provisions of the Internal Revenue Code (including section 162(m) thereof). 4.3 Lump Sum and Accelerated Payments. Subject to the approval of the Administrator, a Participant may elect to have his entire benefit under the Program paid in the form of an actuarially-equivalent lump sum (instead of the annuity forms contemplated by Sections 4.1 and 4.2) as soon as practicable after his benefit under the Retirement Plan commences to be paid, or if he should die prior to such commencement, as soon as practicable after his death, if all of the following conditions are satisfied: (a) The Participant's election to receive his benefit in the form of a lump sum is submitted in writing to the Administrator at least twelve (12) months prior to the day he ceases active employment with the Company; provided, however, that a Participant who submits his lump sum election no later than 45 days after the Company makes its first general notification to employees of the availability of the lump sum form of payment under the Program, shall be deemed to have satisfied the requirements of this paragraph (a) if he submits his election at least 15 days before the date his active employment ceases. (b) The Participant also elects payment in the form of a lump sum under all other non-qualified defined benefit pension plans maintained by the Company in which the Participant participates, including but not limited to The Quaker 415 Excess Benefit Plan and The Quaker Eligible Earnings Adjustment Plan. (c) The election is submitted on a form prescribed by the Administrator. A Participant may revoke his election under this Section 4.3, but no such revocation will be effective unless it has been submitted in writing to the Administrator at least 12 months before the Participant ceases active employment. In addition, the Compensation Committee in its sole discretion may accelerate payment of any Participant's benefit under the Program to such Participant, his Surviving Spouse or his Beneficiary at any time (regardless of his employment or retirement status), whether alone or as part of a more general distribution. Any such accelerated payment shall be in whatever form the Compensation Committee determines, including but not limited to a lump sum, provided that the benefit paid in such accelerated form shall be the actuarial equivalent of the Participant's benefit as of the date distribution commences. Any such acceleration must be for reasons of individual hardship, death, changes in tax laws or accounting principles, or any other reasons which negate or diminish the continued value of benefits under the Program to its Participants or their Surviving Spouses and beneficiaries or to the Company, as determined by the Compensation Committee in its sole discretion. For purposes of this Section 4.3, actuarial equivalence shall be determined using interest and mortality assumptions consistent with those set forth in the Retirement Plan, except that in the event of a lump sum payment, actuarial equivalence shall be determined on the basis of the interest rate and mortality assumptions prescribed by Section 417(e) of the Internal Revenue Code (as amended by the Small Business Job Protection Act of 1996), using the 30-year Treasury rate published for the third month preceding the month that contains the Participant's benefit commencement date. SECTION V AMENDMENT AND TERMINATION 5.1 Amendment and Termination. The Company intends the Program to be permanent but reserves the right to amend or terminate the Program when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board, or the Compensation Committee, and shall be effective as of the date stated in such resolution. No amendment or termination of the Program shall directly or indirectly deprive any Participant, Surviving Spouse, or Beneficiary of all or any portion of any Supplemental Program Benefit payment of which has commenced prior to the effective date of the resolution amending or terminating the Program. 5.2 Termination Benefit. In the case of a Program termination, each actively employed Participant on the Program's termination date shall become vested in his accrued Supplemental Program Benefit as of such termination date. Such accrued Supplemental Program Benefit shall be calculated as set forth in Section 3.2 above as if the Participant's Termination Date was the Program's termination date, regardless of the Participant's age and Years of Service. Payment of a Participant's accrued Supplemental Program Benefit shall not be dependent upon his continuation of employment with the Company following the Program termination date, and such Benefit shall become payable at the date for commencement of payment of a Supplemental Program Benefit pursuant to the terms of Section 4.2. 5.3 Corporate Successors. The Program shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity, but the Program shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue the Program. In the event the Program is not continued by the transferee, purchaser or successor entity, then the Program shall terminate subject to the provisions of Sections 5.1 and 5.2. SECTION VI MISCELLANEOUS 6.1 Forfeitures of Benefits. Notwithstanding any other provision of the Program, future payment of a Supplemental Program Benefit hereunder to a Participant or any other person will, at the discretion of the Compensation Committee, be discontinued and forfeited, and the Company will have no further obligation hereunder to such Participant or to any other person, if any of the following circumstances occur: (a) The Participant is discharged from employment for cause; (b) The Participant engages in competition with the Company prior to attaining age 65; or (c) The Participant performs acts of willful malfeasance or gross negligence in a matter of material importance to the Company. The Compensation Committee shall have sole and uncontrolled discretion with respect to the application of the provisions of this Section and such exercise of discretion shall be conclusive and binding upon the Participant and all other persons. 6.2 No Effect on Employment Rights. Nothing contained herein will confer upon any Participant the right to be retained in the service of the Company nor limit the right of the Company to discharge or otherwise deal with Participants without regard to the existence of the Program. 6.3 Funding. The Program at all times shall be entirely unfunded in accordance with, and for purposes of ERISA, and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. No Participant or any other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Program and any such Participant or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Program. Nothing contained in the Program shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder. 6.4 Spendthrift Provision. No benefit payable under the Program shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge prior to actual receipt thereof by the payee; and any attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge prior to such receipt shall be void; and the Company shall not be liable in any manner for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to any benefit under the Program. 6.5 Administration. The Administrator shall be responsible for the general operation and administration of the Program and for carrying out the provisions thereof. All provisions set forth in the Basic Retirement Plan with respect to the administrative powers and duties of the Administrator, expenses of administration and procedures or filing claims shall also be applicable to the Administrator with respect to the Program. The Administrator shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Company with respect to the Program. 6.6 Limitations on Liability. Notwithstanding any of the preceding provisions of the Program, neither the Company nor any individual acting as an employee or agent of the Company or the Administrator shall be liable to any Participant, former Participant, Surviving Spouse, Beneficiary or any other person for any claim, loss, liability or expense incurred in connection with the Program. 6.7 Gender and Neuter. Where the context admits, words denoting the masculine gender shall include the feminine and neuter genders, the singular shall include the plural, and the plural shall include the singular. 6.8 Applicable Law. The Program is established under ERISA and will be construed according to the federal laws that govern "Top Hat" Plans. IN WITNESS WHEREOF, this Program is executed by a duly authorized officer of the Company. THE QUAKER OATS COMPANY March 5, 1997 By: /s/Douglas J. Ralston Its: Senior Vice President EX-10.5 8 Exhibit 10(i) THE QUAKER ELIGIBLE EARNINGS ADJUSTMENT PLAN (As Amended and Restated Effective as of November 1, 1996) The Quaker Eligible Earnings Adjustment Plan, formerly "The Quaker Deferral Adjustment Benefit Plan" (the "Plan"), maintained by The Quaker Oats Company (the "Company"), is amended and restated effective as of November 1, 1996 and is intended to be an unfunded plan maintained primarily to provide deferred compensation for a select group of highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"), and is also intended to comply with Reg. Section 2520.104-23 under ERISA. The Plan is intended to provide benefits to certain Members of The Quaker Retirement Plan, as amended and restated from time to time (the "Retirement Plan"), who (I) participate in the Deferred Compensation Plan for Executives of The Quaker Oats Company the ("Deferral Plan"), and whose benefits under the Retirement Plan will be reduced because the amounts deferred and credited under the Deferral Plan are not considered earnings for purposes of the Retirement Plan; and/or (II) earn annual compensation exceeding the limitation of Section 401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, and whose benefits under the Retirement Plan will be reduced because Code Section 401(a)(17) limits the amount of annual compensation which may be considered earnings for purposes of the Retirement Plan. The Company hereby formalizes the terms and provisions of the Plan as follows: 1. Each term used in this Plan and also used in the Retirement Plan shall have the same meaning herein as under the Retirement Plan. 2. If, and so long as, a Member (or the Qualified Spouse or other beneficiary of a former Member) shall be entitled to receive benefits under the Retirement Plan, the benefit payable under this Plan shall be based on the amount equal to (a) minus (b) determined as follows: (a) The Member's accrued monthly pension benefit (as calculated under the Retirement Plan), and any additional benefits distributed upon termination of the Retirement Plan, payable as a straight life annuity, that would otherwise have been payable under the Retirement Plan with the following adjustments: (I) without regard to the limitation on benefits imposed by Code Section 415; (II) including amounts deferred under the Deferral Plan as earnings at the time of deferral; and (III) without regard to the compensation limit imposed by Code Section 401(a) (17). (b) The Member's accrued monthly pension benefit under the Retirement Plan as a straight life annuity, and any additional benefits distributed upon termination of the Retirement Plan, plus the amount payable under The Quaker 415 Excess Benefit Plan paid on a monthly basis and as a straight life annuity. 3. Except as provided in Section 4, the benefit payable as determined in accordance with Section 2 shall be paid on the same terms and conditions, in the same form, and at the same times, as would have been paid under the Retirement Plan if the limitations referred to in Section 2(a) did not exist. 4. Subject to the approval of the Administrator, a Member may elect to have his entire benefit under this Plan paid in the form of an actuarially- equivalent lump sum (instead of the annuity forms contemplated by Sections 2) as soon as practicable after his benefit under the Retirement Plan commences to be paid, or if he should die prior to such commencement, as soon as practicable after his death, if all of the following conditions are satisfied: (a) The Member's election to receive his benefit in the form of a lump sum is submitted in writing to the Administrator at least twelve (12) months prior to the day he ceases active employment with the Company; provided, however, that a Member who submits his lump sum election no later than 45 days after the Company makes its first general notification to employees of the availability of the lump sum form of payment under this Plan, shall be deemed to have satisfied the requirements of this paragraph (a) if he submits his election at least 15 days before the date his active employment ceases. (b) The Member also elects payment in the form of a lump sum under all other non-qualified defined benefit pension plans maintained by the Company in which the Member participates, including but not limited to The Quaker 415 Excess Benefit Plan and The Quaker Supplemental Executive Retirement Program. (c) The election is submitted on a form prescribed by the Administrator. A Member may revoke his election under this Section 4, but no such revocation will be effective unless it has been submitted in writing to the Administrator at least 12 months before the Member ceases active employment. In addition, the Compensation Committee of the Company's Board of Directors (the "Compensation Committee" and the "Board") in its sole discretion may accelerate payment of any Member's benefit under this Plan to such Member, his Qualified Spouse or his Beneficiary at any time (regardless of his employment or retirement status), whether alone or as part of a more general distribution. Any such accelerated payment shall be in whatever form the Compensation Committee determines, including but not limited to a lump sum, provided that the benefit paid in such accelerated form shall be the actuarial equivalent of the Member's benefit as of the date distribution commences. Any such acceleration must be for reasons of individual hardship, death, changes in tax laws or accounting principles, or any other reasons which negate or diminish the continued value of benefits under this Plan to its Members or their Qualified Spouses and beneficiaries or to the Company, as determined by the Compensation Committee in its sole discretion. For purposes of this Section 4, actuarial equivalence shall be determined using interest and mortality assumptions consistent with those set forth in the Retirement Plan, except that in the event of a lump sum payment, actuarial equivalence shall be determined on the basis of the interest rate and mortality assumptions prescribed by Section 417(e) of the Internal Revenue Code (as amended by the Small Business Job Protection Act of 1996), using the 30-year Treasury rate published for the third month preceding the month that contains the Member's benefit commencement date. 5. A "Change in Control" shall be deemed to have occurred if: (a) any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that this paragraph (a) shall not apply to any Person who becomes such a beneficial owner of such Company securities pursuant to an agreement with the Company approved by the Board, entered into before such Person has become such a beneficial owner of Company securities representing 5% or more of the combined voting power of the Company's then outstanding voting securities; (b) during any period of 24 consecutive months (not including any period prior to November 13, 1996), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2) or (d) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs (d)(1) or (d)(2); or (d) the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph (d), "surviving entity" shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "director of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger on consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2), (d)(1) or (d)(2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. 6. The Company may enter into a contract with any Member who is projected to be entitled to receive benefits under this Plan, or with any Member (or any Qualified Spouse or other beneficiary) who is entitled to receive benefits under this Plan, stipulating the terms and manner of payments to be made under this Plan, but the entitlement of such a person to receive benefits under this Plan shall not be conditioned upon the entering into of such a contract prior to the entitlement to benefits under the Plan. 7. This Plan shall not be a funded plan, and the Company shall not set aside any funds, or make any investments, for the specific purpose of making payments under this Plan, that would make the Plan considered funded under ERISA. Any payments hereunder shall be made out of the general assets of the Company. The Company may transfer funds to and may make payments through any trust which it deems to comply with the preceding, in order to meet its obligations under this Plan. 8. The Company, by action of its Board or the Executive Committee thereof, shall have the right at any time to amend this Plan in any respect or to terminate this Plan; provided, however, that such amendment or termination shall not reduce the benefits payable under this Plan below the benefits to which any person would have been entitled hereunder at the time of such amendment or termination. 9. Except as otherwise provided herein, the Company shall administer this Plan and shall have the same powers and duties, and shall be subject to the same limitations as are set forth in the Retirement Plan. 10. The interest of any Member and the interest, if any, of any Qualified Spouse or other beneficiary of any Member may not be assigned or alienated either by voluntary or involuntary assignment or by operation of law. 11. Neither this Plan nor any of its provisions shall be construed as giving any Member a right to continue in the employ of the Company. 12. Subject to the provisions of Section 8, this Plan shall terminate when the Retirement Plan terminates. IN WITNESS WHEREOF, this plan is executed by a duly authorized officer of the Company. THE QUAKER OATS COMPANY March 5, 1997 By: /s/Douglas J. Ralston Its: Senior Vice President EX-10.6 9 Exhibit 10(j) QUAKER OFFICERS SEVERANCE PROGRAM (As Amended and Restated Effective as of November 1, 1996) 1. EFFECTIVE DATE AND PURPOSE. The Quaker Officers Severance Program (the "Program") is established and maintained by The Quaker Oats Company ("Quaker"), effective as of November 1, 1996, and is an amendment and restatement of the Program as adopted by Quaker's Board of Directors (the "Board") on March 8, 1989. The purpose of the Program is to promote the interests of Quaker, its divisions and subsidiaries (the "Company"), and its shareholders, by attracting and retaining officers of the Company through assurances of continued compensation and benefits when their employment with the Company is terminated due to certain circumstances beyond their control. 2. ADMINISTRATION. (a) The Program shall be administered by the Severance Program Committee (the "Committee"), which shall initially consist of Quaker's Senior Vice President-Human Resources, Vice President-Human Resources Worldwide Beverages and Vice President - Human Resources Quaker Foods. The Chief Executive Officer of Quaker shall have the authority to expand or reduce the number of Committee members, and to designate, remove or replace the Committee members. (b) The Committee shall have the sole responsibility for the administration of the Program, and may adopt such rules and procedures as it deems necessary, desirable, or appropriate. (c) The Committee shall have such powers as may be necessary to discharge its responsibility to administer the Program, including but not limited to the following: (1) To construe and interpret the Program, decide all questions of eligibility, and determine the amount, manner and time of any severance benefit hereunder. (2) To prescribe procedures for employees to apply for Program benefits, including written applications and forms, if any, and other requests for information. If no procedures are prescribed, then the Company or the Committee may initiate consideration of a claim for severance benefits, or any employee may initiate a claim by providing notice, in writing, to designated Committee members. The Committee may reasonably rely upon all information furnished to it in such applications, forms or notices. (3) To receive from the Company such information as shall be necessary for the proper administration of the Program. The Committee may reasonably rely upon all such information so furnished. (4) To appoint individuals to assist in the administration of the Program as the Committee deems necessary, including but not limited to, Company employees, agents, attorneys, and accountants. The Committee may reasonably rely upon all information and advice furnished by such individuals. (5) To receive, review, and maintain, as it deems appropriate, benefit payment and administrative expense reports. (6) To issue directions to the Company concerning all benefits which are to be paid from the Company's general assets pursuant to the Program provisions. (7) To prepare and distribute to Company employees, information describing the Program in such manner as the Committee determines to be required or appropriate. (d) The Committee shall make all determinations as to the right of any person to a benefit under the Program. Any denial by the Committee of the claim for benefits under the Program by an employee shall be stated in writing by the Committee and delivered or mailed to the employee; and such notice shall set forth the specific reasons for the denial. In addition, the Committee shall afford a reasonable opportunity to any employee whose claim for benefits has been denied for a review of the decision denying the claim. (e) The Committee shall be indemnified by Quaker to the full extent allowed by law. This indemnity shall extend to all individuals appointed to assist in the administration of the Program, as described in subparagraph (c) (4) above. 3. ELIGIBILITY. (a) An officer (as defined below) is eligible for severance benefits under the Program (determined in accordance with paragraph 4) if his employment with the Company is terminated under any of the following conditions: (1) At any time, termination of employment with the Company, other than death, physical or mental incapacity, voluntary resignation, retirement, gross misconduct, or due to the sale, spin-off or other disposition of a plant, profit center, division or subsidiary of Quaker as an ongoing entity if the affected employee is hired by, or is offered continued employment by, the successor or purchasing entity. (2) Notwithstanding anything in subparagraph (1) above to the contrary, within two years following a Change in Control of Quaker (as defined below), any termination of employment with the Company, in lieu of officer accepting continued employment with the Company which involves a significant change in the officer's terms and conditions of employment (as defined below). A "significant change in the officer's terms and conditions of employment" shall be deemed to have occurred when during such two year period: (I) the total of the officer's salary and incentive bonus target is to be reduced, based upon the amounts equal to the officer's salary immediately prior to the Change in Control of Quaker, and the most recent incentive bonus target communicated to the employee immediately prior to the Change in Control of Quaker; (II) the location of continued employment if beyond a 30-mile radius of the officer's location of employment immediately prior to the Change in Control of Quaker; (III) the officer is to be paid on an hourly basis; (IV) there is a significant change in the nature or scope of any of the authorities and powers, which the officer may exercise or is exercising, and duties and functions which the officer may perform or is performing immediately prior to the Change in Control of Quaker; or (V) a reasonable determination by the officer that, as a result of the Change in Control of Quaker, his position is significantly affected so that he is unable to exercise any authorities and powers, or perform any duties and functions described in subparagraph (IV) above. (3) "Change in Control of Quaker" shall be deemed to have occurred if: (I) any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than Quaker, any trustee or other fiduciary holding securities under an employee benefit plan of Quaker, or any company owned, directly or indirectly, by the stockholders of Quaker in substantially the same proportions as their ownership of stock of Quaker), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Quaker representing 30% or more of the combined voting power of Quaker's then outstanding voting securities; provided, however, that this paragraph (a) shall not apply to any Person who becomes such a beneficial owner of such Company securities pursuant to an agreement with the Company approved by the Board, entered into before such Person has become such a beneficial owner of Company securities representing 5% or more of the combined voting power of the Company's then outstanding voting securities; (II) during any period of 24 consecutive months (not including any period prior to November 13, 1996), individuals, who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who has entered into an agreement with Quaker to effect a transaction described in subparagraph (I), (III) (B) or (IV)) whose election by the Board, or whose nomination for election by Quaker's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; (III) the stockholders of Quaker approve (A) a plan of complete liquidation of Quaker or (B) the sale or disposition by Quaker of all or substantially all of Quaker's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs (IV) (A) or (IV) (B); or (IV) the stockholders of Quaker approve a merger or consolidation of Quaker with any other company other than: (A) such a merger or consolidation which would result in the voting securities of Quaker outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of Quaker's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (B) such a merger or consolidation which would result in the directors of Quaker who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this subparagraph (IV), "surviving entity" shall mean only an entity in which all of Quaker's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "directors of Quaker who were directors immediately prior thereto" shall include only individuals who were directors of Quaker at the beginning of the 24 consecutive month period preceding the date of such merger or consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with Quaker to effect a transaction described in subparagraph (I), (III) (B), (IV) (A) or (IV) (B)) whose election by the Board, or whose nomination for election by Quaker's stockholders, was approved by a vote of at least two- thirds (2/3) of the directors before the beginning of such period. (b) An "officer" shall mean any employee of the Company who is a Chief Executive Officer, President or Vice President (including Senior and Executive Vice Presidents) of Quaker, and any other Company employees designated by the Committee as an officer for purposes of the Program. Prior to a Change in Control of Quaker an officer shall be considered eligible under the Program, subject to paragraph 3(a)(1), for so long as he holds such office while the Program is in effect. After a Change in Control of Quaker, an officer shall continue to be considered eligible under the Program, subject to paragraph 3(a)(2). 