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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PENNZOIL PRODUCTS COMPANY
(TO BE RENAMED "PENNZOIL-QUAKER STATE COMPANY")
(Exact name of registrant as specified in its charter)
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DELAWARE 2911 74-159720
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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LINDA F. CONDIT
SECRETARY
PENNZOIL PRODUCTS COMPANY
PENNZOIL PLACE, P.O. BOX 2967 PENNZOIL PLACE, P.O. BOX 2967
HOUSTON, TEXAS 77252-2967 HOUSTON, TEXAS 77252-2967
(713) 546-4000 (713) 546-4000
(Address, Including Zip Code, and (Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, Telephone Number, Including
of Registrant's Principal Executive Offices) Area Code, of Agent For Service)
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With a copy to:
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MOULTON GOODRUM JR. PAUL E. KONNEY RICHARD D. BOHM
BAKER & BOTTS, L.L.P. QUAKER STATE CORPORATION DEBEVOISE & PLIMPTON
3000 ONE SHELL PLAZA 225 EAST JOHN CARPENTER FREEWAY 875 THIRD AVENUE
HOUSTON, TEXAS 77002 IRVING, TEXAS 75062 NEW YORK, NEW YORK 10022
(713) 229-1234 (972) 868-0400 (212) 909-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the merger (the "Merger") of Downstream Merger Company into Quaker
State Corporation ("Quaker State") pursuant to the Agreement and Plan of Merger
dated as of April 14, 1998, as amended (as so amended, the "Merger Agreement"),
described in the Proxy Statement/Prospectus contained herein have been satisfied
or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------------------
CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE PRICE(2) REGISTRATION FEE(3)
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Common Stock, par value $.10 per
share(4)............................... 33,282,860 N/A $584,448,064 $39,588
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(1) Represents the number of shares of Common Stock of the Registrant to be
issued in the Merger to holders of Capital Stock of Quaker State determined
in accordance with the terms of the Merger Agreement (.8204 shares of Common
Stock of the Registrant for each of the 40,569,063 outstanding shares of
Capital Stock of Quaker State) and based on the number of shares of Capital
Stock of Quaker State outstanding on August 7, 1998 and the number of shares
of Capital Stock of Quaker State issuable upon exercise of outstanding
options or subject to restricted share awards as of August 7, 1998.
(2) Reflects the market price of the 40,569,063 shares of Capital Stock of
Quaker State to be exchanged for Common Stock of the Registrant in
connection with the Merger computed in accordance with Rule 457(c), Rule
457(f)(1), Rule 457(h)(1) and Rule 457(i) under the Securities Act, based
upon the average of the high and low sales prices of the Capital Stock of
Quaker State as reported by the New York Stock Exchange, Inc. on August 11,
1998 ($14.40625). The proposed maximum aggregate offering price is estimated
solely to determine the registration fee.
(3) Pursuant to Rule 457(b) under the Securities Act, the fee has been reduced
by the $132,825 paid on July 16, 1998 in connection with the filing under
the Securities Exchange Act of 1934, as amended, of preliminary copies of
Quaker State's proxy materials included herein.
(4) Includes the preferred stock purchase rights to be associated with the
Common Stock of the Registrant exercisable only upon the occurrence of
certain events.
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THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED AUGUST 14, 1998
QUAKER STATE CORPORATION
PENNZOIL PRODUCTS COMPANY
(TO BE RENAMED PENNZOIL-QUAKER STATE COMPANY)
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus relates to an Agreement and Plan of Merger
(as amended, the "Merger Agreement") among Pennzoil Company, a Delaware
corporation ("Pennzoil"), Pennzoil Products Company, a Delaware corporation and
wholly owned subsidiary of Pennzoil ("PPC"), Downstream Merger Company, a
Delaware corporation and wholly owned subsidiary of PPC ("Merger Sub"), and
Quaker State Corporation, a Delaware corporation ("Quaker State"). The Merger
Agreement and related agreements, including a distribution agreement between
Pennzoil and PPC (as amended, the "Distribution Agreement"), provide for the
consolidation of Pennzoil's motor oil, refined products and Jiffy Lube(R) fast
lube operations under PPC (to be renamed "Pennzoil-Quaker State Company"), the
subsequent spin-off of PPC to Pennzoil's stockholders (the "Spin-off") and the
merger of Merger Sub with and into Quaker State (the "Merger"). In connection
with the Merger, Quaker State stockholders will be entitled to receive .8204 of
a share of common stock of Pennzoil-Quaker State Company in exchange for each
share of Quaker State capital stock held.
PPC has filed a registration statement on Form S-4 pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering
approximately 33.3 million shares of Pennzoil-Quaker State Company common stock
to be issuable in connection with the Merger. This Proxy Statement/Prospectus
constitutes the Prospectus filed as a part of the registration statement and is
being furnished to stockholders of Quaker State in connection with the
solicitation of proxies by the Board of Directors of Quaker State for use at the
Special Meeting of the Stockholders of Quaker State (the "Special Meeting"), or
any adjournment or postponement thereof, scheduled to be held on September 18,
1998.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of Quaker State on or about August 18, 1998.
There is no current public trading market for Pennzoil-Quaker State Company
common stock. Pennzoil-Quaker State Company will apply to list its common stock
on the New York Stock Exchange, Inc. (the "NYSE") and the Pacific Exchange, Inc.
(the "Pacific Exchange").
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
YOU SHOULD CONSIDER BEFORE VOTING.
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THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE MERGER HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is August , 1998.
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THIS PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS THE EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, UPON
REQUEST FROM CARRIE L. SHERWOOD, ASSISTANT CORPORATE SECRETARY, QUAKER STATE
CORPORATION, 225 E. JOHN CARPENTER FREEWAY, IRVING, TEXAS 75062, TELEPHONE (972)
868-0400. TO ENSURE TIMELY DELIVERY OF THESE DOCUMENTS, ANY REQUEST SHOULD BE
MADE BY SEPTEMBER 11, 1998.
TABLE OF CONTENTS
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER.... 1
ADDITIONAL QUESTIONS AND ANSWERS ABOUT THE
MERGER FOR QUAKER STATE EMPLOYEES....... 3
SUMMARY................................... 4
SUMMARY SELECTED HISTORICAL AND PRO FORMA
FINANCIAL DATA.......................... 9
Pennzoil Products Group Selected Combined
Financial Information................... 10
Quaker State Corporation Selected
Financial Information................... 11
Pennzoil-Quaker State Company Selected
Unaudited Pro Forma Combined Financial
Information............................. 12
UNAUDITED COMPARATIVE PER SHARE DATA...... 13
QUAKER STATE MARKET PRICE AND DIVIDEND
INFORMATION............................. 14
DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS.............................. 15
RISK FACTORS.............................. 15
THE MERGER AND RELATED TRANSACTIONS....... 18
Special Meeting to Vote on the Proposed
Merger.................................. 18
Structure of the Merger................... 18
Background................................ 19
Quaker State's Reasons for the Merger..... 22
Recommendation of the Quaker State
Board................................... 23
Accounting Treatment and Considerations... 23
Certain United States Federal Income Tax
Consequences............................ 24
Regulatory Matters........................ 25
Litigation................................ 26
No Appraisal Rights....................... 26
Federal Securities Law Consequences;
Resale Restrictions..................... 26
ROLE OF QUAKER STATE'S FINANCIAL
ADVISORS................................ 27
Opinions of Quaker State's Financial
Advisors................................ 27
BUSINESS OF PENNZOIL-QUAKER STATE
COMPANY................................. 33
BUSINESS OF QUAKER STATE.................. 33
General................................... 33
Lubricants and Lubricant Services......... 34
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Consumer Products......................... 35
Discontinued Operations................... 35
Further Information....................... 35
BUSINESS OF PENNZOIL PRODUCTS GROUP....... 36
Motor Oil and Refined Products............ 36
Fast Lube Operations...................... 38
Competition............................... 39
Patents and Trademarks.................... 39
Research and Development.................. 39
Legal Proceedings......................... 40
Governmental Regulation................... 40
Employees................................. 41
PENNZOIL PRODUCTS GROUP SELECTED COMBINED
FINANCIAL INFORMATION................... 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR PENNZOIL PRODUCTS
GROUP................................... 43
Segment Financial Information............. 43
Results of Operations..................... 44
Overhead Charges.......................... 47
Interest Charges, Net..................... 48
Capital Resources and Liquidity........... 48
Year 2000 Issues.......................... 50
PENNZOIL-QUAKER STATE COMPANY UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS.............................. 52
PENNZOIL-QUAKER STATE COMPANY SUPPLEMENTAL
FINANCIAL DATA.......................... 58
THE TRANSACTION AGREEMENTS................ 60
General................................... 60
Restructuring of Pennzoil................. 60
Merger of PPC and Quaker State............ 61
Certain Covenants......................... 62
Certain Representations and Warranties.... 64
Conditions to the Spin-off and Merger..... 64
Termination of the Merger Agreement and
Distribution Agreement.................. 66
Retention Pay Plan........................ 68
Expenses.................................. 68
Amendments................................ 69
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RELATIONSHIP BETWEEN PENNZOIL-QUAKER STATE
COMPANY AND PENNZOIL AFTER THE MERGER... 70
Tax Separation Agreement.................. 70
Employee Benefits Agreement............... 70
Crude Oil Supply Agreement................ 71
Other Agreements.......................... 72
NEW CREDIT ARRANGEMENTS................... 74
MANAGEMENT OF PENNZOIL-QUAKER STATE
COMPANY................................. 75
Directors and Executive Officers.......... 75
Compensation of Directors................. 77
Officer and Director Indemnification...... 78
Executive Compensation.................... 78
Information Regarding Directors and
Officers of Quaker State................ 83
INTERESTS OF CERTAIN PERSONS.............. 83
Existing Officers and Directors Who Will
Join Pennzoil-Quaker State Company at
the Effective Time...................... 83
Indemnification of Officers and
Directors............................... 83
Quaker State Officers' and Directors'
Interests Under Stock Plans............. 84
Interest of a Quaker State Director in
Evercore................................ 85
Pennzoil Officers' Interests Under Stock
Plans................................... 85
Baum Employment Agreement................. 85
Barr Consulting Agreement................. 85
Employment Continuation Agreements........ 86
Rabbi Trust............................... 87
Retention Pay Plan........................ 87
Long-Term Incentive Program............... 87
Other Severance Benefits.................. 87
THE SPECIAL MEETING....................... 87
Time, Date and Place...................... 87
Purpose of the Special Meeting............ 87
Record Date; Voting Rights; Vote Required
for Approval............................ 88
Proxies................................... 88
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS.................................. 89
Security Ownership of Pennzoil............ 89
Security Ownership of Quaker State........ 90
DESCRIPTION OF CAPITAL STOCK OF
PENNZOIL-QUAKER STATE COMPANY........... 92
Pennzoil-Quaker State Company Common
Stock................................... 92
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Pennzoil-Quaker State Company Preferred
Stock................................... 92
Stockholder Rights Plan................... 93
Limitation on Directors' Liability........ 95
Section 203 of Delaware General
Corporation Law......................... 96
Certain Bylaw Provisions.................. 96
Limitation on Changes in Control.......... 97
Transfer Agent and Registrar.............. 97
Stock Exchange Listing; Delisting and
Deregistration of Quaker State Capital
Stock................................... 97
COMPARISON OF STOCKHOLDER RIGHTS.......... 97
General................................... 97
Business Combinations..................... 97
Amendments to Charter and Bylaws.......... 98
No Stockholder Action By Written
Consent................................. 98
Special Meetings of Stockholders.......... 98
Classification of Board of Directors...... 98
Removal of Directors...................... 99
No Cumulative Voting...................... 99
Advance Notice Bylaws..................... 99
Compromise or Arrangement Between
Corporation and Creditors or
Stockholders............................ 99
Comparison of Current Quaker State
Stockholder Rights Plan with Pennzoil-
Quaker State Company Stockholder Rights
Plan Following the Merger............... 100
LEGAL MATTERS............................. 100
EXPERTS................................... 101
FUTURE STOCKHOLDER PROPOSALS.............. 101
WHERE YOU CAN FIND MORE INFORMATION....... 102
INDEX TO FINANCIAL STATEMENTS............. F-1
LIST OF ANNEXES
Annex A -- Agreement and Plan of Merger
Annex B -- Distribution Agreement
Annex C -- Opinion of Chase Securities
Inc.
Annex D -- Opinion of Goldman, Sachs & Co.
Annex E -- Form of Pennzoil-Quaker State
Company Restated Certificate of
Incorporation
Annex F -- Amendment Number One to
Agreement and Plan of Merger
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QUESTIONS AND ANSWERS ABOUT THE MERGER
The following questions and answers highlight selected information
regarding the Merger and related transactions described in this Proxy
Statement/Prospectus. They do not contain all the information that is important
to consider when evaluating the merits of the Merger and related transactions.
For a more complete description of the terms of the Merger and related
transactions, please read this entire Proxy Statement/ Prospectus and the
documents it refers to. See "Where You Can Find More Information" beginning on
page 102.
Q: PLEASE BRIEFLY DESCRIBE THE PROPOSED MERGER AND RELATED TRANSACTIONS.
A: Pennzoil will consolidate its motor oil, refined products and Jiffy Lube(R)
fast lube operations under one company and will spin off that company to
Pennzoil's stockholders. The company to be spun off, now called Pennzoil
Products Company, will be renamed "Pennzoil-Quaker State Company." Quaker
State will then merge with a newly formed subsidiary of Pennzoil-Quaker
State Company and become a new subsidiary of Pennzoil-Quaker State Company.
In this Proxy Statement/Prospectus:
- we refer to Pennzoil Company as "Pennzoil"
- we refer to Pennzoil Products Company as "PPC"
- we refer to Jiffy Lube International, Inc. as "Jiffy Lube"
- we refer to Pennzoil's motor oil, refined products and Jiffy Lube(R) fast
lube operations, which include PPC and Jiffy Lube, as "Pennzoil Products
Group"
- we refer to Quaker State Corporation as "Quaker State"
- we refer to the company formed by the combination of Pennzoil Products
Group and Quaker State as "Pennzoil-Quaker State Company"
- we refer to the agreement, as amended, between Pennzoil and Quaker State
concerning the Merger as the "Merger Agreement"
- we refer to the special meeting of Quaker State stockholders described
beginning on page 87 as the "Special Meeting."
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: As a Quaker State stockholder, you will be entitled to receive .8204 of a
share of common stock of Pennzoil-Quaker State Company in exchange for each
share of Quaker State capital stock that you own. You will receive only
whole shares of Pennzoil-Quaker State Company common stock. You will receive
cash instead of any fractional shares you would otherwise receive in the
exchange.
Q. WHY IS THE BOARD OF DIRECTORS OF QUAKER STATE RECOMMENDING THAT I VOTE IN
FAVOR OF THE MERGER?
A. In the opinion of Quaker State's Board of Directors, this is a strategic
merger that is in the best interests of Quaker State and its stockholders,
and the exchange ratio of .8204 per share is fair to you from a financial
point of view. For the Merger to occur, the holders of a majority of the
outstanding Quaker State capital stock must adopt the Merger Agreement. A
more detailed description of the background and reasons for the Merger
appears beginning on page 19.
Q: HOW MANY PENNZOIL-QUAKER STATE COMPANY SHARES WILL BE OUTSTANDING AFTER THE
MERGER?
A: When the Merger is completed, we expect that there will initially be
approximately 77 million Pennzoil-Quaker State Company shares outstanding,
approximately 38.5% of which will be held by former stockholders of Quaker
State and approximately 61.5% of which will be held by stockholders of
Pennzoil.
Q: WHAT DIVIDENDS WILL I RECEIVE IN THE FUTURE?
A: Quaker State currently pays an annual dividend of $0.40 per share on its
capital stock. We expect that Pennzoil-Quaker State Company will pay an
annual dividend of $0.75 per share on its common stock. However, the Board
of Directors of Pennzoil-Quaker State Company may change its dividend policy
based on business conditions, the company's financial condition, its
earnings and other factors.
1
<PAGE> 6
Q: WHERE WILL THE PENNZOIL-QUAKER STATE COMPANY SHARES BE LISTED?
A: We will apply to list the shares of Pennzoil-Quaker State Company common
stock on the NYSE and the Pacific Exchange.
Q:WHO WILL RUN PENNZOIL-QUAKER STATE COMPANY?
A: Mr. James L. Pate, the current Chairman and Chief Executive Officer of
Pennzoil, will become Chairman and Chief Executive Officer of Pennzoil-Quaker
State Company. In addition, a committee consisting of Mr. Pate, Herbert M.
Baum, the current Chairman and Chief Executive Officer of Quaker State, one
director selected by Pennzoil and one director selected by Quaker State will
be responsible for recruiting a President and Chief Operating Officer of
Pennzoil-Quaker State Company, who will also serve on the Pennzoil-Quaker
State Company Board of Directors. After the Merger, no officer of
Pennzoil-Quaker State Company will also be an officer of Pennzoil.
Q:WHO WILL SERVE ON THE PENNZOIL-QUAKER STATE COMPANY BOARD OF DIRECTORS?
A: The 12 initial directors of the Pennzoil-Quaker State Company Board of
Directors will include seven designees of Pennzoil, including Mr. Pate,
Howard H. Baker, Jr., W. L. Lyons Brown, Jr., Ernest H. Cockrell, Alfonso
Fanjul, Berdon Lawrence and Gerald B. Smith, and five designees of Quaker
State, including Mr. Baum, C. Frederick Fetterolf, Forrest R. Haselton, L.
David Myatt and Lorne R. Waxlax. The number of directors will be increased by
one, and the new President and Chief Operating Officer of Pennzoil-Quaker
State Company will be added as a director, effective upon his or her
appointment as President and Chief Operating Officer.
Q:WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO QUAKER STATE STOCKHOLDERS?
A: We believe these transactions will be tax-free to the stockholders of Quaker
State for U.S. federal income tax purposes, except for cash received instead
of fractional shares. A more detailed description of the federal income tax
consequences of this transaction appears beginning on page 24.
Q:WHEN DO YOU EXPECT TO COMPLETE THE SPIN-OFF AND MERGER?
A: We expect that this transaction will close promptly after the Special Meeting
and receipt of governmental approvals. We expect that we will receive all
necessary governmental approvals before or during the fourth quarter of 1998.
Q:WHAT SHOULD I DO NOW?
A: After reading this document carefully, you should complete and sign your
proxy card and mail it in the enclosed return envelope as soon as possible,
so that your shares may be represented at the Special Meeting. The Quaker
State Board of Directors recommends voting "FOR" adoption of the Merger
Agreement.
Q:SHOULD I SEND MY STOCK CERTIFICATES NOW?
A: No. After the Merger is completed, we will send you instructions for
exchanging your Quaker State shares for shares of Pennzoil-Quaker State
Company common stock.
Q:IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: For your broker to vote your shares, you must provide instructions on how to
vote. You should follow the directions provided by your broker regarding how
to instruct your broker to vote your shares.
Q:CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote by sending a later-dated, signed proxy card to
Quaker State's Secretary before the Special Meeting or by attending the
Special Meeting and voting in person.
Q:WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?
A: We do not expect any other matters to be voted on at the Special Meeting.
Q:WHOM SHOULD I CALL WITH QUESTIONS?
A: If you have any questions about the Merger or if you would like copies of any
of the documents referred to or incorporated by reference in this Proxy
Statement/Prospectus, please call Morrow & Co. Inc. at (800) 566-9061 or
Quaker State at (972) 868-0400 (see "Where You Can Find More Information"
beginning on page 102).
2
<PAGE> 7
ADDITIONAL QUESTIONS AND ANSWERS ABOUT THE MERGER
FOR QUAKER STATE EMPLOYEES
Q:WHAT WILL HAPPEN IN THE MERGER TO EMPLOYEE STOCK OPTIONS AND RESTRICTED SHARE
AWARDS HELD BY QUAKER STATE EMPLOYEES?
A: All employee stock options and restricted share awards will be 100% vested
immediately before the Merger. At the time of the Merger, Quaker State will
repurchase each outstanding option or restricted share award. The purchase
price will equal the average closing trading price of Quaker State capital
stock over the three business days immediately before the effective date of
the Merger or $23 per share (whichever is higher), less any option exercise
price and applicable withholding taxes. However, if Quaker State and the
employee agree, instead of receiving a cash payment, the employee can receive
a similar substitute option or restricted share award for Pennzoil-Quaker
State Company common stock. The exercise price of any substitute option and
the number of shares of Pennzoil-Quaker State Company common stock covered by
any substitute award will be adjusted using formulas designed to maintain the
approximate economic value of the Quaker State options and awards at the time
of the Merger. You will receive additional information concurrently with or
following the delivery of this Proxy Statement/Prospectus regarding how you
may be permitted to elect to receive such a substitute option or award.
Q:MAY I EXERCISE STOCK OPTIONS AND SELL QUAKER STATE STOCK BETWEEN NOW AND THE
COMPLETION OF THE MERGER?
A: Yes, unless you are subject to limitations on trading by persons defined as
Quaker State "affiliates." The limitations on "affiliates" are described in
"Federal Securities Law Consequences; Resale Restrictions" beginning on page
26. You also may be restricted by Quaker State's usual policies regarding the
exercise of options during "black-out" periods.
Q:WHAT WILL HAPPEN IN THE MERGER TO QUAKER STATE CAPITAL STOCK HELD IN THE
QUAKER STATE THRIFT AND STOCK PURCHASE PLAN?
A: The shares of Quaker State capital stock held in the Quaker State Thrift and
Stock Purchase Plan will be exchanged in the Merger for shares of
Pennzoil-Quaker State Company common stock, just like any other shares of
Quaker State capital stock.
Q:HOW WILL SHARES OF QUAKER STATE CAPITAL STOCK HELD IN THE QUAKER STATE THRIFT
AND STOCK PURCHASE PLAN BE VOTED?
A: Shares held in the Quaker State Thrift and Stock Purchase Plan will be voted
by the plan's trustees as the participants direct. If you are a participant
in one of those plans and have Quaker State capital stock allocated to your
account, you will receive a voting instruction card enabling you to direct
the voting of those shares. If you do not direct how to vote your shares,
they will be voted for or against adoption of the Merger Agreement in the
same proportion as shares in the plan are voted by participants who do
provide voting instructions.
3
<PAGE> 8
SUMMARY
This summary highlights selected information regarding the Merger and
related transactions described in this Proxy Statement/Prospectus. It does not
contain all the information that is important to consider when evaluating the
merits of the Merger and related transactions. For a more complete description
of the terms of the Merger and related transactions, please read this entire
Proxy Statement/Prospectus and the documents it refers to. See "Where You Can
Find More Information" on page 102.
The description in this summary of Pennzoil-Quaker State Company after the
Merger and on a pro forma basis includes forward-looking statements and is not
necessarily indicative of the financial position or results of operations that
would have actually occurred if the Merger had taken place earlier or of the
results that may be obtained in the future. You are urged to review "Disclosure
Regarding Forward-Looking Statements" on page 15, and "Pennzoil-Quaker State
Company Unaudited Pro Forma Condensed Combined Financial Statements" beginning
on page 52.
THE COMPANIES
PENNZOIL PRODUCTS GROUP
Pennzoil Place
P.O. Box 2967
Houston, Texas 77252-2967
(713) 546-4000
Pennzoil Products Group manufactures and markets premium-quality lubricants
and refined products, including motor oil, specialty industrial products and
high quality automotive treatment and appearance products, and includes the
operations of Jiffy Lube, the world's largest franchisor of fast lube centers.
QUAKER STATE CORPORATION
225 E. John Carpenter Freeway
Irving, Texas 75062
(972) 868-0400
Quaker State is principally a manufacturer and marketer of leading consumer
automotive products and services, including motor oil and a full range of
high-quality automotive treatment, appearance, accessory and air freshener
products, and an operator and franchisor of Q-Lube(R) fast oil change centers.
For further information on Pennzoil Products Group and Quaker State, see
"Business of Pennzoil Products Group" beginning on page 36 and "Business of
Quaker State" beginning on page 33.
THE PROPOSED MERGER AND RELATED TRANSACTIONS (SEE PAGE 18)
The Merger Agreement and the Distribution Agreement, which together provide
for the Merger and related transactions, are attached as Annexes A and B,
respectively, to this Proxy Statement/Prospectus. We urge you to read these
documents carefully.
Here is some additional detail about the proposed transactions:
Pennzoil Products Group and Quaker State are proposing to merge. Before the
Merger takes place:
- Pennzoil will consolidate its refining, motor oil and Jiffy LubeH fast lube
operations into the Pennzoil Products Group.
- Pennzoil Products Group will be spun off to Pennzoil's stockholders as a new
public company that will be renamed "Pennzoil-Quaker State Company."
- Prior to the Spin-off, PPC will arrange a credit facility of approximately
$1.0 billion that will be used to repay existing intercompany indebtedness
of Pennzoil Products Group to Pennzoil (approximately $386 million), repay
indebtedness under the existing revolving credit facility of Quaker State
(approximately $382 million), fund certain Merger-related expenses
(approximately $73 million) and fund future working capital requirements, if
required.
A newly formed subsidiary of Pennzoil-Quaker State Company will then merge
with Quaker State, with the result that Quaker State will become a subsidiary of
Pennzoil-Quaker State Company. Quaker State's existing stockholders will be
entitled to receive common stock of Pennzoil-Quaker State Company.
PENNZOIL-QUAKER STATE COMPANY AFTER THE MERGER
The proposed Merger of Pennzoil Products Group and Quaker State will create
a premier
4
<PAGE> 9
worldwide automotive aftermarket products and consumer car care company.
Pennzoil-Quaker State Company will enjoy strong brand-name recognition in key
product categories, such as motor oil with Pennzoil(R) and Quaker State(R), fast
oil changes with Jiffy Lube(R) and Q-Lube(R), and car care products with Slick
50(R), Rain-X(R), Blue Coral(R), Black Magic(R), Westley's(R), Medo(R),
Autoshade(R), Gumout(R), Fix-a-Flat(R), Outlaw(R), Snap(R), Classic(R) Car Wax
and others.
Following these transactions, Pennzoil-Quaker State Company will:
- be an independent public company, initially owned approximately 38.5% by
former Quaker State stockholders and approximately 61.5% by Pennzoil
stockholders;
- own and operate the businesses of Pennzoil Products Group and Quaker State;
and
- have total assets of approximately $3.2 billion and initial long-term debt
of approximately $1.0 billion (on a pro forma basis assuming the Spin-off
and Merger occurred on June 30, 1998).
CONSIDERATIONS FOR QUAKER STATE STOCKHOLDERS
Quaker State stockholders will be asked to adopt the Merger Agreement. The
favorable vote of a majority of the outstanding shares of Quaker State capital
stock is required for such adoption. On June 15, 1998, directors and executive
officers of Quaker State and their affiliates beneficially owned approximately
10.6% of the outstanding Quaker State capital stock.
RECOMMENDATION TO QUAKER STATE STOCKHOLDERS
THE BOARD OF DIRECTORS OF QUAKER STATE BELIEVES THE MERGER IS ADVISABLE AND
IN YOUR BEST INTERESTS AND RECOMMENDS THAT YOU VOTE "FOR" THE MERGER PROPOSAL.
In reaching its recommendation in favor of the Merger, the Quaker State
Board considered the challenges and risks associated with combining the
companies and achieving the benefits anticipated from the Merger, as discussed
in "Risk Factors" beginning on page 15 and "Quaker State's Reasons for the
Merger" beginning on page 22.
WHAT QUAKER STATE STOCKHOLDERS WILL RECEIVE
If these transactions are completed, Quaker State stockholders will be
entitled to receive .8204 of a share of Pennzoil-Quaker State Company common
stock for each share of Quaker State capital stock that they own.
OPINIONS OF FINANCIAL ADVISORS (SEE PAGE 27)
In deciding to approve the Merger, the Quaker State Board received and
considered the opinions of Chase Securities Inc. and Goldman, Sachs & Co., its
financial advisors, as to the fairness of the exchange ratio from a financial
point of view to the holders of Quaker State capital stock. The opinions are
attached as Annexes C and D to this Proxy Statement/Prospectus. We encourage you
to read the opinions.
ADDITIONAL CONSIDERATIONS FOR QUAKER STATE STOCKHOLDERS
BOARD OF DIRECTORS AND MANAGEMENT OF PENNZOIL-QUAKER STATE COMPANY AFTER THE
MERGER (SEE PAGE 75)
Pennzoil-Quaker State Company will be initially governed by a Board of 12
directors, consisting of seven designees of Pennzoil, including James L. Pate,
Howard H. Baker, Jr., W. L. Lyons Brown, Jr., Ernest H. Cockrell, Alfonso
Fanjul, Berdon Lawrence and Gerald B. Smith, and five designees of Quaker State,
including Herbert M. Baum, C. Frederick Fetterolf, Forrest R. Haselton, L. David
Myatt and Lorne R. Waxlax. The number of directors will be increased by one, and
the new President and Chief Operating Officer of Pennzoil-Quaker State Company
will be added as a director, effective upon his or her appointment as President
and Chief Operating Officer.
Mr. Pate, the current Chairman and Chief Executive Officer of Pennzoil,
will be Chairman and Chief Executive Officer of Pennzoil-Quaker State Company. A
committee consisting of Mr. Pate, Mr. Baum, one director selected by Pennzoil
and one director selected by Quaker State will be responsible for recruiting a
President and Chief Operating Officer of Pennzoil-Quaker State Company.
The senior management of Pennzoil-Quaker State Company following the Merger
will consist of most of the current senior management of Pennzoil, and such
officers of Pennzoil-Quaker State Company will resign from their officer
positions at Pennzoil.
5
<PAGE> 10
INTERESTS OF QUAKER STATE OFFICERS AND DIRECTORS IN THE MERGER (SEE PAGE 83)
When considering the recommendations of the Quaker State Board, you should
be aware that officers and directors of Quaker State have interests and
arrangements that may be different from your interests as stockholders:
- Five directors of Quaker State, including Mr. Baum, are expected to
become directors of Pennzoil-Quaker State Company.
- Officers and directors of Quaker State will be indemnified against
certain liabilities that may arise from the Merger.
- Officers and directors of Quaker State own restricted shares of Quaker
State capital stock and options to purchase Quaker State capital stock.
Each of these restricted shares and options will vest and be cancelled in
exchange for a cash payment or restricted shares of Pennzoil-Quaker State
Company common stock or options to purchase Pennzoil-Quaker State Company
common stock, based on a purchase price equal to the average closing
trading price of Quaker State capital stock over the three business days
immediately before the effective date of the Merger or $23 per share
(whichever is higher), less any option exercise price and applicable
withholding taxes. The treatment of options gives officers and directors
more choices than stockholders have.
- Certain officers of Quaker State have employment or employment
continuation agreements that provide for certain payments to those
persons if their employment is terminated following a change of control.
The Merger will constitute such a change of control; therefore, the
benefits under these agreements will be triggered.
CONDITIONS TO THE MERGER AND RELATED TRANSACTIONS (SEE PAGE 64)
The Spin-off and Merger will be completed only if certain conditions,
including the following, are satisfied (or waived in certain cases):
- the adoption of the Merger Agreement by Quaker State stockholders owning
a majority of the Quaker State capital stock;
- the absence of legal restrictions that would prevent the completion of
the transactions;
- the receipt of all required material governmental and other consents and
approvals;
- the receipt of a letter ruling from the Internal Revenue Service that the
Spin-off and certain related matters will be generally tax-free to
Pennzoil and its stockholders;
- the material accuracy of representations and warranties and material
performance of covenants in the Merger Agreement; and
- the completion of the Spin-off in accordance with the Distribution
Agreement.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 66)
Pennzoil and Quaker State may mutually agree to terminate the Merger
Agreement without completing the Merger.
The Merger Agreement may also be terminated in certain other circumstances,
as follows:
Either company may terminate the Merger Agreement if:
- the Merger is not completed by December 15, 1998 (but neither company may
terminate the agreement if its own breach of the Merger Agreement is the
reason the Merger is not completed by then);
- a court or governmental authority has acted to prevent the Merger; or
- the stockholders of Quaker State do not adopt the Merger Agreement.
Quaker State may terminate the Merger Agreement if:
- Pennzoil or PPC fails to comply with its obligations in certain
circumstances; or
- Quaker State receives a proposal to acquire Quaker State that Quaker
State's Board determines in good faith to be more favorable to Quaker
State stockholders than the Merger.
Pennzoil may terminate the Merger Agreement if:
- Quaker State fails to comply with its obligations in certain
circumstances;
6
<PAGE> 11
- the Quaker State Board fails to recommend that Quaker State stockholders
adopt the Merger Agreement, withdraws or modifies its recommendation,
fails to confirm its recommendation in certain situations, or approves or
recommends to Quaker State stockholders another proposal to acquire
Quaker State; or
- Quaker State fails to call and hold the Special Meeting.
TERMINATION FEES (SEE PAGE 68)
If the Merger Agreement is terminated for certain reasons, as explained on
page 68, Quaker State must pay Pennzoil a termination fee of $20 million. If the
Merger Agreement is terminated for certain reasons, as explained on page 68,
Pennzoil must pay Quaker State $15 million for retention programs for Quaker
State employees.
REGULATORY APPROVALS (SEE PAGE 25)
Pennzoil and Quaker State have made filings and taken other actions
necessary to obtain approvals from certain U.S. and foreign regulatory
authorities, including antitrust authorities, in connection with the Spin-off
and Merger. The waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act expired on May 27, 1998. We expect that Quaker State and
Pennzoil will obtain all other required material regulatory approvals before the
Special Meeting. We are not certain, however, that Quaker State and Pennzoil
will obtain all required regulatory approvals by then, and approvals may include
conditions that would be detrimental to Pennzoil or Quaker State.
ACCOUNTING TREATMENT AND CONSIDERATIONS (SEE PAGE 23)
We will account for the Merger using the purchase method of accounting,
with Pennzoil Products Group treated as the acquiror. As a result, we will
record the assets and liabilities of Pennzoil Products Group at historical
amounts, without restatement to fair values. We will record the assets and
liabilities of Quaker State at their estimated fair values at the date of the
Merger, with the excess of the purchase price over the sum of such fair values
recorded as goodwill. The purchase price is based upon the market capitalization
of Quaker State, using an average trading price of Quaker State capital stock
for a reasonable period of time immediately before and after the Merger was
announced, plus certain Merger-related costs.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 24)
We have structured the proposed transactions so that the Spin-off and the
Merger are conditioned upon Pennzoil's receiving a letter ruling from the
Internal Revenue Service that the Spin-off and certain related matters will be
generally tax-free to Pennzoil and its stockholders. The proposed transactions
also are conditioned on the receipt of opinions from legal counsel that the
Merger is a "reorganization" in which no gain or loss will be recognized by
Pennzoil-Quaker State Company, Quaker State or its stockholders (except for cash
received by Quaker State stockholders instead of fractional shares).
Tax matters are complicated, and the tax consequences of the proposed
transactions to you will depend on the facts of your own situation. You should
consult your own tax advisor for a full understanding of the tax consequences to
you of the Spin-off and the Merger.
NO APPRAISAL RIGHTS (SEE PAGE 26)
Under Delaware law, Quaker State stockholders will not have any right to an
appraisal of the value of their shares in connection with the Merger.
QUAKER STATE MARKET PRICE INFORMATION (SEE PAGE 14)
Quaker State capital stock is listed on the NYSE and the Pacific Exchange.
On April 14, 1998, the last full trading day prior to the public announcement of
the Merger, Quaker State capital stock closed at $23.50 on the NYSE. On August
13, 1998, Quaker State capital stock closed at $14 3/4 on the NYSE.
LISTING OF PENNZOIL-QUAKER STATE COMPANY STOCK (SEE PAGE 97)
Pennzoil-Quaker State Company will apply to list its common stock on the
NYSE and on the Pacific Exchange.
7
<PAGE> 12
RETENTION PAY PLAN (SEE PAGE 68)
Quaker State has established a Retention Pay Plan to help ensure the
continued service of its employees. Under this plan, there are three types of
retention bonuses payable to Quaker State employees: (i) special bonus pools for
certain essential groups of employees who remain employed by Quaker State until
the closing date; (ii) guaranteed bonuses under pre-existing incentive plans for
employees who remain until December 31, 1998; and (iii) special bonuses for
certain key employees who remain until a release date up to six months after the
closing date.
8
<PAGE> 13
SUMMARY SELECTED HISTORICAL AND
PRO FORMA FINANCIAL DATA
SOURCES OF INFORMATION
We are providing the following selected financial information concerning
Pennzoil Products Group, Quaker State and Pennzoil-Quaker State Company to help
you in your analysis of the financial aspects of the Merger and related
transactions. We derived this information from the audited and unaudited
financial statements for Pennzoil Products Group and Quaker State for the
periods presented. The information is only a summary and you should read it in
conjunction with the financial information included or incorporated by reference
in this Proxy Statement/Prospectus. See "Where You Can Find More Information"
beginning on page 102, "Index to Financial Statements" on page F-1, and
"Pennzoil-Quaker State Company Unaudited Pro Forma Condensed Combined Financial
Statements" beginning on page 52.
HOW WE PREPARED THE UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information is
presented to show you how Pennzoil-Quaker State Company might have looked if
Pennzoil Products Group had been an independent company and Pennzoil Products
Group and Quaker State had been combined for the periods presented. We did not
adjust the pro forma financial information for estimated general and
administrative expense savings and operational efficiencies that may be realized
as a result of the Merger or one-time costs and expenses necessary to achieve
such savings and efficiencies. We prepared the pro forma financial information
using the purchase method of accounting, with Pennzoil Products Group treated as
the acquiror. See "The Merger and Related Transactions -- Accounting Treatment
and Considerations" beginning on page 23 and "Pennzoil-Quaker State Company
Supplemental Financial Data" beginning on page 58.
If the companies had been combined in the past, they might have performed
differently. You should not rely on the pro forma financial information as an
indication of the financial position or results of operations that
Pennzoil-Quaker State Company would have achieved if the Spin-off and Merger had
taken place earlier or of the future results that Pennzoil-Quaker State Company
will achieve after the Merger. See "Pennzoil-Quaker State Company Unaudited Pro
Forma Condensed Combined Financial Statements" beginning on page 52.
MERGER-RELATED EXPENSES
Pennzoil Products Group and Quaker State estimate that they will incur fees
and expenses totaling approximately $90 million in connection with the Merger
and related transactions, which have been included in calculating the purchase
price. After the Merger, Pennzoil-Quaker State Company may incur certain
additional charges and expenses relating to restructuring and integrating the
operations of the Pennzoil Products Group and Quaker State. We did not adjust
the pro forma information for these additional charges and expenses or for
estimated general and administrative expense savings and operational
efficiencies that may be realized as a result of the Merger. See
"Pennzoil-Quaker State Company Supplemental Financial Data" beginning on page
58.
9
<PAGE> 14
PENNZOIL PRODUCTS GROUP
SELECTED COMBINED FINANCIAL INFORMATION
The selected combined financial information set forth below as of and for
the years ended December 31, 1997, 1996, 1995, 1994 and 1993 for Pennzoil
Products Group reflects the combined operations of PPC and Jiffy Lube and has
been derived from the audited combined financial statements and the unaudited
combined financial statements of Pennzoil Products Group. The selected financial
information set forth below as of and for the six months ended June 30, 1998 and
1997 is derived from Pennzoil Products Group's unaudited combined financial
statements, which, in the opinion of management, include all adjustments
necessary for a fair presentation of the financial condition and results of
operations of Pennzoil Products Group. The results of operations for interim
periods are not necessarily indicative of a full year's operations. This
information should be read in conjunction with the combined financial statements
of Pennzoil Products Group, the notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations for Pennzoil Products
Group included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AS OF AND FOR
THE SIX MONTHS
ENDED JUNE 30 AS OF AND FOR THE YEARS ENDED DECEMBER 31
----------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1)
Revenues(2)............. $ 942,411 $1,029,315 $2,013,160 $1,968,013 $1,807,702 $1,748,330 $1,711,123
Income (loss) from
continuing
operations............ 6,646 1,651 (589) (9,189) (53,242) (16,048) 3,406
Net income (loss)(3).... 6,646 1,651 (589) (9,189) (53,242) (16,048) 3,406
COMBINED BALANCE SHEET DATA
Cash and cash
equivalents........... $ 8,162 $ 10,282 $ 9,132 $ 15,797 $ 10,468 $ 12,514 $ 14,562
Total assets............ 1,553,744 1,468,784 1,559,623 1,370,499 1,278,667 1,056,102 1,007,364
Total debt and capital
lease
obligations(4)........ 445,140 448,903 458,620 458,452 435,213 140,031 168,362
Shareholder's equity.... 284,736 244,768 256,380 235,741 224,795 211,741 169,427
</TABLE>
- ---------------
(1) Historical earnings and dividends per share disclosures have been omitted
because they are not meaningful, since Pennzoil Products Group consists of
direct and indirect wholly owned subsidiaries of Pennzoil.
(2) The decrease in revenues for the six months ended June 30, 1998 compared to
the six months ended June 30, 1997 was primarily the result of Pennzoil
Products Group's contribution of its specialty industrial products business
to a partnership with Conoco Inc. called Penreco in October 1997. Beginning
with the fourth quarter of 1997, Pennzoil Products Group's share of
Penreco's earnings, net of expenses, are reflected in revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations for Pennzoil Products Group -- Results of Operations."
(3) The 1997 net loss includes pretax charges of $22.0 million related to the
unsolicited offer by Union Pacific Resources Group Inc. to acquire all
outstanding shares of Pennzoil common stock. The 1996 net loss includes a
pretax charge of $24.4 million for pre-operating expenses of Excel
Paralubes. The 1995 net loss includes pretax charges of $20.0 million
relating to a fire at Pennzoil Products Group's Rouseville manufacturing
facility, $10.0 million for a settlement of certain franchisee litigation,
$9.0 million for pre-operating expenses of Excel Paralubes, $5.7 million
associated with the shutdown of a crude oil gathering system in West
Virginia, $5.7 million associated with international marketing restructuring
charges and $8.2 million associated with a general and administrative cost
reduction program. Results for 1994 include a pretax charge of $32.5 million
for the cessation of crude oil processing at Pennzoil Products Group's
Roosevelt manufacturing facility. The 1993 results include charges of $10.0
million for estimated costs associated with the closing of certain Jiffy
Lube(R) service centers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations for Pennzoil Products Group"
for additional information related to 1995 through 1998.
(4) Includes current maturities of long-term debt and current portion of capital
lease obligations.
10
<PAGE> 15
QUAKER STATE CORPORATION
SELECTED FINANCIAL INFORMATION
(EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AND FOR
THE SIX MONTHS
ENDED JUNE 30 AS OF AND FOR THE YEARS ENDED DECEMBER 31
----------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues.................... $ 613,988 $ 617,046 $1,203,860 $1,121,178 $955,040 $641,316 $532,434
Income (loss) from
continuing
operations before
extraordinary item(1)..... 3,393 13,338 (7,389) 9,651 (4,223) 2,345 3,510
Income from discontinued
operations(2)............. -- 2,371 30,477 4,072 20,462 16,421 10,192
Income before extraordinary
item...................... 3,393 15,709 23,088 13,723 16,239 18,766 13,702
Extraordinary item, net of
taxes(3).................. -- -- -- -- (4,139) -- --
Net income.................. $ 3,393 $ 15,709 $ 23,088 $ 13,723 $ 12,100 $ 18,766 $ 13,702
Per share (basic and
diluted)
Income (loss) from
continuing operations
before extraordinary
item.................... $ .09 $ .38 $ (.21) $ .28 $ (.13) $ .08 $ .12
Income from discontinued
operations.............. -- .07 .87 .12 .64 .58 .38
Extraordinary item, net of
taxes................... -- -- -- -- (.13) -- --
Net income per share........ $ .09 $ .45 $ .66 $ .40 $ .38 $ .66 $ .50
CONSOLIDATED BALANCE SHEET
DATA
Cash and cash equivalents... $ 13,505 $ 9,057 $ 20,205 $ 29,397 $ 30,659 $ 29,805 $ 15,628
Total assets................ 1,195,495 1,087,462 1,169,715 1,029,009 707,651 614,991 776,007
Total debt and capital lease
obligations(4)............ 512,709 458,873 455,695 407,408 125,758 72,667 50,163
Stockholders' equity........ 330,820 314,690 331,901 298,669 272,155 251,850 188,750
</TABLE>
- ---------------
(1) In the first six months of 1998 and in 1997, Quaker State recorded pretax
charges of $21.7 million and $48.4 million, respectively, related to
restructuring, systems integration and other special charges. In 1996,
Quaker State recorded pretax charges of $19.5 million related primarily to
asset write-downs and restructuring charges and a $5 million pretax gain
upon the settlement of a long-term receivable. In 1995, Quaker State
recorded $22.6 million of pretax restructuring charges and a pretax
settlement of $4.4 million for a class action lawsuit.
(2) Quaker State sold its vehicle safety lighting business in 1997, its
exploration and production business in 1995, and its insurance business in
1994. These businesses are reported as discontinued operations.
(3) Premium on early extinguishment of $50 million principal amount of Quaker
State's 8.73% Senior Notes.
(4) Includes current maturities of long-term debt and current portion of capital
lease obligations.
11
<PAGE> 16
PENNZOIL-QUAKER STATE COMPANY
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following selected unaudited pro forma combined financial information
has been prepared to reflect the Merger. This pro forma financial information is
based on the historical financial statements of Pennzoil Products Group and
Quaker State included or incorporated by reference in this Proxy
Statement/Prospectus and the estimates and assumptions set forth in the notes to
the Pennzoil-Quaker State Company unaudited pro forma condensed combined
financial statements. See the Pennzoil-Quaker State Company Unaudited Pro Forma
Condensed Combined Financial Statements and the notes thereto. The unaudited pro
forma combined balance sheet data have been prepared as if the Merger occurred
on June 30, 1998. The unaudited pro forma combined income statement data have
been prepared as if the Merger occurred as of January 1, 1997.
If the companies had been combined in the past, they might have performed
differently. You should not rely on the pro forma financial information as an
indication of the financial positions or results of operations that
Pennzoil-Quaker State Company would have achieved if the Merger had occurred on
June 30, 1998 or January 1, 1997, or of the future results that Pennzoil-Quaker
State Company will achieve after the Merger.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
PENNZOIL PRO FORMA
PRODUCTS QUAKER PRO FORMA COMBINED AS
GROUP(1) STATE ADJUSTMENTS(2) ADJUSTED
---------- ---------- -------------- -----------
(EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues........................................ $2,013,160 $1,203,860 $ -- $3,217,020
Income (loss) from continuing operations before
income tax.................................... 5,656 (11,389) 20,106 14,373
Income (loss) from continuing operations........ (589) (7,389) 8,090 112
Basic and diluted earnings per share............ --
Basic average shares outstanding................ 76,008
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------------
PENNZOIL PRO FORMA
PRODUCTS QUAKER PRO FORMA COMBINED AS
GROUP(1) STATE ADJUSTMENTS(2) ADJUSTED
-------- -------- -------------- -----------
(EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues.............................................. $942,411 $613,988 $ -- $1,556,399
Income from continuing operations before income tax... 13,475 6,193 16,123 35,791
Income from continuing operations..................... 6,646 3,393 7,809 17,848
Basic and diluted earnings per share.................. 0.23
Basic average shares outstanding...................... 77,473
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
------------------------------------------------------
PENNZOIL PRO FORMA
PRODUCTS QUAKER PRO FORMA COMBINED AS
GROUP(1) STATE ADJUSTMENTS(2) ADJUSTED
---------- ---------- -------------- -----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents.......................... $ 8,162 $ 13,505 $ -- $ 21,667
Total assets....................................... 1,553,744 1,195,495 460,646 3,209,885
Total debt and capital lease obligations(3)........ 445,140 512,709 136,422 1,094,271
Shareholders' equity............................... 284,736 330,820 807,053 1,422,609
</TABLE>
- ---------------
(1) For Pennzoil Products Group Combined Financial Statements and notes thereto,
see pages F-2 to F-24.
(2) For an explanation of the assumptions used to prepare the pro forma
adjustments, see the "Notes to Pennzoil-Quaker State Company Unaudited Pro
Forma Condensed Combined Financial Statements" beginning on page 56.
(3) Includes current maturities of long-term debt and current portion of capital
lease obligations.
12
<PAGE> 17
UNAUDITED COMPARATIVE PER SHARE DATA
The following table compares certain historical Pennzoil Products Group and
Quaker State per share information with Pennzoil-Quaker State Company pro forma
equivalent per share information. You should read the table in conjunction with
the financial information for Pennzoil Products Group, Quaker State and
Pennzoil-Quaker State Company included or incorporated by reference in this
Proxy Statement/Prospectus. You should not rely on the pro forma financial
information as an indication of the results that Pennzoil-Quaker State Company
would have achieved if the Spin-off and Merger had taken place earlier or of the
results of Pennzoil-Quaker State Company after the Merger.
<TABLE>
<CAPTION>
PRO FORMA
EQUIVALENT PER
SHARE -- PENNZOIL-
PENNZOIL PRODUCTS QUAKER STATE QUAKER STATE
GROUP HISTORICAL(1) HISTORICAL COMPANY(2)(3)
------------------- ------------ ------------------
<S> <C> <C> <C>
Earnings per share from continuing operations:
Year ended December 31, 1997................. $(0.01) $(0.21) $ 0.00
Six months ended June 30, 1998............... 0.14 0.09 0.23
Dividends per share:
Year ended December 31, 1997(4).............. $ 0.75 $ 0.40 $ 0.75
Six months ended June 30, 1998(4)............ 0.3750 0.20 0.3750
Book value per share at period end:
June 30, 1998................................ $ 5.97 $ 9.08 $ 18.33
</TABLE>
- ---------------
(1) Pro forma basic earnings per share, dividends per share and book value per
share were calculated using historical earnings data and assuming that one
share of Pennzoil-Quaker State Company common stock is issued in the
Spin-off for each share of Pennzoil common stock outstanding.
(2) Pro forma equivalent per share information for Quaker State stockholders was
calculated using the exchange ratio of .8204 of a share of Pennzoil-Quaker
State Company common stock for each share of Quaker State capital stock.
(3) Pro forma earnings per share and dividends per share were calculated
assuming the weighted average number of shares of Pennzoil-Quaker State
Company common stock outstanding for the six months ended June 30, 1998 and
the year ended December 31, 1997 were 77.5 million shares and 76.0 million
shares, respectively. The book value per share was calculated assuming the
number of shares of Pennzoil-Quaker State Company common stock outstanding
at June 30, 1998 was 77.6 million shares.
(4) Historically, Pennzoil Products Group has not paid dividends. For purposes
of this presentation, the annual dividend rate per share for Pennzoil
Products Group was assumed to be $0.75. It is expected that Pennzoil-Quaker
State Company will pay an annual dividend of $0.75 per share. However, the
Board of Pennzoil-Quaker State Company may change its dividend policy based
on business conditions, its financial condition, its earnings and other
factors.
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QUAKER STATE MARKET PRICE AND DIVIDEND INFORMATION
Quaker State capital stock is traded under the symbol "KSF" on the NYSE and
the Pacific Exchange. The following table sets forth the high and low composite
sales prices of Quaker State capital stock and the per share cash dividends
declared for the periods indicated. The quotations are as reported in published
financial sources.
<TABLE>
<CAPTION>
QUAKER STATE
CAPITAL STOCK
-------------------- CASH DIVIDENDS
HIGH LOW DECLARED
---- --- --------------
<S> <C> <C> <C>
1995
First Quarter............................................. $ 15 1/8 $ 13 3/8 $0.10
Second Quarter............................................ 15 1/8 13 1/2 0.10
Third Quarter............................................. 16 1/2 14 5/8 0.10
Fourth Quarter............................................ 14 3/4 12 1/8 0.10
1996
First Quarter............................................. $ 14 3/4 $ 12 5/8 $0.10
Second Quarter............................................ 16 1/8 13 3/4 0.10
Third Quarter............................................. 18 13 7/8 0.10
Fourth Quarter............................................ 18 1/4 14 0.10
1997
First Quarter............................................. $ 16 $ 13 3/8 $0.10
Second Quarter............................................ 16 1/4 14 3/8 0.10
Third Quarter............................................. 17 3/8 14 15/16 0.10
Fourth Quarter............................................ 17 1/8 13 5/16 0.10
1998
First Quarter............................................. $19 7/16 $13 1/16 $0.10
Second Quarter............................................ 24 1/2 15 7/8 0.10
Third Quarter (through August 13)......................... 16 7/8 14 0.10
</TABLE>
On April 14, 1998, the last full trading day prior to the joint public
announcement by Quaker State and Pennzoil of the signing of the Merger
Agreement, the last reported sales price per share of Quaker State capital stock
on the NYSE was $23 1/2. On August 13, 1998, the last reported sales price per
share of Quaker State capital stock on the NYSE was $14 3/4.
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<PAGE> 19
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that reflect
Pennzoil's, PPC's and Quaker State's current views on future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties, including those identified in "Risk Factors," as well
as the following:
- general economic, financial and business conditions, which could affect
Pennzoil Products Group's financial condition and results of operations;
- commodity pricing variations, including crude oil prices, which affect,
directly or indirectly, margins, supply and demand, and results of
operations in Pennzoil Products Group's motor oil and refined products
segment;
- vigorous competition within Pennzoil Products Group's product market,
including pricing and promotional, advertising or other activities
designed to preserve or gain market share, the timing and intensity of
which cannot be foreseen;
- the costs, effects and liabilities associated with legal, regulatory or
administrative proceedings and any required remedial action, anticipated
or unanticipated; and
- the impact of special charges resulting from the Spin-off and Merger,
ongoing evaluation of business strategies, asset valuations and
organizational and corporate structures, and the implementation of
restructuring plans.
These risks and uncertainties could cause actual results or events to
differ materially from historical results or those anticipated. You can identify
forward-looking statements by the use of words such as "expect," "estimate,"
"intend," "project," "budget," "forecast," "anticipate," "plan" and similar
expressions. Forward-looking statements include all statements regarding
Pennzoil Products Group's, Quaker State's and Pennzoil-Quaker State Company's
expected financial position, results of operations, cash flows, dividends,
financing plans, business strategies, operating efficiencies or synergies,
budgets, capital and other expenditures, competitive positions, growth
opportunities for existing products, plans and objectives of management, and
markets for stock. We caution you not to place undue reliance on these
forward-looking statements, which speak only as of their dates. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
RISK FACTORS
In addition to the other information included in this Proxy
Statement/Prospectus, you should carefully consider the following risk factors
in determining whether to vote in favor of the Merger Agreement.
POTENTIAL DIFFICULTIES IN COMBINING THE OPERATIONS OF THE COMPANIES AND
ACHIEVING COST SAVINGS
Pennzoil Products Group and Quaker State have previously operated
separately. The proposed management team of Pennzoil-Quaker State Company does
not have experience with the combined business. Pennzoil-Quaker State Company
may not be able to integrate the operations of Pennzoil Products Group and
Quaker State without a loss of key employees, customers, franchisees or
suppliers; loss of revenues; increase in operating or other costs; or other
difficulties. In addition, Pennzoil-Quaker State Company may not be able to
realize the operating efficiencies and other benefits sought from the Merger.
Pennzoil-Quaker State will evaluate any plans to restructure Quaker State,
including plans that have been previously disclosed to Quaker State
stockholders, and determine what aspects, if any, of those plans to undertake.
The franchise agreements used by Jiffy Lube and Q Lube, Inc. grant certain
exclusive territorial rights to the franchisees. In addition to these rights,
some franchisees of Jiffy Lube and Q Lube, Inc. have additional exclusive
territories encompassing larger geographic areas; there are 16 such additional
exclusive territories. Franchisees may claim that contractual or other rights
will be impaired as a result of the Merger, even if
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<PAGE> 20
Pennzoil Products Group and Quaker State franchise operations are each operated
post-Merger on an independent, stand-alone basis.
RECENT LOSSES
As a combined entity, Pennzoil Products Group, the combination of PPC and
Jiffy Lube, would have incurred net losses from continuing operations for each
of the years ended December 31, 1997, 1996, 1995 and 1994. Quaker State incurred
net losses from continuing operations before extraordinary items for the years
ended December 31, 1997 and 1995. There can be no assurance that Pennzoil-Quaker
State Company will be profitable after the Merger. See "Pennzoil-Quaker State
Company Unaudited Pro Forma Condensed Combined Financial Statements" and the
related notes thereto beginning on page 52, "Pennzoil Products Group Selected
Combined Financial Information" on page 42 and the Pennzoil Products Group
Combined Financial Statements and the related notes thereto included elsewhere
in this Proxy Statement/Prospectus.
DIFFERENT FACTORS AFFECTING PENNZOIL-QUAKER STATE COMPANY'S BUSINESS
Pennzoil-Quaker State Company's range of products and services, scope of
operations, customers, competitors and suppliers will be more diverse than those
of either Pennzoil Products Group or Quaker State. Accordingly, the results of
operations and prospects for Pennzoil-Quaker State Company, as well as its stock
price, may be affected by factors that are different from those that have
affected either Pennzoil Products Group or Quaker State in the past.
NO PRIOR MARKET FOR PENNZOIL-QUAKER STATE COMPANY COMMON STOCK
There is no current public trading market for Pennzoil-Quaker State Company
common stock. Pennzoil-Quaker State Company will apply to list its common stock
on the NYSE and the Pacific Exchange, and we expect "when-issued" trading in
Pennzoil-Quaker State Company common stock to develop before the Merger is
consummated. This means that Pennzoil-Quaker State Company shares may be traded
before the share certificates are issued.
We cannot predict the prices at which Pennzoil-Quaker State Company common
stock may trade, either before the Merger on a "when-issued" basis or after the
Merger. Such trading prices will be determined by the marketplace and may be
influenced by many factors, including the depth and liquidity of the market for
such shares, investor perceptions of Pennzoil-Quaker State Company and the
industry in which it participates, Pennzoil-Quaker State Company's dividend
policy and general economic and market conditions. Until an orderly market
develops, the trading prices for these shares may fluctuate significantly.
Pennzoil-Quaker State Company common stock will be freely transferable,
except for shares received by Pennzoil Products Group or Quaker State
"affiliates," as that term is defined under the Securities Act. See "The Merger
and Related Transactions -- Federal Securities Law Consequences; Resale
Restrictions" on page 26.
QUAKER STATE STOCKHOLDERS' PERCENTAGE OWNERSHIP SUBJECT TO ADJUSTMENT
Stockholders of Quaker State will receive shares initially representing
approximately 38.5% of Pennzoil-Quaker State Company. This percentage is based
on the number of outstanding shares of Pennzoil and Quaker State as of the date
of the Merger Agreement. This percentage will not change if the price of Quaker
State capital stock fluctuates, but will increase to the extent that Quaker
State options are exercised prior to the Merger and decrease to the extent that
Pennzoil options are exercised prior to the Merger.
YEAR 2000 ISSUES
Like most other companies, Pennzoil-Quaker State Company will strive to
ensure that its information systems are able to recognize and process
date-sensitive information properly as the year 2000 approaches. Systems that do
not properly recognize and process this information could generate erroneous
data or even fail.
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<PAGE> 21
PPC and Quaker State are conducting reviews of their key computer systems
and have identified a number of systems that could be affected by the year 2000
issue. Both companies are undertaking to upgrade these systems to allow them to
function properly. If these steps are not completed successfully in a timely
manner, Pennzoil-Quaker State Company's operations and financial performance
could be adversely affected through disruptions in operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations for
Pennzoil Products Group --Year 2000 Issues" beginning on page 50.
TAX RISKS
If the Spin-off is considered part of a plan or a series of related
transactions pursuant to which one or more persons acquire, directly or
indirectly, a 50% or greater interest in PPC (or its successor, Pennzoil-Quaker
State Company) or Pennzoil (an "Ownership Change"), Pennzoil will recognize gain
under section 355(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), as if it had sold the stock of PPC for an amount equal to its fair
market value. Pennzoil-Quaker State Company common stock acquired by former
Quaker State stockholders in connection with the Merger may be taken into
account in determining whether an Ownership Change of PPC (or its successor,
Pennzoil-Quaker State Company) has occurred. Under the Tax Separation Agreement
described under "Relationship Between Pennzoil-Quaker State Company and Pennzoil
After the Merger -- Tax Separation Agreement" on page 70, Pennzoil-Quaker State
Company will be liable to Pennzoil for any such tax arising from an Ownership
Change of PPC (or its successor, Pennzoil-Quaker State Company), unless the
Ownership Change results from an act of Pennzoil or any of its subsidiaries or
affiliates. The amount of this liability could be substantial. Pennzoil and
Pennzoil Products Group believe that there is no plan that would cause gain to
be recognized in this manner. Acquisitions that occur within the four-year
period beginning two years before the date of the Spin-off will be presumed to
be part of such a plan, however, and such a plan possibly could be deemed to
exist even if Pennzoil and Pennzoil Products Group are not aware of it.
CERTAIN ANTITAKEOVER PROVISIONS
The Certificate of Incorporation and Bylaws of Pennzoil-Quaker State
Company, among other things, provide for a classified Board of Directors with
staggered terms, restrict the ability of stockholders to take action by written
consent and authorize the Board of Directors to set the terms of preferred
stock. In addition, Pennzoil-Quaker State Company's Certificate of Incorporation
and the Delaware General Corporation Law contain provisions that impose
restrictions on business combinations with interested parties. Pennzoil-Quaker
State Company also will adopt a stockholders' rights plan. The stockholders'
rights plan, the provisions of the Certificate of Incorporation and Bylaws of
Pennzoil-Quaker State Company and the Delaware General Corporation Law may have
the effect of delaying, deferring or preventing a change in control of Pennzoil-
Quaker State Company. See "Description of Capital Stock of Pennzoil-Quaker State
Company" beginning on page 92 and "Comparison of Stockholder Rights" beginning
on page 97.
INTEREST OF QUAKER STATE OFFICERS AND DIRECTORS IN THE MERGER
Officers and directors of Quaker State have interests and arrangements that
may be different from your interests as stockholders of Quaker State; the Quaker
State Board of Directors considered such interests and arrangements when it
approved the Merger Agreement. See "Interests of Certain Persons" beginning on
page 83.
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<PAGE> 22
THE MERGER AND RELATED TRANSACTIONS
The discussion in this Proxy Statement/Prospectus of the Merger and the
principal terms of the Merger Agreement, the Distribution Agreement and certain
related agreements (the Merger Agreement, the Distribution Agreement and related
agreements, collectively, the "Transaction Agreements") is subject to, and
qualified in its entirety by reference to, the Merger Agreement, the
Distribution Agreement and the other Transaction Agreements, all of which are
attached to (or are exhibits to) this Proxy Statement/Prospectus. The Merger
Agreement and the Distribution Agreement are attached hereto as Annexes A and B,
respectively, and are incorporated herein by reference.
SPECIAL MEETING TO VOTE ON THE PROPOSED MERGER
Quaker State is furnishing this Proxy Statement/Prospectus to its
stockholders in connection with the solicitation of proxies by Quaker State from
the holders of its capital stock, par value $1.00 per share ("Quaker State
Capital Stock"), to use at the Special Meeting.
The Special Meeting will be held at the Four Seasons Hotel, 120 East
Delaware Place, Chicago, Illinois 60611, on September 18, 1998, starting at 1:00
p.m., local time. At the Special Meeting, Quaker State stockholders will be
asked to consider and vote upon adoption of the Merger Agreement (the
"Proposal").
STRUCTURE OF THE MERGER
Approval by Quaker State's stockholders is needed to enable Quaker State to
proceed with the proposed merger of Quaker State and a subsidiary of
Pennzoil-Quaker State Company, which will involve the following steps:
- Restructuring. As further described in the Distribution Agreement,
Pennzoil will consolidate its motor oil, refined products and Jiffy LubeH
fast lube operations under PPC. The registered trademark "Pennzoil" will
be owned by PPC. As part of the consolidation, (i) Pennzoil Receivables
Company ("Pennzoil Receivables"), a subsidiary of Pennzoil, will resell
to Pennzoil the receivables it holds that are not related to Pennzoil
Products Group, (ii) Savannah Company Limited ("Savannah"), Pennzoil's
captive insurance subsidiary, will transfer to Pennzoil certain assets
and liabilities that are not attributable to Pennzoil Products Group,
(iii) Pennzoil will contribute the stock of each of Jiffy Lube, Pennzoil
Receivables, Savannah and Pennzoil Sales Corporation to PPC and (iv) the
assets and liabilities of Pennzoil Petroleums Ltd., an indirect wholly
owned subsidiary of Pennzoil, will be transferred to an indirect wholly
owned subsidiary of PPC. Pennzoil and PPC also will enter into other
agreements providing for, among other things, (i) the license of the
"Pennzoil" trademark to Pennzoil for three years following the Merger and
(ii) certain general administrative support to be provided by Pennzoil to
Pennzoil-Quaker State Company during a transitional period following the
Merger. PPC will change its name to "Pennzoil-Quaker State Company" and
amend its certificate of incorporation as set forth in Annex E. The
actions described in this paragraph constitute the "Restructuring."
- Spin-off. The shares of common stock, par value $.10 per share
("Pennzoil-Quaker State Company Common Stock"), of PPC (to be renamed
"Pennzoil-Quaker State Company") will be distributed to Pennzoil
stockholders on a one-for-one basis.
- Merger. Following the Spin-off, a wholly owned subsidiary of
Pennzoil-Quaker State Company will merge with Quaker State. In connection
with the Merger, Quaker State stockholders will be entitled to receive
.8204 (the "Exchange Ratio") of a share of Pennzoil-Quaker State Company
Common Stock in exchange for each share of Quaker State Capital Stock
owned immediately prior to the Merger. Fractional shares resulting from
the exchange will be paid in cash instead of shares of Pennzoil-Quaker
State Company Common Stock (based upon the closing price of
Pennzoil-Quaker State Company Common Stock on the business day
immediately before the Merger, or, if Pennzoil-Quaker State Company
Common Stock is not publicly traded on such date, on the first business
day thereafter when Pennzoil-Quaker State Company Common Stock is
publicly traded).
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<PAGE> 23
The Merger will become effective when a certificate of merger is filed with
the Secretary of State of Delaware or at such subsequent time as will be
specified in the certificate of merger (the "Effective Time"). The closing of
the Merger (the "Closing") will occur on the date on which the last of the
conditions in the Merger Agreement has been satisfied or waived or on such other
date as Pennzoil and Quaker State agree. We expect the Closing to occur promptly
after the Special Meeting and receipt of governmental approvals, including a
ruling from the Internal Revenue Service (the "IRS") to the effect that the
Spin-off and the contribution of certain assets to PPC in the Restructuring will
generally be tax-free to Pennzoil and its stockholders, which we expect to occur
in late third or early fourth quarter of 1998.
Following the Merger:
- Quaker State's stockholders initially will own shares of Pennzoil-Quaker
State Company Common Stock representing approximately 38.5% of
Pennzoil-Quaker State Company; and
- Pennzoil's stockholders initially will own shares of Pennzoil-Quaker
State Company Common Stock representing approximately 61.5% of
Pennzoil-Quaker State Company.
These percentages are based on the number of outstanding shares of Pennzoil
and Quaker State as of the date of the Merger Agreement. These percentages will
not change if the price of Quaker State Capital Stock fluctuates, but will
change to the extent that Quaker State options or Pennzoil options are exercised
prior to the Merger.
Quaker State holders of options and restricted share awards, as of June 30,
1998, held options and restricted share awards for 4,242,187 shares of Quaker
State Capital Stock. These holders of options and restricted share awards can
receive a similar substitute option or restricted share award in respect of
Pennzoil-Quaker State Company Common Stock instead of receiving a cash payment.
The exercise price of any such option and the number of shares of
Pennzoil-Quaker State Company Common Stock covered by such a substitute award
will be adjusted using formulas designed to maintain the approximate economic
value of the Quaker State options and awards at the time of the Merger.
In connection with the Spin-off, holders of options to purchase Pennzoil
common stock will receive for each such option an additional option to purchase
the same number of shares of Pennzoil-Quaker State Company Common Stock. As of
June 30, 1998, there were outstanding options to purchase 3,542,744 shares of
Pennzoil common stock.
For a more complete description of the principal terms and conditions of
the Merger, please refer to "The Transaction Agreements" and the copies of the
Merger Agreement and the Distribution Agreement attached as Annexes A and B,
respectively.
BACKGROUND
Over the last five years, Quaker State has continually evaluated its
position within the automotive aftermarket industry. Quaker State has considered
various means of enhancing stockholder value, including acquisitions,
divestitures, strategic alliances and strategic combinations. In considering
these alternatives, Herbert M. Baum, Chairman of the Board and Chief Executive
Officer of Quaker State, contacted James L. Pate, Chairman of the Board,
President and Chief Executive Officer of Pennzoil, in late 1995 through Edward
Robinson of Chase Bank of Texas, who had a business relationship with both Mr.
Baum and Mr. Pate. Messrs. Baum and Pate initially discussed a possible
strategic transaction between Quaker State and Pennzoil. This conversation was
followed by discussions between Mr. Baum and Mr. Pate in February and March
1996. The discussions were exploratory in nature and concluded without any
specific proposals.
Thereafter, Quaker State did not actively consider a transaction with
Pennzoil until the summer of 1997. On June 23, 1997, Union Pacific Resources
Group ("UPR") commenced a tender offer for shares of Pennzoil common stock. On
July 16, 1997, representatives of Simmons & Company, International, a
Texas-based investment banking firm, contacted Conrad A. Conrad, Vice Chairman
and Chief Financial Officer of Quaker State, to discuss whether Quaker State
would be interested in acquiring Pennzoil Products Group from UPR in the event
the UPR tender offer was successful. Subsequently, representatives and financial
advisors of
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<PAGE> 24
Quaker State met to discuss a possible transaction and the financing thereof.
Between July and September 1997, representatives of Quaker State and UPR met at
various times, and UPR expressed its willingness to provide Quaker State with
the opportunity to acquire Pennzoil Products Group following completion of UPR's
tender offer. Quaker State and UPR did not enter into any formal agreement
regarding this matter and did not finalize the financial terms under which
Pennzoil Products Group would be sold. UPR withdrew its tender offer for
Pennzoil on November 17, 1997.
During the period when Quaker State's discussions with UPR occurred, Quaker
State's Board held its annual strategy conference, which focused on recent and
projected changes in the automotive aftermarket industry and their effect on
Quaker State's strategic plans. At the conference, the Board discussed, among
other things, the fact that Quaker State recently had been outbid in auctions
involving the sale of two significant car care companies by rival bidders with
greater financial resources than Quaker State. The Board also discussed certain
financial uncertainties inherent in a strategy that focused on the acquisition
and integration of small or single-product businesses in the automotive
aftermarket. Following this discussion, the Board encouraged management to
explore alternate means of creating value for stockholders, including
identifying possible strategic partners for Quaker State.
In December 1997, Mr. Pate contacted Mr. Robinson to inquire about Mr.
Baum's interest in discussing a possible combination of Quaker State and
Pennzoil Products Group. Mr. Baum and Mr. Pate agreed to meet, subject to the
execution of a confidentiality/standstill agreement, which was executed on
December 30, 1997.
On January 26, 1998, representatives of Quaker State and Pennzoil met in
Dallas, Texas to discuss generally the potential benefits and risks of a
combination of Quaker State and Pennzoil Products Group. The parties agreed to
mobilize their internal and external legal and financial advisors to begin due
diligence. Promptly thereafter, Debevoise & Plimpton, representing Quaker State,
and Baker & Botts, L.L.P., representing Pennzoil, began discussing the tax and
regulatory issues associated with a possible combination of the companies. Mr.
Pate, through Pennzoil's financial advisors Lehman Brothers Inc. ("Lehman
Brothers"), delivered an initial written proposal to Mr. Baum through Chase
Securities Inc. ("Chase") on February 2, 1998. The proposal contemplated a
spin-off of Pennzoil Products Group to the stockholders of Pennzoil, followed by
a stock-for-stock merger with Quaker State that would result in the new company
("Newco") being owned 65%/35% by the stockholders of Pennzoil and Quaker State,
respectively. Quaker State's Board met on February 3 and 4 to discuss the
Pennzoil proposal and Quaker State's strategic alternatives. The Board
authorized management to continue negotiating with Pennzoil.
In January and February 1998, Quaker State also held discussions with a
large integrated oil company ("Oilco") regarding a possible strategic
transaction. Quaker State had first held exploratory discussions with this party
in April 1996. Quaker State viewed this possible transaction as an alternative
to a transaction with Pennzoil. Quaker State and Oilco signed a
confidentiality/standstill agreement on February 6, 1998, and a meeting among
Mr. Baum, other representatives of Quaker State and representatives of Oilco
followed on February 9, 1998. As a result of this meeting, Quaker State elected
not to pursue a transaction with Oilco because, among other reasons, (i) the
strategic alliance or joint venture that Oilco preferred would not provide the
same potential for synergies as would a combination with Pennzoil and (ii) Oilco
indicated that it would likely require significant additional time to formulate
a definitive proposal.
On or about February 6, 1998, Lehman Brothers, on behalf of Pennzoil,
contacted Chase and indicated that Pennzoil might consider a 63.5%/36.5%
allocation of Newco stock. On February 9, 1998, Mr. Baum called Mr. Pate to
discuss Pennzoil's proposal, including the proposed allocation of Newco stock.
They tentatively agreed to recommend that Newco would be owned 62.5% by Pennzoil
stockholders and 37.5% by Quaker State stockholders. Mr. Pate advised Mr. Baum
that further discussions between the parties were contingent on Quaker State's
and Pennzoil's signing a mutual exclusivity agreement. At a meeting on February
10, Quaker State's Executive Committee authorized the execution of a 30-day
mutual exclusivity agreement that would limit Quaker State's ability to pursue
alternative transactions and would prevent Pennzoil from taking any action that
would preclude a transaction with Quaker State. The exclusivity agreement was
signed on February 10. The Executive Committee also recommended that, in
addition to
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<PAGE> 25
Chase, Goldman, Sachs & Co. ("Goldman Sachs") should be formally retained as a
financial advisor to Quaker State.
On February 11, Quaker State and Pennzoil jointly retained McKinsey & Co.
to analyze the prospective synergies arising from a combination of Quaker State
and Pennzoil Products Group and to participate in the review of due diligence
materials. On February 12, the Board of Directors of Quaker State met and
reviewed evaluation materials prepared by Chase and key financial aspects of the
proposed transaction. The legal advisors to Quaker State reviewed for the Board
the legal context of the proposed transaction. Between February 13 and February
21, Quaker State and Pennzoil continued their respective due diligence efforts.
Each company established a data room and made management personnel available for
interviews.
On February 18, Mr. Baum and Mr. Pate met in Dallas to discuss issues
concerning the proposed transaction, including the suggested composition of
management for Newco. At the meeting, Mr. Baum and Mr. Pate agreed to recommend
that Mr. Pate should be the Chairman of the Board and that Mr. Baum should serve
as Chief Executive Officer. Mr. Pate and Mr. Baum met again on February 24 in
Houston, and Mr. Pate indicated he had concluded that a Quaker State officer
should not serve as Chief Operating Officer. Mr. Baum stated he would review and
consider a revised proposal for Newco's management. On the same date, Baker &
Botts, L.L.P. delivered initial drafts of the Merger Agreement and the
Distribution Agreement to Debevoise & Plimpton. On February 24-26,
representatives of Quaker State and Pennzoil met in Houston with representatives
of McKinsey & Co. to discuss further due diligence issues and synergies that
could arise from a combination of Quaker State and Pennzoil Products Group.
On February 26, 1998, Mr. Pate delivered to Mr. Baum a proposed
organizational chart for Newco that, in Mr. Baum's view, unacceptably reduced
the involvement of Quaker State management in Newco following the Merger. Mr.
Baum informed Pennzoil that the negotiations were terminated. On March 2, 1998,
Mr. Baum reported to the Executive Committee that the February 26 proposal from
Pennzoil reflected a significant shift in the negotiating position of Pennzoil
and that he had decided not to devote additional resources to consideration of
the transaction unless the management issues were resolved.
Following the termination of negotiations on February 26, Goldman Sachs and
Chase, representing Quaker State, and Lehman Brothers and Evercore Group Inc.
("Evercore"), representing Pennzoil, served as intermediaries between Quaker
State and Pennzoil to attempt to resolve disputed issues. Thereafter, Mr. Baum
received from Evercore, on behalf of Pennzoil, a revised proposal, which, among
other things, contemplated that ownership of Newco would be divided 65%/35%
between Pennzoil and Quaker State stockholders and provided that additional
shares would be issued to Quaker State stockholders (subject to a cap) if the
market price of Newco's stock did not reach $27 (in Quaker State per share
equivalents) within 18 months following the Merger. Mr. Baum believed this
proposal justified further direct discussions with Pennzoil, and he reported the
proposal to the Quaker State Executive Committee on March 11.
Between March 12 and March 25, representatives of Quaker State and Pennzoil
continued negotiating the transaction and tentatively agreed to recommend that
the ownership of Newco would be divided 61.5%/38.5% between Pennzoil and Quaker
State stockholders, respectively. It was further tentatively agreed that the
board of Newco would consist of nine persons, five to be designated by Pennzoil,
three to be designated by Quaker State, and one to be the new Chief Operating
Officer of Newco. The new Chief Operating Officer would be chosen by a committee
consisting of two directors designated by Quaker State and two directors
designated by Pennzoil. Mr. Baum would serve as Vice Chairman of the Board and
Mr. Pate would serve as the Chairman of the Board and Chief Executive Officer.
Additionally, at least two management positions would be offered to Quaker State
personnel, and John D. Barr, President and Chief Operating Officer of Quaker
State, would serve as a transition consultant to Newco for up to one year
following the merger. The Executive Committee of Quaker State met on March 20 to
discuss these developments, and the entire Board of Quaker State met on March 25
and 26 to review the status of the negotiations.
Following the March 25 meeting of Quaker State's Board, Quaker State and
Pennzoil negotiated the remaining terms and conditions of the Transaction
Agreements. Among the subjects of negotiation were (i) the amount of and the
circumstances under which a termination fee would be payable to Pennzoil in the
event the transaction was terminated; (ii) the circumstances under which
Pennzoil and Quaker State could
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terminate the transaction; (iii) the allocation of assets and liabilities
between Newco and Pennzoil; and (iv) the fund to be made available by Pennzoil
for the retention of Quaker State employees.
On April 14, 1998, the Quaker State Board held a special meeting. At that
meeting, Quaker State's management again reviewed for the Board the strategic
reasons for and alternatives to a merger with Pennzoil Products Group that had
been discussed at prior meetings of the Executive Committee and the Board.
Debevoise & Plimpton reviewed certain legal issues associated with the
transaction. Quaker State's management reviewed the structure of the proposed
transaction and the significant results of the legal and financial due diligence
performed on Pennzoil Products Group. Quaker State's management also summarized
the synergies expected to result from the transaction and compared them to the
estimates prepared by McKinsey & Co. Purvin & Gertz Inc., an independent
engineering firm, reviewed the refinery projects of the Pennzoil Products Group.
Chase and Goldman Sachs made a presentation that included a discussion of the
valuation methodologies and analyses used to arrive at their respective fairness
opinions. Chase and Goldman Sachs each gave its opinion to the Quaker State
Board that, as of such date, and based upon the assumptions, limitations and
qualifications disclosed to the Board, the Exchange Ratio was fair from a
financial point of view to the holders of Quaker State Capital Stock. Mr. Baum
discussed the impact of the transaction on Quaker State's other constituencies,
including employees. After concluding that the Merger and related transactions
were advisable and in the best interests of Quaker State and its stockholders,
the Quaker State Board voted unanimously to approve the Merger, authorize the
execution of the Merger Agreement and recommend that Quaker State's stockholders
adopt the Merger Agreement and approve the Merger and the other transactions
contemplated by the Merger Agreement.
Shortly after the Quaker State Board meeting concluded, Quaker State and
Pennzoil executed the Merger Agreement, and Quaker State and Pennzoil issued a
joint press release announcing the execution of the Merger Agreement.
QUAKER STATE'S REASONS FOR THE MERGER
Quaker State's Board has determined that the Merger is advisable and in the
best interests of its stockholders. At a meeting held on April 14, 1998, the
Quaker State Board unanimously approved the Merger Agreement and resolved to
recommend that the shareholders of Quaker State vote for adoption of the Merger
Agreement and approval of the Merger and the other transactions contemplated by
the Merger Agreement.
In reaching its conclusion to approve the Merger Agreement and to recommend
that shareholders vote for adoption of the Merger Agreement and approval of the
Merger and the other transactions contemplated by the Merger Agreement, the
Quaker State Board considered many factors, including, but not limited to, the
following:
(i) Strategic alternatives available to Quaker State and the
potential risks and benefits of each such alternative, including selling
the company, taking the company private, spinning off the lubricants
business, combining with another oil marketer, or attempting to grow the
company by acquiring related or unrelated product lines;
(ii) The difficulties and risks inherent in attempting to enhance
stockholder value primarily through the acquisition of companies in the
automotive aftermarket due to the increasing ability of larger companies
with greater financial resources to outbid Quaker State for acquisitions,
the relatively small number of attractive acquisition targets and
difficulties in achieving synergies and additional sales from such
acquisitions;
(iii) The potential efficiencies and synergies to be realized by the
combination of Quaker State and Pennzoil Products Group, which are expected
to result from the consolidation of sales offices, corporate headquarters,
blending and packaging plants and distribution centers, the reduction of
staff and expenses, and other economies;
(iv) The breadth and power of the leading brands that will be owned by
Pennzoil-Quaker State Company;
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(v) The potential for appreciation in the value of Pennzoil-Quaker
State Company, and the ability of Quaker State's stockholders to
participate in any such appreciation through their initial ownership of
approximately 38.5% of the common stock of Pennzoil-Quaker State Company;
(vi) The written opinions received by the Quaker State Board from
Chase and Goldman Sachs to the effect that, as of April 14, 1998, the
Exchange Ratio was fair from a financial point of view to the holders of
Quaker State Capital Stock, and the analyses of Chase and Goldman Sachs
described under "-- Opinions of Quaker State's Financial Advisors";
(vii) The challenges and potential costs of combining the businesses
of two major companies, and the attendant risks of not achieving the
expected operating efficiencies, other synergies or improvements in
earnings;
(viii) The risk that the Merger would not be consummated;
(ix) The liabilities of Pennzoil Products Group;
(x) The assets, competitive position and prospects of Pennzoil
Products Group, which the Quaker State Board believes, on a combined basis
with those of Quaker State, would represent a good strategic fit between
the two companies in view of their respective product lines and markets;
(xi) The terms and conditions of the Merger Agreement, including,
among other things, the fact that the Merger Agreement (a) provides for the
establishment of a $15 million retention pay program for the benefit of
Quaker State employees that will be funded by Pennzoil and (b) permits
Quaker State's Board, in the exercise of its fiduciary duties, to engage in
negotiations with or to furnish information to third parties in response to
any unsolicited acquisition proposal that is more favorable to Quaker State
stockholders than the Merger and to terminate the Merger Agreement in order
to enter into a definitive agreement relating to such alternative proposal
upon payment of a $20 million termination fee; and
(xii) The treatment of the Merger as a "reorganization" for federal
income tax purposes (see "-- Certain Federal Income Tax Consequences of the
Merger").
Based on this analysis, the Quaker State Board unanimously determined that
the Merger is advisable and in the best interests of Quaker State and Quaker
State's stockholders. The foregoing discussion of the factors considered by the
Quaker State Board is not intended to be exhaustive. In view of the variety of
factors considered in connection with its evaluation of the Merger, the Quaker
State Board did not find it practicable to, and did not, quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination. In addition, individual members of the Quaker State Board may
have given different weights to different factors. For a discussion of the
interests of certain members of Quaker State's management and directors in the
Merger, see "-- Interests of Certain Persons in the Merger."
The full text of the written opinions of Chase and Goldman Sachs, which set
forth the assumptions made, matters considered and limitations on the review
undertaken in connection with such opinions, are attached hereto as Annexes C
and D, respectively, and are incorporated herein by reference. STOCKHOLDERS ARE
URGED TO AND SHOULD READ SUCH OPINIONS IN THEIR ENTIRETY. See also "-- Opinions
of Quaker State's Financial Advisors."
RECOMMENDATION OF THE QUAKER STATE BOARD
QUAKER STATE'S BOARD RECOMMENDS THAT QUAKER STATE STOCKHOLDERS VOTE "FOR"
ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER AND THE OTHER
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.
ACCOUNTING TREATMENT AND CONSIDERATIONS
The Merger will be accounted for using the purchase method of accounting,
with Pennzoil Products Group treated as the acquiror. As a result, the assets
and liabilities of Pennzoil Products Group will be recorded at historical
amounts, without restatement to fair values. The assets and liabilities of
Quaker State will be recorded at their estimated fair values at the date of the
Merger with the excess of the purchase price
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over the sum of such fair values recorded as goodwill. The purchase price is
based upon the market capitalization of Quaker State, using an average trading
price of Quaker State Capital Stock for a reasonable period of time immediately
before and after the Merger was announced, plus certain Merger-related costs.
For purposes of this Proxy Statement/Prospectus, such purchase price is
estimated to be $792 million, which was calculated using a $19.79 per share
valuation of Quaker State Capital Stock. The calculated purchase price is for
accounting purposes only and is not indicative of the price at which shares of
Quaker State Capital Stock will trade immediately before the consummation of the
Merger or the value of shares of Pennzoil-Quaker State Company Common Stock to
be received by stockholders of Quaker State in connection with the Merger.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material federal income tax
consequences of the Restructuring, the Spin-off and the Merger to Pennzoil
Products Group, Pennzoil-Quaker State Company, Quaker State and Quaker State
stockholders and does not purport to be a complete analysis or description of
all potential tax effects of these transactions. The discussion assumes that
holders of Quaker State Capital Stock will hold their stock as a capital asset
as of the Effective Time. The discussion does not address all of the tax
consequences that may be relevant to particular stockholders in light of their
personal circumstances or to taxpayers subject to special treatment under the
federal income tax laws (for example, insurance companies, financial
institutions, broker-dealers, tax-exempt organizations, foreign corporations,
foreign partnerships or other foreign entities and individuals who are not
citizens or residents of the U.S.), and does not address any aspects of state,
local or foreign tax law.
The following discussion is based upon the provisions of the Code, the
Treasury Regulations thereunder, and administrative rulings and judicial
decisions in effect as of the date of this Proxy Statement/Prospectus.
Subsequent legislative, administrative or judicial changes or interpretations
could affect the accuracy of the statements or conclusions set forth herein. Any
such change could apply retroactively. Although the Spin-off and the Merger are
each conditioned on Pennzoil's receipt of a ruling from the IRS to the effect
that the Spin-off and the contribution of certain assets to PPC in the
Restructuring will generally be tax-free to Pennzoil and its stockholders, no
ruling has been or will be sought from the IRS concerning the tax consequences
of the Merger. Each stockholder of Quaker State is urged to consult his or her
own tax advisor as to the federal, state, local and foreign tax consequences of
the Restructuring, the Spin-off and the Merger.
IRS Ruling; Tax Opinions; Tax-Free Character of Transactions. As conditions
to the Spin-off and Merger, (i) Pennzoil must receive a letter ruling from the
IRS that the contribution of certain assets to PPC in the Restructuring will be
a tax-free reorganization within the meaning of section 368(a) of the Code and
that the Spin-off will be a tax-free distribution within the meaning of section
355 of the Code, and (ii) Pennzoil and PPC must receive an opinion of Baker &
Botts, L.L.P., special counsel to Pennzoil, and Quaker State must receive an
opinion of Debevoise & Plimpton, special counsel to Quaker State, in each case
to the effect that, on the basis of certain facts, representations and
assumptions set forth in the opinions, the Merger will be a tax-free
reorganization within the meaning of section 368(a) of the Code. The discussion
below assumes that the Merger and the contribution of certain assets to PPC in
the Restructuring will each be tax-free reorganizations within the meaning of
section 368(a) of the Code and that the Spin-off will be a tax-free distribution
within the meaning of section 355 of the Code.
Consequences to Quaker State Stockholders. The Restructuring and the
Spin-off will not have any direct tax consequences to the Quaker State
stockholders. The Merger will have the following tax consequences to the Quaker
State stockholders:
- No gain or loss will be recognized by Quaker State stockholders upon
their exchange of Quaker State Capital Stock for Pennzoil-Quaker State
Company Common Stock (except as described below with respect to cash
instead of fractional shares).
- Each Quaker State stockholder's tax basis in the Pennzoil-Quaker State
Company Common Stock he or she receives in the Merger (including any
fractional share of Pennzoil-Quaker State Company
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Common Stock for which cash is received) will be the same as the tax
basis of the Quaker State Capital Stock surrendered in exchange therefor.
- Each Quaker State stockholder's holding period in the Pennzoil-Quaker
State Company Common Stock that the stockholder receives in the Merger
will include the period he or she held the Quaker State Capital Stock
surrendered in exchange therefor.
- Each Quaker State stockholder who receives cash in lieu of a fractional
share of Pennzoil-Quaker State Company Common Stock will recognize gain
or loss equal to the difference between the amount of cash and the tax
basis allocated to the fractional share.
Consequences to Quaker State. The Restructuring, Spin-off and Merger will
not have material tax consequences to Quaker State.
Consequences to Pennzoil Products Group and Pennzoil-Quaker State
Company. Pennzoil Products Group and Pennzoil-Quaker State Company generally
will not recognize gain or loss upon the Restructuring, the Spin-off or the
Merger. Pennzoil Products Group will, however, recognize certain items of
intercompany gain or loss immediately before the Spin-off because the Spin-off
will terminate its membership in the Pennzoil consolidated group. Pennzoil
Products Group expects its net tax liability, if any, on such items, after
taking into account the indemnity and tax sharing provisions of the Tax
Separation Agreement, will be less than $3 million. See "Relationship Between
Pennzoil-Quaker State Company and Pennzoil after the Merger -- Tax Separation
Agreement."
Pennzoil Products Group is severally liable for the taxes of the Pennzoil
consolidated group for the period it is part of that group, including any
liability of Pennzoil for tax on the Spin-off under section 355(e). See "Risk
Factors -- Tax Risks." Pennzoil and Pennzoil Products Group have agreed to
indemnify each other from liability for such taxes in the manner described at
"Relationship Between Pennzoil-Quaker State Company and Pennzoil after the
Merger -- Tax Separation Agreement."
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and the rules and regulations promulgated thereunder (the "HSR Act"), the Merger
may not be consummated until notifications have been given and certain
information has been furnished to the Federal Trade Commission (the "FTC") and
the Antitrust Division of the United States Department of Justice (the
"Antitrust Division") and specified waiting period requirements have been
satisfied. Quaker State and Pennzoil have filed the required notification and
report forms under the HSR Act with the FTC and the Antitrust Division, and the
waiting period under the HSR Act expired on May 27, 1998.
Each state in which Quaker State or Pennzoil has operations also may review
the Merger under state antitrust laws. In addition, regulatory approvals or
filings will be required with the appropriate regulatory authorities in certain
countries where Quaker State and Pennzoil conduct business.
At any time before the Effective Time, the Justice Department, the FTC, a
state or foreign governmental authority or a private person or entity could seek
under the antitrust laws, among other things, to enjoin the Spin-off or the
Merger or to cause Pennzoil-Quaker State Company to divest itself, in whole or
in part, of Quaker State or of other businesses conducted by Pennzoil-Quaker
State Company. There can be no assurance that a challenge to the Spin-off or the
Merger will not be made or that, if such a challenge is made, Pennzoil, PPC or
Pennzoil-Quaker State Company will prevail. The obligations of Pennzoil, PPC and
Quaker State to consummate the Spin-off and the Merger are subject to the
condition that there be no decree, judgment, injunction or other order of a
court of competent jurisdiction or other governmental authority that imposes any
material restrictions or limitations on the Spin-off or the Merger. Each party
has agreed to use its commercially reasonable best efforts to have any such
decree, judgment, injunction or order vacated or lifted.
The Spin-off and the Merger are each conditioned on Pennzoil's receipt of a
letter ruling from the IRS to the effect that the Spin-off and the contribution
of certain assets to PPC in the Restructuring will be generally tax-free to
Pennzoil and its stockholders. Pennzoil has filed a request for the ruling with
the IRS.
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Quaker State and Pennzoil believe that they will obtain all material
required regulatory approvals prior to the Special Meeting. However, it is not
certain that all such approvals will be received by such time, or at all, and
governmental authorities may impose unfavorable conditions for granting the
required approvals.
LITIGATION
On July 28, 1998, Oil Changer, Inc. ("Oil Changer") and several
corporations affiliated with Oil Changer filed suit in the Superior Court of the
State of California, Alameda County, against Quaker State, Herbert M. Baum, John
D. Barr, Conrad A. Conrad, Charles F. Bechtel and two other individuals. The
complaint alleges that Quaker State and Oil Changer were "strategic partners" in
an alleged partnership to develop quick lubrication centers in Northern
California. Oil Changer alleges that Quaker State breached the alleged agreement
by developing quick lubrication centers with another entity. The complaint
asserts claims for fraud, breach of fiduciary duty and usurpation of partnership
opportunity, partnership accounting, breach of contract, conspiracy and
violation of Section 17200 of the California Business Professions Code.
Plaintiffs seek compensatory damages of at least $50 million, which plaintiffs
contend should be trebled, at least $50 million in punitive damages,
restitution, attorneys' fees and costs as well as injunctive relief. Quaker
State intends to contest the action vigorously; however, there can be no
assurance that the plaintiffs will not be awarded injunctive relief and/or
damages, some or all of which may be payable by Quaker State.
On July 28, 1998, Oil Changer and several corporations affiliated with Oil
Changer also filed a complaint in the United States District Court for the
Northern District of California against Quaker State and Pennzoil. The complaint
asserts claims under Sections 1 and 2 of the Sherman Act, Section 7 of the
Clayton Act and Sections 16720 and 17200 of the California Business Professions
Code, alleging that the Merger will substantially lessen competition in, or
result in monopolization of, the markets for motor oil and quick lubrication
services in certain areas of California. Plaintiffs seek compensatory and treble
damages, restitution, attorneys' fees and costs as well as injunctive relief
enjoining the Merger or divestiture if the Merger is consummated. Quaker State
and Pennzoil intend to contest the action vigorously; however, there can be no
assurance that the plaintiffs will not be awarded injunctive relief and/or
damages, some or all of which may be payable by Quaker State.
NO APPRAISAL RIGHTS
Quaker State is a Delaware corporation. Section 262 of the Delaware General
Corporation Law ("DGCL") provides appraisal rights (sometimes referred to as
"dissenters' rights") to stockholders of a Delaware corporation that is involved
in a merger under certain circumstances. However, Section 262 appraisal rights
are not available to stockholders of a corporation whose securities are listed
on a national securities exchange and whose stockholders are not required to
accept in exchange for their stock anything other than stock of another
corporation listed on a national securities exchange and cash received instead
of fractional shares. Because Quaker State Capital Stock is traded on the NYSE,
and because Quaker State's stockholders will be entitled to receive
Pennzoil-Quaker State Company Common Stock (and cash in lieu of fractional
shares) in connection with the Merger, which stock also will be traded on the
NYSE, stockholders of Quaker State will not have appraisal rights with respect
to the Merger.
FEDERAL SECURITIES LAW CONSEQUENCES; RESALE RESTRICTIONS
All shares of Pennzoil-Quaker State Company Common Stock that will be
distributed to stockholders of Quaker State in connection with the Merger will
be freely transferable, except for certain restrictions applicable to
"affiliates" of Quaker State. Shares of Pennzoil-Quaker State Company Common
Stock received by persons who are deemed to be affiliates of Quaker State may be
resold by them only in transactions permitted by the resale provisions of Rule
145 (or Rule 144 in the case of such persons who become affiliates of
Pennzoil-Quaker State Company) or as otherwise permitted under the Securities
Act. Persons who may be deemed to be affiliates of Quaker State generally
include certain officers, directors and significant stockholders of Quaker
State. The Merger Agreement requires Quaker State to use its commercially
reasonable efforts to cause each of its affiliates to execute a written
agreement to the effect that such persons will not sell, assign or transfer any
of the shares of Pennzoil-Quaker State Company Common Stock issued to them in
connection with the Merger unless such sale, assignment or transfer has been
registered
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under the Securities Act, is in conformity with Rule 145 or is otherwise exempt
from the registration requirements under the Securities Act.
This Proxy Statement/Prospectus does not cover resales of Pennzoil-Quaker
State Company Common Stock to be received by the stockholders of Quaker State in
connection with the Merger, and no person is authorized to make any use of this
Proxy Statement/Prospectus in connection with any such resale.
ROLE OF QUAKER STATE'S FINANCIAL ADVISORS
In connection with the proposed Merger, Quaker State retained Chase and
Goldman Sachs as financial advisors to assist Quaker State and its Board in
evaluating the transactions contemplated by the Transaction Agreements. Quaker
State entered into engagement agreements with its financial advisors providing
for customary fee, expense reimbursement and indemnification terms.
The financial advisors to Quaker State advised management and Quaker
State's Board regarding the structure and terms of the Merger and the
negotiation of the Transaction Agreements.
In deciding to approve the Merger, the Quaker State Board considered
opinions from its financial advisors as to the fairness of the Exchange Ratio
from a financial point of view to the holders of Quaker State Capital Stock.
OPINIONS OF QUAKER STATE'S FINANCIAL ADVISORS
On April 14, 1998, each of Chase and Goldman Sachs delivered an oral
opinion to the Quaker State Board, subsequently confirmed in writing as of such
date (the "Chase Opinion" and the "Goldman Opinion," respectively), to the
effect in each case that, as of the date of such opinion, the Exchange Ratio was
fair from a financial point of view to the holders of Quaker State Capital
Stock.
THE FULL TEXT OF THE CHASE OPINION AND THE GOLDMAN OPINION, EACH OF WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW
UNDERTAKEN IN CONNECTION WITH SUCH OPINION, ARE ATTACHED HERETO AS ANNEXES C AND
D, RESPECTIVELY, TO THIS PROXY STATEMENT/PROSPECTUS, AND ARE INCORPORATED HEREIN
BY REFERENCE. QUAKER STATE STOCKHOLDERS ARE URGED TO READ EACH OPINION IN ITS
ENTIRETY. THE CHASE OPINION AND THE GOLDMAN OPINION ARE ADDRESSED TO THE QUAKER
STATE BOARD AND DO NOT CONSTITUTE RECOMMENDATIONS AS TO HOW QUAKER STATE
STOCKHOLDERS SHOULD VOTE AT THE SPECIAL MEETING AND SHOULD NOT BE RELIED UPON BY
ANY SUCH HOLDER AS SUCH. THIS SUMMARY OF THE CHASE OPINION AND THE GOLDMAN
OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
RESPECTIVE WRITTEN OPINIONS.
In connection with their opinions, Chase and Goldman Sachs reviewed, among
other things, the Transaction Agreements; Annual Reports to Stockholders and
Annual Reports on Form 10-K of Quaker State and Pennzoil for the five years
ended December 31, 1997; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q of Quaker State and Pennzoil; certain other communications
from Quaker State and Pennzoil to their respective stockholders; audited
historical and unaudited pro forma financial statements with respect to Pennzoil
Products Group referred to in Section 4.5 of the Merger Agreement; and certain
internal financial analyses and forecasts for Quaker State and Pennzoil Products
Group prepared by the managements of Quaker State and Pennzoil, respectively,
including forecasts of certain cost savings (the "Synergies") expected to be
achieved as a result of the Merger. Chase and Goldman Sachs also held
discussions with members of the senior management of Quaker State and Pennzoil
regarding the strategic rationale for, and the potential benefits of, the
transactions contemplated by the Merger Agreement and the past and current
business operations, financial condition and future prospects of Quaker State
and Pennzoil Products Group. In addition, Chase and Goldman Sachs reviewed the
reported price and trading activity for Quaker State Capital Stock, compared
certain financial and stock market information for Quaker State and Pennzoil
with similar information for certain other companies the securities of which are
publicly traded and performed such other studies and analyses as Chase and
Goldman Sachs considered appropriate.
Chase and Goldman Sachs relied without independent verification upon the
accuracy and completeness of all of the financial and other information reviewed
by them for purposes of their opinions. In that regard,
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Chase and Goldman Sachs assumed, with Quaker State's consent, that the financial
forecasts provided by the respective managements of Quaker State and Pennzoil
were reasonably prepared on a basis reflecting the best currently available
judgments and estimates of the managements of Quaker State and Pennzoil as to
the future financial performance of Quaker State and Pennzoil Products Group, as
applicable. Further, in that regard, Chase and Goldman Sachs assumed, with
Quaker State's consent, that the estimates of Synergies resulting from the
Merger were reasonably prepared on a basis reflecting the best currently
available judgments and estimates of the managements of Quaker State and
Pennzoil. Chase and Goldman Sachs also assumed, with Quaker State's consent,
that obtaining any necessary regulatory or third-party approvals for the
Spin-off or the Merger will not have a material adverse effect, in the case of
Chase, or an adverse effect, in the case of Goldman Sachs, on Quaker State or
Pennzoil Products Group, as applicable. Chase and Goldman Sachs did not review
the JV Agreements (as defined in the Merger Agreement) or financial information
specifically relating thereto and assumed, with Quaker State's consent, that
there are no material liabilities under the JV Agreements that are not reflected
in historical or projected financial information regarding Pennzoil Products
Group and that there is no other information regarding the JV Agreements that
would have a material adverse effect, in the case of Chase, or an adverse
effect, in the case of Goldman Sachs, on Pennzoil Products Group. In addition,
Chase and Goldman Sachs did not make, nor did they assume any responsibility for
making, an independent evaluation or appraisal of the assets and liabilities of
Quaker State or Pennzoil Products Group or any of their respective subsidiaries
or divisions, and were not furnished with any such evaluation or appraisal. With
Quaker State's consent, Chase assumed that, except as set forth in a disclosure
schedule to the Merger Agreement provided to it, both the Restructuring and the
Spin-off will be tax-free to Pennzoil Products Group and that the Merger will be
treated as tax-free to each of Quaker State, Pennzoil Products Group and the
holders of Quaker State Capital Stock (other than with respect to any cash
received in lieu of fractional shares of Pennzoil-Quaker State Company Common
Stock). With Quaker State's consent, Goldman Sachs assumed that the Merger will
be treated as tax free to each of Quaker State and Pennzoil Products Group.
Chase and Goldman Sachs were not requested to solicit, and did not solicit,
interest from other parties with respect to an acquisition of or other business
combination with Quaker State. Chase and Goldman Sachs did not express any
opinion as to the price at which the shares of Pennzoil-Quaker State Company
Common Stock may trade if and when they are issued. Their advisory services and
opinions were provided for the information and assistance of the Quaker State
Board in connection with its consideration of the transaction contemplated by
the Merger Agreement and such opinions do not constitute a recommendation as to
how any holder of shares of Quaker State Capital Stock should vote with respect
to such transaction.
The following is a summary of certain financial analyses used by Chase and
Goldman Sachs in connection with providing their opinions to the Quaker State
Board.
(i) Contribution Analysis. Chase and Goldman Sachs analyzed the pro forma
contributions of each of Quaker State and Pennzoil Products Group to the
combined company, assuming the Merger is consummated as set forth in the Merger
Agreement. Chase and Goldman Sachs analyzed, utilizing pro forma results for
calendar year 1997 and estimated results for calendar years 1998 and 2000 (based
on projections provided by Quaker State management), the relative net income and
earnings before interest, taxes, depreciation and amortization ("EBITDA")
contributions from each of Quaker State and Pennzoil Products Group. The
analysis did not assume the realization of any Synergies in connection with the
Merger. The analysis indicated that Quaker State would be expected to contribute
to the combined company approximately 41.1% of the combined company's pro forma
1997 net income, 36.3% of its estimated 1998 net income and 31.2% of its
estimated 2000 net income. Chase and Goldman Sachs also analyzed the implied
equity value contributions of each of Quaker State and Pennzoil Products Group
to the combined company using a discounted cash flow analysis that assumed a
9.0x EBITDA terminal value multiple and a 12.0% discount rate. This analysis was
based on Quaker State management's base case projections, a Quaker State
management sensitivity case for Quaker State assuming 250 basis point decreases
in annual sales growth and 200 basis point decreases in annual EBITDA margins
from the base case, and a Quaker State management sensitivity case for Pennzoil
Products Group assuming 250 basis point decreases in annual sales growth and 300
basis point decreases of annual EBITDA margins from the base case. Chase and
Goldman Sachs determined from this analysis a range of implied equity value
contributions from Quaker State to the combined company from 22% to 43%. Chase
and Goldman Sachs compared these expected contributions to the approximately
38.5% of the
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pro forma primary shares of the combined entity to be owned by former Quaker
State stockholders after the Merger. The pro forma contribution analysis also
indicated that Quaker State would contribute to the combined company
approximately 41.1% of the combined company's pro forma 1997 EBITDA, 38.7% of
its estimated 1998 EBITDA and 35.9% of its estimated 2000 EBITDA. Chase and
Goldman Sachs compared this contribution with the implied Enterprise Value
(defined as equity market value, derived for Pennzoil Products Group by
reference to the 60-day average closing price of Quaker State Capital Stock
prior to receipt of Pennzoil's initial proposal on February 2, 1998, plus net
debt) split of 40.8% Quaker State/59.2% Pennzoil Products Group.
(ii) Pro Forma Merger Consequences Analysis. Chase and Goldman Sachs
analyzed the pro forma impact on Quaker State stockholders resulting from the
Merger for calendar year 1998. This analysis, based upon Quaker State
management's assumptions and estimates relating to the stand-alone results that
could be achieved by Quaker State and Pennzoil Products Group and certain
transaction adjustments, showed accretion to the stockholders of Quaker State in
earnings per share, EBITDA and earnings before interest and taxes for calendar
year 1998 of 54%, 31% and 36%, respectively, giving effect to 100% of the
Synergies and 16%, 15% and 13%, respectively, giving effect to 50% of the
Synergies. The actual results achieved by the combined company may be materially
lower than the projected results.
(iii) Implied Combined Company Share Price Analysis. Chase and Goldman
Sachs performed an analysis to determine the implied combined company stock
trading range based on Quaker State management's base case and sensitivity
projections of 1999 net income and earnings per share for the combined company,
the realization of 50% to 100% of the potential Synergies and a forward price to
1999 earnings multiple of 14.5x, which was based on Quaker State's and its peer
group's historical trading price performance. Under this analysis, the implied
combined company stock trading range, adjusted to reflect Quaker State per share
equivalents, ranged from $16.99 to $28.48. Chase and Goldman Sachs also
performed a discounted cash flow analysis to determine the implied combined
company stock trading range, adjusted to reflect Quaker State per share
equivalents, utilizing a range of estimated 2002 EBITDA multiples from 8x to 10x
and a range of discount rates from 11% to 13%. This analysis was based on Quaker
State management's base case projections and a Quaker State management
sensitivity case assuming decreases in annual sales growth rates from 0 to 250
basis points, decreases in annual EBITDA margins by 0 to 275 basis points, an
estimated 2002 EBITDA multiple of 9x and a discount rate of 12%. Under this
analysis, the implied combined company stock trading price per share ranged from
$17.56 to $35.32, without giving effect to the Synergies, and from $25.66 to
$44.40, giving effect to 100% of the Synergies.
(iv) Discounted Cash Flow Analysis. Chase and Goldman Sachs calculated a
range of present values of the future streams of cash flows that Quaker State
management projected that Quaker State could produce on a stand-alone basis for
the five-year period from 1998 through 2002. Utilizing management projections,
Chase and Goldman Sachs calculated a range of values based upon the discounted
net present value of Quaker State's five-year stream of projected Free Cash Flow
(defined as tax-effected earnings before interest and taxes plus depreciation
and amortization less capital expenditures and changes in working capital) and
its projected calendar year 2002 terminal value (derived by applying multiples
ranging from 8.0x to 10.0x to Quaker State's projected calendar year 2002
EBITDA). The Free Cash Flow streams and estimated terminal values were then
discounted to present value using discount rates ranging from 11.0% to 13.0%.
Based on this analysis, Chase and Goldman Sachs arrived at an implied equity
value range of $19.04 to $27.77 per fully diluted share of Quaker State Capital
Stock.
Chase and Goldman Sachs also performed a discounted cash flow sensitivity
analysis by decreasing Quaker State's projected annual sales growth over the
five-year period by 0 to 250 basis points and by decreasing projected annual
EBITDA margins over the five-year period by 0 to 200 basis points, in each case
based on Quaker State management's sensitivity projections. Based on this
analysis, and utilizing an assumed 9.0x EBITDA exit multiple and a 12.0%
discount rate, Chase and Goldman Sachs arrived at an implied equity value range
of $14.63 to $23.24 per fully diluted share of Quaker State Capital Stock.
(v) Comparable Publicly Traded Companies Analysis. Chase and Goldman Sachs
reviewed and compared certain actual and estimated financial information
relating to Quaker State to corresponding actual
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and estimated financial information for 15 publicly traded companies (the
"Quaker State Public Comparables") that Chase and Goldman Sachs deemed relevant
to their evaluation of Quaker State. Of the 15 Quaker State Public Comparables,
Chase and Goldman Sachs utilized the following six companies, which are branded
consumer products companies: Church & Dwight, Inc., Clorox Co., Dial Corp.,
First Brands Corp., Sherwin Williams Co. and WD 40 Co. (the "Branded Consumer
Products Companies"); the following five companies, which are automotive parts
retail and service center companies: AutoZone, Inc., Discount Auto Parts, Inc.,
Monro Muffler Brake, Inc., O'Reilly Automotive, Inc. and Pep Boys, Inc. (the
"Automotive Parts Retailers and Service Centers"); and the following four
companies, which are branded automotive aftermarket companies: Edelbrock Corp.,
Exide Corp., TBC Corp. and Wynn's International Inc. (the "Branded Automotive
Aftermarket Companies"). Chase and Goldman Sachs calculated the multiples of
total Enterprise Value to latest twelve months ("LTM") EBITDA and share price to
estimated 1998 earnings per share ("EPS") for the Quaker State Comparable
Companies. The total Enterprise Value/LTM EBITDA multiples ranged from 9.1x to
15.9x (with a mean of 12.4x) for the Branded Consumer Products Companies, from
6.3x to 12.5x (with a mean of 9.6x) for the Automotive Parts Retailers and
Service Centers and from 6.1x to 8.4x (with a mean of 7.2x) for the Branded
Automotive Aftermarket Companies. The overall mean total Enterprise Value/LTM
EBITDA multiple was 10.1x. The price/estimated 1998 EPS multiples ranged from
16.1x to 29.9x (with a mean of 21.8x) for the Branded Consumer Products
Companies, from 12.7x to 20.6x (with a mean of 16.3x) for the Automotive Parts
Retailers and Service Centers and from 10.1x to 15.2x (with a mean of 12.1x) for
the Branded Automotive Aftermarket Companies. The overall mean price/1998 EPS
multiple was 17.4x. Chase and Goldman Sachs then derived from this data the
ranges of these multiples deemed most meaningful for their analysis and applied
a range of multiples of 8.0x to 11.0x to Quaker State's 1997 EBITDA, and a range
of multiples of 15.0x to 20.0x to Quaker State's estimated 1998 net income, and
arrived at an implied equity value range of $12.20 to $18.67 per primary share
of Quaker State Capital Stock.
(vi) Comparable Transactions Analysis. Chase and Goldman Sachs also
reviewed certain publicly available information regarding ten selected business
combinations announced since August 1, 1994 (collectively, the "Comparable
Transactions"), including eight transactions involving companies in the
automotive parts, products and service industries and two transactions involving
companies in the oil and gas industry. The Comparable Transactions, in reverse
chronological order of public announcement, were the following: the acquisition
of Hi-Lo Automotive by O'Reilly Automotive; the acquisition of Deflecta-Shield
by Lund International Holdings; the proposed acquisition of Pennzoil by Union
Pacific Resources Group (withdrawn); the acquisition of Stant Corp. by Tomkins
Plc; the acquisition of The Medo Companies by Quaker State; the acquisition of
Armor All products by Clorox Co.; the acquisition of Blue Coral, Inc. by Quaker
State; the acquisition of Trico Products Corp. by Stant Corp.; the acquisition
of Purolator Products Corp. by Mark IV Industries Inc.; and the acquisition of
Specialty Oil Co., Inc. by Quaker State.
Chase and Goldman Sachs compared the prices paid in the Comparable
Transactions in terms of, among other things, Transaction Value (defined as
equity purchase price plus net debt) as a multiple of latest twelve months'
EBITDA. An analysis of these multiples for the Comparable Transactions yielded a
range of 7.0x to 18.1x, with a mean of 10.9x. Chase and Goldman Sachs then
derived from this data the ranges of these multiples deemed most meaningful for
their analysis and applied a range of 9.0x to 12.0x to Quaker State's 1997
EBITDA and arrived at an implied equity value range of $13.71 to $21.24 per
share of Quaker State Capital Stock.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying the Chase Opinion and the Goldman Opinion. In arriving at their
fairness determinations, Chase and Goldman Sachs considered the results of all
such analyses. No company used in the above analyses as a comparison is directly
comparable to Quaker State, Pennzoil or Pennzoil Products Group. The analyses
were prepared solely for purposes of Chase and Goldman Sachs providing their
opinions to the Quaker State Board as to the fairness from a financial point of
view of the Exchange Ratio to the holders of shares of Quaker State Capital
Stock and do not purport to be appraisals or necessarily to reflect the prices
at which businesses or securities actually may be sold. Analyses based upon
projections of future results are not necessarily indicative of actual future
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results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of Quaker State, Pennzoil, Pennzoil Products
Group, Chase, Goldman Sachs or any other person assumes any responsibility if
future results are materially different from those projected. As described
above, the Chase Opinion and the Goldman Opinion were each one of many factors
taken into consideration by the Quaker State Board in making its determination
to approve the Merger Agreement. The foregoing summary does not purport to be a
complete description of the analyses performed by Chase and Goldman Sachs and is
qualified by reference to the written opinions of Chase and Goldman Sachs set
forth as Annexes C and D hereto.
Chase, as part of its investment banking business, is continually engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. Quaker State selected Chase
as its financial advisor on the basis of its reputation as a globally recognized
investment banking firm and its substantial experience in transactions similar
to the Merger. Chase is familiar with Quaker State having acted as its financial
advisor in connection with the Merger Agreement. Chase provides a full range of
financial advisory and securities services and, in the course of its normal
trading activities, may from time to time effect transactions and hold
securities, including derivative securities, of Quaker State, Pennzoil or both
for its own account and for the accounts of its clients and at any time have a
long or short position in such securities. The Chase Manhattan Corporation and
its affiliates, including Chase, in the ordinary course of business, have, from
time to time, provided commercial and investment banking services to Quaker
State and Pennzoil and their affiliates for customary fees. With respect to
Quaker State, these services have included serving as co-manager on two of
Quaker State's bond financings, advising on and arranging bank financing
relating to Quaker State's acquisition of The Medo Companies, participating in
Quaker State's revolving credit facility and providing banking services to
Quaker State's employees. With respect to Pennzoil, these services have included
serving as agent on Pennzoil's $700 million, 364-day revolving/1-year term
credit facility, serving as trustee on Pennzoil's debentures, participating in
Excel Paralubes' (a 50-50 general partnership of Conoco Inc. and PPC) $145
million 364-day revolving credit facility and serving as syndication and
administrative agent and co-manager of Excel Paralubes' two bond issues. The
Chase Manhattan Corporation and its affiliates, including Chase, may provide
commercial and investment banking services to Quaker State, Pennzoil, Pennzoil
Products Group or any of their respective subsidiaries in the future.
Pursuant to a letter agreement dated March 20, 1998 (as amended on April
24, 1998, the "Chase Engagement Letter"), Quaker State engaged Chase to act as
financial advisor to the Quaker State Board in connection with the Merger.
Pursuant to the terms of the Chase Engagement Letter, Quaker State agreed to pay
Chase customary fees, a substantial portion of which is contingent on the
consummation of the Merger. Quaker State also has agreed to reimburse Chase for
its reasonable out-of-pocket expenses, including attorneys' fees, and to
indemnify Chase against certain liabilities, including certain liabilities under
the federal securities laws.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Quaker State selected
Goldman Sachs as its financial advisor on the basis of its reputation as a
globally recognized investment banking firm and its substantial experience in
transactions similar to the Merger. Goldman Sachs is familiar with Quaker State
having acted as its financial advisor in connection with the Merger Agreement.
Goldman Sachs provides a full range of financial advisory and securities
services, and, in the course of its normal trading activities, may from time to
time effect transactions and hold securities, including derivative securities,
of Quaker State, Pennzoil or both for its own account and for the accounts of
its clients and at any time have a long or short position in such securities.
Goldman Sachs may provide investment banking services to Quaker State, Pennzoil,
Pennzoil Products Group or any of their respective subsidiaries in the future.
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Pursuant to a letter agreement dated March 18, 1998 (the "Goldman Sachs
Engagement Letter"), Quaker State engaged Goldman Sachs to act as financial
advisor to the Quaker State Board in connection with the Merger. Pursuant to the
terms of the Goldman Sachs Engagement Letter, Quaker State agreed to pay Goldman
Sachs customary fees, a substantial portion of which is contingent on the
consummation of the Merger. Quaker State also has agreed to reimburse Goldman
Sachs for its reasonable out-of-pocket expenses, including attorneys' fees, and
to indemnify Goldman Sachs against certain liabilities, including certain
liabilities under the federal securities laws.
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BUSINESS OF PENNZOIL-QUAKER STATE COMPANY
The combination of Pennzoil Products Group and Quaker State to form
Pennzoil-Quaker State Company will create a premier worldwide automotive
aftermarket products and consumer car care company. Pennzoil-Quaker State
Company will enjoy strong brand name recognition in key product categories, such
as motor oil with PennzoilH and Quaker StateH, fast lubes with Jiffy LubeH and Q
LubeH, and car care products with Slick 50H, Rain-XH, Blue CoralH, Black MagicH,
Westley'sH, MedoH, AutoshadeH, GumoutH, Fix-a-FlatH, OutlawH, SnapH, ClassicH
Car Wax and others.
On a pro forma basis (assuming Pennzoil Products Group and Quaker State had
been combined as of January 1, 1997), Pennzoil-Quaker State Company would have
had combined revenues of more than $3.0 billion in 1997, of which 44% would have
been from automotive lubricants, 13% would have been from car care products, 23%
would have been from specialty industrial products and transportation fuels, 15%
would have been from automotive services and the remaining 5% would have been
from international sales. On a going-forward basis, management of Pennzoil
Products Group expects to realize from $90 million to $125 million in operating
income improvement as a result of elimination of general and administrative
expenses and realization of operational efficiencies. See "Pennzoil-Quaker State
Company Supplemental Financial Data" and "Disclosure Regarding Forward-Looking
Statements."
Pennzoil-Quaker State Company's strategy is to be a worldwide leader in
providing consumer products for vehicle care and maintenance and to provide
high-quality consumer brands, specialty industrial products and services to
customers. In furtherance of this strategy, Pennzoil-Quaker State Company will
focus particularly on:
- Meeting the needs of customers by developing and marketing the highest
quality products and services.
- Developing new products and extending product lines through investment in
research, development and marketing activities as well as acquisitions.
- Leveraging product technology and category leadership into selling
opportunities across brands, products and services.
- Expanding its presence in international markets with lubricants and other
automotive products.
- Building upon its leading position in the fast lube operations market.
Initially, Pennzoil-Quaker State Company will have a substantial investment
in refining of crude oils and in marketing commodities such as transportation
fuels. In the future, Pennzoil-Quaker State Company intends to focus its capital
and other resources primarily on vehicle care products and services and other
high margin automotive aftermarket categories. Capital will be directed to
enhanced research, development and marketing of new products and potential
acquisition of new brands. Accordingly, over time, Pennzoil-Quaker State Company
intends to transition into a consumer products company that will be different
than Pennzoil-Quaker State Company immediately after the Merger.
BUSINESS OF QUAKER STATE
GENERAL
Quaker State is a leading producer and marketer of motor oils and other
lubricants. Quaker State also operates fast lube centers in certain areas of the
United States and Canada, manufactures and sells automobile polishes, car wash
products and automotive air fresheners, and markets automobile engine and fuel
treatments, automotive window shades, automotive glass treatments and automotive
accessories.
Quaker State markets and distributes major national brand, private label
and proprietary brand lubricants and other automotive consumer products
primarily in the United States, Canada and Mexico. Quaker State's Q Lube, Inc.
("Q Lube") subsidiary operates fast lube centers (primarily under the name Q
Lube) and offers consumers quick and economical oil changes and related services
for passenger vehicles. Quaker State also
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provides collection, transportation and recycling services for used oil,
antifreeze and filters in certain regions of the United States.
Quaker State has taken initiatives to increase its share of the motor oil
market by introducing new products and repositioning Quaker State's current
product line, extending Quaker State's existing brands, acquiring new brands,
creating niche markets for certain of Quaker State's products and offering
incentive programs and marketing allowances to customers and independent
distributors.
LUBRICANTS AND LUBRICANT SERVICES
Quaker State's Lubricants and Lubricant Services segment blends, packages,
markets and sells lubricants (primarily motor oils for automobiles and trucks).
The lubricants include transmission fluids, gear lubricants and greases for
automobiles and trucks, as well as specialty lubricants designed for other types
of vehicles, such as sport utility vehicles, marine craft, motorcycles and
snowmobiles. The lubricants are sold under the Quaker State brand name and
certain private label and proprietary brand names. Quaker State also purchases
and resells automotive consumer products such as oil and air filters and
antifreeze. The Lubricants and Lubricant Services segment also provides
collection, transportation and recycling services for used oil, antifreeze and
used oil filters in certain regions of the United States. The administrative
offices for the Lubricants and Lubricant Services segment are located in Irving,
Texas and Salt Lake City, Utah.
During 1997, revenues from the Lubricants and Lubricant Services segment
comprised approximately 76% of Quaker State's total sales and operating revenues
from continuing operations. Sales to one customer by the Lubricants and
Lubricant Services segment were material to the segment.
(a) Manufacturing. Motor oils and lubricants are made by blending
additives with lubricant stocks, refined from crude oil, at five blending
and packaging plants operated by Quaker State and its subsidiaries in
Vicksburg, Mississippi; Newell, West Virginia; Shreveport, Louisiana; San
Antonio, Texas; and Carson, California. The Newell, West Virginia location
is leased and the other locations are owned. Quaker State's motor oils are
made from lubricant stocks purchased from a number of refiners. During
1997, 14% of the lubricant stocks used by Quaker State were produced at the
Congo refinery in Newell, West Virginia (which was sold to a third party in
July 1997), 58% of Quaker State's lubricant stocks were purchased from one
supplier and approximately 90% of Quaker State's additives were purchased
from one supplier. Quaker State believes that alternative sources of supply
for lubricant stocks and additives are readily available.
(b) Fast Lube Centers. Quaker State's Q Lube subsidiary is one of the
largest operators and franchisors of fast lube centers in the United
States. Fast lube centers owned by Q Lube and its franchisees are operated
under the names Q Lube, McQuik's Oilube or Quaker State Minit-Lube. Fast
lube centers are service outlets providing quick and inexpensive oil
changes, lubrication and related services and products for automobiles. Q
Lube recently began offering similar services for boats at its Q Lube
Marine Centers. Q Lube provides oil changes and lubrication services to
vehicles and related products and services such as air filters, breathers,
PCVs, wipers, headlights, engine treatments, coolant system drain and
refill services, and automatic transmission service. Q Lube is expanding
its service offerings in certain locations to include coolant flushing,
vacuuming, air conditioning system recharging and other services.
Q Lube is one of Quaker State's largest customers for Quaker State motor
oils. In 1991, Q Lube began to convert its company-operated fast lube centers to
the name Q Lube, featuring heightened Quaker State identification. At the end of
1997, the conversion to the Q Lube name at all Company-operated stores was
substantially complete. At December 31, 1997 there were 573 Q Lube locations in
the United States and Canada. In the United States, 143 locations are owned and
operated by Q Lube, 246 locations are leased and operated by Q Lube, and 152 are
licensed by franchisees. Q Lube also owns one marine lube center and three
mobile marine oil change units in the United States. Q Lube centers are located
in 28 states, primarily in the Western, Midwestern and Southern United States.
In Canada, Q Lube owns an interest in 17 centers, has
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11 franchised locations and has entered into a letter of intent to purchase an
additional 85 centers, operated under the name Mr. Lube, from Imperial Oil,
Limited.
CONSUMER PRODUCTS
Quaker State's Consumer Products segment was formed through a series of
acquisitions that occurred principally between 1995 and 1997. Sales by this
segment accounted for 24% of Quaker State's total consolidated sales and
operating revenues in 1997. Sales to one customer by the Consumer Products
segment were material to the segment.
(a) Companies within the Segment. The Consumer Products segment is
comprised of Blue Coral/Slick 50, Ltd. ("Blue Coral"), Blue Coral Systems,
Inc. ("BC Systems"), Quaker State International, Limited ("Quaker State
International"), Rain-X Corporation ("Rain-X"), and Medo Industries, Inc.
("Medo"). In July 1995, Quaker State acquired Slick 50, Inc. ("Slick 50"),
a marketer of automotive engine treatments and related automotive
chemicals. In June 1996, Quaker State acquired Blue Coral, Inc., a
manufacturer and marketer of automobile appearance products, commercial and
industrial cleaning products and commercial car wash products. In October
1996, Quaker State acquired Medo, a company engaged in the design,
manufacture and marketing of air fresheners primarily for use in
automobiles. In early 1997, (i) the commercial car wash operations of Blue
Coral were transferred to a separate subsidiary, BC Systems, and (ii) the
domestic and international operations of Blue Coral (except for BC Systems)
and Slick 50 were consolidated into one domestic and one foreign entity.
In August 1997, Medo acquired the assets of Auto-Shade, L.L.C. and
Auto-Shade (Overseas) L.L.C. (now operated as a separate division,
hereafter referred to as "Axius"). Axius designs and markets automotive
window sun protection products and automotive accessories. In November
1997, Quaker State acquired Rain-X, the marketer of the leading brand of
rain repellant for automobile windows, and incorporated its operations into
Blue Coral.
(b) Manufacturing. Blue Coral purchases motor oils, additives and
chemicals, and either manufactures finished engine and fuel treatments
itself or contracts with an outside packager to produce finished products
in accordance with Blue Coral's specifications. Blue Coral purchases
chemicals, waxes and cleaners from a variety of suppliers, and blends and
packages finished automotive cleaners and protectants at its leased
facilities.
BC Systems arranges for the bulk manufacturing of car wash soaps,
waxes and polishes, which it sells to commercial users.
Medo purchases paperboard, containers and fragrances from a variety of
suppliers, and manufactures and distributes finished air fresheners from a
leased Baltimore, Maryland facility. Axius designs and markets automotive
window sun protection products and automotive accessories. Axius purchases
its automotive window sun protection and other accessory products from a
variety of suppliers and distributes sunshades and other automotive
accessories from a leased Moorpark, California facility.
Quaker State International uses third party contract manufacturers in
the United Kingdom to produce products such as automotive appearance
products and engine, fuel and radiator additives. Quaker State
International leases its United Kingdom headquarters facility.
DISCONTINUED OPERATIONS
In November 1997, Quaker State sold its subsidiary Truck-Lite Co., Inc.
("Truck-Lite") to a third party. Truck-Lite manufactures safety lighting
equipment for trucks and automobiles, which is sold to original equipment
manufacturers and replacement parts distributors.
FURTHER INFORMATION
Further information concerning the business of Quaker State is set forth in
Quaker State's 1997 Annual Report on Form 10-K. See "Where You Can Find More
Information."
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BUSINESS OF PENNZOIL PRODUCTS GROUP
Pennzoil Products Group, through PPC, is engaged primarily in the marketing
and manufacturing of lubricants, car care products and specialty industrial
products. In addition, Pennzoil Products Group, through Jiffy Lube, is engaged
in the franchising, ownership and operation of fast lube centers. PPC was
incorporated in 1986 as a wholly owned subsidiary of Pennzoil to operate
Pennzoil's motor oil and refined products business. Jiffy Lube was incorporated
in 1979 and became a wholly owned subsidiary of Pennzoil in 1991.
MOTOR OIL AND REFINED PRODUCTS
PRODUCT LINES. Pennzoil Products Group's motor oil and refined products
segment produces and markets products under three primary product lines:
lubricants, car care products and specialty industrial products. See Note 14 of
Notes to Combined Financial Statements of Pennzoil Products Group for industry
segment data for the years ended December 31, 1997, 1996 and 1995.
Lubricants. Pennzoil Products Group produces and markets Pennzoil(R) motor
oil, which is in its 13th consecutive year as the number one selling motor oil
in the United States. Pennzoil Products Group also produces and markets Wolf's
Head(R) motor oil. Pennzoil Products Group's commercial and industrial division
produces and markets Pennzoil Long-Life(R), an over-the-road diesel motor oil.
Pennzoil Products Group also markets ancillary products (filters, automatic
transmission fluids, greases, etc.) under the Pennzoil(R) brand name. During
1997, revenues from lubricants comprised approximately 40% of total sales
revenues of Pennzoil Products Group.
The primary markets for Pennzoil Products Group's lubricants are mass
merchandisers, auto parts stores, lube centers and auto dealerships. Secondary
markets include convenience stores, drug stores, grocery stores, tire stores and
independent automotive repair businesses. Pennzoil Products Group markets its
branded motor oils in packages ranging in size from four ounces to 55 gallons
and sells a significant amount in bulk. Packaged motor oils are sold primarily
in one quart plastic bottles.
Consumer marketing for Pennzoil(R) lubricants focuses primarily on the
driving conditions experienced by car owners and the technical benefits that
Pennzoil(R) lubricants provide under those conditions. Key components of the
marketing strategy include targeted media, motorsports participation, public
relations and consumer promotions. Targeted media include national and local
television, radio and print advertising designed to reach specific populations
of consumers based upon their usage behavior. Motorsports participation includes
team sponsorships in NASCAR(R), Indy Racing League(R), NHRA(R) and the
sponsorship of Pennzoil World of Outlaws(R), a grass roots sprint car racing
series. In addition, several national and local racing events are sponsored by
Pennzoil. Consumer promotions are specifically designed to help create foot
traffic for customers and create consumer purchase behavior in retail outlets.
Pennzoil Products Group also owns Viscosity Oil ("Viscosity"), a leading
supplier of original equipment manufacturers'-branded, premium-quality products
to the North American off-road industry. Viscosity supplies lubricants to
substantially all the dealer networks of Case Corporation ("Case") and New
Holland North America ("New Holland") across the United States and Canada. Both
Case and New Holland manufacture and distribute heavy-duty agricultural and
construction equipment.
Through directly and indirectly wholly- and partly-owned subsidiary
companies, joint ventures, licensees, distributors and jobbers, Pennzoil
Products Group markets Pennzoil(R) motor oil and lubricants in more than 60
countries outside of the United States. During 1997, Pennzoil Products Group's
largest national markets outside the United States (by total lubricant volume)
were Canada, Thailand, Indonesia, India and Mexico. These foreign operations may
subject Pennzoil Products Group to the risk of foreign currency fluctuations.
From time to time, Pennzoil Products Group may engage in hedging activities in
an attempt to reduce the impact of these foreign currency fluctuations.
For its lubricants as well as its car care products described below,
Pennzoil Products Group utilizes a brand management structure. Under this
approach, Pennzoil Products Group centralizes all brand-related activity under a
single manager, allowing for coordination of all strategic and tactical
decisions for advertising and promotions, product packaging and positioning,
formulation strategy and pricing. The brand management
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structure, when partnered with research and development and sales and
distribution, is designed to enhance the value of the brands.
Car Care Products. Pennzoil Products Group is one of America's leading
marketers of fuel injector and carburetor cleaners and other car care products
under the Gumout(R) name. These products are sold primarily to the consumer
through retail channels, with Gumout(R) having an increasing presence in the
installed market (lube centers, service stations, auto dealerships, etc.). In
addition, Pennzoil Products Group is a master distributor for Gojo(R) hand
cleaner products and Prestone(R) antifreeze and a distributor for FRIGC(R)
FR-12(TM) refrigerant. The primary markets for car care products are mass
merchandisers and auto parts stores. During 1997, revenues from car care
products comprised approximately 7% of total sales revenues of Pennzoil Products
Group.
In October 1997, Pennzoil Products Group acquired the assets of Total
Action Automotive Products ("TAAP"). TAAP manufactures and markets
premium-quality automotive appearance products, including Classic(R) car waxes
and washes through major automobile retailers and mass merchandisers. In
November 1997, Pennzoil Products Group acquired the marketing and distribution
assets of Snap Automotive Products, Inc. ("Snap"). Snap products include
Fix-A-Flat(R), the number one selling tire inflator in the United States;
Outlaw(R) fuel additives; and Snap(R) fuel additives and chemicals. These
acquisitions add successful brands in car care products markets to Pennzoil
Products Group's portfolio and are an important part of its strategy to grow its
consumer products business.
Specialty Industrial Products and Transportation Fuels. Pennzoil Products
Group markets products for special applications to other industries for use in
their products and processes. These products are marketed to industrial
customers directly and through partnerships. During 1997, revenues from
specialty industrial products and transportation fuels comprised approximately
36% of total sales revenues of Pennzoil Products Group.
In October 1997, PPC and Conoco Inc. ("Conoco") formed a general
partnership called Penreco. Pennzoil Products Group contributed to Penreco its
operations related to petrolatums, white oils, ink solvents, sulfonates and
other specialty petroleum products, including its manufacturing facilities in
Karns City, Pennsylvania and Dickinson, Texas. Conoco contributed to Penreco its
solvents business, which sells products primarily into the drilling fluids,
mining and cleaning products markets and as carrier oils for many consumer
products. Products from Penreco are marketed under the Penreco(R), Magie
Bros(R), Conosol(R) and LVT(R) brand names. Penreco markets to manufacturers and
end-users directly and through licensed distributors.
PPC and Baker Petrolite Corporation ("Baker Petrolite"), the specialty
chemicals division of Baker Hughes Incorporated, are 50-50 general partners in
Bareco(R) Products, which markets a broad line of wax products to domestic and
international purchasers of paraffin, microcrystalline and related synthetic
waxes. Pennzoil Products Group transports partially refined feedstock from Utah
to its Rouseville manufacturing facility, which produces paraffinic and
microcrystalline waxes and related products. These wax products, along with
certain waxes from Baker Petrolite, waxes from Pennzoil Products Group's
Shreveport manufacturing facility and waxes purchased from other suppliers, are
marketed through the partnership under the Be Square(R) and other brand names.
Pennzoil Products Group has invested approximately $28.0 million in its
Rouseville manufacturing facility and its packaging plant in nearby Reno,
Pennsylvania in connection with this venture. Production from these facilities
began in September 1996. As a result, the Rouseville manufacturing facility
processes various high-wax content feedstocks, the use of which has reduced some
of the crude oil processed volumes while maintaining full unit utilization of
the facility's processing capabilities.
MANUFACTURING.
Base Oil and Specialty Product Manufacturing. Pennzoil Products Group owns
and operates two base oil and specialty product manufacturing facilities, one
located near Oil City, Pennsylvania ("Rouseville") and the other located in
Shreveport, Louisiana. The paraffinic base oil produced by these manufacturing
facilities is used in the blending of Pennzoil(R) motor oil and other lubricants
and for sale to industrial customers. The manufacturing facilities also produce
waxes, petrolatums, special cut kerosenes, transformer oils, process oils
37
<PAGE> 42
and other naphthenic base oils for use in producing specialty industrial
products or for sale to industrial customers. In addition, the manufacturing
facilities produce transportation fuels and other by-products.