4. SEVERANCE BENEFITS. (a) An eligible officer pursuant to paragraph 3 will be provided the following severance benefits: (1) Compensation - Payment to an officer shall be made in the form of a single lump sum, or equal monthly installments over the Severance Period (as defined below), at the Committee's sole discretion. The total amount payable in either form shall equal: (I) the officer's current annualized salary at the time of termination (or, if greater, the officer's annualized salary in effect immediately prior to a Change in Control of Quaker), plus (II) the average of the officer's two most recent years' fully paid management incentive bonuses (or in the event of a Change in Control the bonus shall not be less than the Section 4(a)(1) of the Quaker Salaried Employees Compensation and Benefits Protection Plan) (the "Plan") at the time of termination (on an annualized basis, if necessary); and the officer's severance period shall be the one year period commencing with the date following termination of employment (the "Severance Period"). The single sum payment shall be made, or the monthly installments shall commence, at the officer's usual payroll date next following his date of termination. (2) Welfare Benefits - During the officer's Severance Period the officer shall be entitled to continued eligibility for health, medical, dental, life insurance, and accidental death and dismemberment benefits equivalent to those to which he was entitled prior to his termination of employment (regardless of the form of compensation benefit to be provided under subparagraph (1)). The officer shall not be required to contribute more than the normal cost (including those attributable to changes in levels of benefits) for such benefits as existed immediately prior to his termination of employment. The Severance Period for purposes of this subparagraph (2) shall not be applied to reduce the benefit extension period required by the Consolidated Omnibus Budget Reconciliation Act of 1985 or any amendment thereto. (b) All benefits to be paid or provided pursuant to subparagraph 4(a) shall be in addition to, and shall not be reduced by, any other benefits payable or provided by separate agreement with the officer, or plan or arrangement of the Company, except as follows. If an officer is also eligible for severance benefits to be paid and provided pursuant to the Plan, the greater amount or longer severance period with respect to compensation and welfare benefits, respectively, shall be provided in accordance with and pursuant to the terms of the Plan or Program as the case may be. In no event will an officer be entitled to duplicative benefits under the Plan and the Program. (c) Any severance benefits payable under the Program to an officer who dies prior to full payment of such benefits shall be paid to the officer's estate. (d) Notwithstanding any other provision of the Program, severance benefits furnished hereunder shall be subject to the following terms and conditions: (1) If the making of severance benefit payments pursuant to subparagraph 4(a) would subject the officer to an excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, 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 herein as a "Tax Penalty"), then such severance benefit payments shall be reduced to the extent necessary to avoid the imposition of such Tax Penalty. The preceding sentence shall not apply if such officer: (I) is entitled to a tax reimbursement for such Tax Penalty under any other agreement, plan or program of the Company, or (II) may disclaim any portion of or all benefits payable under this or any other agreement, plan or program of the Company in order to avoid such Tax Penalty. (2) If the officer and the Company shall disagree as to whether the furnishing of a benefit under the Program would result in the imposition of a Tax Penalty, the matter shall be resolved by an opinion of counsel chosen by the employee and reasonably satisfactory to the Company. The Company shall pay the fees and expenses of such counsel, and shall make available to counsel such information as may be reasonably necessary to prepare the opinion. 5. NONASSIGNMENT. No benefits payable under the Program shall be subject in any manner to assignment, anticipation, alienation, sale, transfer, pledge, encumbrance, or charge, and any such attempted action shall be void and no such benefit shall be in any manner liable for or subject to debts, contract, liabilities, engagements, or torts of any officer. If any officer shall become bankrupt or shall attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge any amount or benefit payable under the plan, then the Committee in its discretion may hold or apply such benefit or any part thereof to or for the benefit of such officer or his beneficiary, his spouse, children, blood relatives, or other dependents, in such manner and in such proportions as the administrator may consider proper. 6. AMENDMENT AND TERMINATION. Quaker, by action of its Board, or the Compensation Committee thereof, shall have the right to amend or terminate this Program; provided, however, that no such amendment shall alter, modify, or rescind coverage or benefits under the Program; and in no event shall the Program be amended or terminated during the five-year period following a Change in Control of Quaker in a manner which would reduce payments or benefit extension periods. 7. CONTINUED EMPLOYMENT. Neither the Program nor any of its provisions shall be construed as giving any officer of the Company a right to continue in the employ of the Company, or as a limitation of the Company's right to discharge any of its employees, with or without cause. 8. SUCCESSORS. The Program shall be binding upon any successor of the Company whether by merger, consolidation, or sale of all or substantially all of the Company's assets. 9. GOVERNING LAW. The Program shall be construed and enforced according to the Employee Retirement Income Security Act of 1974 ("ERISA"), and the laws of the State of Illinois, other than its laws respecting choice of law, to the extent not preempted by ERISA. IN WITNESS WHEREOF, this Program is executed by a duly authorized officer of Quaker. THE QUAKER OATS COMPANY January 15, 1997 By: /s/ Douglas J. Ralston Its: Senior Vice President EX-10.7 10 Exhibit 10(l) THE QUAKER 415 EXCESS BENEFIT PLAN (As Amended and Restated Effective as of November 1, 1996) The Quaker 415 Excess Benefit Plan (the "Plan") was originally adopted effective as of January 1, 1983, and was amended and restated effective as of November 1, 1996. The Plan is established and maintained by The Quaker Oats Company (the "Company") and is intended to be an unfunded "excess benefit plan" within the meaning of Sections 3(36) and 4(b) (5) of the Employee Retirement Income Security Act of 1974 ("ERISA"). As such, the purpose of this Plan is solely to provide benefits to certain Members of The Quaker Retirement Plan, as amended and restated from time to time (the "Retirement Plan"), in excess of the limitations on benefits imposed by Section 415 of the Internal Revenue Code, or any future comparable provision(s) ("Code Section 415"). The Company hereby formalizes the terms and provision of the Plan as follows: 1. Each term used in this Plan and also used in the Retirement Plan shall have the same meaning herein as under the Retirement Plan. 2. If, and so long as, a Member (or the Qualified Spouse or other beneficiary of a former Member) shall be entitled to receive benefits under the Retirement Plan, the benefits payable under this Plan shall equal: (a) the "retirement income" (as calculated under the Retirement Plan), and any other benefits, including benefits distributed upon termination of the Retirement Plan, that such person would have been paid under the Retirement Plan without regard to the limitation on benefits imposed by Code Section 415; reduced by (b) the retirement income and any other benefits that such person actually receives under the Retirement Plan. Except as provided in Section 4, such amounts shall be paid on the same terms and conditions, and at the same times, as they would have been paid under the Retirement Plan if no such limitation existed. 3. The Company may enter into a contract with any Member who is projected to be entitled to receive benefits under this Plan, or with any Member (or any Qualified Spouse or other beneficiary) who is entitled to receive benefits under this Plan, stipulating the terms and manner of payments to be made under this Plan, but the entitlement of such a person to receive benefits under this Plan shall not be conditioned upon the entering into of such a contract prior to the entitlement to benefits under this Plan. 4. Subject to the approval of the Administrator, a Member may elect to have his entire benefit under this Plan paid in the form of an actuarially- equivalent lump sum (instead of the annuity forms contemplated by Section 2) as soon as practicable after his benefit under the Retirement Plan commences to be paid, or if he should die prior to such commencement, as soon as practicable after his death, if all of the following conditions are satisfied: (a) The Member's election to receive his benefit in the form of a lump sum is submitted in writing to the Administrator at least twelve (12) months prior to the day he ceases active employment with the Company; provided, however, that a Member who submits his lump sum election no later than 45 days after the Company makes its first general notification to employees of the availability of the lump sum form of payment under this Plan, shall be deemed to have satisfied the requirements of this paragraph (a) if he submits his election at least 15 days before the date his active employment ceases. (b) The Member also elects payment in the form of a lump sum under all other non-qualified defined benefit pension plans maintained by the Company in which the Member participates, including but not limited to The Quaker Supplemental Executive Retirement Program and The Quaker Eligible Earnings Adjustment Plan. (c) The election is submitted on a form prescribed by the Administrator. A Member may revoke his election under this Section 4, but no such revocation will be effective unless it has been submitted in writing to the Administrator at least 12 months before the Member ceases active employment. In addition, the Compensation Committee of the Company's Board of Directors (the "Compensation Committee" and the "Board") in its sole discretion may accelerate payment of any Member's benefit under this Plan to such Member, his Qualified Spouse or his Beneficiary at any time (regardless of his employment or retirement status), whether alone or as part of a more general distribution. Any such accelerated payment shall be in whatever form the Compensation Committee determines, including but not limited to a lump sum, provided that the benefit paid in such accelerated form shall be the actuarial equivalent of the Member's benefit as of the date distribution commences. Any such acceleration must be for reasons of individual hardship, death, changes in tax laws or accounting principles, or any other reasons which negate or diminish the continued value of benefits under this Plan to its Members or their Qualified Spouses and beneficiaries or to the Company, as determined by the Compensation Committee in its sole discretion. For purposes of this Section 4, actuarial equivalence shall be determined using interest and mortality assumptions consistent with those set forth in the Retirement Plan, except that in the event of a lump sum payment, actuarial equivalence shall be determined on the basis of the interest rate and mortality assumptions prescribed by Section 417(e) of the Internal Revenue Code (as amended by the Small Business Job Protection Act of 1996), using the 30-year Treasury rate published for the third month preceding the month that contains the Member's benefit commencement date. 5. A "Change in Control" shall be deemed to have occurred if: (a) any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that this paragraph (a) shall not apply to any Person who becomes such a beneficial owner of such Company securities pursuant to an agreement with the Company approved by the Board, entered into before such Person has become such a beneficial owner of Company securities representing 5% or more of the combined voting power of the Company's then outstanding voting securities; (b) during any period of 24 consecutive months (not including any period prior to November 13, 1996), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2) or (d) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; (c) the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs (d)(1) or (d)(2); or (d) the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph (d), "surviving entity" shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "director of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger on consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c)(2), (d)(1) or (d)(2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. 6. This Plan shall not be a funded plan, and the Company shall not set aside any funds, or make any investments, for the specific purpose of making payments under this Plan, that would make the Plan considered funded under ERISA. Any payments hereunder shall be made out of the general assets of the Company. Notwithstanding the preceding, the Company may transfer funds to and may make payments through an trust which it deems to comply with the preceding, in order to meet its obligations under this Plan. 7. The Company, by action of its Board or the Executive Committee thereof, shall have the right at any time to amend this Plan in any respect or to terminate this Plan; provided, however, that such amendment or termination shall not reduce the benefits payable under this Plan below the benefits to which any person would have been entitled hereunder at the time of such amendment or termination. 8. Except as otherwise provided herein, the Company shall administer this Plan and shall have the same powers and duties, and shall be subject to the same limitations as are set forth in the Retirement Plan. 9. The interest of any Member and the interest, if any, of any Qualified Spouse or to other beneficiary of any Member may not be assigned or alienated either by voluntary or involuntary assignment or by operation of law. 10.Neither this Plan nor any of its Provisions shall be construed as giving any Member a right to continue in the employ of the Company. 11.Subject to the provisions of Section 7, this Plan shall terminate when the Retirement Plan terminates. IN WITNESS THEREOF, this Plan is executed by a duly authorized officer of the Company. THE QUAKER OATS COMPANY March 5, 1997 By: /s/Douglas J. Ralston Its: Senior Vice President EX-10.8 11 Exhibit 10(m) QUAKER SALARIED EMPLOYEES COMPENSATION AND BENEFITS PROTECTION PLAN (As Amended and Restated Effective as of November 1, 1996) 1. EFFECTIVE DATE AND PURPOSE. The Quaker Salaried Employees Compensation and Benefits Protection Plan (the "Plan") is established and maintained by The Quaker Oats Company ("Quaker"), and is amended and restated effective as of November 1, 1996. The primary purpose of the Plan is to promote the interests of Quaker, its domestic divisions and domestic subsidiaries (the "Company"), and its shareholders, by attracting and retaining salaried employees of the Company through assurances of continued compensation and benefits when their employment with the Company is terminated due to certain circumstances beyond their control within two years following a Change in Control of Quaker. 2. ADMINISTRATION. (a) The Plan shall be administered by the Salaried Employees Compensation and Benefits Protection Plan Committee (the "Committee"), which shall consist of Quaker's Senior Vice President - Human Resources, Vice President - Human Resources Worldwide Beverages and Vice President - Human Resources Quaker Foods. The Chief Executive Officer of Quaker shall have the authority to expand or reduce the number of Committee members, and to designate, remove or replace the Committee members. (b) The Committee shall have the sole responsibility for the administration of the Plan, and may adopt such rules and procedures as it deems necessary, desirable, or appropriate. (c) The Committee shall have such powers as may be necessary to discharge its responsibility to administer the Plan, including but not limited to the following: (1) To construe and interpret the Plan, decide all questions of eligibility, and determine the amount, manner and time of any severance benefit hereunder. (2) To prescribe procedures for employees applying for Plan benefits, including written applications and forms, and other requests for information. The Committee may reasonably rely upon all such applications, forms and information so furnished. (3) To receive from the Company such information as shall be necessary for the proper administration of the Plan. The Committee may reasonably rely upon all such information so furnished. (4) To appoint individuals to assist in the administration of the Plan as the Committee deems necessary, including but not limited to, Company employees, agents, attorneys, and accountants. The Committee may reasonably rely upon all information and advice furnished by such individuals. (5) To receive, review, and maintain, as it deems appropriate, benefit payment and administrative expense reports. (6) To issue directions to the Company concerning all benefits which are to be paid from the Company's general assets pursuant to the Plan provisions. (7) To prepare and distribute to Company employees information describing the Plan, in such manner as the Committee determines to be required or appropriate. (d) The Committee shall make all determinations as to the right of any person to a benefit under the Plan. Any denial by the Committee of the claim for benefits under the Plan by an employee shall be stated in writing by the Committee and delivered or mailed to the employee; and such notice shall set forth the specific reasons for the denial. In addition, the Committee shall afford a reasonable opportunity to any employee whose claim for benefits has been denied for a review of the decision denying the claim. (e) The Committee shall be indemnified by Quaker to the full extent allowed by law. This indemnity shall extend to all individuals appointed to assist in the administration of the Plan, as described in subparagraph (c)(4) above. 3. ELIGIBILITY. A domestic salaried employee of the Company at the time of a Change in Control of Quaker (as defined below) is eligible for severance benefits under the Plan (determined in accordance with paragraph 4) if his employment is terminated under any of the following conditions within two years following the Change in Control of Quaker: (a) Any termination of employment with the Company, other than death, physical or mental incapacity, voluntary resignation, retirement, gross misconduct, or due to the sale, spin-off or other disposition of a plant, profit center, division or subsidiary of Quaker as an ongoing entity if the affected employee is hired by, or is offered continued employment by, the successor or purchasing entity. (b) Notwithstanding anything in subparagraph (a) above to the contrary, any termination of employment with the Company, in lieu of the employee accepting continued employment with the Company which involves a significant change in the employee's terms and conditions of employment (as defined below). A "significant change in the employee's terms and conditions of employment" shall be deemed to have occurred when during such two year period: (1) the total of the employee's salary and incentive bonus is to be reduced, based upon the amounts equal to the employee's salary immediately prior to the Change in Control of Quaker, and the most recent incentive bonus paid fully accrued and payable to the employee immediately prior to the Change in Control of Quaker; (2) the location of continued employment is beyond a 30-mile radius of the employee's location of employment immediately prior to the Change in Control of Quaker; (3) the employee is to be paid on an hourly basis; (4) for purposes of Section 4(a)(3) only, there is a significant change in the nature of scope of any of the authorities and powers which the employee may exercise or is exercising, and duties and function which the employee may perform or is performing, immediately prior to the Change in Control; or (5) for purposes of Section 4(a)(3) only, there is a reasonable determination by the employee that, as a result of the Change in Control, his position is significantly affected so that he is unable to exercise any authorities and powers, or perform any duties and functions describe in (4) above. (c) For purposes of Section 4(a)(3), nondomestic employees will be included in the eligible group. (d) "Change in Control of Quaker" shall be deemed to have occurred if: (1) any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")(other than Quaker, any trustee or other fiduciary holding securities under an employee benefit plan of Quaker, or any company owned, directly or indirectly, by the stockholders of Quaker in substantially the same proportions as their ownership of stock of Quaker), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Quaker representing 30% or more of the combined voting power of Quaker's then outstanding voting securities; provided, however, that this paragraph (a) shall not apply to any Person who becomes such a beneficial owner of such Company securities pursuant to an agreement with the Company approved by the Company's Board of Directors (the "Board"), entered into before such Person has become such a beneficial owner of Company securities representing 5% or more of the combined voting power of the Company's then outstanding voting securities; (2) during any period of 24 consecutive months (not including any period prior to November 13, 1996), individuals, who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who has entered into an agreement with Quaker to effect a transaction described in subparagraph (1), (3)(ii) or (4)) whose election by the Board or whose nomination for election by Quaker's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; (3) the stockholders of Quaker approve (i) a plan of complete liquidation of Quaker or (ii) the sale or disposition by Quaker of all or substantially all of Quaker's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs (4)(i) or (4)(ii); or (4) the stockholders of Quaker approve a merger or consolidation of Quaker with any other company other than: (i) such a merger or consolidation which would result in the voting securities of Quaker outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more that 70% of the combined voting power of Quaker's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (ii) such a merger or consolidation which would result in the directors of Quaker who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this subparagraph (4), "surviving entity" shall mean only an entity in which all of Quaker's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "directors of Quaker who were directors immediately prior thereto" shall include only individuals who were directors of Quaker at the beginning of the 24 consecutive month period preceding the date of such merger or consolidation, or who were new directors (other than any director designated by a person who has entered into an agreement with Quaker to effect a transaction described in subparagraph (1), (3)(ii), (4)(i) or (4)(ii)) whose election by the Board, or whose nomination for election by Quaker's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. 4. SEVERANCE BENEFITS. (a) An eligible employee pursuant to paragraph 3 will be provided the following severance benefits: (1) Compensation - Payment to an employee shall be made in the form of a single lump sum, or equal monthly installments over the Severance Period (as defined below), at the Committee's sole discretion. For this purpose the total amount payable in either form shall equal: (i) 75% of the employee's (A) current annualized salary at the time of termination (or, if greater, the employee's annualized salary in effect immediately prior to the Change in Control of Quaker), and (B) determined on an annualized basis, the most recently paid (or fully accrued and unpaid) incentive bonus at the time of termination (or, if greater, the amount of the incentive bonus shall be the greater of the target incentive bonus for such year, or the incentive bonus calculated for such year); plus (ii) such annualized salary amount and incentive bonus amount multiplied by a fraction, the numerator of which is the employee's number of years of service with the Company (as defined below) exceeding 20, and the denominator of which is 26. However, in no event will such total severance benefit payable exceed two times such annualized salary amount and incentive bonus amount. If the severance benefit is to be paid in monthly installments, the severance period shall be a nine month period commencing with the date following termination of employment, plus any additional period corresponding to the additional benefit payable to an employee with more than 20 years of service with the Company (the "Severance Period"). The single sum payment shall be made, or the monthly installments shall commence, at the employee's usual payroll date next following his date of termination. "Years of service with the Company" shall mean the employee's number of completed years of service with the Company; including service as a full time hourly employee, and service rendered to an entity or organization that was acquired by the Company. (2) Welfare Benefits - During the Severance Period an employee shall be entitled to Employee Welfare Benefits to which he would have been entitled under currently elected coverage under the Company's medical, dental and life insurance programs prior to his termination of employment, regardless of the form of compensation benefit to be provided under subparagraph (1). The employee shall not be required to contribute more than the normal cost (including those attributable to changes in levels of benefits) for such benefits as existed immediately prior to the Change in Control of Quaker. The Severance Period for purposes of this subparagraph (2) shall not be applied to reduce the benefit extension period required by the Consolidated Omnibus Budget Reconciliation Act of 1985 or any amendment thereto. (3) Incentive Bonus (prior to Severance Period) - In addition to amounts payable under subparagraphs (1) and (2) above payment shall be made to the employee within a reasonable time thereafter of the employee's incentive bonus as provided herein below. For purposes hereof, "incentive bonus" shall mean any form of incentive bonus payment for which the employee would have been eligible immediately prior to the Change in Control, but which is not paid to the employee as of employment termination. If an entire fiscal year has been completed prior to termination of employment, the amount of such incentive bonus shall be the greater of (i) the target incentive bonus for such year, or (ii) the incentive bonus calculated for such year. In addition for the fiscal year including termination of employment the amount of such incentive bonus shall be the greater of (A) the target incentive bonus for such year, or (B) an incentive bonus calculated for such year, with amount of the incentive bonus prorated based on the number of completed months during such fiscal year. (b) All benefits to be paid or provided pursuant to subparagraph 4(a) shall be in addition to, and shall not be reduced by, any other benefits payable or provided by separate agreement with the employee, or plan or arrangement of the Company, except as follows: (1) If an employee is also eligible for severance benefits to be paid and provided pursuant to the Quaker Officers Severance Program or the Quaker Severance Pay Plan (the "Programs"), the greater amount or longer severance period with respect to compensation and welfare benefits, respectively, shall be provided in accordance with and pursuant to the terms of the Programs or Plan as the case may be. In no event will an employee be entitled to duplicative benefits under the Programs and subparagraphs 4(a)(1) and (2) of the Plan. (2) If an employee would otherwise be eligible for retiree welfare benefits, the employee may choose to be eligible for such benefits or to be covered by the Plan during the Severance Period, after which the employee shall become eligible for such retiree welfare benefits. (3) An employee who is being provided disability benefits and payments at the time of the Change in Control of Quaker shall continue to receive only such disability payments and benefit plan coverage to which he is entitled at such time for so long as he remains eligible for such disability benefits. Following the expiration of such payments during the two year period following the Change in Control of Quaker, the employee shall then be eligible for severance benefits under the Plan determined in accordance with paragraph 3. (c) Any severance benefits payable under the Plan to an employee who dies prior to full payment of such benefits shall be paid to the employee's estate. (d) Notwithstanding any other provision of the Plan, severance benefits furnished hereunder shall be subject to the following terms and conditions: (1) If the making of severance benefit payments pursuant to subparagraphs 4(a)(1) and (2) would subject the employee to the excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, 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 herein as a "Tax Penalty"), then such severance benefit payments shall be reduced to the extent necessary to avoid the imposition of such Tax Penalty. The preceding sentence shall not apply if such employee (i) is entitled to a tax reimbursement for such Tax Penalty under any other agreement plan or program of the company, or (ii) may disclaim any portion of or all compensation payable under this or any other agreement, plan or program of the Company in order to avoid such Tax Penalty. (2) If the employee and the Company shall disagree as to whether the furnishing of a benefit under the Plan would result in the imposition of a Tax Penalty, the matter shall be resolved by an opinion of counsel chosen by the employee and reasonably satisfactory to the Company. The Company shall pay the fees and expense of such counsel, and shall make available to counsel such information as may be reasonably necessary to prepare the opinion. 5. RETIREE HEALTH PLANS. All domestic full time salaried employees covered under The Quaker Retiree Health Incentive Plan, and other retiree health plans maintained for the benefit of its salaried employees (the "Health Plans"), who have attained age 50 upon termination of employment within two years after a Change in Control, shall be credited with an additional five years of service under the Health Plans for all purposes of eligibility and benefits under the Health Plans, and during such two-year period the minimum age requirement for purposes of eligibility of such terminated employees under the Health Plans shall be age 50, except that in no event shall benefits be provided under the Health Plans until the employee has reached age 55. 