PPC and Conoco are 50-50 general partners in Excel Paralubes, a joint
venture which operates a state-of-the-art base oil hydrocracker facility located
at Conoco's refinery near Lake Charles, Louisiana. The facility is capable of
producing approximately 18,000 barrels per day of high-quality base oils, the
base ingredient in finished lubricants. Conoco operates the plant with support
positions staffed by both Conoco and Pennzoil Products Group. Each partner
purchases 50% of base oil production volume at contract rates based on
prevailing market prices. The addition of this facility has made Pennzoil
Products Group self-sufficient in high-quality base oil stocks.
Blending and Packaging. Pennzoil(R) motor oil and lubricants are produced
by blending additives and lubricant base oils in five domestic company-owned and
operated blending and packaging plants (Portland, Oregon; Shreveport, Louisiana;
Rouseville, Pennsylvania; Vernon, California; and St. Louis, Missouri). Three
packaging plants (Mundy's Corner, Pennsylvania; Marion, Illinois; and Alameda,
California) produce products for the commercial and industrial lubricant
markets, and a packaging plant in Winter Haven, Florida produces car care
products. Outside the United States, Pennzoil(R) motor oil and lubricants are
blended and packaged by wholly owned subsidiaries of Pennzoil Products Group in
Australia and Spain, by a majority owned subsidiary in India, by joint ventures
in Bolivia, Malaysia and Peru, by licensees in Indonesia, the Philippines and
Thailand, and by a third-party contract with a joint venture in South Africa.
Raw Materials. The feedstocks processed into base oils and specialty
industrial products by Pennzoil Products Group's manufacturing facilities are
purchased at prevailing market prices. Essentially all of the base oils used in
the manufacture of Pennzoil(R) motor oil and lubricants are supplied by the
Pennzoil Products Group manufacturing facilities and Excel Paralubes, either
directly or through exchanges. The same facilities are also primary suppliers to
Penreco and Bareco. Pennzoil Products Group purchases from others the
requirements of its marketing operations not produced in its own facilities.
DISTRIBUTION. Lubricants and car care products are distributed domestically
through 53 owned and operated distribution facilities in 24 states. Pennzoil
Products Group products are also distributed through independent distributors
and directly from third-party suppliers. Lubricants are also distributed
worldwide in over 60 countries through a combination of company-owned
distribution facilities, licensee facilities and independent distributors.
Approximately 33% of the total lubricating products sold internationally by
Pennzoil Products Group are exported from the United States, typically by
third-party trucking or ocean carrier.
FAST LUBE OPERATIONS
Jiffy Lube is the largest provider of fast automotive preventive
maintenance services in the United States. As of December 31, 1997, 1,516 Jiffy
Lube(R) service centers were open in metropolitan areas throughout the United
States with a heavy concentration of centers in the northeastern and eastern
part of the United States.
Jiffy Lube's standard full service includes an oil change and filter
replacement, chassis lubrication, checking for proper tire inflation, window
washing, interior vacuuming, checking and topping off transmission,
differential, windshield washer, battery and power steering fluid levels and air
filter and windshield wiper examination. The standard full service can generally
be performed in ten minutes or less. Jiffy Lube(R) service centers also provide
other authorized services and products at an additional cost. Pennzoil(R) motor
oil is the featured motor oil in company-operated service centers and most
franchise-operated service centers. Pennzoil supplied approximately 90% of the
lubricants to Jiffy Lube(R) centers in 1997.
As of December 31, 1997, franchisees operated 935 Jiffy Lube(R) service
centers, and 581 service centers were owned and operated by Jiffy Lube,
including 32 franchised service centers and 133 company-operated service centers
at Sears Auto Centers across the country. In 1998, Jiffy Lube plans to open
approximately 120 service centers throughout the United States, of which about
20 will be company owned. As of July 10, 1998, Jiffy Lube had opened 54 service
centers during 1998. During 1997, revenues from fast lube operations comprised
approximately 16% of total sales revenues of Pennzoil Products Group.
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<PAGE> 43
Jiffy Lube(R) has been recognized as a "super brand" in BrandWeek's annual
rating of the top 2000 brands in America. Jiffy Lube has been named first in
growth in the automotive aftercare market (Entrepreneur Magazine, February,
1998), the number one franchise in the automotive oil change category
(Entrepreneur Magazine, January, 1998) and in the fast oil change industry
(Franchise Times, December, 1997).
COMPETITION
The lubricants business is highly competitive. The major competitors of
Pennzoil Products Group and their principal brands of motor oil in the United
States are Quaker State, Ashland Inc. (Valvoline(R)), Texaco, Inc.
(Havoline(R)), Burmah Castrol PLC (Castrol(R)), and Mobil Oil Corporation
(Mobil(R)). Pennzoil Products Group also competes with a number of independent
blending and packaging companies. Outside of the United States, Pennzoil
Products Group also competes with major fuels marketers and state-owned
petroleum companies. The principal methods of competition in the motor oil
business are product quality, price, distribution capability, advertising and
sales promotion. Some of the competitors, particularly the major integrated oil
companies, have greater financial resources than Pennzoil Products Group.
The car care business is highly competitive and very fragmented. The car
care industry is composed of several categories, such as maintenance chemicals,
appearance chemicals, tire cleaners and air fresheners. Major branded
competitors in these categories are STP(R), primarily a maintenance chemical,
and Armor All(R) and Turtle Wax(R), in appearance products. Many other national
brands exist in each of the various categories, although in general, they have
small market shares. Private label brands also compete with the national brands
with respect to certain car care products. The principal methods of competition
in car care products are specific product benefits, distribution capability and
advertising and sales promotion.
The specialty industrial products business is also highly competitive. The
major competitors are Witco Corporation, Petro-Canada, Lyondell Petrochemical
Company and Amoco Corporation in the white oils business and several major
integrated oil companies in the solvents business. Wax products major
competitors are Moore and Munger, Allied Signal Inc., International Group Inc.
and National Wax, a division of Burmah Castrol. Specialty industrial products
compete on the basis of product quality, customer service and price.
The fast lube business is also highly competitive. The major competitors of
Jiffy Lube are Q Lube (a subsidiary of Quaker State) and Ashland Inc. through
its Valvoline Instant Oil Change centers. A large number of independent fast
lube chains also compete with Jiffy Lube on a regional or local basis. In
addition to competing with other fast lube centers, Jiffy Lube competes with
automobile dealers, service stations and garages. The principal methods of
competition are quality of service, speed, location, warranty, price,
convenience, reliability and sales promotion.
PATENTS AND TRADEMARKS
Most of the Pennzoil Products Group's brand name consumer products are
protected by registered trademarks. Its brand names and trademarks are extremely
important to its business, and Pennzoil Products Group pursues a course of
vigorous action against apparent infringements. Pennzoil Products Group's
numerous trademarks have been registered in the United States and throughout the
world where the Pennzoil Products Group's products are sold. Pennzoil Products
Group's rights in these trademarks endure for as long as they are used or
registered.
Pennzoil Products Group currently has 56 active patents related to
lubricants, synthetic lubricants, lubricant additives, hydrocarbon gel, and
automotive chemicals. Although some products are covered by patents, Pennzoil
Products Group does not believe that patents are material to its business.
RESEARCH AND DEVELOPMENT
Research and development activities are directed toward continued
improvement of Pennzoil Products Group motor oils, other lubricants and engine
additives and the development of new products. Research and development
personnel develop quality control programs to assure the continuous production
of high quality
39
<PAGE> 44
products and provide extensive technical services to the manufacturing,
packaging, sales and marketing operations as well as to customers and consumers.
Pennzoil Products Group expects to spend approximately $12.9 million on
research activities and quality testing in 1998. These activities are carried
out in a 65,700 square foot facility in The Woodlands, Texas. Pennzoil Products
Group also operates a state of the art base oil refinery pilot plant at this
location. A 6,200 square foot mechanical automotive testing laboratory,
including an engine dynamometer, was added in early 1998.
Over the past year, Pennzoil Products Group has developed several new
product concepts that are in various stages of research and development.
Pennzoil Products Group has a comprehensive new products methodology to ensure
that products in the research and development stream have desired consumer
benefits or uses. Rigorous testing is conducted at all key phases of development
to minimize risks and help assess the market potential of each concept.
LEGAL PROCEEDINGS
Pennzoil Products Group is a party to various legal proceedings and
administrative actions that are of an ordinary or routine nature incidental to
the operations of Pennzoil Products Group. In the opinion of management of
Pennzoil Products Group, such proceedings and actions should not, individually
or in the aggregate, have a material adverse effect on the business, financial
condition or results of operations of Pennzoil Products Group. Reference is made
to Note 11 of Notes to the Pennzoil Products Group Combined Financial Statements
for a description of certain legal proceedings.
GOVERNMENTAL REGULATION
Pennzoil Products Group's operations are affected from time to time in
varying degrees by political developments and federal, state and local laws and
regulations.
ENVIRONMENTAL MATTERS. The operations of Pennzoil Products Group in the
United States are subject to numerous federal, state and local laws and
regulations controlling the discharge of materials into the environment or
otherwise relating to the protection of the environment and human health and
safety.
Pennzoil Products Group is subject to a variety of state and federal Clean
Air Act rules requiring air emission reductions from its operating units and
fuels. Currently, the U.S. Environmental Protection Agency ("EPA"), the Ozone
Transport Assessment Group ("OTAG"), Ozone Transport Region ("OTR") and several
states are examining new standards and/or controls which could impose
significant costs on the Pennzoil Products Group. The EPA has recently adopted
new, more stringent national ambient air quality standards for ozone and
particulate matter. Under the new standards, many more areas of the country will
be considered high pollution areas and will be subject to additional regulatory
controls, including possible fuel specification requirements. Control measures
to implement these new standards will be adopted over the next five to seven
years. Similarly, the multi-state OTAG and OTR groups are developing lists of
suggested controls to limit interstate ozone transport. The EPA has issued a
proposal to require states to begin adopting many of these suggested controls
over the next few years.
The precise effect of these actions on the Pennzoil Products Group and
other industrial companies is uncertain because most of the requirements will be
implemented through EPA regulations to be issued over a period of years. For
example, fuels produced at one or both of the Pennzoil Products Group's
refineries will likely be required to be reformulated to a composition
significantly different from the fuels currently produced. No definitive cost
estimate is available because it is also likely that any reformulated fuel
required by such future regulations will differ significantly, but
unpredictably, from the reformulated gasoline required in some parts of the
country today.
Pennzoil Products Group is also subject to certain laws and regulations
relating to environmental remediation activities associated with past
operations, such as the Comprehensive Environmental Response, Compensation, and
Liability Act, the Resource Conservation and Recovery Act and similar state
statutes. In response to liabilities associated with these activities, accruals
have been established when reasonable
40
<PAGE> 45
estimates are possible. Pennzoil Products Group adjusts the accruals when new
remediation responsibilities are discovered and probable costs become estimable,
or when current remediation estimates must be adjusted to reflect new
information.
Pennzoil Products Group's assessment of the potential impact of these
environmental laws is subject to uncertainty due to the difficult process of
estimating remediation costs that are subject to ongoing and evolving change.
Initial estimates of remediation costs reflect a broad-based analysis of site
conditions and potential environmental and human health impacts derived from
preliminary site investigations (including soil and water analysis, migration
pathways and potential risk). Later changes in these initial estimates may be
based on additional site investigations, completion of feasibility studies
(comparing and selecting from among various remediation methods and
technologies) and risk assessments (determining the degree of current and future
risk to the environment and human health, based on current scientific and
regulatory criteria) and the actual implementation of the remediation plan. This
process occurs over relatively long periods of time and is influenced by
regulatory and community approval processes and is subject to the ongoing
development of remediation technologies. Pennzoil Product Group's assessment
analysis takes into account the condition of each site at the time of
estimation, the degree of uncertainty surrounding the estimates for each phase
of remediation and other site-specific factors.
Capital outlays of approximately $17.9 million have been made by Pennzoil
Products Group since January 1995 with respect to environmental protection.
Capital expenditures for environmental control facilities are currently expected
to be approximately $2.5 million in 1998. Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations for
Pennzoil Products Group -- Capital Resources and Liquidity -- Environmental
Matters" for additional information.
FAST LUBE MATTERS. Jiffy Lube is subject to, and devotes substantial
efforts to compliance with, a variety of federal and state laws governing
franchise sales and marketing and franchise trade practices. Although the
regulatory environment differs by state, applicable laws and regulations
generally require disclosure of business information in connection with the sale
of franchises. Certain state regulations also affect the ability of the
franchisor to revoke or refuse to renew a franchise. Jiffy Lube seeks to comply
with applicable regulatory requirements. However, given the scope of Jiffy
Lube's business and the nature of franchise regulations, compliance problems can
be encountered from time to time.
EMPLOYEES
As of December 31, 1997, Pennzoil Products Group and its subsidiaries had
8,970 employees, of whom 5,402 were full-time employees and 3,568 were temporary
and part-time employees.
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<PAGE> 46
PENNZOIL PRODUCTS GROUP
SELECTED COMBINED FINANCIAL INFORMATION
The selected combined financial information set forth below as of and for
the years ended December 31, 1997, 1996, 1995, 1994 and 1993 for Pennzoil
Products Group reflects the combined operations of PPC and Jiffy Lube and has
been derived from the audited combined financial statements and the unaudited
combined financial statements of Pennzoil Products Group. The selected financial
information set forth below as of and for the six months ended June 30, 1998 and
1997 is derived from Pennzoil Products Group's unaudited combined financial
statements, which, in the opinion of management, include all adjustments
necessary for a fair presentation of the financial condition and results of
operations of Pennzoil Products Group. The results of operations for interim
periods are not necessarily indicative of a full year's operations. This
information should be read in conjunction with the combined financial statements
of Pennzoil Products Group, the notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations for Pennzoil Products
Group included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AS OF AND FOR
THE SIX MONTHS
ENDED JUNE 30 AS OF AND FOR THE YEARS ENDED DECEMBER 31
----------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1)
Revenues(2)............. $ 942,411 $1,029,315 $2,013,160 $1,968,013 $1,807,702 $1,748,330 $1,711,123
Income (loss) from
continuing
operations............ 6,646 1,651 (589) (9,189) (53,242) (16,048) 3,406
Net income (loss)(3).... 6,646 1,651 (589) (9,189) (53,242) (16,048) 3,406
COMBINED BALANCE SHEET DATA
Cash and cash
equivalents........... $ 8,162 $ 10,282 $ 9,132 $ 15,797 $ 10,468 $ 12,514 $ 14,562
Total assets............ 1,553,744 1,468,784 1,559,623 1,370,499 1,278,667 1,056,102 1,007,364
Total debt and capital
lease
obligations(4)........ 445,140 448,903 458,620 458,452 435,213 140,031 168,362
Shareholder's equity.... 284,736 244,768 256,380 235,741 224,795 211,741 169,427
</TABLE>
- ---------------
(1) Historical earnings and dividends per share disclosures have been omitted
because they are not meaningful, since Pennzoil Products Group consists of
direct and indirect wholly owned subsidiaries of Pennzoil.
(2) The decrease in revenues for the six months ended June 30, 1998 compared to
the six months ended June 30, 1997 was primarily the result of Pennzoil
Products Group's contribution of its specialty industrial products business
to the Penreco partnership in October 1997. Beginning with the fourth
quarter of 1997, Pennzoil Products Group's share of Penreco's earnings, net
of expenses, are reflected in revenues. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations for Pennzoil
Products Group -- Results of Operations."
(3) The 1997 net loss includes pretax charges of $22.0 million related to the
unsolicited offer by Union Pacific Resources Group Inc. to acquire all
outstanding shares of Pennzoil common stock. The 1996 net loss includes a
pretax charge of $24.4 million for pre-operating expenses of Excel
Paralubes. The 1995 net loss includes pretax charges of $20.0 million
relating to a fire at Pennzoil Products Group's Rouseville manufacturing
facility, $10.0 million for a settlement of certain franchisee litigation,
$9.0 million for pre-operating expenses of Excel Paralubes, $5.7 million
associated with the shutdown of a crude oil gathering system in West
Virginia, $5.7 million associated with international marketing restructuring
charges and $8.2 million associated with a general and administrative cost
reduction program. Results for 1994 include a pretax charge of $32.5 million
for the cessation of crude oil processing at Pennzoil Products Group's
Roosevelt manufacturing facility. The 1993 results include charges of $10.0
million for estimated costs associated with the closing of certain Jiffy
LubeH service centers. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations for Pennzoil Products Group"
for additional information related to 1995 through 1998.
(4) Includes current maturities of long-term debt and current portion of capital
lease obligations.
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<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR PENNZOIL PRODUCTS GROUP
SEGMENT FINANCIAL INFORMATION
The tabular presentation below sets forth certain financial information
regarding Pennzoil Products Group. Pennzoil Products Group's international
operations historically have not been material in relation to combined revenues,
operating income and identifiable assets. The results of operations for interim
periods are not necessarily indicative of a full year's operations.
<TABLE>
<CAPTION>
AS OF AND FOR
THE SIX MONTHS
ENDED JUNE 30 AS OF AND FOR THE YEARS ENDED DECEMBER 31
----------------------- ------------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ------------ ------------ ------------
(UNAUDITED) (EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales
Motor oil and refined
products..................... $ 769,113 $ 872,170 $1,700,856 $1,701,069 $1,536,867
Fast lube operations............ 160,954 154,933 316,068 290,219 277,331
Intersegment sales(1)........... (17,868) (16,595) (34,776) (29,972) (27,131)
---------- ---------- ---------- ---------- ----------
912,199 1,010,508 1,982,148 1,961,316 1,787,067
---------- ---------- ---------- ---------- ----------
Other income, net
Motor oil and refined
products..................... 23,320 14,943 18,484 (6,784) 8,744
Fast lube operations............ 6,892 3,864 12,528 13,481 11,891
---------- ---------- ---------- ---------- ----------
30,212 18,807 31,012 6,697 20,635
---------- ---------- ---------- ---------- ----------
Total revenues.......... $ 942,411 $1,029,315 $2,013,160 $1,968,013 $1,807,702
========== ========== ========== ========== ==========
OPERATING INCOME (LOSS)
Motor oil and refined products.... $ 45,061 $ 29,077 $ 65,336 $ 36,539 $ (11,259)
Fast lube operations.............. 2,571 3,279 2,100 8,240 (5,210)
---------- ---------- ---------- ---------- ----------
Total operating income
(loss)................ 47,632 32,356 67,436 44,779 (16,469)
Interest expense, net............. 34,157 27,104 61,780 55,071 60,816
Income tax provision (benefit).... 6,829 3,601 6,245 (1,103) (24,043)
---------- ---------- ---------- ---------- ----------
Net income (loss)................. 6,646 1,651 $ (589) $ (9,189) $ (53,242)
========== ========== ========== ========== ==========
DEPRECIATION AND AMORTIZATION
Motor oil and refined products.... $ 25,460 $ 19,417 $ 43,051 $ 32,078 $ 34,000
Fast lube operations.............. 11,216 10,547 21,439 19,840 21,549
IDENTIFIABLE ASSETS
Motor oil and refined products.... $1,181,517 $1,092,125 $1,190,731 $1,003,180 $ 915,818
Fast lube operations.............. 372,227 376,659 368,892 367,319 362,849
CAPITAL EXPENDITURES
Motor oil and refined products.... $ 17,761 $ 74,285 $ 121,958 $ 231,677 $ 134,883
Fast lube operations.............. 11,267 9,929 25,836 19,509 40,773
</TABLE>
- ---------------
(1) Substantially all intersegment sales, which are priced at market, are from
the motor oil and refined products segment to the fast lube operations
segment.
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<PAGE> 48
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30,
1997. Net sales for Pennzoil Products Group were $912.2 million for the six
months ended June 30, 1998, a decrease of $98.3 million, or approximately 9.7%,
from the same period in 1997. The decrease was primarily due to lower net sales
reported by the motor oil and refined products segment as a result of the
contribution of its specialty industrial products business to the Penreco
partnership in October 1997. Prior to the creation of this partnership, net
sales from the contributed operations were fully consolidated in the financial
statements of Pennzoil Products Group. Pennzoil Products Group's share of
Penreco earnings are now accounted for under the equity method of accounting
with its share of Penreco net earnings being reported as a component of other
income. Net sales associated with the contributed specialty industrial products
operations were $81.5 million during the six months ended June 30, 1997.
Excluding the net sales associated with the contributed specialty
industrial products operations in 1997, net sales decreased $16.8 million, or
1.8%, for the six months ended June 30, 1998 compared to the same period in
1997. This decrease was primarily due to lower lubricating product and fuels net
sales reported in the motor oil and refined products segment as a result of
lower market prices. These lower market prices, primarily the result of lower
petroleum feedstock costs, more than offset increases in sales volumes of
lubricating products and fuels. Sales volumes of lubricating products and fuels
increased approximately 12.8% and 4.5%, respectively, for the six months ended
June 30, 1998 compared to the same period in 1997.
Excluding the impact of specialty industrial products operations
contributed to Penreco, gross margin (i.e., net sales less cost of sales and
purchases from affiliates) increased $38.8 million, primarily the result of
lower petroleum feedstock costs.
Net income for Pennzoil Products Group was $6.6 million for the six months
ended June 30, 1998 compared to $1.7 million for the same period in 1997. Higher
income related to Excel Paralubes, up $6.0 million during the first six months
of 1998 compared to 1997, was offset by higher depreciation expense and higher
selling, general and administrative expenses. Depreciation expense was up $6.7
million over the same period in 1997 primarily due to depreciation on the new
Shreveport manufacturing facility upgrade. Selling, general and administrative
expenses were down $2.1 million for the six months ended June 30, 1998 compared
to the same period in 1997. Overhead charges from Richland Development
Corporation ("Richland") increased $3.6 million for the first six months of 1998
compared to the same period in 1997. See "-- Overhead Charges" and Note 3 of
Notes to Combined Financial Statements for more detail relating to overhead
charges.
1997 COMPARED TO 1996 AND 1995. Net sales were $1,982.1 million for the
year ended December 31, 1997, an increase of $20.8 million and $195.1 million
over the same period in 1996 and 1995, respectively. The increase in net sales
for the year ended 1997 compared to 1996 was primarily due to higher revenues
from the fast lube operations segment due to the increase in number of centers
open and an increase in average ticket price. The motor oil and refined products
segment recorded an increase of approximately 17% in lubricating product sales
volumes over 1996. However, the contribution of the specialty industrial
products operations to the Penreco partnership, and subsequent equity
consolidation of those operations in the fourth quarter of 1997, offset the
lubricating product sales volume increase to revenues.
The increase in net sales for the year ended December 31, 1996 compared to
1995 was primarily due to higher sales in the fast lube operations segment and
higher lubricating product prices in the motor oil and refined products segment.
Net sales increased in the fast lube operations segment due to an increase in
the number of centers open and to increases in average ticket price per car.
Lubricating product sales volumes increased approximately 2% for the year ended
December 31, 1996 compared to 1995, with most of the increase in net sales
coming from higher market prices received for those products.
Gross margin increased $46.6 million for the year ended December 31, 1997
compared to the same period in 1996. The increase in gross margin was primarily
driven by increases in sales volumes and improved product mix, as sales of
higher value products replaced sales of lower value products. Gross margin
increased $38.7 million for the year ended December 31, 1996 compared to the
same period in 1995. The increase in
44
<PAGE> 49
gross margin for 1996 compared to 1995 was primarily due to several nonrecurring
or unusual charges described below that were recorded in 1995. See " -- Motor
Oil and Refined Products" and "-- Fast Lube Operations" for more details.
Pennzoil Products Group reported a net loss of $0.6 million for the year
ended December 31, 1997 compared to a net loss of $9.2 million and $53.2 million
for the same periods in 1996 and 1995, respectively. Selling, general and
administrative expenses for the year ended December 31, 1997 increased $35.1
million and $2.7 million over the same period in 1996 and 1995, respectively.
Overhead charges from Richland, a component of selling, general and
administrative expense, increased $23.1 million and $18.6 million over the same
periods in 1996 and 1995, respectively. See "-- Overhead Charges" and Note 3 of
Notes to Combined Financial Statements for more detail relating to overhead
charges. Depreciation expense for the year ended December 31, 1997 increased
$12.6 million and $8.9 million over the same periods in 1996 and 1995,
respectively. The increase in depreciation expense was primarily due to the
completion of the upgrade at the Shreveport manufacturing facility.
In addition, the net loss reported in 1995 includes several nonrecurring or
unusual pretax charges:
- $20.0 million for the costs, net of projected insurance proceeds,
relating to a fire at Pennzoil Products Group's Rouseville manufacturing
facility.
- $10.0 million associated with a settlement of certain franchisee
litigation.
- $5.7 million in connection with the shutdown of a crude oil gathering
system in West Virginia.
- $5.7 million associated with international marketing restructuring
charges.
- $8.2 million associated with a general and administrative cost reduction
program.
MOTOR OIL AND REFINED PRODUCTS. Net sales for this segment decreased 11.8%
for the first six months of 1998 compared to the same period in 1997. The
decrease was primarily due to the contribution of most of the specialty
industrial products business to the Penreco partnership. Also contributing to
the decrease were lower lubricating products and fuels sales prices whose
decline generally followed the market price decrease of crude oil and other
petroleum feedstocks.
Lower lubricating product prices offset higher lubricating product volumes.
Domestic motor oil sales volumes, part of total lubricating products, increased
3.8% for the six months ended June 30, 1998 compared to the same period in 1997.
Gross margin, excluding the impact of specialty industrial products
contributed to Penreco, increased $38.4 million for the six months ended June
30, 1998 compared to the same period in 1997. The increase was primarily due to
decreases in feedstock costs, which have declined faster than product prices.
Operating income from this segment was $45.0 million for the six months
ended June 30, 1998, compared to $29.1 million for the same period in 1997. The
increase in income was partly due to higher equity income from Excel Paralubes.
Income related to PPC's investment in Excel Paralubes, a base oil plant in which
PPC and Conoco are equal partners, increased $6.0 million for the six months
ended June 30, 1998, compared to the same period in 1997. Higher depreciation
and overhead expenses for the segment were partially offset by lower selling,
general and administrative expenses. The higher depreciation expense was due to
the completion of the upgrade at the Shreveport manufacturing facility in April
1997.
Net sales for this segment in 1997 were almost equal to net sales reported
in 1996. Increases in lubricating product volumes were offset by the decrease in
specialty industrial products revenues caused by the contribution of those
operations to PenrecoH in October 1997. Net sales for 1996 were up 10.7% over
1995 primarily due to higher product sales prices. Total lubricating product
sales volumes for the year ended 1996 were up approximately 2% over 1995.
Gross margin improved $39.5 million in 1997 compared to 1996. This increase
was primarily due to improved fuel volumes and lubricating product margins. The
increase in fuels margins was primarily the result of the completion of the
upgrade at the Shreveport manufacturing facility. The motor oil and refined
products
45
<PAGE> 50
segment sells more fuels than it manufactures; therefore, it purchases for
resale volumes needed to meet customer requirements. The Shreveport
manufacturing facility upgrade allows the segment to produce more fuels and
purchase less from third parties as it meets its customers' needs.
Operating income for this segment was $65.3 million for the year ended
December 31, 1997 compared to operating income of $36.5 million for the same
period in 1996. The Excel Paralubes base oil manufacturing facility commenced
commercial operations in December 1996, and the results for 1997 include a full
year of sales of base oils from the Excel Paralubes plant, although production
from Excel Paralubes was not yet at capacity levels for the first part of the
year. Operating income reported by Pennzoil related to its 50% share of the
Excel Paralubes manufacturing facility was $21.5 million higher than in 1996
primarily as a result of pre-operating expenses recorded during 1996. In
addition, operating results related to specialty industrial products increased
approximately $5.0 million over 1996, primarily as a result of higher volumes
and margins.
Partially offsetting these increases were higher selling, general and
administrative expenses and higher overhead charges in 1997 compared to 1996.
Overhead charges in 1997 increased $13.9 million over 1996. See "-- Overhead
Charges" and Note 3 of Notes to Combined Financial Statements for more detail
relating to overhead charges.
Operating income for this segment in 1996 was $36.5 million, compared with
an operating loss of $11.3 million in 1995. Included in the operating loss
reported in 1995 were nonrecurring or unusual pretax charges of (i) $20.0
million for the costs, net of projected insurance proceeds, relating to a fire
at Pennzoil Products Group's Rouseville manufacturing facility, (ii) $4.0
million associated with a settlement of certain franchisee litigation, (iii)
$5.7 million in connection with the shutdown of a crude oil gathering system in
West Virginia and (iv) $5.7 million associated with international marketing
restructuring charges. Excluding these nonrecurring or unusual charges,
operating income for the segment increased $12.4 million for the year ended
December 31, 1996 compared to 1995. Overall higher margins on lubricating
products offset higher pre-operating expenses at Excel Paralubes which were
$15.4 million higher in 1996 compared to 1995. Operating income from specialty
industrial products sales in 1996 increased approximately $5.2 million over
1995, primarily as a result of higher volumes and lower expenses. Segment
overhead charges decreased $2.7 million in 1996 compared to 1995. See
"-- Overhead Charges" and Note 3 of Notes to Combined Financial Statements for
more detail relating to overhead charges.
FAST LUBE OPERATIONS. Net sales recorded by the fast lube operations
segment, operating through Jiffy Lube, for the first six months of 1998
increased 3.9% compared to the same period in 1997. The increase in net sales
was due in part to an increase in the number of service centers open. Net sales
reported by the segment are comprised of sales revenues from company-owned
service centers and franchise fees and royalty revenues from franchisee-operated
service centers. System-wide sales increased $26.9 million to $400.4 million for
the first six months of 1998 compared to the same period in 1997. The increase
in system-wide sales was due to the number of service centers open and an
increase in the average ticket prices. System-wide average ticket prices
increased to $36.88 for the six months ended June 30, 1998, compared with $35.83
for the same period in 1997, as customers take advantage of additional
authorized services and products available at service centers. There were 1,556
service centers (including 596 Jiffy Lube company-operated service centers) open
as of June 30, 1998.
The fast lube operations segment reported operating income of $2.6 million
for the six months ended June 30, 1998 compared to operating income of $3.3
million for the same period in 1997. The decrease in operating income was due to
higher overhead charges from Richland. Excluding overhead charges, operating
income increased $0.8 million for the six months ended June 30, 1998 compared to
the same period in 1997 as a result of an increase in royalty income. See
"-- Overhead Charges" and Note 3 of Notes to Combined Financial Statements for
more detail relating to overhead charges.
Net sales recorded by the fast lube operations segment were up $25.8
million and $38.7 million in 1997 compared to 1996 and 1995, respectively. These
increases were due to an increase in the number of company-owned service centers
open and an increase in franchise royalties. The increase in the number of
service centers open was primarily due to the agreement with Sears and partially
due to acquisitions.
46
<PAGE> 51
In March 1995, Jiffy Lube and Sears agreed to open fast lube units in Sears
Auto Centers over the next three years. Under the agreement, Jiffy Lube
remodels, equips and operates service areas within Sears Auto Centers, while
Sears continues to use the remaining bays for its operations. Jiffy Lube had 165
fast lube units open at Sears Auto Centers at the end of 1997, of which 133 were
company owned.
During the year ended December 31, 1997, Jiffy Lube acquired 35 centers
along with related real estate in exchange for cash of $17.8 million and
liabilities and debt assumed of $2.5 million. Also, during the year ended
December 31, 1997, 24 centers were sold for $3.1 million in cash and $0.4
million in forgiveness of debt. Also during 1997, six company-owned service
centers were exchanged for six franchisee-operated stores.
During the year ended December 31, 1996, Jiffy Lube acquired 16 centers and
real estate in exchange for $4.7 million in cash and $2.8 million in liabilities
and debt assumed. Also during the year ended December 31, 1996, 36 centers were
sold for $4.4 million in cash and $0.6 million in forgiveness of debt.
During the year ended December 31, 1995, Jiffy Lube acquired 52 service
centers and real estate in exchange for $35.3 million in cash and $1.3 million
of liabilities and debt assumed and four service centers with a net book value
of $0.4 million. Also during the year ended December 31, 1995, 19 service
centers were sold for $2.6 million in cash and $0.3 million in forgiveness of
debt.
The fast lube operations segment recorded operating income of $2.1 million
during 1997, compared to operating income of $8.2 million in 1996 and an
operating loss of $5.2 million in 1995. Operating results include overhead
charges of $22.4 million in 1997 compared to $13.1 million in 1996 and $14.9
million in 1995. See "-- Overhead Charges" and Note 3 of Notes to Combined
Financial Statements for more detail relating to overhead charges. Excluding
overhead charges, operating income increased $3.1 million for 1997 compared to
1996. The increase in operating income was due primarily to higher company
service center sales, lower operating expenses resulting from fewer new service
center openings and increased royalty income. New service center openings
generally incur higher initial expenses to operate and also require more
advertising than the acquisition of existing stores or the opening of stores in
Sears centers.
The operating loss reported in 1995 included a nonrecurring charge of $6.0
million associated with a settlement of certain franchisee litigation. Excluding
this nonrecurring charge and overhead charges, operating income increased $5.7
million in 1996 compared to 1995. The increase in income from 1995 to 1996 was
primarily due to lower selling, general and administrative expenses in 1996. The
lower expenses in 1996 were partially offset by higher start-up expenses
associated with the large number of new centers added in 1996.
OVERHEAD CHARGES
Pennzoil and its wholly owned subsidiary, Richland, provide administrative
services to Pennzoil Products Group. Pennzoil Products Group is charged by
Pennzoil for all direct costs associated with its operations, and certain
administrative costs not directly charged to Pennzoil Products Group are
allocated through a monthly charge from Richland. The services provided by
Richland and Pennzoil include accounting, finance/treasury, environmental safety
and health, human resources, information technology, legal, corporate secretary,
corporate communications, executive and general, and government relations. Based
upon a formula that takes into account business segment assets, sales and
employees, approximately 65% of indirect charges incurred by Pennzoil on behalf
of its business segments has historically been charged to Pennzoil Products
Group. These charges, referred to as overhead charges, totaled $22.5 million and
$18.8 million for the six months ended June 30, 1998 and 1997, respectively.
Overhead charges were down in the first six months of 1997 due to higher income
reported by Pennzoil's captive insurance subsidiary. These charges totaled $56.0
million, $32.9 million and $37.3 million for the years ended December 31, 1997,
1996 and 1995, respectively. Approximately 60% of the corporate overhead charges
to the Pennzoil Products Group are allocated to the motor oil and refined
products segment with approximately 40% being allocated to the fast lube
operations segment. The increase in overhead charges in 1997 was primarily due
to expenses incurred by Pennzoil related to an unsolicited offer by Union
Pacific Resources Group Inc. to acquire all outstanding shares of Pennzoil
common stock. Pennzoil Products Group's share of these expenses were
approximately $22.0 million. See Note 1 of Notes to Combined Financial
Statements. After the Spin-off and Merger, Richland will continue to provide
certain services to Pennzoil-Quaker State Company for a period of up to one
year. See "Relationship
47
<PAGE> 52
Between Pennzoil-Quaker State Company and Pennzoil After the Merger -- Other
Agreements -- Transition Services Agreement."
INTEREST CHARGES, NET
Interest charges, net, for Pennzoil Products Group increased $7.1 million
for the six months ended June 30, 1998 compared to the same period in 1997. The
increase was primarily due to a decrease in interest capitalized as a result of
the completion of the Shreveport manufacturing facility upgrade in April 1997.
Interest charges, net, increased $6.7 million in 1997 compared to 1996 due
to higher affiliated borrowings by the fast lube operations segment and lower
capitalized interest. Interest charges, net, decreased $5.7 million in 1996
compared to 1995 primarily due to higher capitalized interest related to the
Shreveport manufacturing facility upgrade.
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31
----------------- ---------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest expense..................... $ 6,202 $ 6,290 $12,847 $12,208 $13,243
Affiliated interest charges.......... 28,210 27,638 56,374 52,966 50,618
Less: Interest capitalized........... 255 6,824 7,441 10,103 3,045
------- ------- ------- ------- -------
$34,157 $27,104 $61,780 $55,071 $60,816
======= ======= ======= ======= =======
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW. Pennzoil Products Group had cash and cash equivalents of $8.2
million, $9.1 million and $15.8 million at June 30, 1998 and December 31, 1997
and 1996, respectively. Cash flow generated from operating activities before
changes in operating assets and liabilities was $74.5 million for the six months
ended June 30, 1998, compared to $56.1 million for the same period in 1997. Cash
flow generated from operating activities before changes in operating assets and
liabilities was $149.6 million, $86.3 million and $38.1 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
The increase in cash flow from operations before changes in operating
assets and liabilities for the year ended December 31, 1997 compared to the same
period in 1996 was primarily due to cash distributions from Excel Paralubes, an
insurance reimbursement and higher operating income. The increase in cash flow
from operations before changes in operating assets and liabilities for the year
ended December 31, 1996 compared to the same period in 1995 was primarily due to
higher operating income. Reference is made to the Combined Financial Statements
of Pennzoil Products Group and the notes thereto for further information.
CAPITAL EXPENDITURES. Capital expenditures for the Pennzoil Products Group
were $147.8 million in 1997, $251.2 million in 1996 and $175.7 million in 1995.
Capital expenditures in 1997, 1996 and 1995 included $42.0 million, $147.3
million and $52.3 million, respectively, for the upgrade of Pennzoil Products
Group's Shreveport manufacturing facility. Also included in 1996 and 1995
capital expenditures was $8.6 million and $19.2 million, respectively, in
expenditures for facilities at the Rouseville manufacturing facility to enable
production of additional waxes in connection with the Bareco joint venture. The
1998 capital budget for Pennzoil Products Group is estimated to be approximately
$94.2 million which includes $33.6 million for approximately 20 additional
company-owned service centers and the refurbishing of approximately 166 existing
company-owned service centers. Pennzoil Products Group believes that its cash
flow from operations, supplemented as required by additional borrowings,
provides it with sufficient resources to finance operations and planned capital
needs.
ACCOUNTS RECEIVABLE. Current receivables include trade accounts and notes
receivable and are net of allowances for doubtful accounts of $8.4 million, $7.7
million and $7.4 million at June 30, 1998 and December 31, 1997 and 1996,
respectively. Long-term receivables consist of notes receivable and are net of
allowances for doubtful accounts of $0.9 million at June 30, 1998 and December
31, 1997 and 1996.
48
<PAGE> 53
At June 30, 1998 and December 31, 1997 and 1996, current receivables
included notes receivable of $7.4 million, $12.4 million and $11.9 million,
respectively. Other assets included long-term notes receivable of $35.0 million,
$41.4 million and $39.3 million at June 30, 1998 and December 31, 1997 and 1996,
respectively. The long-term receivables are loans that are made to customers to
enhance their operations. Each loan requires a promissory note between the
customer and Pennzoil Products Group, and most require payment of principal and
interest. Similar to other incentive programs, sales agreements normally
accompany the loans.
In September 1996, Pennzoil Receivables Company, a wholly owned special
purpose subsidiary of Pennzoil, entered into a one-year receivables sales
facility, which provided for the ongoing sales of up to $135.0 million of
accounts receivable of certain Pennzoil subsidiaries. In September 1997, the
facility was amended to extend the expiration date of the facility to September
1998. Pennzoil Products Group net accounts receivable sold to Pennzoil
Receivables Company totaled $117.7 million, $103.3 million and $111.2 million as
of June 30, 1998 and December 31, 1997 and 1996, respectively. Pennzoil
Receivables Company will be transferred to Pennzoil Products Group in connection
with the Merger. Receivables relating to Pennzoil will be transferred to
Pennzoil in connection with the Merger.
WORKING CAPITAL AND LIQUIDITY. At June 30, 1998, Pennzoil Products Group
had a working capital deficit of $282.6 million, which included affiliated
payables of $299.5 million, and $240.5 million of notes payable to Pennzoil.
Excluding these affiliated accounts, Pennzoil Products Group had positive
working capital of $257.4 million at June 30, 1998. At December 31, 1997,
Pennzoil Products Group had a working capital deficit of $332.0 million, which
included affiliated payables of $314.4 million, and $230.0 million of notes
payable to Pennzoil. Excluding these affiliated accounts, Pennzoil Products
Group had positive working capital of $212.4 million at December 31, 1997.
Current liabilities at December 31, 1996 and 1995 included affiliated payables
of $174.6 million and $216.8 million of notes payable to Pennzoil and affiliated
payables of $141.3 million and $197.0 million of notes payable to Pennzoil,
respectively. Excluding these affiliated accounts, Pennzoil Products Group had
positive working capital of $190.6 million and $208.2 million at December 31,
1996 and 1995, respectively. Affiliated accounts have not been settled on a
regular basis.
In April 1998, PPC and Pennzoil entered into the Distribution Agreement to
complete the separation of Pennzoil Products Group from Pennzoil. The
Distribution Agreement provides that prior to the date of the Spin-off, Pennzoil
Products Group will enter into third-party financing arrangements. Pennzoil will
not have any liability or obligation with respect to such financing
arrangements. Immediately prior to the date of the Spin-off, Pennzoil Products
Group will repay certain intercompany indebtedness including affiliated payables
and notes payable to Pennzoil. The amount of the repayment will be the lesser of
(i) the amount of intercompany indebtedness and (ii) the total of $500 million
plus outstanding cash of Pennzoil Products Group, less existing third-party debt
and capital lease obligations of Pennzoil Products Group. Pennzoil Products
Group expects the repayment amount to be approximately $390 million. Any
intercompany indebtedness that exceeds the payment amount described above will
be treated as a capital contribution from Pennzoil to Pennzoil Products Group.
CREDIT FACILITIES. Pennzoil Products Group has revolving credit agreements
with Pennzoil that provide for borrowings of up to $590 million through December
31, 1998 and $340 million through December 31, 2004. Amounts borrowed under the
credit agreements bear interest at variable and fixed rates. At December 31,
1997 and 1996, there were $230.0 million and $216.8 million, respectively,
outstanding classified as current liabilities -- payables to affiliate; and
$336.2 million and $335.7 million, respectively, outstanding classified as
long-term debt -- affiliated. The average interest rates applicable to amounts
outstanding under these credit agreements during 1997 and 1996 were 9.8% and
9.9%, respectively. In December 1997, Pennzoil made a capital contribution of
$30.0 million to Pennzoil Products Group. This amount was reclassified from
amounts outstanding under the revolver to shareholders' equity. Interest
associated with the affiliated debt was $56.4 million, $53.0 million and $50.6
million for the years ended December 31, 1997, 1996 and 1995, respectively.
On the basis of financing proposals already received, Pennzoil Products
Group believes it will be able to enter into third-party financing arrangements
that will provide it sufficient funding to settle obligations with Pennzoil and
provide sufficient funding for future periods. Prior to the Spin-off, PPC will
arrange a credit
49
<PAGE> 54
facility of approximately $1 billion that will be used to repay existing
intercompany indebtedness of Pennzoil Products Group to Pennzoil (approximately
$386 million), repay indebtedness under the existing revolving credit facility
of Quaker State (approximately $382 million), fund certain Merger-related
expenses (approximately $73 million) and fund future working capital
requirements.
Pennzoil Products Group has a long-term credit facility with a Canadian
bank that provides for borrowings of up to C$27 million through October 25,
1999. This long-term credit facility will continue to be effective upon the
Merger. Outstanding borrowings under the credit facility totaled US$12.2 million
and US$13.9 million at December 31, 1997 and 1996, respectively. The average
interest rates applicable to amounts outstanding under the credit facility were
3.4% and 3.2% during 1997 and 1996, respectively.
ENVIRONMENTAL. Pennzoil Products Group is subject to certain laws and
regulations relating to environmental remediation activities associated with
past operations, such as the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act and
similar state statutes. In response to liabilities associated with these
activities, accruals have been established when reasonable estimates are
possible. Such accruals primarily include estimated costs associated with
remediation. Pennzoil Products Group has not used discounting in determining its
accrued liabilities for environmental remediation, and no claims for possible
recovery from third-party insurers or other parties related to environmental
costs have been recognized in Pennzoil Products Group's combined financial
statements. Pennzoil Products Group adjusts the accruals when new remediation
responsibilities are discovered and probable costs become estimable, or when
current remediation estimates must be adjusted to reflect new information.
Certain of Pennzoil Products Group's subsidiaries are involved in matters
in which it has been alleged that such subsidiaries are potentially responsible
parties ("PRPs") under CERCLA or similar state legislation with respect to
various waste disposal areas owned or operated by third parties. In addition,
certain of Pennzoil Products Group's subsidiaries are involved in other
environmental remediation activities, including the removal, inspection and
replacement, as necessary, of underground storage tanks. As of December 31, 1997
and 1996, Pennzoil Products Group's combined balance sheet included accrued
liabilities for environmental remediation of $11.6 million and $16.2 million,
respectively. Of these reserves, $2.4 million and $2.1 million are reflected on
the combined balance sheet as current liabilities as of December 31, 1997 and
1996, respectively, and $9.2 million and $14.1 million are reflected as other
liabilities as of December 31, 1997 and 1996, respectively. Pennzoil Products
Group does not currently believe there is a reasonable possibility of incurring
additional material costs in excess of the current accruals recognized for such
environmental remediation activities. With respect to the sites in which
Pennzoil Products Group subsidiaries are PRPs, Pennzoil Products Group's
conclusion is based in large part on (i) the availability of defenses to
liability, including the availability of the "petroleum exclusion" under CERCLA
and similar state laws, and/or (ii) Pennzoil Products Group's current belief
that its share of wastes at a particular site is or will be viewed by the
Environmental Protection Agency or other PRPs as being de minimis. As a result,
Pennzoil Products Group's monetary exposure is not expected to be material
beyond the amounts reserved.
YEAR 2000 ISSUES
Pennzoil Products Group is conducting a review of its key computer systems
and has identified a number of systems that are affected by the year 2000 issue.
The company is undertaking or has completed conversion of these non-compliant
financial, operating, human resources, and payroll systems to the compliant SAP
software system. In addition, Pennzoil Products Group is currently upgrading
electronic commerce systems to compliant versions. Conversion of operating and
financial software, as well as desktop hardware and software used in
international locations for Pennzoil Products Group, to compliant versions began
in the second quarter of 1998, with completion expected in the second quarter of
1999. Upgrades and standardization to network, infrastructure, desktop and
communications systems to make these assets compliant are in progress. This
effort is scheduled for completion in the first quarter of 1999, following the
release of compliant updates from the vendors. The only system replacements that
have been accelerated to remedy non-compliance are the Pennzoil Products Group
voicemail systems and the international desktop hardware, software, financial
and operational systems. No major information technology ("IT") projects have
been deferred due to year 2000
50
<PAGE> 55
matters. Contingency planning will be started for the IT systems in the first
quarter of 1999, and will include backup, standby and storage service solutions
to reduce the impact of critical service providers.
Pennzoil Products Group is conducting a comprehensive inventory and
assessment of systems and devices with embedded chips in the manufacturing and
non-manufacturing environments. The manufacturing environment, which consists of
refining, blending, storing and transporting petrochemicals, has the greatest
inherent risk, since embedded chip systems control and monitor these processes.
At this time, two Pennzoil Products Group manufacturing facilities have
non-compliant control systems. These deficiencies will be addressed upon the
release of a compliant version of the software from the vendor, which is
expected in August 1998. These systems will first undergo a pilot test at a
Pennzoil Products Group research facility, followed by a full system test at the
manufacturing facilities during a scheduled plant shutdown. If for any reason
these systems are still found to be non-compliant, additional plant or
operations shutdowns could be necessary to conduct further remediation and
testing. In addition, all currently compliant control systems that have
potential for environmental, safety or business interruption impact will be
tested during scheduled maintenance. In order to prevent safety and
environmental problems due to non-compliant embedded-chip systems, operation of
these systems would be reduced or discontinued. Contingency planning is also
underway to provide alternatives in the event these systems are partially or
completely inoperable. If these steps are not completed successfully in a timely
manner, Pennzoil Products Group operations and financial performance could be
adversely affected through disruptions in operations. Costs associated with such
disruptions currently cannot be estimated.
Pennzoil Products Group is contacting key suppliers, banks, customers and
other unaffiliated companies that have business relationships with Pennzoil
Products Group to assess their year 2000 compliance programs. Pennzoil Products
Group could be adversely affected by the failure of these unaffiliated companies
to adequately address the year 2000 issue. This assessment includes activities
such as face-to-face meetings, reviews of year 2000 readiness and cooperative
testing. Contingency planning will be included in this assessment to identify
arrangements to mitigate the impact of disruptions from outside sources. In
addition, Pennzoil Products Group has implemented internal procedures to respond
cooperatively to inquiries from regulatory agencies and other businesses about
its year 2000 programs.
As with most companies, Pennzoil Products Group anticipates more issues
arising from international business partners, especially in the banking,
utility, shipping and governmental segments. Pennzoil Products Group is
currently reviewing all banking relationships in international locations. In
addition, Pennzoil Products Group is actively involved in a joint industry
effort through the American Petroleum Institute to collectively address the
readiness of their common business partners such as utilities and governmental
agencies, and to share approaches to solving the specific problems of each
international location.
Both incremental historical and estimated future costs related to the year
2000 issue are not expected to be material to the financial results of Pennzoil
Products Group for several reasons. Most of the remediation is being
accomplished with upgrades to existing software that is under maintenance
contracts. Independent quality assurance services and tools are to be used to
assure the reliability of the assessment and costs. These services are to be
supplemented with Pennzoil Products Group resources.
51
<PAGE> 56
PENNZOIL-QUAKER STATE COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
have been prepared to reflect the Merger. These pro forma financial statements
are based on the historical financial statements of Pennzoil Products Group and
Quaker State included or incorporated by reference in this Proxy Statement/
Prospectus and the estimates and assumptions set forth below and in the notes to
the unaudited pro forma condensed combined financial statements.
The Merger will be accounted for using the purchase method of accounting,
with Pennzoil Products Group treated as the acquiror. As a result, the assets
and liabilities of Pennzoil Products Group will be recorded at historical
amounts, without restatement to fair values. The assets and liabilities of
Quaker State will be recorded at fair values at the date of the Merger with the
excess of the purchase price over the sum of such fair values recorded as
goodwill. The purchase price is based upon the market capitalization of Quaker
State, using an average trading price of Quaker State Capital Stock for a
reasonable period of time immediately before and after the Merger was announced,
plus certain Merger-related costs. Such purchase price is estimated to be $792
million, which was calculated using a $19.79 per share valuation for Quaker
State Capital Stock. The calculated purchase price is for accounting purposes
only and is not indicative of the price at which shares of Quaker State Capital
Stock will trade immediately before the consummation of the Merger or the value
of shares of Pennzoil-Quaker State Company Common Stock to be received by
stockholders of Quaker State in connection with the Merger.
The unaudited pro forma condensed combined balance sheet has been prepared
as if the Merger occurred on June 30, 1998. The unaudited pro forma condensed
combined statements of income have been prepared as if the Merger occurred as of
January 1, 1997.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The unaudited pro forma condensed combined financial statements
presented herein are not necessarily indicative of the results that would have
actually occurred if the Merger had been consummated as of June 30, 1998 or
January 1, 1997, or of results that may be attained in the future. The unaudited
pro forma condensed combined financial statements should be read in conjunction
with the historical financial statements and notes thereto included elsewhere in
this Proxy Statement/Prospectus or incorporated by reference herein.
The unaudited pro forma condensed combined financial statements do not
reflect adjustments for any estimated general and administrative expense
savings, operational efficiencies and one-time costs included in
"Pennzoil-Quaker State Company Supplemental Financial Data."
52
<PAGE> 57
PENNZOIL-QUAKER STATE COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1998
(EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
PENNZOIL PENNZOIL-
PRODUCTS QUAKER PRO FORMA QUAKER STATE
GROUP STATE ADJUSTMENTS COMPANY
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............. $ 8,162 $ 13,505 $ -- $ 21,667
Accounts receivable................... 156,433 216,068 -- 372,501
Inventories........................... 193,705 91,117 -- 284,822
Other current assets.................. 49,939 20,283 -- 70,222
---------- ---------- --------- ----------
TOTAL CURRENT ASSETS.................... 408,239 340,973 -- 749,212
---------- ---------- --------- ----------
NET PROPERTY, PLANT AND EQUIPMENT....... 781,306 251,820 -- 1,033,126
GOODWILL, BRANDS AND OTHER ASSETS....... 364,199 602,702 398,146(a)
62,500(b) 1,427,547
---------- ---------- --------- ----------
TOTAL ASSETS.................. $1,553,744 $1,195,495 $ 460,646 $3,209,885
========== ========== ========= ==========
CURRENT LIABILITIES
Current maturities of long-term
debt............................... $ 219 $ 5,157 $ -- $ 5,376
Accounts payable...................... 102,579 71,280 8,000(a) 181,859
Payable to affiliate.................. 539,929 -- (479,929)(c) 60,000
Other current liabilities............. 48,069 109,608 (14,900)(b) 142,777
---------- ---------- --------- ----------
TOTAL CURRENT LIABILITIES..... 690,796 186,045 (486,829) 390,012
---------- ---------- --------- ----------
Long-term debt, less current
maturities......................... 45,510 487,948 392,014(d)
73,400(b) 998,872
Long-term debt affiliated............. 328,992 -- (328,992)(d) --
Capital lease obligations............. 67,022 19,604 -- 86,626
Other liabilities..................... 136,688 171,078 4,000(b) 311,766
---------- ---------- --------- ----------
TOTAL LIABILITIES............. 1,269,008 864,675 (346,407) 1,787,276
---------- ---------- --------- ----------
SHAREHOLDERS' EQUITY.................... 284,736 330,820 807,053(e) 1,422,609
---------- ---------- --------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........ $1,553,744 $1,195,495 $ 460,646 $3,209,885
========== ========== ========= ==========
</TABLE>
See Notes to Pennzoil-Quaker State Company Unaudited Pro Forma
Condensed Combined Financial Statements.
53
<PAGE> 58
PENNZOIL-QUAKER STATE COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PENNZOIL PENNZOIL-
PRODUCTS QUAKER PRO FORMA QUAKER STATE
GROUP STATE ADJUSTMENTS COMPANY
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Net sales.................................. $ 912,199 $ 611,408 -- $1,523,607
Other income, net.......................... 30,212 2,580 -- 32,792
---------- ---------- --------- ----------
Total.............................. 942,411 613,988 -- 1,556,399
COSTS AND EXPENSES
Cost of sales.............................. 584,248 368,496 -- 952,744
Purchases from affiliate................... 104,325 -- -- 104,325
Selling, general and administrative........ 163,447 180,331 -- 343,778
Depreciation and amortization.............. 36,676 22,780 5,758(f) 65,214
Restructuring, systems integration and
other special charges................... -- 21,674 (8,794)(l) 12,880
Taxes, other than income................... 6,083 -- -- 6,083
Affiliated interest charges................ 28,210 -- (28,210)(g) --
Interest charges, net...................... 5,947 14,514 15,123(h) 35,584
---------- ---------- --------- ----------
Total.............................. 928,936 607,795 (16,123) 1,520,608
---------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAX................................. 13,475 6,193 16,123 35,791
Income tax provision......................... 6,829 2,800 8,314(i) 17,943
---------- ---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS............ $ 6,646 $ 3,393 $ 7,809 $ 17,848
========== ========== ========= ==========
Basic earnings per share..................... $ 0.09 $ 0.23(j)
========== ==========
Diluted earnings per share................... $ 0.09 $ 0.23(k)
========== ==========
Basic -- Average shares outstanding.......... 36,361 77,473(j)
========== ==========
Diluted -- Average shares outstanding........ 36,907 78,655(k)
========== ==========
</TABLE>
See Notes to Pennzoil-Quaker State Company Unaudited Pro Forma
Condensed Combined Financial Statements.
54
<PAGE> 59
PENNZOIL-QUAKER STATE COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
(EXPRESSED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PENNZOIL PENNZOIL-
PRODUCTS QUAKER PRO FORMA QUAKER STATE
GROUP STATE ADJUSTMENTS COMPANY
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Net sales................................ $1,982,148 $1,193,971 $ -- $3,176,119
Other income, net........................ 31,012 9,889(1) -- 40,901
---------- ---------- -------- ----------
Total............................ 2,013,160 1,203,860 -- 3,217,020
COSTS AND EXPENSES
Cost of sales............................ 1,182,742 761,317 -- 1,944,059
Purchases from affiliate................. 336,413 -- -- 336,413
Selling, general and administrative...... 350,123 337,342 -- 687,465
Depreciation and amortization............ 64,490 41,266 11,516(f) 117,272
Restructuring, systems integration and
other special charges................. -- 48,411 -- 48,411
Taxes, other than income................. 11,956 -- -- 11,956
Affiliated interest charges.............. 56,374 -- (56,374)(g) --
Interest charges, net.................... 5,406 26,913 24,752(h) 57,071
---------- ---------- -------- ----------
Total............................ 2,007,504 1,215,249 (20,106) 3,202,647
---------- ---------- -------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX........................ 5,656 (11,389) 20,106 14,373
Income tax provision (benefit)............. 6,245 (4,000) 12,016(i) 14,261
---------- ---------- -------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS... $ (589) $ (7,389) $ 8,090 $ 112
========== ========== ======== ==========
Basic earnings per share................... $ (0.21) $ --(j)
========== ==========
Diluted earnings per share................. $ (0.21) $ --(k)
========== ==========
Basic -- Average shares outstanding........ 35,213 76,008(j)
========== ==========
Diluted -- Average shares outstanding...... 35,213 76,882(k)
========== ==========
</TABLE>
- ---------------
(1) Includes a gain of $3.5 million on the sale of joint venture interests.
See Notes to Pennzoil-Quaker State Company Unaudited Pro Forma
Condensed Combined Financial Statements.
55
<PAGE> 60
NOTES TO PENNZOIL-QUAKER STATE COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(a) Goodwill -- The Merger will be accounted for under the purchase method
of accounting, with Pennzoil Products Group treated as the acquiror. Pro forma
goodwill of $460.6 million has been allocated to reflect 100% of the excess of
the purchase price over the estimated fair value of Quaker State's assets and
liabilities. Such goodwill was determined assuming a purchase price of $792
million, which was based upon the market capitalization of Quaker State, using
an average trading price of Quaker State Capital Stock for a reasonable period
of time immediately before and after the Merger was announced, plus estimated
transaction costs. The calculated purchase price is for accounting purposes only
and is not indicative of the price at which shares of Quaker State Capital Stock
will trade immediately before the consummation of the Merger or the value of
shares of Pennzoil-Quaker State Company Common Stock to be received by
stockholders of Quaker State in connection with the Merger. Transaction costs
include capitalized costs of $8.0 million (pretax) to be incurred by Pennzoil
Products Group and $62.5 million in after-tax expenses ($77.4 million pretax) to
be incurred and recorded by Quaker State. As of June 30, 1998, Quaker State had
incurred $2.6 million in after-tax merger expenses ($4.3 million pretax).
The Company is in the process of estimating the allocation of purchase cost
to individual assets and liabilities of Quaker State; however, it does not
anticipate making significant adjustments to the book values of such assets and
liabilities. The recording of goodwill and the associated amortization period of
40 years are supported by longstanding brand-name recognition, trademarks, trade
names and other intangible assets.
(b) Merger costs -- Represents estimated expenses of $77.4 million to be
incurred by Quaker State related to the Merger. The expenses include the buyout
of outstanding stock options, payouts under long-term incentive plans, payouts
for change of control provisions, investment banker fees and other
Merger-related costs. The after-tax adjustment to goodwill related to these
expenses is $62.5 million.
(c) Accounts payable affiliated -- Represents the elimination of affiliated
payable balances. See note (d).
(d) Long-term debt (affiliated and third party) -- Represents the
settlement of certain intercompany indebtedness with Pennzoil and the transfer
of industrial revenue bonds totaling $5.7 million from Pennzoil to Pennzoil
Products Group immediately prior to the Spin-off. The maximum settlement payment
equals the sum of $500 million plus the outstanding cash and cash equivalents of
Pennzoil Products Group, less existing third-party debt and capital lease
obligations of Pennzoil Products Group. The maximum payment is assumed for all
periods presented. The difference between the amount originally owed to Pennzoil
for debt and affiliated payables balances (excluding payables in the aggregate
amount of not greater than $60 million owed by Pennzoil Products Group to
Pennzoil or any Pennzoil subsidiary in respect of crude oil) and the final cash
settlement is treated as a capital contribution from Pennzoil. The following
table provides certain information relating to total pro forma debt of
Pennzoil-Quaker State Company. Amounts are estimates and are subject to change.
<TABLE>
<CAPTION>
JUNE 30, 1998
PRO FORMA DEBT
------------------------
(EXPRESSED IN THOUSANDS)
<S> <C>
New borrowing by Pennzoil-Quaker State Company to repay debt
to Pennzoil(1)............................................ $ 386,349
Industrial revenue bonds transferred from Pennzoil.......... 5,665
----------
Total related to Pennzoil......................... 392,014
New borrowing to repay Quaker State debt subsequent to
Merger(1)................................................. 382,100
New borrowing to pay Quaker State expenses upon Merger(1)... 73,400
Previously existing long-term debt of Pennzoil Products
Group excluding current maturities........................ 45,510
Previously existing Quaker State debt excluding current
maturities, less amount repaid with new borrowings........ 105,848
----------
Total............................................. 998,872
Current maturities of long-term debt........................ 5,376
----------
Total long-term debt including current
maturities...................................... $1,004,248
==========
</TABLE>
- ---------------
(1) New debt to be borrowed using the new credit facility initially.
56
<PAGE> 61
Pennzoil-Quaker State Company believes that operating cash flows will be
sufficient to fund 1999 capital expenditures and dividends, and Pennzoil-Quaker
State Company is arranging sufficient sources of funds to satisfy, if necessary,
one-time payments for Merger expenditures and other working capital
requirements. See "New Credit Arrangements."
(e) Shareholders' equity -- A reconciliation of the pro forma adjustment to
shareholders' equity is as follows:
<TABLE>
<CAPTION>
PRO FORMA AS OF
JUNE 30, 1998
------------------------
(EXPRESSED IN THOUSANDS)
<S> <C>
Capital contribution from Pennzoil:
Settlement of payable to affiliate........................ $ 479,929
Settlement of long-term debt affiliated................... 328,992
Less: Payment to be received from Pennzoil Products
Group.................................................. (392,014)
---------
Total contribution................................ 416,907
Excess purchase price over the book value of Quaker State
net assets................................................ 390,146
---------
Total pro forma adjustment to shareholders' equity.......... $ 807,053
=========
</TABLE>
(f) Depreciation and amortization -- Represents the amortization of
goodwill resulting from the acquisition of Quaker State over a 40-year estimated
useful life. See note (a).
(g) Affiliated interest expense -- Represents elimination of interest
associated with affiliated debt. See note (d).
(h) Interest charges, net -- Represents interest on debt incurred by
Pennzoil-Quaker State Company to repay debt owed to Pennzoil and to pay certain
transaction costs and interest on industrial revenue bonds transferred from
Pennzoil at an assumed rate of 6.25%. See note (d).
(i) Income taxes -- Represents the incremental provision for federal and
state income taxes related to pro forma adjustments. The amortization of
goodwill related to the acquisition of Quaker State is assumed to be
nondeductible for tax purposes resulting in an effective tax rate of 52% and 60%
for the six months ended June 30, 1998 and the year ended December 31, 1997,
respectively. The provision for net taxable adjustments, excluding the
amortization of goodwill, was computed using a 38% tax rate.
(j) Basic earnings per share -- The weighted average shares of
Pennzoil-Quaker State Company common stock outstanding as of June 30, 1998 are
used to compute basic earnings per share. The pro forma condensed combined
income statements assume one share of Pennzoil-Quaker State stock is issued for
every share of Pennzoil stock outstanding and .8204 of a share of
Pennzoil-Quaker State common stock are issued for each share of Quaker State
Capital Stock outstanding as of the beginning of the period presented.
(k) Diluted earnings per share -- The weighted average shares calculation
of Pennzoil-Quaker State Company Common Stock outstanding (see note (j))
includes the effect of options to purchase shares of Pennzoil-Quaker State
Company Common Stock whose exercise prices were less than the average market
price of the underlying shares. Options to purchase one share of Quaker State
Capital Stock would be converted into an option to purchase .8204 shares of
Pennzoil-Quaker State Company Common Stock. In connection with the Spin-off,
holders of options to purchase shares of Pennzoil common stock are assumed to
receive an option to purchase the same number of shares of Pennzoil-Quaker State
Company Common Stock. For pro forma calculation purposes, those options are
assumed to be exercised at the beginning of the period presented. The number of
shares of Pennzoil-Quaker State Company Common Stock outstanding after the
Merger will change to the extent that Quaker State options and Pennzoil options
are exercised prior to the Merger.
(1) Restructuring, systems integration and other special
charges -- Represents costs incurred by Quaker State directly attributable to
the transaction. These costs include $4.3 million for transaction costs incurred
(see Note b) and $4.5 million for other costs primarily related to employee
retention programs.
57
<PAGE> 62
PENNZOIL-QUAKER STATE COMPANY
SUPPLEMENTAL FINANCIAL DATA
The Pennzoil-Quaker State Company Unaudited Pro Forma Condensed Combined
Financial Statements included elsewhere herein give effect to certain pro forma
adjustments to historical amounts as described in the notes thereto. In
evaluating the notes, the additional supplemental financial data summarized
below should be considered.
The supplemental financial data include the unaudited historical combined
statement of income of Pennzoil Products Group and the unaudited historical
consolidated statement of income of Quaker State for the twelve month period
ended June 30, 1998, adjusted for general and administrative expense savings and
operational efficiencies that may be realized on an annualized basis as a result
of the Merger. Although the table below sets forth combined recent earnings for
the two companies plus expected expense savings and efficiencies, the savings
and efficiencies are expected to require at least two years to achieve.
Additionally, in order to set forth the impact of the expense savings and
efficiencies alone, the table below omits significant one-time costs and
expenses that will be incurred in order to realize these benefits. See
"Disclosure Regarding Forward-Looking Statements" and "Risk Factors -- Potential
Difficulties in Combining the Operations of the Companies."
The table below sets forth (1) a base case calculated on a pro forma basis
(using a methodology consistent with the Pennzoil-Quaker State Company Unaudited
Pro Forma Condensed Combined Financial Statements that does not include
adjustments for expense savings and efficiencies), (2) a case that assumes $90
million in annual expense savings and efficiencies over the base case and (3) a
case that assumes $125 million in annual expense savings and efficiencies over
the base case.
<TABLE>
<CAPTION>
DATA FOR THE TWELVE MONTHS ENDED
JUNE 30, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------------------
ASSUMING NO EXPENSE ASSUMING $90 MILLION OF ASSUMING $125 MILLION OF
SAVINGS AND EXPENSE SAVINGS AND EXPENSE SAVINGS AND
EFFICIENCIES EFFICIENCIES EFFICIENCIES
------------------- ------------------------ ------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues........................ $3,127.1 $3,127.1 $3,127.1
Operating income................ 80.6 170.6(1) 205.6(1)
Net income...................... (0.7) 55.1 76.8
Basic earnings per share(2)..... (0.01) 0.71 0.99
Diluted earnings per share(3)... (0.01) 0.70 0.98
OTHER DATA:
Earnings before interest and
income taxes.................. 80.6 170.6 205.6
Depreciation and amortization... 126.8 126.8 126.8
-------- -------- --------
EBITDA(4)....................... $ 207.4 $ 297.4 $ 332.4
</TABLE>
- ---------------
(1) Represents historical results adjusted for general and administrative
expense savings and operational efficiencies that may be realized as a
result of the Merger. These savings and efficiencies are expected to require
at least two years to achieve. Full general and administrative expense and
operational efficiency savings are assumed for the entire year. Potential
one-time costs and expenses of approximately $110 million associated with
the initial implementation of savings and efficiency initiatives have been
excluded.
(2) See note (j) of the Notes to Pennzoil-Quaker State Company Unaudited Pro
Forma Condensed Combined Financial Statements.
(3) See note (k) of the Notes to Pennzoil-Quaker State Company Unaudited Pro
Forma Condensed Combined Financial Statements.
(4) EBITDA is defined as income before interest and taxes plus depreciation and
amortization. The computation of EBITDA as presented may not be comparable
to computations presented by other companies. This information does not
represent and should not be considered as an alternative to net income, any
other measure of performance as determined by generally accepted accounting
principles or an indicator of operating performance.