6. NONASSIGNMENT. No benefits payable under the Plan shall be subject in any manner to assignment, anticipation, alienation, sale, transfer, pledge, encumbrance, or charge, and any such attempted action shall be void and no such benefit shall be in any manner liable for or subject to debts, contracts, liabilities, engagements, or torts of any employee. If any employee shall become bankrupt or shall attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge any amount or benefit payable under the Plan, then the Committee in its discretion may hold or apply such benefit or any part thereof to or for the benefit of such employee or his beneficiary, his spouse, children, blood relatives, or other dependents, in such manner and in such proportions as the administrator may consider proper. 7. AMENDMENT AND TERMINATION. Quaker, by action of its Board, or the Compensation Committee thereof, shall have the right to amend this Plan in any respect, or to terminate this Plan; provided, however, that in no event shall the Plan be amended or terminated during the five-year period following a Change in Control of Quaker in a manner which would reduce payments or benefit extension periods for any employee. 8. CONTINUED EMPLOYMENT. Neither the Plan nor any of its provisions shall be construed as giving any employee of the Company a right to continue in the employ of the Company, or as a limitation of the Company's right to discharge any of its employees, with or without cause. 9. SUCCESSORS. The Plan shall be binding upon any successor of the Company whether by merger, consolidation, or sale of all or substantially all of the Company's assets. 10. GOVERNING LAW. The Plan shall be construed and enforced according to the Employee Retirement Income Security Act of 1974 ("ERISA"), and the laws of the State of Illinois, other than its laws respecting choice of law, to the extent not pre-empted by ERISA. IN WITNESS WHEREOF, this Plan is executed by a duly authorized officer of the Company. THE QUAKER OATS COMPANY March 5 , 1997 By: /s/ Douglas J. Ralston Its: Senior Vice President EX-10.9 12 Exhibit 10 (f) (2) Schedule of Termination Benefit Agreements with Certain Executive Officers The attached Termination Benefit Agreement is identical in all material respects to the executive Termination Benefit Agreements for those executive employees listed below and which have been omitted from this filing: Name Execution Date John A. Boynton November 19, 1996 John H. Calhoun November 19, 1996 Penelope C. Cate November 27, 1996 Michael L. Cohen November 19 ,1996 Janet K. Cooper November 27, 1996 A. Stephen Diamond November 27, 1996 James F. Doyle November 27, 1996 Margaret M. Eichman November 18, 1996 Scott Gantwerker November 20, 1996 Thomas L. Gettings December 10, 1996 John G. Jartz December 10, 1996 James E. LeGere November 18, 1996 I. Charles Mathews November 27, 1996 Mart C. Matthews November 18, 1996 Luther C. McKinney November 20, 1996 Douglas W. Mills November 27, 1996 Kenneth W. Murray November 21, 1996 Douglas J. Ralston November 20, 1996 Michael B. Schott November 27, 1996 Robert S. Thomason November 27, 1996 Russell A. Young December 13, 1996 EX-10.10 13 Exhibit 10(f)(2) EXECUTIVE SEPARATION AGREEMENT THIS AGREEMENT is made between The Quaker Oats Company, a New Jersey corporation (the "Company"), and Barbara R. Allen (the "Executive"), dated this 19th day of November, 1996. WITNESSETH THAT: WHEREAS, the Company wishes to attract and retain well-qualified executive personnel and to assure both itself and the Executive of continuity of management in the event of any actual or threatened change in control of the Company; NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. Operation of Agreement. The "effective date of this Agreement" shall be the date on which the Executive declares it effective, by notice to the Company in writing, but only if a change in control of the Company (as defined in Section 2) has occurred on or before the date of the notice. 2. Change in Control. A "change in control of the Company" shall be deemed to have occurred if: a. any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that this paragraph (a) shall not apply to any Person who becomes such a beneficial owner of such Company securities pursuant to an agreement with the Company approved by the Company's Board of Directors (the "Board"), entered into before such Person has become such a beneficial owner of Company securities representing 5% or more of the combined voting power of the Company's then outstanding voting securities; b. during any period of 24 consecutive months (not including any period prior to November 13, 1996), individuals, who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph a., c. (2) or d. of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; c. the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs d. (1) or d. (2); or d. the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph d., "surviving entity" shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "directors of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger or consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph a., c. (2), d. (1) or d. (2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, for the period commencing on the effective date of this Agreement and ending on the earlier to occur of the third anniversary of such effective date or the 65th birthday of the Executive (the "employment period"), to exercise such authorities and powers, and perform such duties and functions, as are commensurate with the authorities and powers being exercised, and duties and functions being performed, by the Executive immediately prior to the effective date of this Agreement, which services shall be performed at the current location where the Executive was employed immediately prior to the effective date of this Agreement or at such other location within a 30-mile radius of such current location. The Executive shall not be required to accept any other location. The Executive agrees that during the employment period she shall devote her full business time exclusively to her executive duties as described herein and perform such duties faithfully and efficiently. 4. Compensation, Compensation Plans, Benefit Plans, Perquisites. During the employment period and prior to termination (as defined in Section 5) of the Executive, the Executive shall be compensated as follows: a. She shall receive an annual salary which is not less than her annual salary immediately prior to the effective date of this Agreement, with the opportunity for increases, from time to time thereafter, which are in accordance with the Company's regular practices. b. She shall be eligible to participate on a reasonable basis in bonus, stock option, restricted stock and other incentive compensation plans, which shall provide benefits comparable to those to which she was provided immediately prior to the effective date of this Agreement. c. She shall be eligible to participate on a reasonable basis in tax- qualified employee benefit plans (including but not limited to pension, profit sharing and employee stock ownership plans), and supplemental non-qualified employee benefit plans relating thereto, which shall provide benefits comparable to those to which she was provided immediately prior to the effective date of this Agreement. d. She shall be entitled to receive employee welfare benefits (currently elected medical, dental and life insurance benefits) and perquisites which are comparable to those to which she was provided immediately prior to the effective date of this Agreement. 5. Termination. "Termination" shall mean either (a) termination by the Company of the employment of the Executive with the Company for any reason other than death, physical or mental incapacity, or cause (as defined below), or (b) resignation of the Executive upon the occurrence of any of the following events: (1) a significant change in the nature or scope of the Executive's authorities, powers, functions, or duties from those described in Section 3; (2) a reduction in total compensation from that provided in Section 4; (3) the breach by the Company of any other provision of this Agreement; or (4) a reasonable determination by the Executive that, as a result of a change in control of the Company her position is significantly affected so that she is unable to exercise the authorities, powers, functions or duties attached to her position as described in Section 3. "Cause" means gross misconduct or willful and material breach of this Agreement by the Executive. No act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interest of the Company. 6. Confidentiality. The Executive agrees that during and after the employment period, she will not divulge or appropriate to her own use or the use of others any secret or confidential information or knowledge pertaining to the business of the Company, or any of its subsidiaries, obtained during her employment by the Company or any of its subsidiaries. 7. Severance and Benefit Payments. a. In the event of termination of the Executive during the employment period, the Company shall pay the Executive a lump-sum severance allowance equal to salary and bonus payments for the following 24 calendar months. The initial salary rate shall not be less than her annual salary immediately prior to termination, or if greater, not less than her annual salary immediately prior to the change in control of the Company; such salary shall be increased every March 1, thereafter, according to the then current Hewitt Associate's projection for movement in executive base salaries. The initial bonus amount shall not be less than the annual equivalent of the incentive bonus calculated under Section 4(a)(1) of the Salaried Employees Compensation and Benefits Protection Plan; such bonus amount shall be increased every January 1, thereafter, according to the then current Hewitt Associates' projection for movement in executive total cash compensation. The lump-sum severance allowance shall not be adjusted on a present value basis. b. In the event of termination of the Executive during the employment period, the Company shall also pay the Executive a lump-sum benefit payment in an amount equivalent to (1) the benefits she would have accrued or been allocated under any tax-qualified employee benefit plan (including but not limited to pension, profit sharing and employee stock ownership plans) and any non-qualified supplemental benefit plan relating thereto, maintained by the Company as if she had remained in the employ of the Company for 24 calendar months after her termination, which benefits will be paid in addition to the benefits provided under such plans and (2) employee welfare benefits (currently elected coverage under the medical, dental and life insurance programs) to which she would have been entitled under all such employee benefit plans, programs or arrangements maintained by the Company as if she had remained in the employ of the company for 24 calendar months after her termination. Such a benefit payment shall be adjusted to include expected increases to the Executive's salary, bonus and other compensation as specified in paragraph 7a. having an effect on such benefits for such period. The lump-sum benefit payment shall not be adjusted on a present value basis (except for benefits accrued in a defined benefit pension plan). c. The amount of the severance allowance and benefit payment described in this Section shall be determined and such payment shall be made as soon as it is reasonably practicable. d. The severance allowance and benefit payment to be provided pursuant to this Section 7 shall be in addition to, and shall not be reduced by, any other amounts or benefits provided by separate agreement with the Executive, or plan or arrangement of the Company or its subsidiaries, unless specifically stipulated in an agreement which constitutes an amendment to this Agreement as provided in Section 14. 8. Make-Whole Payments. If any amount payable to the Executive by the Company or any subsidiary or affiliate thereof, whether under this Agreement or otherwise (a "Payment"), is subject to any tax under section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code"), or any similar federal or state law (an "Excise Tax"), the Company shall pay to the Executive an additional amount (the "Make Whole-Amount") which is equal to (I) the amount of the Excise Tax, plus (II) the aggregate amount of any interest, penalties, fines or additions to any tax which are imposed in connection with the imposition of such Excise Tax, plus (III) all income, excise and other applicable taxes imposed on the Executive under the laws of any Federal, state, or local government or taxing authority by reason of the payments required under clause (I) and clause (II) and this clause (III). a.For purposes of determining the Make-Whole Amount, the Executive shall be deemed to be taxed at the highest marginal rate under all applicable local, state, federal and foreign income tax laws for the year in which the Make-Whole Amount is paid. The Make-Whole Amount payable with respect to an Excise Tax shall be paid by the Company coincident with the Payment with respect to which such Excise Tax relates. b.All calculations under this paragraph 8 shall be made initially by the Company and the Company shall provide prompt written notice thereof to the Executive to timely file all applicable tax returns. Upon request of the Executive, the Company shall provide the Executive with sufficient tax and compensation data to enable the Executive or her tax advisor to independently make the calculations described in subparagraph a. above and the Company shall reimburse the Executive for reasonable fees and expenses incurred for any such verification. c.If the Executive gives written notice to the Company of any objection to the results of the Company's calculations within 60 days of the Executive's receipt of written notice thereof, the dispute shall be referred for determination to tax counsel selected by the independent auditors of the Company ("Tax Counsel"). The Company shall pay all fees and expenses of such Tax Counsel. Pending such determination by Tax Counsel, the Company shall pay the Executive the Make-Whole Amount as determined by it in good faith. The Company shall pay the Executive any additional amount determined by Tax Counsel to be due under this Section 8 (together with interest thereon at a rate equal to 120% of the Federal short-term rate determined under section 1274(d) of the Code) promptly after such determination. d.The determination by Tax Counsel shall be conclusive and binding upon all parties unless the Internal Revenue Service, a court of competent jurisdiction, or such other duly empowered governmental body or agency (a "Tax Authority") determines that the Executive owes a greater or lesser amount of Excise Tax with respect to any Payment than the amount determine by Tax Counsel. e.If a Tax Authority makes a claim against the Executive which, if successful, would require the Company to make a payment under this Section 8, the Executive agrees to contest the claim on request of the Company subject to the following conditions: (1) The Executive shall notify the Company of any such claim within 10 days of becoming aware thereof. In the event that the Company desires the claim to be contested, it shall promptly (but in no event more than 30 days after the notice from the Executive or such shorter time as the Tax Authority may specify for responding to such claim) request the Executive to contest the claim. The Executive shall not make any payment of any tax which is the subject of the claim before the Executive has given the notice or during the 30-day period thereafter unless the Executive receives written instructions from the Company to make such payment together with an advance of funds sufficient to make the requested payment plus any amounts payable under this Section 8 determined as if such advance were an Excise Tax, in which case the Executive will act promptly in accordance with such instructions. (2) If the Company so requests, the Executive will contest the claim by either paying the tax claimed and suing for a refund in the appropriate court or contesting the claim in the United States Tax Court or other appropriate court, as directed by the Company; provided, however, that any request by the Company for the Executive to pay the tax shall be accompanied by an advance from the Company to the Executive of funds sufficient to make the requested payment plus any amounts payable under this Section 8 determined as if such advance were an Excise Tax. If directed by the Company in writing the Executive will take all action necessary to compromise or settle the claim, but in no event will the Executive compromise or settle the claim or cease to contest claim without the written consent of the Company; provided, however, that the Executive may take any such action if the Executive waives in writing her right to a payment under this Section 8 for any amounts payable in connection with such claim. The Executive agrees to cooperate in good faith with the Company in contesting the claim and to comply with any reasonable request from the Company concerning the contest of the claim, including the pursuit of administrative remedies, the appropriate forum for any judicial proceedings, and the legal basis for contesting the claim. Upon request of the Company, the Executive shall take appropriate appeals of any judgment or decision that would require the Company to make a payment under this Section 8. Provided that the Executive is in compliance with the provisions of this section, the Company shall be liable for and indemnify the Executive against any loss in connection with, and all costs and expenses, including attorney's fees, which may be incurred as a result of, contesting the claim, and shall provide the Executive within 30 days after each written request therefor by the Executive cash advances or reimbursement for all such costs and expenses actually incurred or reasonably expected to be incurred by the Executive as a result of contesting the claim. f.Should a Tax Authority finally determine that an additional Excise Tax is owed, then the Company shall pay an additional Make-Up Amount to the Executive in a manner consistent with this Section 8 with respect to any additional Excise Tax and any assessed interest, fines, or penalties. If any Excise Tax as calculated by the Company or Tax Counsel, as the case may be, is finally determined by a Tax Authority to exceed the amount required to be paid under applicable law, then the Executive shall repay such excess to the Company, but such repayment shall be reduced by the amount of any taxes paid by the Executive on such excess which are not offset by the tax benefit attributable to the repayment. 9. Mitigation and Set Off. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. The Company shall not be entitled to set off against the amounts payable to the Executive under this Agreement any amounts owed to the Company by the Executive, any amounts earned by the Executive in other employment after termination of her employment with the Company, or any amounts which might have been earned by the Executive in other employment had she sought such other employment. 10. Arbitration of All Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof, except with respect to Section 8, shall be settled by arbitration in the City of Chicago in accordance with the laws of the State of Illinois by three arbitrators appointed by the parties. If the parties cannot agree on the appointment, one arbitrator shall be appointed by the Company and one by the Executive, and the third shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States Court of Appeals for the Seventh Circuit. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 10. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel or incur other costs and expenses in connection with enforcement of her rights under this Agreement, Executive shall be entitled to recover from the Company her reasonable attorneys' fees and costs and expenses in connection with enforcement of her rights (including the enforcement of any arbitration award in court). Payment shall be made to the Executive by the Company at the time these attorneys' fees and costs and expenses are incurred by the Executive. If, however, the arbitrators should later determine that under the circumstances the Executive could have had no reasonable expectation of prevailing on the merits at the time she initiated the arbitration based on the information then available to her, she shall repay any such payments to the Company in accordance with the order of the arbitrators. Any award of the arbitrators shall include interest at a rate or rates considered just under the circumstances by the arbitrators. 11. Notices. Any notices, requests, demands, and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address she has filed in writing with the Company or, in the case of the Company, at its principal executive offices. 12. Non-Alienation. The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law. Nothing in this paragraph shall limit the Executive's rights or powers which her executor or administrator would otherwise have. 13. Governing Law. The Agreement shall be construed and enforced according to the Employee Retirement Income Security Act of 1974 ("ERISA"), and the laws of the State of Illinois, other than its laws respecting choice of law, to the extent not pre-empted by ERISA. 14. Amendment. This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 15. Term. Unless the Executive has theretofore declared this Agreement effective, pursuant to Section 1 of this Agreement, this Agreement shall terminate (a) March 31, 1998 or (b) when the Executive has been placed on inactive service by the Company prior to a change in control of the Company. 16. Successors to the Company. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company. 17. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 18. Prior Agreement. Any prior Executive Separation Agreement between the Executive and the Company which has not yet terminated pursuant to its terms, is canceled by mutual consent of the Executive and the Company pursuant to execution of this Agreement, effective as of the day and year first above written. IN WITNESS WHEREOF, the Executive has hereunto set her hand and, pursuant to the authorization from its Board, the Company has caused these presents to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Assistant Secretary, all as of the day and year first above written. ATTEST: THE QUAKER OATS COMPANY Gerald A. Cassioppi By: /s/Douglas J. Ralston Assistant Secretary Its: Senior Vice President By: /s/ Barbara Allen Its: EXECUTIVE THE QUAKER SUPPLEMENTAL EXECUTIVE RETIREMENT PROGRAM Schedule A Additional Participant Effective Date Years of Service William D. Smithburg 8/1/89 -0- Frank J. Morgan 8/1/89 -0- Luther C. McKinney 8/1/89 -0- Paul E. Price 8/1/89 -0- Michael J. Callahan 8/1/89 -6- Lawrence M. Baytos 8/1/89 -0- Philip A. Marineau 1/8/92 -0- Douglas J. Ralston 1/8/92 -0- Terry G. Westbrook 1/8/92 -2- Walter G. Van Benthuysen 7/14/93 -1- Robert S. Thomason 11/13/96 -0- A. Stephen Diamond 11/13/96 -0- EX-11 14 EXHIBIT 11 THE QUAKER OATS COMPANY AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS Calculation of Fully Diluted Earnings Per Share Dec 31, Dec 31, Dec 31, Dollars in Millions (Except Per Share Data) 1996 1995 1994 Income Before Cumulative Effect of Accounting Change $247.9 $724.0 $193.1 Less: Adjustments attributable to conversion of ESOP Convertible Preferred Stock (0.8) (1.0) (1.3) Income Before Cumulative Effect of Accounting Change Used for Fully Diluted Calculation 247.1 723.0 191.8 Cumulative Effect of Accounting Change - net of tax -- -- (4.1) Net Income Used for Fully Diluted Calculation $247.1 $723.0 $187.7 Shares in Thousands Average Number of Common Shares Outstanding 135,466 134,149 133,709 Plus Dilutive Securities: Stock Options 1,276 1,309 1,703 ESOP Convertible Preferred Stock 2,441 2,586 2,659 Average Shares Outstanding Used for Fully Diluted Calculation 139,183 138,044 138,071 Fully Diluted Earnings Per Share Before Cumulative Effect of Accounting Change $ 1.78 $ 5.23 $ 1.39 Fully Diluted Cumulative Effect of Accounting Change -- -- (0.03) Fully Diluted Earnings Per Share $ 1.78 $ 5.23 $ 1.36 EX-12 15 EXHIBIT 12 THE QUAKER OATS COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions) Year Ended Dec. 31, 1996 Dec. 31, 1995 Earnings: Income Before Income Taxes $415.6 $1,220.5 Add Fixed Charges - net of capitalized interest 118.2 147.3 Earnings $533.8 $1,367.8 Fixed Charges Interest on Indebtedness $112.3 $ 139.5 Portion of rents representative of the interest factor 12.1 12.1 Fixed Charges $124.4 $ 151.6 Ratio of Earnings to Fixed Charges (a) 4.29 9.02 (a) For purposes of computing the ratio of earnings to fixed charges, earnings represent pretax income from continuing operations plus fixed charges (net of capitalized interest). Fixed charges represent interest (whether expensed or capitalized) and one-third (the portion deemed representative of the interest factor) of rents. EX-13.1 16 Exhibit 13 Management's Discussion and Analysis Operating Results The following discussion addresses the operating results and financial condition of the Company for the year ended December 31, 1996, which represents the first full calendar year since the Company changed from a June 30 fiscal year. Previously reported amounts have been restated to conform to the current presentation. The comparisons of 1996 operations to those of 1995, and of 1995 to 1994 are affected by the significant changes the Company has made in its portfolio of businesses during these years. As a result of these changes, comparative results are more difficult to analyze. To aid in the analysis of operating results, this discussion will address the financial results as reported, then note the impact of divested businesses where applicable, and finally, review the results of the ongoing businesses by industry segment. See Note 2 to the Consolidated Financial Statements for further discussion of the Company's acquisition and divestiture activities. The following tables summarize the net sales and operating results of the Company for the years ended December 31, 1996 (current year), 1995 (prior year) and 1994:
Net Sales Dollars in Millions Year Ended December 31 1996 1995 1994 U.S. and U.S. and U.S. and Canadian International Total Canadian International Total Canadian International Total Foods $2,559.2 $625.5 $3,184.7 $2,604.9 $ 594.5 $3,199.4 $2,518.6 $ 543.2 $3,061.8 Beverages 1,614.7 314.0 1,928.7 1,603.9 353.8 1,957.7 933.4 268.7 1,202.1 Ongoing Businesses 4,173.9 939.5 5,113.4 4,208.8 948.3 5,157.1 3,452.0 811.9 4,263.9 Divested Businesses 81.6 4.0 85.6 376.5 420.4 796.9 950.0 997.2 1,947.2 Total Company $4,255.5 $943.5 $5,199.0 $4,585.3 $1,368.7 $5,954.0 $4,402.0 $1,809.1 $6,211.1 Operating Income (Loss) Dollars in Millions Year Ended December 31 1996 1995 1994 U.S. and U.S. and U.S. and Canadian International Total Canadian International Total Canadian International Total Foods $ 359.8 $ 6.6 $ 366.4 $ 260.2 $(22.7) $ 237.5 $ 320.9 $ 50.2 $371.1 Beverages 84.4 (29.7) 54.7 18.9 (58.0) (39.1) 69.8 (29.1) 40.7 Ongoing Businesses 444.2 (23.1) 421.1 279.1 (80.7) 198.4 390.7 21.1 411.8 Gains on divestitures 133.6 2.8 136.4 604.2 566.6 1,170.8 -- 9.8 9.8 Divested Businesses 7.9 0.5 8.4 29.7 16.1 45.8 1.9 62.9 64.8 141.5 3.3 144.8 633.9 582.7 1,216.6 1.9 72.7 74.6 Total Company $ 585.7 $ (19.8) $ 565.9 $ 913.0 $502.0 $1,415.0 $ 392.6 $ 93.8 $486.4 Note: Operating results include certain allocations of overhead expenses. "Foods": includes all food lines as well as the food service business. "Beverages": includes Gatorade thirst quencher sports beverages and Snapple premium teas and fruit drinks. "Ongoing Businesses": includes the net sales and operating income of all Company businesses not reported as Divested Businesses (see below). "Divested Businesses": 1996 includes current year (through the divestiture date) net sales and operating income for the U.S. and Canadian frozen foods business (July 1996) and Italian products business (January 1996). 1995 includes prior year net sales and operating income for the following businesses (through their respective divestiture dates): U.S. and Canadian pet food (March 1995), U.S. bean and chili (June 1995), European pet food (April 1995), Mexican chocolate (May 1995), Dutch honey (February 1995) and the businesses divested in 1996. 1994 includes net sales and operating income for the year ended December 31, 1994 for businesses divested in 1995 and 1996. "Gains on divestitures": 1996 includes pretax gains related to the following divestitures: U.S. and Canadian frozen foods business ($133.6 million) and Italian products business ($2.8 million). 1995 includes pretax gains on the following divestitures: U.S. and Canadian pet food ($513.0 million), U.S. bean and chili ($91.2 million), European pet food ($487.2 million), Mexican chocolate ($74.5 million) and Dutch honey ($4.9 million). 1994 includes pretax gains on the divestiture of a business in Venezuela ($9.8 million).
25 1996 Compared with 1995 Consolidated net sales decreased 13 percent primarily due to the absence of divested businesses in the current year. Divested businesses accounted for $85.6 million and $796.9 million of sales in 1996 and 1995, respectively. (See "Divested Businesses" footnote in the preceding tables.) Sales were up for U.S. Gatorade thirst quencher and hot cereals, Canadian and International Foods; however, these increases were offset by declines in Snapple beverages, ready-to-eat cereals (due to a June price reduction) and rice cakes, as well as declines in less profitable sales in the food service coffee, Golden Grain and European beverages businesses. With the exception of a ready-to-eat cereals price reduction, price changes did not have a significant impact on 1996 sales. Consolidated gross profit margin was 46.0 percent in 1996 compared to 44.7 percent in 1995. The gross profit margin increase is primarily due to lower costs in the U.S. and Canadian Beverages business. Selling, general and administrative (SG&A) expenses declined 16 percent, driven by an 18 percent decrease in advertising and merchandising (A&M) expenses. $182.6 million of the decrease in A&M spending relates to the absence of divested businesses in the current year. The remaining decrease reflects increased efficiency in A&M spending in U.S. and Canadian Foods and Gatorade thirst quencher businesses. A&M expenses were 23.1 percent of sales, down from 24.6 percent in the prior year. The Company intends to continue to implement changes in A&M programs in an effort to increase the efficiency and effectiveness of its sales efforts. Consolidated operating income of $565.9 million for the current year included $136.4 million in gains on divestitures. Prior year operating income of $1.42 billion included $1.17 billion in gains on divestitures. (See "Gains on divestitures" footnote in the preceding tables.) Operating income in 1996 and 1995 also included restructuring charges of $23.0 million and $117.3 million, respectively. Estimated savings from the 1996 restructuring actions are about $6 million annually beginning in 1997, of which approximately 90 percent will be in cash. See Note 3 to the Consolidated Financial Statements for further discussion on restructuring charges. Excluding the gains on divestitures, restructuring charges and operating income from divested businesses in both years, operating income of $444.1 million increased 41 percent from the prior year, reflecting improvement across the Foods and Beverages segments. Net financing costs (net interest expense and foreign exchange losses) decreased $25.5 million in the current year. Debt levels declined due to proceeds from the 1996 and 1995 divestitures, resulting in lower interest expense. The effective tax rate in 1996 was 40.4 percent versus 40.7 percent in the prior year. Excluding the impact of the gains on divestitures and restructuring charges in both years, and a non-recurring foreign tax benefit of $7.2 million in the current year, the effective tax rate was 41.0 percent in 1996 versus 40.2 percent in 1995. Industry Segment Operating Results Foods - U.S. and Canadian net sales declined 2 percent on flat volume. During 1996 the Company implemented changes in the A&M programs of its U.S. and Canadian businesses with the intention of removing less profitable promotions from its merchandising mix. Operating income margins expanded both in businesses with volume increases, including hot cereals, Canadian foods and granola bars, as well as those with volume declines, including Golden Grain and food service, reflecting the success of these A&M program changes. During 1996 the rice cakes and ready-to-eat cereals businesses faced significant competitive issues which adversely affected sales. Rice cakes volume declined due to increased competitive pressure in the low-fat snacks category. In June, the Company took price reductions averaging 15 percent on 87 percent of its ready-to-eat cereals brands. These pricing actions, a response to comparable actions taken by major competitors, resulted in significantly lower ready-to- eat sales and operating income in 1996 as compared to 1995. The adverse affect of the price reductions on ready-to-eat cereals operating income was partially mitigated by a 3 percent volume gain in ready-to-eat cereals. International sales were up 5 percent while volume decreased 2 percent compared to the prior year. Price increases in the Latin American business, particularly in Brazil, were the key driver of the International sales gain. Volume declines were primarily in the Brazilian pasta and European foods businesses, which more than offset volume gains in other foods businesses in Brazil and Venezuela. The Brazilian pasta volume decline was due to competitive pricing pressures, while the decrease in European foods volume reflects the business realignment in that region. 1996 operating income included $6.4 million of restructuring charges related to U.S. plant consolidations. 1995 operating income included restructuring charges of $39.1 million and $31.3 million for cost-reduction and realignment activities in the U.S. and Canadian and International businesses, respectively. Excluding these charges, operating income increased $64.9 million or 21 percent compared to 1995. U.S. and Canadian operating results excluding restructuring 26 charges reflected a 2.8 percentage-point improvement in operating margin, mainly the result of A&M efficiency improvements. The International operating income increase from the prior year is primarily due to the absence of 1995 restructuring charges. Improved profits in Europe were offset by operating income declines in Latin America, due to increased operating losses in the Brazilian pasta business. Beverages - Net sales decreased 1 percent reflecting lower Snapple beverages volume, which offset Gatorade thirst quencher volume gains. U.S. and Canadian sales increased 1 percent while volume decreased 2 percent. U.S. and Canadian Gatorade thirst quencher sales growth of 5 percent on a 4 percent volume gain was aided by successful new flavors and packaging and retail shelf space gains. U.S. and Canadian Snapple beverages sales were 8 percent below last year on a volume decline of 11 percent. A shift in the sales mix (Company-owned versus third-party distribution) resulted in the disproportionate sales and volume changes. Sales results trailed the prior year as Snapple beverages never gained necessary volume momentum early in the beverage season. In addition, a mid-summer change in advertising and promotion tactics, which resulted in over $20 million of incremental marketing expenses, did not generate anticipated volume gains. The sales decline, combined with higher marketing and overhead expenses, increased U.S. Snapple beverages operating loss versus 1995. International sales and volume decreased 11 percent primarily due to decreases in European Gatorade thirst quencher, reflecting 1995 restructuring actions, and declines in International Snapple beverages. 1996 operating income of the U.S. and Canadian business included restructuring charges of $16.6 million related to the transition from a Company-owned Snapple beverages distributor in certain Texas markets to a third-party beverages distributor. 1995 total Beverages operating results included restructuring charges of $46.9 million for cost-reduction and realignment activities and a $19.1 million inventory charge related to Snapple beverages. In the U.S. and Canadian business an increase in gross margin was a key driver of operating profitability improvement. Gross margin increased 3.6 percentage-points primarily due to cost-reductions and other supply chain efficiency gains. A&M spending was lower than the prior year with significant efficiencies in Gatorade thirst quencher A&M offsetting increases in Snapple beverages support. The improvement in International operating results was mainly due to overhead reductions, principally in Europe. 1995 Compared with 1994 Consolidated net sales decreased 4 percent primarily due to the businesses divested in 1995. Net sales from ongoing businesses increased 21 percent largely due to the inclusion of a full year of Snapple beverages operations. Snapple beverages contributed $610.3 million in sales in 1995 compared to $25.0 million in 1994. Excluding Snapple beverages from the comparison, sales rose 7 percent reflecting growth in the ongoing Foods and Beverages segments. Price increases did not significantly affect the comparison of 1995 and 1994 net sales. Significant changes in the Company's portfolio account for the decline in gross profit margin from 49.7 percent in 1994 to 44.7 percent in 1995. The inclusion of Snapple beverages and an inventory charge of $19.1 million, pertaining to Snapple beverages, contributed to the overall gross profit margin percentage decline, as did changes in the product mix and geographic segment mix of the Foods businesses. SG&A expenses were 8 percent lower than 1994 due mainly to a 13 percent decrease in A&M spending. The Company spent $204.8 million in 1995 and $531.1 million in 1994 on A&M to support businesses that have been divested. For ongoing businesses, A&M expenses were 24.4 percent and 27.1 percent of sales in 1995 and 1994, respectively. 1995 consolidated operating income increased over $900 million from 1994, largely driven by gains on divestitures of $1.17 billion in 1995. Operating income from ongoing businesses declined in 1995 mainly due to lower gross profit margin in the Foods segment and the Snapple beverages operating loss. Restructuring charges of $117.3 million in 1995 were down $1.1 million from 1994; $45.8 million of the 1994 restructuring charges pertained to Divested businesses. Net financing costs (net interest expense and foreign exchange losses) increased by $28.3 million in 1995 to $133.8 million. Higher interest expense, resulting from borrowings related to the Company's 1994 acquisitions, was partly offset by lower foreign exchange losses. The effective tax rate in 1995 was 40.7 percent versus 39.7 percent in 1994. Excluding the impact of the gains on divestitures and restructuring charges in 1995 and 1994, the effective tax rates were 40.2 and 40.1 percent, respectively. Industry Segment Operating Results Foods - 1995 net sales increased 4 percent from 1994, with higher sales in both the U.S. and Canadian and International businesses. U.S. and Canadian sales rose 3 percent on a volume gain of 2 percent, driven by growth in grain-based snacks, Canadian foods, food service and Golden Grain, which more than offset declines in ready-to-eat and hot cereals. Hot cereals 1995 sales performance was adversely affected by increased competition from private-label products. 27 International sales and volume increases of 9 percent and 31 percent, respectively, reflect the overall changes made in the International portfolio, most notably the November 1994 acquisition of the Brazilian pasta business. U.S. and Canadian operating income was down 19 percent, almost entirely due to a decline in gross profit margin primarily driven by a change in the mix of products sold, principally lower sales of hot and ready-to-eat cereals. 1995 operating income of U.S. and Canadian Foods included $39.1 million of restructuring charges related to cost-reduction and realignment activities. 1995 restructuring charges were $23.6 million lower than 1994, with the decrease in charges offset by higher overhead expenses in 1995. International 1995 operating results were adversely affected by restructuring charges of $31.3 million related to business realignment (compared to $5.3 million in 1994) and operating losses of the Brazilian pasta business. Reduced inflation and currency changes in Brazil also contributed to the operating income decline, although lower net financing costs in that country more than offset the decline. Beverages - The comparison of 1995 and 1994 operating results of the Beverages segment is significantly affected by the December 1994 acquisition of Snapple beverages. 1995 net sales increased 63 percent, reflecting the first full year of Snapple beverages sales. U.S. and Canadian sales increased $670.5 million with $539.1 million of the increase due to Snapple beverages and the remaining growth driven by Gatorade thirst quencher. New packaging, new flavors and favorable weather conditions all contributed to the U.S. and Canadian Gatorade thirst quencher's 15 percent sales increase on a 13 percent volume gain. The International sales gain of 32 percent reflects the significant changes made across the Company's International businesses to pursue opportunities for growth in the Latin America and Asia/Pacific regions. Excluding Snapple beverages, International sales grew 15 percent in 1995, with growth in Latin America and Asia/Pacific regions more than offsetting lower sales in Europe. The U.S. and Canadian Beverages 1995 operating income declined $50.9 million from 1994, with the Snapple beverages operating loss more than offsetting Gatorade thirst quencher operating income increases. The Snapple beverages 1995 operating loss included a restructuring charge of $24.4 million to reduce excess contract manufacturing capacity and an inventory charge of $19.1 million for excess and obsolete ingredients, labels, packaging and finished product. Operating income for Gatorade thirst quencher in the U.S. and Canadian business increased significantly over 1994 driven by sales growth and lower A&M spending. U.S. and Canadian cost-reduction and realignment activities resulted in $8.0 million of restructuring charges in 1995, a $3.6 million increase from 1994. The International operating loss increased in 1995 driven by a $14.5 million restructuring charge for realignment activities in Gatorade thirst quencher, mainly in Europe, and underwriting of expansion in the Latin America and Asia/Pacific regions. Liquidity and Capital Resources Net cash provided by operating activities was $410.4 million in 1996, an increase of $3.3 million compared to 1995, reflecting improvements in operating profitability. Net cash provided by operating activities in 1995 and 1994 was $407.1 million and $415.8 million, respectively. Operating cash flow in 1995 was adversely impacted by lower gross margins in 1995 compared to 1994 and a decrease in current liabilities that reflected the reduction of 1994 tax liabilities related to divestiture gains and payments related to restructuring liabilities. Capital expenditures were $242.7 million, $301.2 million and $218.5 million for 1996, 1995 and 1994, respectively. Capital expenditures are expected to continue at about the current rate in 1997, as the Company plans to continue its expansion of production capacity for beverages and grain-based products in the United States and China. Additional capital expenditures are planned to support efforts to reduce supply chain costs and improve manufacturing and distribution efficiencies. The Company expects that its future capital expenditures and cash dividends will be financed through cash flow from operating activities. Proceeds from business divestitures and asset dispositions during 1996, 1995 and 1994 were $174.4 million, $1.28 billion and $13.2 million, net of tax, respectively. Net cash outlays related to business acquisitions were $57.3 million in 1995 and $1.83 billion in 1994. The proceeds of the 1995 business divestitures were used to reduce commercial paper borrowings secured in 1994 to finance the Snapple beverages acquisition. Cash provided from the 1996 divestitures was primarily used to further reduce short-term debt. Financing activities used cash of $331.3 million and $1.34 billion in 1996 and 1995, respectively, primarily reflecting the use of business divestiture proceeds to reduce short-term debt. Net cash of $1.64 billion was provided by the Company's 1994 financing activities, principally the commercial paper borrowings used to finance the Snapple beverages acquisition. Short-term and long-term debt (total debt) as of December 31, 1996 was $1.56 billion, a decrease of $202.2 million from December 31, 1995. Total debt at December 31, 1994 was $2.96 billion. The total debt-to-total capitalization ratio was 55.6 percent, 61.7 percent and 86.3 percent as of December 31, 1996, 1995 and 1994, respectively. 28 The Company reduced the level of its revolving credit facilities by $300.0 million during the second quarter and an additional $300.0 million during the fourth quarter of 1996. The Company now has a $900.0 million annually extendible five-year revolving credit facility. Credit facilities secured by the Company have dramatically decreased over the last two years as commercial paper borrowings supported by the revolving credit facilities were reduced. The Company's levels of revolving credit facilities at December 31, 1995 and 1994 were $1.5 billion and $2.4 billion, respectively. Following the announcement by the Company in June 1996 that the Snapple beverages business would operate at a level significantly below break-even for the year and that price reductions in the ready-to-eat cereal category would negatively impact 1996 results, the credit rating agencies announced that they would review the status of the Company's debt ratings. In late 1996 the Company's long-term debt ratings were downgraded and its commercial paper ratings were affirmed. The Company's long-term debt and commercial paper ratings had been previously downgraded early in 1995 by Moody's and early in 1996 by Standard & Poor's and Fitch. The Company's current debt and commercial paper ratings are as follows: Standard & Poor's (BBB+ and A2); Fitch (BBB and F2); and Moody's (Baa1 and P2). The Company utilizes derivative financial instruments to hedge exposure to foreign currency fluctuations. The majority of the Company's international business is currently in Latin American countries, principally Brazil, where hedging markets are rapidly evolving but are not yet as developed or as efficient as the traditional foreign exchange markets. The Company's exposure to European foreign currency changes has been significantly reduced due to the divestiture of the European pet food and Italian products businesses. The Company intends to continue to use foreign currency hedge instruments to reduce the risk that the U.S. dollar value of cash flows from foreign operations will decrease as exchange rates fluctuate. Additional information on the Company's hedging activities is in Note 7 to the Consolidated Financial Statements. Current Accounting Changes In October 1995, the Financial Accounting Standards Board (FASB) issued Statement #123, "Accounting for Stock-Based Compensation." The Company implemented the disclosure provisions of this Statement in 1996, and has decided that it will not recognize the expense related to stock options in the financial statements. See Note 10 to the Consolidated Financial Statements for further discussion. Cautionary Statement on Forward-Looking Statements Forward-looking statements, within the meaning of Section 21E of the Securities and Exchange Act of 1934, are made throughout this Management's Discussion and Analysis. The Company's results may differ materially from those in the forward-looking statements. Forward-looking statements are based on management's current views and assumptions, and involve risks and uncertainties that could significantly affect expected results. For example, operating results may be affected by external factors such as: actions of competitors; changes in laws and regulations, including changes in governmental interpretations of regulations and changes in accounting standards; customer demand; effectiveness of spending or programs; distributor relations; fluctuations in the cost and availability of supply chain resources; and foreign economic conditions, including currency rate fluctuations. The Company has evaluated the recoverability of Snapple beverages long-lived assets as of December 31, 1996 pursuant to FASB Statement #121. Although the Company's latest evaluation of recoverability has not resulted in the recognition of an impairment loss, given the disappointing performance of the business, management expects to update its assessment during 1997. Accordingly, the Company's estimate of undiscounted future cash flows to be generated by Snapple beverages could change in the near term. A change that results in recognition of an impairment loss would require the Company to reduce the carrying value of Snapple beverages to fair market value, which is significantly below the current carrying value of the long-lived assets. The carrying value of Snapple beverages long-lived assets, including intangible assets, as of December 31, 1996 was $1.7 billion. For the U.S. ready-to-eat cereals business, returning the business to higher profit levels will largely depend on the competitive environment and the Company's achievement of greater levels of efficiency and effectiveness in A&M and overhead spending. The reduction of future operating losses of the Brazilian pasta business will depend on the competitive and commodity environments. The Company will be reviewing strategies relative to this business during the first half of 1997. 29 EX-13.2 17
Five-Year Year Ended December 31 1996 1995 1994 1993 1992 Selected Financial Data Operating Results(a)(b)(c)(d)(e)(f)(g) Net sales $ 5,199.0 $ 5,954.0 $6,211.1 $5,791.9 $ 5,704.7 Gross profit 2,391.5 2,659.6 3,088.4 2,920.0 2,841.1 Income before income taxes and cumulative effect of accounting changes 415.6 1,220.5 320.4 495.0 465.3 Provision for income taxes 167.7 496.5 127.3 190.4 188.4 Income before cumulative effect of accounting changes 247.9 724.0 193.1 304.6 276.9 Cumulative effect of accounting changes - net of tax -- -- (4.1) -- (115.5) Net income $ 247.9 $ 724.0 $ 189.0 $ 304.6 $ 161.4 Per common share: Income before cumulative effect of accounting changes $ 1.80 $ 5.39 $ 1.41 $ 2.14 $ 1.85 Cumulative effect of accounting changes -- -- (0.03) -- (0.79) Net income $ 1.80 $ 5.39 $ 1.38 $ 2.14 $ 1.06 Dividends declared: Common stock $ 153.3 $ 150.8 $ 145.8 $ 138.2 $ 131.8 Per common share $ 1.14 $ 1.14 $ 1.10 $ 1.01 $ 0.91 Convertible preferred and redeemable preference stock $ 3.7 $ 4.0 $ 4.0 $ 4.1 $ 4.2 Average number of common shares outstanding (in thousands) 135,466 134,149 133,709 139,833 146,135 (a) 1996 operating results include pretax restructuring charges of $23.0 million, or $.14 per share, and pretax gains of $136.4 million, or $.60 per share, for business divestitures. (b) 1995 operating results include pretax restructuring charges of $117.3 million, or $.53 per share, and pretax gains of $1.17 billion, or $5.20 per share, for business divestitures. (c) 1994 operating results include pretax restructuring charges of $118.4 million, or $.55 per share, and a pretax gain of $9.8 million, or $.07 per share, for a business divestiture. (d) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1994 through 1996 gains on divestitures and restructuring charges. (e) See Note 13 to the consolidated financial statements for discussion of the 1994 cumulative effect of accounting change. (f) Per share data reflect the 1994 two-for-one stock split-up. (g) 1992 cumulative effect of accounting changes includes an after-tax charge of $125.4 million for the adoption of FASB Statement #106 and a $9.9 million tax benefit for the adoption of FASB Statement #109. 30 Dollars in Millions (Except Per Share Data) Year Ended December 31 1996 1995 1994 1993 1992 Financial Statistics Current ratio 0.7 0.6 0.5 0.9 1.2 Working capital $ (465.0) $ (621.6) $(1,616.9) $ (89.4) $ 177.6 Property, plant and equipment - net $1,200.7 $1,167.8 $ 1,333.1 $1,222.0 $1,217.2 Depreciation expense $ 119.1 $ 115.3 $ 133.1 $ 132.3 $ 131.7 Total assets $4,394.4 $4,620.4 $ 5,061.1 $2,805.2 $2,783.2 Long-term debt $ 993.5 $1,051.8 $ 1,025.9 $ 708.4 $ 673.8 Convertible preferred stock (net of deferred compensation) and redeemable preference stock $ 19.0 $ 17.7 $ 17.0 $ 13.1 $ 9.5 Common shareholders' equity $1,229.9 $1,079.3 $ 452.7 $ 437.4 $ 780.0 Net cash provided by operating activities $ 410.4 $ 407.1 $ 415.8 $ 506.6 $ 503.7 Operating return on assets (a) 13.3% 30.9% 13.1% 24.0% 21.9% Gross profit as a percentage of sales 46.0% 44.7% 49.7% 50.4% 49.8% Advertising and merchandising as a percentage of sales 23.1% 24.6% 27.2% 25.9% 25.6% Income before cumulative effect of accounting changes as a percentage of sales 4.8% 12.2% 3.1% 5.3% 4.9% Total debt-to-total capitalization ratio (b) 55.6% 61.7% 86.3% 69.9% 49.6% Common dividends as a percentage of income available for common shares (excluding cumulative effect of accounting changes) 63.3% 21.2% 78.0% 47.2% 49.2% Number of common shareholders 29,690 30,353 28,142 28,237 33,721 Number of employees worldwide 14,800 16,100 20,753 20,207 20,792 Market price range of common stock: High (c) $39 1/2 $37 1/2 $42 1/2 $38 1/2 $37 3/16 Low (c) $30 3/8 $30 1/4 $29 3/4 $30 3/16 $25 1/8 (a) Operating income divided by average identifiable assets of the consolidated total (excluding corporate). (b) Total debt divided by total debt plus total shareholders' equity including convertible preferred stock (net of deferred compensation) and redeemable preference stock. (c) Per share data reflect the 1994 two-for-one stock split-up. 31
EX-13.3 18 The Quaker Oats Company and Subsidiaries