58
<PAGE> 63
The adjustments to the unaudited historical combined statements of income
of Pennzoil Products Group and Quaker State for the twelve months ended June 30,
1998 give effect to approximately $90 million to $125 million of annual expense
savings and efficiencies that may be realized as a result of combining the
operations of Pennzoil Products Group with those of Quaker State, as follows:
General and Administrative Expense Savings. Management of Pennzoil Products
Group expects to eliminate approximately $25 million to $34 million in general
and administrative expenses following the Merger. These savings are expected to
be realized through the consolidation of various support functions, including
but not limited to accounting, finance/treasury, environmental safety and
health, human resources, information technology, legal, corporate secretary,
corporate communications, executive and general, and government relations.
Savings are expected to be realized through the elimination of duplicate
infrastructure in these areas and the associated personnel. Management expects
to realize 35% to 50% of the cost savings in the first 12 months after the
Merger and full savings by the end of the second year.
Operational Efficiencies. Management of Pennzoil Products Group expects to
realize approximately $65 million to $91 million in operational efficiencies
after the Merger. These expected efficiencies include savings from combining and
optimizing marketing, manufacturing, purchasing and research and development
operations, and from consolidating sales and distribution organizations and
facilities. Specific cost savings include reducing marketing expenses associated
with auto racing; eliminating redundant overhead costs related to marketing;
closing certain blending and packaging plants; shifting production to
underutilized facilities; improving logistics and consolidating purchasing for
manufacturing; reducing direct market sales and distribution expenses by
combining sales forces and eliminating redundant sales offices and distribution
centers; and rationalizing the national distribution network for Pennzoil-Quaker
State Company products. Management expects to realize 35% to 50% of the cost
savings in the first 12 months after the Merger and full savings by the end of
the second year.
THE SUPPLEMENTAL FINANCIAL DATA DO NOT PURPORT TO BE INDICATIVE OF THE
COMBINED FINANCIAL POSITION OR COMBINED RESULTS OF OPERATIONS OF PENNZOIL-QUAKER
STATE COMPANY THAT MIGHT HAVE OCCURRED, NOR ARE THEY INDICATIVE OF THE FUTURE
FINANCIAL POSITION OR RESULTS OF OPERATIONS OF PENNZOIL-QUAKER STATE COMPANY.
THESE SAVINGS AND SYNERGIES ARE EXPECTED TO BE REALIZED OVER TIME AS THE
CONSOLIDATION OF THE BUSINESSES OF PENNZOIL PRODUCTS GROUP AND QUAKER STATE IS
COMPLETED. BECAUSE THE MARKETS IN WHICH PENNZOIL PRODUCTS GROUP AND QUAKER STATE
OPERATE ARE HIGHLY COMPETITIVE AND BECAUSE OF THE INHERENT UNCERTAINTIES
ASSOCIATED WITH MERGING TWO LARGE COMPANIES, THERE CAN BE NO ASSURANCE THAT THE
COMBINED ENTITY WILL BE ABLE FULLY TO REALIZE THE SYNERGIES AND COST SAVINGS
CURRENTLY EXPECTED AS A RESULT OF THE MERGER OR THAT SUCH SYNERGIES AND COST
SAVINGS WILL BE REALIZED AT THE TIMES CURRENTLY ANTICIPATED. MOREOVER, THERE CAN
BE NO ASSURANCE THAT COST SAVINGS THAT ARE REALIZED WILL NOT BE OFFSET BY LOSSES
IN REVENUES OR OTHER CHARGES TO EARNINGS.
59
<PAGE> 64
THE TRANSACTION AGREEMENTS
This section describes the material provisions of the Merger Agreement and
the Distribution Agreement. This description does not purport to be complete and
is qualified in its entirety by reference to the Merger Agreement and
Distribution Agreement, copies of which are attached hereto as Annexes A and B,
respectively, and which are incorporated herein by reference. All stockholders
are urged to read the Merger Agreement and the Distribution Agreement carefully
in their entirety.
GENERAL
The Distribution Agreement sets forth the terms and conditions on which
Pennzoil will be restructured in connection with the Merger, including (1) the
separation of Pennzoil's motor oil, refined products and fast lube operations
from Pennzoil's exploration and production operations and (2) the Spin-off of
PPC. The Merger Agreement sets forth the terms and conditions on which the
Merger will be effected.
RESTRUCTURING OF PENNZOIL
Separation of Pennzoil's Motor Oil, Refined Products and Fast Lube
Operations from Pennzoil's Exploration and Production Operations. Before the
Spin-off, Pennzoil's motor oil, refined products and fast lube operations will
be separated from Pennzoil's exploration and production operations in the
following manner:
- PPC will own, either directly or through subsidiaries, all of the motor
oil, refined products and fast lube operations, including operations of
Jiffy Lube, Pennzoil Sales Corporation and Pennzoil Petroleums Ltd. PPC
will also own Pennzoil Receivables after Pennzoil Receivables resells to
Pennzoil the accounts receivable Pennzoil Receivables holds that are not
related to Pennzoil Products Group.
- Pennzoil will retain all of its exploration and production operations. In
addition, PPC has transferred to Pennzoil certain of PPC's oil and gas
assets that historically have been operated by Pennzoil. Pennzoil's
captive insurance subsidiary, Savannah, will transfer to Pennzoil certain
assets and liabilities not related to Pennzoil Products Group, and
Savannah will be transferred from Pennzoil to PPC.
- Pennzoil will transfer to PPC certain of Pennzoil's assets that
historically have been operated by PPC.
The PPC assets and the Pennzoil assets will, to the extent reasonably
practicable, be separated from each other. To the extent the separation of
assets cannot be achieved in a reasonably practicable manner, the parties will
enter into appropriate arrangements regarding the use of the shared assets. PPC
and Pennzoil will use their best efforts to amend certain contracts in order to
separate the contractual rights and duties of PPC from those of Pennzoil. If
such amendments cannot be obtained, or if an amendment would be ineffective or
would adversely affect the rights of PPC, Pennzoil and PPC will cooperate in
negotiating mutually agreeable arrangements. In each case, Quaker State will
have the right to consent to any arrangement between PPC and Pennzoil.
Intercompany Indebtedness and Other Financing Matters. PPC will repay the
intercompany indebtedness and other intercompany accounts owed by PPC to
Pennzoil, provided, however:
- intercompany indebtedness will not include certain trade payables (in the
aggregate amount of not greater than $60 million) owed by PPC to Pennzoil
in respect of crude oil; and
- intercompany indebtedness to be paid to Pennzoil by Pennzoil Products
Group will not exceed an amount equal to $500 million plus the cash or
cash equivalents of Pennzoil Products Group on hand at the date of the
Spin-off minus the sum of (i) all the outstanding indebtedness for
borrowed money, including capital leases, of PPC as of such date and (ii)
the cash paid or payable to Pennzoil Products Group as described in the
next paragraph.
Pennzoil will transfer to Pennzoil Products Group on the day of the
Spin-off an amount of cash or other readily available funds equal to 68% of the
aggregate total of the exercise prices per share of any Pennzoil
60
<PAGE> 65
stock option exercised in the period of time between April 14, 1998 (the date of
the Distribution Agreement) and the date of the Spin-off.
Pennzoil will transfer to PPC industrial revenue bonds relating to certain
of Pennzoil's refining assets that have been transferred to PPC. The aggregate
principal amount of these bonds as of June 30, 1998 totals approximately $5.7
million.
Intercompany Agreements. All contracts, agreements, licenses or other
arrangements between Pennzoil and PPC, other than the Transaction Agreements and
the Crude Oil Supply Agreement to be entered into by the parties (see
"Relationship Between Pennzoil-Quaker State Company and Pennzoil After the
Merger"), will terminate as of the close of business on the day prior to the
Spin-off.
Non-Competition by Pennzoil. Pennzoil will not engage in the automotive
aftermarket business anywhere in the world where PPC or Quaker State currently
conducts business for five years after the date of the Spin-off (subject to
certain exceptions).
Exclusive Management. Following the Spin-off, none of the officers of
Pennzoil will simultaneously hold a position as an officer of Pennzoil-Quaker
State Company.
PPC Liabilities. With certain exceptions, PPC will assume and indemnify
Pennzoil for all of the liabilities associated with Pennzoil's motor oil,
refined products and fast lube operations. In addition, PPC will assume 65% and
Pennzoil will assume 35% of any losses that may arise from certain litigation in
which both PPC and Pennzoil are named parties. PPC will also assume:
- losses arising from certain known investigations or certain litigation
relating to the business of Pennzoil;
- certain known liabilities relating to Pennzoil's benefit plans;
- up to $6 million payable by PPC and Pennzoil to any agent, broker,
investment banker or others as a result of the transactions; and
- all environmental liabilities relating to PPC's business.
Spin-off. After the separation of PPC from Pennzoil but before the Merger,
Pennzoil will distribute all outstanding shares of PPC common stock to
Pennzoil's stockholders. As a result of the Spin-off, Pennzoil and its
subsidiaries will own and operate the oil and gas exploration and production
businesses, and PPC (with its name changed to Pennzoil-Quaker State Company)
will be a separate, publicly traded company owned by Pennzoil's stockholders
that will own and operate the motor oil, refined products and franchise
businesses.
Each Pennzoil stockholder will receive one share of PPC common stock for
every share of Pennzoil common stock that he or she owns. In addition, each
Pennzoil stockholder will retain all of the shares of Pennzoil common stock that
he or she owned prior to the Spin-off.
MERGER OF PPC AND QUAKER STATE
The Merger. The Merger Agreement provides for the merger of a wholly owned
subsidiary of PPC with and into Quaker State, with Quaker State being the
surviving corporation. As a result, PPC, which will be renamed "Pennzoil-Quaker
State Company," will be the public parent company owning Quaker State.
The Merger will become effective at the Effective Time. The Closing will
occur on the date on which the last of the conditions set forth in the Merger
Agreement has been satisfied or waived or on such other date as PPC and Quaker
State may agree. It is anticipated that such date will be in late third or early
fourth quarter of 1998.
Pursuant to the Merger Agreement, each share of Quaker State Capital Stock
outstanding immediately prior to the Effective Time will be converted into the
right to receive .8204 of one share of Pennzoil-Quaker State Company Common
Stock. All shares of Quaker State Capital Stock that are owned by Quaker State
or its subsidiaries or PPC or its subsidiaries will, at the Effective Time, be
cancelled and will cease to exist, without any payment for such shares.
61
<PAGE> 66
Each option or share award ("Award") under any Quaker State stock plan,
agreement or nonemployee director awards outstanding immediately prior to the
Effective Time will become vested or exercisable. Unless otherwise agreed,
Quaker State will take necessary action to repurchase or cancel the outstanding
Awards. The outstanding Awards will be repurchased for $23.00 in cash (or the
average closing trading price of Quaker State Capital Stock over the three
business days immediately preceding consummation of the Merger, if higher) or
cancelled and replaced with an alternative Award under the PPC 1998 Incentive
Plan.
CERTAIN COVENANTS
Interim Operations. From April 14, 1998 (the date of the Merger Agreement)
until the earlier of the Effective Time or the date of termination of the Merger
Agreement, Quaker State and its subsidiaries, Pennzoil (in regard to the PPC
Business only) and PPC and its subsidiaries are required to conduct their
businesses in the ordinary course consistent with past practice, to use
commercially reasonable efforts to preserve their business organizations intact
and to maintain their rights and franchises, keep available the services of
their current officers and key employees and preserve their relationships with
customers, suppliers and others having business dealings with them. During this
period, each of Quaker State, Pennzoil (in regard to PPC) and PPC and their
respective subsidiaries may not (subject to certain limited exceptions), among
other things:
- amend its certificate of incorporation or bylaws;
- split, combine or reclassify any outstanding capital stock;
- declare or pay any dividends (although Quaker State may pay regular
quarterly cash dividends);
- redeem, repurchase or otherwise acquire any shares of its capital stock;
- issue, deliver or sell any securities;
- sell, lease, pledge, encumber or otherwise dispose of any assets in a
single transaction or in a series of related transactions, except in the
ordinary course of business, that have a fair market value in excess of
$5.0 million individually or $10.0 million in the aggregate;
- make any acquisition where the fair market value of the consideration
exceeds $5.0 million or a series of acquisitions where the fair market
value of the consideration exceeds $10.0 million;
- incur or guarantee certain indebtedness, issue or sell any debt
securities or warrants or rights to acquire any debt securities, enter
into any lease or otherwise incur any material obligation or liability,
with certain exceptions;
- grant any material increases in compensation to directors, officers or
key employees, enter into any new or materially amend any existing
employment, severance or termination contract with directors, officers or
key employees, become obligated under a new employee benefit, pension or
severance plan or arrangement or amend any existing employee benefit,
pension or severance plan or arrangement, except as required by the
collective bargaining process or consistent with past practice;
- pay or agree to pay any director, officer or key employee, whether past
or present, any pension, retirement allowance or other employee benefit
not required or contemplated by any existing benefit, severance,
termination or employment contracts or arrangements;
- make any material changes in accounting methods (other than those
required by accounting rules) or change its fiscal year;
- authorize, recommend or adopt a plan of complete or partial liquidation
or dissolution;
- enter into or amend any agreement or arrangement with any of its
affiliates (other than wholly owned subsidiaries) on terms materially
less favorable than could be reasonably expected to have been obtained
with an unaffiliated third party on an arm's-length basis;
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- other than in the ordinary course of business, modify, amend, terminate,
renew or fail to use reasonable business efforts to renew any material
contract, waive, release or assign any material rights or claims or enter
into certain contracts not in the ordinary course of business;
- fail to maintain insurance in customary amounts and against customary
risks and losses;
- make or rescind any material tax election, settle or compromise any
material tax liability, amend any material tax returns or materially
change any of its methods of reporting income or deductions for federal
income tax purposes, except as may be required by applicable law;
- pay, discharge or satisfy any material claims, liabilities or obligations
not in the ordinary course of business;
- intentionally take any action reasonably likely to cause a breach of a
representation or warranty in the Merger Agreement or a failure of a
condition to the Merger Agreement; or
- take any action inconsistent with the foregoing.
No Solicitation. Each of Quaker State, Pennzoil and PPC has agreed in the
Merger Agreement that it and its subsidiaries will not, and that it will use its
best efforts to cause its officers, directors, employees, advisors and agents
not to, directly or indirectly, initiate, solicit or encourage any inquiries or
the making or implementation of any Acquisition Proposal (as defined below) or
have any discussions or engage in any negotiations with any person relating to
an Acquisition Proposal. Quaker State also has agreed that it and its
subsidiaries will not, and that it will use its best efforts to cause its
officers, directors, employees, advisors and agents not to, directly or
indirectly, provide any non-public information to any person relating to an
Acquisition Proposal.
Notwithstanding these restrictions, Quaker State or the Quaker State Board
may furnish information (pursuant to confidentiality arrangements) and may
participate directly or indirectly in discussions and negotiations if the Board
concludes, after consultation with its legal and financial advisors, that to do
so would be advisable in order to comply with its fiduciary duties, and if
another person makes a Superior Proposal (as defined below). Quaker State has
agreed to notify Pennzoil promptly after any inquiries or proposals are
received, any confidential information is requested or any negotiations or
discussions relating to an Acquisition Proposal are sought to be initiated or
continued, and to keep Pennzoil informed, on a current basis, of the status and
material terms of any such inquiry, request for information, offer or proposal,
discussions or negotiations. PPC has agreed to notify Quaker State if PPC
receives an unsolicited request with respect to an Acquisition Proposal.
"Acquisition Proposal" means any proposal (other than in connection with
the Merger or as otherwise specifically contemplated by the Merger Agreement or
the other Transaction Agreements) regarding a merger, consolidation, share
exchange, business combination, recapitalization or similar transaction
involving, or a purchase of all or any significant portion of the assets or any
equity securities of, Quaker State or PPC or any of their respective
subsidiaries.
A "Superior Proposal" means any proposal or offer made by a third party to
acquire, directly or indirectly, for consideration consisting of cash and/or
securities, more than 50% of the combined voting power of the shares of Quaker
State Capital Stock then outstanding or a substantial portion of the assets of
Quaker State and its subsidiaries and otherwise on terms which the Board of
Directors of Quaker State determines in its good faith judgment to be more
favorable to the Quaker State stockholders than the Merger.
Special Meetings of Stockholders. Quaker State has agreed to hold the
Special Meeting as promptly as practicable for the purpose of voting upon the
adoption of the Merger Agreement and any related matters.
Quaker State has agreed that its Board will recommend to its stockholders
that they adopt the Merger Agreement and approve the transactions contemplated
thereby. Notwithstanding this agreement, if a Superior Proposal is made, the
Quaker State Board may withdraw or modify its recommendation or recommend such
Superior Proposal or take a position as contemplated by Rule 14e-2(a) under the
Exchange Act if the Board
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concludes in good faith (after consultation with its legal and financial
advisors) that it is advisable to do so in order to comply with its fiduciary
duties.
Certain Employee Benefit Matters. For a period of one year after the
Effective Time, PPC must (or must cause Quaker State to) provide the same basic
compensation for the employees of Quaker State and PPC and employee benefits
plans and programs for those employees that are, in the aggregate, substantially
comparable to the plans and programs in effect for such employees at the
Effective Time.
Certain Other Covenants. Quaker State and PPC have agreed to certain other
customary covenants in the Merger Agreement, including covenants relating to
obtaining necessary consents and approvals, cooperating with each other to
obtain antitrust clearances, providing access to and furnishing information,
providing notices of certain events and consulting with each other regarding
public statements and filings, using reasonable efforts to obtain agreements
from affiliates, consummating the transactions that must be consummated prior to
the Effective Time and reporting the Spin-off and Merger as tax-free
transactions.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains, subject to certain exceptions, substantially
reciprocal representations and warranties by Pennzoil and PPC, jointly and
severally, and Quaker State as to the following, among other things:
capitalization; due organization and good standing; corporate authorization to
effect the Merger; governmental approvals required in connection with the
Merger; filings with the SEC; financial statements; absence of certain
undisclosed liabilities; absence of certain changes since December 31, 1997;
brokerage fees, commissions and finders' fees; contracts; affiliate
transactions; compliance with laws; payments to employees; corporate governance
matters; tax matters; intellectual property matters; environmental matters and
employee benefit matters.
In addition, Pennzoil and PPC have made representations and warranties to
Quaker State in the Merger Agreement with respect to Pennzoil and PPC as to the
following, among other things: viability of certain joint ventures; accuracy of
pro forma financial statements; proper reincorporation in Delaware of PPC; and
good title to and sufficiency of PPC's assets.
Quaker State has made certain additional representations and warranties to
PPC and Pennzoil in the Merger Agreement as to the following, among other
things: opinions of financial advisors; amendment of its existing Rights
Agreement; and antitakeover statutes.
The representations and warranties in the Merger Agreement do not survive
the Effective Time.
CONDITIONS TO THE SPIN-OFF AND MERGER
Conditions to Each Party's Obligations. The obligations of Quaker State,
Pennzoil and PPC to effect the Spin-off and to consummate the Merger are subject
to the satisfaction or waiver by PPC and Quaker State of the following
conditions:
- the receipt of all material required consents, approvals and
authorizations of any governmental authority for the consummation of the
Spin-off and the Merger;
- the expiration or termination of any waiting period under the HSR Act
(which occurred on May 27, 1998) and the absence of any order of a court
of competent jurisdiction or other governmental authority restraining,
enjoining, prohibiting or otherwise imposing any material restrictions or
limitations on the Spin-off or the Merger;
- the effectiveness of the Registration Statement of which this Proxy
Statement/Prospectus is a part and the Registration Statement on Form 10
registering under the Exchange Act the shares of PPC common stock to be
issued in the Spin-off, with no stop order suspending their effectiveness
or proceedings seeking such a stop order;
- the receipt of all necessary permits and authorizations under state
securities laws, the Securities Act and the Exchange Act relating to the
issuance and trading of shares of PPC Common Stock to be
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issued in the Spin-off and the Merger; and the approval of the NYSE for
listing, subject to official notice of issuance, of such shares of PPC
Common Stock and such other shares required to be reserved for issuance
in connection with the Spin-off and the Merger;
- the receipt of the requisite approval of Quaker State stockholders;
- the absence of any order, decree, ruling or judgment of a court of
competent jurisdiction or other governmental authority restraining,
enjoining or prohibiting the Spin-off or the Merger;
- the absence of any action, proceeding or investigation by any
governmental authority that seeks to restrain, enjoin, prohibit or delay
consummation of the Spin-off or the Merger or to impose any material
restrictions or requirements thereon or on any of Pennzoil, PPC or Quaker
State with respect thereto;
- the absence of any action, or the enactment or enforcement of any
statute, rule, regulation or executive order, by any governmental
authority that would restrain, prohibit or delay the consummation of the
Spin-off or the Merger or impose material restrictions or requirements
thereon or on any of Pennzoil, PPC or Quaker State with respect thereto;
- the receipt by the Pennzoil Board of Directors of an opinion of a
nationally recognized investment banking or appraisal firm to the effect
that, after giving effect to the Restructuring and the Spin-off, Pennzoil
will not be insolvent;
- the receipt by Pennzoil of a ruling from the IRS to the effect that the
Spin-off and the contribution of certain assets to PPC in the
Restructuring will be generally tax-free to Pennzoil and its
stockholders; and
- in the case of the Merger, the consummation of the Spin-off in accordance
with the Distribution Agreement.
Additional Conditions to the Obligations of Pennzoil. The obligations of
Pennzoil to effect the Spin-off are subject to the satisfaction or waiver by
Pennzoil of the following additional conditions:
- the correctness of the representations and warranties of Quaker State in
the Merger Agreement when made and as of the date of the Spin-off (except
to the extent such representations and warranties address matters as of a
particular date), except as would not have a material adverse effect on
any of the parties to the Merger Agreement or to the extent specifically
contemplated by the Merger Agreement;
- the performance in all material respects by Quaker State of its covenants
and agreements in the Merger Agreement required to be performed at or
prior to the date of the Spin-off; and
- the confirmation by PPC and Quaker State to Pennzoil and each other that
each condition in the Merger Agreement to PPC's and Quaker State's
respective obligations to effect the Merger has been or will be fulfilled
at the Effective Time or has been waived by PPC or Quaker State.
Additional Conditions to Obligations of PPC. The obligations of PPC to
consummate the Merger are subject to the satisfaction or waiver by PPC at or
prior to the Effective Time of the following additional conditions, among
others:
- the correctness of the representations and warranties of Quaker State in
the Merger Agreement as of the date of the Merger Agreement and as of the
Effective Time (except to the extent such representations and warranties
address matters as of a particular date), except as would not be
reasonably likely to have a material adverse effect on PPC or Quaker
State or to the extent specifically contemplated or permitted by the
Merger Agreement;
- the performance in all material respects by Quaker State of its covenants
and agreements in the Merger Agreement required to be performed at or
prior to the Effective Time;
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- the receipt by Quaker State of the consent or approval of each person
whose consent or approval is required for the consummation of the Merger
under any contract to which Quaker State is a party or by which its
property or assets are bound, except as would not be reasonably likely to
have a material adverse effect on Quaker State or the Merger or to the
extent that alternative arrangements (reasonably acceptable to PPC)
relating to the failure to obtain any such consent or approval are
otherwise provided for; and
- the receipt by Pennzoil and PPC of an opinion of Baker & Botts, L.L.P.,
special counsel to Pennzoil, to the effect that the Merger will be
treated as a reorganization for federal income tax purposes within the
meaning of section 368(a) of the Code.
Additional Conditions to Obligations of Quaker State. The obligations of
Quaker State to consummate the Merger are subject to the satisfaction or waiver
by Quaker State of the following additional conditions, among others:
- the correctness of the representations and warranties of PPC and Pennzoil
in the Transaction Agreements as of the date of the Merger Agreement and
as of the Effective Time (except to the extent such representations and
warranties address matters as of a particular date), except as would not
be reasonably likely to have a material adverse effect on PPC or Quaker
State or to the extent specifically contemplated or permitted by the
Merger Agreement;
- the performance in all material respects by PPC and Pennzoil of their
respective covenants and agreements in the Transaction Agreements
required to be performed at or prior to the Effective Time;
- the receipt by PPC of the consent or approval of each person whose
consent or approval is required for the consummation of the Merger under
any contract to which PPC is a party or by which its property or assets
are bound, except as would not be reasonably likely to have a material
adverse effect on PPC, Pennzoil-Quaker State Company or the Merger or to
the extent that alternative arrangements (reasonably acceptable to Quaker
State) relating to the failure to obtain any such consent or approval are
otherwise provided for;
- the adoption by PPC of a Rights Agreement prior to the date of the
Spin-off (in a form reasonably satisfactory to Quaker State);
- the delivery by PPC of a letter ruling from the IRS to the effect that
the Spin-off and the contribution of certain assets to PPC in the
Restructuring will be generally tax-free to Pennzoil and its stockholders
and Quaker State's reasonable satisfaction that the Spin-off has taken
place in accordance with the terms of the Distribution Agreement and such
ruling;
- the receipt by Quaker State of an opinion of Debevoise & Plimpton,
special counsel to Quaker State, to the effect that the Merger will be
treated as a reorganization for federal income tax purposes within the
meaning of section 368(a) of the Code; and
- the entering into by PPC and Pennzoil of the Trademark License Agreement
(described below), the Tax Separation Agreement (described below), the
Employee Benefits Agreement (described below), the Transition Services
Agreement (described below) and the Distribution Agreement, each of which
must be in full force and effect.
TERMINATION OF THE MERGER AGREEMENT AND DISTRIBUTION AGREEMENT
Rights to Terminate. At any time prior to the Effective Time, the Merger
Agreement may be terminated and the transactions contemplated may be abandoned
as follows:
- by the mutual consent of each party to the Merger Agreement;
- by any party if:
c the Effective Time has not occurred on or before December 15, 1998;
provided that this right is not available to any party whose failure to
perform any of its obligations under the Merger Agreement
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required to be performed by it at or prior to such date has been a cause
of, or contributed to, the failure of the Merger to have become
effective at or before such date; or
c any court or other governmental authority has issued an order, decree,
ruling or judgment restraining, enjoining or prohibiting the Merger and
such order, decree, ruling or judgment has become final and
nonappealable, provided that, if the party seeking to terminate the
Merger Agreement is a party to the applicable proceeding, such party
shall have used all commercially reasonable efforts to remove such
order, decree, ruling or judgment;
- by Pennzoil or Quaker State if the Quaker State stockholders do not
approve the adoption of the Merger Agreement and the Merger and the other
transactions contemplated by the Merger Agreement;
- by Pennzoil if:
c Quaker State has not performed in all material respects its covenants
and agreements contained in the Merger Agreement required to be
performed at or prior to the Effective Time;
c the representations and warranties of Quaker State contained in the
Merger Agreement are or become untrue in any respect (except to the
extent such representations and warranties address matters as of a
particular date), except where the failure to be true and correct would
not be reasonably likely to have a material adverse effect on Quaker
State or PPC or to the extent specifically contemplated by the Merger
Agreement; provided that this right to terminate is not available unless
Quaker State cannot cure such failure or untruth for 30 days after
Pennzoil has given Quaker State notice of such failure or untruth;
c the Board of Quaker State withdraws or modifies its approval or
recommendation of the Merger or the Merger Agreement, or approves or
recommends to Quaker State stockholders a Superior Proposal (or resolves
to do any of the foregoing);
c the Board of Quaker State fails to reconfirm its recommendation of the
Merger Agreement to its stockholders within 10 business days of its
receipt of Pennzoil's request for the Quaker State Board to do so
following receipt by Quaker State of an Acquisition Proposal;
c Quaker State fails to call and hold the Quaker State stockholders
meeting within 60 days after the effectiveness of the Registration
Statement of which this Proxy Statement/Prospectus is a part; or
c such Registration Statement fails to become effective due to the
inability of PPC to complete such Registration Statement as a result of
actions or non-actions by Quaker State;
- by Quaker State if:
c either Pennzoil or PPC fails to perform in all material respects its
respective covenants and agreements contained in the Merger Agreement
required to be performed at or prior to the Effective Time;
c the respective representations and warranties of Pennzoil or PPC
contained in the Merger Agreement are or become untrue in any respect
(except to the extent such representations and warranties address
matters as of a particular date), except where the failure to be true
and correct would not be reasonably likely to have a material adverse
effect on PPC or Quaker State; provided that this right to terminate is
not available unless Pennzoil and PPC are unable to cure such failure or
untruth for 30 days after Quaker State has given Pennzoil and PPC notice
of such failure or such untruth; or
- Quaker State receives a Superior Proposal and is allowed to terminate in
accordance with the Merger Agreement; provided that if Quaker State
terminates the Merger Agreement in connection with the receipt of a
Superior Proposal, Quaker State must pay Pennzoil a $20 million
termination fee.
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If the Merger Agreement is terminated, no provision of the Merger Agreement
will survive (other than the provisions relating to payment of expenses and
confidentiality), and termination will be without any liability on the part of
any party or its directors, officers or stockholders, other than liability for
which the termination fee is the sole remedy or liability for a breach of the
Merger Agreement, if applicable. The Distribution Agreement may be terminated
only after the Merger Agreement is terminated.
Termination Fee Payable by Quaker State. Quaker State has agreed to pay
Pennzoil $20 million in immediately available funds if the Merger Agreement is
terminated because:
- the Quaker State Board, after having received a Superior Proposal,
decides in good faith that terminating the Merger Agreement is advisable
in order to comply with its fiduciary duties;
- the Quaker State Board fails to make or withdraws or modifies, in a
manner that is adverse to Pennzoil, its recommendation that its
stockholders approve the Merger and adopt the Merger Agreement and the
Quaker State stockholders reject the Merger; or
- the Quaker State Board withdraws or modifies its approval or
recommendation of the Merger or Merger Agreement, approves or recommends
to Quaker State stockholders a Superior Proposal or resolves to do any of
the foregoing.
RETENTION PAY PLAN
On April 14, 1998, pursuant to the Merger Agreement, the Quaker State Board
of Directors adopted a Retention Pay Plan (as amended, the "Retention Pay Plan")
for employees of Quaker State to help ensure for Quaker State the continued
service of its employees through a transition period of up to six months
following the Merger. Under the Merger Agreement, up to $15 million of the cost
of the Retention Pay Plan will be borne by Pennzoil.
Under the Retention Pay Plan, Quaker State has established special bonus
pools for identified employees of Quaker State. These identified participants in
the Retention Pay Plan will receive a special retention payment upon the
completion of the Merger, provided that they are still employed with Quaker
State at that time, or, if their employment is terminated other than for "Cause"
(as defined in the Retention Pay Plan), upon such termination. As an additional
retention device under the Retention Pay Plan, Quaker State has guaranteed bonus
payments to participants in Quaker State's existing incentive plans who remain
in Quaker State's employ through December 31, 1998. Quaker State also has
established special retention bonuses for certain key employees, which will
generally entitle any such employee to an additional bonus of up to one year's
salary if such employee remains employed by Quaker State for up to six months
following the Merger.
Under the Retention Pay Plan, the severance benefits payable under Quaker
State's Severance Plan will be increased by an additional four weeks of
severance pay with respect to any employee of Quaker State otherwise entitled to
receive severance benefits who executes a release of claims in a form acceptable
to Quaker State. In addition, Quaker State will provide certain outplacement
services for its employees who are eligible to receive severance benefits.
EXPENSES
Distribution Agreement. Whether or not the Spin-off or the other
transactions contemplated by the Distribution Agreement are consummated, PPC
will pay:
- all SEC and NYSE filing fees, agent and bank fees for PPC's credit
arrangements and fees to implement the PPC 1998 Incentive Plan and the
PPC Rights Agreement (described under "Description of Capital Stock of
Pennzoil-Quaker State Company -- Stockholder Rights Plan");
- an aggregate of $6 million of investment banking fees and other financial
advisory, broker's, finder's or similar fees, commissions or
reimbursements;
- 65% of all other fees and expenses incurred by Pennzoil and/or PPC
(subject to certain exceptions) relating to the transactions contemplated
by the Transaction Agreements; and
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- the cost of printing and mailing the Proxy Statement/Prospectus.
Whether or not the Spin-off or the other transactions contemplated by the
Distribution Agreement are consummated, Pennzoil will pay:
- the balance over $6 million not paid by PPC of investment banking fees
and other financial advisory, broker's, finder's or similar fees,
commissions or reimbursements incurred by Pennzoil and PPC related to the
Spin-off; and
- 35% of all other fees and expenses incurred by Pennzoil and/or PPC
relating to the transactions contemplated by the Transaction Agreements
and up to $15 million of the cost of the Retention Pay Plan (with certain
exceptions).
All other costs and expenses incurred in connection with the Distribution
Agreement and the transactions contemplated by the Distribution Agreement,
whether or not the Spin-off or other transactions contemplated by the
Distribution Agreement are consummated, will be paid by the party incurring such
costs or expenses.
Merger Agreement. Except as otherwise provided in the Distribution
Agreement, whether or not the Merger or other transactions contemplated by the
Merger Agreement are consummated, all costs and expenses incurred in connection
with the Merger Agreement and the transactions contemplated thereby will be paid
by the party incurring such costs or expenses.
AMENDMENTS
Distribution Agreement. The Distribution Agreement may be amended, modified
or supplemented by Pennzoil and PPC, subject to the consent of Quaker State,
which consent shall not be unreasonably withheld or delayed.
Merger Agreement. The Merger Agreement may be amended by Pennzoil, PPC and
Quaker State at any time before or after adoption of the Merger Agreement by the
stockholders of Quaker State. However, after such adoption, no amendment shall
be made that by law requires further approval by such stockholders without such
further approval.
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RELATIONSHIP BETWEEN PENNZOIL-QUAKER STATE COMPANY AND
PENNZOIL AFTER THE MERGER
PPC and Pennzoil, or their respective subsidiaries, will enter into various
agreements that will govern the ongoing relationships between Pennzoil-Quaker
State Company and Pennzoil and provide for an orderly transition after the
Restructuring and Merger. Certain of these agreements are summarized below.
TAX SEPARATION AGREEMENT
Prior to the Spin-off, Pennzoil and PPC will enter into the Tax Separation
Agreement (which will become an agreement between Pennzoil and Pennzoil-Quaker
State Company after the Merger), which will provide, among other things, that
(i) Pennzoil-Quaker State Company will be responsible for and indemnify Pennzoil
against all taxes that are attributable to certain inventory adjustments with
respect to PPC and its subsidiaries and all taxes on any gain recognized by
Pennzoil under section 355(e) of the Code as a result of an Ownership Change of
PPC following the Spin-off unless the Ownership Change results from any act of
Pennzoil or a subsidiary or affiliate (see "Risk Factors -- Tax Risks"), (ii)
Pennzoil will be responsible for and indemnify Pennzoil-Quaker State Company and
its subsidiaries against any other consolidated federal income tax liability for
periods ending on or before the date of the Spin-off and any other consolidated,
combined or unitary state, local or foreign income tax reportable on a return
that includes both Pennzoil (or any post-Spin-off direct or indirect subsidiary
of Pennzoil) and PPC (or any post-Spin-off direct or indirect subsidiary of
PPC), (iii) any other taxes will be borne by the party on whom imposed by law,
and (iv) Pennzoil-Quaker State Company will make a payment to Pennzoil equal to
the greater of (a) 38% of the aggregate net income for federal income tax
purposes (with certain significant adjustments) and (b) 24% of the alternative
minimum taxable income (with certain significant adjustments) of PPC and its
subsidiaries for the taxable year beginning on January 1, 1998 and ending on the
date of the Spin-off. The Tax Separation Agreement will also establish, as
between Pennzoil and Pennzoil-Quaker State Company, procedures for the conduct
and settlement of certain tax audits and related proceedings and the
determination of the amount of the tax sharing payment described in clause (iv)
above. The Tax Separation Agreement will not be binding on the IRS or any other
taxing authority and will not affect the several liability of Pennzoil and PPC
and their respective subsidiaries to the IRS for U.S. federal and certain state,
local, or foreign income taxes of the Pennzoil consolidated group relating to
periods beginning prior to the date of the Spin-off (including any tax liability
under section 355(e) of the Code).
EMPLOYEE BENEFITS AGREEMENT
In connection with the Reorganization, Pennzoil and PPC will enter into an
employee benefits agreement (the "Employee Benefits Agreement") (which will
become an agreement between Pennzoil and Pennzoil-Quaker State Company after the
Merger) that will allocate the assets and liabilities under Pennzoil's employee
benefit plans and other employment-related liabilities between Pennzoil and PPC.
As a general matter, PPC and Pennzoil will each (i) continue to employ their
respective employees and (ii) assume the liabilities existing at the time of the
Spin-off for their respective employees and former employees. The Employee
Benefits Agreement also will provide for the treatment of certain retirement
plans, investment and savings programs, medical and life insurance benefits,
retiree medical and life insurance benefits and stock awards.
Pennzoil-Quaker State Company will, effective as of the date of the
Spin-off, establish pension plans, health and welfare plans, a savings (401(k))
plan, and executive compensation plans to mirror the plans that Pennzoil
currently sponsors for its employees. Pennzoil will transfer the amount
necessary to fund the projected benefit obligations under the Pennzoil pension
plans of PPC's current and former employees, determined in accordance with the
actuarial assumptions used by the applicable Pennzoil pension plan with respect
to its last completed actuarial report, and also will transfer the allocated
share of any surplus assets under the Pennzoil pension plans. If a Pennzoil
pension plan has insufficient assets to fund all liabilities on a "plan
termination basis," Pennzoil will transfer the minimum amount required to be
transferred under the
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applicable Code provision. Similar principles will apply with respect to any
employee benefit plan maintained outside of the United States.
Pennzoil-Quaker State Company will establish the Pennzoil-Quaker State
Company Incentive Plan pursuant to which stock options, stock appreciation
rights, and other equity-related incentive awards, as well as cash performance
awards, may be granted. Outstanding Pennzoil equity-related awards held by
current or former employees of Pennzoil will be converted into similar awards
with respect to Pennzoil-Quaker State Company stock and Pennzoil stock, based on
formulas that preserve the inherent value of such awards at the time of the
Spin-off. Replacement awards generally will have the same other terms and
conditions as the original awards.
The Employee Benefits Agreement provides that for two years following the
Spin-off, Pennzoil and Pennzoil-Quaker State Company will not solicit each
other's employees for employment.
CRUDE OIL SUPPLY AGREEMENT
Pennzoil and PPC will enter into a Crude Oil Supply Agreement immediately
prior to the Spin-off (which will become an agreement between Pennzoil and
Pennzoil-Quaker State Company after the Merger). Under the agreement,
Pennzoil-Quaker State Company will have the preferential right (but not the
obligation) to purchase on a month-to-month basis, at market prices, up to 100%
of the crude oil produced and saved (the "Committed Crude") attributable to
Pennzoil's interests in Pennzoil's current oil and gas properties in Michigan,
New York, Ohio, Pennsylvania and West Virginia (the "Eastern Properties") and
Pennzoil's current oil and gas properties in the Bluebell-Altamont Field, Utah
(the "Western Properties"). This preferential right to purchase will extend
until October 1, 2017 in the case of the Eastern Properties, and until March 1,
2010 in the case of the Western Properties. Throughout the term of the
preferential right to purchase, Pennzoil will have the right to solicit and/or
entertain written offers from purchasers other than Pennzoil-Quaker State
Company for the purchase of all or any portion of the Committed Crude. If
Pennzoil receives a third-party offer to purchase or exchange Committed Crude
that it wishes to accept, it will be required to notify Pennzoil-Quaker State
Company in writing of such offer at least 15 working days prior to the beginning
of the calendar month in which such third-party purchase is to commence. If
Pennzoil-Quaker State Company elects to match all substantive terms and
conditions of the third-party offer, Pennzoil-Quaker State Company must advise
Pennzoil within five working days of its receipt of such notification. If
Pennzoil-Quaker State Company does not elect to match all substantive terms and
conditions of the third-party offer, Pennzoil may accept the third-party offer
for the full term contemplated and the crude subject to the third-party offer
will no longer be considered Committed Crude.
Throughout the term of the preferential right to purchase, in the event
Pennzoil elects to sell, exchange or otherwise assign to a third party all or
any portion of Pennzoil's interest in any of the wells producing Committed
Crude, Pennzoil will be required to, within 10 working days after reaching
agreement with the third-party purchaser on the terms of such sale, exchange or
assignment, notify Pennzoil-Quaker State Company in writing of such election,
with full information concerning the proposed sale, exchange or assignment.
Pennzoil-Quaker State Company will have the option, within 20 working days of
Pennzoil-Quaker State Company's receipt of such notification, to elect to match
all substantive terms and conditions of such sale, exchange or assignment. If
Pennzoil-Quaker State Company does not elect to match all substantive terms and
conditions of such sale, exchange or assignment, Pennzoil may accept such sale,
exchange or assignment, and such sale, exchange or assignment will be free and
clear of any pre-existing contractual commitments between Pennzoil-Quaker State
Company and Pennzoil.
Ninety days prior to the end of each calendar year, Pennzoil will provide
Pennzoil-Quaker State Company with a development plan for the Eastern Properties
and the Western Properties showing planned recompletions and well abandonments
for the upcoming calendar year. For a period of 30 days following the receipt of
the development plan, Pennzoil-Quaker State Company may elect to cause Pennzoil
to refrain from implementing any or all of the planned recompletions and well
abandonments identified in the development plan. If Pennzoil-Quaker State
Company so elects, then Pennzoil will have the right (a) to continue to operate
any such well at Pennzoil-Quaker State Company's expense, (b) to assign any such
well to Pennzoil-
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<PAGE> 76
Quaker State Company for operation by Pennzoil-Quaker State Company or by a
third party on Pennzoil-Quaker State Company's behalf or (c) withdraw its
proposal to abandon or recomplete. If Pennzoil elects to operate the well at
Pennzoil-Quaker State Company's expense, Pennzoil-Quaker State Company will,
beginning on the first day of the calendar year covered by the development plan,
reimburse Pennzoil for (i) the direct expense of operating the well, and (ii)
fixed overhead charges. Pennzoil-Quaker State Company will be entitled to all
revenues attributable to wells for which Pennzoil-Quaker State Company has
assumed such cost responsibility.
Pennzoil-Quaker State Company may elect to cause Pennzoil to drill
additional wells for the production of Committed Crude by agreeing to fund all
development costs associated with such wells. On or before January 1 of each
calendar year, Pennzoil-Quaker State Company will notify Pennzoil of its desire
to fund the drilling of any new wells (including associated pipelines,
processing and support facilities) for the production of Committed Crude. Within
60 days following the receipt of such an election, Pennzoil will furnish
Pennzoil-Quaker State Company with a recommended drilling plan consisting of a
list of recommended drilling locations, relevant technical information
supporting such recommendations and estimates for the proposed work. Within 30
days of its receipt of the recommended drilling plan, Pennzoil-Quaker State
Company will make a final selection of the wells it desires to have drilled
during the remainder of the calendar year. Pennzoil may elect to drill any of
the proposed wells for its own account. Pennzoil-Quaker State Company will fund
all capital expenditures on the proposed wells (including associated pipelines,
processing and support activities) which Pennzoil elects not to drill for its
own account (the "Joint Wells") and will receive 100% of all revenues
attributable to each of the Joint Wells until "payout," which will occur when
Pennzoil-Quaker State Company has recovered all of its capital expenditures
attributable to such well plus a return on its investment calculated at the
six-month LIBOR rate plus one percent. Until payout, Pennzoil-Quaker State
Company will bear all of the direct operating expenses attributable to the Joint
Wells plus monthly fixed overhead charges. Pennzoil-Quaker State Company also
will bear all costs incurred prior to payout for the plugging and abandonment of
any wells drilled pursuant to this paragraph. Pennzoil-Quaker State Company's
obligation to bear costs and expenses hereunder will apply to all costs and
expenses incurred, notwithstanding the fact that such costs and expenses may
exceed the estimates provided.
At any time after the second anniversary of the Spin-off, and until October
1, 2017 in the case of the Eastern Properties, and until March 1, 2010 in the
case of the Western Properties, Pennzoil-Quaker State Company shall have the
right to purchase the entirety of Pennzoil's interest in either the Eastern
Properties or the Western Properties, or in both the Eastern and Western
Properties, including: (a) oil, gas and mineral fee and leasehold interests
(including royalty and overriding royalty interests); (b) related or adjoining
surface fee, leasehold and associated surface interests; (c) related personal
property and fixtures thereon or associated therewith; and (d) all rights and
obligations under all contracts associated therewith. Within five working days
of the giving of notice to make such a purchase by Pennzoil-Quaker State
Company, the parties shall each name a qualified independent appraiser, and such
two named appraisers shall choose a third independent appraiser, who shall each
submit an appraisal of the fair market value of the properties to be purchased.
After receiving such appraisals, in the event Pennzoil-Quaker State Company
wishes to proceed with such purchase, Pennzoil-Quaker State Company shall pay to
Pennzoil the higher of (i) the average of the three independent appraisals of
the properties, or (ii) the net book value (book value adjusted for
depreciation, depletion and amortization plus capital and other investments) of
the properties at the purchase date, plus the amount of any book value
write-down required by generally accepted accounting principles taken subsequent
to the date of the Crude Oil Supply Agreement and prior to the receipt by
Pennzoil of Pennzoil-Quaker State Company's notice to make such purchase.
OTHER AGREEMENTS
Other Agreements between PPC and Pennzoil. Before the Merger occurs, PPC,
Pennzoil and their subsidiaries will enter into other agreements in connection
with the Restructuring and Merger (the "Other Agreements"). The Other Agreements
will include (i) the Transition Services Agreement (as defined below); (ii) the
Trademark License Agreement (as defined below) and (iii) other agreements
regarding other matters as may be advisable. The Other Agreements must be on
terms acceptable to Pennzoil, PPC and
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<PAGE> 77
Quaker State. Each of these agreements will become an agreement between Pennzoil
and Pennzoil-Quaker State Company after the Merger.
Transition Services Agreement. Pennzoil and PPC have agreed that Richland
Services Company ("Richland"), an indirect, wholly owned subsidiary of Pennzoil,
will provide certain services to Pennzoil-Quaker State Company for a period of
up to one year after the date of the Spin-off. Certain officers of
Pennzoil-Quaker State Company will serve as officers of Richland during the term
of the Transition Services Agreement. Pennzoil-Quaker State Company may, without
cause, discontinue any or all of the services being provided to it by giving
Richland at least 30 days' prior written notice of the discontinuation thereof.
No discontinuation shall be effective prior to 90 days after the date of the
Transition Services Agreement. The services to be provided by Richland to
Pennzoil-Quaker State Company include:
- Legal
- Environmental, safety and health
- Human resources
- Finance/treasury (including cash management, risk management, corporate
credit, corporate finance, facilities management, real estate management
and services and planning and financial review)
- Accounting (including corporate accounting, income tax, payroll, credit
union and internal audit)
- Information technology
- Corporate communications (including public relations, investor relations,
media relations and community relations)
- Corporate secretary (including shareowner services, mail services,
contributions, records management, travel services, forms management and
print services)
- Executive and general (including executive services, security and
aviation)
- Government relations
Subject to certain exceptions, all parties have agreed to keep confidential
any information received from any other party.
Trademark License Agreement. Prior to the Effective Time, Pennzoil and PPC
will enter into an agreement (which will become an agreement between Pennzoil
and Pennzoil-Quaker State Company after the Merger) whereby Pennzoil-Quaker
State Company will license the trademarks PENNZOIL (words only), PENNZOIL (bell
design without the oval), PENNZOIL (bell and oval design) and PENNZENERGY (words
only) (the "Trademark") to Pennzoil. Pennzoil-Quaker State Company will grant to
Pennzoil and its affiliates an exclusive, worldwide, paid up, royalty free
license to use the Trademark in connection with activities related to oil and
gas exploration, production, exploitation, development and energy related
transportation, other than those included in the operations of Pennzoil Products
Group. All ownership of the Trademark will at all times belong to
Pennzoil-Quaker State Company. Pennzoil may not sublicense the Trademark without
Pennzoil-Quaker State Company's consent. If Pennzoil learns that the Trademark
is being infringed, it shall promptly notify Pennzoil-Quaker State Company of
such infringement. Pennzoil has agreed not to take any action with respect to
any infringement unless instructed in writing to do so by Pennzoil-Quaker State
Company. The parties have agreed that nothing in the Trademark License Agreement
is to be construed as an agreement to defend Pennzoil against actions or suits
brought by any third parties regarding the Trademark, or as a warranty or
representation: (i) as to the validity or scope of the Trademark or (ii) that
any good or service using the Trademark will not infringe any trademark of any
third party.
The Trademark License Agreement will remain in force for three years unless
earlier terminated in accordance with certain provisions of the Trademark
License Agreement. The Trademark License Agreement will terminate upon a change
of control of Pennzoil.
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<PAGE> 78
NEW CREDIT ARRANGEMENTS
It is expected that, prior to the Spin-off, PPC will enter into a credit
facility ("Credit Facility") with The Chase Manhattan Bank, as administrative
agent, and Chase Securities Inc., as book manager and lead arranger, and a group
of banks to provide for up to $1.0 billion of unsecured borrowings. Pennzoil
Products Group expects that borrowings under the Credit Facility will be used to
repay existing intercompany indebtedness of Pennzoil Products Group to Pennzoil
(approximately $386 million), repay indebtedness under the existing revolving
credit facility of Quaker State (approximately $382 million), fund certain
Merger-related expenses (approximately $73 million) and fund future working
capital requirements, if required.
Pennzoil Products Group expects that the Credit Facility will be an
unsecured 364-day revolving credit facility, with an option to convert the
facility into a one-year term loan. The Credit Facility would provide for LIBOR
loans, base rate loans and bid rate loans. The Credit Facility is expected to
provide for optional reduction of commitments and mandatory reduction of
commitments from proceeds of sales of public debt, up to an agreed maximum
reduction amount. The Credit Facility is expected to contain customary
representations and warranties and affirmative covenants. Negative covenants
would be customary and are expected to include, without limitation, provisions
concerning sale, lease or disposition of assets, liens and encumbrances and
merger or consolidation. Events of default are expected to be customary and
include customary cure periods.
The terms of the Pennzoil-Quaker State Company third-party financing
arrangements must be reasonably acceptable to Pennzoil and Quaker State. For
information relating to the pro forma debt to be outstanding at Pennzoil-Quaker
State Company, see "Notes to Pennzoil-Quaker State Company Unaudited Pro Forma
Condensed Combined Financial Statements."
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<PAGE> 79
MANAGEMENT OF PENNZOIL-QUAKER STATE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of Pennzoil-Quaker State Company following the
Merger will initially be composed of 12 directors, seven of whom are to be
designated by Pennzoil and five of whom are to be designated by Quaker State.
The 13th director will be the President and Chief Operating Officer of Pennzoil-
Quaker State Company, who will be selected by a committee of the Board of
Directors of Pennzoil-Quaker State Company composed of two directors selected by
Quaker State and two directors selected by PPC, acting by the affirmative vote
of a majority of the members of such committee.
The following table sets forth the names, ages (as of July 1, 1998) and
titles of the directors and executive officers of Pennzoil-Quaker State Company
following the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James L. Pate(1)...................... 62 Chairman of the Board, Chief Executive
Officer and Director
Herbert M. Baum(2).................... 61 Vice Chairman and Director
David P. Alderson II.................. 48 Group Vice President and Chief
Financial Officer
Clyde W. Beahm........................ 60 Executive Vice President
Linda F. Condit....................... 51 Vice President and Corporate Secretary
William M. Robb....................... 53 Group Vice President -- Products
Manufacturing
James W. Shaddix...................... 52 General Counsel
James M. Wheat........................ 43 Group Vice President -- Fast Lube
Operations
Howard H. Baker, Jr.(1)............... 72 Director
W.L. Lyons Brown, Jr.(1).............. 61 Director
Ernest H. Cockrell(1)................. 52 Director
Alfonso Fanjul(1)..................... 61 Director
C. Frederick Fetterolf(2)............. 69 Director
Forrest R. Haselton(2)................ 59 Director
Berdon Lawrence(1).................... 55 Director
L. David Myatt(2)..................... 52 Director
Gerald B. Smith(1).................... 47 Director
Lorne R. Waxlax(2).................... 64 Director
</TABLE>
- ---------------
(1) Pennzoil designee.
(2) Quaker State designee.
JAMES L. PATE will become the Chairman of the Board, Chief Executive
Officer and director of Pennzoil-Quaker State Company following the Merger and
will resign as Chief Executive Officer of Pennzoil. Mr. Pate was named Chairman
of the Board of Pennzoil in 1994 and Chief Executive Officer in 1990. He served
as President of Pennzoil from 1990 until December 1997. Mr. Pate has served as a
director of Pennzoil since 1989. Mr. Pate is also a director of Bowater
Incorporated. Mr. Pate's term as a director of Pennzoil-Quaker State Company
will expire in 2000.
HERBERT M. BAUM will become the Vice Chairman of the Board and director of
Pennzoil-Quaker State Company following the Merger. Since 1993, Mr. Baum has
been Chairman and Chief Executive Officer of Quaker State. Prior to joining
Quaker State, he was Executive Vice President of Campbell Soup Company and
President, Campbell North/South America. Mr. Baum has served as a director of
Quaker State since 1993. Mr. Baum is also a director of Dial Corporation,
Fleming Companies, Inc., Meredith Corporation, Midas, Inc. and Whitman
Corporation. Mr. Baum's term as a director of Pennzoil-Quaker State Company will
expire in 2000.
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<PAGE> 80
DAVID P. ALDERSON II will become the Group Vice President and Chief
Financial Officer of Pennzoil-Quaker State Company following the Merger and will
resign as Group Vice President -- Finance and Accounting of Pennzoil, a position
he has held since December 1995. From August 1989 to June 1996, he was Treasurer
of Pennzoil, and from February 1992 to December 1995, he was Group Vice
President -- Finance of Pennzoil.
CLYDE W. BEAHM will become the Executive Vice President of Pennzoil-Quaker
State Company following the Merger and will resign as Group Vice
President -- Products Marketing of Pennzoil, a position he has held since
January 1996. From July 1992 to January 1996, he was Group Vice
President -- Franchise Operations of Pennzoil. Prior thereto, he was Executive
Vice President -- Franchise Operations of Pennzoil.
LINDA F. CONDIT will become the Vice President and Corporate Secretary of
Pennzoil-Quaker State Company following the Merger and will resign as Vice
President and Corporate Secretary of Pennzoil. Ms. Condit has been Vice
President of Pennzoil since December 1995 and Corporate Secretary of Pennzoil
since March 1990.
WILLIAM M. ROBB will become the Group Vice President -- Products
Manufacturing of Pennzoil-Quaker State Company following the Merger and will
resign as Group Vice President -- Products Manufacturing of Pennzoil, a position
he has held since October 1992.
JAMES W. SHADDIX will become the General Counsel of Pennzoil-Quaker State
Company following the Merger and will resign as the General Counsel of Pennzoil,
a position he has held since March 1990.
JAMES M. WHEAT will become the Group Vice President -- Fast Lube Operations
of Pennzoil-Quaker State Company following the Merger and will resign as Group
Vice President -- Franchise Operations of Pennzoil, a position he has held since
July 1996. From June 1995 to July 1996, he was Executive Vice President of Jiffy
Lube. From July 1992 to June 1995, he was Senior Vice President -- Marketing and
Field Operations of Jiffy Lube. Prior thereto, he was Vice
President -- Marketing and Field Operations of Jiffy Lube.
HOWARD H. BAKER, JR. has been a partner with the law firm of Baker,
Donelson, Bearman & Caldwell since 1988. From 1987 to 1988, he was Chief of
Staff to the President of the United States. Mr. Baker also served three terms
as a member of the United States Senate and was Senate Majority Leader from 1981
to 1985 and Minority Leader from 1977 to 1981. He has served as a director of
Pennzoil since 1991. Mr. Baker is a regent of the Smithsonian Institution. Mr.
Baker's term as a director of Pennzoil-Quaker State Company will expire in 2000.
W. L. LYONS BROWN, JR. served as Chairman of the Board of Brown-Forman
Corporation, a major diversified producer and marketer of fine quality consumer
products, until his retirement in 1995. He was also Chief Executive Officer of
Brown-Forman Corporation from 1975 until 1993. He has served as a director of
Pennzoil since 1991. Mr. Brown is also a director of Essex International Inc.
and Westvaco Corporation and an advisory director of Bessemer Holdings, L.P. Mr.
Brown's term as director of Pennzoil-Quaker State Company will expire in 2001.
ERNEST H. COCKRELL has been engaged for more than the past five years in
oil and gas exploration and production. He has served as a director of Pennzoil
since 1978. Mr. Cockrell is also a director of Denali Incorporated, Southwest
Bancorporation of Texas, Inc. and Southwest Bank of Texas. Mr. Cockrell's term
as director of Pennzoil-Quaker State Company will expire in 2001.
ALFONSO FANJUL has been Chairman of the Board and Chief Executive Officer
of Florida Crystals Corporation (sugar) for more than the past five years. He is
also Chairman of the Board, President and Chief Executive Officer of Central
Romana Corporation, Ltd. (sugar, cattle, real estate and resorts). Mr. Fanjul
has served as a director of Pennzoil since 1984. Mr. Fanjul's term as director
of Pennzoil-Quaker State Company will expire in 1999.
C. FREDERICK FETTEROLF retired in 1991 as President and Chief Operating
Officer of Aluminum Company of America. He is a director of Allegheny Teledyne
Inc., Commonwealth Industries, Inc., Dentsply
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International, Mellon Bank Corporation, Praxair, Inc. and Union Carbide
Corporation. Mr. Fetterolf's term as director of Pennzoil-Quaker State Company
will expire in 1999.
FORREST R. HASELTON retired in 1993 as President -- Retail of the Sears
Merchandise Group, a division of Sears Roebuck and Company. Mr. Haselton's term
as director of Pennzoil-Quaker State Company will expire in 1999.
BERDON LAWRENCE has been President of Hollywood Marine, Inc., a Gulf Coast
operator of tank barges and tow boats handling petrochemical and petroleum
products, for more than the past five years. Mr. Lawrence has served as a
director of Pennzoil since 1990. Mr. Lawrence's term as director of Pennzoil-
Quaker State Company will expire in 1999.
L. DAVID MYATT is the Managing Member of LDM Investments, L.L.C., an
investment management company that he formed in 1995. He was Vice Chairman of
Quaker State from 1994 to 1997 and has been employed by Quaker State since 1994.
From 1994 to 1995, he was Chief Executive Officer of Quaker State's Motor Oil
Division. Prior to joining Quaker State in 1994, Mr. Myatt was President of two
lubricant companies, Specialty Oil Company and Westland Oil Company, since 1977.
These companies were acquired by Quaker State in 1994. Mr. Myatt's term as
director of Pennzoil-Quaker State Company will expire in 2001.
GERALD B. SMITH has been Chairman and Chief Executive Officer of Smith,
Graham & Co. Asset Managers L.P., a fixed income investment management firm, for
more than the past five years. He is a member of the management board of Rorento
N.V., a director of Sisters of Charity of the Incarnate Word Healthcare System
and a member of the audit committee of Northern Borders Partners, L.P. Mr.
Smith's term as a director of Pennzoil-Quaker State Company will expire in 2000.
LORNE R. WAXLAX retired in 1993 as Executive Vice President of the Gillette
Company. Mr. Waxlax is a director of BJ's Wholesale Club, Inc., Clean Harbors,
Inc., HomeBase, Inc., Hon Industries, Inc. and The Iams Company. Mr. Waxlax's
term as director of Pennzoil-Quaker State Company will expire in 2000.
The Board of Directors of Pennzoil-Quaker State Company will be divided
into three classes. The term of the Class I directors, who will be Messrs.
Fanjul, Fetterolf, Haselton and Lawrence, expires at the annual stockholders'
meeting for election of directors in 1999. The term of the Class II directors,
who will be Messrs. Baker, Baum, Pate, Smith and Waxlax, expires at the annual
stockholders' meeting for election of directors in 2000. The term of the Class
III directors, who will be Messrs. Brown, Cockrell and Myatt and the new
President and Chief Operating Officer, expires at the annual stockholders'
meeting for the election of directors in 2001. After 1999 for the Class I
directors, after 2000 for the Class II directors and after 2001 for the Class
III directors, each class will hold office until the third annual stockholders'
meeting for election of directors following the most recent election of such
class. Pennzoil-Quaker State Company's classified Board of Directors could have
the effect of increasing the length of time necessary to change the composition
of a majority of the Board of Directors. In general, at least two annual
meetings of stockholders will be necessary for stockholders to effect a change
in a majority of the members of Pennzoil-Quaker State Company's Board of
Directors. Executive officers serve at the discretion of the Board of Directors.
There will be three committees of Pennzoil-Quaker State Company's Board of
Directors: the Executive Committee, the Compensation Committee and the Audit
Committee. The members of the Executive Committee will be Messrs. Pate
(Chairman), Baker, Baum, Fetterolf, Lawrence, Myatt, Smith and the new President
and Chief Operating Officer. The members of the Compensation Committee will be
Messrs. Cockrell (Chairman), Fanjul and Haselton. The members of the Audit
Committee will be Messrs. Brown, Cockrell and Waxlax (Chairman).
COMPENSATION OF DIRECTORS
Directors who are officers of Pennzoil-Quaker State Company will receive no
additional compensation for serving on the Board. Pennzoil-Quaker State Company
has adopted a compensation package for its outside directors that includes a
director's fee of $30,000 per annum for service on the Board of Directors and a
committee fee of $2,000 per committee per annum for service on the Audit,
Executive and Compensation Committees. Each such director also receives an
additional fee of $1,000 for each Board, Executive
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<PAGE> 82
Committee or other committee meeting attended. All directors will be reimbursed
for their travel and other expenses involved in attendance at Board and
committee meetings.
OFFICER AND DIRECTOR INDEMNIFICATION
Pennzoil-Quaker State Company's Bylaws will provide for the indemnification
of its officers and directors, and the advancement to them of expenses in
connection with proceedings and claims, to the fullest extent permitted by
applicable law. The Bylaws will include related provisions meant to facilitate
the indemnitee's receipt of such benefits. These provisions will cover, among
other things: (i) specification of the method of determining entitlement to
indemnification and the selection of independent counsel that will in some cases
make such determination; (ii) specification of certain time periods by which
certain payments or determinations must be made and actions must be taken and
(iii) the establishment of certain presumptions in favor of an indemnitee. The
benefits of certain of these provisions will be available to an indemnitee only
if there has been a change in control (as defined in the Bylaws).
Pennzoil-Quaker State Company expects to enter into indemnification agreements
with its directors and officers that provide for similar protections. In
addition, Pennzoil-Quaker State Company will obtain insurance coverage for
directors' and officers' liability prior to the consummation of the Merger.
EXECUTIVE COMPENSATION
Set forth below is information regarding the compensation during 1997 of
the person who will serve as Chief Executive Officer of Pennzoil-Quaker State
Company and the other four most highly compensated persons who will serve as
executive officers of Pennzoil-Quaker State Company (collectively, the "named
officers"). All compensation was paid by Pennzoil.
Summary Compensation Table. The summary compensation table set forth below
contains information regarding the compensation of each of the named officers
for services rendered to Pennzoil in all capacities during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ ----------------------- ---------
SECURITIES
OTHER UNDERLYING ALL
ANNUAL RESTRICTED OPTIONS/ LONG-TERM OTHER
COMPEN- STOCK SARS INCENTIVE COMPEN-
SATION AWARDS (SHARES) PLAN SATION
NAME SALARY BONUS (1) (2) (3) PAYOUTS (4)
---- -------- -------- -------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
James L. Pate.............. $761,200 $757,300 $183,000 $358,800 30,000 $368,100 $98,900
David P. Alderson II....... 284,600 315,600 61,200 62,200 5,200 78,000 31,000
Clyde W. Beahm............. 263,800 172,900 61,200 56,500 4,300 72,900 24,600
William M. Robb............ 273,500 159,500 62,600 56,500 4,000 74,600 25,000
James W. Shaddix........... 284,600 315,600 61,200 62,200 5,200 78,000 31,100
</TABLE>
- ---------------
(1) Amounts shown include aircraft usage costs of $98,900 for Mr. Pate; a
perquisite allowance of $59,400 for Mr. Pate and $42,400 for Messrs.
Alderson, Beahm, Robb and Shaddix; and excess medical coverage of $18,800
for Messrs. Pate, Alderson, Beahm and Shaddix and $20,100 for Mr. Robb.
(2) Amounts shown under Restricted Stock Awards are the aggregate market value
on January 1, 1997 of shares of Pennzoil common stock underlying common
stock units awarded on such date under Pennzoil's Conditional Stock Award
Programs. Each common stock unit awarded is to be distributed in the form of
a share of Pennzoil common stock at the end of a five-year period, provided
certain conditions as to continued employment are met. In the interim,
participants receive dividend equivalents on their common stock units as
though they were shares of Pennzoil common stock. The aggregate common stock
units held at the end of 1997 and their values were 24,350 units, $1,626,900
for Mr. Pate; 5,210 units, $348,100 for Mr. Alderson; 4,550 units, $304,000
for Mr. Beahm; 5,030 units, $336,100 for Mr. Robb;
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<PAGE> 83
and 5,230 units, $349,400 for Mr. Shaddix. Such values are calculated by
multiplying the closing market price of Pennzoil common stock on December
31, 1997 ($66.8125) by the number of common stock units held at such date.
(3) All options were granted in tandem with stock appreciation rights, but there
is currently in effect a moratorium on the exercise of any such stock
appreciation rights.
(4) Amounts shown under All Other Compensation include (i) amounts contributed
or accrued for 1997 under Pennzoil's Savings and Investment Plan and related
supplemental agreements ($95,300 for Mr. Pate, $29,400 for Mr. Alderson,
$23,100 for Mr. Beahm, $23,500 for Mr. Robb and $29,500 for Mr. Shaddix) and
(ii) amounts paid by Pennzoil in 1997 for certain premiums on term life
insurance ($3,600 for Mr. Pate, $1,600 for Messrs. Alderson, Robb and
Shaddix and $1,500 for Mr. Beahm).
Option/SAR Grants. Shown below is further information on grants of stock
options by Pennzoil during 1997 to the named officers reflected in the Summary
Compensation Table.
OPTION/SAR GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/SARS GRANTED TO PRICE
GRANTED IN 1997 EMPLOYEES IN (PER EXPIRATION GRANT DATE
(SHARES)(1) 1997 SHARE)(2) DATE VALUE(3)
--------------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
James L. Pate..................... 30,000 3.6% $51.25 3/24/2007 $581,200
David P. Alderson II.............. 5,200 0.6% 51.25 3/24/2007 100,700
Clyde W. Beahm.................... 4,300 0.5% 51.25 3/24/2007 83,300
William M. Robb................... 4,000 0.5% 51.25 3/24/2007 77,500
James W. Shaddix.................. 5,200 0.6% 51.25 3/24/2007 100,700
</TABLE>
- ---------------
(1) All the above options were granted on March 24, 1997 and become exercisable
the day before the Distribution Date. Such options were granted in tandem
with stock appreciation rights, but there is currently in effect a
moratorium on the exercise of any such stock appreciation rights. All the
above options were granted pursuant to Pennzoil's 1997 Incentive Plan.
(2) The option exercise price is 100% of the average of the high and low trading
prices of Pennzoil common stock on the New York Stock Exchange on the date
of grant (March 24, 1997) and may be paid in cash or previously owned shares
of Pennzoil common stock.
(3) Based on the Black-Scholes option pricing model adapted for use in valuing
executive stock options. The actual value, if any, that may be realized will
depend on the excess of the underlying stock price over the exercise price
on the date the option is exercised, so that there is no assurance the value
realized will be at or near the value estimated by the Black-Scholes model.
The estimated values under the model are based on the following assumptions:
expected volatility based on a three-year historical volatility of month-end
Pennzoil common stock prices (20.5%), a risk-free rate of return based on a
10-year zero-coupon U.S. Treasury rate at the time of grant (6.6%), the
current dividend rate on Pennzoil common stock ($1 per year), an option
exercise period of 10 years (with the exercise occurring at the end of such
period) and no adjustment for the risk of forfeiture over the vesting
period.
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Option Exercises and 1997 Year-End Option/SAR Holdings. Shown below is
information with respect to unexercised options to purchase Pennzoil common
stock granted in 1997 and prior years to the named officers and held by them at
December 31, 1997. None of the named officers exercised options or tandem stock
appreciation rights in 1997.
YEAR-END 1997 OPTION/SAR HOLDINGS
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
------------------------------- -------------------------------
EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
James L. Pate........................ 238,199 125,001 $3,579,000 $2,879,700
David P. Alderson II................. 52,566 23,034 739,000 532,800
Clyde W. Beahm....................... 36,265 21,000 599,800 494,000
William M. Robb...................... 47,720 20,000 710,500 461,300
James W. Shaddix..................... 53,989 23,201 759,200 536,300
</TABLE>
- ---------------
(1) The excess, if any, of the market value of Pennzoil common stock at December
31, 1997 ($66.8125) over the option exercise price.
(2) All of these options become immediately exercisable the day before the
Distribution Date.
Long-Term Incentive Awards. Shown below is information with respect to
awards earned in 1997 under Pennzoil long-term incentive arrangements.
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
OTHER PERIOD NON-STOCK-PRICE-BASED PLANS(1)
UNTIL MATURATION ------------------------------------
OR PAYOUT THRESHOLD TARGET MAXIMUM
---------------- --------- --------- ----------
<S> <C> <C> <C> <C>
James L. Pate............................ 3 years $193,800 $ 635,500 $1,116,000
David P. Alderson II..................... 3 years 34,700 109,700 193,500
Clyde W. Beahm........................... 3 years 29,700 97,200 170,100
William M. Robb.......................... 3 years 30,400 99,500 174,100
James W. Shaddix......................... 3 years 34,700 109,700 193,500
</TABLE>
- ---------------
(1) Payout of the 1997 long-term incentive awards will be determined by
comparing Pennzoil's total shareholder return ("TSR") to a selected group of
peer companies, designated at the time of grant. At the end of the
performance period, Pennzoil and the peer companies will be ranked based on
their TSR. Maximum payout is achieved if Pennzoil is ranked fourth or
higher. Target payout is achieved if Pennzoil is ranked eighth. Threshold
payout occurs if Pennzoil is ranked thirteenth. The incentive awards are
targeted at the market 55th percentile. Pennzoil's absolute TSR for a given
performance cycle must be at least break-even to trigger any payout under
the plan. Awards, calculated as a percentage of base salary, are paid (if
earned) after the completion of the three-year performance cycle.
Retirement Plan and Supplemental Agreements. Pennzoil has a tax-qualified
retirement plan applicable to salaried employees generally. The retirement plan
generally provides for annual retirement benefits approximating between 1.1% and
1.6% of a calculated career average compensation multiplied by the number of
years of service. For purposes of the retirement plan, career average
compensation approximates the lesser of an employee's final five-year average
compensation and his 1997 annual compensation. The annual benefits under the
retirement plan are net of certain offsets based on social security benefits and
reflect limitations mandated by the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), on the maximum amounts payable. Pennzoil has
agreements with Messrs. Pate, Alderson, Beahm, Robb and Shaddix to supplement
their benefits under the tax-qualified retirement plan in the event and to the
extent the
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aforesaid limitations on annual benefits mandated by ERISA reduce the retirement
benefits that otherwise would be payable under such plan. Pennzoil also has a
deferred compensation agreement with Mr. Pate designed to bring his total annual
retirement benefits from all sources (including social security and benefits
from prior employers) to 57% of his annual salary rate at retirement. This
percentage is comparable to the proportion that retirement benefits provided by
Pennzoil's regular retirement plan (and social security) for the majority of
Pennzoil's employees bear to remuneration at the time of retirement. In
addition, the deferred compensation agreement provides for continuation of
medical expense reimbursement plan coverage for the participant, his spouse and
dependents. Benefits under Mr. Pate's deferred compensation agreement will
commence upon termination of employment for any reason. Based on salaries as of
December 31, 1997, estimated annual benefits upon retirement at normal
retirement age (65) from all sources would be $441,800 for Mr. Pate, $162,700
for Mr. Alderson, $64,800 for Mr. Beahm, $107,900 for Mr. Robb and $152,900 for
Mr. Shaddix. Messrs. Pate, Alderson, Beahm, Robb and Shaddix will enter into
similar arrangements with Pennzoil-Quaker State Company.
Termination of Employment and Change-in-Control Arrangements and Other
Agreements. Pennzoil maintains an Executive Severance Plan for selected
employees providing for severance benefits upon a termination of employment for
reasons other than cause within two years after a change in control of Pennzoil.
Benefits are payable only in the event there occurs each of (a) a change in
control of Pennzoil, (b) a designation by the Board of Directors and the
Compensation Committee of Pennzoil that the employee is likely to be adversely
affected by the change in control and (c) a subsequent termination of employment
within two years for reasons other than cause. Benefits are prorated if the
employee is within three years of normal retirement age (65) at termination of
employment. Participants in the plan include Messrs. Pate, Alderson, Beahm, Robb
and Shaddix. Such severance benefits generally include a payment of up to three
times a participant's annual salary and incentive bonus and continuation of life
insurance and medical coverage for one year following termination of employment.
Messrs. Pate, Alderson, Beahm, Robb and Shaddix will participate in a similar
plan with Pennzoil-Quaker State Company.
Pennzoil also has agreements with Messrs. Pate, Alderson, Beahm, Robb and
Shaddix that provide for the acceleration of benefits in the event of the
occurrence, as determined by the Board of Directors, of a change in control of
Pennzoil that has a reasonable likelihood of causing the forfeiture of benefits
that such persons otherwise would have earned by depriving them of the
opportunity to fulfill applicable service and age prerequisites. The agreements
provide that the covered persons will receive, in the event of such a change in
control but without regard to any termination of employment, cash payments equal
to the appreciated value of all unvested, nonqualified stock options. The
agreements also provide, in the event of termination of employment of a covered
employee within six months following such a change in control, (a) for cash
payments generally equal to the unvested amounts under Pennzoil's Savings and
Investment Plan (as well as the agreements providing for reimbursement of
benefits that would be payable under such Plan but for limitations imposed by
ERISA) forfeitable on the date of termination of employment, (b) for
continuation of life insurance and, in certain instances, medical expense
coverage for one year, (c) for cash payments equal to the discounted value of
benefits otherwise payable under the deferred compensation agreements referred
to above under "-- Retirement Plan and Supplemental Agreements," based on an
assumed continuation of employment until age 65 and actuarially determined life
expectancies, (d) in certain instances, for cash payments in settlement of
long-term medical benefits otherwise payable and (e) for cash payments equal to
the discounted value of benefits otherwise payable under a supplemental
disability plan and a salary continuation plan. Other agreements provide for
certain executive officers that, upon any termination of employment (other than
termination for cause or voluntary termination prior to a change in control),
the executive officer will receive (i) in certain instances, continued executive
medical coverage to age 55 without any increase in cost, and thereafter retiree
medical coverage at no greater cost than currently applicable to retirees with
more than 20 years of service and (ii) supplemental retirement benefits payable
at age 55 equal to the benefit such executive officer would have earned had
current cash compensation continued to age 55. Deferred compensation agreements
and certain supplemental benefit agreements under which payments are currently
being made have been supplemented by Pennzoil to provide, upon a change in
control of Pennzoil, for the cash-out of retirement, spouse and medical
benefits. In addition, Pennzoil's conditional stock award programs provide for
acceleration of benefits upon a change in control. Furthermore, benefits under
Pennzoil's
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<PAGE> 86
Long-Term Incentive Plans will be paid out immediately as if such plans had
reached the end of their terms and the target goals had been achieved. The
dollar amounts that would be payable under the agreements and plan described in
this and the preceding paragraph and the other plans providing payments
triggered by a change in control, exclusive of amounts attributable to benefits
already vested, would be (as of December 31, 1997) $11,426,100 for Mr. Pate,
$2,876,000 for Mr. Alderson, $2,283,300 for Mr. Beahm, $2,265,200 for Mr. Robb
and $2,880,800 for Mr. Shaddix. In addition, a change in control would result in
the accelerated payment of benefits already earned and vested over a period of
years in the amounts of $7,062,900 for Mr. Pate, $1,258,500 for Mr. Alderson,
$864,000 for Mr. Beahm; $1,000,900 for Mr. Robb and $1,280,400 for Mr. Shaddix.
Messrs. Pate, Alderson, Beahm, Robb and Shaddix will enter into similar
agreements and participate in similar plans with Pennzoil-Quaker State Company.
Pennzoil-Quaker State Company 1998 Incentive Plan. The Merger Agreement
provides that, prior to the Merger, PPC and Pennzoil, as sole stockholder of
PPC, shall have approved and adopted Pennzoil-Quaker State Company's 1998
Incentive Plan (the "Incentive Plan"). The objectives of the Incentive Plan are
to attract and retain key employees, to encourage a sense of proprietorship and
to stimulate the active interest of those persons in the development and
financial success of Pennzoil-Quaker State Company by making awards ("Awards")
designed to provide participants in the Incentive Plan with a proprietary
interest in the growth and performance of Pennzoil-Quaker State Company. Persons
eligible for Awards are directors and key employees holding positions of
responsibility with Pennzoil-Quaker State Company or any of its subsidiaries and
whose performance can have a significant effect on the success of
Pennzoil-Quaker State Company, and individuals who are expected to become such
key employees within six months of the date of an Award.
The Compensation Committee of Pennzoil-Quaker State Company's Board of
Directors (the "Committee") will administer the Incentive Plan. The Committee
will have the exclusive power to administer the Incentive Plan, to take all
actions specifically contemplated thereby or necessary or appropriate in
connection with the administration thereof, to interpret the Incentive Plan, to
adopt such rules, regulations and guidelines for carrying out the Incentive Plan
as the Committee may deem necessary or proper in the best interests of
Pennzoil-Quaker State Company and in keeping with the objectives of the
Incentive Plan and to correct any defect or reconcile any inconsistency in the
Incentive Plan. The Committee may, in its discretion, among other things, extend
or accelerate the exercisability of an Award, accelerate the vesting of or
eliminate or make less restrictive any restrictions contained in any Award,
waive any restriction or other provision of the Incentive Plan or in any Award
or otherwise amend or modify any Award in any manner that is either (i) not
adverse to that participant holding the Award or (ii) consented to by that
participant. The Committee also may make an Award to an individual who it
expects to become an employee of Pennzoil-Quaker State Company or any of its
subsidiaries within six months of the Award, subject to such individual's being
so employed by Pennzoil-Quaker State Company or a subsidiary thereof within such
period. The Committee may delegate to the chief executive officer and other
senior officers of Pennzoil-Quaker State Company its duties under the Incentive
Plan.
The Board of Directors of Pennzoil-Quaker State Company may amend, modify,
suspend or terminate the Incentive Plan for the purpose of meeting or addressing
any changes in legal requirements or for any other purpose permitted by law,
except that (i) no amendment or alteration that would adversely affect the
rights of any participant under any Award previously granted to such participant
shall be made without the consent of such participant and (ii) no amendment or
alteration shall be effective prior to its approval by the stockholders of
Pennzoil-Quaker State Company to the extent such approval is required by
applicable legal requirements. The Board of Directors may make certain
adjustments in the event of any subdivision, split or consolidation of
outstanding shares of Pennzoil-Quaker State Company Common Stock, any
declaration of a stock dividend payable in shares of Pennzoil-Quaker State
Company Common Stock, any recapitalization or capital reorganization of
Pennzoil-Quaker State Company, any consolidation or merger of Pennzoil-Quaker
State Company with another corporation or entity, any adoption by
Pennzoil-Quaker State Company of any plan of exchange affecting Pennzoil-Quaker
State Company Common Stock or any distribution to holders of Pennzoil-Quaker
State Company Common Stock of securities or property (other than normal cash
dividends).
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<PAGE> 87
Awards may be in the form of, among other things (i) rights to purchase a
specified number of shares of Pennzoil-Quaker State Company Common Stock at a
specified price ("Options"), (ii) rights to receive a payment, in cash or
Pennzoil-Quaker State Company Common Stock, equal to the excess of the fair
market value or other specified value of a number of shares of Pennzoil-Quaker
State Company Common Stock on the rights exercise date over a specified strike
price ("SARs"), (iii) grants of restricted or unrestricted shares of
Pennzoil-Quaker State Company Common Stock or units denominated in shares of
Pennzoil-Quaker State Company Common Stock, (iv) grants denominated in cash and
(v) grants denominated in cash, Pennzoil-Quaker State Company Common Stock,
units denominated in Pennzoil-Quaker State Company Common Stock or any other
property which are made subject to the attainment of one or more performance
goals ("Performance Awards").
After the Merger, the Committee will determine the directors and employees
to receive Awards and the terms, conditions and limitations applicable to each
such Award, which conditions may, but need not, include continuous service with
Pennzoil-Quaker State Company, achievement of specific business objectives,
attainment of specified growth rates, increases in specified indices, attainment
of specified growth rates or other comparable measures of performance.
Performance Awards may include more than one performance goal, and a performance
goal may be based on one or more business criteria that apply to the individual,
Pennzoil-Quaker State Company as a whole or one or more of Pennzoil-Quaker State
Company's business units and may include, among other measures, any of the
following: increased revenue; net income; earnings before interest, taxes,
depreciation and amortization (EBITDA); other earnings measures; economic value
added; cash flow measures; stock price; market share; return on equity or
capital; return on revenue measures; costs; and safety and environmental
performance measures.
INFORMATION REGARDING DIRECTORS AND OFFICERS OF QUAKER STATE
Information regarding the directors and executive officers of Quaker State,
including compensation paid to its executive officers, is set forth in portions
of Quaker State's 1998 Proxy Statement and Annual Report on Form 10-K filed with
the Securities and Exchange Commission ("SEC"), which are listed as items 1 and
2 in "Where You Can Find More Information."
INTERESTS OF CERTAIN PERSONS
Members of Quaker State's management and Board of Directors may be deemed
to have interests in the Merger that are different from, or in addition to, the
interests of Quaker State's stockholders generally. The Board of Directors of
Quaker State was aware of these interests and considered them, among other
matters, in approving the Merger Agreement and the transactions contemplated
thereby. In addition, members of Pennzoil's management and Board of Directors
may be deemed to have interests in the Restructuring, the Spin-off and the
Merger that are different from, or in addition to, the interests of Pennzoil's
stockholders generally. The Board of Directors of Pennzoil was aware of these
interests and considered them, among other matters, in approving the
Distribution Agreement, the Merger Agreement and the transactions contemplated
thereby.
EXISTING OFFICERS AND DIRECTORS WHO WILL JOIN PENNZOIL-QUAKER STATE COMPANY AT
THE EFFECTIVE TIME
Following the Merger, seven current executive officers of Pennzoil will
become executive officers of Pennzoil-Quaker State Company. Seven directors of
Pennzoil and five directors of Quaker State will become directors of
Pennzoil-Quaker State Company. See "Management of Pennzoil-Quaker State
Company."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Merger Agreement provides that, following the Effective Time, Pennzoil
will indemnify, defend and hold harmless PPC, Quaker State and each controlling
person of PPC or Quaker State (within the meaning of
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<PAGE> 88
Section 15 of the Securities Act or Section 20 of the Exchange Act) from and
against, and pay or reimburse each of the foregoing for, all losses arising out
of or resulting from or in connection with:
- any assets or liabilities of, or the operations of, Pennzoil or any of
its subsidiaries (other than PPC and its subsidiaries).
- any untrue statement or alleged untrue statement of a material fact
contained in or incorporated by reference into this Proxy
Statement/Prospectus, the Registration Statement of which this Proxy
Statement/Prospectus is part or the Registration Statement on Form 10 (or
any amendment or supplement thereto) or any omission or alleged omission
to state herein or therein a material fact required to be stated herein
or therein or necessary to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading,
other than information provided by Quaker State specifically for
inclusion in, or incorporation by reference into, this Proxy
Statement/Prospectus or any such Registration Statement.
- financial advisory, broker's, finder's or similar fees or commissions,
reimbursement of expenses or indemnification or contribution above $6
million payable in connection with the transactions contemplated by the
Merger Agreement to any agent, broker, investment banker, financial
advisor or other similar person by Pennzoil or by PPC.
The Merger Agreement also provides that, following the Effective Time, PPC
and Quaker State will jointly and severally indemnify, defend and hold harmless
Pennzoil and each controlling person of Pennzoil from and against, and pay or
reimburse each of the foregoing for, all losses arising out of or resulting from
or in connection with:
- any assets or liabilities of, or the operations of, PPC and Quaker State
or any of their subsidiaries.
- any untrue statement or alleged untrue statement of a material fact
contained in or incorporated by reference into this Proxy
Statement/Prospectus, the Registration Statement of which this Proxy
Statement/Prospectus is part or the Registration Statement on Form 10 (or
any amendment or supplement thereto) or any omission or alleged omission
to state herein or therein a material fact required to be stated herein
or therein or necessary to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading,
but only with respect to information provided by Quaker State
specifically for inclusion in, or incorporation by reference into, this
Proxy Statement/Prospectus or any such Registration Statement.
In addition, the Merger Agreement provides that all rights of
indemnification provided in the respective charters and bylaws of PPC and Quaker
State will continue for a period of six years following the Effective Time. The
Merger Agreement further requires PPC and Pennzoil to maintain for a period of
six years following the Effective Time liability insurance for officers and
directors of PPC with respect to claims arising out of facts or events occurring
prior to or at the Effective Time.
QUAKER STATE OFFICERS' AND DIRECTORS' INTERESTS UNDER STOCK PLANS
Certain members of Quaker State's management and Board own options to
purchase Quaker State Stock or have restricted or performance shares under
Quaker State's 1986 Stock Option Plan, 1994 Stock Incentive Plan or 1994
Non-Employee Directors Stock Option Plan or as part of a Non-Employee Director
Restricted Stock Award (which was approved by Quaker State's stockholders at the
1998 annual meeting in lieu of pre-existing retirement benefits) or that were
granted pursuant to agreements with such individuals. In accordance with the
terms of these plans and other awards, all such options, restricted shares and
performance shares will become fully vested immediately before the Merger. Under
the terms of the Merger Agreement, at the time of the Merger, either Quaker
State will repurchase and cancel each outstanding option or restricted or
performance share for a cash payment equal to the average closing trading price
of Quaker State Stock over the three business days immediately before the Merger
or $23 per share (whichever is higher), less any option exercise price and
applicable withholding taxes, or, if Quaker State and the holder of the award
agree, he or she, instead of receiving this cash payment, will receive a similar
substitute option or restricted or performance share award with respect to
Pennzoil-Quaker State Company stock. The number of shares of Pennzoil-Quaker
State Company stock covered by such a substitute award, and the exercise price
for any such option, will be designed to approximate the economic value of the
Quaker State awards at the time of the Merger.
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<PAGE> 89
INTEREST OF A QUAKER STATE DIRECTOR IN EVERCORE
Mr. J. Taylor Crandall, a member of Quaker State's Board, is an executive
officer of a corporation, Keystone Inc. ("Keystone"), that is a limited partner
in Evercore, a financial advisor to Pennzoil. As such, Keystone will indirectly
benefit from any fees paid to Evercore in connection with the Merger. Keystone
has no operational control or day-to-day involvement in the conduct of the
business of Evercore. Mr. Crandall disclosed this indirect interest to Quaker
State's Board at the meetings that occurred on February 3 and 4, 1998.
PENNZOIL OFFICERS' INTERESTS UNDER STOCK PLANS
Pursuant to the Employee Benefits Agreement, (i) each outstanding employee
stock option award of Pennzoil granted under any Pennzoil stock option program
and outstanding the day before the date of the Spin-off will be fully vested and
exercisable as of such date and, if not exercised prior to such date, the
exercise price and the number of shares subject to such option will be adjusted,
(ii) the holder of each Pennzoil option outstanding and not exercised
immediately after the date of the Spin-off will receive for each such option an
option to purchase .32 shares of Pennzoil common stock and an option to purchase
.68 shares of Pennzoil-Quaker State Company Common Stock, (iii) each conditional
stock award of Pennzoil granted under a conditional stock award program of
Pennzoil shall be fully vested and matured (but payable at the conclusion of the
end of the program under which it has been granted) and (iv) the holder of a
Pennzoil conditional stock award shall be granted a conditional stock award
under the Incentive Plan having terms and conditions substantially the same as
the Pennzoil conditional stock award in respect of which it is granted
(including being fully vested and matured).
In addition, as of the date of the Spin-off, outstanding awards under
Pennzoil's existing incentive plans, other than the stock option or conditional
stock award programs referenced above, shall be vested and earned with the date
of the Spin-off constituting the end of each respective award period. Such
vested and earned awards shall be paid in cash following the date of the
Spin-off without regard to whether the holder of an award is then employed by
Pennzoil or Pennzoil-Quaker State Company.
BAUM EMPLOYMENT AGREEMENT
Mr. Baum is employed under an employment agreement (the "Baum Employment
Agreement") which provides that in the event the agreement terminates by reason
of disability, discharge without cause or resignation, following a change of
control of Quaker State (as defined therein), Mr. Baum, in addition to accrued
compensation and benefits, will be entitled to receive until his death a monthly
retirement payment, calculated as of the date of termination, which is the
monthly equivalent of a $300,000 annual benefit reduced by the actuarial
equivalent of (i) Mr. Baum's projected primary social security amount and (ii)
the benefits payable to Mr. Baum under all tax qualified retirement plans
maintained by Quaker State. The retirement payments will be suspended during any
period in which Mr. Baum is an employee or independent contractor of another
company with a rate of compensation equal to or in excess of $16,667 per month.
In the event of Mr. Baum's disability, the payment will be reduced
dollar-for-dollar by the amount of disability benefits, if any, paid to Mr. Baum
in accordance with any disability policy or program of Quaker State. The Baum
Employment Agreement provides that if Mr. Baum is discharged without cause or
resigns with good reason at any time within two years following the date that a
change of control of Quaker State (as defined therein) occurs, then, in addition
to the other amounts payable thereunder, Mr. Baum will be entitled to receive
for a period of three years from the date of termination his base salary and an
annual bonus equal to his target bonus for the calendar year in which the date
of termination occurs. The Merger will constitute a change of control of Quaker
State under the Baum Employment Agreement and, as a result of Mr. Baum's changed
duties following the Merger, he will be entitled to receive the payments
provided for under this agreement.
BARR CONSULTING AGREEMENT
PPC will enter into a mutually acceptable consulting agreement with John D.
Barr (which will become an agreement between Pennzoil-Quaker State Company and
Mr. Barr), currently President and Chief Operating Officer of Quaker State, with
a term continuing until one year from the Effective Time, under which Mr. Barr
will perform services on behalf of Pennzoil-Quaker State Company with respect to
matters
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<PAGE> 90
relating to Quaker State's business. The consulting agreement will provide for
payment to Mr. Barr of a consulting fee of $750,000, which will be paid in equal
monthly installments during 1999 and reimbursement of Mr. Barr's reasonable
expenses associated with providing his services. The consulting agreement will
not affect benefits payable to Mr. Barr under his existing employment agreement
with Quaker State. The consulting agreement will provide that, during the term
of the consulting agreement, Mr. Barr will not engage in any business or
endeavor which is in competition with Pennzoil-Quaker State Company.
EMPLOYMENT CONTINUATION AGREEMENTS
In 1995, Quaker State entered into Employment Continuation Agreements with
a number of key executives, including John D. Barr, Conrad A. Conrad, Paul E.
Konney and Charles F. Bechtel but not including Mr. Baum (the "Employment
Continuation Agreements"). The Employment Continuation Agreements provide for
the continued employment of the executives for a period of two years following a
change of control as defined in the agreements. The Merger will constitute a
change of control under the Employment Continuation Agreements. Under the
Employment Continuation Agreements, during this two-year period, the executive's
position, authority and responsibilities shall be at least commensurate with
those held, exercised and assigned immediately prior to the change of control,
and the executive shall receive a base salary at a monthly rate at least equal
to the monthly salary paid to the executive immediately prior to the change of
control. The executive also shall be afforded the opportunity to receive an
annual bonus on terms no less favorable to the executive than the annual bonus
opportunity that had been available to the executive for the calendar year ended
immediately prior to the change of control. During the employment period, the
executive also shall be entitled to participate in all long-term incentive
compensation programs and employee benefit plans at essentially the same levels
as prior to the change of control.
The Employment Continuation Agreements provide that if the executive's
employment terminates during the employment period by reason of death or
disability, the executive or his beneficiary or estate shall be entitled to
accrued compensation and benefits as well as any additional benefits payable due
to death or disability under Quaker State's plans, policies or programs. The
executive also is entitled to accrued compensation and benefits unless the
executive's employment is terminated during the employment period for cause or
the executive voluntarily terminates his employment during such period other
than for good reason (as defined in the Employment Continuation Agreement).
However, if during the employment period Quaker State terminates the
executive's employment other than for cause, or if, following a change of
control, the executive terminates his employment for good reason, the Employment
Continuation Agreements provide that Quaker State will pay the executive, in
addition to accrued compensation and benefits, cash amounts equal to (i) three
times the sum of (a) the executive's annual base salary and (b) the average of
the bonuses payable to the executive for the three calendar years ending
immediately prior to the change of control and (ii) the present value of the
additional retirement benefits that would have been payable to the executive
under Quaker State's Pension Plan or any supplemental retirement arrangements
had the executive remained in employment until the expiration of the employment
period. These agreements require a lump sum payment to the executive, and it is
anticipated that these agreements will be paid out in accordance with their
terms at the Closing.
In the event any amount paid to an executive under an Employment
Continuation Agreement would be an "excess parachute payment" as defined in the
Code, the amount payable under the agreement may be subject to a special excise
tax. During 1997, the Employment Continuation Agreements were amended and
restated to provide for the gross-up of any amount subject to taxes on excess
parachute payments so that the benefits of the agreement to the named Executive
Officers will not be reduced. In addition, Mr. Conrad's agreement was further
amended in 1998 to provide that his incremental retirement benefit following a
change of control would be determined as of the later of his having attained age
55 or the expiration of the employment period, instead of the expiration of the
employment period as provided in the other Employment Continuation Agreements.
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RABBI TRUST
In 1996, Quaker State established a "Rabbi Trust", which is intended to be
a grantor trust under Section 671 of the Code. In accordance with the terms of
the trust agreement, the Rabbi Trust was funded by Quaker State upon Quaker
State's execution of the Merger Agreement (a "Threatened Change in Control" as
such term is defined in the related Trust Agreement) in an amount sufficient to
provide for the payment of non-employee directors' retirement benefits, all
benefits provided under the 1996 Directors' Fee Plan, the Employment
Continuation Agreements and the Baum Employment Agreement, severance benefits
under Mr. Barr's employment agreement; and payments under Quaker State's
Supplemental Excess Retirement Plan Agreements. The Rabbi Trust also will
provide funds for the cost of litigation on behalf of the participants in such
plans or agreements to the extent necessary to ensure their rights thereunder.
The Rabbi Trust is a trust of which Quaker State, for tax purposes, is the
beneficiary and the trust assets, as assets of Quaker State, will be subject to
the claims of Quaker State's creditors in the event of Quaker State's bankruptcy
or insolvency.
RETENTION PAY PLAN
Executive officers are eligible to receive certain benefits under the
Retention Pay Plan described under "The Transaction Agreements -- Retention Pay
Plan."
LONG-TERM INCENTIVE PROGRAM
Under Quaker State's 1997 Long-Term Incentive Program, all of the
outstanding performance units will vest as of the Effective Time and will be
paid by Quaker State. The award payout will be 150% of the $1.00 unit value, or
$1.50 per unit. As of June 30, 1998, there were 5,638,884 units outstanding.
OTHER SEVERANCE BENEFITS
Since 1988, Quaker State has had a severance plan (the "Severance Plan")
under which eligible employees are entitled to a severance allowance in the
event of termination of employment following a change of control (as defined in
the Severance Plan). All non-union, full-time salaried employees and all
non-union, full-time hourly employees of Quaker State and its domestic
subsidiaries are entitled to participate. Under the Severance Plan, an eligible
employee whose employment is terminated by employer action other than for cause
following a change of control or who resigns under certain circumstances
following a change of control is entitled to a severance allowance equal to two
weeks of earnings for each full year and a prorated portion of earnings for each
partial year the employee has been employed plus earned but unused vacation pay,
to a maximum of two years of earnings. For purposes of determining the severance
allowance, an employee's earnings include his or her regular rate of salary for
the calendar year in which the change of control occurs plus bonuses earned for
the preceding calendar year, reduced to a weekly average; provided, however,
that if such earnings for the calendar year in which the termination occurs are
higher, the higher earnings are used. Participation in any pension or medical
plan in which the employee participated at the time of termination of employment
continues during the severance allowance payment period. Executive officers who
are not parties to the employment continuation agreements described above will
be eligible to receive benefits under the Severance Plan.
THE SPECIAL MEETING
This Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies from the holders of Quaker State Capital Stock by the
Quaker State Board for use at the Special Meeting. This Proxy
Statement/Prospectus and accompanying form of proxy are first being mailed to
the stockholders of Quaker State beginning on or about August 18, 1998.
TIME, DATE AND PLACE
The Special Meeting will be held at the Four Seasons Hotel, 120 East
Delaware Place, Chicago, Illinois 60611, on September 18, 1998, starting at 1:00
p.m., local time.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting (and any adjournment or postponement thereof),
Quaker State's stockholders will be asked to consider and vote upon the adoption
of the Merger Agreement (the "Proposal").
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RECORD DATE; VOTING RIGHTS; VOTE REQUIRED FOR APPROVAL
The close of business on August 10, 1998 (the "Quaker State Record Date")
has been established as the record date for Quaker State's stockholders entitled
to notice of and to vote at the Special Meeting.
Only holders of record of shares of Quaker State Capital Stock on the
Quaker State Record Date are entitled to notice of and to vote at the Special
Meeting. Each holder of record of Quaker State Capital Stock as of the Quaker
State Record Date is entitled to cast one vote per share on all matters
submitted to Quaker State's stockholders.
On August 10, 1998, there were 36,387,301 shares of Quaker State Capital
Stock outstanding and entitled to vote at the Special Meeting.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Quaker State Capital Stock entitled to vote is necessary
to constitute a quorum at the Special Meeting. The affirmative vote of the
holders of a majority of the outstanding shares of Quaker State Capital Stock is
required to approve and adopt the Proposal.
On June 15, 1998, directors and executive officers of Quaker State and
their affiliates beneficially owned approximately 10.6% of the outstanding
Quaker State Capital Stock. For additional information on the ownership of
Quaker State Capital Stock by Quaker State directors and executive officers, see
"Security Ownership of Certain Beneficial Owners."
PROXIES
All shares of Quaker State Capital Stock represented by properly executed
proxies received prior to or at the Special Meeting and not revoked will be
voted in accordance with the instructions indicated in such proxies. If no
instructions are indicated on a properly executed returned proxy, such proxy
will be voted FOR the approval of the Proposal.
Abstentions may be specified on the Proposal. A properly executed proxy
marked "ABSTAIN" with respect to the Proposal will be counted as present for
purposes of determining whether there is a quorum and for purposes of
determining the aggregate voting power and number of shares represented and
entitled to vote at the Special Meeting with respect to the Proposal. Because
the affirmative votes described above are required for approval of the Proposal,
a proxy marked "ABSTAIN" with respect to the Proposal will have the effect of a
vote against the Proposal. In addition, the failure of a stockholder of Quaker
State to return a proxy will have the effect of a vote against the Proposal.
Under NYSE rules, brokers who hold shares in street name for customers have
the authority to vote on certain "routine" proposals when they have not received
instructions from beneficial owners. Under NYSE rules, such brokers are
precluded from exercising their voting discretion with respect to proposals for
non-routine matters such as the Proposal. Thus, absent specific instructions
from the beneficial owner of such shares, brokers are not empowered to vote such
shares with respect to the approval and adoption of the Proposal (i.e., "broker
non-votes"). Since the affirmative votes described above are required for
approval of the Proposal, a "broker non-vote" with respect to the Proposal will
have the effect of a vote against the Proposal.
A stockholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of Quaker State a signed notice of revocation or a
later-dated, signed proxy or by attending the Special Meeting and voting in
person. Attendance at the Special Meeting will not in itself constitute the
revocation of a proxy.
The cost of solicitation of proxies will be paid by Quaker State. In
addition to solicitation by mail, arrangements will be made with brokerage
houses and other custodians, nominees and fiduciaries to send the proxy
materials to beneficial owners; and Quaker State will, upon request, reimburse
such brokerage houses and custodians for their reasonable expenses in so doing.
Quaker State has retained Morrow & Co., Inc. ("Morrow") for a fee of $15,000
(plus expenses), to aid in the solicitation of proxies and to verify certain
records related to the solicitations. Quaker State has retained Morrow to
provide additional services for a fee of $25,000. To the extent necessary in
order to ensure sufficient representation at its Special Meeting, Quaker State
or its proxy solicitor may request the return of proxy cards by personal
interview, mail, telephone,
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facsimile or other means of electronic transmission. The extent to which this
will be necessary depends upon how promptly proxy cards are returned.
Stockholders are urged to send in their proxies without delay.
Stockholders should not send in any stock certificates with their proxy
cards. As soon as practicable after the consummation of the Merger, a
transmittal form will be sent to former stockholders of Quaker State with
instructions for receiving Pennzoil-Quaker State Company Common Stock.
Stockholders will receive uncertificated shares of Pennzoil-Quaker State Company
stock recorded in book-entry form unless they request certificated shares.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
SECURITY OWNERSHIP OF PENNZOIL
The following table sets forth information concerning the number of shares
of Pennzoil Common Stock beneficially owned, directly or indirectly, as of June
1, 1998, by (i) the directors, the chief executive officer and the four other
most highly compensated executive officers of Pennzoil, (ii) all the foregoing
and other current executive officers of Pennzoil as a group and (iii) each
person known to possess voting or dispositive power over more than five percent
of outstanding Pennzoil Common Stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
BENEFICIAL OWNER SHARES(1) OF CLASS
---------------- --------- ----------
<S> <C> <C>
David P. Alderson II........................................ 72,726 *
Howard H. Baker, Jr. ....................................... 5,000 *
W. L. Lyons Brown, Jr.(2)................................... 9,821 *
Stephen D. Chesebro'........................................ 19,467 *
Ernest H. Cockrell(2)....................................... 419,066 *
Harry H. Cullen............................................. 16,115 *
Alfonso Fanjul(2)........................................... 30,700 *
Donald A. Frederick......................................... 6,709 *
Berdon Lawrence............................................. 15,000 *
James L. Pate............................................... 338,715 *
Brent Scowcroft............................................. 3,500 *
James W. Shaddix............................................ 80,865 *
Gerald B. Smith............................................. 2,000 *
Cyril Wagner, Jr. .......................................... 19,900 *
All the above and all other current executive officers as a
group (20 persons)........................................ 1,232,245 2.6
State Farm Mutual Automobile Insurance Company(3)........... 3,746,692 7.9
One State Farm Plaza
Bloomington, Illinois 61710
Franklin Mutual Advisers, Inc.(4)........................... 2,864,900 6.0
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
</TABLE>
- ---------------
(1) Pursuant to regulations of the SEC, securities must be listed as
beneficially owned by a person who directly or indirectly holds or shares
the power to vote or dispose of the securities, whether or not the person
has any economic interest in the securities. In addition, a person is deemed
a beneficial owner if he has the right to acquire beneficial ownership
within 60 days, including upon exercise of a stock option or conversion of a
convertible security. Securities owned by certain family members are
included in the foregoing table even in certain instances where the
possession or sharing of voting or dispositive power is not acknowledged.
The tabulation also includes shares subject to stock options exercisable
within 60 days (65,966 for Mr. Alderson, 16,666 for Mr. Chesebro', 6,666 for
Mr. Frederick, 309,866 for Mr. Pate, 67,556 for Mr. Shaddix and 643,194 for
all the above and all other current executive officers as a group).
(2) Certain persons have shared voting and dispositive power with respect to
certain shares of Pennzoil Common Stock in the above tabulation as follows:
Mr. Brown, 3,321 shares, which are held by charitable foundations of which
Mr. Brown is a member of the governing body; Mr. Cockrell, 419,066 shares,
409,066 of which are held by family partnerships and 10,000 of which are
held by a charitable foundation
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of which Mr. Cockrell is an officer; and Mr. Fanjul, 30,500 shares, which
are held by corporations in which Mr. Fanjul is controlling shareholder.
(3) The information in the foregoing table regarding State Farm Mutual
Automobile Insurance Company ("State Farm") is based on filings made with
the SEC reflecting ownership of Pennzoil Common Stock as of December 31,
1996, and no filing having been made to reflect any changes as of December
31, 1997. The filings state that the shares of Pennzoil Common Stock were
acquired in the ordinary course of business and not for the purpose of
influencing control of Pennzoil. The filings indicate sole voting and
dispositive power for 3,746,692 shares of Pennzoil Common Stock by State
Farm and related entities.
(4) The information in the foregoing table regarding Franklin Mutual Advisers,
Inc. ("Franklin") is based on a filing made with the SEC reflecting
ownership of Pennzoil Common Stock as of December 31, 1997. The filing
states that the shares of Pennzoil Common Stock were acquired in the
ordinary course of business and not for the purpose of influencing control
of Pennzoil. The filing indicates sole voting and dispositive power for
2,864,900 shares of Pennzoil Common Stock by Franklin and related entities.
* Less than 1%.
SECURITY OWNERSHIP OF QUAKER STATE
The following table sets forth information concerning the number of shares
of Quaker State Capital Stock beneficially owned, directly or indirectly, by the
directors and all executive officers of Quaker State, and by the directors and
all executive officers as a group. The table also sets forth information
concerning the number of shares beneficially owned (as defined in Rule 13d-3 of
the Securities Exchange Act of 1934, as amended) by each person known by Quaker
State who owns more than five percent of the outstanding shares of Quaker State
Capital Stock. Except as described in the notes below, all information in the
table and the accompanying footnotes is stated as of June 15, 1998.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
BENEFICIAL OWNER SHARES(1) OF CLASS
---------------- --------- ----------
<S> <C> <C>
John D. Barr................................................ 506,788(2)(3)(4) 1.4
Herbert M. Baum............................................. 1,154,641(2)(3)(4) 3.2
Charles F. Bechtel.......................................... 97,242(2)(4)(5) *
Leonard M. Carroll.......................................... 19,221(2)(6) *
Conrad A. Conrad............................................ 192,554(2)(4)(5) *
J. Taylor Crandall.......................................... 6,044(2)(7) *
Laurel Cutler............................................... 14,623(2)(6) *
C. Frederick Fetterolf...................................... 23,803(2)(6)(7) *
F. William Grube............................................ 31,294(2)(5)(6) *
Forrest R. Haselton......................................... 17,034(2)(6) *
Paul E. Konney.............................................. 88,441(2)(4) *
Kenneth Lee................................................. 1,000 *
L. David Myatt.............................................. 1,544,634(2)(4) 4.5
Raymond A. Ross, Jr......................................... 16,813(2)(6) *
Lorne R. Waxlax............................................. 37,713(2)(6) *
All directors and executive officers as a group (16
persons).................................................. 3,851,845(2)(3)(4)(5) 10.6
The Prudential Insurance Company of America(7).............. 2,023,320(7) 5.6
</TABLE>
- ---------------
* Less than one percent of the outstanding shares of Quaker State Capital
Stock is beneficially owned.
(1) In determining the percentage of the outstanding shares of Quaker State
Capital Stock owned by each person and by all directors and executive
officers as a group, the shares in the table include shares that may be
acquired upon the exercise of stock options immediately prior to the
Effective Time, assuming that the Effective Time occurs prior to or on
November 1, 1998; such shares are deemed to be outstanding for purposes of
the relevant percentage calculation. The directors and executive officers
have sole voting power and sole investment power with respect to all shares
set forth in the table except as indicated in the footnotes which follow.
(2) Includes shares which may be acquired by the following persons upon the
exercise of stock options which are presently exercisable or become
exercisable at the Effective Time: Mr. Barr, 467,500 shares;
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Mr. Baum, 902,000 shares; Mr. Bechtel, 85,500 shares; Mr. Carroll, 5,000
shares; Mr. Conrad, 160,000 shares; Mr. Crandall, 2,000 shares; Ms. Cutler,
5,000 shares; Mr. Fetterolf, 5,000 shares; Mr. Grube, 4,000 shares; Mr.
Haselton, 4,000 shares; Mr. Konney, 86,000 shares; Mr. Myatt, 250,000
shares; Mr. Ross, 5,000 shares; Mr. Waxlax, 4,000 shares; and all directors
and executive officers as a group, 1,986,000 shares.
(3) Includes restricted shares as to which the following persons have sole
voting power but do not have investment power: Mr. Barr, 21,000 shares; Mr.
Baum, 69,667 shares; and all directors and executive officers as a group,
90,667 shares.
(4) Includes, as of June 15, 1998, full shares represented by units credited to
the accounts of the following persons under the Quaker State Thrift and
Stock Purchase Plan: Mr. Barr, 4,288 shares; Mr. Baum, 2,542 shares; Mr.
Bechtel, 3,299 shares; Mr. Conrad, 17,105 shares; Mr. Konney, 2,441 shares;
Mr. Myatt, 11,559 shares; and all directors and executive officers as a
group, 41,234 shares. The plan's trustee votes these shares in accordance
with directions received from the plan's participants. Shares for which
directions are not provided by the plan's participants are voted in the same
proportions as shares for which votes have been received from other
participants.
(5) Includes shares held jointly by the following persons with their spouses:
Mr. Bechtel, 7,920 shares; Mr. Conrad, 15,449 shares; Mr. Grube, 20,000
shares; and all directors and executive officers as a group, 43,369 shares.
(6) Includes restricted shares of Quaker State Capital Stock issued to
non-employee directors in lieu of certain retirement benefits, as approved
at the 1998 annual meeting of the Quaker State stockholders: Mr. Carroll,
7,360 shares; Mr. Cutler, 8,623 shares; Mr. Fetterolf, 9,800 shares; Mr.
Grube, 7,294 shares; Mr. Haselton, 6,004 shares; Mr. Ross, 7,713 shares and
Mr. Waxlax, 8,745 shares.
(7) Includes shares of deferred Quaker State Capital Stock held for the
following persons under the Directors' Fee Plan, as of June 15, 1998: Mr.
Fetterolf, 6,003 shares and Mr. Crandall, 4,044 shares.
(8) The Prudential Insurance Company of America ("Prudential") has offices at
751 Broad Street, Newark, New Jersey 07102-3777. According to the Schedule
13G dated February 10, 1998 received by Quaker State, Prudential holds as of
December 31, 1997 sole voting and dispositive power over 5,600 shares, and
shared voting and dispositive power over 2,017,720 shares. Prudential has
indirect voting and investment discretion over 2,017,720 shares that are
held for the benefit of its clients by its separate accounts, externally
managed accounts, registered investment companies, subsidiaries and/or other
affiliates. All 2,023,320 shares were acquired in the ordinary course of
business and not with the purpose or effect of changing or influencing
control of Quaker State.
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DESCRIPTION OF CAPITAL STOCK OF PENNZOIL-QUAKER STATE COMPANY
Prior to the Spin-off, the authorized capital stock of Pennzoil-Quaker
State Company will consist of 100 million shares of Common Stock, par value
$0.10 per share ("Pennzoil-Quaker State Company Common Stock"), and 10 million
shares of Preferred Stock, par value $1.00 per share ("Pennzoil-Quaker State
Company Preferred Stock"). The following summary of the material terms of the
capital stock of Pennzoil-Quaker State Company does not purport to be complete
and is qualified by reference to the form of Pennzoil-Quaker State Company's
Restated Certificate of Incorporation and Amended and Restated Bylaws, which are
filed as exhibits to the registration statement of which this Proxy
Statement/Prospectus is a part.
PENNZOIL-QUAKER STATE COMPANY COMMON STOCK
Each share of Pennzoil-Quaker State Company Common Stock will possess
ordinary voting rights for the election of directors and for other corporate
matters, each share being entitled to one vote. There will be no cumulative
voting rights, meaning that the holders of a majority of the shares voting for
the election of directors can elect all the directors if they choose to do so.
The Pennzoil-Quaker State Company Common Stock will carry no preemptive rights
and will not be convertible, redeemable or assessable, or entitled to the
benefits of any sinking fund. Subject to any preferential rights of the
Pennzoil-Quaker State Company Preferred Stock, the holders of Pennzoil-Quaker
State Company Common Stock will be entitled to receive dividends in such amounts
and at such times as may be declared by the Board of Directors out of funds
legally available therefor and to share ratably in the assets of Pennzoil-Quaker
State Company legally available for distribution to its stockholders in the
event of its liquidation, dissolution or winding-up.
The Pennzoil-Quaker State Company Restated Certificate of Incorporation
will provide that stockholders may not act by written consent in lieu of a
meeting. The Pennzoil-Quaker State Company Restated Certificate of Incorporation
will also provide that the number of directors shall not be fewer than three nor
more than 15 and will provide for a classified Board of Directors, consisting of
three classes as nearly equal in size as practicable. Each class will hold
office until the third annual stockholders' meeting for election of directors
following the most recent election of such class, except that the initial terms
of the three classes expire in 1999, 2000 and 2001, respectively. See
"Management -- Directors and Executive Officers." A director may not be removed
without cause and may only be removed for cause by the affirmative vote of the
holders of 75% or more of the combined voting power of the then-outstanding
shares of voting stock, voting together as a single class. Special meetings of
the stockholders may be called by the Chairman of the Board, the President or
the Board of Directors, but may not be called by stockholders. The provisions
relating to capital stock, the Board of Directors, the Board of Directors power
to amend the Bylaws, the calling of special meetings, actions taken by written
consent and limitation of liability of directors may be amended only by the vote
of the holders of at least 80% of the capital stock entitled to vote for the
election of directors.
PENNZOIL-QUAKER STATE COMPANY PREFERRED STOCK
The Board of Directors of Pennzoil-Quaker State Company will be empowered,
without approval of the stockholders, to cause shares of Pennzoil-Quaker State
Company Preferred Stock to be issued in one or more series, with the numbers of
shares of each series to be determined by it. The Board of Directors will be
authorized to fix or alter the designation, number, voting powers, preferences
and relative, participating, optional and other rights, and the qualifications,
limitations or restrictions of such rights. Among the specific matters that may
be determined by the Board of Directors are the rate of dividends; the
redemption price, if any; the terms of a sinking fund or redemption or purchase
account, if any; the amount payable in the event of any voluntary liquidation,
dissolution or winding up of the affairs of the Company; conversion or exchange
rights, if any; and voting powers, if any.
Although Pennzoil-Quaker State Company has no present intention to issue
Pennzoil-Quaker State Company Preferred Stock (other than pursuant to the Rights
Agreement described below), the issuance of shares of Pennzoil-Quaker State
Company Preferred Stock, or the issuance of rights to purchase such shares,
could be used to discourage an unsolicited acquisition proposal. For instance,
the issuance of a series of Pennzoil-Quaker State Company Preferred Stock might
impede a business combination by including class voting rights that would enable
the holders to block such a transaction; or such issuance might facilitate a
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<PAGE> 97
business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of Pennzoil-Quaker State Company Preferred Stock could adversely
affect the voting power of the holders of the Pennzoil-Quaker State Company
Common Stock. Although the Board of Directors is required to make any
determination to issue such stock based on its judgment as to the best interests
of the stockholders of Pennzoil-Quaker State Company, the Board of Directors
could act in a manner that would discourage an acquisition attempt or other
transaction that some or even a majority of the stockholders might believe to be
in their best interests or in which stockholders might receive a premium for
their stock over the then market price of such stock. The Board of Directors
does not at present intend to seek stockholder approval prior to any issuance of
currently authorized stock, unless otherwise required by law or the rules of any
market on which Pennzoil-Quaker State Company's securities are traded.
STOCKHOLDER RIGHTS PLAN
Prior to the Spin-off, the Board of Directors of PPC will declare a
dividend of one right to purchase PPC preferred stock ("Right") for each
outstanding share of PPC common stock to be paid to Pennzoil immediately prior
to the Spin-off. As a result, one Right will be distributed with each share of
Pennzoil-Quaker State Company Common Stock distributed in the Spin-off and the
Merger. Each Right will entitle the registered holder to purchase from
Pennzoil-Quaker State Company a unit consisting of one one-hundredth of a share
(a "Fractional Share") of Series A Junior Participating Preferred Stock, par
value $1.00 per share, of Pennzoil-Quaker State Company (the "Series A Preferred
Stock"), at a specified purchase price per Fractional Share to be determined by
the Board of Directors of PPC prior to the Spin-off, subject to adjustment (the
"Purchase Price"). The following summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement between Pennzoil-Quaker State Company and a Rights Agent (the
"Rights Agreement"), the form of which is filed as an exhibit to the
Registration Statement of which this Proxy Statement/Prospectus is a part and is
incorporated herein by reference.
Initially, the Rights will be attached to all certificates representing
outstanding shares of Pennzoil-Quaker State Company Common Stock, and no
separate certificates for the Rights ("Rights Certificates") will be
distributed. Following the Spin-off, the Rights will separate from the
Pennzoil-Quaker State Company Common Stock and a "Rights Distribution Date" will
occur, with certain exceptions, upon the earlier of (i) 10 days following a
public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of Pennzoil-Quaker
State Company Common Stock (the date of the announcement being the "Stock
Acquisition Date"), or (ii) 10 business days following the commencement of a
tender offer or exchange offer that would result in a person's becoming an
Acquiring Person. In certain circumstances, the Rights Distribution Date may be
deferred by the Board of Directors of Pennzoil-Quaker State Company. Certain
inadvertent acquisitions will not result in a person's becoming an Acquiring
Person if the person promptly divests itself of sufficient Pennzoil-Quaker State
Company Common Stock. Following the Distribution and until the Rights
Distribution Date, (a) the Rights will be evidenced by the certificates
representing outstanding shares of Pennzoil-Quaker State Company Common Stock
and will be transferred with and only with such certificates, which will contain
a notation incorporating the Rights Agreement by reference, and (b) the
surrender for transfer of any certificate for Pennzoil-Quaker State Company
Common Stock will also constitute the transfer of the Rights associated with the
Pennzoil-Quaker State Company Common Stock represented by such certificate.
The Rights are not exercisable until the Rights Distribution Date and will
expire at the close of business 10 years after the Rights are issued, unless
earlier redeemed or exchanged by Pennzoil-Quaker State Company as described
below.
As soon as practicable after the Rights Distribution Date, Rights
Certificates will be mailed to holders of record of Pennzoil-Quaker State
Company Common Stock as of the close of business on the Rights Distribution Date
and, from and after the Rights Distribution Date, the separate Rights
Certificates alone will represent the Rights. All shares of Pennzoil-Quaker
State Company Common Stock issued prior to the Rights
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Distribution Date will be issued with Rights. Shares of Pennzoil-Quaker State
Company Common Stock issued after the Rights Distribution Date in connection
with certain employee benefit plans or upon conversion of certain securities
will be issued with Rights. Except as otherwise determined by the Board of
Directors of Pennzoil-Quaker State Company, no other shares of Pennzoil-Quaker
State Company Common Stock issued after the Rights Distribution Date will be
issued with Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring Person
(except pursuant to a tender or exchange offer for all outstanding shares of
Pennzoil-Quaker State Company Common Stock at a price and on terms that a
majority of the independent directors of Pennzoil-Quaker State Company
determines to be fair to and otherwise in the best interests of Pennzoil-Quaker
State Company and its stockholders (a "Permitted Offer")), each holder of a
Right will thereafter have the right to receive, upon exercise of such Right, a
number of shares of Pennzoil-Quaker State Company Common Stock (or, in certain
circumstances, cash, property or other securities of Pennzoil-Quaker State
Company) having a Current Market Price (as defined in the Rights Agreement)
equal to two times the exercise price of the Right. Notwithstanding the
foregoing, following the occurrence of any Triggering Event (as defined below),
all Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by or transferred to an Acquiring Person (or
by certain related parties) will be null and void in the circumstances set forth
in the Rights Agreement. Rights are not exercisable following the occurrence of
any Flip-In Event, however, until such time as the Rights are no longer
redeemable by Pennzoil-Quaker State Company as set forth below.
In the event (a "Flip-Over Event") that, at any time from and after the
time an Acquiring Person becomes such, (i) Pennzoil-Quaker State Company is
acquired in a merger or other business combination transaction (other than
certain mergers that follow a Permitted Offer) or (ii) 50% or more of Pennzoil-
Quaker State Company's assets or earning power is sold or transferred, each
holder of a Right (except Rights that are voided as set forth above) shall
thereafter have the right to receive, upon exercise, a number of shares of
common stock of the acquiring company having a Current Market Price equal to two
times the exercise price of the Right. Flip-In Events and Flip-Over Events are
collectively referred to as "Triggering Events."
The number of outstanding Rights associated with a share of Pennzoil-Quaker
State Company Common Stock, or the number of Fractional Shares of Series A
Preferred Stock issuable upon exercise of a Right and the Purchase Price, are
subject to adjustment in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the Pennzoil-Quaker State Company Common
Stock occurring prior to the Rights Distribution Date. The Purchase Price
payable, and the number of Fractional Shares of Series A Preferred Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution in the event of certain
transactions affecting the Series A Preferred Stock.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Series A Preferred Stock that are not integral
multiples of a Fractional Share are required to be issued and, in lieu thereof,
an adjustment in cash may be made based on the market price of the Series A
Preferred Stock on the last trading date prior to the date of exercise. Pursuant
to the Rights Agreement, Pennzoil-Quaker State Company reserves the right to
require prior to the occurrence of a Triggering Event that, upon any exercise of
Rights, a number of Rights be exercised so that only whole shares of Series A
Preferred Stock will be issued.
At any time until ten days following the first date of public announcement
of the occurrence of a Flip-In Event, Pennzoil-Quaker State Company may redeem
the Rights in whole, but not in part, at a price of $0.01 per Right, payable, at
the option of Pennzoil-Quaker State Company, in cash, shares of Pennzoil-Quaker
State Company Common Stock or such other consideration as the Board of Directors
of Pennzoil-Quaker State Company may determine. Immediately upon the
effectiveness of the action of the Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $0.01 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Pennzoil-Quaker
State Company Common Stock then outstanding or the occurrence of a Flip-Over
Event, Pennzoil-Quaker State Company may exchange the Rights (other than
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Rights owned by an Acquiring Person or an affiliate or an associate of an
Acquiring Person, which will have become void), in whole or in part, at an
exchange ratio of one share of Pennzoil-Quaker State Company Common Stock,
and/or other equity securities deemed to have the same value as one share of
Pennzoil-Quaker State Company Common Stock, per Right, subject to adjustment.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Pennzoil-Quaker State Company, including, without
limitation, the right to vote or to receive dividends. While the distribution of
the Rights should not be taxable to stockholders or to Pennzoil-Quaker State
Company, stockholders may, depending upon the circumstances, recognize taxable
income in the event that the Rights become exercisable for Pennzoil-Quaker State
Company Common Stock (or other consideration of Pennzoil-Quaker State Company)
or for the common stock of the acquiring company as set forth above or are
exchanged as provided in the preceding paragraph.
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors of Pennzoil-Quaker State
Company as long as the Rights are redeemable. Thereafter, the provisions of the
Rights Agreement other than the redemption price may be amended by the Board of
Directors in order to cure any ambiguity, defect or inconsistency, to make
changes that do not materially adversely affect the interests of holders of
Rights (excluding the interests of any Acquiring Person), or to shorten or
lengthen any time period under the Rights Agreement; provided, however, that no
amendment to lengthen the time period governing redemption shall be made at such
time as the Rights are not redeemable.
The Rights will have certain antitakeover effects. They will cause
substantial dilution to any person or group that attempts to acquire
Pennzoil-Quaker State Company without the approval of Pennzoil-Quaker State
Company's Board of Directors. As a result, the overall effect of the Rights may
be to render more difficult or discourage any attempt to acquire Pennzoil-Quaker
State Company, even if such acquisition may be favorable to the interests of
Pennzoil-Quaker State Company's stockholders. Because the Board of Directors of
Pennzoil-Quaker State Company can redeem the Rights or approve a Permitted
Offer, the Rights should not interfere with a merger or other business
combination approved by the Board. The Rights are being issued to protect
Pennzoil-Quaker State Company's stockholders from coercive or abusive takeover
tactics and inadequate takeover offers and to afford Pennzoil-Quaker State
Company's Board of Directors more negotiating leverage in dealing with
prospective acquirors.
LIMITATION ON DIRECTORS' LIABILITY
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Delaware law, directors
are accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Delaware law enables corporations to limit the available relief for such conduct
to equitable remedies such as injunction or rescission. The Pennzoil-Quaker
State Company Restated Certificate of Incorporation will limit the monetary
liability of directors of Pennzoil-Quaker State Company to Pennzoil-Quaker State
Company or its stockholders to the fullest extent permitted by Delaware law.
Specifically, directors of Pennzoil-Quaker State Company will not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to Pennzoil-Quaker State Company or its stockholders, (ii) for acts or
omissions that are not in good faith or that involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in the Pennzoil-Quaker State Company
Restated Certificate of Incorporation may have the effect of reducing the
likelihood of stockholder class actions and derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited
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Pennzoil-Quaker State Company and its stockholders. Pennzoil-Quaker State
Company's Bylaws will provide indemnification to Pennzoil-Quaker State Company's
officers and directors and certain other persons with respect to certain
matters, and Pennzoil-Quaker State Company will enter into agreements with each
of its directors providing for indemnification with respect to certain matters.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Pennzoil-Quaker State Company is a Delaware corporation and is subject to
Section 203 of the DGCL. In general, Section 203 prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) of a Delaware corporation from engaging
in a "business combination" (as defined) with the corporation for three years
following the time such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer) or (iii) following the
transaction in which such person became an interested stockholder, the business
combination was approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of two-thirds of the outstanding voting stock of the corporation not owned by
the interested stockholder. Under Section 203, the restrictions described above
also do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
CERTAIN BYLAW PROVISIONS
Pennzoil-Quaker State Company's Bylaws will contain provisions requiring
that advance notice be delivered to Pennzoil-Quaker State Company of any
business to be brought by a stockholder before an annual meeting of stockholders
and providing for certain procedures to be followed by stockholders in
nominating persons for election to the Board of Directors of Pennzoil-Quaker
State Company. Generally, such advance notice provisions provide that written
notice must be given to the Secretary of Pennzoil-Quaker State Company by a
stockholder (i) in the event of business to be brought by a stockholder before
an annual meeting, not less than 90 days nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting of stockholders of
Pennzoil-Quaker State Company (with certain exceptions if the date of the annual
meeting is different by more than specified amounts from the anniversary date)
and (ii) in the event of nominations of persons for election to the Board of
Directors by any stockholder, (a) with respect to an election to be held at the
annual meeting of stockholders, not less than 90 days nor more than 120 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders of Pennzoil-Quaker State Company (with certain exceptions if the
date of the annual meeting is different by more than specified amounts from the
anniversary date) and (b) with respect to an election to be held at a special
meeting of stockholders for the election of directors, not later than the close
of business on the tenth business day following the date on which notice of the
special meeting was mailed by Pennzoil-Quaker State Company to stockholders or
public disclosure of the date and purpose of the special meeting was made,
whichever first occurs. Such notice must set forth specific information
regarding such stockholder and such business or director nominee, as described
in Pennzoil-Quaker State Company's Bylaws. Both the Pennzoil-Quaker State
Company Restated Certificate of Incorporation and Bylaws will provide that the
Bylaws may be amended by the affirmative vote of at least (i) a majority of the
then authorized number of directors or (ii) 66 2/3% of the combined voting power
of the outstanding voting stock of Pennzoil-Quaker State Company.
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LIMITATION ON CHANGES IN CONTROL
Certain of the above provisions and the provisions of Section 203 of the
DGCL could have the effect of delaying, deferring or preventing a change in
control of the Company or the removal of existing management or deterring
potential acquirors from making an offer to stockholders of the Company. This
could be the case notwithstanding that a majority of the stockholders might
benefit from such a change in control or offer.
TRANSFER AGENT AND REGISTRAR
The transfer agent for the Pennzoil-Quaker State Company Common Stock will
initially be Pennzoil for a transition period, and the registrar for the
Pennzoil-Quaker State Company Common Stock will be Harris Trust and Savings
Bank.
STOCK EXCHANGE LISTING; DELISTING AND DEREGISTRATION OF QUAKER STATE CAPITAL
STOCK
It is a condition to the consummation of the Merger that the shares of
Pennzoil-Quaker State Company Common Stock to be issued in the Spin-off and the
Merger and such other shares required to be reserved for issuance in connection
therewith be approved for listing on the NYSE prior to the Effective Time,
subject to official notice of issuance. If the Merger is consummated, Quaker
State Capital Stock, including the associated preferred stock purchase rights,
will cease to be listed on the NYSE and the Pacific Exchange and will be
deregistered under the Exchange Act.
COMPARISON OF STOCKHOLDER RIGHTS
GENERAL
The rights of Quaker State stockholders are currently governed by Delaware
law, the Certificate of Incorporation and Bylaws of Quaker State. Following the
Merger, the rights of Quaker State stockholders who become stockholders of
Pennzoil-Quaker State Company in connection with the Merger will be governed by
Delaware law, the Pennzoil-Quaker State Company Restated Certificate of
Incorporation and the Pennzoil-Quaker State Company Bylaws. The following is a
summary of the principal differences between the current rights of Quaker State
stockholders and those of Pennzoil-Quaker State Company. Because Quaker State
and Pennzoil-Quaker State Company are both Delaware corporations, the law
governing the rights of Quaker State stockholders will not change. The following
summary sets forth the material differences between the Certificates of
Incorporation and Bylaws of the companies, which are incorporated by reference
herein.
BUSINESS COMBINATIONS
Under Delaware law, approval by the affirmative vote of the holders of a
majority of the outstanding stock of a corporation entitled to vote generally is
required for a merger or consolidation or sale, lease or exchange of all or
substantially all of the corporation's assets. Unless the corporate charter
provides otherwise, no vote of the stockholders of a surviving corporation is
required to approve a merger if (i) the merger does not amend in any respect the
surviving corporation's charter, (ii) each share of the surviving corporation's
stock outstanding immediately prior to the merger is to remain outstanding
unchanged, and (iii) the number of shares of common stock of the surviving
corporation to be issued or delivered under the plan of merger (plus those
issuable upon conversion of any securities to be issued under the plan) does not
exceed 20% of the surviving corporation's common stock outstanding immediately
prior to the merger. Additionally, when certain conditions are met, no vote of
stockholders is required for the merger of a Delaware corporation into a
corporation that holds at least 90% of the outstanding shares of each class of
the corporation.
The Quaker State Certificate of Incorporation requires the affirmative vote
of the holders of 95% of all shares of stock of Quaker State entitled to vote in
elections of directors, voting as one class, to approve certain mergers,
consolidations, sales or leases of assets with a value of $5 million or more or
certain other transactions involving any beneficial owner of more than 30% of
the outstanding shares of stock of Quaker
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State entitled to vote in elections of directors (a "Quaker State Related
Person"). The Pennzoil-Quaker State Company Restated Certificate of
Incorporation will not contain any similar provision.
Pennzoil-Quaker State Company will be subject to the provisions of Section
203 of the DGCL. Quaker State has opted out of Section 203 and is therefore not
subject to its provisions. See "Description of Capital Stock of Pennzoil-Quaker
State Company -- Section 203 of the Delaware General Corporation Law."
AMENDMENTS TO CHARTER AND BYLAWS
Section 242 of the DGCL provides that an amendment to a corporation's
certificate of incorporation must be adopted by a resolution of the board of
directors declaring the advisability of the amendment and approved by the
affirmative vote of the holders of at least a majority of the outstanding stock
entitled to vote thereon, and a majority of the outstanding stock of each class
entitled to vote thereon as a separate class, unless the certificate of
incorporation requires a greater percentage. The Pennzoil-Quaker State Company
Restated Certificate of Incorporation will require the affirmative vote of at
least 80% of the combined voting power of the then-outstanding shares of voting
stock to approve amendments to the Pennzoil-Quaker State Company Restated
Certificate of Incorporation relating to capital stock, the Board of Directors,
the Board of Directors power to amend the Bylaws, the calling of special
meetings, actions taken by written consent and limitation of liability of
directors. The Quaker State Certificate of Incorporation requires the
affirmative vote of the holders of 95% of all shares of stock of Quaker State
entitled to vote in elections of directors, voting as one class, to approve
amendments to the Quaker State Certificate of Incorporation relating to the
provisions governing a business combination with a Quaker State Related Person,
unless such amendment is unanimously recommended to the stockholders by the
Quaker State Board of Directors if all the directors of Quaker State are
continuing directors (as defined). All other amendments to the Quaker State
Certificate of Incorporation require the affirmative vote of holders of a
majority of the shares of Quaker State Capital Stock. Both the Pennzoil-Quaker
State Company Restated Certificate of Incorporation and Bylaws will provide that
the Bylaws may be amended by the affirmative vote of at least (i) a majority of
the then authorized number of directors or (ii) 66 2/3% of the combined voting
power of the outstanding voting stock of Pennzoil-Quaker State Company. The
Quaker State Bylaws provide for amendment of the Bylaws by resolution of a
majority of directors or by a majority of the stockholders.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
Under Section 228 of the DGCL, stockholders may, unless otherwise provided
in the certificate of incorporation, act without a meeting, without prior notice
and without a vote, by written consent of holders of outstanding stock having
not less than the minimum number of votes necessary to take such action at a
meeting at which all shares entitled to vote were present and voted. The
Pennzoil-Quaker State Company Restated Certificate of Incorporation will provide
that stockholders may not act by written consent. The Quaker State Certificate
of Incorporation allows stockholders to act by written consent.
SPECIAL MEETINGS OF STOCKHOLDERS
The Pennzoil-Quaker State Company Restated Certificate of Incorporation
will provide that special meetings of the stockholders may be called only by the
Chairman of the Board, the President or the Pennzoil-Quaker State Company Board
of Directors pursuant to a resolution adopted by a majority of the directors of
Pennzoil-Quaker State Company. Special meetings of the stockholders of
Pennzoil-Quaker State Company may not be called by any other person. The Quaker
State Bylaws provide that special meetings of the stockholders of Quaker State
may be called only by the Chairman of the Board, the President or the Secretary
or the Board of Directors of Quaker State pursuant to a resolution adopted by a
majority of the total number of authorized directors.
CLASSIFICATION OF BOARD OF DIRECTORS
The Pennzoil-Quaker State Company Restated Certificate of Incorporation
will provide that the number of directors shall be not less than three nor more
than 15, with the number of directors being fixed from time
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to time by or pursuant to a resolution passed by the Pennzoil-Quaker State
Company Board of Directors. The Pennzoil-Quaker State Company Restated
Certificate of Incorporation will provide that the directors of Pennzoil-Quaker
State Company will be divided into three classes serving staggered three-year
terms such that approximately one-third of the Pennzoil-Quaker State Company
Board of Directors is elected each year. The Quaker State Bylaws provide that
the number of directors shall be 14, which number may be modified from time to
time by resolution of the Quaker State Board of Directors. Neither the Quaker
State Certificate of Incorporation nor the Quaker State Bylaws provide for a
classified board of directors.
REMOVAL OF DIRECTORS
Under Section 141 of the DGCL, any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
the shares entitled to vote at an election of directors, except (i) in the case
of a corporation having a classified board, stockholders may effect such removal
only for cause, unless the certificate of incorporation otherwise provides, and
(ii) in the case of a corporation having cumulative voting, if less than the
entire board is to be removed, no director may be removed without cause if the
votes cast against such director's removal would be sufficient to elect such
director if then cumulatively voted at an election of the entire board of
directors or, if the board is classified, at an election of the class of
directors of which he is a part. The Pennzoil-Quaker State Company Restated
Certificate of Incorporation will provide that any director may be removed from
office only for cause and only by the affirmative vote of the holders of 75% or
more of the combined voting power of the then-outstanding shares of voting
stock, voting together as a single class. Neither the Quaker State Certificate
of Incorporation nor the Quaker State Bylaws contain special provisions relating
to the removal of directors.