Eleven-Year Transition Fiscal Selected Financial Data Year Ended Period Ended Years Ended December 31 December 31 June 30 1996 1995 1995 Operating Results(a)(b)(c)(d)(e)(f)(g)(h)(i)(j) Net sales $5,199.0 $2,733.1 $6,365.2 Gross profit 2,391.5 1,203.8 2,983.7 Income from continuing operations before income taxes and cumulative effect of accounting changes 415.6 25.6 1,359.9 Provision for income taxes 167.7 11.9 553.8 Income from continuing operations before cumulative effect of accounting changes 247.9 13.7 806.1 (Loss) income from discontinued operations - net of tax -- -- -- Income from the disposal of discontinued operations - net of tax -- -- -- Cumulative effect of accounting changes - net of tax -- -- (4.1) Net income $ 247.9 $ 13.7 $ 802.0 Per common share: Income from continuing operations before cumulative effect of accounting changes $ 1.80 $ 0.09 $ 6.00 (Loss) income from discontinued operations -- -- -- Income from the disposal of discontinued operations -- -- -- Cumulative effect of accounting changes -- -- (0.03) Net income $ 1.80 $ 0.09 $ 5.97 Dividends declared: Common stock $ 153.3 $ 75.7 $ 150.8 Per common share $ 1.14 $ 0.57 $ 1.14 Convertible preferred and redeemable preference stock $ 3.7 $ 2.0 $ 4.0 Average number of common shares outstanding (in thousands) 135,466 134,355 133,763 (a) 1996 operating results include pretax restructuring charges of $23.0 million, or $.14 per share, and pretax gains of $136.4 million, or $.60 per share, for business divestitures. (b) 1995 transition period reflects only six months of operating results. (c) 1995 transition period operating results include pretax restructuring charges of $40.8 million, or $.18 per share. (d) Fiscal 1995 operating results include pretax restructuring charges of $76.5 million, or $.35 per share, and pretax gains of $1.17 billion, or $5.20 per share, for business divestitures. 32 Dollars in Millions (Except Per Share Data) 1994 1993 1992 1991 1990 1989 1988 1987 1986 $5,955.0 $5,730.6 $5,576.4 $5,491.2 $5,030.6 $4,879.4 $4,508.0 $3,823.9 $2,968.6 3,028.8 2,860.6 2,745.3 2,652.7 2,350.3 2,229.0 2,114.6 1,750.7 1,298.7 378.7 467.6 421.5 411.5 382.4 239.1 314.6 295.9 255.8 147.2 180.8 173.9 175.7 153.5 90.2 118.1 141.3 113.4 231.5 286.8 247.6 235.8 228.9 148.9 196.5 154.6 142.4 -- -- -- (30.0) (59.9) 54.1 59.2 33.5 37.2 -- -- -- -- -- -- -- 55.8 -- -- (115.5) -- -- -- -- -- -- -- $ 231.5 $ 171.3 $ 247.6 $ 205.8 $ 169.0 $ 203.0 $ 255.7 $ 243.9 $ 179.6 $ 1.68 $ 1.96 $ 1.63 $ 1.53 $ 1.47 $ 0.94 $ 1.23 $ 0.98 $ 0.89 -- -- -- (0.20) (0.40) 0.34 0.37 0.22 0.23 -- -- -- -- -- -- -- 0.35 -- -- (0.79) -- -- -- -- -- -- -- $ 1.68 $ 1.17 $ 1.63 $ 1.33 $ 1.07 $ 1.28 $ 1.60 $ 1.55 $ 1.12 $ 140.6 $ 136.1 $ 128.6 $ 118.7 $ 106.9 $ 95.2 $ 79.9 $ 63.2 $ 55.3 $ 1.06 $ 0.96 $ 0.86 $ 0.78 $ 0.70 $ 0.60 $ 0.50 $ 0.40 $ 0.35 $ 4.0 $ 4.2 $ 4.2 $ 4.3 $ 3.6 -- -- -- $ 2.3 135,236 143,948 149,762 151,808 153,074 158,614 159,670 157,624 158,120 (e) Fiscal 1994 operating results include pretax restructuring charges of $118.4 million, or $.55 per share, and a pretax gain of $9.8 million, or $.07 per share, for a business divestiture. (f) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1994 through 1996 gains on divestitures and restructuring charges. (g) See Note 13 to the consolidated financial statements for discussion of fiscal 1995 cumulative effect of accounting change. (h) Fiscal 1993 cumulative effect of accounting changes includes an after- tax charge of $125.4 million for the adoption of FASB Statement #106 and a $9.9 million tax benefit for the adoption of FASB Statement #109. (i)Fiscal 1989 operating results include pretax restructuring charges of $124.3 million, or $.50 per share, for plant consolidations and overhead reductions and a pretax charge of $25.6 million, or $.10 per share, for a change to the LIFO method of accounting for the majority of U.S. Foods and Beverages inventories. (j) Per share data and average number of common shares outstanding reflect the fiscal 1995 two-for-one stock split-up. 33 The Quaker Oats Company and Subsidiaries Eleven-Year Transition Fiscal Years Selected Financial Data Year Ended Period Ended Ended December 31 December 31 June 30 1996 1995 1995 Financial Statistics(a)(b)(c) Current ratio 0.7 0.6 0.7 Working capital $ (465.0) $ (621.6) $ (496.3) Property, plant and equipment - net $1,200.7 $1,167.8 $1,113.4 Depreciation expense $ 119.1 $ 59.2 $ 125.4 Total assets $4,394.4 $4,620.4 $4,826.9 Long-term debt $ 993.5 $1,051.8 $1,103.1 Convertible preferred stock (net of deferred compensation) and redeemable preference stock $ 19.0 $ 17.7 $ 18.8 Common shareholders' equity $1,229.9 $1,079.3 $1,128.8 Net cash provided by operating activities $ 410.4 $ 84.3 $ 475.5 Operating return on assets (d) 13.3% 2.4% 42.3% Gross profit as a percentage of sales 46.0% 44.0% 46.9% Advertising and merchandising as a percentage of sales 23.1% 24.1% 26.3% Income from continuing operations before cumulative effect of accounting changes as a percentage of sales 4.8% 0.5% 12.7% Total debt-to-total capitalization ratio (e) 55.6% 61.7% 59.0% Common dividends as a percentage of income available for common shares (excluding cumulative effect of accounting changes) 63.3% 633.3% 19.0% Number of common shareholders 29,690 30,353 29,148 Number of employees worldwide 14,800 16,100 17,300 Market price range of common stock: High (f) $39 1/2 $37 3/8 $42 1/2 Low (f) $30 3/8 $30 3/4 $29 3/4 (a) Income-related statistics exclude the results of businesses reported as discontinued operations. Balance sheet amounts and related statistics have not been restated for discontinued operations, other than Fisher-Price, due to materiality. (b) 1995 transition period reflects only six months of results. (c) Effective fiscal 1991, common shareholders' equity and number of employees worldwide were reduced as a result of the Fisher-Price spin-off. 34 Dollars in Millions (Except Per Share Data) 1994 1993 1992 1991 1990 1989 1988 1987 1986 1.0 1.0 1.2 1.3 1.3 1.8 1.4 1.4 1.4 $ (5.5) $ (37.5) $ 168.7 $ 317.8 $ 342.8 $ 695.8 $ 417.5 $ 507.9 $ 296.8 $1,214.2 $1,228.2 $1,273.3 $1,232.7 $1,154.1 $ 959.6 $ 922.5 $ 898.6 $ 691.0 $ 133.3 $ 129.9 $ 129.7 $ 125.2 $ 103.5 $ 94.2 $ 88.3 $ 81.6 $ 59.1 $3,043.3 $2,815.9 $3,039.9 $3,060.5 $3,377.4 $3,125.9 $2,886.1 $3,136.5 $1,944.5 $ 759.5 $ 632.6 $ 688.7 $ 701.2 $ 740.3 $ 766.8 $ 299.1 $ 527.7 $ 160.9 $ 15.3 $ 11.4 $ 7.9 $ 4.8 $ 1.8 -- -- -- -- $ 445.8 $ 551.1 $ 842.1 $ 901.0 $1,017.5 $1,137.1 $1,251.1 $1,087.5 $ 831.7 $ 450.8 $ 558.2 $ 581.3 $ 543.2 $ 460.0 $ 408.3 $ 320.8 $ 375.1 $ 266.9 19.9% 21.1% 18.9% 18.8% 20.4% 14.4% 18.3% 22.1% 25.8% 50.9% 49.9% 49.2% 48.3% 46.7% 45.7% 46.9% 45.8% 43.7% 26.6% 25.7% 26.0% 25.6% 23.8% 23.4% 24.9% 22.9% 21.7% 3.9% 5.0% 4.4% 4.3% 4.6% 3.1% 4.4% 4.0% 4.8% 68.8% 59.0% 48.7% 47.4% 52.3% 44.2% 33.8% 50.2% 35.7% 63.1% 48.9% 52.9% 58.9% 65.1% 46.9% 31.3% 25.9% 31.2% 28,197 33,154 33,580 33,603 33,859 34,347 34,231 32,358 27,068 20,000 20,200 21,100 20,900 28,200 31,700 31,300 30,800 29,500 $41 $ 38 1/2 $ 37 7/8 $32 7/16 $34 7/16 $ 33 1/8 $28 11/16 $28 13/16 $ 19 7/8 $30 15/16 $28 1/16 $ 25 1/8 $ 20 7/8 $22 9/16 $21 5/16 $ 15 1/2 $16 5/16 $ 11 3/4 (d) Operating income divided by average identifiable assets of the consolidated total (excluding corporate). (e) Total debt divided by total debt plus total shareholders' equity including convertible preferred stock (net of deferred compensation) and redeemable preference stock. (f) Per share data reflect the fiscal 1995 two-for-one stock split-up. 35
EX-13.4 19 The Quaker Oats Company and Subsidiaries
Dollars in Millions (Except Per Share Data) Consolidated Year Ended December 31 1996 1995 1994 Statements of Income Net Sales $5,199.0 $ 5,954.0 $6,211.1 Cost of goods sold 2,807.5 3,294.4 3,122.7 Gross profit 2,391.5 2,659.6 3,088.4 Selling, general and administrative expenses 1,981.0 2,358.8 2,553.9 Gains on divestitures and restructuring charges - net (113.4) (1,053.5) 108.6 Interest expense 106.8 131.6 101.5 Interest income (7.4) (6.2) (9.0) Foreign exchange loss - net 8.9 8.4 13.0 Income Before Income Taxes and Cumulative Effect of Accounting Change 415.6 1,220.5 320.4 Provision for income taxes 167.7 496.5 127.3 Income Before Cumulative Effect of Accounting Change 247.9 724.0 193.1 Cumulative effect of accounting change - net of tax -- -- (4.1) Net Income 247.9 724.0 189.0 Preferred dividends - net of tax 3.7 4.0 4.0 Net Income Available for Common $ 244.2 $ 720.0 $ 185.0 Per Common Share: Income Before Cumulative Effect of Accounting Change $ 1.80 $ 5.39 $ 1.41 Cumulative effect of accounting change -- -- (0.03) Net Income $ 1.80 $ 5.39 $ 1.38 Dividends declared $ 1.14 $ 1.14 $ 1.10 Average Number of Common Shares Outstanding (in thousands) 135,466 134,149 133,709 See accompanying notes to the consolidated financial statements. 36 Dollars in Millions Consolidated Year Ended December 31 1996 1995 1994 Statements of Cash Flows Cash Flows from Operating Activities: Net income $ 247.9 $ 724.0 $ 189.0 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of accounting change -- -- 4.1 Depreciation and amortization 200.6 204.0 173.0 Deferred income taxes 14.3 22.5 (20.5) Gains on divestitures - net of tax of $54.6, $476.2 and $1.0 in 1996, 1995 and 1994, respectively (81.8) (694.6) (8.8) Restructuring charges 23.0 117.3 118.4 Loss on disposition of property and equipment 29.0 27.4 12.2 Decrease (increase) in trade accounts receivable 62.6 43.7 (94.3) Decrease (increase) in inventories 19.6 44.8 (92.4) Decrease (increase) in other current assets 65.1 (76.0) (27.4) (Decrease) increase in trade accounts payable (53.7) 49.8 11.3 (Decrease) increase in other current liabilities (164.2) (117.0) 81.8 Change in deferred compensation 21.5 21.4 16.7 Other items 26.5 39.8 52.7 Net Cash Provided by Operating Activities 410.4 407.1 415.8 Cash Flows from Investing Activities: Additions to property, plant and equipment (242.7) (301.2) (218.5) Business acquisitions -- (57.3) (1,833.9) Business divestitures - net of tax of $54.6, $476.2 and $1.0 in 1996, 1995 and 1994, respectively - and asset dispositions 174.4 1,278.7 13.2 Change in other assets 0.2 4.2 (2.5) Net Cash (Used in) Provided by Investing Activities (68.1) 924.4 (2,041.7) Cash Flows from Financing Activities: Cash dividends (157.0) (154.8) (149.8) Change in short-term debt (124.5) (1,243.5) 1,520.3 Proceeds from long-term debt 2.4 212.6 77.9 Reduction of long-term debt (77.7) (60.0) (87.5) Proceeds from short-term debt to be refinanced -- (112.0) 300.0 Issuance of common treasury stock 31.0 20.4 20.8 Repurchases of common stock -- -- (44.7) Repurchases of preferred stock (5.5) (5.7) (1.5) Net Cash (Used in) Provided by Financing Activities (331.3) (1,343.0) 1,635.5 Effect of Exchange Rate Changes on Cash and Cash Equivalents 6.3 1.7 17.7 Net Increase (Decrease) in Cash and Cash Equivalents 17.3 (9.8) 27.3 Cash and Cash Equivalents - Beginning of Period 93.2 103.0 75.7 Cash and Cash Equivalents - End of Period $ 110.5 $ 93.2 $ 103.0 See accompanying notes to the consolidated financial statements. 37 The Quaker Oats Company and Subsidiaries Consolidated December 31 1996 1995 Balance Sheets Assets Current Assets Cash and cash equivalents $ 110.5 $ 93.2 Trade accounts receivable - net of allowances 294.9 398.3 Inventories Finished goods 181.8 203.6 Grains and raw materials 62.1 69.7 Packaging materials and supplies 31.0 33.4 Total inventories 274.9 306.7 Other current assets 209.4 281.9 Total Current Assets 889.7 1,080.1 Property, Plant and Equipment Land 29.6 26.0 Buildings and improvements 389.5 398.4 Machinery and equipment 1,524.2 1,521.6 Property, plant and equipment 1,943.3 1,946.0 Less accumulated depreciation 742.6 778.2 Property - Net 1,200.7 1,167.8 Intangible Assets - Net of Amortization 2,237.2 2,309.2 Other Assets 66.8 63.3 Total Assets $4,394.4 $ 4,620.4 See accompanying notes to the consolidated financial statements. 38 Dollars in Millions December 31 1996 1995 Liabilities and Shareholders' Equity Current Liabilities Short-term debt $ 517.0 $ 643.4 Current portion of long-term debt 51.1 68.6 Trade accounts payable 210.2 298.4 Accrued payroll, benefits and bonus 111.3 105.1 Accrued advertising and merchandising 130.2 150.9 Income taxes payable 42.4 65.4 Other accrued liabilities 292.5 369.9 Total Current Liabilities 1,354.7 1,701.7 Long-term Debt 993.5 1,051.8 Other Liabilities 558.9 536.3 Deferred Income Taxes 238.4 233.6 Preferred Stock, Series B, no par value, authorized 1,750,000 shares; issued 1,282,051 of $5.46 cumulative convertible shares (liquidating preference of $78 per share) 100.0 100.0 Deferred Compensation (64.9) (71.7) Treasury Preferred Stock, at cost, 187,810 shares and 122,562 shares, respectively (16.1) (10.6) Common Shareholders' Equity Common stock, $5 par value, authorized 400 million shares 840.0 840.0 Reinvested earnings 1,521.3 1,433.6 Cumulative translation adjustment (68.2) (77.8) Deferred compensation (103.4) (118.1) Treasury common stock, at cost (959.8) (998.4) Total Common Shareholders' Equity 1,229.9 1,079.3 Total Liabilities and Shareholders' Equity $4,394.4 $4,620.4 39 The Quaker Oats Company and Subsidiaries Consolidated Statements of Common Shareholders' Equity Common Stock Issued Common Shares Shares Amount Outstanding Balance as of December 31, 1993 83,989,396 $420.0 66,905,833 Net income Cash dividends declared on common stock Cash dividends declared on preferred stock Common stock issued for stock purchase and incentive plans 1,103,130 Repurchases of common stock (1,228,000) Two-for-one stock split-up 83,989,396 420.0 66,905,833 Foreign currency adjustments (net of allocated income tax benefits of $6.3) Deferred compensation Other Balance as of December 31, 1994 167,978,792 840.0 133,686,796 Net income Cash dividends declared on common stock Cash dividends declared on preferred stock Common stock issued for stock purchase and incentive plans 1,119,259 Foreign currency adjustments (net of allocated income tax benefits of $4.0) Deferred compensation Other Balance as of December 31, 1995 167,978,792 840.0 134,806,055 Net income Cash dividends declared on common stock Cash dividends declared on preferred stock Common stock issued for stock purchase and incentive plans 1,287,010 Foreign currency adjustments (net of allocated income tax benefits of $1.1) Deferred compensation Other Balance as of December 31, 1996 167,978,792 $840.0 136,093,065 See accompanying notes to the consolidated financial statements. 40 Dollars in Millions Additional Cumulative Paid-In Reinvested Translation Deferred Treasury Common Stock Capital Earnings Adjustment Compensation Shares Amount Total $ -- $1,250.3 $(68.9) $(144.4) 17,083,563 $(1,019.6) $ 437.4 189.0 189.0 (145.8) (145.8) (4.0) (4.0) (1.9) (1.9) (1,103,130) 32.5 28.7 1,228,000 (44.7) (44.7) (420.0) 17,083,563 (21.1) (21.1) 11.3 11.3 1.9 1.9 -- 867.6 (90.0) (133.1) 34,291,996 (1,031.8) 452.7 724.0 724.0 (150.8) (150.8) (4.0) (4.0) (2.7) (3.2) (1,119,259) 33.4 27.5 12.2 12.2 15.0 15.0 2.7 2.7 -- 1,433.6 (77.8) (118.1) 33,172,737 (998.4) 1,079.3 247.9 247.9 (153.3) (153.3) (3.7) (3.7) (3.0) (3.2) (1,287,010) 38.6 32.4 9.6 9.6 14.7 14.7 3.0 3.0 $ -- $1,521.3 $(68.2) $(103.4) 31,885,727 $ (959.8) $1,229.9 41 The Quaker Oats Company and Subsidiaries Industry Segment and Identifiable Assets Geographic Area Information Year Ended December 31 1996 1995 1994 Industry Segment Information Foods $1,735.4 $1,761.2 $1,715.9 Beverages 2,438.2 2,483.2 2,294.4 Total Ongoing Businesses 4,173.6 4,244.4 4,010.3 Divested Businesses (a) -- 107.4 804.0 Total Businesses 4,173.6 4,351.8 4,814.3 Corporate (b) 220.8 268.6 246.8 Total Consolidated $4,394.4 $4,620.4 $5,061.1 Identifiable Assets Year Ended December 31 1996 1995 1994 Geographic Area Information United States and Canada $3,609.2 $3,678.8 $3,553.3 Latin America 343.7 344.8 277.5 Europe and Asia/Pacific 220.7 220.8 179.5 International 564.4 565.6 457.0 Total Ongoing Businesses 4,173.6 4,244.4 4,010.3 Divested Businesses (a) -- 107.4 804.0 Total Businesses 4,173.6 4,351.8 4,814.3 Corporate (b) 220.8 268.6 246.8 Total Consolidated $4,394.4 $4,620.4 $5,061.1 (a) Includes the following Divested Businesses: 1996 (U.S. and Canadian frozen foods and Italian products); 1995 and 1994 (U.S. and Canadian frozen foods, U.S. and Canadian pet food, U.S. bean and chili, Italian products, European pet food, Mexican chocolate and Dutch honey). (b) Identifiable assets include corporate cash and cash equivalents, short-term investments and miscellaneous receivables and investments. 42 Dollars in Millions Capital Expenditures Depreciation & Amortization 1996 1995 1994 1996 1995 1994 $ 132.3 $ 171.2 $ 106.2 $ 103.5 $ 100.9 $ 95.1 110.1 101.9 48.2 93.9 87.6 26.6 242.4 273.1 154.4 197.4 188.5 121.7 0.3 22.9 56.6 1.7 13.5 49.5 242.7 296.0 211.0 199.1 202.0 171.2 -- 5.2 7.5 1.5 2.0 1.8 $ 242.7 $ 301.2 $ 218.5 $ 200.6 $ 204.0 $ 173.0 Net Sales (c) Operating Income (d)(e)(f)(g)(h) 1996 1995 1994 1996 1995 1994 $4,173.9 $4,208.8 $3,452.0 $ 444.2 $ 279.1 $ 390.7 625.4 600.6 465.9 15.4 26.1 62.1 314.1 347.7 346.0 (38.5) (106.8) (41.0) 939.5 948.3 811.9 (23.1) (80.7) 21.1 5,113.4 5,157.1 4,263.9 421.1 198.4 411.8 85.6 796.9 1,947.2 144.8 1,216.6 74.6 5,199.0 5,954.0 6,211.1 565.9 1,415.0 486.4 -- -- -- -- -- -- $5,199.0 $5,954.0 $6,211.1 $ 565.9 $1,415.0 $486.4 (c) Represents net sales to unaffiliated customers only. Net sales between geographic areas have been eliminated. (d) U.S. and Canada includes restructuring charges of $23.0 million, $71.5 million and $67.1 million in 1996, 1995 and 1994, respectively. (e) Latin America includes restructuring charges of $4.1 million and $3.8 million in 1995 and 1994, respectively. (f) Europe and Asia/Pacific includes restructuring charges of $41.7 million and $1.7 million in 1995 and 1994, respectively. (g) Divested Businesses includes restructuring charges of $45.8 million in 1994 and gains on divestitures of $136.4 million, $1.17 billion and $9.8 million in 1996, 1995 and 1994, respectively. (h) See Notes 2 and 3 to consolidated financial statements for further discussion of 1994 through 1996 gains on divestitures and restructuring charges. 43 The Quaker Oats Company and Subsidiaries Dollars in Millions (Except Per Share Data) Industry Segment Net Sales Operating Income (a)(b)(c)(d) Information Year Ended December 31 1996 1995 1994 1996 1995 1994 Foods U.S. and Canadian $2,559.2 $2,604.9 $2,518.6 $ 359.8 $ 260.2 $320.9 International 625.5 594.5 543.2 6.6 (22.7) 50.2 Total Foods 3,184.7 3,199.4 3,061.8 366.4 237.5 371.1 Beverages U.S. and Canadian 1,614.7 1,603.9 933.4 84.4 18.9 69.8 International 314.0 353.8 268.7 (29.7) (58.0) (29.1) Total Beverages 1,928.7 1,957.7 1,202.1 54.7 (39.1) 40.7 Total Ongoing Businesses 5,113.4 5,157.1 4,263.9 421.1 198.4 411.8 Total Divested Businesses (e)(f)(g)(h) 85.6 796.9 1,947.2 144.8 1,216.6 74.6 Net Sales and Operating Income $5,199.0 $5,954.0 $6,211.1 565.9 1,415.0 486.4 Less: General corporate expenses(i) 42.0 60.7 60.5 Interest expense - net 99.4 125.4 92.5 Foreign exchange loss - net 8.9 8.4 13.0 Income before income taxes and cumulative effect of accounting change 415.6 1,220.5 320.4 Provision for income taxes 167.7 496.5 127.3 Income before cumulative effect of accounting change $ 247.9 $ 724.0 $193.1 Income per common share before cumulative effect of accounting change (j) $ 1.80 $ 5.39 $ 1.41 (a) 1996 operating results for Ongoing Businesses include pretax restructuring Charges of $23.0 million, or $.14 per share; $6.4 million is included in U.S. and Canadian Foods and $16.6 million is included in U.S. and Canadian Beverages. (b) 1995 operating results for Ongoing Businesses include pretax restructuring charges of $117.3 million, or $.53 per share; $39.1 million, $32.4 million, $31.3 million and $14.5 million are included in U.S. and Canadian Foods, U.S. and Canadian Beverages, International Foods and International Beverages, respectively. (c) 1994 operating results include pretax restructuring charges of $118.4 million, or $.55 per share; $62.7 million, $4.4 million, $5.3 million, $0.2 million and $45.8 million are included in U.S. and Canadian Foods, U.S. and Canadian Beverages, International Foods, International Beverages and Divested Businesses, respectively. (d) See Notes 2 and 3 to the consolidated financial statements for further discussion of 1994 through 1996 gains on divestitures and restructuring charges. (e) 1996 operating results for Divested Businesses include pretax gains of $136.4 million, or $.60 per share. (f) 1995 operating results for Divested Businesses include pretax gains of $1.17 billion, or $5.20 per share. (g) 1994 operating results for Divested Businesses include a pretax gain of $9.8 million, or $.07 per share. (h) 1996 includes current year (through the divestiture date) net sales and operating income for the U.S. and Canadian frozen foods business and Italian products business. 1995 includes prior year net sales and operating income for the following businesses (through the divestiture date): U.S. and Canadian pet food, U.S. bean and chili, European pet food, Mexican chocolate,Dutch honey and the businesses divested in 1996. (i) 1995 and 1994 general corporate expenses include a provision of $10.6 million and $18.4 million, or $.05 and $.08 per share, respectively, for estimated litigation costs. (j) Per share data reflect the 1994 two-for-one stock split-up
44 EX-13.5 20 Notes to the Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies Consolidation - The consolidated financial statements include The Quaker Oats Company and all of its subsidiaries (the Company). All significant intercompany transactions have been eliminated. Acquired businesses are included in the results of operations since their acquisition dates. Divested businesses are included in the results of operations until their divestiture dates. Fiscal-Year Change - The Consolidated Financial Statements and Notes to the Consolidated Financial Statements for the year ended December 31, 1996, represent the first full calendar year since the Company changed from a June 30 fiscal year. Previously reported amounts have been restated to conform to the current presentation. Foreign Currency Translation - Assets and liabilities of the Company's foreign subsidiaries, other than those located in highly inflationary countries, are translated at current exchange rates, while income and expense are translated at average rates for the period. For entities in highly inflationary countries, a combination of current and historical rates is used to determine foreign currency gains and losses resulting from financial statement translation. Translation gains and losses are reported as a component of common shareholders' equity, except for those associated with highly inflationary countries, which are reported directly in the consolidated income statements. Futures, Swaps, Options, Caps and Forward Contracts - The Company uses a variety of futures, swaps, options, caps and forward contracts in its management of foreign currency, commodity price and interest rate exposures. Realized and unrealized gains and losses on foreign exchange contracts that are effective as net investment hedges are recognized as a component of common shareholders' equity. Realized and unrealized gains and losses on commodity options and futures contracts that hedge commodity price exposure are deferred in inventory and subsequently included in cost of goods sold as the inventory is sold. Expenses associated with interest rate swap and cap agreements that hedge interest rate exposure are deferred and recognized as a component of interest expense over the term of each agreement. Other realized and unrealized gains and losses on financial instruments are recognized currently in the consolidated income statements. Cash and Cash Equivalents - Cash equivalents are composed of all highly liquid investments with an original maturity of three months or less. As a result of the Company's cash management system, checks issued but not presented to the banks for payment may create negative book cash balances. Such negative balances are included in trade accounts payable and amounted to $45.5 million and $64.7 million as of December 31, 1996 and 1995, respectively. Inventories - Inventories are valued at the lower of cost or market, using various cost methods, and include the cost of raw materials, labor and overhead. The percentages of year-end inventories valued using each of the methods were as follows: December 31 1996 1995 Last-in, first-out (LIFO) 53% 49% Average quarterly cost 39% 44% First-in, first-out (FIFO) 8% 7% If the LIFO method of valuing these inventories was not used, total inventories would have been $15.3 million and $12.2 million higher than reported as of December 31, 1996 and 1995, respectively. Long-lived Assets - Long-lived assets are comprised of intangible assets and property, plant and equipment. Long-lived assets, including certain identifiable intangibles and goodwill related to those assets to be held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or the appropriate grouping of assets, is compared to the carrying amount to determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on the best information available, including considering prices for similar assets and the results of valuation techniques to the extent available. Long- lived assets and certain identifiable intangibles to be disposed of that are not covered by Accounting Principles Board (APB) Opinion No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," are reported at the lower of the asset's carrying amount or its fair value less cost to sell. The Company reports an asset to be disposed of at the lower of its carrying amount or its estimated net realizable value. 45 The Company has evaluated the recoverability of Snapple beverages long-lived assets, including intangible assets, as of December 31, 1996 pursuant to Financial Accounting Standards Board (FASB) Statement #121. In performing its review for recoverability, the Company compared the estimated undiscounted future cash flows to the carrying value of Snapple beverages long-lived assets, including intangible assets. The carrying value of Snapple beverages long- lived assets at December 31, 1996 was $1.7 billion. As the estimated undiscounted future cash flows exceeded the carrying value of long-lived assets, the Company was not permitted or required to recognize an impairment loss. Although the Company's latest evaluation of recoverability has not resulted in the recognition of an impairment loss, given the disappointing performance of the business, management expects to update its assessment during 1997. Accordingly, the Company's estimate of undiscounted future cash flows to be generated by Snapple beverages could change in the near term. A change that results in recognition of an impairment loss would require the Company to reduce the carrying value of Snapple beverages to fair market value, which is significantly below the current carrying value of the long-lived assets. Intangibles - Intangible assets consist principally of excess purchase price over net tangible assets of businesses acquired (goodwill) and trademarks. Goodwill is amortized on a straight-line basis over periods not exceeding 40 years. Intangible assets, net of amortization, and their estimated useful lives consist of the following: Estimated Useful Lives Dollars in Millions (In Years) 1996 1995 Goodwill 10 to 40 $1,887.1 $1,893.2 Trademarks and other 2 to 40 586.8 588.4 Intangible assets 2,473.9 2,481.6 Less accumulated amortization 236.7 172.4 Intangible assets - net of amortization $2,237.2 $2,309.2 Property and Depreciation - Property, plant and equipment are carried at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives range from 20 to 50 years for buildings and improvements and from three to 17 years for machinery and equipment. Software Costs - The Company defers significant software development project costs. No software costs were deferred during 1996. Software costs of $0.2 million were deferred during 1995. Amounts deferred are amortized over a three- year period beginning with a project's completion. Net deferred software costs as of December 31, 1996 and 1995 were $1.5 million and $4.2 million, respectively. Current Accounting Changes - The Company adopted FASB Statement #123, "Accounting for Stock-Based Compensation," as of December 31, 1996 and implemented the disclosure provisions of this Statement. While the Statement encourages companies to recognize expense for stock options at estimated fair value based on an option-pricing model, the Company has elected to disclose the pro forma net income and earnings per share that would have been obtained under the Statement's approach for valuing and expensing stock options. See Note 10 for further discussion and related disclosures. Income Taxes - The Company uses an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes are provided when tax laws and financial accounting standards differ with respect to the amount of income for a year and the bases of assets and liabilities. Income taxes have been provided on $111.0 million of the $142.9 million of unremitted earnings from foreign subsidiaries. Taxes are not provided on earnings expected to be indefinitely reinvested. Estimates and Assumptions - The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2 Acquisitions and Divestitures The Company has made significant changes in its business portfolio with the 1994 acquisitions and the 1995 through 1996 divestitures. On December 6, 1994, the Company purchased Snapple Beverage Corp. for a tender- offer price of $1.7 billion. The acquisition was accounted for as a purchase and the results of Snapple beverages are included in the consolidated financial 46 statements since the date of acquisition. The acquisition was initially financed with commercial paper borrowings. The after-tax proceeds on the 1995 divestitures of $1.25 billion were used to reduce the commercial paper borrowings. The following table presents unaudited pro forma combined historical results as if Snapple Beverage Corp. was acquired at the beginning of 1994. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of 1994, nor are they necessarily indicative of future consolidated results. Pro Forma Results (Unaudited) Dollars in Millions (Except Per Share Data) 1994 Net Sales $ 6,859.7 Income before cumulative effect of accounting change $ 150.0 Income per common share before cumulative effect of accounting change $ 1.09 In 1994, the Company also purchased the Adria pasta business in Brazil, the Southern Foods oat milling business in Australia, and the Arnie's bagel business in the United States. In 1994, the Company realized a $9.8 million gain on the sale of a business in Venezuela. Sales and operating income from these businesses were not material. On March 14, 1995, the Company completed the sale of its U.S. and Canadian pet food business to H.J. Heinz Company for $725.0 million and realized a gain of $513.0 million. On April 24, 1995, the Company completed the sale of its European pet food business to Dalgety PLC for $700.0 million and realized a gain of $487.2 million. Other divestitures in 1995 included the Dutch honey business in February 1995, the Mexican chocolate business in May 1995 and the U.S. bean and chili businesses in June 1995. The Company realized gains on these divestitures of $4.9 million, $74.5 million and $91.2 million, respectively. In 1995, the Company also purchased the Nile Spice variety soup- in-a-cup business in the United States. Pro forma information for the 1994 and 1995 acquisitions was not material in the aggregate. On January 15, 1996, the Company completed the sale of its Italian products business and realized a gain of $2.8 million. On July 9, 1996, the Company completed the sale of its U.S. and Canadian frozen foods business for $185.8 million and realized a gain of $133.6 million. The following table presents sales and operating income from the businesses divested in 1996 and 1995 through the divestiture dates. Operating income includes certain allocations of overhead expenses and excludes gains on divestitures and restructuring charges in all years. Dollars in Millions 1996 1995 1994 Sales: U.S. and Canadian $81.6 $376.5 $950.0 International 4.0 420.4 997.2 Sales from divested businesses $85.6 $796.9 $1,947.2 Operating income: U.S. and Canadian $7.9 $29.7 $47.7 International 0.5 16.1 62.9 Operating income from divested businesses $8.4 $45.8 $110.6 Note 3 Restructuring Charges In September 1996, the Company recorded restructuring charges of $23.0 million. These charges included $16.6 million to change how the Company sells Snapple beverages in certain Texas markets and $6.4 million for plant consolidations in the U.S. Foods business. Estimated savings from the 1996 restructuring actions are about $6 million annually beginning in 1997, of which approximately 90 percent will be in cash. In December 1995, the Company recorded restructuring charges of $40.8 million. These charges included $24.4 million to reduce the amount of contract manufacturing capacity in the Snapple beverages supply chain system and $16.4 million to realign the European beverage and Asia/Pacific grain-based food businesses. The realignment in Europe and Asia/Pacific resulted in the elimination of about 80 positions and allowed the Company to focus on more attractive growth areas in Southern Europe for beverages and China for foods. In June 1995, the Company recorded restructuring charges of $76.5 million for cost-reduction and realignment activities in order to address the changes in its business portfolio and to allow it to more quickly and effectively respond to the needs of trade customers and consumers. These changes resulted in the elimination of approximately 850 positions and primarily included the realignment of the corporate, U.S. shared services and business unit structures, the European cereal business and the U.S. distribution center network. Savings realized from these restructuring activities have been in line with expectations. 47 In 1994, the Company recorded restructuring charges of $118.4 million to eliminate positions at the headquarters and research and development facilities, a combination and realignment of the U.S. sales force, manufacturing consolidations for the bean and chili, rice cake and Aunt Jemima syrup businesses and the closing of a Canadian pet food facility and refocusing of the Canadian business, as well as other cost-reduction initiatives. Approximately 1,500 positions were eliminated as a result of these initiatives. Savings realized from the 1994 restructuring activities have been in line with expectations. With the 1995 divestitures of the U.S. and Canadian and European pet food businesses, as well as the U.S. bean and chili businesses, there are no remaining reserves and no recurring savings to be realized from the restructuring activities related to these businesses. Restructuring provisions were determined based on estimates prepared at the time the restructuring actions were approved by management and the Board of Directors. The 1996 and 1995 restructuring reserve balances are considered adequate to cover committed restructuring actions. The restructuring charges and utilization to date were as follows:
As of December 31, 1996 Amounts Charged Amounts Remaining Dollars in Millions Cash Non-Cash Total Utilized Reserve 1996 Severance and termination benefits $ 1.4 $ -- $ 1.4 $ 0.9 $ 0.5 Asset write-offs -- 18.9 18.9 14.0 4.9 Loss on lease and other 2.6 0.1 2.7 0.1 2.6 Subtotal 4.0 19.0 23.0 15.0 8.0 1995 Severance and termination benefits 48.8 -- 48.8 44.6 4.2 Loss on reduction of contract manufacturing capacity 22.5 1.9 24.4 8.1 16.3 Asset write-offs to consolidate facilities 0.1 22.8 22.9 18.8 4.1 Contract cancellation fees, loss on leases and other 21.2 -- 21.2 7.6 13.6 Subtotal 92.6 24.7 117.3 79.1 38.2 1994 Severance and termination benefits 44.7 -- 44.7 44.7 -- Asset write-offs and loss on leases 7.6 30.7 38.3 38.3 -- Product-line discontinuations 3.3 32.1 35.4 35.4 -- Subtotal 55.6 62.8 118.4 118.4 -- Total $152.2 $106.5 $258.7 $212.5 $46.2
Operating income excluding restructuring charges, gains on divestitures and divested businesses in all periods was as follows: Dollars in Millions 1996 1995 1994 Operating Income as reported $565.9 $1,415.0 $486.4 Restructuring charges: Foods 6.4 70.4 68.0 Beverages 16.6 46.9 4.6 Ongoing Businesses 23.0 117.3 72.6 Divested Businesses -- -- 45.8 Subtotal 23.0 117.3 118.4 Gains on divestitures (136.4) (1,170.8) (9.8) Operating income from Divested Businesses (8.4) (45.8) (110.6) Subtotal (144.8) (1,216.6) (120.4) Operating income excluding charges, gains and Divested Businesses $444.1 $ 315.7 $484.4 Note 4 Trade Accounts Receivable Allowances Dollars in Millions 1996 1995 Balance at beginning of year $26.8 $20.8 Provision for doubtful accounts 12.3 13.5 Provision for discounts and allowances 32.2 23.9 Write-offs of doubtful accounts - net of recoveries (8.4) (7.4) Discounts and allowances taken (28.0) (21.2) Effect of divestitures (5.3) (1.9) Effect of exchange rate changes (0.3) (0.9) Balance at end of year $29.3 $26.8 Note 5 Revolving Credit Facilities and Short-term Debt In 1996, the Company reduced the level of its revolving credit facilities by a total of $600.0 million. The Company now has a $900.0 million annually extendible five-year revolving credit facility with various banks. The facility supports the Company's commercial paper borrowings and is also available for direct borrowings. There were no direct borrowings in 1996 or in 1995. The revolving credit facility requires the Company and certain domestic subsidiaries to maintain certain financial ratios. 48 The Company had an Adjusted Principal Revolving Credit Agreement through December 29, 1995, at which time the Company terminated the Agreement. The Company borrowed the predetermined amount available each quarter during 1995. Short-term debt consists primarily of commercial paper borrowings in the United States and notes payable to banks in foreign countries. Commercial paper borrowings outstanding as of December 31, 1996 and 1995 were $438.6 million and $693.0 million, respectively. Notes payable to banks were $78.4 million and $19.4 million as of December 31, 1996 and 1995, respectively. See Note 6 for discussion of reclassification of short-term debt to long-term debt. Weighted average interest rates on all short-term debt outstanding as of December 31, 1996 and 1995 were 5.8 percent and 6.4 percent, respectively. Nominal interest rates in highly inflationary countries have been adjusted for currency devaluation to express interest rates in U.S. dollar terms. Note 6 Long-term Debt Dollars in Millions 1996 1995 7.76% Senior ESOP notes due through 2001 $ 64.9 $ 71.7 8.0% Senior ESOP notes due through 2001 100.3 115.6 7.75%-7.9% Series A medium-term notes due through 2000 41.5 56.7 8.63%-9.34% Series B medium-term notes due through 2019 185.6 216.1 6.5%-7.48% Series C medium-term notes due through 2024 200.0 200.0 6.45%-7.78% Series D medium-term notes due through 2026 400.0 331.0 6.63% deutsche mark swap due 1997 18.1 19.4 5.7%-8.0% Industrial Revenue Bonds due through 2009, tax-exempt 24.9 33.4 Non-interest bearing installment note due 2014 6.1 5.4 Short-term debt to be refinanced -- 69.0 Other 3.2 2.1 Subtotal 1,044.6 1,120.4 Less current portion of long-term debt 51.1 68.6 Long-term debt $ 993.5 $1,051.8 Aggregate required payments for long-term debt maturing over the next five years are as follows: Dollars in Millions 1997 1998 1999 2000 2001 Required payments $51.1 $108.6 $94.4 $80.5 $47.7 In January 1990, the Company filed a $600.0 million medium-term note shelf registration with the SEC. In April 1995, the Company filed a prospectus supplement for $400.0 million Series D medium-term notes in addition to the $200.0 million Series C medium-term notes previously issued under the 1990 shelf registration. As of December 31, 1995, the Company had issued $331.0 million of Series D medium-term notes with the intent to issue the remaining $69.0 million of medium-term notes in the near future. As a result, the consolidated balance sheet as of December 31, 1995, included the reclassification of $69.0 million of short-term debt to long-term debt, reflecting the Company's intent and ability to refinance this debt on a long-term basis. As of December 31, 1996, the Company had issued $400.0 million of Series D medium-term notes bearing interest ranging from 6.45 percent to 7.78 percent per annum with maturities from three to 30 years. The non-interest bearing installment note for $55.5 million had an unamortized discount of $49.4 million and $50.1 million as of December 31, 1996 and 1995, respectively, based on an imputed interest rate of 13 percent. Note 7 Financial Instruments The Company actively monitors its exposure to foreign currency rate, commodity price and interest rate risks. Financial instruments are used to reduce the impact of these risks and to fund operating requirements. The primary financial instruments used are foreign exchange forward contracts, purchased foreign currency options, commodity options and futures contracts, and short- term and long-term debt instruments. In addition, the Company has occasionally used interest rate swap and cap agreements. Foreign currency hedge instruments are used to reduce the risk that the U.S. dollar value of the net investment in and cash flows from foreign operations will decrease as exchange rates fluctuate. Similarly, commodity hedge instruments are used to reduce the risk that raw material purchases will be adversely affected as commodity prices change. Interest rate swap and cap agreements are used to reduce the risk that interest costs will increase as interest rates change. While the hedge instruments are subject to the risk of loss from exchange rate, commodity price or interest rate changes, the losses would generally be offset by expected gains on translation of the net 49 investments, higher operating results, lower costs of the purchases being hedged or lower interest costs. The Company uses financial instruments only for purposes of hedging risk associated with underlying exposures. The Company does not trade or use these instruments with the objective of earning financial gains on the exchange rate, commodity price or interest rate fluctuations alone, nor does it utilize instruments in currencies, commodities or interest for which there are no underlying exposures. Management believes that its use of financial instruments to reduce risk is in the Company's best interest. Latin American and Asian currency hedging markets are rapidly evolving but are not yet fully developed. Historically, the Company has not hedged these currencies because the opportunities were limited and costly. During 1996, the Company executed certain hedging instruments to reduce exposure to Brazilian currency movements. As of December 31, 1996, no Brazilian currency hedges were outstanding. As in Europe and Canada, the Company will continue to use foreign currency hedge instruments, where economical, to reduce exposure to potentially significant currency movements in Latin America and in Asia. Where hedging opportunities are not available, the exposures are addressed through managing net asset positions and borrowing or investing in a combination of local currency and U.S. dollars. The counterparties to the Company's financial instruments are major financial institutions. The Company continually evaluates the creditworthiness of the counterparties and has never experienced, nor does it anticipate, nonperformance by any of its counterparties. Balance Sheet Hedges - The Company utilizes net investment hedges and foreign currency swaps to offset foreign currency gains and losses which are recognized in the balance sheet. Net Investment Hedges - The Company's significant net hedges and the related foreign currency net investments and net exposures as of December 31, 1996 were as follows: Dollars in Millions Net Investment Net Hedge Net Exposure Currency: British pound $ 23.2 $ 5.2 $ 18.0 Canadian dollar $ 26.5 $ 9.5 $ 17.0 Dutch guilder $ 19.8 $18.5 $ 1.3 German mark $ 20.1 $16.3 $ 3.8 Italian lira $ 24.5 $ 4.4 $ 20.1 The Company actively monitors its net exposures and adjusts the hedge amounts as appropriate. The net hedges are stated above on an after-tax basis. The net exposures are subject to gain or loss if foreign currency exchange rates fluctuate. On a consolidated basis, the net gain or loss is recognized as an increase or decrease in cumulative translation adjustment in the consolidated balance sheet, except in highly inflationary economies where net gains and losses are reported in net income. As of December 31, 1996 and 1995, the Company had net foreign exchange forward contracts to sell primarily European and Canadian currencies for $35.3 million and $74.7 million, respectively, to hedge its net investments. These contracts will mature in 1997. Unrealized losses as of December 31, 1996 and 1995 were $0.2 million and $1.0 million, respectively. The carrying value of these contracts approximates fair value. Foreign Currency Swaps - In 1988, the Company swapped $15.0 million of long- term debt for 27.9 million in deutsche mark (DM) denominated long-term debt, effectively hedging part of the German net investment. The DM swap agreement requires the Company to re-exchange DM 27.9 million for $15.0 million in August 1997 and to make semiannual interest payments of DM 0.9 million through August 1997. The DM swap was included in current long-term debt as of December 31, 1996 for $18.1 million. The DM swap was included in long-term debt as of December 31, 1995 for $19.4 million. The long-term debt is revalued as the U.S. dollar/DM exchange rate changes. Due to the sale of the European pet food business in 1995, the net investment in Germany was reduced to the point where the DM swap was no longer effective as a net investment hedge, requiring any subsequent revaluation adjustments to be charged or credited to the consolidated income statement. To offset this charge or credit, the Company entered into a foreign exchange forward contract and the net effect on the consolidated income statements for 1996 and 1995 was not material. The interest payments are subject to exchange rate fluctuations; however, the effect on the Company's consolidated income statements was not material. Income Statement Hedges - The Company uses foreign currency options and forwards, commodity options and futures, and interest rate hedges to offset gains and losses which are recognized in the income statement. Foreign Currency Hedges - The Company uses foreign currency options and forwards to offset the impact of foreign currency fluctuations recognized in the Company's operating results. Included in the consolidated income 50 statements were losses from foreign currency hedge instruments of $1.0 million, $3.5 million and $2.0 million in 1996, 1995 and 1994, respectively. Commodity Options and Futures - The Company uses commodity options and futures contracts to reduce its exposure to commodity price changes. The Company regularly hedges purchases of oats, corn, corn sweetener, wheat, coffee beans and orange juice concentrate. Of the $2.81 billion in cost of goods sold, approximately $275 million to $325 million is in commodities that may be hedged. The Company's strategy is typically to hedge certain production requirements for various periods up to 12 months. As of December 31, 1996 and 1995, approximately 32 percent and 54 percent, respectively, of hedgeable production requirements for the next 12 months were hedged. Deferred unrecognized losses related to commodity options and futures contracts as of December 31, 1996 and 1995 were $0.1 million and $0.4 million, respectively. Realized gains (losses) charged to cost of goods sold in 1996, 1995 and 1994 were $5.1 million, $0.3 million and $(5.2) million, respectively. The fair values of these commodity instruments as of December 31, 1996 and 1995, based on quotes from brokers, were net losses of $2.9 million and $0.2 million, respectively. Interest Rate Hedges - The Company actively monitors its interest rate exposure. In 1995, the Company entered into interest rate swap agreements with a notional value of $150.0 million. The swap agreements were used to hedge fixed interest rate risk related to anticipated issuance of long-term debt. The swap agreements were subsequently terminated at a cost of $11.9 million as long-term debt was issued. Included in the consolidated balance sheets as of December 31, 1996 and 1995 were $8.9 million and $10.8 million, respectively, of prepaid interest expense as settlement of all the interest rate swap agreements. Prepaid interest expense is recognized in the consolidated income statements on a straight-line basis over the original term of the swap agreements, which ranged from three to 10 years. The carrying value of the settled interest rate swap agreements approximates the fair value of the swap at the settlement date less amortized interest. In 1994, the Company entered into interest rate cap agreements with a notional value of $600.0 million to hedge floating interest rate risk. As of December 31, 1996 and 1995 there were no interest rate cap agreements in place and no deferred prepaid interest related to these agreements. Included in 1996 interest expense was $1.9 million related to the interest rate swap agreements. In 1995, interest expense included $2.0 million related to both the interest rate swap and cap agreements. Debt Instruments - The carrying value of cash and cash equivalents and short- term debt approximates fair value due to the short-term maturity of the instruments. The fair value of long-term debt was $1.07 billion and $1.10 billion as of December 31, 1996 and 1995, respectively, and was based on market prices for the same or similar issues or on the current rates offered to the Company for similar debt of the same maturities. The carrying value of long- term debt, including current maturities, as of December 31, 1996 and 1995 was $1.04 billion and $1.12 billion, respectively. Note 8 Capital Stock In November 1994, shareholders approved an increase in authorized shares from 200 million to 400 million. Pursuant to the two-for-one stock split-up, shareholders of record received an additional share of common stock for each share held. Per share data and average number of common shares outstanding have been retroactively restated. As a result of the increase in issued shares, common stock has been increased and reinvested earnings has been decreased by $420.0 million. During 1994, 0.6 million shares of the Company's outstanding common stock were repurchased for $22.5 million under a 10 million share repurchase program announced in August 1993. The Company is authorized to issue 10 million shares of preferred stock in series, with terms fixed by resolution of the Board of Directors. One million shares of Series A Junior Participating Preferred Stock had been reserved for issuance in connection with the 1986 Shareholder Rights Plan. The 1986 Shareholder Rights Plan expired on July 30, 1996 and was replaced by a new Shareholder Rights Plan adopted on May 8, 1996. As a result, the one million shares of Series A Junior Participating Preferred Stock have been canceled and four million shares of Series C Junior Participating Preferred Stock have been reserved for issuance in connection with the new Shareholder Rights Plan. See Note 11 for further discussion. An additional 1,750,000 shares of Series B Employee Stock Ownership Plan (ESOP) Convertible Preferred Stock (Series B Stock) have been reserved for issuance in connection with the Company's ESOP. As of December 31, 1996, 1,282,051 shares of the Series B Stock had been issued and are each convertible into 2.1576 shares of the Company's common stock. The Series B Stock will be issued only for the ESOP and will not be traded on the open market. 51 The Company is also authorized to issue one million shares of redeemable preference stock, none of which had been issued as of December 31, 1996. Note 9 Deferred Compensation The ESOP was established to issue debt and to use the proceeds of such debt to acquire shares of the Company's stock for future allocation to ESOP participants. The ESOP borrowings are included as long-term debt on the Company's consolidated balance sheets. See Note 6 for further discussion on the ESOP notes. Deferred compensation of $168.3 million as of December 31, 1996 primarily represents the Company's payment of future compensation expense related to the ESOP. As the Company makes annual contributions to the ESOP, these contributions, along with the dividends accumulated on the common and preferred stock held by the ESOP, are used to repay the outstanding loans. As the loans are repaid, common and preferred stock are allocated to ESOP participants and deferred compensation is reduced by the amount of the principal payments on the loans. The following table presents the ESOP loan payments: Dollars in Millions 1996 1995 Principal payments $22.1 $19.4 Interest payments 14.7 16.2 Total ESOP payments $36.8 $35.6 As of December 31, 1996, 4,171,785 shares of common stock and 453,105 shares of preferred stock were held in the accounts of ESOP participants. Note 10 Employee Stock Option and Award Plans In November 1989, the Company's shareholders approved the adoption of The Quaker Long Term Incentive Plan of 1990 (Plan). The purpose of the Plan is to promote the interests of the Company and its shareholders by providing the officers and other key employees with additional incentives and the opportunity, through stock ownership, to increase their proprietary interest in the Company and their personal interest in its continued success. The Plan provides for benefits to be awarded in a variety of ways, with stock options being used most frequently. Twenty-six million shares of common stock have been authorized for grant under the Plan. Previously, stock options were issued under the 1984 Long-Term Incentive Plan, which expired by its terms on December 31, 1990. Stock options may be granted for the purchase of common stock at a price not less than the fair market value on the date of grant. Generally, the exercise price of each stock option equals the market price of the Company's stock on the date of grant. However, portions of the 1992 option awards were granted at exercise prices higher than the fair market value on the date of grant. Options are generally exercisable after one or more years and expire no later than 10 years from the date of grant. As of December 31, 1996, 726 persons held such options. Effective December 31, 1996, the Company has elected to disclose the pro forma effects of FASB Statement #123, "Accounting for Stock-Based Compensation." As allowed under the provisions of this new Statement, the Company will continue to apply APB Opinion #25 and related Interpretations in accounting for the stock options awarded under the Plan. Accordingly, no compensation cost has been recognized for these stock options. Had compensation cost for the Plan been determined consistent with FASB Statement #123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: Dollars in Millions 1996 1995 Net Income: As reported $247.9 $724.0 Pro forma $242.0 $720.7 Earnings per share: As reported $ 1.80 $ 5.39 Pro forma $ 1.76 $ 5.37 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1996 1995 Dividend yield 3.3 % - 3.4 % 3.2 % Expected volatility 14.4 % - 20.1 % 20.6 % - 20.9 % Risk-free interest rates 5.66 % - 6.76 % 5.78 % - 6.23 % Expected lives 2 to 8 years 2 to 8 years 52 A summary of the status of the Company's option plans is presented below:
1996 1995 1994 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 16,724,814 $33.99 14,706,033 $33.78 12,899,425 $31.70 Granted 152,150 $33.93 4,038,115 $33.13 3,138,450 $39.98 Exercised 1,260,977 $24.66 927,371 $22.97 847,806 $22.97 Forfeited 1,351,957 $38.14 1,091,963 $37.36 484,036 $37.40 Outstanding at end of year 14,264,030 $34.42 16,724,814 $33.99 14,706,033 $33.78 Exercisable at end of year 10,947,837 $34.33 10,150,528 $34.00 8,159,018 $30.47 Weighted-average fair value of options granted during the year $ 5.97 $ 6.38 N/A N/A: Information not applicable as the date of issue for the 1994 option grants precedes the effective date of FASB Statement #123 requirements. The following summarizes information about stock options outstanding at December 31, 1996: Options Outstanding Options Exercisable Average Weighted- Weighted- Range of Remaining Average Average Exercise Contractual Exercise Exercise Prices Shares Life Price Shares Price $20.38-40.35 14,264,030 6.43 Years $34.42 10,947,837 $34.33 Under the Plan, restricted stock awards grant shares of the Company's common stock to key officers and employees. These shares are subject to a restriction period from the date of grant, during which they may not be sold, assigned, pledged or otherwise encumbered. The number of shares of the Company's common stock awarded were 55,600, 19,400 and 45,000 in 1996, 1995 and 1994, respectively. The 1994 awards reflect the 1994 two-for-one stock split-up. Restrictions on these awards lapse after a period of time designated by the Compensation Committee of the Board of Directors. Note 11 Shareholder Rights Plan On May 8, 1996, the Company's Board of Directors adopted a new Shareholder Rights Plan to replace the Shareholder Rights Plan originally adopted in 1986 which expired on July 30, 1996. The Company's Shareholder Rights Plan is designed to deter coercive or unfair takeover tactics and to prevent a person or group from gaining control of the Company without offering a fair price to all shareholders. Under the terms of the 1996 Shareholder Rights Plan, all common shareholders own one "Right" per outstanding share of common stock entitling them to purchase from the Company one one-hundredth of a share of Series C Junior Participating Preferred Stock at an exercise price of $150. The Rights become exercisable: 10 days after a public announcement that a person or group has acquired shares representing 15 percent or more of the outstanding shares of common stock; or 15 business days following commencement of a tender offer for 15 percent or more of such outstanding shares of common stock. The Company can redeem the Rights for $0.01 per Right at any time prior to their becoming exercisable. The Rights will expire on July 31, 2006, unless redeemed earlier by the Company or exchanged for common stock. If after the Rights become exercisable the Company is involved in a merger or other business combination at any time when there is a holder of 15 percent or more of the Company's stock, the Rights will then entitle holders, upon exercise of the Rights, to receive shares of common stock of the acquiring or surviving company with a market value equal to twice the exercise price of each Right. There is an exemption for any issuance of common stock by the Company directly to any person, even if that person would become the beneficial owner of 15% or more of the common stock provided that such person does not acquire any additional shares of common stock. The Rights described in this paragraph shall not apply to an acquisition, merger or consolidation which is determined by a majority of the Company's independent directors, after consulting one or more investment banking firms, to be fair and otherwise in the best interest of the Company and its shareholders. 53 Note 12 Pension Plans The Company has various pension plans covering substantially all U.S. employees and certain foreign employees. Plan benefits are based on compensation paid to employees and their years of service. Company policy is to make contributions to its U.S. plans within the maximum amount deductible for Federal income tax purposes. Plan assets consist primarily of equity securities and government, corporate and other fixed-income obligations. The components of net pension costs for the plans were as follows: Dollars in Millions 1996 1995 1994 Service cost (benefits earned during the year) $ 34.0 $53.5 $ 49.9 Interest cost on projected benefit obligation 70.0 63.3 57.6 Return on plan assets (72.4) (69.0) (65.0) Net amortization and deferral (8.7) (7.3) (8.1) Multi-employer plans 0.5 0.4 0.3 Net pension costs $ 23.4 $40.9 $ 34.7 The decline in the Company's 1996 pension expense is due primarily to an increase in the actual rate of return on the plans' net assets, a reduction in the number of active employees and changes in certain actuarial assumptions to better reflect the Company's actual experience. Reconciliations of the funded status of the Company's U.S. plans to the accrued pension costs were as follows:
Overfunded Underfunded Dollars in Millions 1996 1995 1996 1995 Vested benefits $ 702.5 $ 658.7 $ 65.6 $ 59.3 Non-vested benefits 25.0 15.4 0.9 1.5 Accumulated benefit obligation 727.5 674.1 66.5 60.8 Effect of projected future salary increases 65.1 75.3 10.5 13.9 Projected benefit obligation 792.6 749.4 77.0 74.7 Plan assets at market value 880.4 783.7 26.9 27.1 Projected benefit obligation less (greater) than plan assets 87.8 34.3 (50.1) (47.6) Unrecognized net (gain) loss (135.7) (64.3) 1.5 1.7 Unrecognized prior service cost 16.4 19.0 4.2 5.2 Unrecognized net (asset) liability at transition (9.9) (22.1) 0.9 1.5 Accrued pension costs $ (41.4) $ (33.1) $ (43.5) $ (39.2) Assumptions (reflecting averages across all plans): Weighted average discount rate: 7.5%, Rate of future compensation increases: 4.5%, Long-term rate of return on plan assets: 9.5%.