NO CUMULATIVE VOTING
Under Section 214 of the DGCL, the certificate of incorporation of a
corporation may provide for cumulative voting in the election of directors.
Neither the Pennzoil-Quaker State Company Restated Certificate of Incorporation
nor the Quaker State Certificate of Incorporation provides for cumulative
voting.
ADVANCE NOTICE BYLAWS
Quaker State's Bylaws establish advance notice procedures with regard to
the nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors and with regard to
certain matters to be brought before an annual meeting of stockholders of Quaker
State. All such nominations must be received no less than 60 nor more than 90
days from the anniversary of the next preceding annual meeting. Pennzoil-Quaker
State Company's Bylaws contain similar provisions, although the advance notice
required thereunder is no less than 90 nor more than 120 days from the
anniversary of the next preceding annual meeting.
COMPROMISE OR ARRANGEMENT BETWEEN CORPORATION AND CREDITORS OR STOCKHOLDERS
As authorized under Section 102(b)(2) of the DGCL, the Quaker State
Certificate of Incorporation provides that whenever a compromise or arrangement
is proposed between the corporation and its creditors or any class of them
and/or between the corporation and its stockholders or any class of them, any
court of equitable jurisdiction within the State of Delaware may, on the
application in a summary way of the corporation or any of its creditors or
stockholders or on the application of any receiver or receivers appointed for
the corporation under the provisions of Section 291 of the DGCL or on the
application of trustees in dissolution or of any receiver or receivers appointed
for the corporation under the provisions of Section 279 of the DGCL, order a
meeting of the creditors or class of creditors, and/or the stockholders or class
of stockholders of the corporation, as the case may be, to be summoned in such
manner as the court directs. If a majority in number representing three-fourths
in value of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of the corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of the corporation as a
consequence of such compromise or arrangement, the compromise or arrangement and
the reorganization shall, if sanctioned by the court to which the application
has been made, be binding on all the creditors or class of creditors, and/or on
all the
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stockholders or class of stockholders, of the corporation, as the case may be,
and also on the corporation. The Pennzoil-Quaker State Company Restated
Certificate of Incorporation will not include such provisions.
COMPARISON OF CURRENT QUAKER STATE STOCKHOLDER RIGHTS PLAN WITH PENNZOIL-QUAKER
STATE COMPANY STOCKHOLDER RIGHTS PLAN FOLLOWING THE MERGER
On September 28, 1995, the Quaker State Board declared a dividend
distribution of one Capital Stock Purchase Right (a "Quaker State Right") for
each outstanding share of Quaker State Capital Stock pursuant to its Rights
Agreement dated September 28, 1995 with Mellon Securities Trust Company (the
"Quaker State Rights Agreement"). The Quaker State Rights are designed to cause
substantial dilution to any person or group that acquires beneficial ownership
of 15% or more of the Quaker State Capital Stock (a "Quaker State Acquiring
Person"). The Quaker State Rights are redeemable by the Quaker State Board for
$.01 per Quaker State Right at any time before a person becomes a Quaker State
Acquiring Person. The Quaker State Rights are exchangeable by the Quaker State
Board at any time after a person becomes a Quaker State Acquiring Person and
prior to the acquisition by certain persons of 50% or more of the outstanding
shares of Quaker State Capital Stock at an exchange ratio of one share of Quaker
State Capital Stock per Right. The purpose of the Quaker State Rights is to
deter any acquisition of 15% or more of the Quaker State Capital Stock except
pursuant to a transaction that has been approved by the Quaker State Board.
In connection with the execution of the Merger Agreement, the Quaker State
Rights Agreement was amended to provide that the Merger Agreement and the
transactions contemplated thereby would not cause Pennzoil, PPC or any of their
affiliates to become a Quaker State Acquiring Person or otherwise trigger any
consequences under the Quaker State Rights Agreement. In addition, if the Merger
is completed, the Quaker State Rights will expire immediately prior to the
Effective Time without any payment being made with respect to the Quaker State
Rights.
Prior to the Spin-off, Pennzoil-Quaker State Company will adopt the
Pennzoil-Quaker State Company Rights Agreement, which is similar in all material
respects to the Quaker State Rights Agreement. See "Description of Capital Stock
of Pennzoil-Quaker State Company -- Stockholder Rights Plan."
LEGAL MATTERS
Certain legal matters in connection with the Pennzoil-Quaker State Company
Common Stock to be issued to Pennzoil's stockholders and Quaker State's
stockholders in the Spin-off and the Merger will be passed upon by Baker &
Botts, L.L.P., counsel to Pennzoil, located at 910 Louisiana, Houston, Texas
77002. Additionally, it is a condition to the consummation of the Merger that
Quaker State receive an opinion from Debevoise & Plimpton, located at 875 Third
Avenue, New York, New York 10022, and that Pennzoil and PPC receive an opinion
from Baker & Botts, L.L.P., with respect to the tax treatment of the Merger.
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EXPERTS
The Pennzoil Products Group combined financial statements included in this
Proxy Statement/ Prospectus to the extent and for the periods indicated in their
report have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
The consolidated financial statements and financial statement schedule of
Quaker State and its subsidiaries as of December 31, 1997 and 1996, and for each
of the years in the three-year period ended December 31, 1997, incorporated in
this Proxy Statement/Prospectus by reference to the Quaker State Annual Report
on Form 10-K, have been incorporated by reference herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent public accountants, and upon
the authority of such firm as experts in accounting and auditing.
FUTURE STOCKHOLDER PROPOSALS
If the Merger is consummated, Pennzoil-Quaker State Company expects to hold
an annual meeting of stockholders in the second quarter of 1999. Stockholder
proposals intended to be included in Pennzoil-Quaker State Company's proxy
materials for the 1999 annual meeting of stockholders must be received by
Pennzoil-Quaker State Company a reasonable time before the solicitation of
proxies for the meeting is made.
If the Merger is not consummated, Quaker State expects to hold a meeting in
the second quarter of 1999. Any proposal submitted by a stockholder for the 1999
annual meeting of Quaker State stockholders must be received by Quaker State on
or prior to November 26, 1998 in order to be eligible to be included in Quaker
State's proxy materials for that meeting. Under the Quaker State Bylaws,
proposals by stockholders of director nominees or business to be considered at
the 1999 annual meeting of stockholders that are not submitted for possible
inclusion in the proxy materials for that meeting must be received by the
Secretary of Quaker State between February 14 and March 16, 1999.
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WHERE YOU CAN FIND MORE INFORMATION
Quaker State is subject to the informational requirements of the Exchange
Act and in accordance therewith files annual, quarterly and current reports,
proxy statements and other information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's public reference
rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, Seven World Trade
Center, New York, New York 10048 and 500 West Madison 14th Floor, Chicago,
Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms. Quaker State's SEC filings also are available to the
public from commercial document retrieval services and at the world-wide web
site maintained by the SEC at http://www.sec.gov. You may also inspect such
reports, proxy statements and other information concerning Quaker State at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005 and the Pacific Exchange, 301 Pine Street, San Francisco, California
94104, on which exchanges the Quaker State Capital Stock is listed.
Pennzoil has filed the Pennzoil-Quaker State Company Registration Statement
on Form S-4 with the SEC to register the Pennzoil-Quaker State Company Common
Stock to be issued in connection with the Merger. This Proxy
Statement/Prospectus is a part of the Pennzoil-Quaker State Company Registration
Statement and constitutes a prospectus of Pennzoil-Quaker State Company in
addition to being a proxy statement of Quaker State for the Special Meeting.
As allowed by SEC rules, this Proxy Statement/Prospectus does not contain
all the information you can find in the Pennzoil-Quaker State Company
Registration Statement or the exhibits to the Pennzoil-Quaker State Company
Registration Statement.
The SEC allows Quaker State to "incorporate by reference" information into
this Proxy Statement/Prospectus, which means that Quaker State can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this Proxy Statement/Prospectus, except for any information
superseded by information in this Proxy Statement/Prospectus. This Proxy
Statement/Prospectus incorporates by reference the documents set forth below
that Quaker State previously filed with the SEC. These documents contain
important information about Quaker State and its finances.
1. Quaker State's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
2. The portions of Quaker State's Proxy Statement dated March 27, 1998
that have been incorporated by reference in Quaker State's Form 10-K for
the fiscal year ended December 31, 1997.
3. Quaker State's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1998 and June 30, 1998.
4. Quaker State's Current Reports on Form 8-K filed on November 17,
1997 and April 21, 1998 and Form 8-K/A2 filed on April 3, 1998.
Quaker State also is incorporating by reference all additional documents
that it files with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, between the date of this Proxy
Statement/Prospectus and the date of the Special Meeting.
If you are a stockholder or beneficial owner, Quaker State may have sent
you some of the documents incorporated by reference, but you can obtain any of
them from Quaker State or the SEC. Documents incorporated by reference are
available from Quaker State without charge, excluding exhibits unless Quaker
State specifically has incorporated by reference an exhibit in this Proxy
Statement/Prospectus. Stockholders, beneficial owners, and any other person to
whom a Proxy Statement/Prospectus is delivered, may obtain
102
<PAGE> 107
without change a copy of documents that we incorporate by reference in this
Proxy Statement/Prospectus by requesting them in writing or by telephone at the
following address:
Quaker State Corporation
225 E. John Carpenter Freeway
Irving, Texas 75062
Attn: Secretary
Tel: (972) 868-0400
If you would like to request documents from Quaker State, please do so by
September 11, 1998 to receive them before the Special Meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS TO CONSIDER AND VOTE UPON THE
ADOPTION OF THE MERGER AGREEMENT. NEITHER QUAKER STATE NOR PENNZOIL-QUAKER STATE
COMPANY HAS AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY
STATEMENT/PROSPECTUS IS DATED AUGUST , 1998. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY
DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THIS PROXY
STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF PENNZOIL-QUAKER STATE
COMPANY COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
103
<PAGE> 108
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PENNZOIL PRODUCTS GROUP COMBINED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................. F-2
Combined Statement of Income and Comprehensive Income for
the six months ended June 30, 1998 and 1997 and for the
years ended December 31, 1997, 1996 and 1995........... F-3
Combined Balance Sheet as of June 30, 1998 and December
31, 1997 and 1996...................................... F-4
Combined Statement of Shareholder's Equity for the six
months ended June 30, 1998 and for the years ended
December 31, 1997, 1996 and 1995....................... F-5
Combined Statement of Cash Flows for the six months ended
June 30, 1998 and 1997 and for the years ended December
31, 1997, 1996 and 1995................................ F-6
Notes to Combined Financial Statements.................... F-7
</TABLE>
F-1
<PAGE> 109
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennzoil Products Group:
We have audited the accompanying combined balance sheet of Pennzoil
Products Company, Jiffy Lube International, Inc. and the other entities
described in Note 1 (wholly owned subsidiaries of Pennzoil Company and
collectively, "Pennzoil Products Group") prepared for the purposes of the
Combination, described in Note 1, as of December 31, 1997 and 1996, and the
related combined statements of income and comprehensive income, shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of Pennzoil Products
Group's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The summarized financial data for
Excel Paralubes (a 50%-owned equity investee of Pennzoil Products Group)
contained in Note 4 are derived from the financial statements of Excel
Paralubes, which were audited by other auditors. Their report has been furnished
to us and our opinion, insofar as it relates to the data in Note 4, is based
solely on the report of the other auditors.
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, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Pennzoil Products Group as of December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 2, 1998
F-2
<PAGE> 110
PENNZOIL PRODUCTS GROUP
COMBINED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30 YEAR ENDED DECEMBER 31
------------------------- ------------------------------------
1998 1997 1997 1996 1995
---------- ------------ ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales...................... $912,199 $1,010,508 $1,982,148 $1,961,316 $1,787,067
Other income, net.............. 30,212 18,807 31,012 6,697 20,635
-------- ---------- ---------- ---------- ----------
942,411 1,029,315 2,013,160 1,968,013 1,807,702
COSTS AND EXPENSES
Cost of sales.................. 584,248 624,521 1,182,742 1,202,909 1,278,565
Purchases from affiliate....... 104,325 170,916 336,413 342,046 130,834
Selling, general and
administrative.............. 163,447 165,555 350,123 315,022 347,386
Depreciation and
amortization................ 36,676 29,964 64,490 51,918 55,549
Taxes, other than income....... 6,083 6,003 11,956 11,339 11,837
Interest charges............... 6,202 6,290 12,847 12,208 13,243
Affiliated interest............ 28,210 27,638 56,374 52,966 50,618
Interest capitalized........... (255) (6,824) (7,441) (10,103) (3,045)
-------- ---------- ---------- ---------- ----------
928,936 1,024,063 2,007,504 1,978,305 1,884,987
INCOME (LOSS) BEFORE INCOME
TAX............................ 13,475 5,252 5,656 (10,292) (77,285)
Income tax provision (benefit)... 6,829 3,601 6,245 (1,103) (24,043)
-------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)................ $ 6,646 $ 1,651 $ (589) $ (9,189) $ (53,242)
======== ========== ========== ========== ==========
Foreign currency translation
adjustment..................... $ (2,564) $ (2,124) $ (5,584) $ (914) $ (1,747)
Unrealized gains (losses) on
marketable securities, net of
tax............................ 1,480 -- (1,768) -- --
-------- ---------- ---------- ---------- ----------
OTHER COMPREHENSIVE INCOME, NET
OF TAX......................... (1,084) (2,124) (7,352) (914) (1,747)
-------- ---------- ---------- ---------- ----------
COMPREHENSIVE INCOME............. $ 5,562 $ (473) $ (7,941) $ (10,103) $ (54,989)
======== ========== ========== ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-3
<PAGE> 111
PENNZOIL PRODUCTS GROUP
COMBINED BALANCE SHEET
(EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30 -----------------------
1998 1997 1996
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.............................. $ 8,162 $ 9,132 $ 15,797
Receivables............................................ 156,433 143,303 119,790
Inventories
Crude oil........................................... 10,566 14,245 18,710
Motor oil and refined products...................... 183,139 184,028 147,554
Materials and supplies, at average cost................ 12,411 11,814 12,374
Other current assets................................... 37,528 36,838 33,862
---------- ---------- ----------
TOTAL CURRENT ASSETS........................... 408,239 399,360 348,087
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Motor oil and refined products......................... 1,185,757 1,182,930 1,170,259
Fast lube operations and other......................... 239,067 228,345 206,379
---------- ---------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT............ 1,424,824 1,411,275 1,376,638
Less accumulated depreciation and amortization......... 643,518 621,098 632,507
---------- ---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT.............. 781,306 790,177 744,131
---------- ---------- ----------
OTHER ASSETS
Goodwill............................................... 163,134 158,489 114,695
Other.................................................. 201,065 211,597 163,586
---------- ---------- ----------
TOTAL OTHER ASSETS............................. 364,199 370,086 278,281
---------- ---------- ----------
TOTAL ASSETS............................................. $1,553,744 $1,559,623 $1,370,499
========== ========== ==========
CURRENT LIABILITIES
Current maturities of long-term debt................... $ 219 $ 2,363 $ 1,181
Accounts payable....................................... 102,579 120,577 104,629
Payable to affiliates.................................. 539,929 544,390 391,366
Payroll accrued........................................ 17,906 17,825 17,601
Other current liabilities.............................. 30,163 46,161 34,095
---------- ---------- ----------
TOTAL CURRENT LIABILITIES...................... 690,796 731,316 548,872
LONG-TERM DEBT, less current maturities
Long-term debt-affiliated.............................. 328,992 336,172 335,661
Other long-term debt................................... 45,510 49,798 49,163
---------- ---------- ----------
TOTAL LONG-TERM DEBT, less currentmaturities... 374,502 385,970 384,824
DEFERRED INCOME TAXES.................................... 8,031 1,179 --
CAPITAL LEASE OBLIGATIONS................................ 67,022 67,136 70,404
OTHER LIABILITIES........................................ 128,657 117,642 130,658
---------- ---------- ----------
TOTAL LIABILITIES.............................. 1,269,008 1,303,243 1,134,758
---------- ---------- ----------
SHAREHOLDER'S EQUITY
Common stock........................................... 4,148 4,148 4,148
Additional capital..................................... 418,664 395,870 367,290
Accumulated deficit.................................... (127,703) (134,349) (133,760)
Net unrealized holding loss on marketable securities... (288) (1,768) --
Cumulative foreign currency translation adjustment..... (10,085) (7,521) (1,937)
---------- ---------- ----------
TOTAL SHAREHOLDER'S EQUITY..................... 284,736 256,380 235,741
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY............... $1,553,744 $1,559,623 $1,370,499
========== ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-4
<PAGE> 112
PENNZOIL PRODUCTS GROUP
COMBINED STATEMENT OF SHAREHOLDER'S EQUITY
(EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30 YEAR ENDED DECEMBER 31
------------------ ------------------------------------------------------------
1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ --------- ------ --------- ------ --------- ------ ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning and end of
period:
Pennzoil Products Company
41,476,490 shares at $0.10
par....................... 41,476 $ 4,148 41,476 $ 4,148 41,476 $ 4,148 41,476 $ 4,148
Jiffy Lube International, Inc.
1,000 shares at $0.25 par... 1 -- 1 -- 1 -- 1 --
------ --------- ------ --------- ------ --------- ------ ---------
41,477 $ 4,148 41,477 $ 4,148 41,477 $ 4,148 41,477 $ 4,148
ADDITIONAL CAPITAL
Balance at beginning of
period...................... 395,870 367,290 346,059 344,455
Contribution from parent.... 22,794 28,580 21,231 1,604
--------- --------- --------- ---------
Balance at end of period....... 418,664 395,870 367,290 346,059
--------- --------- --------- ---------
ACCUMULATED DEFICIT
Balance at beginning of
period...................... (134,349) (133,760) (124,389) (71,147)
Net income (loss)........... 6,646 (589) (9,189) (53,242)
Dividends on common stock... -- -- (182) --
--------- --------- --------- ---------
Balance at end of period....... (127,703) (134,349) (133,760) (124,389)
--------- --------- --------- ---------
NET UNREALIZED HOLDING LOSS ON
MARKETABLE SECURITIES
Balance at beginning of
period...................... (1,768) -- -- --
Change in unrealized holding
loss...................... 1,480 (1,768) -- --
--------- --------- --------- ---------
Balance at end of period....... (288) (1,768) -- --
--------- --------- --------- ---------
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENT
Balance at beginning of
period...................... (7,521) (1,937) (1,023) 724
Translation adjustment...... (2,564) (5,584) (914) (1,747)
--------- --------- --------- ---------
Balance at end of period....... (10,085) (7,521) (1,937) (1,023)
--------- --------- --------- ---------
TOTAL SHAREHOLDER'S
EQUITY............... 41,477 $ 284,736 41,477 $ 256,380 41,477 $ 235,741 41,477 $ 224,795
====== ========= ====== ========= ====== ========= ====== =========
</TABLE>
See Notes to Combined Financial Statements.
F-5
<PAGE> 113
PENNZOIL PRODUCTS GROUP
COMBINED STATEMENT OF CASH FLOWS
(EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
------------------- --------------------------------
1998 1997 1997 1996 1995
-------- -------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................... $ 6,646 $ 1,651 $ (589) $ (9,189) $(53,242)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 36,676 29,964 64,490 51,918 55,549
Deferred income taxes............... 11,810 15,124 36,029 28,628 (1,703)
(Gain) loss on sales of assets...... (4,465) (351) (3,072) (10,904) 1,238
Partnership distributions in excess
of earnings....................... 4,926 -- 23,774 -- --
Non-cash accruals................... 13,343 10,299 25,366 17,248 31,700
Other non-cash items................ 5,515 (602) 3,555 8,558 4,566
Change in operating assets and
liabilities (see Notes 2 and 6)... (70,723) 14,189 35,227 111,949 135,004
-------- -------- --------- --------- --------
Net cash provided by (used in)
operating activities......... 3,728 70,274 184,780 198,208 173,112
-------- -------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................... (29,028) (84,214) (147,794) (251,186) (171,250)
Acquisition of Viscosity............... -- -- -- -- (33,642)
Acquisition of Snap.................... -- -- (41,000) -- --
Proceeds from sales of assets.......... 13,788 5,873 14,350 13,457 8,900
Other investing activities............. 8,299 (10,971) (28,222) (3,043) (25,935)
-------- -------- --------- --------- --------
Net cash provided by (used in)
investing activities......... (6,941) (89,312) (202,666) (240,772) (221,927)
-------- -------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt repayments........................ (9,643) (9,092) (10,457) (17,304) (5,802)
Proceeds from note payable to
affiliate........................... 10,429 22,615 13,178 19,845 49,973
Net proceeds from notes payable........ -- -- -- 1,673 --
Proceeds from issuances of debt........ 1,457 -- 8,500 43,679 2,598
-------- -------- --------- --------- --------
Net cash provided by financing
activities................... 2,243 13,523 11,221 47,893 46,769
-------- -------- --------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ (970) (5,515) (6,665) 5,329 (2,046)
CASH AND CASH EQUIVALENTS, beginning of
period................................. 9,132 15,797 15,797 10,468 12,514
-------- -------- --------- --------- --------
CASH AND CASH EQUIVALENTS, end of
period................................. $ 8,162 $ 10,282 $ 9,132 $ 15,797 $ 10,468
======== ======== ========= ========= ========
</TABLE>
See Notes to Combined Financial Statements.
F-6
<PAGE> 114
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) PRINCIPLES OF COMBINATION AND MERGER WITH QUAKER STATE CORPORATION
Principles of Combination
The accompanying combined financial statements include all majority-owned
subsidiaries of Pennzoil Products Company ("PPC") and Jiffy Lube International,
Inc. ("JLI") except that these statements exclude the oil and gas assets of PPC
held in the Eastern Refining Business Unit. Also included in these financial
statements, in accordance with the distribution agreement described below, is
Pennzoil Sales Company, certain assets and liabilities of Pennzoil Company's
captive insurance company (which are subject to adjustment based on an actuarial
study), and certain assets and liabilities reported in Pennzoil Company's
corporate segment related to PPC and JLI. This combined group of entities is
collectively referred to as "Pennzoil Products Group." Pennzoil Products Group
is engaged primarily in the manufacturing and marketing of lubricants, car care
products and specialty industrial products as well as the franchising, ownership
and operation of fast lube centers. The accompanying combined financial
statements reflect the historical costs and results of operations of Pennzoil
Products Group. All significant intercompany accounts and transactions within
Pennzoil Products Group have been eliminated. Pennzoil Products Group follows
the equity method of accounting for investments in 20%- to 50%-owned entities.
Merger with Quaker State Corporation
On April 14, 1998, PPC, Pennzoil Company ("Pennzoil"), Downstream Merger
Company, a wholly owned subsidiary of PPC, and Quaker State Corporation ("Quaker
State") entered into a merger agreement. Contemporaneously therewith, Pennzoil
and PPC entered into a distribution agreement that provides for a series of
combination transactions (the "Combination"). The Combination will include the
following transactions: (a) Pennzoil will effect certain transfers of assets and
liabilities between PPC and certain affiliates of Pennzoil; (b) Pennzoil will
distribute to its shareholders the equity interest in PPC, effectively conveying
to such shareholders its ownership of PPC; and (c) a wholly owned subsidiary of
PPC will be merged (the "Merger") with and into Quaker State, with Quaker State
being the surviving company and becoming a wholly owned subsidiary of PPC.
Closing under the Merger Agreement is conditioned upon, among other things,
approval by Quaker State's stockholders and receipt of a favorable tax ruling
from the Internal Revenue Service. The required waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 has expired.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information (Unaudited)
The interim financial statements as of June 30, 1998 and for the six month
periods ended June 30, 1997 and 1998 are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements have
been included.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
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.
F-7
<PAGE> 115
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Receivables
Current receivables include trade accounts and notes receivable and are net
of allowances for doubtful accounts of $7.7 million and $7.4 million in 1997 and
1996, respectively. Long-term receivables consist of notes receivable and are
net of allowances for doubtful accounts of $0.9 million in each of 1997 and
1996.
At December 31, 1997 and 1996, current receivables included notes
receivable of $12.4 million and $11.9 million, respectively. Other assets
included long-term notes receivable of $41.4 million and $39.3 million at
December 31, 1997 and 1996, respectively.
In September 1996, Pennzoil Receivables Company, a wholly owned special
purpose subsidiary of Pennzoil, entered into a one-year receivables sales
facility, which provided for the ongoing sales of up to $135.0 million of
accounts receivable of certain Pennzoil subsidiaries. In September 1997, the
facility was amended to extend the expiration date of the facility to September
1998. Pennzoil Products Group's net accounts receivable sold to Pennzoil
Receivables Company totaled $103.3 million and $111.2 million as of December 31,
1997 and 1996, respectively.
Inventories
A majority of inventories is reported at cost using the last-in, first-out
("LIFO") method, which is lower than market. Substantially all other inventories
are reported at cost using the first-in, first-out method. Inventories valued on
the LIFO method totaled $146.4 million and $115.3 million at December 31, 1997
and 1996, respectively. The current cost of LIFO inventories was approximately
$170.7 million and $186.2 million at December 31, 1997 and 1996, respectively.
Property, Plant and Equipment and Depreciation and Amortization
Property, plant and equipment additions are recorded at cost. Depreciation
of property, plant and equipment is computed using the straight-line or
accelerated methods over the estimated useful lives of the asset. Pennzoil
Products Group capitalizes the interest cost associated with major construction
projects based on the effective interest rate on aggregate borrowings.
Intangible Assets
Substantially all intangible assets relate to goodwill recognized in
business combinations accounted for as purchases. Goodwill is being amortized on
a straight-line basis over periods ranging from 20 to 40 years. Amortization
expense recorded in 1997, 1996 and 1995 was $13.1 million, $10.6 million and
$8.5 million, respectively.
Deferred Refinery Turnaround Costs
A turnaround is a periodically required standard procedure for maintenance
of a refinery, which involves the shutdown and inspection of major processing
units and generally occurs approximately every three years. The estimated costs
of major maintenance, including turnarounds at refineries, are accrued. Accruals
for turnarounds included in other liabilities in the accompanying combined
balance sheet were $10.0 million and $10.1 million at December 31, 1997 and
1996, respectively. Other expenditures for maintenance and repairs are charged
to expense when incurred. Renewals and improvements are treated as additions to
property, plant and equipment, and items replaced are treated as retirements.
Income Taxes
Pennzoil Products Group is included in Pennzoil's consolidated income tax
returns. Each Pennzoil subsidiary with taxable income is charged an amount equal
to its taxable income multiplied by the highest rate
F-8
<PAGE> 116
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
imposed on corporations, less allowable credits. If the subsidiary has a taxable
loss, it receives credit equal to its taxable loss multiplied by the highest
rate imposed on corporations, plus allowable credits, for its pro rata share of
the tax savings to the consolidated group. Each subsidiary accrues deferred
income taxes on temporary differences between the book and tax basis of its
assets and liabilities.
Environmental Expenditures
Environmental expenditures are expensed or capitalized in accordance with
generally accepted accounting principles. Liabilities for these expenditures are
recorded when it is probable that obligations have been incurred and the amounts
can be reasonably estimated. Reference is made to Note 11 for a discussion of
amounts recorded for these liabilities.
Cash Flow Information
For purposes of the combined statement of cash flows, all highly liquid
investments purchased with a maturity of three months or less are considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances has been immaterial. No cash was paid or received for income taxes in
1997, 1996 or 1995.
Changes in operating assets and liabilities, net of effects from the
purchase of equity interests in certain businesses acquired, consist of the
following (expressed in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
------------------- ------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Receivables............................. $(33,105) $(30,214) $(30,432) $118,567 $(41,159)
Inventories............................. (2,391) (26,689) (34,121) (13,115) (4,972)
Accounts payable and accrued
liabilities........................... (15,439) 10,096 12,747 (64,719) 57,631
Intersegment items...................... (11,641) 90,452 153,535 56,131 183,038
Other assets and liabilities............ (8,147) (29,456) (66,502) 15,085 (59,534)
-------- -------- -------- -------- --------
Decrease (increase) in operating assets
and liabilities....................... $(70,723) $ 14,189 $ 35,227 $111,949 $135,004
======== ======== ======== ======== ========
Cash paid during the period for:
Interest (net of amounts
capitalized)....................... $ 5,789 $ (750) $ 4,954 $ 1,708 $ 9,087
</TABLE>
Earnings Per Share
Earnings per share have been omitted from the combined statement of income
and comprehensive income because Pennzoil Products Group consists of wholly
owned subsidiaries of Pennzoil and is not a separate legal entity.
International Operations
Pennzoil Products Group's income (loss) from continuing operations before
income tax includes losses of $9.3 million, $8.9 million and $13.2 million from
international operations in 1997, 1996 and 1995, respectively.
Foreign Currency Translation
For subsidiaries whose functional currency is deemed to be other than the
U.S. dollar, asset and liability accounts are translated at year-end exchange
rates and revenue and expenses are translated at average exchange rates
prevailing during the year. Translation adjustments are included as a separate
component of
F-9
<PAGE> 117
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
shareholder's equity. Any gains or losses on transactions or monetary assets or
liabilities in currencies other than the functional currency are included in net
income in the current period.
Comprehensive Income
Effective January 1, 1998, Pennzoil Products Group adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components. The statement requires companies to report, in
addition to net income, other components of comprehensive income including
unrealized gains or losses on available-for-sale securities and foreign currency
translation adjustments and the related tax effects. For the six months ended
June 30, 1998 and year ended December 31, 1997, unrealized holding gains
(losses) on marketable securities includes income tax (benefit) of $.8 million
and ($1.0) million, respectively.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The SOP is
effective for fiscal years beginning after December 15, 1998 and earlier
adoption is permitted. The adoption of the SOP is not expected to have a
material impact on Pennzoil Products Group's results of operations.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." The SOP is effective for financial statements for fiscal
years beginning after December 15, 1998 and earlier adoption is permitted.
Pennzoil Products Group is currently evaluating the implementation of SOP No.
98-5.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The SFAS establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The SFAS requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999 and early adoption is permitted. The
effect of adopting SFAS No. 133 has not been determined, but is not expected to
have a material impact on Pennzoil Products Group's results of operations.
(3) TRANSACTIONS WITH AFFILIATES
Purchases from affiliates
Purchases from affiliates include purchases of crude oil at market prices
from Pennzoil Exploration and Production Company, a wholly owned subsidiary of
Pennzoil, of $336.4 million, $342.0 million and $130.8 million in 1997, 1996 and
1995, respectively.
Allocated General and Administrative Expenses and Other Items
Pennzoil Products Group is charged by Pennzoil for all direct costs
associated with its operations. Such direct charges (excluding benefit plans
discussed in Note 5) totaled $10.0 million, $13.0 million and $19.9 million for
the years ended December 31, 1997, 1996, and 1995, respectively. In addition,
certain administrative costs not directly charged to Pennzoil business segments
are allocated to its subsidiaries through a monthly charge from Richland
Development Corporation, a wholly owned subsidiary of Pennzoil that provides
support services to the operating segments. The amount allocated by Pennzoil to
its subsidiaries was determined based on a formula which averages each segment's
percentage of Pennzoil's total assets, sales and employees. Based upon this
formula, it was determined that approximately 65% of the indirect charges
F-10
<PAGE> 118
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
incurred by Pennzoil on behalf of its subsidiaries were charged to the Pennzoil
Products Group. These charges totaled $56.0 million, $32.9 million and $37.3
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Stock Option Plans
Pennzoil grants stock options to purchase Pennzoil common stock and
conditional stock awards as long-term incentives to eligible employees of
Pennzoil and its subsidiaries. Such awards are accounted for under the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." APB Opinion No. 25 does not require compensation
costs to be recorded on options which have exercise prices at least equal to the
market price of the stock on the date of grant. Accordingly, no compensation
cost has been recognized for the Pennzoil Products Group's employee
participation in the stock based plans. Pennzoil Products Group was charged $1.2
million, $.6 million and $.6 million in 1997, 1996 and 1995, respectively, for
costs attributable to its employees' participation in these plans.
(4) EQUITY INVESTMENT
Pennzoil Products Group owns a 50% interest in Excel Paralubes ("Excel").
Excel is a general partnership between PPC and Conoco, Inc. ("Conoco") located
adjacent to Conoco's refinery in Lake Charles, Louisiana. The facility is
capable of producing approximately 18,000 barrels per day of high-quality base
oils, the base ingredient in finished lubricants. Conoco is acting as operator
of the plant with support positions staffed by both companies. Commercial
production commenced at the facility in December 1996.
Pennzoil Products Group's net investment in Excel, which was a credit
balance of $37.4 million and $34.4 million at December 31, 1997 and 1996,
respectively, is netted against other equity investments and included in other
assets on the combined balance sheet. Pennzoil Products Group's 1997, 1996 and
1995 equity in Excel's pre-tax losses (totaling $2.8 million, $24.3 million, and
$9.0 million, respectively) is included in other income on the combined
statement of income.
Summarized balance sheet and operations information for Excel (on a 100%
basis) as of December 31, 1997 and for the year then ended follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1997 1996
-------- --------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Current assets.............................................. $ 56,446 $ 31,329
Noncurrent assets........................................... 457,556 437,670
Current liabilities......................................... 81,617 47,701
Noncurrent liabilities...................................... 507,164 490,000
Partners' deficit........................................... (74,779) (68,702)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1997 1996 1995
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................... $264,388 $ 14,528 $ --
Operating earnings (loss).............................. 32,023 (35,769) (16,913)
Net loss (after interest expense)...................... (5,677) (48,713) (17,955)
</TABLE>
At December 31, 1997, Excel had total debt of $542.8 million, consisting of
$240.0 million of 7.125% senior bonds due 2011, $250.0 million of 7.43% senior
bonds due 2015, and $52.8 million of variable rate borrowings under commercial
paper facilities with banks. Borrowings under commercial paper facilities are
F-11
<PAGE> 119
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
due in 1998 and are classified as short-term. Recourse for the partners under
the bonds is limited to the revenues and assets of Excel. Certain restrictive
covenants may limit the ability of Excel to incur debt, make distributions to
the partners, make investments or create liens. Conoco and PPC maintain an
agreement with Excel to provide support to Excel up to an aggregate amount of
$60 million during the existence of a liquidity cash flow deficit.
(5) BENEFIT PLANS
Retirement Plans
Substantially all employees of Pennzoil Products Group are covered by
non-contributory retirement plans of Pennzoil which provide benefits based on
participants' years of service and compensation or stated amounts for each year
of service. Annual contributions to the plans are made in accordance with the
minimum funding provisions of ERISA where applicable, but not in excess of the
maximum amount that can be deducted for federal income tax purposes. Pennzoil
Products Group recognized pension expense (income) totaling $(1.5) million, $2.8
million and $6.0 million for such coverage in 1997, 1996 and 1995, respectively.
Approximately 65% of Pennzoil's total accumulated benefit obligation is provided
on behalf of Pennzoil Products Group. The following information is presented on
a total plan basis for Pennzoil.
Total net periodic pension cost for Pennzoil included the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year........ $ 8,506 $ 8,510 $ 8,190
Interest cost on projected benefit obligations......... 15,127 13,760 12,743
Expected return on plan assets......................... (23,557) (18,195) (11,846)
Net amortization and deferral.......................... (1,063) 1,500 1,723
-------- -------- --------
Net periodic pension cost.................... $ (987) $ 5,575 $ 10,810
======== ======== ========
</TABLE>
Actual return on plans' assets for Pennzoil was $64.8 million, $46.3
million, and $47.6 million in 1997, 1996 and 1995, respectively.
Assumptions used were:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
--------------------
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Discount rates.............................................. 7.25% 7.50% 7.50%
Weighted average rates of increase in compensation levels... 4.60% 4.60% 4.60%
Expected long-term rate of return on assets................. 10.50% 10.50% 9.00%
</TABLE>
F-12
<PAGE> 120
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables set forth the plans' funded status and amounts
recognized in Pennzoil's consolidated balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
PLANS WHERE PLANS WHERE
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS TOTAL
BENEFITS EXCEED ASSETS PLANS
------------- ------------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................ $183,342 $ 6,312 $189,654
======== ======= ========
Accumulated benefit obligation........................... $205,281 $ 6,504 $211,785
======== ======= ========
Projected benefit obligation............................. 226,054 8,714 234,768
Plan assets at fair value.................................. 273,422 308 273,730
-------- ------- --------
Projected benefit obligation (in excess of) less than plan
assets................................................... 47,368 (8,406) 38,962
Unrecognized net (gain) loss............................... (88,899) 2,035 (86,864)
Prior service cost not yet recognized in net pension
periodic cost............................................ 29,590 3,742 33,332
Unrecognized net obligation (asset)........................ (889) 1 (888)
Minimum liability adjustment............................... -- (3,568) (3,568)
-------- ------- --------
Pension liability recognized in the Pennzoil consolidated
balance sheet............................................ $(12,830) $(6,196) $(19,026)
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------
PLANS WHERE PLANS WHERE
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS TOTAL
BENEFITS EXCEED ASSETS PLANS
------------- ------------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation............................... $157,852 $ 5,045 $162,897
======== ======= ========
Accumulated benefit obligation.......................... $178,008 $ 5,153 $183,161
======== ======= ========
Projected benefit obligation............................ 194,544 6,567 201,111
Plan assets at fair value................................. 217,552 802 218,354
-------- ------- --------
Projected benefit obligation (in excess of) less than plan
assets.................................................. 23,008 (5,765) 17,243
Unrecognized net (gain) loss.............................. (53,457) 1,287 (52,170)
Prior service cost not yet recognized in net pension
periodic cost........................................... 16,542 2,871 19,413
Unrecognized net obligation (asset)....................... (1,121) 28 (1,093)
Minimum liability adjustment.............................. -- (2,810) (2,810)
-------- ------- --------
Pension liability recognized in the Pennzoil consolidated
balance sheet........................................... $(15,028) $(4,389) $(19,417)
======== ======= ========
</TABLE>
Pennzoil's plan assets include equity securities, common trust funds and
various debt securities. Pennzoil amortizes unrecognized prior service cost on a
straight-line basis over a period equal to the average of the expected future
service of active employees expected to receive benefits under the respective
plans.
Postretirement Health Care and Life Insurance Benefits
Pennzoil sponsors several unfunded defined benefit postretirement plans
covering most salaried and hourly employees of Pennzoil Products Group. The
plans provide certain medical and life insurance benefits
F-13
<PAGE> 121
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and are either contributory or non-contributory. Pennzoil Products Group was
charged $3.6 million, $3.8 million and $4.2 million by Pennzoil for such
coverage in 1997, 1996 and 1995, respectively.
Contribution Plans
Employees of Pennzoil Products Group who have completed one year of service
are also covered by a defined contribution plan of Pennzoil. Employee
contributions of not less than 1% to not more than 6% of each covered employee's
compensation are matched between 50% and 100% by Pennzoil. Pennzoil Products
Group was charged $6.5 million, $6.3 million and $6.4 million for such
contributions in 1997, 1996 and 1995, respectively.
(6) WORKING CAPITAL AND LIQUIDITY
At June 30, 1998, Pennzoil Products Group had a working capital deficit of
$282.6 million, which included affiliated payables of $299.5 million and $240.5
million of notes payable to Pennzoil. Excluding these affiliated accounts,
Pennzoil Products Group had positive working capital of $257.4 million at June
30, 1998. At December 31, 1997, Pennzoil Products Group had a working capital
deficit of $332.0 million, which included affiliated payables of $314.4 million,
and $230.0 million of notes payable to Pennzoil. Excluding these affiliated
accounts, Pennzoil Products Group had positive working capital of $212.4 million
at December 31, 1997. Current liabilities at December 31, 1996 included
affiliated payables of $174.6 million and $216.8 million of notes payable to
Pennzoil. Excluding these affiliated accounts, Pennzoil Products Group had
positive working capital of $190.6 million at December 31, 1996. Affiliated
accounts have not been settled on a regular basis.
In April 1998, PPC entered into an agreement with Pennzoil to complete the
separation of PPC from Pennzoil. After the separation, a subsidiary of PPC will
merge with Quaker State. Prior to Pennzoil's distribution of its equity interest
in PPC to its stockholders, PPC will enter into a third-party financing
arrangement. Immediately prior to the distribution, PPC will repay certain
intercompany indebtedness including affiliated payables and notes payable to
Pennzoil. The amount of the repayment will be the lesser of (i) the amount of
intercompany indebtedness or (ii) the total of $500 million plus outstanding
cash of PPC, less existing third-party debt and capital lease obligations of
PPC. Any intercompany indebtedness that exceeds the payment amount described
above will be treated as a capital contribution from Pennzoil to PPC.
Pennzoil Products Group believes it will be able to enter into third-party
financing arrangements that will provide Pennzoil Products Group with sufficient
funding to settle obligations with Pennzoil and funding for future periods.
(7) INCOME TAXES
Accounting for Income Taxes
Pennzoil Products Group accounts for income taxes under the provisions of
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition
of deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-14
<PAGE> 122
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Federal, State and Foreign
Federal, state and foreign income tax expense (benefit) for continuing
operations consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1997 1996 1995
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Current
United States...................................... $(30,044) $(30,010) $(22,472)
Foreign............................................ 239 317 313
State.............................................. 20 (37) (181)
Deferred
United States...................................... 32,470 27,863 (3,286)
Foreign............................................ (442) (874) (337)
State.............................................. 4,002 1,638 1,920
-------- -------- --------
$ 6,245 $ (1,103) $(24,043)
======== ======== ========
</TABLE>
Pennzoil Products Group's net deferred tax liability (asset) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1996
----------- -----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Deferred tax liability...................................... $ 145,641 $ 102,851
Deferred tax asset.......................................... (166,745) (140,347)
Valuation allowance......................................... 22,283 15,425
--------- ---------
Net deferred tax liability (asset)................ $ 1,179 $ (22,071)
========= =========
</TABLE>
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1996
----------- -----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Property, plant and equipment............................... $103,262 $ 64,091
Investments in foreign subsidiaries......................... (17,256) (24,591)
Postretirement benefit obligations.......................... (15,283) (14,229)
Alternative minimum tax credit carryforward................. (32,595) (16,928)
Net operating loss carryforwards............................ (29,973) (21,450)
Other, net.................................................. (29,259) (24,389)
Valuation allowance......................................... 22,283 15,425
-------- --------
Net deferred tax liability (asset)................ $ 1,179 $(22,071)
======== ========
</TABLE>
F-15
<PAGE> 123
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The principal items accounting for the difference in income taxes on income
from continuing operations computed at the federal statutory rate and income
taxes as recorded are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1997 1996 1995
------ ------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate........ $1,980 $(3,602) $(27,050)
Increases (reductions) resulting from:
State income taxes, net............................... 2,592 1,000 1,055
Taxes on foreign income less than statutory rate...... (149) (532) (16)
Nondeductible goodwill................................ 1,173 1,173 1,300
Other, net............................................ 649 858 668
------ ------- --------
Income tax provision (benefit).......................... $6,245 $(1,103) $(24,043)
====== ======= ========
</TABLE>
The Internal Revenue Service is currently reviewing Pennzoil's 1995, 1994,
and 1993 consolidated federal income tax returns.
As of December 31, 1997, Pennzoil Products Group had a United States net
operating loss carryforward of approximately $4.5 million, which is available to
reduce future federal income taxes payable. Additionally, for the purposes of
determining alternative minimum tax, an approximate $3.1 million net operating
loss is available to offset future alternative minimum taxable income.
Utilization of these regular and alternative minimum tax net operating losses,
to the extent generated in separate return years, is limited based on the
separate taxable income of Pennzoil Products Group, or its successor, generating
the loss. If not used, these carryovers will expire in the years 2000 to 2006.
In addition, Pennzoil Products Group has approximately $32.6 million of
alternative minimum tax credits indefinitely available to reduce regular tax
liability to the extent it exceeds the related alternative minimum tax otherwise
due. All net operating loss and credit carryover amounts are subject to
examination by the tax authorities.
Pennzoil Products Group also had state net operating loss carryforwards,
the tax effect of which was approximately $28.4 million as of December 31, 1997.
A valuation allowance of approximately $20.6 million has been established to
offset the portion of the deferred tax asset related to state tax loss
carryforwards expected to expire before their utilization.
(8) DEBT
Debt outstanding was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996
----------- -----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Amounts due Pennzoil under revolving credit agreements...... $566,168 $552,479
Industrial Revenue Bonds ("IRBs")........................... 33,050 24,550
International debt facilities............................... 12,466 18,591
Other debt.................................................. 6,645 7,203
-------- --------
Total debt........................................ 618,329 602,823
Less amounts classified as current maturities............... 232,359 217,999
-------- --------
Total long-term debt.............................. $385,970 $384,824
======== ========
</TABLE>
Pennzoil Products Group currently has revolving credit agreements with
Pennzoil that provide for borrowings of up to $590 million through December 31,
1998 and $340 million through December 31, 2004.
F-16
<PAGE> 124
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Amounts borrowed under the credit agreements bear interest at variable and fixed
rates. At December 31, 1997 and 1996, there were $230.0 million and $216.8
million, respectively, outstanding classified as current liabilities -- payables
to affiliate and $336.2 million and $335.7 million, respectively, outstanding
classified as long-term debt-affiliated. The average interest rates applicable
to amounts outstanding under these credit agreements during 1997 and 1996 were
9.8% and 9.9%, respectively. In December 1997, Pennzoil made a capital
contribution of $30.0 million to the Company. This amount was reclassified from
amounts outstanding under one of the revolvers to shareholder's equity. Interest
associated with the affiliated debt was $56.4 million, $53.0 million and $50.6
million for the years ended December 31, 1997, 1996 and 1995, respectively.
The IRBs were issued by the Industrial Development Board of the Parish of
Caddo, Inc. On December 23, 1996, $24.6 million of the IRBs were issued and are
scheduled for retirement on December 1, 2026. On December 19, 1997, $8.5 million
were issued and are due on December 1, 2027. The proceeds from the bonds were
used to help fund an upgrade to the Company's Shreveport refinery. The interest
rate on the IRBs is currently reset weekly and interest payments are made every
month.
The Company's long-term credit facility with a Canadian bank provides for
up to C$27 million through October 25, 1999. Outstanding borrowings under the
credit facility totaled US$12.2 million and US$13.9 million at December 31, 1997
and 1996, respectively. The average interest rate applicable to amounts
outstanding under the credit facility was 3.4% and 3.2% during 1997 and 1996,
respectively.
At December 31, 1997, aggregated maturities of long-term debt for the years
ending December 31, 1998 through 2002 were $2.4 million, $.2 million, $.4
million, $.2 million and $.1 million, respectively. These maturities exclude the
$566.2 million outstanding under the revolving credit agreements with Pennzoil.
(9) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
Financial Instruments With Off-Balance-Sheet Risk
Pennzoil Products Group is a party to various financial instruments with
off-balance-sheet risk as part of its normal course of business, including
financial guarantees and contractual commitments to extend financial guarantees,
credit and other assistance to customers, franchisees and other third parties.
These financial instruments involve, to varying degrees, elements of credit risk
which are not recognized in Pennzoil Products Group's combined balance sheet.
Other financial guarantees include debt and lease obligation guarantees
with expiration dates of up to twenty years issued to third parties to guarantee
the performance of customers and franchisees in the fast-lube industry.
Commitments to extend credit are also provided to fast lube industry
participants to finance equipment purchases, working capital needs and, in some
cases, the acquisition of land and construction of improvements.
Contractual commitments to extend credit and other assistance are in effect
as long as certain conditions established in the respective contracts are met.
Contractual commitments to extend financial guarantees are conditioned on the
occurrence of specified events. The largest of these commitments is to provide a
guarantee of letters of credit issued by third parties to meet the reinsurance
requirements of Pennzoil Products Group's captive insurance subsidiary. This
commitment has no stated maturity and is expected to vary in amount from year to
year to meet the reinsurance requirements. Reserves established for reported and
incurred but not reported insurance losses in the amounts of $31.6 million and
$31.7 million have been recognized in Pennzoil Products Group's consolidated
balance sheet as of December 31, 1997 and 1996, respectively. The credit risk to
Pennzoil Products Group is mitigated by the insurance subsidiary's portfolio of
high-quality, short-term investments used to collateralize the letters of
credit. At December 31, 1997, the market value of the collateral represented
approximately 122% of the estimated credit risk.
F-17
<PAGE> 125
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Following are the amounts related to Pennzoil Products Group's financial
guarantees and contractual commitments to extend financial guarantees, credit
and other assistance as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNTS
DECEMBER 31
------------------
1997 1996
------- --------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Financial guarantees relating to Excel Paralubes............ $16,790 $255,900
Other financial guarantees.................................. 5,159 8,305
Commitments to extend financial guarantees
Guarantees of letters of credit........................... 28,535 20,825
Other guarantees.......................................... 9,557 7,383
------- --------
Total............................................. $60,041 $292,413
======= ========
</TABLE>
Pennzoil Products Group's exposure to credit losses in the event of
nonperformance by the other parties to these financial instruments is
represented by the contractual or notional amounts. Decisions to extend
financial guarantees and commitments and the amount of remuneration and
collateral required are based on management's credit evaluation of the
counterparties on a case-by-case basis. The collateral held varies but may
include accounts receivable, inventory, equipment, real property, securities and
personal assets. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Concentrations of Credit Risk
Pennzoil Products Group extends credit to various companies in the normal
course of business. Within these industries, certain concentrations of credit
risk exist. These concentrations of credit risk may be similarly affected by
changes in economic or other conditions and may, accordingly, impact Pennzoil
Products Group's overall credit risk. However, management believes that Pennzoil
Products Group's receivables are well diversified, thereby reducing potential
credit risk to Pennzoil Products Group, and that allowances for doubtful
accounts are adequate to absorb estimated losses as of December 31, 1997.
Pennzoil Products Group's policies concerning collateral requirements and the
types of collateral obtained for on-balance-sheet financial instruments are the
same as those described above under "Financial Instruments With
Off-Balance-Sheet Risk."
At December 31, 1997, receivables related to group concentrations in the
motor oil and refined products and fast lube industries were $160.0 million and
$31.5 million, respectively, compared with $137.9 million and $29.1 million,
respectively, at December 31, 1996.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
Balance Sheet Financial Instruments
The carrying amounts of Pennzoil Products Group's short-term financial
instruments, including cash equivalents, other investments, trade accounts
receivable, trade accounts payable and notes payable, approximate their fair
values based on the short maturities of those instruments.
F-18
<PAGE> 126
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the carrying amounts and estimated fair
values of Pennzoil Products Group's other balance sheet financial instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- --------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Notes receivable................................... $ 52,610 $ 51,314 $ 50,295 $ 48,889
Long-term debt..................................... 52,161 52,332 50,344 49,608
Amounts due to Pennzoil under revolving credit
agreements....................................... 566,168 644,884 552,479 622,764
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument included above:
Notes Receivable The estimated fair value of notes receivable is
based on discounting future cash flows using estimated year-end interest
rates at which similar loans have been made to borrowers with similar
credit ratings for the same remaining maturities.
Long-Term Debt The estimated fair value of long-term debt is based on
quoted market prices or, where such prices are not available, on estimated
year-end interest rates of debt with the same remaining average maturities
and credit quality.
Off-Balance-Sheet Financial Instruments
The estimated fair value of certain financial guarantees written and
commitments to extend financial guarantees was $3.3 million and $5.9 million as
of December 31, 1997 and 1996, respectively. The estimated fair value of certain
financial guarantees written and commitments to extend financial guarantees is
based on the estimated cost to Pennzoil Products Group to obtain third party
letters of credit to relieve Pennzoil Products Group of its obligations under
such guarantees or, in the case of certain lease guarantees related to Jiffy
Lube franchisees, the present value of expected future cash flows using a
discount rate commensurate with the risks involved.
(11) COMMITMENTS AND CONTINGENCIES
Environmental Matters
Pennzoil Products Group is subject to certain laws and regulations relating
to environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), the Resource Conservation and Recovery Act and similar state
statutes. In response to liabilities associated with these activities, accruals
have been established when reasonable estimates are possible. Such accruals
primarily include estimated costs associated with remediation. Pennzoil Products
Group has not used discounting in determining its accrued liabilities for
environmental remediation, and no claims for possible recovery from third party
insurers or other parties related to environmental costs have been recognized in
Pennzoil Products Group's combined financial statements. Pennzoil Products Group
adjusts the accruals when new remediation responsibilities are discovered and
probable costs become estimable, or when current remediation estimates must be
adjusted to reflect new information.
Certain of Pennzoil Products Group's subsidiaries are involved in matters
in which it has been alleged that such subsidiaries are potentially responsible
parties ("PRPs") under CERCLA or similar state legislation with respect to
various waste disposal areas owned or operated by third parties. In addition,
certain of Pennzoil Products Group's subsidiaries are involved in other
environmental remediation activities, including the
F-19
<PAGE> 127
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
removal, inspection and replacement, as necessary, of underground storage tanks.
As of December 31, 1997 and 1996, Pennzoil Products Group's combined balance
sheet included accrued liabilities for environmental remediation of $11.6
million and $16.2 million, respectively. Of these reserves, $2.4 million and
$2.1 million are reflected on the combined balance sheet as current liabilities
as of December 31, 1997 and 1996, respectively, and $9.2 million and $14.1
million are reflected as other liabilities as of December 31, 1997 and 1996,
respectively. Pennzoil Products Group does not currently believe there is a
reasonable possibility of incurring additional material costs in excess of the
current accruals recognized for such environmental remediation activities. With
respect to the sites in which Pennzoil Products Group subsidiaries are PRPs,
Pennzoil Products Group's conclusion is based in large part on (i) the
availability of defenses to liability, including the availability of the
"petroleum exclusion" under CERCLA and similar state laws, and/or (ii) Pennzoil
Products Group's current belief that its share of wastes at a particular site is
or will be viewed by the Environmental Protection Agency or other PRPs as being
de minimis. As a result, Pennzoil Products Group's monetary exposure is not
expected to be material beyond the amounts reserved.
Class Action
In April 1994, a lawsuit styled Lazy Oil, Inc. vs. Witco Corporation;
Quaker State Corporation; and Pennzoil Company, was filed in the United States
District Court for the Western District of Pennsylvania. Three other suits,
Andreassi vs. Witco Corporation; Quaker State Corporation; and Pennzoil Company
and Thomas A. Miller Oil vs. Witco Corporation; Quaker State Corporation; and
Pennzoil Company, and Wynnewood Drilling Associates v. Witco Corporation; Quaker
State Corporation; Quaker State Oil Refining Corporation; Pennzoil Company; and
Pennzoil Products Company were also filed in 1994, containing allegations
substantially identical to those in the Lazy Oil case. All four suits have been
consolidated for discovery and trial. The consolidated case, styled Lazy Oil
Co., John B. Andreassi and Thomas A. Miller Oil Co. on behalf of themselves and
others similarly situated vs. Witco Corporation; Quaker State Corporation;
Quaker State Oil Refining Corp.; Pennzoil Company and Pennzoil Products Company
is currently pending in the United States District Court for the Western
District of Pennsylvania, Erie Division.
On December 31, 1997, the Court entered an order approving a settlement,
over the objection of three of the four class representatives and certain other
class members. Under the settlement, Pennzoil Products Group paid $9.7 million
plus administrative costs. The objecting class representatives have given notice
that they intend to appeal the approval of the settlement to the United States
Court of Appeals for the Third Circuit. This class action suit brought by
purchasers of "Penn Grade crude" alleged that, from 1981 to 1995, the defendants
engaged in a combination and conspiracy in unreasonable restraint of trade in
violation of Section 1 of the Sherman Act, by allegedly acting to fix, lower,
maintain and stabilize the purchase price of "Penn Grade crude" sold by the
plaintiffs and the other class members to the defendants. The plaintiffs also
alleged that the defendants have fraudulently concealed their alleged
combination and conspiracy. Plaintiffs' motion for class certification was not
opposed by defendants, and the Court certified a class of plaintiffs consisting
of all persons who sold "Penn Grade crude" to any of the defendants between 1981
and June 30, 1995. Pennzoil Products Group believes that the final outcome of
these matters will not have a material adverse effect on its financial condition
or results of operations.
Texas Federal Court Employment Action
In August 1996, a lawsuit styled Donna Alexander, et al. v. Pennzoil
Company, et al., was filed in the United States District Court for the Southern
District of Texas, Houston Division. Both PPC and JLI are named defendants. The
amended complaint filed by eleven named plaintiffs alleges wrongful and illegal
discrimination by Pennzoil and subsidiaries against African-American employees
and seeks actual damages of $75.0 million and punitive damages of three times
that amount. Pennzoil vigorously denies these allegations and will oppose
plaintiff's efforts to have the case certified as a class action by the Court.
Pennzoil Products
F-20
<PAGE> 128
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Group believes that the final outcome of the case will not have a material
effect on its combined financial condition or results of operations.
Louisiana Federal Court Employment Action
In September 1997, a lawsuit styled Kenneth Epperson, et al. vs. Pennzoil
Co., et al., was filed in the United States District Court for the Western
District of Louisiana, Shreveport Division. The amended complaint filed by nine
named plaintiffs alleges discriminatory employment policies and practices
against African-American and other minority employees and seeks attorney's fees
and costs, various forms of injunctive and equitable relief, $50.0 million in
damages for back pay, front pay, and emotional distress, and a minimum of three
times that amount in punitive damages. Pennzoil vigorously denies these
allegations and will oppose plaintiffs' efforts to have the case certified as a
class action by the Court. Pennzoil Products Group believes that the final
outcome of the case will not have a material effect on its financial condition
or results of operations.
Other
Pennzoil Products Group is involved in various other claims, lawsuits and
other proceedings relating to a wide variety of matters. While uncertainties are
inherent in the final outcome of such matters and it is presently impossible to
determine the actual costs that ultimately may be incurred, management currently
believes that the resolution of such uncertainties and the incurrence of such
costs should not have a material adverse effect on Pennzoil Products Group's
financial condition or results of operations.
(12) LEASES
As Lessee
Pennzoil Products Group leases various assets and office space with lease
periods of one to 20 years. Additionally, Pennzoil Products Group leases sites
and equipment which are subleased to franchisees or used in the operation of
automotive fast lubrication and fluid maintenance service centers operated by
Pennzoil Products Group. The typical lease period for the service centers is 20
years with escalation clauses generally increasing the lease payments by 9%
every third year, with some leases containing renewal options generally for
periods of five years. These leases, excluding leases for land that are
classified as operating leases, are accounted for as capital leases and are
capitalized using interest rates appropriate at the inception of each lease.
Certain operating and capital lease payments are contingent upon such
factors as the consumer price index or the prime interest rate with any future
changes reflected in income as accruable. The effects of these changes are not
considered material.
Total operating lease rental expenses for Pennzoil Products Group were
$55.1 million, $55.2 million and $56.4 million for 1997, 1996 and 1995,
respectively. Interest expense related to Pennzoil Products Group's capital
lease obligations was $8.6 million during 1997 and 1996 and $9.4 million in
1995.
F-21
<PAGE> 129
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum commitments under noncancellable leasing arrangements as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNTS PAYABLE
AS LESSEE
------------------------
CAPITAL OPERATING
LEASES LEASES
--------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
YEAR ENDING DECEMBER 31:
1998........................................................ $ 11,454 $ 53,564
1999........................................................ 11,541 48,450
2000........................................................ 11,675 44,380
2001........................................................ 11,727 39,752
2002........................................................ 11,606 37,284
Thereafter.................................................. 67,717 236,320
-------- --------
Net minimum future lease payments........................... $125,720 $459,750
========
Less interest............................................... 55,440
--------
Present value of net minimum lease payments at December 31,
1997...................................................... $ 70,280
========
</TABLE>
Assets recorded under capital lease obligations of $58.2 million and $13.3
million at December 31, 1997 are classified as property, plant and equipment and
other assets, respectively, in the accompanying combined balance sheet. Assets
recorded under capital lease obligations of $44.1 million and $13.4 million at
December 31, 1996 are classified as property, plant and equipment and other
assets, respectively, in the accompanying combined balance sheet.
As Lessor
Pennzoil Products Group owns or leases numerous service center sites which
are leased or subleased to franchisees. Buildings owned or leased that meet the
criteria for direct financing leases are carried at the gross investment in the
lease less unearned income. Unearned income is recognized in such a manner as to
produce a constant periodic rate of return on the net investment in the direct
financing lease. Any buildings leased or subleased that do not meet the criteria
for a direct financing lease and any land leased or subleased are accounted for
as operating leases. The typical lease period is 20 years and some leases
contain renewal options. The franchisee is responsible for the payment of
property taxes, insurance and maintenance costs related to the leased property.
The net investment in direct financing leases is classified as other assets in
the accompanying combined balance sheet.
F-22
<PAGE> 130
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payment receivables under noncancellable leasing
arrangements as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNTS RECEIVABLE
AS LESSOR
-------------------------
DIRECT
FINANCING OPERATING
LEASES LEASES
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
YEAR ENDING DECEMBER 31:
1998........................................................ $ 4,593 $ 11,996
1999........................................................ 4,651 11,542
2000........................................................ 4,723 11,347
2001........................................................ 4,781 10,532
2002........................................................ 4,814 10,063
Thereafter.................................................. 28,648 56,026
------- --------
Net minimum future lease payments........................... $52,210 $111,506
========
Less unearned income........................................ 22,626
-------
Net investment in direct financing leases at December 31,
1997...................................................... $29,584
=======
</TABLE>
(13) ACQUISITIONS AND DIVESTITURES
Acquisition of Snap Automotive Products
In November 1997, PPC acquired the marketing and distribution assets of
Snap Automotive Products, Inc. ("Snap") for $41.0 million. The acquisition was
accounted for using the purchase method of accounting, and the results of
operations of Snap subsequent to November 1997 have been included in Pennzoil
Products Group's combined statement of income.
Acquisition of Viscosity Oil
In September 1995, PPC acquired the assets of the Viscosity Oil division
("Viscosity Oil") of Case Corporation for $33.6 million. The acquisition was
accounted for using the purchase method of accounting, and the results of
operations of Viscosity Oil subsequent to September 1995 have been included in
Pennzoil Products Group's combined statement of income.
F-23
<PAGE> 131
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(14) SEGMENT FINANCIAL INFORMATION
The tabular presentation below sets forth certain financial information
regarding Pennzoil Products Group's industry segments for the years ended
December 31, 1997, 1996 and 1995. Pennzoil Products Group's international
operations historically have not been material to combined revenues, operating
income and identifiable assets.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Motor Oil & Refined Products............................. $1,719,340 $1,694,285 $1,545,611
Fast Lube Operations..................................... 328,596 303,700 289,222
Intersegment Sales....................................... (34,776) (29,972) (27,131)
---------- ---------- ----------
$2,013,160 $1,968,013 $1,807,702
---------- ---------- ----------
OPERATING INCOME (LOSS)
Motor Oil & Refined Products............................. $ 65,336 $ 36,539 $ (11,259)
Fast Lube Operations..................................... 2,100 8,240 (5,210)
---------- ---------- ----------
Total operating income (loss).................. 67,436 44,779 (16,469)
Interest expense, net.................................... 61,780 55,071 60,816
Income tax provision (benefit)........................... 6,245 (1,103) (24,043)
---------- ---------- ----------
Net income (loss)........................................ $ (589) $ (9,189) $ (53,242)
========== ========== ==========
DEPRECIATION AND AMORTIZATION
Motor Oil & Refined Products............................. $ 43,051 $ 32,078 $ 34,000
Fast Lube Operations..................................... 21,439 19,840 21,549
IDENTIFIABLE ASSETS
Motor Oil & Refined Products............................. $1,190,731 $1,003,180 $ 915,818
Fast Lube Operations..................................... 368,892 367,319 362,849
CAPITAL EXPENDITURES
Motor Oil & Refined Products............................. $ 121,958 $ 231,677 $ 134,883
Fast Lube Operations..................................... 25,836 19,509 40,773
</TABLE>
F-24
<PAGE> 132
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF APRIL 14, 1998,
AMONG
PENNZOIL COMPANY
PENNZOIL PRODUCTS COMPANY
DOWNSTREAM MERGER COMPANY
AND
QUAKER STATE CORPORATION
<PAGE> 133
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 DEFINITIONS.............................................. A-1
ARTICLE 2 THE MERGER............................................... A-7
2.1 Distribution and Merger..................................... A-7
2.2 Effect on Capital Stock..................................... A-7
2.3 Cancellation of Stock....................................... A-8
2.4 Stockholders Meeting........................................ A-8
2.5 Closing..................................................... A-8
2.6 Effective Time.............................................. A-8
2.7 Closing of Transfer Books................................... A-8
2.8 Exchange of Certificates.................................... A-8
Quaker State Employee Stock Options, Restricted Stock and
2.9.. Performance Shares.......................................... A-10
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PENNZOIL............... A-11
3.1 Organization, Qualification, Etc............................ A-11
3.2 Corporate Authority; No Violation, Etc...................... A-11
3.3 Information Supplied........................................ A-12
3.4 Brokers or Finders.......................................... A-12
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PENNZOIL AND PPC....... A-12
4.1 Organization, Qualification, Etc............................ A-12
4.2 Capital Stock and Other Matters............................. A-13
4.3 Corporate Authority; No Violation........................... A-13
4.4 Affiliate Transactions...................................... A-14
4.5 PPC Financial Statements.................................... A-14
4.6 Absence of Certain Changes or Events........................ A-15
4.7 Investigations; Litigation.................................. A-15
4.8 Licenses; Compliance with Laws.............................. A-15
4.9 Proxy Statement/Prospectus; Registration Statement.......... A-16
4.10 Information Supplied........................................ A-16
4.11 Environmental Matters....................................... A-16
4.12 Tax Matters................................................. A-17
4.13 Benefit Plans............................................... A-17
4.14 Labor Matters............................................... A-18
4.15 Intellectual Property Matters............................... A-19
4.16 Material Contract Defaults.................................. A-19
4.17 Brokers or Finders.......................................... A-19
4.18 Certain Board Findings...................................... A-19
4.19 Vote Required............................................... A-19
4.20 Stockholder Approval........................................ A-19
4.21 Certain Payments............................................ A-20
4.22 Joint Ventures.............................................. A-20
4.23 Reincorporation............................................. A-20
4.24 Assets...................................................... A-20
4.25 Franchising Matters......................................... A-20
4.26 Loans....................................................... A-21
</TABLE>
A-i
<PAGE> 134
<TABLE>
<S> <C> <C>
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF QUAKER STATE................................................... A-21
5.1 Organization, Qualification, Etc................................................................. A-21
5.2 Capital Stock and Other Matters.................................................................. A-21
5.3 Corporate Authority; No Violation................................................................ A-22
5.4 Quaker State Reports and Financial Statements.................................................... A-22
5.5 Absence of Certain Changes or Events............................................................. A-23
5.6 Investigations; Litigation....................................................................... A-23
5.7 Licenses; Compliance with Laws................................................................... A-23
5.8 Proxy Statement/Prospectus; Registration Statement............................................... A-24
5.9 Information Supplied............................................................................. A-24
5.10 Environmental Matters............................................................................ A-24
5.11 Tax Matters...................................................................................... A-25
5.12 Benefit Plans.................................................................................... A-25
5.13 Labor Matters.................................................................................... A-27
5.14 Intellectual Property Matters.................................................................... A-27
5.15 Material Contract Defaults....................................................................... A-27
5.16 Certain Payments................................................................................. A-27
5.17 Opinion of Quaker State Financial Advisor........................................................ A-28
5.18 Brokers or Finders............................................................................... A-28
5.19 Quaker State Rights Agreement.................................................................... A-28
5.20 Takeover Statutes................................................................................ A-28
5.21 Certain Board Findings........................................................................... A-28
5.22 Vote Required.................................................................................... A-28
ARTICLE 6 COVENANTS AND AGREEMENTS......................................................................... A-28
6.1 Conduct of Business by Quaker State Pending the Merger........................................... A-28
6.2 Conduct of Business by PPC and Pennzoil Pending the Merger....................................... A-32
6.3 Cooperation...................................................................................... A-36
6.4 Proxy Statement/Prospectus....................................................................... A-37
6.5 Letter of PPC's Accountants...................................................................... A-37
6.6 Letter of Quaker State's Accountants............................................................. A-37
6.7 PPC Employee Stock Options, Incentive and Benefit Plans.......................................... A-37
6.8 Employee Benefit Plans........................................................................... A-38
6.9 Investigation.................................................................................... A-38
6.10 Reasonable Efforts; Further Assurances, Etc...................................................... A-39
6.11 No Solicitation.................................................................................. A-39
6.12 Director and Officer Indemnification; Insurance.................................................. A-40
6.13 Rule 145 Affiliates.............................................................................. A-41
6.14 Public Announcements............................................................................. A-41
6.15 Defense of Litigation............................................................................ A-41
6.16 Notification..................................................................................... A-41
6.17 Debt Instruments................................................................................. A-42
6.18 Quaker State Rights Plan......................................................................... A-42
ARTICLE 7 CONDITIONS TO THE MERGER......................................................................... A-42
7.1 Conditions to the Obligations of PPC, Pennzoil and Quaker State to Effect the Merger............. A-42
7.2 Additional Conditions to the Obligations of PPC.................................................. A-43
7.3 Additional Conditions to the Obligations of Quaker State......................................... A-44
ARTICLE 8 TERMINATION, AMENDMENT AND WAIVERS............................................................... A-45
8.1 Termination...................................................................................... A-45
8.2 Effect of Termination............................................................................ A-46
8.3 Termination Fee.................................................................................. A-46
8.4 Amendment........................................................................................ A-46
8.5 Waivers.......................................................................................... A-46
</TABLE>
A-ii
<PAGE> 135
<TABLE>
<S> <C> <C>
ARTICLE 9 MISCELLANEOUS.................................................................................... A-47
9.1 Survival of Representations, Warranties and Agreements; Indemnification.......................... A-47
9.2 Expenses......................................................................................... A-48
9.3 Notices.......................................................................................... A-48
9.4 Certain Construction Rules....................................................................... A-48
9.5 Severability..................................................................................... A-49
9.6 Assignment; Binding Effect....................................................................... A-49
9.7 No Third Party Beneficiaries..................................................................... A-49
9.8 Limited Liability................................................................................ A-49
9.9 Entire Agreement................................................................................. A-49
9.10 Governing Law.................................................................................... A-49
9.11 Counterparts..................................................................................... A-49
9.12 Retention Pay Program............................................................................ A-50
</TABLE>
<TABLE>
<S> <C>
EXHIBITS:
Exhibit A Form of Distribution Agreement
Exhibit B Certificate of Incorporation of PPC
Exhibit C Bylaws of PPC
Exhibit D Initial Officers of PPC after the Effective Time
Exhibit E PPC 1998 Incentive Plan
Exhibit F Form of Rule 145 Affiliate Agreements
Exhibit G Retention Pay Program
</TABLE>
A-iii
<PAGE> 136
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of April 14, 1998, is among
Pennzoil Company, a Delaware corporation ("Pennzoil"), Pennzoil Products
Company, a Delaware corporation ("PPC"), Downstream Merger Company, a Delaware
corporation and a wholly owned subsidiary of PPC ("Merger Sub"), and Quaker
State Corporation, a Delaware corporation ("Quaker State").