Reconciliations of the funded status of the Company's foreign plans to the prepaid (accrued) pension costs were as follows:
Overfunded Underfunded Dollars in Millions 1996 1995 1996 1995 Vested benefits $ 95.1 $ 78.2 $ 14.0 $ 21.0 Non-vested benefits -- 0.1 0.6 2.2 Accumulated benefit obligation 95.1 78.3 14.6 23.2 Effect of projected future salary increases 29.0 24.4 0.7 0.8 Projected benefit obligation 124.1 102.7 15.3 24.0 Plan assets at market value 139.0 114.6 0.1 -- Projected benefit obligation less (greater) than plan assets 14.9 11.9 (15.2) (24.0) Unrecognized net (gain) loss (4.7) (3.5) 0.5 0.2 Unrecognized prior service cost 2.7 3.9 -- -- Unrecognized net asset at transition (7.3) (7.9) (0.1) (0.1) Prepaid (accrued) pension costs $ 5.6 $ 4.4 $(14.8) $(23.9) Assumptions (reflecting averages across all plans): Weighted average discount rate: 7.9%, Rate of future compensation increases: 6.1%, Long-term rate of return on plan assets: 8.1%.
Unrecognized prior service cost is being amortized over periods ranging from 10 to 18 years. The foreign pension plans included unfunded termination indemnity reserves of $6.7 million and $15.4 million as of December 31, 1996 and 1995, respectively. Note 13 Postretirement Benefits Other Than Pensions and Other Postemployment Benefits The Company has various postretirement health care plans covering substantially all U.S. employees and certain foreign employees. The plans provide for the payment of certain health care and life insurance benefits for retired employees who meet certain service-related eligibility requirements. The Company funds only the plans' annual cash requirements. 54 The components of postretirement benefit costs were as follows: Dollars in Millions 1996 1995 1994 Service cost (benefits earned during the year) $ 6.7 $ 6.9 $ 7.1 Interest cost on projected benefit obligation 17.3 19.4 19.0 Amortization 0.4 0.2 0.1 Total postretirement benefit costs $24.4 $26.5 $26.2 The Company's unfunded accumulated postretirement benefit obligations and accrued postretirement benefit costs were as follows: Dollars in Millions 1996 1995 Current retirees $ 132.3 $ 136.4 Current active employees - fully eligible 11.7 15.8 Current active employees - not fully eligible 105.1 113.6 Accumulated postretirement benefit obligation 249.1 265.8 Unrecognized net gain (loss) 27.1 (5.5) Unrecognized prior service cost (5.2) (2.3) Accrued postretirement benefit costs $ 271.0 $ 258.0 Assumptions: Weighted average discount rate: 7.50% Health care trend rates (varies by plan): 1997 2007 and Beyond Pre-age 65 9-12% 4-6% Age 65 and over 7-12% 4-6% If the health care trend rates were increased one percentage point, the current- year postretirement benefit costs would have been $3.9 million higher and the accumulated postretirement benefit obligation as of December 31, 1996 would have been $34.3 million higher. Effective July 1, 1994, the Company adopted FASB Statement #112, "Employers' Accounting for Postemployment Benefits." The Statement requires that the expected cost of other postemployment benefits be charged to expense during the years that employees render services. The cumulative effect of adoption was a $6.8 million pretax charge, or $4.1 million after-tax, in the third quarter of 1994. The adoption of the Statement has not had a material effect on annual operating results or cash flows since adoption, nor is it expected to have a material effect in future years. Note 14 Lease and Other Commitments Certain equipment and operating properties are rented under non-cancelable and cancelable operating leases. Total rental expense under operating leases was $36.4 million, $36.3 million and $33.5 million for the years ended December 31, 1996, 1995 and 1994, respectively. The following is a schedule of future minimum annual rentals on non-cancelable operating leases, primarily for sales offices, distribution centers and corporate headquarters, in effect as of December 31, 1996.
Dollars in Millions 1997 1998 1999 2000 2001 Thereafter Total Total payments $29.3 $28.0 $24.7 $17.5 $16.3 $66.1 $181.9
The Company enters into executory contracts to promote various products. As of December 31, 1996, future commitments under these contracts amounted to $47.0 million. Note 15 Supplementary Income Statement Information Dollars in Millions 1996 1995 1994 Advertising, media and production $ 289.8 $ 271.5 $ 303.5 Merchandising 913.5 1,192.7 1,383.9 Total advertising and merchandising $1,203.3 $1,464.2 $1,687.4 Depreciation expense $ 119.1 $ 115.3 $ 133.1 Amortization of intangibles $ 78.5 $ 86.7 $ 36.9 Research and development $ 33.0 $ 40.4 $ 56.2 Note 16 Interest Expense Dollars in Millions 1996 1995 1994 Interest expense $ 113.0 $135.9 $103.1 Interest expense capitalized (6.2) (4.3) (1.6) Subtotal 106.8 131.6 101.5 Interest income (7.4) (6.2) (9.0) Interest expense - net $ 99.4 $125.4 $ 92.5 Interest paid in the years ended December 31, 1996, 1995 and 1994 was $109.0 million, $129.9 million and $96.6 million, respectively. 55 Note 17 Income Taxes The Company uses an asset and liability approach to financial accounting and reporting for income taxes in accordance with FASB Statement #109, "Accounting for Income Taxes." Provisions for income taxes on income before cumulative effect of accounting change were as follows: Dollars in Millions 1996 1995 1994 Currently payable: Federal $ 99.4 $339.1 $129.8 Foreign 10.2 131.7 15.0 State 26.6 54.9 40.2 Total currently payable 136.2 525.7 185.0 Deferred - net: Federal 15.9 (19.8) (42.2) Foreign 10.4 (7.3) (3.1) State 5.2 (2.1) (12.4) Total deferred - net 31.5 (29.2) (57.7) Provision for income taxes $167.7 $496.5 $127.3 The components of the deferred income tax provision (benefit) were as follows: Dollars in Millions 1996 1995 1994 Accelerated tax depreciation $ 3.7 $(23.8) $ 8.8 Postretirement benefits 0.6 (6.5) (6.0) Accrued expenses including restructuring charges 40.6 12.6 (30.8) Loss carryforwards (7.1) 3.5 (6.1) Foreign gain deferral 9.8 -- -- Other (16.1) (15.0) (23.6) Provision (benefit) for deferred income taxes $31.5 $(29.2) $(57.7) Total income tax provisions (benefits) were allocated as follows: Dollars in Millions 1996 1995 1994 Continuing operations $ 167.7 $ 496.5 $ 127.3 Cumulative effect of accounting change $ -- $ -- $ (2.7) Items charged directly to common shareholders' equity $ (8.4) $ (11.4) $ (12.7) The sources of pretax income before cumulative effect of accounting change were as follows: Dollars in Millions 1996 1995 1994 U.S. sources $362.8 $ 925.4 $302.2 Foreign sources 52.8 295.1 18.2 Income before income taxes and cumulative effect of accounting change $415.6 $1,220.5 $320.4 Reconciliations of the statutory Federal income tax rates to the effective income tax rates were as follows:
Dollars in Millions 1996 1995 1994 % of % of % of Pretax Pretax Pretax Amount Income Amount Income Amount Income Tax provision based on the Federal statutory rate $145.5 35.0% $427.2 35.0% $112.1 35.0% State and local income taxes - net of Federal income tax benefit 20.7 5.0 34.3 2.8 18.1 5.6 Repatriation of foreign earnings (11.3) (2.7) 18.9 1.5 (3.9) (1.2) Foreign tax rate differential 2.1 0.5 21.1 1.7 5.5 1.7 Miscellaneous items 10.7 2.6 (5.0) (0.3) (4.5) (1.4) Provision for income taxes $167.7 40.4% $496.5 40.7% $127.3 39.7%
Deferred tax assets and deferred tax liabilities were as follows: Dollars in Millions 1996 1995 Assets Liabilities Assets Liabilities Depreciation and amortization $ 56.9 $400.1 $ 58.8 $ 405.6 Postretirement benefits 100.3 -- 100.9 -- Other benefit plans 60.8 9.2 59.8 20.2 Accrued expenses including restructuring charges 80.3 7.9 147.9 10.4 Loss carryforwards 14.5 -- 13.5 -- Other 13.3 33.2 15.9 22.8 Subtotal 326.1 450.4 396.8 459.0 Valuation allowance (14.2) -- (20.0) -- Total $311.9 $450.4 $ 376.8 $459.0 56 As of December 31, 1996, the Company had $48.3 million of operating and capital loss carryforwards available to reduce future taxable income of certain international subsidiaries. These loss carryforwards must be utilized within the carryforward periods of these international jurisdictions. The majority of loss carryforwards have no expiration restrictions. Those with restrictions expire primarily in five years. A valuation allowance has been provided for a portion of the deferred tax assets related to the loss carryforwards. Included in other current assets were deferred tax assets of $99.9 million and $151.4 million as of December 31, 1996 and 1995, respectively. Income taxes paid during 1996, 1995 and 1994 were $161.1 million, $434.7 million and $100.4 million, respectively. Note 18 Litigation The case entitled Sands, Taylor & Wood v. The Quaker Oats Company, which dealt with the Company's use of the words "thirst aid" in advertising Gatorade thirst quencher, was settled in September 1995 while the case was pending before the U.S. Court of Appeals for the Seventh Circuit. The Company did not incur any additional charge above the amount previously recorded in connection with this settlement. On November 1, 1995, the Company filed suit against Borden, Inc. in Federal District Court in New York alleging that Borden made material misrepresentations and committed fraud in connection with the Company's November 1994 acquisition of a Brazilian pasta business for $100 million. The Company seeks to rescind the transaction and collect damages. The Company is also a party to a number of lawsuits and claims, which it is vigorously defending. Such matters arise out of the normal course of business and relate to the Company's recent acquisition activity and other issues. Certain of these actions seek damages in large amounts. While the results of litigation cannot be predicted with certainty, management believes that the final outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. Changes in assumptions, as well as actual experience, could cause the estimates made by management to change. Note 19 Quarterly Financial Data (Unaudited) Dollars in Millions (Except Per Share Data) First Second Third Fourth 1996 Quarter(a) Quarter Quarter(b) Quarter Net sales $1,222.8 $1,481.8 $ 1,436.2 $1,058.2 Cost of goods sold 664.5 790.1 754.3 598.6 Gross profit $ 558.3 $ 691.7 $ 681.9 $ 459.6 Net income $ 32.2 $ 64.6 $ 133.0 $ 18.1 Per common share: Net income $ 0.23 $ 0.47 $ 0.98 $ 0.12 Cash dividends declared $ 0.285 $ 0.285 $ 0.285 $ 0.285 Market price range: High $ 35 7/8 $ 37 5/8 $ 36 7/8 $ 39 1/2 Low $ 32 3/4 $ 32 3/8 $ 30 3/8 $ 34 1/8 (a)Includes a $2.8 million pretax gain ($1.7 million after-tax or $.01 per share) for the sale of the Italian products business. (b)Includes a $133.6 million pretax gain ($80.1 million after-tax or $.59 per share) for the sale of the U.S. and Canadian frozen foods business and pretax restructuring charges of $23.0 million ($19.4 million after-tax or $.14 per share) related to plant consolidations in the U.S. Foods business and a change in how the Company sells Snapple beverages in certain Texas markets. Dollars in Millions (Except Per Share Data) First Second Third Fourth 1995 Quarter(a) Quarter(b) Quarter Quarter(c) Net sales $1,633.5 $1,587.4 $1,553.6 $1,179.5 Cost of goods sold 871.0 894.1 825.0 704.3 Gross profit $ 762.5 $ 693.3 $ 728.6 $ 475.2 Net income $ 366.1 $ 344.2 $ 61.5 $ (47.8) Per common share: Net income $ 2.73 $ 2.57 $ 0.45 $ (0.36) Cash dividends declared $ 0.285 $ 0.285 $ 0.285 $ 0.285 Market price range: High $ 36 1/2 $ 37 1/2 $ 36 $ 37 3/8 Low $ 30 1/4 $ 32 1/8 $ 30 3/4 $ 31 1/8 (a) Includes a $513.0 million pretax gain ($322.2 million after-tax or $2.41 per share) for the sale of the U.S. and Canadian pet food business and a $4.9 million pretax gain ($2.8 million after-tax or $.02 per share) for the sale of the Dutch honey business. (b) Includes a $487.2 million pretax gain ($272.6 million after-tax or $2.04 per share) for the sale of the European pet food business; a $74.5 million pretax gain ($43.9 million after-tax or $.33 per share) for the sale of the Mexican chocolate business; a $91.2 million pretax gain ($53.1 million after- tax or $.40 per share) for the sale of the U.S. bean and chili businesses; pretax restructuring charges of $76.5 million ($46.1 million after-tax or $.35 per share) for cost-reduction and realignment activities; and an additional $10.6 million pretax provision ($6.2 million after-tax or $.05 per share) for estimated litigation costs. (c)Includes pretax restructuring charges of $40.8 million ($24.5 million after- tax or $.18 per share) for Snapple beverages supply chain cost reductions and for realignment activities in Europe and Asia/Pacific. 57 Report of Independent Public Accountants To the Shareholders of The Quaker Oats Company: We have audited the accompanying consolidated balance sheets of The Quaker Oats Company (a New Jersey corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, common shareholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Quaker Oats Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years ended December 31, 1996, 1995 and 1994 in conformity with generally accepted accounting principles. As indicated in Note 13, effective July 1, 1994, the Company changed its accounting for postemployment benefits. /s/Arthur Andersen LLP Chicago, Illinois February 5, 1997 Report of Management Management is responsible for the preparation and integrity of the Company's financial statements. The financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include some amounts that are based on management's estimates and judgment. To fulfill its responsibility, management's goal is to maintain strong systems of internal controls, supported by formal policies and procedures that are communicated throughout the Company. Management regularly evaluates its systems of internal controls with an eye toward improvement. Management also maintains a staff of internal auditors who evaluate the adequacy of and investigate the adherence to these controls, policies and procedures. Our independent public accountants, Arthur Andersen LLP, have audited the financial statements and have rendered an opinion as to the statements' fairness in all material respects. During the audit, they obtain an understanding of the Company's internal control systems and perform tests and other procedures to the extent required by generally accepted auditing standards. The Board of Directors pursues its oversight role with respect to the Company's financial statements through the Audit Committee, which is composed solely of non-management directors. The Audit Committee meets periodically with the independent public accountants, internal auditors and management to assure that all are properly discharging their responsibilities. The Audit Committee approves the scope of the annual audit and reviews the recommendations the independent public accountants have for improving internal accounting controls. The Board of Directors, on recommendation of the Audit Committee, engages the independent public accountants, subject to shareholder approval. Both Arthur Andersen LLP and the internal auditors have unrestricted access to the Audit Committee. 58 Additional 10-K Information Description of Property As of December 31, 1996, the Company operated 57 manufacturing plants in 19 states and 15 foreign countries and owned or leased distribution centers and sales offices in 20 states and 23 foreign countries. Owned and Leased Owned and Leased Distribution Owned and Leased Mfg. Locations Centers Sales Offices Industry Segment U.S. Foreign U.S. Foreign U.S. Foreign Foods 22 20 7 14 6 22 Beverages 7 7 -- 3 18 13 Shared -- 1 2 3 12 10 Total 29 28 9 20 36 45 The Company owns a research and development laboratory in Barrington, Illinois and leases corporate office space in downtown Chicago, Illinois. Management believes manufacturing, distribution and office space owned and leased are suitable and adequate for the business and productive capacity is appropriately utilized. Trademarks The Company and its subsidiaries own a number of trademarks and are not aware of any circumstances that could adversely affect the continued use of these trademarks. Among the most important of the domestic trademarks owned by the Company are Quaker, Cap'n Crunch, Quaker Toasted Oatmeal, Life, Quaker 100% Natural and Quaker Oatmeal Squares for breakfast cereals; Gatorade for thirst- quenching beverages; Snapple for teas and juice drinks; Quaker and Quaker Chewy for grain-based snacks; Rice-A-Roni and Near East for value-added rice and grain products; Pasta Roni for value-added pasta; Nile Spice for soup in a cup; Golden Grain and Mission for pasta; Quaker and Aunt Jemima for mixes, syrups and corn goods; Ardmore Farms for citrus and fruit juices; Continental, Maryland Club and Continental WB for coffee, and; Mrs. Richardson's for ice cream toppings. Many of the grocery product trademarks owned by the Company in the United States are registered in foreign countries in which the Company does substantial business. Internationally, key trademarks owned include: Quaker, Cruesli, Honey Monster, Sugar Puffs and Scott's for breakfast cereals; Coqueiro for fish; Toddy and ToddYnho for chocolate beverages; and Adria for pasta products. Worldwide Foods Description The Company is a major participant in the competitive packaged food industry in the United States and is a leading manufacturer of hot cereals, pancake mixes, grain-based snacks, cornmeal, hominy grits and value-added rice products. In addition, the Company is the second-largest manufacturer of syrups and value- added pasta products and is among the five largest manufacturers of ready-to- eat cereals and dry pasta products. The Company competes with a significant number of large and small companies on the basis of price, value, innovation, quality and convenience, among other attributes. The Company's food products are purchased by consumers through a wide range of food distributors. The Company utilizes both its own and broker sales forces and has distribution centers throughout the country, each of which carries an inventory of most of the Company's food products. In addition, the Company markets a line of over 400 items for the food service market, including Quaker hot and ready-to-eat cereals; Continental and Maryland Club coffee; Ardmore Farms single-serve frozen fruit juices; a specialty line of custom-blended dry baking mixes; ready- to-bake biscuits; Arnie's Bagelicious Bagels and Petrofsky's bagels; Burry cookies and crackers; and Mrs. Richardson's syrups, ice cream toppings and condiments. Outside the United States, the Company manufactures and markets its products in countries throughout Latin America, Europe and the Asia/Pacific region. It is the leading hot cereals producer in the United Kingdom and many other countries and is a leading pasta manufacturer and canned fish processor in Brazil. Worldwide Beverage Description The Company is the world's leading manufacturer of sports beverages. It sells its sports beverages in over 45 countries around the world and is the leading sports drink distributor in the United States, Canada, Mexico, Italy, Argentina, Brazil, Venezuela, Colombia, Indonesia and the Philippine Islands. It is also one of the leading sports drink brands in Korea and Australia, where Gatorade thirst quencher is sold through licensee arrangements. In the U.S., Gatorade thirst quencher utilizes a combination of brokers and the Company's own sales force and has distribution centers throughout the country. The Company is also a leading marketer of single-serve, alternative beverages (which include ready-to-drink teas, lemonades and juice drinks) in the United States and Canada where it competes with a significant number of large and small companies on the basis of price, value, innovation, quality and convenience, among other attributes. The Company sells Snapple beverages in the United States through a network of independent beverage distribution companies and a few self-owned distributors; each maintains a complete inventory. Raw Materials The raw materials used in manufacturing include oats, wheat, soy products, corn, rice, sweeteners, tea, orange and other juice concentrates, almonds, coffee beans, raisins, beef, chicken, shortening and fish, as well as a variety of packaging materials. These products are purchased mainly in the open market. Supplies of all raw materials have been adequate and continuous. 59 Directors Members of the Board of Directors Frank C. Carlucci 1*,5,6 Chairman The Carlyle Group (Banking) Washington, D.C. Silas S. Cathcart 2*,3,5 Retired Chairman Illinois Tool Works (Diversified Products) Chicago, Illinois Kenneth I. Chenault 1,2,4,5 President and Chief Operating Officer American Express Company (Financial and Travel Services) New York, New York Judy C. Lewent 1,4,5,6 Senior Vice President and Chief Financial Officer Merck & Co., Inc. (Pharmaceuticals) Whitehouse Station, New Jersey Vernon R. Loucks, Jr. 2,3,5* Chairman and Chief Executive Officer Baxter International Inc. (Medical Care Products) Deerfield, Illinois Thomas C. MacAvoy 1,5,6* Paul M. Hammaker Professor of Business Administration Darden Graduate School of Business Administration University of Virginia Charlottesville, Virginia Luther C. McKinney 3 Senior Vice President Law, Corporate Affairs and Corporate Secretary Walter J. Salmon 4,5,6 Stanley Roth, Sr. Professor of Retailing Harvard Business School Boston, Massachusetts William D. Smithburg 3,5 Chairman, President and Chief Executive Officer William L. Weiss 2,3,4*,5 Chairman Emeritus Ameritech Corporation (Telecommunications) Chicago, Illinois Board Committees 1 Audit 2 Compensation 3 Executive 4 Finance 5 Nominating (William D. Smithburg Ex Officio Member) 6 Public Responsibility * Denotes Committee Chairman Officers Senior Officers William D. Smithburg + Age 58 Chairman, President and Chief Executive Officer Joined Quaker in 1966. Elected to present office in 1995. Luther C. McKinney + Age 65 Senior Vice President Law, Corporate Affairs and Corporate Secretary Joined Quaker in 1974. Elected to present office in November 1996. Douglas J. Ralston + Age 51 Senior Vice President Human Resources Joined Quaker in 1981. Elected to present office in 1992. Robert S. Thomason + Age 52 Senior Vice President Finance and Chief Financial Officer Joined Quaker in 1971. Elected to present office in 1995. Corporate Staff Officers John H. Calhoun Vice President and Associate General Corporate Counsel Penelope C. Cate Vice President Government and Community Relations Michael L. Cohen Vice President Human Resource Development Janet K. Cooper + Age 43 Vice President and Treasurer Joined Quaker in 1978. Elected to present office in 1992. Margaret M. Eichman Vice President Investor Relations and Corporate Communications Scott Gantwerker Vice President Quality Worldwide Thomas L. Gettings + Age 40 Vice President and Corporate Controller Joined Quaker in 1987. Elected to present office in 1992. Mary M. Hoskins Assistant Treasurer John G. Jartz + Age 43 Vice President General Counsel and Business Development Joined Quaker in 1980. Elected to present office in November 1996. James E. LeGere Vice President Information Services I. Charles Mathews Vice President Diversity Management Mart C. Matthews Vice President and Associate General Corporate Counsel Kenneth W. Murray Vice President Internal Auditing Quaker Foods (U.S. and Canada) Douglas W. Mills + Age 51 Executive Vice President Joined Quaker in 1969. Elected to present office in 1994. John A. Boynton Vice President and Chief Customer Officer Polly B. Kawalek President - Hot Breakfasts David L. Morton President and Chief Executive Officer The Quaker Oats Company of Canada Limited Mark A. Shapiro President Golden Grain Russell A. Young Vice President Supply Chain Worldwide Beverages James F. Doyle + Age 44 Executive Vice President Joined Quaker in 1981. Elected to present office in 1994. Bernardo Wolfson President - Beverages, Latin America and Europe Michael B. Schott + Age 48 Vice President and President - Snapple Beverages Joined Quaker in August 1996. Elected to present office in September 1996. Worldwide Quaker Food Service A. Stephen Diamond + Age 51 Executive Vice President Joined Quaker in 1993. Elected to present office in November 1996. Ronald L. Bane Vice President and Business Leader Continental Coffee Dale W. Tremblay Vice President and Business Leader - McDonald's and In-Store Bakery Business Units International Food Products Barbara R. Allen + Age 44 Executive Vice President Joined Quaker in 1977. Elected to present office in 1995. Europe George F. Sewell President - Cereals, Europe Pacific Cassian Cheung President - Pacific International Foods + also Executive Officers as defined by Securities and Exchange Commission regulations. Such Executive Officers serve at the pleasure of the Board of Directors. All Executive Officers (except Michael B. Schott, who joined the Company in August 1996 and was formerly the Vice President of Nantucket Nectars [1996], Chief Operating Officer of Arizona Beverages [1993-1996], and General Manager of Don Lee Distributor, Inc. [1991-1993], and A. Stephen Diamond, who joined the Company in August 1993 and was formerly President of Pillsbury Europe and Managing Director of Grand Met Food Group UK) have been employed by The Quaker Oats Company in an executive capacity for five years or more. Shareholder Information Dividend Reinvestment and Stock Purchase Plan Owners of Quaker Oats common stock may use the Company's Dividend Reinvestment and Stock Purchase Plan to purchase additional shares through automatic dividend reinvestment and/or optional cash investments. A booklet describing the Plan and enrollment procedures is available on request from the Harris Bank. (Telephone and address are listed on page 65.) Dividends Cash dividends on Quaker common stock have been paid for 91 consecutive years. Dividends are generally declared on a quarterly basis, with holders as of the record date being entitled to receive the cash dividend on the payable date. Shareholder Services Harris Trust and Savings Bank acts as transfer agent and registrar for the Company stock and maintains all primary shareholder records. Shareholders may obtain information relating to their share positions, dividends, stock transfer requirements, lost certificates, dividend reinvestment accounts and other related matters by telephoning the Shareholder Hotline toll-free at 1-800-344- 1198. Form 10-K This Annual Report includes all financial statements and notes required by Form 10-K. If you request a Form 10-K, you will receive the annual report, proxy statement, and the Form 10-K cover page, exhibit list and conformed signature page. Annual Meeting Shareholders are cordially invited to attend the Annual Meeting, which will be held at the Rosemont Theatre, 5400 North River Road in Rosemont, Illinois, May 14, 1997, at 9:30 a.m. (CST). Investor Relations Security analysts, investment professionals and shareholders should direct their business-related inquiries to: Investor Relations - Suite 27-7 or call (312) 222-7818 Media Relations Copies of Press Releases are available at no charge through PR Newswire's Company News On-Call fax service. Call 1-800-758-5804, extension 103689. Press and media related inquiries should be addressed to: Media Relations - Suite 27-6 or call (312) 222-7388 Consumer Affairs Inquiries regarding our products should be addressed to: Consumer Affairs The Quaker Oats Company P.O. Box 049003 Chicago, Illinois 60604-9003 For information about a specific product, call the toll-free number shown on the package. The Quaker Oats Company was incorporated in 1901 under the laws of the state of New Jersey. Ticker Symbol: OAT Internet address: www.quakeroats.com Corporate Headquarters Mailing Address: Street Address: The Quaker Oats Quaker Tower Company 321 North Clark Street P.O. Box 049001 Chicago, Illinois 60610-4714 Chicago, Illinois (312) 222-7111 60604-9001 Transfer Agent, Harris Trust and Savings Bank, Shareholder Services Registrar and Dividend Division Disbursing Agent P.O. Box 755, 311 West Monroe Chicago, Illinois 60690-0755 1-800-344-1198 Dividend Reinvestment Harris Trust and Savings Bank, Dividend Reinvestment and and Stock Purchase Plan Stock Purchase Plan P.O. Box A3309 Chicago, Illinois 60690-3309 1-800-344-1198 Independent Public Arthur Andersen LLP Accountants 33 West Monroe Chicago, Illinois 60603 (312) 580-0033 Shares Listed New York Stock Exchange Chicago Stock Exchange Pacific Stock Exchange The Stock Exchange, London EX-21 21 EXHIBIT 21 State of Subsidiary Incorporation THE QUAKER OATS COMPANY ACTIVE DOMESTIC SUBSIDIARIES AS OF 12/31/96 Subsidiary State of Incorporation Ardmore Farms, Inc. Pennsylvania Arnie's Bagelicious Bagels, Inc. Delaware Continental Coffee Products Company Delaware The Gatorade Company Delaware Gatorade Puerto Rico Company Delaware Golden Grain Company California Grocery International Holdings, Inc. Delaware Liqui-Dri Foods, Inc. Kentucky Mr. Natural, Inc. Delaware Pacific Snapple Distributors, Inc. California QO Coffee Holdings, Inc. Delaware Quaker Custom Foods, Inc. Delaware Quaker Food Service Holdings Pte. Ltd. Delaware Quaker Latin America, Inc. Delaware Quaker Oats Asia, Inc. Delaware Quaker Oats Europe, Inc. Illinois Quaker Oats Holdings, Inc. Delaware Quaker Oats Music, Inc. Delaware Quaker Oats Phillipines, Inc. Delaware Quaker South Africa, Inc. Delaware Richardson Foods Corporation New York Snapple Beverage Corp. Delaware Snapple Caribbean Corp. Delaware Snapple Finance Corp. Delaware Snapple International Corp. Delaware Snapple Worldwide Corp. Delaware Southwest Snapple Corp. Delaware Southwest Snapple Holdings Corp. Delaware Stokely-Van Camp, Inc. Indiana ACTIVE FOREIGN SUBSIDIARIES AS OF 12/31/96 Subsidiary Country Elaboradora Argentina de Cereales, S.A. Argentina Quaker Oats Australia, Pty. Ltd. Australia The Gatorade Company of Australia Pty. Ltd. Australia Quaker Oats Foreign Sales Corporation Barbados QUIC Ltd. Bermuda Quaker Brasil, Ltda. Brazil The Quaker Oats Company of Canada Limited Canada Beverages Gatorade (Chile) Ltda Chile Productos Quaker, S.A. Colombia Quaker Oats Limited England Quaker Trading Limited England The Quaker Beverages GmbH Germany Quaker Beverages Italia, S.p.A. Italy Quaker Oats Japan, Ltd. Japan Quaker Products (Malaysia) Sdn. Bhd Malaysia Quaker de Mexico, S.A. de C.V. Mexico Productos Quaker de Mexico S.A. de C.V. Mexico Quaker Oats B.V. The Netherlands QO Puerto Rico, Inc. Puerto Rico Quaker Bebidas, S.A. Spain Productos Quaker, C.A. Venezuela DOMESTIC PARTNERSHIPS Rhode Island Beverage Corp., GP Snapple Beverage Corp. 50% Jeffrey A. Honickman, and Jeffrey A. Honickman Trustee 50% Select Beverages, Inc. Snapple Beverage Corp. 20.0% T.H. Lee and Affiliates 70.1% Kemmerer Group 5.0% Select Management 4.9% DOMESTIC LIMITED PARTNERSHIPS Rhode Island Beverage Snapple Beverage Corp. 49.5% Packing Company L.P. Honickman Trust 49.5% Rhode Island Beverage Corp. 1.0% DOMESTIC JOINT VENTURES Rhone Poulenc The Quaker Oats Company 50% Rhone Poulenc 50% Uni-Quaker Ltd. South Africa Quaker South Africa, Inc. 50% Unimil Pty. Ltd. 50% FOREIGN JOINT VENTURES Guangzhou Quaker Oats Food and The Quaker Oats Company 90% Beverage Co. Ltd. Stokely-VanCamp, Inc. 10% P.T. Gatorade Indonesia The Quaker Oats Company 90% P.T. Gatorade Indonesia 10% Shanghai Guan Sheng Yuan Quaker The Quaker Oats Company 70% Oats Co. Ltd. Shanghai Guan Sheng Yuan Quaker Oats Co., Ltd. 30% Shanghai Quaker Oats Beverages Co. The Quaker Oats Company 80% Ltd. Shanghai Quaker Oats Beverages Co. Ltd. 20% Quaker Cremica Foods Pte. Ltd. Quaker Food Service Holdings Pte. Ltd. 50% Quaker Cremica Foods Pte. Ltd. 50% EX-23 22 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated February 5, 1997, included in this Form 10-K for the year ended December 31, 1996 into the Company's previously filed Registration Statement File Nos. 33-13980, 33-13981, 33-32970, 2-79503 and 33-33253. /s/ Arthur Andersen LLP Chicago, Illinois March 19, 1997 EX-27 23
5 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 111 0 324 29 275 890 1943 742 4394 1355 994 0 100 840 309 4394 5199 5199 2808 2808 0 12 107 416 168 248 0 0 0 248 1.80 1.78
EX-10.11 24 Exhibit 10 (f)(1) EXECUTIVE SEPARATION AGREEMENT THIS AGREEMENT is made between The Quaker Oats Company, a New Jersey corporation (the "Company"), and William D. Smithburg (the "Executive"), dated this 18th day of November, 1996. WITNESSETH THAT: WHEREAS, the Company wishes to attract and retain well-qualified executive personnel and to assure both itself and the Executive of continuity of management in the event of any actual or threatened change in control of the Company; NOW, THEREFORE, it is hereby agreed by and between the parties as follows: 1. Operation of Agreement. The "effective date of this Agreement" shall be the date on which the Executive declares it effective, by notice to the Company in writing, but only if a change in control of the Company (as defined in Section 2) has occurred on or before the date of the notice. 2. Change in Control. A "change in control of the Company" shall be deemed to have occurred if: a. any "Person," which shall mean a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding voting securities; provided, however, that this paragraph (a) shall not apply to any Person who becomes such a beneficial owner of such Company securities pursuant to an agreement with the Company approved by the Company's Board of Directors (the "Board"), entered into before such Person has become such a beneficial owner of Company securities representing 5% or more of the combined voting power of the Company's then outstanding voting securities; b. during any period of 24 consecutive months (not including any period prior to November 13, 1996), individuals, who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph a., c. (2) or d. of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of the period cease for any reason to constitute at least a majority thereof; c. the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) the sale or disposition by the Company of all or substantially all of the Company's assets unless the acquirer of the assets or its directors shall meet the conditions for a merger or consolidation in subparagraphs d. (1) or d. (2); or d. the stockholders of the Company approve a merger or consolidation of the Company with any other company other than: (1) such a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 70% of the combined voting power of the Company's or such surviving entity's outstanding voting securities immediately after such merger or consolidation; or (2) such a merger or consolidation which would result in the directors of the Company who were directors immediately prior thereto continuing to constitute at least 50% of the directors of the surviving entity immediately after such merger or consolidation. In this paragraph d., "surviving entity" shall mean only an entity in which all of the Company's stockholders immediately before such merger or consolidation become stockholders by the terms of such merger or consolidation, and the phrase "directors of the Company who were directors immediately prior thereto" shall include only individuals who were directors of the Company at the beginning of the 24 consecutive month period preceding the date of such merger or consolidation, or who were new directors (other than any director designated by a Person who has entered into an agreement with the Company to effect a transaction described in paragraph a., c. (2), d. (1) or d. (2) of this Section) whose election by the Board, or whose nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds (2/3) of the directors before the beginning of such period. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, for the period commencing on the effective date of this Agreement and ending on the earlier to occur of the third anniversary of such effective date or the 65th birthday of the Executive (the "employment period"), to exercise such authorities and powers, and perform such duties and functions, as are commensurate with the authorities and powers being exercised, and duties and functions being performed, by the Executive immediately prior to the effective date of this Agreement, which services shall be performed at the current location where the Executive was employed immediately prior to the effective date of this Agreement or at such other location within a 30-mile radius of such current location. The Executive shall not be required to accept any other location. The Executive agrees that during the employment period he shall devote his full business time exclusively to his executive duties as described herein and perform such duties faithfully and efficiently. 4. Compensation, Compensation Plans, Benefit Plans, Perquisites. During the employment period and prior to termination (as defined in Section 5) of the Executive, the Executive shall be compensated as follows: a. He shall receive an annual salary which is not less than his annual salary immediately prior to the effective date of this Agreement, with the opportunity for increases, from time to time thereafter, which are in accordance with the Company's regular practices. b. He shall be eligible to participate on a reasonable basis in bonus, stock option, restricted stock and other incentive compensation plans, which shall provide benefits comparable to those to which he was provided immediately prior to the effective date of this Agreement. c. He shall be eligible to participate on a reasonable basis in tax- qualified employee benefit plans (including but not limited to pension, profit sharing and employee stock ownership plans), and supplemental non-qualified employee benefit plans relating thereto, which shall provide benefits comparable to those to which he was provided immediately prior to the effective date of this Agreement. d. He shall be entitled to receive employee welfare benefits (currently elected medical, dental and life insurance benefits) and perquisites which are comparable to those to which he was provided immediately prior to the effective date of this Agreement. 5. Termination. "Termination" shall mean either (a) termination by the Company of the employment of the Executive with the Company for any reason other than death, physical or mental incapacity, or cause (as defined below); (b) resignation of the Executive, which, notwithstanding anything else herein to the contrary, may be declared by the executive during the 30-day period following the first anniversary of the effective date of this Agreement; or (c) resignation of the Executive upon the occurrence of any of the following events: (1) a significant change in the nature or scope of the Executive's authorities, powers, functions, or duties from those described in Section 3; (2) a reduction in total compensation from that provided in Section 4; (3) the breach by the Company of any other provision of this Agreement; or (4) a reasonable determination by the Executive that, as a result of a change in control of the Company his position is significantly affected so that he is unable to exercise the authorities, powers, functions or duties attached to his position as described in Section 3. "Cause" means gross misconduct or willful and material breach of this Agreement by the Executive. No act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the action or omission was in the best interest of the Company. 6. Confidentiality. The Executive agrees that during and after the employment period, he will not divulge or appropriate to his own use or the use of others any secret or confidential information or knowledge pertaining to the business of the Company, or any of its subsidiaries, obtained during his employment by the Company or any of its subsidiaries. 7. Severance and Benefit Payments. a. In the event of termination of the Executive during the employment period, the Company shall pay the Executive a lump-sum severance allowance equal to salary and bonus payments for the following 24 calendar months. The initial salary rate shall not be less than his annual salary immediately prior to termination, or if greater, not less than his annual salary immediately prior to the change in control of the Company; such salary shall be increased every March 1, thereafter, according to the then current Hewitt Associate's projection for movement in executive base salaries. The initial bonus amount shall not be less than the annual equivalent of the incentive bonus calculated under Section 4(a)(1) of the Salaried Employees Compensation and Benefits Protection Plan; such bonus amount shall be increased every January 1, thereafter, according to the then current Hewitt Associates' projection for movement in executive total cash compensation. The lump-sum severance allowance shall not be adjusted on a present value basis. b. In the event of termination of the Executive during the employment period, the Company shall also pay the Executive a lump-sum benefit payment in an amount equivalent to (1) the benefits he would have accrued or been allocated under any tax-qualified employee benefit plan (including but not limited to pension, profit sharing and employee stock ownership plans) and any non-qualified supplemental benefit plan relating thereto, maintained by the Company as if he had remained in the employ of the Company for 24 calendar months after his termination, which benefits will be paid in addition to the benefits provided under such plans and (2) employee welfare benefits (currently elected coverage under the medical, dental and life insurance programs) to which he would have been entitled under all such employee benefit plans, programs or arrangements maintained by the Company as if he had remained in the employ of the company for 24 calendar months after his termination. Such a benefit payment shall be adjusted to include expected increases to the Executive's salary, bonus and other compensation as specified in paragraph 7a. having an effect on such benefits for such period. The lump-sum benefit payment shall not be adjusted on a present value basis (except for benefits accrued in a defined benefit pension plan). c. The amount of the severance allowance and benefit payment described in this Section shall be determined and such payment shall be made as soon as it is reasonably practicable. d. The severance allowance and benefit payment to be provided pursuant to this Section 7 shall be in addition to, and shall not be reduced by, any other amounts or benefits provided by separate agreement with the Executive, or plan or arrangement of the Company or its subsidiaries, unless specifically stipulated in an agreement which constitutes an amendment to this Agreement as provided in Section 14. 8. Make-Whole Payments. If any amount payable to the Executive by the Company or any subsidiary or affiliate thereof, whether under this Agreement or otherwise (a "Payment"), is subject to any tax under section 4999 of the Internal Revenue Code of 1986, as amended, (the "Code"), or any similar federal or state law (an "Excise Tax"), the Company shall pay to the Executive an additional amount (the "Make Whole-Amount") which is equal to (I) the amount of the Excise Tax, plus (II) the aggregate amount of any interest, penalties, fines or additions to any tax which are imposed in connection with the imposition of such Excise Tax, plus (III) all income, excise and other applicable taxes imposed on the Executive under the laws of any Federal, state, or local government or taxing authority by reason of the payments required under clause (I) and clause (II) and this clause (III). a.For purposes of determining the Make-Whole Amount, the Executive shall be deemed to be taxed at the highest marginal rate under all applicable local, state, federal and foreign income tax laws for the year in which the Make-Whole Amount is paid. The Make-Whole Amount payable with respect to an Excise Tax shall be paid by the Company coincident with the Payment with respect to which such Excise Tax relates. b.All calculations under this paragraph 8 shall be made initially by the Company and the Company shall provide prompt written notice thereof to the Executive to timely file all applicable tax returns. Upon request of the Executive, the Company shall provide the Executive with sufficient tax and compensation data to enable the Executive or his tax advisor to independently make the calculations described in subparagraph a. above and the Company shall reimburse the Executive for reasonable fees and expenses incurred for any such verification. c.If the Executive gives written notice to the Company of any objection to the results of the Company's calculations within 60 days of the Executive's receipt of written notice thereof, the dispute shall be referred for determination to tax counsel selected by the independent auditors of the Company ("Tax Counsel"). The Company shall pay all fees and expenses of such Tax Counsel. Pending such determination by Tax Counsel, the Company shall pay the Executive the Make-Whole Amount as determined by it in good faith. The Company shall pay the Executive any additional amount determined by Tax Counsel to be due under this Section 8 (together with interest thereon at a rate equal to 120% of the Federal short-term rate determined under section 1274(d) of the Code) promptly after such determination. d.The determination by Tax Counsel shall be conclusive and binding upon all parties unless the Internal Revenue Service, a court of competent jurisdiction, or such other duly empowered governmental body or agency (a "Tax Authority") determines that the Executive owes a greater or lesser amount of Excise Tax with respect to any Payment than the amount determine by Tax Counsel. e.If a Tax Authority makes a claim against the Executive which, if successful, would require the Company to make a payment under this Section 8, the Executive agrees to contest the claim on request of the Company subject to the following conditions: (1) The Executive shall notify the Company of any such claim within 10 days of becoming aware thereof. In the event that the Company desires the claim to be contested, it shall promptly (but in no event more than 30 days after the notice from the Executive or such shorter time as the Tax Authority may specify for responding to such claim) request the Executive to contest the claim. The Executive shall not make any payment of any tax which is the subject of the claim before the Executive has given the notice or during the 30-day period thereafter unless the Executive receives written instructions from the Company to make such payment together with an advance of funds sufficient to make the requested payment plus any amounts payable under this Section 8 determined as if such advance were an Excise Tax, in which case the Executive will act promptly in accordance with such instructions. (2) If the Company so requests, the Executive will contest the claim by either paying the tax claimed and suing for a refund in the appropriate court or contesting the claim in the United States Tax Court or other appropriate court, as directed by the Company; provided, however, that any request by the Company for the Executive to pay the tax shall be accompanied by an advance from the Company to the Executive of funds sufficient to make the requested payment plus any amounts payable under this Section 8 determined as if such advance were an Excise Tax. If directed by the Company in writing the Executive will take all action necessary to compromise or settle the claim, but in no event will the Executive compromise or settle the claim or cease to contest claim without the written consent of the Company; provided, however, that the Executive may take any such action if the Executive waives in writing his right to a payment under this Section 8 for any amounts payable in connection with such claim. The Executive agrees to cooperate in good faith with the Company in contesting the claim and to comply with any reasonable request from the Company concerning the contest of the claim, including the pursuit of administrative remedies, the appropriate forum for any judicial proceedings, and the legal basis for contesting the claim. Upon request of the Company, the Executive shall take appropriate appeals of any judgment or decision that would require the Company to make a payment under this Section 8. Provided that the Executive is in compliance with the provisions of this section, the Company shall be liable for and indemnify the Executive against any loss in connection with, and all costs and expenses, including attorney's fees, which may be incurred as a result of, contesting the claim, and shall provide the Executive within 30 days after each written request therefore by the Executive cash advances or reimbursement for all such costs and expenses actually incurred or reasonably expected to be incurred by the Executive as a result of contesting the claim. f.Should a Tax Authority finally determine that an additional Excise Tax is owed, then the Company shall pay an additional Make-Up Amount to the Executive in a manner consistent with this Section 8 with respect to any additional Excise Tax and any assessed interest, fines, or penalties. If any Excise Tax as calculated by the Company or Tax Counsel, as the case may be, is finally determined by a Tax Authority to exceed the amount required to be paid under applicable law, then the Executive shall repay such excess to the Company, but such repayment shall be reduced by the amount of any taxes paid by the Executive on such excess which are not offset by the tax benefit attributable to the repayment. 9. Mitigation and Set Off. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. The Company shall not be entitled to set off against the amounts payable to the Executive under this Agreement any amounts owed to the Company by the Executive, any amounts earned by the Executive in other employment after termination of his employment with the Company, or any amounts which might have been earned by the Executive in other employment had he sought such other employment. 10. Arbitration of All Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof, except with respect to Section 8, shall be settled by arbitration in the City of Chicago in accordance with the laws of the State of Illinois by three arbitrators appointed by the parties. If the parties cannot agree on the appointment, one arbitrator shall be appointed by the Company and one by the Executive, and the third shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States Court of Appeals for the Seventh Circuit. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 10. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel or incur other costs and expenses in connection with enforcement of his rights under this Agreement, Executive shall be entitled to recover from the Company his reasonable attorneys' fees and costs and expenses in connection with enforcement of his rights (including the enforcement of any arbitration award in court). Payment shall be made to the Executive by the Company at the time these attorneys' fees and costs and expenses are incurred by the Executive. If, however, the arbitrators should later determine that under the circumstances the Executive could have had no reasonable expectation of prevailing on the merits at the time he initiated the arbitration based on the information then available to him, he shall repay any such payments to the Company in accordance with the order of the arbitrators. Any award of the arbitrators shall include interest at a rate or rates considered just under the circumstances by the arbitrators. 11. Notices. Any notices, requests, demands, and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal executive offices. 12. Non-Alienation. The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law. Nothing in this paragraph shall limit the Executive's rights or powers which his executor or administrator would otherwise have. 13. Governing Law. The Agreement shall be construed and enforced according to the Employee Retirement Income Security Act of 1974 ("ERISA"), and the laws of the State of Illinois, other than its laws respecting choice of law, to the extent not pre-empted by ERISA. 14. Amendment. This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 15. Term. Unless the Executive has theretofore declared this Agreement effective, pursuant to Section 1 of this Agreement, this Agreement shall terminate (a) March 31, 1998 or (b) when the Executive has been placed on inactive service by the Company prior to a change in control of the Company. 16. Successors to the Company. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the Company and any successor of the Company. 17. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 18. Prior Agreement. Any prior Executive Separation Agreement between the Executive and the Company which has not yet terminated pursuant to its terms, is canceled by mutual consent of the Executive and the Company pursuant to execution of this Agreement, effective as of the day and year first above written. IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board, the Company has caused these presents to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Assistant Secretary, all as of the day and year first above written. ATTEST: THE QUAKER OATS COMPANY Gerald A. Cassioppi By: /s/ Douglas J. Ralston Assistant Secretary Its: Senior Vice President /s/ William D. Smithburg EXECUTIVE -----END PRIVACY-ENHANCED MESSAGE-----