A. Business Separation. PPC has heretofore distributed to Pennzoil certain
oil and gas assets that have historically been operated by Pennzoil. Prior to
the Distribution Date (as such term and other capitalized terms are defined in
Article I hereof), Pennzoil intends to cause the transfer to PPC or a wholly
owned subsidiary of PPC the capital stock of certain Pennzoil subsidiaries that
are engaged in phases of the PPC Business heretofore carried on by PPC (the
"Contribution"); and Pennzoil and PPC shall take the further steps set forth in
Section 2.02 of the Distribution Agreement to separate more completely the PPC
Business from the Pennzoil Business.
B. The Distribution. On the Distribution Date, Pennzoil intends to
distribute all of the issued and outstanding shares of PPC Common Stock on a pro
rata basis (the "Distribution") to the holders as of the Record Date of the
outstanding common stock of Pennzoil, par value $0.831/3 per share ("Pennzoil
Common Stock").
C. The Merger. At the Effective Time, the parties intend to effect a merger
of Merger Sub with and into Quaker State, with Quaker State being the surviving
corporation (the "Merger"), and Quaker State becoming a wholly owned subsidiary
of PPC.
D. Intended Tax Consequences. The parties to this Agreement intend that the
Contribution and the Distribution qualify under Sections 355 and 368 of the
Code, that the Merger qualify under Section 368 of the Code, and that no gain or
loss for federal income tax purposes be recognized as a result of the
transactions described herein or in the Transaction Agreements.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth in this Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound hereby, agree as
follows:
ARTICLE 1
DEFINITIONS
"Affiliate" shall mean, with respect to any specified Person, any other
Person that, directly or indirectly, controls, is controlled by or is under
common control with, such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlled by" and
"under common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by contract or otherwise; provided, however,
that for purposes of this Agreement, no member of either Group shall be deemed
an Affiliate of any member of the other Group.
"Agreement" shall mean this Agreement and Plan of Merger, together with all
exhibits and schedules attached hereto.
"Alternative Award" shall have the meaning specified in Section 2.9.
"Approved for Listing" shall mean, with respect to shares of PPC Common
Stock, that such shares have been approved for listing on the NYSE, subject to
official notice of issuance.
"Award" shall have the meaning specified in Section 2.9.
"Canceled Award" shall have the meaning specified in Section 2.9.
"Certificate of Merger" shall have the meaning specified in Section 2.6.
"Certificates" shall have the meaning specified in Section 2.3.
A-1
<PAGE> 137
"Closing" shall have the meaning specified in Section 2.5.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Confidentiality Agreement" shall mean the Confidentiality Agreement, dated
as of December 30, 1997, between Pennzoil and Quaker State.
"Contract" shall mean any loan or credit agreement, note, bond, indenture,
mortgage, deed of trust, lease, franchise, permit, authorization, license,
contract, instrument, employee benefit plan or practice or other binding
agreement, obligation or commitment.
"Controlling Person" shall have the meaning specified in Section 9.1(b).
"DGCL" shall mean the General Corporation Law of the State of Delaware.
"Disclosure Schedules" shall mean, collectively, the Pennzoil Disclosure
Schedule, the PPC Disclosure Schedule and the Quaker State Disclosure Schedule.
"Distribution" shall have the meaning set forth in the Recitals hereto.
"Distribution Agreement" shall mean the Distribution Agreement in the form
attached hereto as Exhibit A, between Pennzoil and PPC, pursuant to which
certain transfers will be made between Pennzoil and certain of its Affiliates
and PPC and certain of its Affiliates and shares of PPC Common Stock will be
distributed to the stockholders of Pennzoil, with such additions, deletions and
other modifications thereto that are agreed in writing by Pennzoil and PPC, with
a Quaker State Consent.
"Distribution Date" shall mean the date and time that the Distribution
shall become effective.
"Effective Time" shall have the meaning specified in Section 2.6.
"Employee Benefits Agreement" shall mean the Employee Benefits Agreement
between Pennzoil and PPC, in the form attached to the Distribution Agreement,
with such additions, deletions and other modifications thereto that are mutually
agreed upon in writing by Pennzoil and PPC, with a Quaker State Consent.
"Environmental Law" shall mean any and all foreign, federal, state or local
statute, rule, regulation or ordinance, as well as any order, decree,
determination, judgment or injunction issued, promulgated, approved or entered
thereunder by any Governmental Authority, including requirements of common law,
relating to pollution or the protection, cleanup or restoration of the
environment, or to human health, including the Federal Clean Air Act, the
Federal Clean Water Act, the Federal Resource Conservation and Recovery Act, the
Federal Comprehensive Environmental Response, Compensation, and Liability Act
and the Federal Toxic Substances Control Act.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" shall mean, with respect to any Person, any other Person
or any trade or business, whether or not incorporated, that, together with such
first Person would be deemed a "single employer" within the meaning of section
4001(b) of ERISA.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
together with the rules and regulations of the SEC promulgated thereunder.
"Exchange Agent" shall have the meaning specified in Section 2.8(a).
"Exchange Fund" shall have the meaning specified in Section 2.8(a).
"GAAP" shall mean United States generally accepted accounting principles as
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board.
"Governmental Authority" shall mean any foreign, federal, state or local
court, administrative agency, board, bureau or commission or other governmental
department, authority or instrumentality.
A-2
<PAGE> 138
"Hazardous Material" shall mean any hazardous or toxic substance or
material regulated under Environmental Laws, and includes without limitation
petroleum and any derivative thereof.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"HSR Agencies" shall mean the Federal Trade Commission and the Antitrust
Division of the Department of Justice.
"IRS" shall mean the U.S. Internal Revenue Service.
"JLI" shall mean Jiffy Lube International, Inc., a Nevada corporation.
"Licenses" shall mean any license, ordinance, authorization, permit,
certificate, variance, exemption, order, franchise or approval from any
Governmental Authority, domestic or foreign.
"Losses" shall have the meaning set forth in Section 9.1(b).
"Material Adverse Effect," with respect to any Person, shall mean a
material adverse effect on the business, assets, liabilities, results of
operations or condition (financial or otherwise) of such Person and its
Subsidiaries, taken as a whole, or on the ability of such Person to perform its
obligations hereunder or under the other Transaction Agreements.
"Merger" shall have the meaning specified in Section 2.1(c).
"Merger Sub" shall have the meaning specified in the preamble hereto.
"NYSE" shall mean the New York Stock Exchange, Inc.
"Option" shall have the meaning specified in Section 2.9.
"Order" shall have the meaning specified in Section 6.10(a).
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Pennzoil" shall have the meaning specified in the preamble hereof.
"Pennzoil Common Stock" shall have the meaning set forth in the Recitals
hereto.
"Pennzoil Disclosure Schedule" shall mean the schedule prepared and
delivered by Pennzoil to Quaker State as of the date of this Agreement, setting
forth, among other things, certain information that, to the extent provided
herein, qualifies certain representations, warranties and agreements of Pennzoil
made in this Agreement.
"Pennzoil-PPC Agreements" shall have the meaning specified in Section 4.4.
"Pennzoil Group" shall mean Pennzoil and the Pennzoil Subsidiaries
immediately after the Distribution Date.
"Pennzoil Subsidiaries" shall mean all direct and indirect Subsidiaries of
Pennzoil immediately after the Distribution Date.
"Person" shall mean a natural person, corporation, company, partnership,
limited partnership or other entity, including a Governmental Authority.
"PPC" shall have the meaning specified in the preamble hereof.
"PPC 1998 Incentive Plan" shall mean the PPC 1998 Incentive Plan in the
form attached as Exhibit E hereto, with such additions, deletions and other
modifications that are mutually agreed upon by Pennzoil and PPC, with a Quaker
State Consent.
"PPC Acquisition" shall mean, in each case other than in connection with
the Merger or as otherwise specifically contemplated by this Agreement or the
Transaction Agreements, (i) any merger, consolidation, share exchange, business
combination, recapitalization or other similar transaction or series of related
transactions involving PPC or any Significant Subsidiary of PPC other than any
merger of PPC with or into
A-3
<PAGE> 139
Quaker State or any wholly owned Subsidiary of Quaker State or the merger of
Quaker State with or into PPC or any wholly owned subsidiary of PPC; (ii) any
sale, lease, exchange, transfer or other disposition of the PPC Assets or any of
its Subsidiaries constituting 5% or more of the consolidated PPC Assets or
accounting for 5% or more of the consolidated revenues of PPC in any one
transaction or in a series of related transactions; (iii) any tender offer,
exchange offer or any similar transaction or series of related transactions made
by any Person involving PPC Common Stock or the capital stock of any Subsidiary
of PPC; (iv) the acquisition by any Person (other than Quaker State or any of
its Affiliates) of beneficial ownership (as determined pursuant to Rule 13d-3 of
the Exchange Act) or the formation of any group (as defined in Section 13(d) of
the Exchange Act) to acquire beneficial ownership (as determined pursuant to
Rule 13d-3 of the Exchange Act) of more than five percent of PPC Common Stock or
any stock of any Subsidiaries of PPC (other than any such beneficial ownership
thereof arising solely from beneficial ownership of Pennzoil Common Stock); or
(v) any other substantially similar transaction or series of related
transactions that would hinder the consummation of the transactions contemplated
by, or otherwise defeat the purposes of, this Agreement or the other Transaction
Agreements.
"PPC Acquisition Proposal" shall mean any proposal (other than in
connection with the Merger or as otherwise specifically contemplated by this
Agreement or the other Transaction Agreements) regarding a PPC Acquisition.
"PPC Assets" shall mean the assets used in, held for use in connection with
or necessary for the conduct of, or otherwise material to the business or
operations of, the PPC Business, including, without limitation, those assets
being transferred to PPC pursuant to the Distribution Agreement.
"PPC Benefit Plans" shall have the meaning specified in Section 4.13(a).
"PPC Business" shall mean the businesses and operations conducted by PPC,
the PPC Subsidiaries and Affiliates of PPC and JLI and its Affiliates prior to
the Distribution Date.
"PPC Common Stock" shall mean the Common Stock, par value $.10 per share,
of PPC.
"PPC Disclosure Schedule" shall mean the schedule prepared and delivered by
PPC to Quaker State as of the date of this Agreement, setting forth, among other
things, certain information that, to the extent provided herein, qualifies
certain representations, warranties and agreements of PPC made in this
Agreement.
"PPC Employee" shall have the meaning specified in Section 4.13(a).
"PPC Financial Statements" shall have the meaning specified in Section 3.5.
"PPC Group" shall mean PPC and the PPC Subsidiaries.
"PPC Preferred Stock" shall mean the Preferred Stock, par value $1.00 per
share, of PPC.
"PPC Subsidiaries" shall mean all direct and indirect Subsidiaries of PPC
immediately after the Distribution Date.
"PPC Voting Debt" shall have the meaning specified in Section 4.2.
"Pro Forma Financial Statements" shall have the meaning specified in
Section 4.5.
"Proxy Statement/Prospectus" shall mean the proxy statement/prospectus to
be distributed to the stockholders of Quaker State in connection with the Merger
and the transactions contemplated by this Agreement, including any preliminary
proxy statement/prospectus or definitive proxy statement/prospectus filed with
the SEC in accordance with the terms and provisions hereof. The Proxy
Statement/Prospectus shall constitute a part of the Registration Statement on
Form S-4.
"Quaker State" shall have the meaning specified in the preamble hereof.
"Quaker State Acquisition" shall mean, in each case other than in
connection with the Merger or as otherwise specifically contemplated by this
Agreement (i) any merger, consolidation, share exchange, business combination,
recapitalization or other similar transaction or series of related transactions
involving Quaker State or any Significant Subsidiary of Quaker State other than
any merger of Quaker State with or
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into PPC or any wholly owned Subsidiary of PPC or the merger of PPC with or into
Quaker State or a wholly owned Subsidiary of Quaker State; (ii) any sale, lease,
exchange, transfer or other disposition of the assets of Quaker State or any of
its Subsidiaries constituting 5% or more of the consolidated assets of Quaker
State or accounting for 5% or more of the consolidated revenues of Quaker State
in any one transaction or in a series of related transactions; (iii) any tender
offer, exchange offer or any similar transaction or series of related
transactions made by any Person involving Quaker State Capital Stock or the
capital stock of any Subsidiary of Quaker State; (iv) the acquisition by any
Person (other than PPC or any of its Affiliates) of beneficial ownership (as
determined pursuant to Rule 13d-3 of the Exchange Act) or the formation of any
group (as defined in Section 13(d) of the Exchange Act) to acquire beneficial
ownership (as determined pursuant to Rule 13d-3 of the Exchange Act) of more
than five percent of Quaker State Capital Stock or any stock of any Subsidiaries
of Quaker State; or (v) any other substantially similar transaction or series of
related transactions that would hinder the consummation of the transactions
contemplated by, or otherwise defeat the purposes of, this Agreement or the
other Transaction Agreements.
"Quaker State Acquisition Proposal" shall mean any proposal (other than in
connection with the Merger or as specifically contemplated by this Agreement)
regarding a Quaker State Acquisition.
"Quaker State Benefit Plans" shall have the meaning set forth in Section
5.12(a).
"Quaker State Capital Stock" shall mean the capital stock, par value $1.00
per share, of Quaker State.
"Quaker State Consent" shall mean the consent of Quaker State, which
consent shall not be unreasonably delayed or withheld.
"Quaker State Disclosure Schedule" shall mean the schedule prepared and
delivered by Quaker State to PPC as of the date of this Agreement, setting
forth, among other things, certain information that, to the extent provided
herein, qualifies certain representations, warranties and agreements of Quaker
State made in this Agreement.
"Quaker State Employees" shall have the meaning set forth in Section
5.12(a).
"Quaker State Rights" shall have the meaning specified in Section 5.19.
"Quaker State Rights Agreement" shall mean the Rights Agreement, dated as
of September 28, 1995, between Quaker State and Mellon Securities Trust Company,
as Rights Agent.
"Quaker State SEC Documents" shall have the meaning specified in Section
5.4(e).
"Quaker State Share Price" shall have the meaning set forth in Section 2.9.
"Quaker State Stock Plans" shall mean have the meaning specified in Section
2.9.
"Quaker State Stockholders Meeting" shall have the meaning specified in
Section 2.4(a).
"Quaker State Voting Debt" shall have the meaning specified in Section 5.2.
"Registration Statements" shall mean the Registration Statement on Form S-4
to be filed by PPC with the SEC to effect the registration under the Securities
Act of the shares of PPC Common Stock into which shares of Quaker State Capital
Stock will be converted pursuant to the Merger and a registration statement on
Form 10 (or, if such form is not appropriate, the appropriate form pursuant to
the Exchange Act) to be filed by PPC with the SEC to effect the registration of
PPC Common Stock pursuant to the Exchange Act.
"Requisite Approval" shall have the meaning specified in Section 5.22.
"Retention Pay Program" shall have the meaning specified in Section 9.12.
"Return" shall mean any return, report, declaration, form, claim for refund
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Rule 145 Affiliate" shall have the meaning specified in Section 6.14.
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"Rule 145 Affiliate Agreement" shall have the meaning specified in Section
6.14.
"SEC" shall mean the U.S. Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended,
together with the rules and regulations of the SEC promulgated thereunder.
"Section 355 Ruling" shall have the meaning set forth in Section 6.2(u).
"Share Award" shall have the meaning specified in Section 2.9.
"Significant Subsidiary" shall have the meaning set forth in Rule 1-02 of
Regulation S-X of the Exchange Act.
"Subsidiary" shall mean, with respect to any Person, a corporation,
partnership or other entity in which such Person, a Subsidiary of such Person or
such Person and one or more Subsidiaries of such Person, directly or indirectly,
has either (i) a majority ownership in the equity thereof, (ii) the power, under
ordinary circumstances, to elect, or to direct the election of, a majority of
the board of directors or other governing body of such entity, (iii) the title
or function of general partner, or the right to designate the Person having such
title or function or (iv) control thereof and, in the case of PPC, shall include
the corporate entities that have been or are being transferred to PPC by
Pennzoil as described or provided in the Distribution Agreement, including
without limitation JLI.
"Surviving Corporation" shall have the meaning set forth in Section 2.1(c).
"Tax" shall mean all federal, state, local and foreign income, profits,
value-added, franchise, gross receipts, payroll, sales, employment, use,
property, withholding, excise and other taxes, duties or assessments of any
nature whatsoever, together with all interest, penalties and additions imposed
with respect to such amounts.
"Tax Separation Agreement" shall mean the Tax Separation Agreement to be
entered into between Pennzoil and PPC in the form attached to the Distribution
Agreement, with such additions, deletions and other modifications thereto that
are mutually agreed upon in writing by Pennzoil, PPC and Quaker State.
"Termination Date" shall mean the date, if any, on which this Agreement is
terminated pursuant to Section 8.1.
"Termination Fee" shall have the meaning specified in Section 8.3(a).
"Trademark License Agreement" shall mean the Trademark License Agreement to
be entered into between Pennzoil and PPC in the form attached to the
Distribution Agreement, with such additions, deletions and other modifications
thereto that are mutually agreed to in writing by Pennzoil and PPC, with a
Quaker State Consent.
"Transaction Agreements" shall mean this Agreement, the Distribution
Agreement, the Employee Benefits Agreement, the Trademark License Agreement, the
Transition Services Agreement, the Tax Separation Agreement and the other
agreements, if any, entered into or to be entered into in connection with the
Distribution as contemplated by Article II or Section 8.15 of the Distribution
Agreement.
"Transition Services Agreement" shall mean the Transition Services
Agreement to be entered into between Pennzoil and PPC in the form attached to
the Distribution Agreement, with such additions, deletions and other
modifications thereto that are mutually agreed upon in writing by Pennzoil and
PPC, with a Quaker State Consent.
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ARTICLE 2
THE MERGER
2.1 Distribution and Merger.
(a) Subject to the terms and conditions of the Distribution Agreement,
prior to the Distribution Date, the parties thereto shall effect the various
transactions contemplated by the Distribution Agreement.
(b) Immediately prior to the Effective Time, the issued and outstanding
capital stock of Merger Sub shall consist of 1,000 shares of common stock, all
of which shall be owned by PPC. Prior to the Effective Time and except as
specifically contemplated by this Agreement or as mutually approved in writing
by PPC and Quaker State, PPC shall cause Merger Sub not to conduct any business
operations, enter into any Contract (other than this Agreement), acquire any
assets or incur any liabilities.
(c) At the Effective Time: (i) Merger Sub shall be merged with and into
Quaker State (the "Merger"), the separate existence of Merger Sub shall cease
and Quaker State shall continue as the surviving corporation (sometimes referred
to herein as the "Surviving Corporation"); (ii) the Certificate of Incorporation
of Quaker State immediately prior to the Effective Time shall be the Certificate
of Incorporation of the Surviving Corporation; and (iii) the Bylaws of Quaker
State as in effect immediately prior to the Effective Time shall be the Bylaws
of the Surviving Corporation.
(d) The directors of Quaker State at the Effective Time shall, from and
after the Effective Time, be the initial directors of the Surviving Corporation,
the officers of Quaker State at the Effective Time shall, from and after the
Effective Time, be the initial officers of the Surviving Corporation, and such
directors and officers shall serve until their successors have been duly elected
or appointed and qualified or until their earlier death, resignation or removal
in accordance with the Surviving Corporation's Certificate of Incorporation and
Bylaws. The Board of Directors of PPC immediately after the Effective Time shall
consist of nine directors, five of which will be designated by PPC, three of
which will be designated by Quaker State and one of which will be the President
and Chief Operating Officer of PPC. Two of the directors designated by Quaker
State and four of the directors designated by PPC will be independent directors.
The Certificate of Incorporation and Bylaws of PPC immediately prior to the
Effective Time will be substantially in the forms attached hereto as Exhibit B
and Exhibit C, respectively, except (i) for such changes that are agreed to by
Pennzoil and PPC, with a Quaker State Consent, and (ii) that prior to the
Distribution Date, the name of PPC will be changed to a name mutually agreed to
by PPC and Quaker State. The initial officers of PPC after the Effective Time
shall be as set forth in Exhibit D hereto. The President and Chief Operating
Officer of PPC will be selected by a committee of the Board of Directors of PPC
comprised of two directors selected by Quaker State and two directors selected
by PPC, acting by the affirmative vote of a majority of the members of such
committee.
(e) The Merger shall have the effects set forth in this Article 2 and the
applicable provisions of the DGCL.
2.2 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder of any capital stock of
Quaker State:
(a) Each share of Quaker State Capital Stock issued and outstanding
immediately prior to the Effective Time (other than shares to be canceled
in accordance with Section 2.2(b)) shall be automatically converted into
the right to receive .8204 fully paid and nonassessable share(s) of PPC
Common Stock.
(b) Each share of Quaker State Capital Stock held by Quaker State as
treasury stock and each share of Quaker State Capital Stock owned by PPC or
any wholly owned Subsidiary of PPC or Quaker State, in each case
immediately prior to the Effective Time, shall be canceled and shall cease
to exist and no stock or other consideration shall be delivered in exchange
therefor.
(c) Each share of capital stock of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be converted into one fully
paid and nonassessable share of Quaker State Capital Stock.
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2.3 Cancellation of Stock. Each share of Quaker State Capital Stock issued
and outstanding immediately prior to the Effective Time, when converted in
accordance with Section 2.2, shall no longer be outstanding and shall
automatically be canceled and shall cease to exist. Each holder of a certificate
that, immediately prior to the Effective Time, represented outstanding shares of
Quaker State Capital Stock (collectively, the "Certificates") shall cease to
have any rights with respect thereto, except the right to receive, upon the
surrender of any such Certificate, a certificate representing the shares of PPC
Common Stock to which such holder is entitled pursuant to Section 2.2 and any
cash in lieu of fractional shares of PPC Common Stock to be issued or paid in
consideration therefor in accordance with Section 2.8(c), without interest.
2.4 Stockholders Meeting.
(a) As promptly as practicable following the date hereof and the
effectiveness of the Registration Statements and subject to Section 6.11(b),
Quaker State shall call a special meeting of its stockholders (the "Quaker State
Stockholders Meeting") to be held as promptly as practicable for the purpose of
voting upon (i) the adoption of the Merger Agreement and (ii) any related
matters. This Agreement shall be submitted for adoption to the stockholders of
Quaker State at such special meeting. Quaker State shall deliver to Quaker
State's stockholders the Proxy Statement/Prospectus in definitive form in
connection with the Quaker State Stockholders Meeting at the time and in the
manner provided by the applicable provisions of the DGCL, the Exchange Act and
Quaker State's Certificate of Incorporation and Bylaws and shall conduct the
Quaker State Stockholders Meeting and the solicitation of proxies in connection
therewith in compliance with such statutes, charter and bylaws.
(b) Subject to Section 6.11(b), the Board of Directors of Quaker State
shall recommend that Quaker State stockholders adopt this Agreement and approve
the transactions contemplated hereby, and such recommendations shall be set
forth in the Proxy Statement/Prospectus.
2.5 Closing. Unless the transactions herein contemplated shall have been
abandoned and this Agreement terminated pursuant to Section 8.1, the closing of
the Merger and the other transactions contemplated hereby (the "Closing") shall
take place at the offices of PPC at 10:00 a.m., Central time, on the date on
which the last of the conditions set forth in Article 7 is fulfilled or waived
(except for those conditions that, by the express terms thereof, are not capable
of being satisfied until the Effective Time), or at such other time and place as
PPC and Quaker State shall agree in writing.
2.6 Effective Time. Upon the terms and subject to the conditions of this
Agreement, as soon as practicable at or after the Closing, a certificate of
merger shall be filed with the Secretary of State of the State of Delaware with
respect to the Merger (the "Certificate of Merger"), in such form as is required
by, and executed in accordance with, the applicable provisions of the DGCL. The
Merger shall become effective at the time of filing of the Certificate of Merger
or at such later time as the parties hereto may agree and as is provided in the
Certificate of Merger. The date and time at which the Merger shall become so
effective is herein referred to as the "Effective Time."
2.7 Closing of Transfer Books. From and after the Effective Time, the
stock transfer books of Quaker State shall be closed and no transfer shall be
made of any shares of capital stock of Quaker State that were outstanding
immediately prior to the Effective Time.
2.8 Exchange of Certificates.
(a) Exchange Agent. Prior to the Effective Time, PPC or Pennzoil shall
deposit with such bank or trust company as shall be agreed upon by PPC and
Quaker State (the "Exchange Agent"), for the benefit of holders of shares of
Quaker State Capital Stock and for exchange in accordance with this Article 2,
through the Exchange Agent, certificates representing the shares of PPC Common
Stock (such shares of PPC Common Stock, together with any dividends or
distributions with respect thereto to which the holders thereof may be entitled
pursuant to Section 2.8(c), being hereinafter referred to as the "Exchange
Fund") issuable pursuant to Section 2.2 in exchange for outstanding shares of
Quaker State Capital Stock. The Exchange Agent shall, pursuant to irrevocable
instructions, deliver the PPC Common Stock contemplated to be issued pursuant to
Section 2.2 from the shares of stock held in the Exchange Fund. The Exchange
Fund shall not be used for any other purpose.
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(b) Exchange Procedures. As promptly as practicable after the Effective
Time, PPC shall cause the Exchange Agent to mail or deliver to each holder of
record of a Certificate or Certificates whose shares were converted pursuant to
Section 2.2 into the right to receive shares of PPC Common Stock (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent and shall be in such form and have such other
provisions as PPC and Quaker State may reasonably specify) and (ii) instructions
for the use of such letter of transmittal in effecting the surrender of the
Certificates in exchange for certificates representing the shares of PPC Common
Stock that such holder has the right to receive pursuant to this Article 2. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by PPC, together with such letter of
transmittal, duly executed, and any other required documents, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing the number of whole shares of PPC Common Stock that such holder has
the right to receive pursuant to this Article 2 (and cash in lieu of any
fractional shares of PPC Common Stock, as contemplated by Section 2.8(e)) (and
any dividends or distributions pursuant to Section 2.8(c)), and the Certificate
so surrendered shall forthwith be canceled. In the event of a transfer of
ownership of shares of Quaker State Capital Stock that is not registered in the
transfer records of Quaker State, a certificate representing the proper number
of shares of PPC Common Stock may be issued to a transferee only on the
condition that the Certificate formerly representing such shares of Quaker State
Capital Stock is presented to the Exchange Agent, properly endorsed, and
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid or that no
such taxes are applicable. Until surrendered as contemplated by this Section
2.8, each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender a certificate
representing shares of PPC Common Stock and cash in lieu of any fractional
shares of PPC Common Stock, as contemplated by Section 2.8(e) (and any dividends
or distributions pursuant to Section 2.8(c)). The Exchange Agent shall not be
entitled to vote or exercise any rights of ownership with respect to the PPC
Common Stock held by it from time to time hereunder, except that it shall
receive and hold all dividends or other distributions paid or distributed with
respect thereto for the account of persons entitled thereto.
If any Certificate shall have been lost, stolen, mislaid or destroyed, upon
the making of an affidavit of that fact by the person claiming such Certificate
to be lost, stolen, mislaid or destroyed, PPC shall cause to be delivered in
exchange for such lost, stolen, mislaid or destroyed Certificate the
consideration deliverable in respect thereof as determined in accordance with
this Article 2. When authorizing the delivery of such consideration in exchange
therefor, PPC may, in its sole discretion and as a condition precedent to the
delivery thereof, require the owner of such lost, stolen, mislaid or destroyed
Certificate to give PPC a bond, in form and substance reasonably satisfactory to
PPC, and in such sum as PPC may reasonably direct, as indemnity against any
claim that may be made against PPC or the Exchange Agent with respect to the
Certificate alleged to have been lost, stolen, mislaid or destroyed.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to PPC
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of PPC Common
Stock which such holder is entitled to receive pursuant to the terms hereof and
no cash payment in lieu of fractional shares shall be paid to any such holder
pursuant to Section 2.8(e) until the holder of record of such Certificate shall
surrender such Certificate. Subject to the effect of applicable laws, following
the surrender of any such Certificate, there shall be paid to the record holder
of the certificates representing shares of PPC Common Stock issued in exchange
therefor, without interest (i) at the time of such surrender, the amount of cash
payable in lieu of a fractional share of PPC Common Stock to which such holder
is entitled pursuant to Section 2.8(e) and the amount of dividends or other
distributions with a record date after the Effective Time theretofore paid with
respect to such whole shares of PPC Common Stock and (ii) at the appropriate
payment date therefor, the amount of dividends or other distributions with a
record date after the Effective Time but prior to the surrender of such
Certificate and a payment date subsequent to the surrender of such Certificate
payable with respect to such whole shares of PPC Common Stock. PPC shall deposit
in the Exchange Fund all such dividends and distributions.
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(d) No Further Ownership Rights in Quaker State Capital Stock. All shares
of PPC Common Stock issued upon the surrender for exchange of Certificates
formerly representing shares of Quaker State Capital Stock (including any cash
paid pursuant to Section 2.8(c)) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Quaker State Capital
Stock subject, however, to the Surviving Corporation's obligation to pay any
dividends or make any other distributions with a record date prior to the
Effective Time that may have been declared or made by Quaker State on such
shares of Quaker State Capital Stock in accordance with the terms of this
Agreement or prior to the date hereof and that remain unpaid at the Effective
Time. If, after the Effective Time, Certificates are presented to PPC or Quaker
State for any reason, they shall be canceled and exchanged as provided in this
Article 2.
(e) No Fractional Shares. Notwithstanding anything herein to the contrary,
no certificate or scrip representing fractional shares of PPC Common Stock shall
be issued upon the surrender for exchange of Certificates, and such fractional
share interests will not entitle the owner thereof to vote or to any rights as a
stockholder of PPC. All fractional shares of PPC Common Stock that a holder of
Quaker State Capital Stock would otherwise be entitled to receive as a result of
the Merger shall be aggregated and if a fractional share results from such
aggregation, such holder shall be entitled to receive, in lieu thereof, an
amount in cash determined by multiplying (i) the closing sale price per share of
PPC Common Stock on the NYSE on the business day preceding the Effective Time,
if the stock is being traded on such date, or if the stock is not being traded
on such date, the closing sale price per share of PPC Common Stock on the NYSE
on the first business day that such stock is traded, by (ii) the fraction of a
share of PPC Common Stock to which such holder would otherwise have been
entitled. PPC shall timely make available to the Exchange Agent any cash
necessary to make payments in lieu of fractional shares as aforesaid.
Alternatively, PPC shall have the option of instructing the Exchange Agent to
aggregate all fractional shares of PPC Common Stock, sell such shares in the
public market and distribute to holders of Quaker State Capital Stock who
otherwise would have been entitled to such fractional shares of PPC Common Stock
a pro rata portion of the proceeds of such sale. No such cash in lieu of
fractional shares of PPC Common Stock shall be paid to any holder of Quaker
State Capital Stock until Certificates formerly representing such Quaker State
Capital Stock are surrendered and exchanged in accordance with Section 2.8(b).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund and any
cash in lieu of fractional shares of PPC Common Stock made available to the
Exchange Agent that remains undistributed to the former stockholders of Quaker
State on the one-year anniversary of the Effective Time shall be delivered to
PPC, upon demand, and any stockholders of Quaker State who have not theretofore
complied with this Article 2 shall thereafter look only to PPC for payment of
their claim for PPC Common Stock and any cash in lieu of fractional shares of
PPC Common Stock and any dividends or distributions with respect to PPC Common
Stock.
(g) No Liability. Neither PPC nor the Surviving Corporation shall be liable
to any holder of a Certificate or any holder of shares of PPC Common Stock for
shares of PPC Common Stock (or dividends or distributions with respect thereto
or with respect to Quaker State Capital Stock) or cash in lieu of fractional
shares of PPC Common Stock delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
2.9 Quaker State Employee Stock Options, Restricted Stock and Performance
Shares. In accordance with the terms of the Quaker State 1994 Stock Incentive
Plan, 1994 Non-Employee Directors Stock Option Plan and 1986 Stock Option Plan
(the "Quaker State Stock Plans"), each option to acquire shares of Quaker State
Capital Stock (each, an "Option") and restricted or performance share award
(each, a "Share Award") granted to an employee, officer or director of Quaker
State under the Quaker State Stock Plans and outstanding immediately prior to
the Effective Time (an Option or a Share Award, an "Award") shall, immediately
prior to the Effective Time, become vested or exercisable. Unless otherwise
agreed by PPC, Quaker State and the holder of an Award as contemplated by this
Section 2.9, Quaker State shall cause all requisite action to be taken so that
as of the Effective Time, each Award outstanding immediately prior to the
Effective Time shall be canceled or repurchased and the holder of such an Award
shall be entitled to receive an amount of cash (less any required withholding or
other similar taxes) equal to (a) for each share of Quaker State Capital Stock
subject to an Option, an amount in cash equal to the excess, if any, of (i) the
greater of
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(x) $23.00 and (y) the average closing trading prices per share of Quaker State
Capital Stock on the three business days immediately preceding the Effective
Time on the NYSE (such higher amount, the "Quaker State Share Price") over (ii)
the per share exercise price of such Option, and (b) for each share of Quaker
State Capital Stock subject to a Share Award, the Quaker State Share Price.
Quaker State shall use its reasonable best efforts to obtain all necessary
consents of the holders of Awards to the cancellation or repurchase of Awards in
accordance with this Section 2.9. If Quaker State and the holder of an Award
agree, instead of receiving the cash payment provided for in this Section 2.9
for all or a portion of his or her Award, the holder shall receive an
alternative award (the "Alternative Award") under the PPC 1998 Incentive Plan.
Any such Alternative Award shall (a) be in substitution for such Award under the
applicable stock option plan of Quaker State (the "Canceled Award"); (b) provide
rights and entitlements substantially equivalent to or better than the rights,
terms and conditions applicable under the corresponding Canceled Award,
including but not limited to, an identical or better vesting schedule; (c) have
economic value substantially equivalent to the value of the corresponding
Canceled Award; and (d) have terms and conditions which provide that, in the
event that the employment of the grantee of such Alternative Award is
involuntarily or constructively terminated, any conditions on such grantee's
rights under, or any restrictions on exercisability applicable to, each such
Alternative Award shall be waived or shall lapse, as the case may be. For
purposes of subclause (c) of the immediately preceding sentence, economic
equivalent value shall be determined in the case of the Canceled Award, based on
the Quaker State Share Price, and, in the case of the substitute award for PPC
Common Stock, the value of the PPC Common Stock used under the Employee Benefits
Agreement for converting the Pennzoil equity based awards into an award for PPC
Common Stock.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PENNZOIL
Pennzoil represents and warrants to and agrees with Quaker State and PPC as
follows:
3.1 Organization, Qualification, Etc. Pennzoil is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
3.2 Corporate Authority; No Violation, etc. Pennzoil has the corporate
power and authority to enter into each Transaction Agreement and to carry out
its obligations hereunder and thereunder. The execution, delivery and
performance by Pennzoil of each Transaction Agreement and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all requisite corporate action on the part of Pennzoil. This Agreement has been
duly executed and delivered by Pennzoil and constitutes a legal, valid and
binding agreement of Pennzoil, enforceable against Pennzoil in accordance with
its terms (except insofar as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, or by principles governing the availability of
equitable remedies). As of the Distribution Date, each other Transaction
Agreement will have been duly executed and delivered by Pennzoil and will
constitute a legal, valid and binding agreement of Pennzoil, enforceable against
Pennzoil in accordance with its terms (except insofar as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally, or by principles governing
the availability of equitable remedies). None of the execution and delivery by
Pennzoil of this Agreement or any other Transaction Agreement, the consummation
by Pennzoil of the transactions contemplated hereby or thereby or compliance by
Pennzoil with any of the provisions hereof or thereof will (a) violate or
conflict with any provisions of Pennzoil's Certificate of Incorporation or
Bylaws; (b) require any consent, approval, authorization or permit of,
registration, declaration or filing with, or notification to, any Governmental
Authority or any other Person, except (i) as set forth in Section 3.2 of the
Pennzoil Disclosure Schedule or (ii)'where the failure to so obtain, make or
file such consents, approvals, authorizations, permits, registrations,
declarations, filings or notifications, individually or in the aggregate, would
not be reasonably likely to have a Material Adverse Effect on PPC; (c) result in
a default (or an event that, with notice or lapse of time or both, would become
a default) or give rise to any right of termination by any third party,
cancellation, amendment or acceleration of any obligation or the loss of any
benefit under, any Contract to which Pennzoil or any of its Subsidiaries or PPC
or any of its Subsidiaries is a party or by which
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Pennzoil or any of its Subsidiaries or PPC or any of its Subsidiaries or any of
the PPC Assets is bound or affected, except (i) s set forth in Section 3.2 of
the Pennzoil Disclosure Schedule or (ii) for any such defaults, terminations,
cancellations, amendments, accelerations or losses that, individually or in the
aggregate, would not be reasonably likely to have a Material Adverse Effect on
PPC; (d) result in the creation of a lien, pledge, security interest, claim or
other encumbrance on any of the issued and outstanding shares of PPC Common
Stock, capital stock of any PPC Subsidiary or on any of the PPC Assets pursuant
to any Contract to which Pennzoil or any of its Subsidiaries (including PPC and
its Subsidiaries) is a party or by which PPC or its Subsidiaries or any of the
PPC Assets is bound or affected except (i) as set forth in Section 3.2 of the
Pennzoil Disclosure Schedule or (ii) for any such liens, pledges, security
interests or encumbrances which, individually or in the aggregate would not be
reasonably likely to have a Material Adverse Effect on PPC; or (e) violate or
conflict with any order, writ, injunction, decree, law, ordinance, rule or
regulation applicable to Pennzoil or any of its Subsidiaries (including PPC and
its Subsidiaries), or any of the properties, business or assets of any of the
foregoing, except (i) as set forth in Section 3.2 of the Pennzoil Disclosure
Schedule or (ii) violations and conflicts that, individually or in the
aggregate, would not be reasonably likely to have a Material Adverse Effect on
PPC. Section 3.2 of the Pennzoil Disclosure Schedule identifies all consents,
approvals and authorizations of any Governmental Authority that are legally
required to be obtained by Pennzoil for the consummation of the transactions
contemplated by the Transaction Agreements.
3.3 Information Supplied. All documents that Pennzoil is responsible for
filing with any Governmental Authority in connection with the transactions
contemplated hereby and by the other Transaction Agreements will comply in all
material respects with the provisions of applicable law. All information
supplied or to be supplied by Pennzoil in any document filed with any
Governmental Authority in connection with the transactions contemplated hereby
and by the other Transaction Agreements will be, at the time of filing, at the
Distribution Date and at the Effective Time, true and correct in all material
respects, except where the failure of such information to be true and correct,
individually or in the aggregate, would not be reasonably likely to have a
Material Adverse Effect on PPC.
3.4 Brokers or Finders. Except as set forth in Section 3.4 of the Pennzoil
Disclosure Schedule, no agent, broker, investment banker, financial advisor or
other similar Person is or will be entitled, by reason of any agreement, act or
statement by Pennzoil or any of its Subsidiaries, directors, officers or
employees, to any financial advisory, broker's, finder's or similar fee or
commission, to reimbursement of expenses or to indemnification or contribution,
in each case, by PPC or its Subsidiaries in connection with any of the
transactions contemplated by this Agreement or the other Transaction Agreements.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PENNZOIL AND PPC
Pennzoil and PPC, jointly and severally, represent and warrant to Quaker
State as follows and in each case after giving effect to the transactions
contemplated by the Distribution Agreement (unless otherwise explicitly stated):
4.1 Organization, Qualification, Etc. Each of PPC and Merger Sub is and
will be upon the Effective Time a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. PPC has all
requisite power and authority to own, lease and operate its properties and
assets and to carry on its business as presently conducted and is duly qualified
and licensed to do business and is in good standing in each jurisdiction in
which the ownership or leasing of its property or the conduct of its business
requires such qualification, except for jurisdictions in which the failure to be
so qualified or to be in good standing, individually or in the aggregate, would
not be reasonably likely to have a Material Adverse Effect on PPC. The copies of
the PPC Certificate of Incorporation and Bylaws in existence on the date hereof
are included as part of Section 4.1 of the PPC Disclosure Schedule and are
complete and correct and in full force and effect on the date hereof. Each of
PPC's Significant Subsidiaries is a corporation or (as indicated in Section 4.1
of the PPC Disclosure Schedule) other legal entity duly organized, validly
existing and, to the extent such concept or similar concept exists in the
relevant jurisdiction, in good standing under the laws of the state or other
jurisdiction of its incorporation or other organization, has all requisite power
and authority to
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own, lease and operate its properties and assets and to carry on its business as
presently conducted and is duly qualified and licensed to do business and is in
good standing in each jurisdiction in which the ownership or leasing of its
property or the conduct of its business requires such qualification, except for
jurisdictions in which the failure to be so qualified or to be in good standing,
individually or in the aggregate, would not be reasonably likely to have a
Material Adverse Effect on PPC. All of the Subsidiaries of PPC and their
respective jurisdictions of incorporation or organization (together with a
designation of those Subsidiaries constituting Significant Subsidiaries of PPC)
are identified in Section 4.1 of the PPC Disclosure Schedule.
4.2 Capital Stock and Other Matters. The authorized capital stock of PPC
consists of 100,000,000 shares of PPC Common Stock and 10,000,000 shares of PPC
Preferred Stock. At the Distribution Date, (i) there will be issued and
outstanding 47,669,227 shares of PPC Common Stock (the number of outstanding
shares of Pennzoil Common Stock as of April 13, 1998, as adjusted on a
one-for-one basis for any increase or decrease in the number of outstanding
shares of Pennzoil Common Stock after such date, in accordance with the terms of
this Agreement); (ii) no shares of PPC Common Stock will be held by PPC in its
treasury; (iii) no shares of PPC Preferred Stock will be issued and outstanding;
and (iv) no bonds, debentures, notes or other indebtedness of PPC or any of its
Subsidiaries having the right to vote (or convertible into securities having the
right to vote) on any matters on which holders of shares of capital stock of PPC
(including PPC Common Stock) may vote ("PPC Voting Debt") will be issued or
outstanding. None of such shares of PPC Common Stock will be subject to
preemptive rights. Except as set forth in this Section 4.2 or contemplated by
Section 7.3(d), there are not now outstanding, nor will there be outstanding at
the Effective Time, (i) any shares of capital stock of PPC, PPC Voting Debt or
other voting securities of PPC, (ii) any securities of PPC or any of its
Subsidiaries convertible into or exchangeable for shares of capital stock of
PPC, PPC Voting Debt or other voting securities of PPC or PPC Common Stock or
(iii) except as specified in Section 6.7, the Employee Benefits Agreement,
Section 4.2 of the PPC Disclosure Schedule or in the PPC 1998 Incentive Plan in
the form of Exhibit E attached hereto, any options, warrants, calls, rights
(including preemptive rights), commitments or other Contracts (other than
certain Transaction Agreements) to which PPC or any of its Subsidiaries is a
party or by which PPC or any of its Subsidiaries will be bound obligating PPC or
any of its Subsidiaries to issue, deliver, sell, purchase, redeem or acquire, or
cause to be issued, delivered, sold, purchased, redeemed or acquired, or
otherwise relating to, shares of capital stock of PPC or any PPC Voting Debt or
other voting securities of PPC or any of its Subsidiaries or obligating PPC or
any of its Subsidiaries to grant, extend or enter into any such option, warrant,
call, right, commitment or Contract. There are no stockholder agreements, voting
trusts or other Contracts (other than the Distribution Agreement) to which PPC
is a party or by which it is bound relating to the voting or transfer of any
shares of capital stock of PPC. The authorized capital stock of Merger Sub will
consist of 1,000 shares of common stock, all of which, immediately prior to the
Distribution Date, will be owned by PPC.
4.3 Corporate Authority; No Violation. PPC has the corporate power and
authority to enter into each Transaction Agreement and to carry out its
obligations hereunder and thereunder. The execution, delivery and performance by
PPC of each Transaction Agreement and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all requisite
corporate action on the part of PPC. Merger Sub has the corporate power and
authority to enter into this Agreement and to carry out its obligations
hereunder. This Agreement has been duly authorized by all requisite corporate
action on the part of Merger Sub and has been duly executed and delivered by
Merger Sub and constitutes a legal, valid and binding agreement of Merger Sub,
enforceable against Merger Sub in accordance with its terms (except insofar as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by principles governing the availability of equitable remedies).
This Agreement has been duly executed and delivered by PPC and constitutes a
legal, valid and binding agreement of PPC, enforceable against PPC in accordance
with its terms (except insofar as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, or by principles governing the
availability of equitable remedies). As of the Distribution Date, each other
Transaction Agreement will have been duly executed and delivered by PPC and will
constitute a legal, valid and binding agreement of PPC, enforceable against PPC
in accordance with its terms (except insofar as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally, or by principles governing
the availability
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of equitable remedies). Merger Sub is not a party to any Contract except this
Agreement, and has no obligations or liabilities except under this Agreement and
costs incidental to its incorporation in the State of Delaware. None of the
execution and delivery by PPC of this Agreement or any other Transaction
Agreement, the consummation by PPC of the transactions contemplated hereby or
thereby, or compliance by PPC with any of the provisions hereof or thereof will
(a) violate or conflict with any provision of PPC's Certificate of Incorporation
or Bylaws; (b) require any consent, approval, authorization or permit of,
registration, declaration or filing with, or notification to, any Governmental
Authority or any other Person, except (i) as set forth in Section 4.3 of the PPC
Disclosure Schedule or (ii) where the failure to so obtain, make or file such
consents, approvals, authorizations, permits, registrations, declarations,
filings or notifications, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect on PPC; (c) result in a
default (or an event that, with notice or lapse of time or both, would become a
default) or give rise to any right of termination or buy-out by any third party,
cancellation, amendment or acceleration of any obligation or the loss of any
benefit under any Contract to which PPC or any of its Subsidiaries is a party or
by which PPC or any of its Subsidiaries or any of the PPC Assets is bound or
affected, except (i) as set forth in Section 4.3 of the PPC Disclosure Schedule
or (ii) for any such defaults, terminations, cancellations, amendments,
accelerations or losses that, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect on PPC; (d) result in the
creation of a lien, pledge, security interest, claim or other encumbrance on any
of the issued and outstanding shares of PPC Common Stock or capital stock of any
PPC Subsidiaries or on any of the PPC Assets pursuant to any Contract to which
PPC or any of its Subsidiaries is a party or by which PPC or any of its
Subsidiaries or any of the PPC Assets is bound or affected except (i) as set
forth in Section 4.3 of the PPC Disclosure Schedule or (ii) for such liens,
pledges, security interests, claims or encumbrances that, individually or in the
aggregate, would not be reasonably likely to have a Material Adverse Effect on
PPC; or (e) violate or conflict with any order, writ, injunction, decree, law,
ordinance, rule or regulation applicable to PPC or any of its Subsidiaries, or
any of the properties, businesses or assets of any of the foregoing, except (i)
as set forth in Section 4.3 of the PPC Disclosure Schedule or (ii) violations
and conflicts that, individually or in the aggregate, would not be reasonably
likely to have a Material Adverse Effect on PPC. Section 4.3 of the PPC
Disclosure Schedule identifies all consents, approvals and authorizations of any
Governmental Authority that are legally required to be obtained by PPC for the
consummation of the transactions contemplated by the Transaction Agreements.
4.4 Affiliate Transactions. Except as set forth in Section 4.4 of the PPC
Disclosure Schedule (such agreements described therein referred to as the
"Pennzoil-PPC Agreements") and except for the other Transaction Agreements,
there are no material Contracts between (i) PPC or any of its Subsidiaries, on
the one hand, and (ii) Pennzoil or any of its Affiliates (other than PPC and its
Subsidiaries), on the other hand. PPC has made available to Quaker State
complete and correct copies of the Pennzoil/PPC Agreements. Each of the
Pennzoil/PPC Agreements is in full force and effect on the date hereof.
4.5 PPC Financial Statements. PPC has previously made available to Quaker
State complete and correct copies of audited combined financial statements of
PPC and JLI as of and for the period ended December 31, 1997 (including any
related notes and schedules thereto, the "1997 PPC Financial Statements"). PPC
has previously made available to Quaker State pro forma combined financial
statements for PPC and JLI (as described by Rule 11-01 of Regulation S-X of the
Exchange Act) after giving effect to the transactions described in or
contemplated by the Distribution Agreement, and as described in the notes to
such financial statements, as of and for the period ended December 31, 1997
(including any related notes and schedules thereto, the "1997 Pro Forma
Financial Statements"). In addition, PPC will have provided to Quaker State
within 30 days of the date hereof (i) audited combined financial statements of
PPC and JLI as of and for the periods ended December 31, 1995 and 1996 (together
with the 1997 PPC Financial Statements, the "PPC Financial Statements"), and
(ii) pro forma combined financial statements of PPC and JLI as of and for the
period ended December 31, 1996 (together with the 1997 Pro Forma Financial
Statements, the "Pro Forma Financial Statements") and any and all other
financial statements required to be included by Regulation S-X of the Exchange
Act in the Registration Statements and the Proxy Statement/Prospectus. The PPC
Financial Statements fairly present or will fairly present in all material
respects the combined financial position of PPC and JLI as of the dates thereof
and the results of operations and changes in financial position or other
information included therein for the periods or as of the dates then ended. The
Pro Forma
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Financial Statements fairly present or will fairly present in all material
respects in accordance with Rule 11-01 of Regulation S-X of the Exchange Act,
and any other pro forma financial statements prepared in accordance with this
Section 4.5 will fairly present in all material respects in accordance with Rule
11-01 of Regulation S-X of the Exchange Act, the combined financial position of
the PPC and JLI as of the dates thereof, and the results of operations and
changes in financial position or other information included therein for the
periods or as of the dates then ended. The PPC Financial Statements and the Pro
Forma Financial Statements have been or will be prepared in accordance with
GAAP, and on a consistent basis. Except as set forth in the footnotes to the
1997 PPC Financial Statements, the 1997 Pro Forma Financial Statements or as set
forth in Section 4.5 of the PPC Disclosure Schedule, PPC and its Subsidiaries do
not have any liability or obligation of any nature (whether accrued, absolute,
contingent or otherwise) other than (i) liabilities incurred in the ordinary
course of business since December 31, 1997 or (ii) liabilities and obligations
that, individually or in the aggregate (together with those described in clause
(i)), would not be reasonably likely to have a Material Adverse Effect on PPC.
4.6 Absence of Certain Changes or Events. Except as specifically
contemplated by this Agreement or the other Transaction Agreements or as set
forth in Section 4.6 of the PPC Disclosure Schedule, since December 31, 1997,
the PPC Business has been conducted only in the ordinary course and (i) there
has not been, occurred or arisen any change in, or any event (including any
damage, destruction or loss whether or not covered by insurance), condition or
state of facts of any character that, individually or in the aggregate, would be
reasonably likely to have a Material Adverse Effect on PPC, whether or not
arising in the ordinary course of business, and (ii) none of Pennzoil, PPC or
any of their respective Subsidiaries has taken or failed to take any action the
taking of which or failure of which to take, as the case may be, would have
caused PPC to have violated the provisions of Section 6.2 if they had then been
applicable to PPC and its Subsidiaries during such period.
4.7 Investigations; Litigation.
(a) No investigation or review by any Governmental Authority with respect
to Pennzoil, PPC or any of their respective Subsidiaries is pending, or to the
best of Pennzoil's or PPC's knowledge, threatened, nor has any Governmental
Authority indicated to Pennzoil or PPC or any of their respective Subsidiaries
an intention to conduct the same, except (i) as set forth in Section 4.7(a) of
the PPC Disclosure Schedule and (ii) with respect to such investigations and
reviews the outcome of which, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect on PPC.
(b) Except as set forth in Section 4.7(b) of the PPC Disclosure Schedule,
there is no action, suit or proceeding pending or, to the best of PPC's
knowledge, threatened against or affecting Pennzoil, PPC or any of their
respective Subsidiaries at law or in equity, or before any Governmental
Authority, that, if adversely determined, individually or in the aggregate,
would be reasonably likely to have a Material Adverse Effect on PPC. There is no
judgment, decree, injunction, rule or order of any Governmental Authority or
arbitrator outstanding against Pennzoil, PPC or any of their respective
Subsidiaries that, individually or in the aggregate, would be reasonably likely
to have a Material Adverse Effect on PPC.
(c) The investigations and reviews listed on Schedule 4.7(a) and the
actions, suits and proceedings listed on Schedule 4.7(b) pertain entirely or
predominantly to the PPC Business.
4.8 Licenses; Compliance with Laws. PPC and its Subsidiaries hold all
Licenses that are required for the conduct of the PPC Business, as presently
conducted and as proposed to be conducted, except such Licenses for which the
failure to so hold, individually or in the aggregate, would not be reasonably
likely to have a Material Adverse Effect on PPC. PPC and its Subsidiaries are in
compliance with the terms of all such Licenses so held, except where the failure
so to comply, individually or in the aggregate, would not be reasonably likely
to have a Material Adverse Effect on PPC. PPC and its Subsidiaries are in
compliance with all, and have received no notice of any violation (as yet
unremedied) of any laws, ordinances or regulations of any Governmental Authority
applicable to any of them or their respective operations the noncompliance with
which, individually or in the aggregate, would be reasonably likely to have a
Material Adverse Effect on PPC.
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4.9 Proxy Statement/Prospectus; Registration Statement. None of the
information regarding Pennzoil or its Subsidiaries or PPC or its Subsidiaries or
the transactions contemplated by this Agreement or any other Transaction
Agreement provided by Pennzoil or PPC specifically for inclusion in, or
incorporation by reference into, the Proxy Statement/Prospectus or the
Registration Statements will, in the case of the definitive Proxy
Statement/Prospectus or any amendment or supplement thereto, at the time of the
mailing of the definitive Proxy Statement/Prospectus and any amendment or
supplement thereto and at the time of the Quaker State Stockholders Meeting, or,
in the case of each Registration Statement, at the time it becomes effective, at
the time of the Quaker State Stockholders Meeting, at the Distribution Date and
at the Effective Time contain an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
are made, not misleading. The Registration Statements will comply in all
material respects with the provisions of the Securities Act and the Exchange
Act, as the case may be, except that no representation is made by Pennzoil or
PPC with respect to information provided by Quaker State specifically for
inclusion in, or incorporation by reference into, the Registration Statements.
4.10 Information Supplied. All documents that PPC or Pennzoil is
responsible for filing with any Governmental Authority in connection with the
transactions contemplated hereby or by any other Transaction Agreement will
comply in all material respects with the provisions of applicable law. All
information supplied or to be supplied by PPC or Pennzoil in any document filed
with any Governmental Authority in connection with the transactions contemplated
hereby or by any other Transaction Agreement will be, at the time of filing and
at the Effective Time, true and correct in all material respects, except where
the failure to be true and correct, individually or in the aggregate, would not
be reasonably likely to have a Material Adverse Effect on PPC.
4.11 Environmental Matters. Except as set forth in Section 4.11 of
the PPC Disclosure Schedule:
(a) Each of PPC and its Subsidiaries has obtained all licenses,
permits and other authorizations under Environmental Laws required for the
conduct and operation of its business and is in compliance and at all times
has been in compliance with the terms and conditions contained therein, and
is in compliance and at all times has been in compliance with all
applicable Environmental Laws, except where the failure to obtain such
licenses, permits and other authorizations, the non-compliance with the
terms and conditions contained therein or the non-compliance with other
provisions of applicable Environmental Laws would not, individually or in
the aggregate, create a Material Adverse Effect on PPC.
(b) Each of PPC and its Subsidiaries is not subject to any
environmental indemnification obligation regarding businesses formerly
owned or operated by PPC or regarding properties formerly owned or leased
by PPC except for indemnification obligations that would not, individually
or in the aggregate, create a Material Adverse Effect on PPC.
(c) There is no condition on, at or under any property (including,
without limitation, the air, soil and ground water) currently or formerly
owned, leased or used by PPC or any of its Subsidiaries or created by PPC's
or any PPC Subsidiary's operations that would create liability for PPC
under applicable Environmental Laws, except for liability that would not,
individually or in the aggregate, create a Material Adverse Effect on PPC.
(d) There are no past or present actions, activities, circumstances,
events or incidents (including but not limited to the release, emission,
discharge, presence or disposal of any Hazardous Material) that are
reasonably likely to form the basis of a claim under Environmental Laws
that individually or in the aggregate, would create a Material Adverse
Effect on PPC.
(e) PPC has made available to Quaker State all material site
assessments, compliance audits, and other similar studies in its
possession, custody or control relating to (i) the environmental conditions
on, under or about the properties or assets currently or formerly owned,
leased, operated or used by PPC, any of its Subsidiaries or any predecessor
in interest thereto and (ii) any Hazardous Materials used, managed,
handled, transported, treated, generated, stored, discharged, emitted, or
otherwise released by PPC, any
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of its Subsidiaries or any other person on, under, about or from any of the
properties currently or formerly owned or leased, or otherwise in
connection with the use or operation of any of the properties owned or
leased, or otherwise in connection with the use or operation of any of the
properties and assets of PPC or any of its Subsidiaries, or their
respective businesses and operations.
4.12 Tax Matters.
(a) Except as set forth in Section 4.12 of the PPC Disclosure Schedule, (i)
all material Returns relating to PPC and the PPC Subsidiaries required to be
filed have been filed, (ii) all such Returns are true and correct in all
material respects, (iii) all Taxes shown as due and payable on such Returns, and
all material Taxes (whether or not reflected on such Returns) relating to PPC or
any PPC Subsidiaries required to be paid, have been paid, (iv) all Taxes
relating to PPC and the PPC Subsidiaries for any taxable period (or a portion
thereof) beginning on or prior to the date of the Closing (which are not yet due
and payable) have been properly reserved for in the 1997 Pro Forma Financial
Statements and (v) PPC and the PPC Subsidiaries have duly and timely withheld
all material Taxes required to be withheld and such withheld Taxes have been
either duly and timely paid to the proper Governmental Authority or properly set
aside in accounts for such purpose and will be duly and timely paid to the
proper Governmental Authority.
(b) Except as set forth in Section 4.12 of the PPC Disclosure Schedule, no
written agreement or other written document waiving or extending, or having the
effect of waiving or extending, the statute of limitations or the period of
assessment or collection of any Taxes relating to PPC or any PPC Subsidiary, and
no power of attorney with respect to any such Taxes has been filed or entered
into with any Governmental Authority.
(c) Except as set forth in Section 4.12 of the PPC Disclosure Schedule, (i)
no audits or other administrative proceedings or court proceedings are presently
pending with regard to any Taxes or Return of PPC or any PPC Subsidiary as to
which any taxing authority has asserted in writing any claim which, if adversely
determined, would have a Material Adverse Effect on PPC and (ii) no Governmental
Authority is now asserting in writing any deficiency or claim for Taxes or any
adjustment to Taxes with respect to which PPC or any PPC Subsidiary may be
liable with respect to income and other material Taxes which have not been fully
paid or finally settled.
(d) Except as set forth in Section 4.12 of the PPC Disclosure Schedule,
none of PPC or any PPC Subsidiary (i) is a party to or bound by or has any
obligation under any written Tax Separation, sharing or similar agreement or
arrangement other than the Tax Separation Agreement, (ii) is or has been a
member of any consolidated, combined or unitary group for purposes of filing
Returns or paying Taxes or (iii) has entered into a closing agreement pursuant
to Section 7121 of the Code, or any predecessor provision or any similar
provision of state or local law.
(e) Except as set forth in Section 4.12 of the PPC Disclosure Schedule,
none of the PPC Assets is subject to any Tax lien (other than liens for Taxes
that are not yet due or that are being contested in good faith by appropriate
proceedings and which have been properly reserved for in the books and records
of PPC).
4.13 Benefit Plans.
(a) Section 4.13(a) of the PPC Disclosure Schedule lists each "employee
benefit plan" (as defined in Section 3(3) of ERISA), and all other employee
benefit, bonus, incentive, deferred compensation, stock option (or other
equity-based), severance, change in control, welfare (including post-retirement
medical and life insurance) and fringe benefit plans, whether or not subject to
ERISA and whether written or oral, sponsored, maintained or contributed to or
required to be contributed to by PPC or any of its Subsidiaries, to which PPC or
any of its Subsidiaries is a party or in which any person who is currently, has
been or, on or prior to the Effective Time, is expected to become an employee of
PPC (a "PPC Employee") is a participant (the "PPC Benefit Plans"). Neither PPC,
any of its Subsidiaries nor any ERISA Affiliate thereof has any commitment or
formal plan, whether legally binding or not, to create any additional employee
benefit plan or modify or change any existing PPC Benefit Plan that would affect
any PPC Employee. PPC has heretofore delivered or made available to Quaker State
true and complete copies of each PPC Benefit Plan and any amendments thereto (or
if the plan is not a written plan, a description thereof), any related trust or
other funding vehicle, any reports or summaries required under ERISA or the Code
and the most recent
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determination letter received from the IRS with respect to each such plan
intended to qualify under Section 401 of the Code.
(b) No liability under Title IV (including, without limitation, Sections
4069 and 4212(c) of ERISA) or Section 302 of ERISA has been incurred by PPC, any
of its Subsidiaries or any ERISA Affiliate thereof that has not been satisfied
in full, and no condition exists that presents a material risk to PPC, any of
its Subsidiaries or any ERISA Affiliate thereof of incurring any such liability,
other than liability for premiums due the PBGC (which premiums have been paid
when due). Except as set forth on Section 4.13(b) of the PPC Disclosure
Schedule, the present value of accrued benefits under each PPC Benefit Plan that
is subject to Title IV of ERISA, determined based upon the actuarial assumptions
used for funding purposes in the most recent actuarial report prepared by such
plan's actuary with respect to such plan, did not exceed, as of its latest
valuation date, the then current value of the assets of such plan allocable to
such accrued benefits.
(c) Except as set forth on Section 4.13(c) of the PPC Disclosure Schedule,
(i) no PPC Benefit Plan is a "multiemployer pension plan," as defined in Section
3(37) of ERISA, and (ii) none of PPC, any of its Subsidiaries or any ERISA
Affiliate has made or suffered a "complete withdrawal" or a "partial
withdrawal," as such terms are respectively defined in Sections 4203 and 4205 of
ERISA, which has not been satisfied in full.
(d) Except as set forth in Section 4.13(d) of the PPC Disclosure Schedule,
each PPC Benefit Plan has been operated and administered in all material
respects in accordance with its terms and applicable law, including, but not
limited to, ERISA and the Code. All contributions required to be made with
respect to any PPC Benefit Plan have been timely made. There are no pending or,
to the knowledge of PPC or Pennzoil, threatened claims by, on behalf of or
against any of the PPC Benefit Plans or any assets thereof, other than routine
benefit claim matters, that, if adversely determined could, individually or in
the aggregate, result in a material liability for PPC or any of its Subsidiaries
and no matter is pending (other than routine qualification determination
filings, copies of which have been furnished to Quaker State or will be promptly
furnished to Quaker State when made) with respect to any of the PPC Benefit
Plans before the IRS, the United States Department of Labor or the PBGC.
(e) Each PPC Benefit Plan intended to be "qualified" within the meaning of
Section 401(a) of the Code is so qualified and the trusts maintained thereunder
are exempt from taxation under Section 501(a) of the Code, each trust maintained
under any PPC Benefit Plan intended to satisfy the requirements of Section
501(c)(9) of the Code has satisfied such requirements and, in either such case,
no event has occurred or condition is known to exist that would reasonably be
expected to adversely affect such tax-qualified status for any such PPC Benefit
Plan or any such trust.
(f) Except as set forth in Section 4.13(f) of the PPC Disclosure Schedule,
no PPC Benefit Plan provides medical, surgical, hospitalization, death or
similar benefits (whether or not insured) for employees or former employees of
PPC or any Subsidiary of PPC for periods extending beyond their retirement or
other termination of service, other than (i) coverage mandated by applicable
law, (ii) death benefits under any "pension plan," or (iii) benefits the full
cost of which is borne by the current or former employee (or his beneficiary).
4.14 Labor Matters. Except as set forth in Section 4.14 of the PPC
Disclosure Schedule, neither PPC nor any of its Subsidiaries is a party to, or
bound by, any collective bargaining agreement or other Contract with a labor
union or labor organization, nor is PPC or any of its Subsidiaries the subject
of any proceeding asserting that PPC or any of its Subsidiaries has committed an
unfair labor practice or is seeking to compel it to bargain with any labor
organization as to wages or conditions of employment nor is there any strike,
work stoppage or other labor dispute involving PPC or any of its Subsidiaries
pending or, to the best of PPC's or Pennzoil's knowledge, threatened, that,
individually or in the aggregate, would be reasonably likely to have a Material
Adverse Effect on PPC. There are no labor controversies pending or, to the best
of PPC's or Pennzoil's knowledge, threatened against PPC or any of its
Subsidiaries that, individually or in the aggregate, would be reasonably likely
to have a Material Adverse Effect on PPC. Except as set forth in Section 4.14 of
the PPC Disclosure Schedule, since January 1, 1996, there have been no claims
initiated by any labor organization to represent any employees of PPC not
currently represented by a labor organization.
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4.15 Intellectual Property Matters. PPC and its Subsidiaries own or
possess adequate licenses or other valid rights to use all patents, patent
rights, trademarks, trademark rights, trade names, trade name rights,
copyrights, service marks, trade secrets, applications for trademarks and
service marks, know-how and other proprietary rights and information used or
held for use in connection with the business of PPC and its Subsidiaries as
currently conducted or as proposed to be conducted immediately after the
Effective Time (including in connection with services provided by PPC and its
Subsidiaries to third parties), except where the failure to own or possess such
items, individually or in the aggregate, would not be reasonably likely to have
a Material Adverse Effect on PPC. To the best of Pennzoil's or PPC's knowledge,
there is no assertion or claim challenging the validity of any of the foregoing
that, individually or in the aggregate, would be reasonably likely to have a
Material Adverse Effect on PPC. The conduct of the business of PPC and its
Subsidiaries as currently conducted or as proposed to be conducted immediately
after the Effective Time does not conflict in any way with any patent, patent
right, license, trademark, trademark right, trade name, trade name right,
copyright, service mark, trade secret, know-how or other proprietary rights or
information of any third party that, individually or in the aggregate, would be
reasonably likely to have a Material Adverse Effect on PPC. To the best of
Pennzoil's or PPC's knowledge, there are no infringements of any proprietary
rights owned by or licensed by or to PPC or any PPC Subsidiary that,
individually or in the aggregate, would be reasonably likely to have a Material
Adverse Effect on PPC.
4.16 Material Contract Defaults. Neither Pennzoil, PPC nor any of their
respective Subsidiaries is in default in any respect under any Contract to which
it or any of its Subsidiaries is a party or by which it or any such Subsidiary
is bound, which default, individually or in the aggregate, would be reasonably
likely to have a Material Adverse Effect on PPC, and there has not occurred any
event that, with the lapse of time or the giving of notice or both, would
constitute such a default.
4.17 Brokers or Finders. Except as set forth in Section 4.17 of the PPC
Disclosure Schedule (which includes a description of any amounts payable), no
agent, broker, investment banker, financial advisor or other similar Person is
or will be entitled, by reason of any agreement, act or statement by Pennzoil,
PPC or any of their respective Subsidiaries, directors, officers or employees,
to any financial advisory, broker's, finder's or similar fee or commission, to
reimbursement of expenses or to indemnification or contribution in connection
with any of the transactions contemplated by this Agreement or any other
Transaction Agreement.
4.18 Certain Board Findings. The Board of Directors of PPC, at a meeting
duly called and held, (i) has approved this Agreement and the other Transaction
Agreements and (ii) has determined that the Transaction Agreements and the
transactions contemplated hereby and thereby, taken together, are fair to, and
in the best interests of, PPC and the holder of its capital stock.
4.19 Vote Required. The only vote of stockholders of PPC required under
any of the DGCL, the NYSE rules or PPC's Certificate of Incorporation and Bylaws
to approve the transactions contemplated by the Transaction Agreements,
including, without limitation, to consummate the Merger, to issue PPC Common
Stock to the stockholders of Quaker State pursuant to the Merger and to amend
the Certificate of Incorporation of PPC to change the name of PPC is the
affirmative vote of the sole holder of the outstanding shares of PPC Common
Stock prior to the Distribution Date.
4.20 Stockholder Approval. As of the date hereof, the sole stockholder of
PPC is Pennzoil. Immediately after execution of this Agreement, Pennzoil will
deliver to PPC a written consent of PPC's sole stockholder in compliance with
Section 228 of the DGCL with respect to all aspects of the Transaction
Agreements and the transactions contemplated hereby and thereby which require
the consent of PPC's stockholders under the DGCL, the NYSE rules, PPC's
Certificate of Incorporation or PPC's bylaws. The approval of Pennzoil's
stockholders is not required to effect the transactions contemplated by the
Distribution Agreement, this Agreement, including, without limitation, the
Distribution and the Merger, or any other Transaction Agreement. Upon delivery
of such written consent, the approval of PPC's stockholders after the
Distribution Date will not be required to effect the transactions contemplated
by the Merger Agreement, including, without limitation, the Merger, unless this
Agreement is amended in accordance with Section 251(d) of the DGCL after the
Distribution Date and such approval is required, solely as a result of such
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amendment, under the DGCL, the NYSE rules, PPC's Certificate of Incorporation or
PPC's Bylaws or by the IRS.
4.21 Certain Payments. Except as disclosed in Section 4.21 of the PPC
Disclosure Schedule and except as contemplated by the other Transaction
Agreements, no PPC Benefit Plan or employment arrangement, no similar plan or
arrangement sponsored or maintained by Pennzoil in which any PPC Employee is a
participant and no contractual arrangements between PPC and any third party
exists that could result in the payment to any current, former or future
director, officer, shareholder or employee of PPC or any of its Subsidiaries, or
of any entity the assets or capital stock of which have been acquired by PPC or
a PPC Subsidiary, of any money or other property or rights or accelerate or
provide any other rights or benefits to any such individual as a result of the
consummation of the transactions contemplated by the Transaction Agreements
(including the Distribution), whether or not (a) such payment, acceleration or
provision would constitute a "parachute payment" (within the meaning of Section
280G of the Code) or (b) some other subsequent action or event would be required
to cause such payment, acceleration or provision to be triggered.
4.22 Joint Ventures. PPC is a party to the joint venture agreements listed
in Section 4.22 of the PPC Disclosure Schedule (the "JV Agreements"). Each of
the JV Agreements is in full force and effect and, to the knowledge of Pennzoil
and PPC, enforceable against the other party or parties thereto (except insofar
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by principles governing the availability of equitable remedies).
The PPC Financial Statements and the Pro Forma Financial Statements accurately
reflect and will accurately reflect in all material respects all assets and
liabilities of PPC under the JV Agreements. No consent from any party to any JV
Agreement is required thereunder to consummate the transactions contemplated by
any of the Transaction Agreements. None of the other parties to any of the JV
Agreements has any right, or shall have any right as a result of the execution,
delivery or performance of this Agreement or the other Transaction Agreements or
the consummation of the transactions contemplated hereby or thereby, to purchase
any of PPC's interest in any joint venture listed in Section 4.22 of the PPC
Disclosure Schedule or to terminate any JV Agreement.
4.23 Reincorporation. In March 1998, PPC was "reincorporated" in Delaware
by (i) Pennzoil Products Company, a Nevada corporation ("PPC-Nevada"), forming a
wholly owned Delaware subsidiary ("PPC-Delaware"), (ii) PPC-Nevada merging into
PPC-Delaware, with PPC-Delaware being the surviving corporation, and (iii)
PPC-Delaware thereafter changing its name to Pennzoil Products Company (the
"Reincorporation"). The Reincorporation of PPC in Delaware was consummated in
accordance with the DGCL and all applicable provisions of Nevada corporate law.
The Reincorporation was duly authorized by all requisite corporate action on the
part of PPC. All consents under any Contract to which PPC or any of its
Subsidiaries was then a party and all governmental consents, approvals,
authorizations, permits, declarations, filings or notifications necessary to
consummate the Reincorporation were duly obtained or made, except where the
failure to so obtain or make, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect on PPC.
4.24 Assets. Except as set forth in Section 4.24 of the PPC Disclosure
Schedule, after giving effect to the transactions described in or contemplated
by the Distribution Agreement, PPC, together with its Subsidiaries, will own all
PPC Assets. Section 4.24 of the PPC Disclosure Schedule lists all services
currently provided to PPC or any PPC Subsidiary by Pennzoil or any of its
Affiliates. Each of PPC and Pennzoil and their respective Subsidiaries (as the
case may be) has maintained all the PPC Assets in working order and operating
condition, subject only to ordinary wear and tear, and all PPC Assets are
adequate and suitable in all material respects for the purposes for which they
are presently being used. The PPC Assets constitute all the assets, properties
and rights related to or required for the conduct of the PPC Business except for
the services to be provided pursuant to the Transition Services Agreement.
4.25 Franchising Matters. Each of PPC and its Subsidiaries has made or
caused to be made all required federal and state filings relating to its
franchising arrangements, and neither PPC nor any of its Subsidiaries has
received notice from any Governmental Authority alleging that any information
given to franchisees or prospective franchisees (including franchising
circulars) fails to comply with applicable law,
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except where any such failure, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect on PPC.
4.26 Loans. Section 4.26 of the PPC Disclosure Schedule sets forth each
currently outstanding loan exceeding $100,000 in principal amount made by PPC or
any of its Subsidiaries to any Person.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF QUAKER STATE
Quaker State represents and warrants to and agrees with PPC that, except as
otherwise set forth in the Quaker State SEC Documents:
5.1 Organization, Qualification, Etc. Quaker State is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, has all requisite power and authority to own, lease and operate its
properties and assets and to carry on its business as presently conducted and is
duly qualified and licensed to do business and is in good standing in each
jurisdiction in which the ownership or leasing of its property or the conduct of
its business requires such qualification, except for jurisdictions in which the
failure to be so qualified or to be in good standing, individually or in the
aggregate, would not be reasonably likely to have a Material Adverse Effect on
Quaker State. The copies of the Quaker State Certificate of Incorporation and
Bylaws included as part of Section 5.1 of the Quaker State Disclosure Schedule
are complete and correct and in full force and effect on the date hereof. Each
of Quaker State's Significant Subsidiaries is a corporation or (as indicated in
Section 5.1 of the Quaker State Disclosure Schedule) other legal entity duly
organized, validly existing and, to the extent such concept or similar concept
exists in the relevant jurisdiction, in good standing under the laws of the
state or other jurisdiction of its incorporation or other organization, has all
requisite power and authority to own, lease and operate its properties and
assets and to carry on its business as presently conducted, and is duly
qualified and licensed to do business and is in good standing in each
jurisdiction in which the ownership or leasing of its property or the conduct of
its business requires such qualification, except for jurisdictions in which the
failure to be so qualified or to be in good standing, individually or in the
aggregate, would not be reasonably likely to have a Material Adverse Effect on
Quaker State. All of the Subsidiaries of Quaker State and their respective
jurisdictions of incorporation or organization (together with a designation of
those Subsidiaries constituting Significant Subsidiaries of Quaker State) are
identified in Section 5.1 of the Quaker State Disclosure Schedule.
5.2 Capital Stock and Other Matters. The authorized capital stock of
Quaker State consists of 95,000,000 shares of Quaker State Capital Stock. At the
close of business on April 10, 1998, (i) 36,391,725 shares of Quaker State
Capital Stock were issued and outstanding, 5,549,848 shares of Quaker State
Capital Stock were reserved for issuance pursuant to the Quaker State Stock
Plans and options to purchase 4,162,773 shares of Quaker State Capital Stock
were outstanding, (ii) 1,709,956 shares of Quaker State Capital Stock were held
by Quaker State in its treasury or by its Subsidiaries; and (iii) no bonds,
debentures, notes or other indebtedness of Quaker State or any of its
Subsidiaries having the right to vote (or convertible into securities having the
right to vote) on any matters on which holders of shares of capital stock of
Quaker State may vote ("Quaker State Voting Debt") were issued or outstanding.
All of the issued and outstanding shares of Quaker State capital stock are
validly issued, fully paid and nonassessable and are not subject to preemptive
rights. Except as set forth in this Section 5.2, there are not outstanding (i)
any shares of capital stock, Quaker State Voting Debt or other voting securities
of Quaker State, (ii) except for the Quaker State Rights, any securities of
Quaker State or any of its Subsidiaries convertible into or exchangeable for
shares of capital stock, Quaker State Voting Debt or other voting securities of
Quaker State or (iii) except as specified in Section 5.2 of the Quaker State
Disclosure Schedule and except for the Quaker State Rights, any options,
warrants, calls, rights (including preemptive rights), commitments or other
Contracts to which Quaker State or any of its Subsidiaries is a party or by
which Quaker State or any of its Subsidiaries is bound obligating Quaker State
or any of its Subsidiaries to issue, deliver, sell, purchase, redeem or acquire,
or cause to be issued, delivered, sold, purchased, redeemed or acquired, or
otherwise relating to, shares of capital stock or any Quaker State Voting Debt
or other voting securities of Quaker State or any of its Subsidiaries or
obligating Quaker State or any of its Subsidiaries to grant, extend or enter
into any such option, warrant, call, right, commitment or Contract.
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Except as set forth in Section 5.2 of the Quaker State Disclosure Schedule,
there are no stockholder agreements, voting trusts or other Contracts to which
Quaker State is a party or by which it is bound relating to the voting or
transfer of any shares of capital stock of Quaker State.
5.3 Corporate Authority; No Violation. Quaker State has the corporate
power and authority to enter into this Agreement and, subject to obtaining the
Requisite Approval, to carry out its obligations hereunder. The execution,
delivery and performance by Quaker State of this Agreement and the consummation
of the transactions contemplated hereby have been duly authorized by all
requisite corporate action on the part of Quaker State, subject to obtaining the
Requisite Approval. This Agreement has been duly executed and delivered by
Quaker State and constitutes a legal, valid and binding agreement of Quaker
State, enforceable against Quaker State in accordance with its terms (except
insofar as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, or by principles governing the availability of equitable
remedies). None of the execution and delivery by Quaker State of this Agreement,
the consummation by Quaker State of the transactions contemplated hereby or
compliance by Quaker State with any of the provisions hereof will (a) violate or
conflict with any provision of Quaker State's Certificate of Incorporation or
Bylaws; (b) require any consent, approval, authorization or permit of,
registration, declaration or filing with, or notification to, any Governmental
Authority or any other Person, except (i) as set forth in Section 5.3 of the
Quaker State Disclosure Schedule or (ii) where the failure to so obtain, make or
file such consents, approvals, authorizations, permits, registrations,
declarations, filings or notifications, individually or in the aggregate, would
not be reasonably likely to have a Material Adverse Effect on Quaker State; (c)
result in a default (or an event that, with notice or lapse of time or both,
would become a default) or give rise to any right of termination or buy-out by
any third party, cancellation, amendment or acceleration of any obligation or
the loss of any benefit under any Contract to which Quaker State or any of its
Subsidiaries is a party, by which Quaker State or any of its Subsidiaries or any
of their respective assets or properties is bound or affected, except (i) as set
forth in Section 5.3 of the Quaker State Disclosure Schedule or (ii) for any
such defaults, terminations, cancellations, amendments, accelerations or losses
that, individually or in the aggregate, would not be reasonably likely to have a
Material Adverse Effect on Quaker State; (d) result in the creation of a lien,
pledge, security interest, claim or other encumbrance on any of the issued and
outstanding shares of Quaker State Capital Stock or on any of the assets of
Quaker State or its Subsidiaries pursuant to any Contract to which Quaker State
or any of its Subsidiaries is a party or by which Quaker State or any of its
Subsidiaries or any of the assets of Quaker State or its Subsidiaries is bound
or affected except (i) as set forth in Section 5.3 of the Quaker State
Disclosure Schedule or (ii) for any such liens, pledges, security interests,
claims or encumbrances which, individually or in the aggregate would not be
reasonably likely to have a Material Adverse Effect on Quaker State; or (e)
violate or conflict with any order, writ, injunction, decree, law, ordinance,
rule or regulation applicable to Quaker State or any of its Subsidiaries, or any
of the properties, businesses or assets of any of the foregoing, except (i) as
set forth in Section 5.3 of the Quaker State Disclosure Schedule or (ii)
violations and conflicts that, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect on Quaker State. Section 5.3
of the Quaker State Disclosure Schedule identifies all consents, approvals and
authorizations of any Governmental Authority that are legally required to be
obtained by Quaker State for the consummation of the transactions contemplated
by this Agreement.
5.4 Quaker State Reports and Financial Statements. Quaker State has
previously made available to PPC complete and correct copies of:
(a) Quaker State's Annual Reports on Form 10-K filed with the SEC
under the Exchange Act for each of the years ended December 31, 1996 and
1997;
(b) Quaker State's Quarterly Reports on Form 10-Q filed with the SEC
under the Exchange Act for the quarters ended March 31, 1997, June 30, 1997
and September 30, 1997;
(c) each definitive proxy statement filed by Quaker State with the SEC
under the Exchange Act since January 1, 1996;
(d) all current reports on Form 8-K filed by Quaker State with the SEC
under the Exchange Act since January 1, 1996; and
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(e) each other form, report, schedule, registration statement and
definitive proxy statement filed by Quaker State or any of its Subsidiaries
with the SEC since January 1, 1996 (collectively, and together with the
items specified in clauses (a) through (d) above, the "Quaker State SEC
Documents").
As of their respective dates, the Quaker State SEC Documents complied in
all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and none of such Quaker State SEC Documents
when filed contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and
unaudited consolidated interim financial statements included in the Quaker State
SEC Documents (including any related notes and schedules) fairly present in all
material respects the financial position of Quaker State and its consolidated
Subsidiaries as of the dates thereof and the results of operations and changes
in financial position or other information included therein for the periods or
as of the dates then ended, subject, where appropriate, to normal year-end audit
adjustments, in each case in accordance with past practice and GAAP during the
periods involved (except as otherwise stated therein). Since January 1, 1997,
Quaker State has timely filed all reports, registration statements and other
filings required to be filed with the SEC under the rules and regulations of the
SEC. Except as set forth in the Quaker State SEC Documents or Section 5.4 of the
Quaker State Disclosure Schedule, Quaker State and its Subsidiaries do not have
any liability or obligation of any nature (whether accrued, absolute, contingent
or otherwise) other than (i) liabilities incurred in the ordinary course of
business since December 31, 1997 or (ii) liabilities and obligations that,
individually or in the aggregate (together with those described in clause (i)),
would not be reasonably likely to have a Material Adverse Effect on Quaker
State.
5.5 Absence of Certain Changes or Events. Except as specifically
contemplated by this Agreement or as set forth in Section 5.5 of the Quaker
State Disclosure Schedule, since December 31, 1997 (a) there has not been,
occurred or arisen any change in, or any event (including any damage,
destruction or loss whether or not covered by insurance), condition or state of
facts of any character that, individually or in the aggregate, would be
reasonably likely to have a Material Adverse Effect on Quaker State whether or
not arising in the ordinary course of business and (b) neither Quaker State nor
any of its Subsidiaries has taken or failed to take any action the taking of
which or failure of which to take, as the case may be, would have violated the
provisions of Section 6.1 if they had then been applicable to Quaker State and
its Subsidiaries during such period other than as a result of the announcement
of the transactions contemplated by this Agreement.
5.6 Investigations; Litigation.
(a) No investigation or review by any Governmental Authority with respect
to Quaker State or any of its Subsidiaries is pending, or to the best of Quaker
State's knowledge, threatened, nor has any Governmental Authority indicated to
Quaker State or any of its Subsidiaries an intention to conduct the same, except
(i) as set forth in Section 5.6(a) of the Quaker State Disclosure Schedule and
(ii) with respect to such investigations and reviews the outcome of which,
individually or in the aggregate, would not be reasonably likely to have a
Material Adverse Effect on Quaker State.
(b) Except as set forth in Section 5.6(b) of the Quaker State Disclosure
Schedule, there is no action, suit or proceeding pending or, to the best of
Quaker State's knowledge, threatened against or affecting Quaker State or any of
its Subsidiaries at law or in equity, or before any Governmental Authority,
that, if adversely determined, individually or in the aggregate, would be
reasonably likely to have a Material Adverse Effect on Quaker State. There is no
judgment, decree, injunction, rule or order of any Governmental Authority or
arbitrator outstanding against Quaker State or any of its Subsidiaries that,
individually or in the aggregate, would be reasonably likely to have a Material
Adverse Effect on Quaker State.
5.7 Licenses; Compliance with Laws. Quaker State and its Subsidiaries hold
all Licenses that are required for the conduct of the businesses of Quaker State
and its Subsidiaries, taken as a whole, as presently conducted and as proposed
to be conducted, except such Licenses for which the failure to so hold,
individually or in the aggregate, would not be reasonably likely to have a
Material Adverse Effect on Quaker State. Quaker State and its Subsidiaries are
in compliance with the terms of all such Licenses so held, except where the
failure so to comply, individually or in the aggregate, would not be reasonably
likely to have a Material
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Adverse Effect on Quaker State. Quaker State and its Subsidiaries are in
compliance with all, and have received no notice of any violation (as yet
unremedied) of any, laws, ordinances or regulations of any Governmental
Authority applicable to any of them or their respective operations the
noncompliance with which, individually or in the aggregate, would be reasonably
likely to have a Material Adverse Effect on Quaker State.
5.8 Proxy Statement/Prospectus; Registration Statement. None of the
information regarding Quaker State or its Subsidiaries or the transactions
contemplated by this Agreement provided by Quaker State specifically for
inclusion in, or incorporation by reference into, the Proxy Statement/Prospectus
or the Registration Statements will, in the case of the definitive Proxy
Statement/Prospectus or any amendment or supplement thereto, at the time of the
mailing of the Proxy Statement/Prospectus and any amendment or supplement
thereto, and at the time of the Quaker State Stockholders Meeting, or, in the
case of each Registration Statement, at the time it becomes effective and at the
time of the Quaker State Stockholders Meeting, contain an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.
5.9 Information Supplied. All documents that Quaker State is responsible
for filing with any Governmental Authority in connection with the transactions
contemplated hereby or by any other Transaction Agreement will comply in all
material respects with the provisions of applicable law. All information
supplied or to be supplied by Quaker State in any document filed with any
Governmental Authority in connection with the transactions contemplated hereby
or by any other Transaction Agreement will be, at the time of filing and at the
Effective Time, true and correct in all material respects, except where the
failure to be true and correct, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect on Quaker State.
5.10 Environmental Matters. Except as set forth in Section 5.10 of the
Quaker State Disclosure Schedule:
(a) Each of Quaker State and its Subsidiaries has obtained all
licenses, permits and other authorizations under Environmental Laws
required for the conduct and operation of its business and is in compliance
and at all times has been in compliance with the terms and conditions
contained therein, and is in compliance and at all times has been in
compliance with all applicable Environmental Laws, except where the failure
to obtain such licenses, permits and other authorizations, the
non-compliance with the terms and conditions contained therein or the
non-compliance with other provisions of applicable Environmental Laws would
not, individually or in the aggregate, create a Material Adverse Effect on
Quaker State.
(b) Each of Quaker State and its Subsidiaries is not subject to any
environmental indemnification obligation regarding businesses formerly
owned or operated by Quaker State or regarding properties formerly owned or
leased by Quaker State except for indemnification obligations that would
not, individually or in the aggregate, create a Material Adverse Effect on
Quaker State.
(c) There is no condition on, at or under any property (including,
without limitation, the air soil and ground water) currently or formerly
owned, leased or used by Quaker State or any of its Subsidiaries or created
by Quaker State's or any Quaker State Subsidiary's operations that would
create liability for Quaker State under applicable Environmental Laws,
except for liability that would not, individually or in the aggregate,
create a Material Adverse Effect on Quaker State.
(d) There are no past or present actions, activities, circumstances,
events or incidents (including but not limited to the release, emission,
discharge, presence or disposal of any Hazardous Material) that are
reasonably likely to form the basis of a claim under Environmental Laws
that, individually or in the aggregate, would create a Material Adverse
Effect on Quaker State.
(e) Quaker State has made available to PPC all material site
assessments, compliance audits, and other similar studies in its
possession, custody or control relating to (i) the environmental conditions
on, under or about the properties or assets currently or formerly owned,
leased, operated or used by Quaker
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State, any of its Subsidiaries or any predecessor in interest thereto and
(ii) any Hazardous Materials used, managed, handled, transported, treated,
generated, stored, discharged, emitted, or otherwise released by Quaker
State, any of its Subsidiaries or any other person on, under, about or from
any of the properties currently or formerly owned or leased, or otherwise
in connection with the use or operation of any of the properties owned or
leased, or otherwise in connection with the use or operation of any of the
properties and assets of Quaker State or any of its Subsidiaries, or their
respective businesses and operations.
5.11 Tax Matters.
(a) Except as set forth in Section 5.11 of the Quaker State Disclosure
Schedule, (i) all material Returns relating to Quaker State and the Quaker State
Subsidiaries required to be filed have been filed, (ii) all such Returns are
true and correct in all material respects, (iii) all Taxes shown as due and
payable on such Returns, and all material Taxes (whether or not reflected on
such Returns) relating to Quaker State or any Quaker State Subsidiary required
to be paid, have been paid, (iv) all Taxes relating to Quaker State and the
Quaker State Subsidiaries for any taxable period (or a portion thereof)
beginning on or prior to the date of the Closing (which are not yet due and
payable) have been properly reserved for in the books and records of Quaker
State, and (v) Quaker State and the Quaker State Subsidiaries have duly and
timely withheld all material Taxes required to be withheld and such withheld
Taxes have been either duly and timely paid to the proper Governmental Authority
or properly set aside in accounts for such purpose and will be duly and timely
paid to the proper Governmental Authority.
(b) Except as set forth in Section 5.11 of the Quaker State Disclosure
Schedule, no written agreement or other written document waiving or extending,
or having the effect of waiving or extending, the statute of limitations or the
period of assessment or collection of any Taxes relating to Quaker State or any
Quaker State Subsidiary and no power of attorney with respect to any such Taxes
has been filed or entered into with any Governmental Authority. The time for
filing any Return relating to Quaker State has not been extended to a date later
than the date of this Agreement.
(c) Except as set forth in Section 5.11 of the Quaker State Disclosure
Schedule, (i) no audits or other administrative proceedings or court proceedings
are presently pending with regard to any Taxes or Return of Quaker State or any
Quaker State Subsidiary as to which any taxing authority has asserted in writing
any claim which, if adversely determined, would have a Material Adverse Effect
on Quaker State, and (ii) no Governmental Authority is now asserting in writing
any deficiency or claim for Taxes or any adjustment to Taxes with respect to
which Quaker State or any Quaker State Subsidiary may be liable with respect to
income and other Material Taxes which have not been fully paid or finally
settled.
(d) Except as set forth in Section 5.11 of the Quaker State Disclosure
Schedule, none of Quaker State or any Quaker State Subsidiary (i) is a party to
or bound by or has any obligation under any written Tax Separation, sharing or
similar agreement or arrangement, (ii) is or has been a member of any
consolidated, combined or unitary group for purposes of filing Returns or paying
Taxes or (iii) has entered into a closing agreement pursuant to Section 7121 of
the Code, or any predecessor provision or any similar provision of state or
local law.
(e) Except as set forth in Section 5.11 of the Quaker State Disclosure
Schedule, none of the assets of Quaker State or any of its Subsidiaries are
subject to any Tax lien (other than liens for Taxes that are not yet due or that
are being contested in good faith by appropriate proceedings and which have been
properly reserved for in the books and records of Quaker State).
5.12 Benefit Plans.
(a) Section 5.12(a) of the Quaker State Disclosure Schedule lists each
"employee benefit plan" (as defined in Section 3(3) of ERISA), and all other
employee benefit, bonus, incentive, deferred compensation, stock option (or
other equity-based), severance, change in control, welfare (including
post-retirement medical and life insurance) and fringe benefit plans, whether or
not subject to ERISA and whether written or oral, sponsored, maintained or
contributed to or required to be contributed to by Quaker State or any of its
Subsidiaries, to which Quaker State or any of its Subsidiaries is a party or in
which any person who is
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currently, has been or, prior to the Effective Time, is expected to become an
employee of Quaker State (a "Quaker State Employee") is a participant (the
"Quaker State Benefit Plans"). Neither Quaker State, any of its Subsidiaries nor
any ERISA Affiliate thereof has any commitment or formal plan, whether legally
binding or not, to create any additional employee benefit plan or modify or
change any existing Quaker State Benefit Plan that would affect any Quaker State
Employee. Quaker State has heretofore delivered or made available to Pennzoil
and PPC true and complete copies of each Quaker State Benefit Plan and any
amendments thereto (or if the plan is not a written plan, a description
thereof), any related trust or other funding vehicle, any reports or summaries
required under ERISA or the Code and the most recent determination letter
received from the IRS with respect to each such plan intended to qualify under
Section 401 of the Code.
(b) No liability under Title IV (including, without limitation, Sections
4069 and 4212(c) of ERISA) or Section 302 of ERISA has been incurred by Quaker
State or any ERISA Affiliate thereof that has not been satisfied in full, and no
condition exists that presents a material risk to Quaker State, any of its
Subsidiaries or any ERISA Affiliate thereof of incurring any such liability,
other than liability for premiums due the PBGC (which premiums have been paid
when due). Except as set forth on Section 5.12(b) of the Quaker State Disclosure
Schedule, the present value of accrued benefits under each Quaker State Benefit
Plan that is subject to Title IV of ERISA, determined based upon the actuarial
assumptions used for funding purposes in the most recent actuarial report
prepared by such plan's actuary with respect to such plan, did not exceed, as of
its latest valuation date, the then current value of the assets of such plan
allocable to such accrued benefits.
(c) Except as set forth on Section 5.12(c) of the Quaker State Disclosure
Schedule, (i) no Quaker State Benefit Plan is a "multiemployer pension plan," as
defined in Section 3(37) of ERISA and (ii) none of Quaker State, any of its
Subsidiaries or any ERISA Affiliate thereof has made or suffered a "complete
withdrawal" or a "partial withdrawal," as such terms are respectively defined in
Sections 4203 and 4205 of ERISA, which has not been satisfied in full.
(d) Except as set forth in Section 5.12(d) of the Quaker State Disclosure
Schedule, each Quaker State Benefit Plan has been operated and administered in
all material respects in accordance with its terms and applicable law,
including, but not limited to, ERISA and the Code. All contributions required to
be made with respect to any Quaker State Benefit Plan have been timely made.
There are no pending or, to the knowledge of Quaker State, threatened claims by,
on behalf of or against any of the Quaker State Benefit Plans or any assets
thereof, other than routine benefit claim matters, that, if adversely determined
could, individually or in the aggregate, result in a material liability for
Quaker State or any of its Subsidiaries and no matter is pending (other than
routine qualification determination filings, copies of which have been furnished
to the Pennzoil and PPC or will be promptly furnished to the Pennzoil and PPC
when made) with respect to any of the Quaker State Benefit Plans before the IRS,
the United States Department of Labor or the PBGC.
(e) Each Quaker State Benefit Plan intended to be "qualified" within the
meaning of Section 401(a) of the Code is so qualified and the trusts maintained
thereunder are exempt from taxation under Section 501(a) of the Code, each trust
maintained under any Quaker State Benefit Plan intended to satisfy the
requirements of Section 501(c)(9) of the Code has satisfied such requirements
and, in either such case, no event has occurred or condition is known to exist
that would reasonably be expected to adversely affect such tax-qualified status
for any such Quaker State Benefit Plan or any such trust.
(f) Except as set forth in Section 5.12(f) of the Quaker State Disclosure
Schedule, no Quaker State Benefit Plan provides medical, surgical,
hospitalization, death or similar benefits (whether or not insured) for
employees or former employees of Quaker State or any Quaker State Subsidiary for
periods extending beyond their retirement or other termination of service, other
than (i) coverage mandated by applicable law, (ii) death benefits under any
"pension plan," or (iii) benefits the full cost of which is borne by the current
or former employee (or his beneficiary). Quaker State has the right, and will
have the right after the Effective Time to terminate any Quaker State Plan or to
amend any such Quaker State Plan to reduce future benefits, (including, without
limitation, any Quaker State Plan that provides post-retirement medical and life
insurance benefits) without incurring or otherwise being responsible for any
material liability with respect thereto.
(g) Quaker State's defined benefit pension plans listed in Section 5.12(g)
of the Quaker State Disclosure Schedule have been amended to eliminate any
provisions that relate to a change in control of Quaker State.
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Quaker State's Rabbi Trust listed in Schedule 5.12(g) of the Quaker State
Disclosure Schedule will require the provision of a letter of credit in
connection with a change in control of Quaker State in an amount not to exceed
the amount set forth on Schedule 5.12(g).
5.13 Labor Matters. Except as set forth in Section 5.13 of the Quaker
State Disclosure Schedule, neither Quaker State nor any of its Subsidiaries is a
party to, or bound by, any collective bargaining agreement or other Contract
with a labor union or labor organization, nor is Quaker State or any of its
Subsidiaries the subject of any proceeding asserting that Quaker State or any of
its Subsidiaries has committed an unfair labor practice or is seeking to compel
it to bargain with any labor organization as to wages or conditions of
employment nor is there any strike, work stoppage or other labor dispute
involving Quaker State or any of its Subsidiaries pending or, to the best of
Quaker State's knowledge, threatened, that, individually or in the aggregate,
would be reasonably likely to have a Material Adverse Effect on Quaker State.
There are no labor controversies pending or, to the best of Quaker State's
knowledge, threatened against Quaker State or any of its Subsidiaries that,
individually or in the aggregate, would be reasonably likely to have a Material
Adverse Effect on Quaker State. Except as set forth in Section 5.13 of the
Quaker State Disclosure Schedule, since January 1, 1996, there have been no
claims initiated by any labor organization to represent any employees of Quaker
State not currently represented by a labor organization.
5.14 Intellectual Property Matters. Quaker State and its Subsidiaries own
or possess adequate licenses or other valid rights to use all patents, patent
rights, trademarks, trademark rights, trade names, trade name rights,
copyrights, service marks, trade secrets, applications for trademarks and
service marks, know-how and other proprietary rights and information used or
held for use in connection with the business of Quaker State and its
Subsidiaries as currently conducted or as proposed to be conducted immediately
after the Effective Time (including in connection with services provided by
Quaker State and its Subsidiaries to third parties), except where the failure to
own or possess such items, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect on Quaker State. To the best
of Quaker State's knowledge, there is no assertion or claim challenging the
validity of any of the foregoing that, individually or in the aggregate, would
be reasonably likely to have a Material Adverse Effect on Quaker State. The
conduct of the business of Quaker State and its Subsidiaries as currently
conducted or as proposed to be conducted immediately after the Effective Time
does not conflict in any way with any patent, patent right, license, trademark,
trademark right, trade name, trade name right, copyright, service mark, trade
secret, know-how or other proprietary rights or information of any third party
that, individually or in the aggregate, would be reasonably likely to have a
Material Adverse Effect on Quaker State. To the best of Quaker State's
knowledge, there are no infringements of any proprietary rights owned by or
licensed by or to Quaker State or any Quaker State Subsidiary that, individually
or in the aggregate, would be reasonably likely to have a Material Adverse
Effect on Quaker State.
5.15 Material Contract Defaults. Neither Quaker State nor any of its
Subsidiaries is in default in any respect under any Contract to which it or any
of its Subsidiaries is a party or by which it or any such Subsidiary is bound
which default, individually or in the aggregate, would be reasonably likely to
have a Material Adverse Effect on Quaker State, and there has not occurred any
event that, with the lapse of time or the giving of notice or both, would
constitute such a default.
5.16 Certain Payments. Except as disclosed in Section 5.16 of the Quaker
State Disclosure Schedule, no Quaker State Benefit Plan or employment
arrangement, and no contractual arrangements between Quaker State and any third
party, exists that could result in the payment to any current, former or future
director, officer, shareholder or employee of Quaker State or any of its
Subsidiaries, or of any entity the assets or capital stock of which have been
acquired by Quaker State or a Quaker State Subsidiary, of any money or other
property or rights or accelerate or provide any other rights or benefits to any
such individual as a result of the consummation of the transactions contemplated
by the Transaction Agreements whether or not (a) such payment, acceleration or
provision would constitute a "parachute payment" (within the meaning of Section
280G of the Code) or (b) some other subsequent action or event would be required
to cause such payment, acceleration or provision to be triggered.
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5.17 Opinion of Quaker State Financial Advisor. Quaker State has received
the oral opinions of Goldman, Sachs & Co. and Chase Securities Inc., to the
effect that, as of the date hereof, the Exchange Ratio (as defined in the
opinions) is fair, from a financial point of view, to holders of Quaker State
Common Stock. Written opinions, dated as of the date hereof, to the same effect,
will be delivered as promptly as practicable to PPC.
5.18 Brokers or Finders. Except as set forth in Section 5.18 of the Quaker
State Disclosure Schedule (which includes a description of any amounts payable),
no agent, broker, investment banker, financial advisor or other similar Person
is or will be entitled, by reason of any agreement, act or statement by Quaker
State, or any of its Subsidiaries, directors, officers or employees, to any
financial advisory, broker's, finder's or similar fee or commission, to
reimbursement of expenses or to indemnification or contribution in connection
with any of the transactions contemplated by this Agreement or any other
Transaction Agreement.
5.19 Quaker State Rights Agreement. The Board of Directors of Quaker State
has taken all necessary action to amend the Quaker State Rights Agreement so
that (a) the approval, execution or delivery of this Agreement, or the
consummation of any transaction contemplated hereby, will not cause (i) the
rights to purchase shares of Quaker State Capital Stock (the "Quaker State
Rights") issued pursuant to the Quaker State Rights Agreement to become
exercisable, distributed or triggered under the Quaker State Rights Agreement,
(ii) PPC or any of its Affiliates or Subsidiaries to be deemed an "Acquiring
Person" (as defined in the Quaker State Rights Agreement) or (iii) the
"Distribution Date" or the "Stock Acquisition Time" (each as defined in the
Quaker State Rights Agreement) to occur upon any such event and (b) immediately
prior to the Effective Time, the Quaker State Rights will expire or terminate.
Quaker State represents and warrants that none of a "Distribution Date," a
"Stock Acquisition Time," a "Section 11(a)(ii) Event," a "Section 11(a)(ii)
Trigger Date" or a "Section 13 Event" (each as defined in the Quaker State
Rights Agreement) has occurred under the Quaker State Rights Agreement.
5.20 Takeover Statutes. No "fair price," "moratorium," "control share
acquisition," "business combination," "shareholder protection" or other similar
antitakeover statute or regulation enacted under Delaware law, or to the
knowledge of Quaker State, under the law of any other jurisdiction, will apply
to this Agreement, the Merger or the transactions contemplated hereby. The
action of the Board of Directors of Quaker State in approving the Merger and
this Agreement is sufficient to render inapplicable to the Merger and this
Agreement (and the transactions provided for herein) the restrictions on
"business combinations" (as defined in Section 203 of the DGCL) set forth in
Section 203 of the DGCL.
5.21 Certain Board Findings. The Board of Directors of Quaker State, at a
meeting duly called and held, (i) has approved this Agreement, (ii) has
determined that this Agreement and the transactions contemplated hereby,
including the Merger, taken together, are fair to, and in the best interests of,
the stockholders of Quaker State and (iii) has resolved to recommend that the
stockholders of Quaker State entitled to vote thereon adopt this Agreement,
subject to Section 6.11(b).
5.22 Vote Required. The only vote of the stockholders of Quaker State
required under any of the DGCL, the NYSE rules or Quaker State's Certificate of
Incorporation for adoption of this Agreement and the approval of the
transactions contemplated by this Agreement is the affirmative vote of a
majority of the voting power of all outstanding shares of Quaker State Capital
Stock at the Quaker State Stockholders Meeting (sometimes referred to herein as
the "Requisite Approval").
ARTICLE 6
COVENANTS AND AGREEMENTS
6.1 Conduct of Business by Quaker State Pending the Merger. Following the
date of this Agreement and prior to the earlier of the Effective Time or the
Termination Date, except as specifically contemplated or permitted by this
Agreement or the other Transaction Agreements or described in Section 6.1 of the
Quaker
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State Disclosure Schedule or to the extent that PPC shall otherwise consent in
writing, Quaker State agrees as to itself and its Subsidiaries that:
(a) Ordinary Course. Each of Quaker State and its Subsidiaries shall
conduct its operations in accordance with its ordinary course of business
consistent with past practice and use all commercially reasonable efforts
to preserve intact its present business organization, maintain its rights
and franchises, keep available the services of its current officers and key
employees and preserve its relationships with customers, suppliers and
others having business dealings with it in such a manner that its goodwill
and ongoing businesses are not impaired in any material respect. Quaker
State shall not, nor shall it permit any of its Subsidiaries to, enter into
any new material line of business.
(b) Dividends; Changes in Stock. Quaker State shall not, nor shall it
permit any of its Subsidiaries to, nor shall Quaker State or any of its
Subsidiaries propose to, (i) declare or pay any dividends on or make other
distributions in respect of any shares of its capital stock or partnership
interests (whether in cash, securities or property), except for (x) the
declaration and payment of regular quarterly cash dividends not in excess
of $0.10 per share on shares of Quaker State Capital Stock and (y) the
declaration and payment of cash dividends or distributions paid on or with
respect to a class of capital stock or partnership interests all of which
shares of capital stock or partnership interests (with the exception of
directors' qualifying shares and other similarly nominal holdings required
by law to be held by Persons other than Quaker State or its wholly owned
Subsidiaries), as the case may be, of the applicable corporation or
partnership are owned directly or indirectly by Quaker State; (ii) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of, or
in substitution for, shares of its capital stock; or (iii) redeem,
repurchase or otherwise acquire, or permit any Subsidiary to redeem,
repurchase or otherwise acquire, any shares of its capital stock (including
any securities convertible or exchangeable into such capital stock), except
as required by the terms of the securities outstanding on the date hereof
or as contemplated by a Quaker State Benefit Plan.
(c) Issuance of Securities. Quaker State shall not, nor shall it
permit any of its Subsidiaries to, issue, deliver or sell, or authorize or
propose to issue, deliver or sell, any shares of its capital stock of any
class, any Quaker State Voting Debt or any securities convertible into, or
any rights, warrants or options to acquire, any such shares, Quaker State
Voting Debt or convertible securities, other than (i) the issuance of
shares of Quaker State Capital Stock (and associated Quaker State Rights)
upon the exercise of stock options or satisfaction of other Awards granted
under the Quaker State Benefit Plans that are outstanding on the date
hereof pursuant to the Quaker State Benefit Plans or based upon the
employment, executive termination or other agreements identified in Section
6.1(c) of the Quaker State Disclosure Schedule; and (ii) issuances by a
wholly owned Subsidiary of its capital stock to Quaker State.
(d) Governing Documents. Quaker State shall not amend or propose to
amend its Certificate of Incorporation or Bylaws, nor shall it permit any
of its Subsidiaries to amend or propose to amend its charter or bylaws in
any manner that would hinder the consummation of the transactions
contemplated by, or otherwise defeat the purposes of, this Agreement.
(e) Acquisitions. Other than (i) any single acquisition where the fair
market value of the total consideration payable in any such acquisition
does not exceed $5.0 million, (ii) any series of acquisitions, whether or
not related, where the fair market value of the total consideration payable
in all such acquisitions does not exceed $10.0 million in the aggregate and
(iii) the transactions listed in Section 6.1(e) of the Quaker State
Disclosure Schedule, Quaker State shall not, nor shall it permit any of its
Subsidiaries to, in a single transaction or a series of transactions,
acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division
thereof; provided, however, that in any event, Quaker State shall not, nor
shall it permit any of its Subsidiaries to, make any such acquisition,
agreement or purchase if it would
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hinder in any material respect the consummation of the transactions
contemplated by this Agreement or the other Transaction Agreements.
(f) Dispositions. Quaker State shall not, nor shall it permit any of
its Subsidiaries to, in a single transaction or a series of related
transactions, sell (including sale-leaseback), lease, pledge, encumber or
otherwise dispose of, or agree to sell (or engage in a sale-leaseback),
lease (whether such lease is an operating or capital lease), pledge,
encumber or otherwise dispose of, any of its assets that individually has a
fair market value in excess of $5.0 million or in the aggregate have a fair
market value in excess of $10.0 million other than (i) dispositions in the
ordinary course of business consistent with past practice, (ii)
dispositions of securities held for investment purposes only and (iii) the
transactions listed in Section 6.1(f) of the Quaker State Disclosure
Schedule; provided, that Quaker State shall not consummate or agree to
consummate any such transaction with respect to any securities of any of
its Subsidiaries.
(g) Indebtedness; Leases. Quaker State shall not, nor shall it permit
any of its Subsidiaries to, incur (which shall not be deemed to include
entering into credit agreements, lines of credit or similar arrangements
until borrowings are made under such arrangements) any indebtedness for
borrowed money or guarantee or otherwise become contingently liable for any
such indebtedness or issue or sell any debt securities or warrants or
rights to acquire any debt securities of Quaker State or any of its
Subsidiaries or guarantee any debt securities of others or enter into any
lease (whether such lease is an operating or capital lease) or otherwise
incur any material obligation or liability (absolute or contingent) other
than in connection with (i) any customer Contract or vendor Contract
entered into in the ordinary course of business consistent with past
practice, (ii) equipment leasing in the ordinary course of business
consistent with past practice, (iii) the redemption or repurchase of
indebtedness or debt securities outstanding on the date hereof with the
proceeds of newly incurred indebtedness or newly issued debt securities,
and (iv) borrowings in the ordinary course of business under commercial
paper programs or bank lines of credit.
(h) Employee Arrangements. Except as required pursuant to the
collective bargaining process and as consistent with the historic
bargaining practices of Quaker State and its Subsidiaries, Quaker State and
its Subsidiaries shall not:
(i) grant any material increases in the compensation of any of its
directors, officers or key employees, except in the ordinary course of
business consistent with past practice;
(ii) pay or agree to pay to any director, officer or key employee,
whether past or present, any pension, retirement allowance or other
employee benefit not required or contemplated by any of the existing
benefit, severance, termination, pension or employment plans, Contracts
or arrangements as in effect on the date hereof;
(iii) except in the ordinary course of business consistent with
past practice, enter into any new, or materially amend any existing,
employment or severance or termination Contract with any director,
officer or key employee; or
(iv) except (x) in the ordinary course of business consistent with
past practice or (y) as may be required to comply with applicable law,
become obligated under any new pension plan, welfare plan, multiemployer
plan, employee benefit plan, severance plan, benefit arrangement or
similar plan or arrangement that was not in existence on the date
hereof, or amend any such plan or arrangement in existence on the date
hereof if such amendment would have the effect of materially enhancing
any benefits thereunder.
(i) Compliance with Laws; Licenses. Quaker State shall not, nor shall
it permit any of its Subsidiaries to, (i) fail to comply with any laws,
ordinances or regulations applicable to it or to the conduct of its
business, except for any such failure to comply that, individually or in
the aggregate, would not have a Material Adverse Effect on Quaker State or
(ii) permit to expire or terminate without renewal
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any License that is necessary to the operation of a material portion of the
business of such party, any facilities associated therewith or any other
business.
(j) No Liquidation or Dissolution. Quaker State shall not authorize,
recommend, propose or announce an intention to adopt a plan of complete or
partial liquidation or dissolution of Quaker State or any of its
Subsidiaries.
(k) Accounting Methods. Quaker State shall not make any material
change in its methods of accounting in effect at December 31, 1997, except
as required by the Financial Accounting Standards Board or changes in GAAP
as concurred in by Quaker State's independent auditors. Quaker State shall
not change its fiscal year.
(l) Affiliate Transactions. Quaker State shall not, nor shall it
permit any of its Subsidiaries to, enter into or amend any agreement or
arrangement with any of their respective affiliates (as such term is
defined in Rule 405 under the Securities Act, an "Affiliate"), other than
with wholly owned Subsidiaries of Quaker State, on terms materially less
favorable to Quaker State or such Subsidiary, as the case may be, than
could be reasonably expected to have been obtained with an unaffiliated
third party on an arm's-length basis.
(m) Contracts. Quaker State shall not, nor shall it permit any of its
Subsidiaries to, except in the ordinary course of business consistent with
past practice, modify, amend, terminate, renew or fail to use reasonable
business efforts to renew any material Contract to which it or any of its
Subsidiaries is a party or waive, release or assign any material rights or
claims. Quaker State shall not, nor shall it permit any of its Subsidiaries
to, enter into any Contract not in the ordinary course of business
involving total consideration of $1.0 million or more with a term longer
than one year which is not terminable by Quaker State or any such
Subsidiary of Quaker State without penalty upon no more than 30 days' prior
notice.
(n) Insurance. Quaker State shall, and shall cause its Subsidiaries
to, maintain with financially responsible insurance companies insurance in
such amounts and against such risks and losses as are customary for
companies engaged in their respective businesses.
(o) Tax Matters. Without PPC's prior written consent, which consent
shall not be unreasonably withheld or delayed, Quaker State shall not (i)
make or rescind any material express or deemed election relating to Taxes
unless it is reasonably expected that such action will not adversely affect
Quaker State, including elections for any and all joint ventures,
partnerships, limited liability companies, working interests or other
investments where Quaker State has the capacity to make such binding
election, (ii) settle or compromise any material claim, action, suit,
litigation, proceeding, arbitration, investigation, audit or controversy
relating to Taxes, except where such settlement or compromise will not
result in a Material Adverse Effect on Quaker State, (iii) amend any
material Returns or (iv) change in any material respect any of its methods
of reporting income or deductions for federal income tax purposes from
those expected to be employed in the preparation of its federal income tax
return for the taxable year ending December 31, 1997, except as may be
required by applicable law or except for such changes that are reasonably
expected not to result in a Material Adverse Effect on Quaker State,
provided, however, that Quaker State may make or rescind any such election,
settle or compromise any such claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy, change any such method of
reporting or amend any such Return without PPC's prior written consent if
the amount of Tax liabilities relating to such action does not exceed $1.0
million.
(p) Discharge of Liabilities. Unless otherwise provided in this
Agreement, Quaker State shall not, nor shall it permit any of its
Subsidiaries to, pay, discharge or satisfy any material claims, liabilities
or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business (which includes the payment of final and
unappealable judgments) or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) of Quaker State
included in Quaker State's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, or incurred in the ordinary course of business.
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(q) Tax-Free Reorganization Treatment. Quaker State shall not take or
cause to be taken any action before the Effective Time that would
disqualify the Merger from constituting a tax-free reorganization under
Section 368 of the Code.
(r) Advice of Changes. Subject to Section 2.2 of the Confidentiality
Agreement, Quaker State shall promptly advise PPC orally and in writing of
any change or event having, or that, insofar as can reasonably be foreseen,
could have, either individually or together with other changes or events, a
Material Adverse Effect on Quaker State.
(s) No Action. Subject to the terms and conditions of this Agreement,
Quaker State shall not, nor will it permit any of its Subsidiaries to,
intentionally take or agree or commit to take any action that would be
reasonably likely to result in any of its representations and warranties
set forth in this Agreement being or becoming untrue in any material
respect, or in any of the conditions set forth in Article 7 not being
satisfied at the Effective Time.
(t) Agreements. Quaker State shall not, nor shall it permit any of its
Subsidiaries to, agree in writing or otherwise to take any action
inconsistent with the foregoing.
6.2 Conduct of Business by PPC and Pennzoil Pending the Merger. Following
the date of this Agreement and prior to the earlier of the Effective Time or the
Termination Date, except as specifically contemplated or permitted by this
Agreement or the other Transaction Agreements or described in Section 6.2 of the
PPC Disclosure Schedule or to the extent that Quaker State shall otherwise
consent in writing, Pennzoil and PPC agree:
(a) Ordinary Course. Pennzoil (in regard to the PPC Business only) and
each of PPC and its Subsidiaries shall conduct its operations in accordance
with its ordinary course of business consistent with past practice and use
all commercially reasonable efforts to preserve intact its present business
organization, maintain its rights and franchises, keep available the
services of its current officers and key employees and preserve its
relationships with customers, suppliers and others having business dealings
with it in such a manner that its goodwill and ongoing businesses are not
impaired in any material respect. PPC shall not, nor shall it permit any of
its Subsidiaries to, enter into any new material line of business.
(b) Dividends; Changes in Stock. PPC shall not, nor shall it permit
any of its Subsidiaries to, nor shall it or any of its Subsidiaries propose
to, (i) declare or pay any dividends on or make other distributions in
respect of any shares of its capital stock or partnership interests
(whether in cash, securities or property), except for the declaration and
payment of cash dividends or distributions paid on or with respect to a
class of capital stock or partnership interests all of which shares of
capital stock or partnership interests (with the exception of directors'
qualifying shares and other similarly nominal holdings required by law to
be held by Persons other than PPC or its wholly owned Subsidiaries), as the
case may be, of the applicable corporation or partnership are owned
directly or indirectly by PPC; (ii) split, combine or reclassify any of its
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of, or in substitution for, shares of its
capital stock, except as contemplated by the Distribution Agreement or
(iii) redeem, repurchase or otherwise acquire, or permit any Subsidiary to
redeem, repurchase or otherwise acquire, any shares of its capital stock
(including any securities convertible or exchangeable into such capital
stock).
(c) Issuance of Securities. Neither Pennzoil nor PPC shall, nor shall
they permit any of their respective Subsidiaries to, issue, deliver or
sell, or authorize or propose to issue, deliver or sell, any shares of
PPC's capital stock or capital stock of any PPC Subsidiary of any class,
any PPC Voting Debt or any securities convertible into, or any rights,
warrants or options to acquire, any such shares, PPC Voting Debt or
convertible securities, other than (i) pursuant to this Agreement, pursuant
to the other Transaction Agreements and pursuant to the PPC 1998 Incentive
Plan; (ii) the issuance of shares of Pennzoil Common Stock upon the
exercise of stock options of Pennzoil or satisfaction of other awards of
Pennzoil that are outstanding on the date hereof or under Pennzoil's
dividend reinvestment plan; and (iii) issuances by a wholly owned
Subsidiary of PPC of its capital stock to PPC. Without limiting the
foregoing, Pennzoil shall not issue, deliver or sell, or authorize or
propose to issue, deliver or sell any
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additional options or other equity-based awards that could be converted
into any option to acquire PPC Common Stock pursuant to the Employee
Benefits Agreement.
(d) Governing Documents. Neither Pennzoil nor PPC shall amend or
propose to amend PPC's Certificate of Incorporation or Bylaws, nor shall it
permit any of its Subsidiaries to amend or propose to amend its charter or
bylaws except as explicitly provided herein, in the Distribution Agreement
or otherwise, with a Quaker State consent.
(e) Acquisitions. Other than (i) any single acquisition where the fair
market value of the total consideration payable in any such acquisition
does not exceed $5.0 million and (ii) any series of acquisitions, whether
or not related, where the fair market value of the total consideration
payable in all such acquisitions does not exceed $10.0 million in the
aggregate, PPC shall not, nor shall it permit any of its Subsidiaries to,
in a single transaction or a series of transactions, acquire or agree to
acquire by merging or consolidating with, or by purchasing a substantial
equity interest in or a substantial portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof; provided, however, that in
any event, PPC shall not, nor shall it permit any of its Subsidiaries to,
make any such acquisition, agreement or purchase if it would hinder in any
material respect the consummation of the transactions contemplated by this
Agreement or the other Transaction Agreements.
(f) Dispositions. Pennzoil (in regard to the PPC Business only) shall
not, and PPC shall not, nor shall they permit any of their Subsidiaries to,
in a single transaction or a series of related transactions, sell
(including sale-leaseback), lease, pledge, encumber or otherwise dispose
of, or agree to sell (or engage in a sale-leaseback), lease (whether such
lease is an operating or capital lease), pledge, encumber or otherwise
dispose of, any of its assets that individually has a fair market value in
excess of $5.0 million or in the aggregate have a fair market value in
excess of $10.0 million other than (i) dispositions in the ordinary course
of business consistent with past practice and (ii) dispositions of
securities held for investment purposes only; provided, that, except as
otherwise provided in this Agreement and the other Transaction Agreements,
Pennzoil shall not consummate or agree to consummate any such Transaction
with respect to any securities of PPC or any of its Subsidiaries.
(g) Indebtedness; Leases. Pennzoil (in regard to the PPC Business
only) shall not, and PPC shall not, nor shall they permit any of their
Subsidiaries to, incur (which shall not be deemed to include entering into
credit agreements, lines of credit or similar arrangements until borrowings
are made under such arrangements) any indebtedness for borrowed money or
guarantee or otherwise become contingently liable for any such indebtedness
or issue or sell any debt securities or warrants or rights to acquire any
debt securities of PPC or any of its Subsidiaries or guarantee any debt
securities of others or enter into any lease (whether such lease is an
operating or capital lease) or otherwise incur any material obligation or
liability (absolute or contingent) other than in connection with any
customer Contract or vendor Contract entered into in the ordinary course of
business consistent with past practice, equipment leasing in the ordinary
course of business consistent with past practice, the redemption or
repurchase of indebtedness or debt securities outstanding on the date
hereof with the proceeds of newly incurred indebtedness or newly issued
debt securities, and borrowings in the ordinary course of business under
commercial paper programs, bank lines of credit, other short-term credit
arrangements or financing from Pennzoil (provided, that such financing from
Pennzoil is treated as described in Section 2.06(b) of the Distribution
Agreement).
(h) Employee Arrangements. Except as required pursuant to the
collective bargaining process and as consistent with the historic
bargaining practices of PPC and its Subsidiaries, PPC and its Subsidiaries
shall not:
(i) grant any material increases in the compensation of any of its
directors, officers or key employees, except in the ordinary course of
business consistent with past practice;
(ii) pay or agree to pay to any director, officer or key employee,
whether past or present, any pension, retirement allowance or other
employee benefit not required or contemplated by any of the
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existing benefit, severance, termination, pension or employment plans,
Contracts or arrangements as in effect on the date hereof;
(iii) except in the ordinary course of business consistent with
past practice, enter into any new, or materially amend any existing,
employment or severance or termination Contract with any director,
officer or key employee; or
(iv) except (x) in the ordinary course of business consistent with
past practice or (y) as may be required to comply with applicable law,
become obligated under any new pension plan, welfare plan, multiemployer
plan, employee benefit plan, severance plan, benefit arrangement or
similar plan or arrangement that was not in existence on the date
hereof, or amend any such plan or arrangement in existence on the date
hereof if such amendment would have the effect of materially enhancing
any benefits thereunder.
(i) Compliance with Laws; Licenses. Pennzoil (in regard to the PPC
Business only) shall not, and PPC shall not, nor shall they permit any of
their Subsidiaries to, (i) fail to comply with any laws, ordinances or
regulations applicable to it or to the conduct of its business, except for
any such failure to comply that, individually or in the aggregate, would
not have a Material Adverse Effect on PPC or (ii) permit to expire or
terminate without renewal any License that is necessary to the operation of
a material portion of the business of PPC or its Subsidiaries, any
facilities associated therewith, the PPC Business, or any other business.
(j) No Liquidation or Dissolution. Neither Pennzoil nor PPC shall
authorize, recommend, propose or announce an intention to adopt a plan of
complete or partial liquidation or dissolution of PPC or any of its
Subsidiaries.
(k) Accounting Methods. Neither Pennzoil nor PPC shall make any
material change in PPC's methods of accounting in effect at December 31,
1997, except as required by the Financial Accounting Standards Board or
changes in GAAP as concurred in by PPC's independent auditors. Neither
Pennzoil nor PPC shall change PPC's fiscal year.
(l) Affiliate Transactions. Except as provided in this Agreement and
the other Transaction Agreements, PPC shall not, nor shall it permit any of
its Subsidiaries to, enter into or amend any agreement or arrangement with
any of their respective affiliates (as such term is defined in Rule 405
under the Securities Act, an "Affiliate"), other than with wholly owned
Subsidiaries of PPC, on terms materially less favorable to PPC or such
Subsidiary, as the case may be, than could be reasonably expected to have
been obtained with an unaffiliated third party on an arm's-length basis.
(m) Contracts. Neither Pennzoil nor PPC shall, nor shall they permit
any of their respective Subsidiaries to, except in the ordinary course of
business consistent with past practice, modify, amend, terminate, renew or
fail to use reasonable business efforts to renew any material Contract to
which PPC or any of its Subsidiaries is a party or which otherwise is or
will be, a PPC Asset, or waive, release or assign any material rights or
claims. PPC shall not, nor shall it permit any of its Subsidiaries to,
enter into any Contract not in the ordinary course of business involving
total consideration of $1.0 million or more with a term longer than one
year which is not terminable by PPC or any such Subsidiary of PPC without
penalty upon no more than 30 days' prior notice.
(n) Insurance. Pennzoil and PPC shall, and shall cause their
Subsidiaries to, maintain with financially responsible insurance companies
insurance for the PPC Business and the PPC Assets in such amounts and
against such risks and losses as are customary for companies engaged in
their respective businesses.
(o) Tax Matters. Without Quaker State's prior written consent, which
consent shall not be unreasonably withheld or delayed, neither Pennzoil nor
PPC shall (i) make or rescind any material express or deemed election
relating to Taxes unless it is reasonably expected that such action will
not adversely affect PPC, including elections for any and all joint
ventures, partnerships, limited liability companies, working interests or
other investments where Pennzoil or PPC has the capacity to make such
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binding election, (ii) settle or compromise any material claim, action,
suit, litigation, proceeding, arbitration, investigation, audit or
controversy relating to Taxes, except where such settlement or compromise
will not result in a Material Adverse Effect on PPC, (iii) amend any
material Returns or (iv) change in any material respect any of its methods
of reporting income or deductions for federal income tax purposes from
those expected to be employed in the preparation of its federal income tax
return for the taxable year ending December 31, 1997, except as may be
required by applicable law or except for such changes that are reasonably
expected not to result in a Material Adverse Effect on PPC provided,
however, that Pennzoil or PPC may make or rescind any such election, settle
or compromise any such claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy, change any such method of
reporting or amend any such Return without Quaker State's prior written
consent if the amount of Tax liabilities relating to such action does not
exceed $1.0 million.
(p) Discharge of Liabilities. Unless otherwise provided in this
Agreement, PPC shall not, nor shall it permit any of its Subsidiaries to,
pay, discharge or satisfy any material claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business (which includes the payment of final and unappealable judgments)
or in accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent consolidated financial
statements (or the notes thereto) of PPC included in the PPC Financial
Statements, or incurred in the ordinary course of business.
(q) Tax-Free Reorganization Treatment. Neither Pennzoil nor PPC shall
take or cause to be taken any action, whether before or after the Effective
Time, (i) that would disqualify the Distribution from constituting a
tax-free distribution under Section 355 of the Code or a tax-free
transaction under Section 368 of the Code or (ii) that would disqualify the
Merger from constituting a tax-free reorganization under Section 368 of the
Code.
(r) Advice of Changes. Subject to Section 2.2 of the Confidentiality
Agreement, Pennzoil and PPC shall promptly advise Quaker State orally and
in writing of any change or event having, or that, insofar as can
reasonably be foreseen, could have, either individually or together with
other changes or events, a Material Adverse Effect on PPC.
(s) No Action. Neither Pennzoil nor PPC shall, nor will they permit
any of their respective Subsidiaries to intentionally take or agree or
commit to take any action that would be reasonably likely to result in any
of its representations and warranties set forth in this Agreement or the
other Transaction Agreements being or becoming untrue in any material
respect, or in any of the conditions set forth in Article 7 not being
satisfied at the Effective Time.
(t) Other Transaction Agreements. At or prior to the Distribution
Date, Pennzoil and PPC shall execute and deliver the Distribution
Agreement, the Tax Separation Agreement, the Employee Benefits Agreement,
the Transition Services Agreement and the Trademark License Agreement.
(u) Section 355 Ruling. In connection with the Distribution, Pennzoil
(with the reasonable cooperation of Quaker State) shall use all
commercially reasonable efforts in seeking, as promptly as practicable, a
private letter ruling from the IRS to the effect that the contribution of
assets to PPC prior to the Distribution and the Distribution will qualify
as tax-free transactions under Sections 355 and 368 of the Code (the
"Section 355 Ruling"). Prior to filing with the IRS, Pennzoil shall furnish
Quaker State with a draft of the ruling request letter and with a draft of
each supplement, and Quaker State shall be afforded a reasonable time to
review and comment on each. Each draft will be substantially in the form
that Pennzoil intends to file with the IRS, but each may be revised before
filing in an effort to improve clarity, accuracy, or cogency in light of
points raised by Quaker State and others and to supply additional facts
required by IRS guidelines that are not material to the Section 355 Ruling.
Contemporaneously with each mailing to the IRS, Pennzoil shall mail to
Quaker State a copy of each letter or other document it files with the IRS.
Pennzoil shall allow Quaker State, and shall encourage the IRS to allow
Quaker State, to participate in any in-person conference and any substitute
telephone conference with the IRS concerning the Section 355 Ruling unless,
as to any such conference, the IRS objects to such participation or such
participation will unreasonably delay the holding of the conference. A
substitute
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telephone conference is one regarding possible material changes to the form
of the transactions, representations, or future events or one in which the
IRS preliminarily indicates an unwillingness to grant the requested Section
355 Ruling. In any event, Pennzoil shall keep Quaker State informed of the
status of the Section 355 Ruling request.
(v) Solicitation. Pennzoil and PPC shall not, and they shall use their
respective best efforts to cause their respective Subsidiaries, officers,
directors, employees, advisors and agents not to, directly or indirectly,
(i) solicit, initiate or knowingly encourage or induce the making of any
PPC Acquisition Proposal, (ii) negotiate with any third party with respect
to any PPC Acquisition, (iii) endorse or recommend any PPC Acquisition
Proposal of any third party or (iv) enter into any Contract or non-binding
letter of intent with any third party with the intent to effect any PPC
Acquisition. PPC shall promptly notify Quaker State orally and in writing
of any such unsolicited request and the identity of the third party making
such request and thereafter shall keep Quaker State promptly advised of any
development with respect thereto.
(w) Agreements. Neither Pennzoil nor PPC shall, nor shall they permit
any of their respective Subsidiaries to, agree in writing or otherwise to
take any action inconsistent with the foregoing.
6.3 Cooperation. Pennzoil, PPC and Quaker State shall together, or
pursuant to the allocation of responsibility set forth below or otherwise to be
agreed upon between them:
(a) as promptly as practicable following the date hereof, Quaker State
shall prepare and file with the SEC the Proxy Statement and Pennzoil and
PPC shall prepare and file the Registration Statements (the Proxy Statement
will be included as a prospectus in the Registration Statement on Form S-4)
with respect to the transactions contemplated by this Agreement, and each
of Pennzoil, Quaker State and PPC shall use all commercially reasonable
efforts to have such Proxy Statement/Prospectus cleared by the SEC under
the Exchange Act and the Registration Statements declared effective by the
SEC under the Securities Act and the Exchange Act, as the case may be, as
promptly as practicable after such filings; and in connection with the
Proxy Statement/Prospectus and the Registration Statements, PPC and
Pennzoil shall prepare audited annual and unaudited interim financial
statements prepared in accordance with GAAP and in compliance with
Regulation S-X under the Exchange Act for such Proxy Statement/Prospectus
and Registration Statements;
(b) Pennzoil and PPC shall take all such action as may reasonably be
required under state securities or Blue Sky laws in connection with the
issuance of shares of PPC Common Stock pursuant to the Merger;
(c) Pennzoil, PPC and Quaker State shall cooperate with one another in
determining whether any filings are required to be made with or consents
required to be obtained from, any Governmental Authority or any lender,
lessor or other third party prior to the Effective Time in connection with
the consummation of the transactions contemplated by this Agreement and
cooperate to the extent reasonably necessary or commercially appropriate in
making any such filings promptly and in seeking timely to obtain any such
consents;
(d) As promptly as practicable, Pennzoil and PPC shall make
application to the NYSE and any other stock exchanges as shall be agreed
upon for the listing or quotation of the shares of PPC Common Stock to be
issued pursuant to the transactions contemplated by this Agreement and the
Distribution Agreement and use all commercially reasonable efforts to cause
such shares to be Approved for Listing;
(e) Pennzoil, PPC and Quaker State shall, as promptly as practicable,
make their respective filings and any other required or requested
submissions under the HSR Act, promptly respond to any requests for
additional information from either the Federal Trade Commission or the
Department of Justice; and cooperate in the preparation of, and coordinate,
such filings, submissions and responses (including the exchange of drafts
between each party's outside counsel) so as to reduce the length of any
review periods;
(f) Pennzoil, PPC and Quaker State shall promptly provide outside
counsel for the other parties for their confidential review copies of all
filings made by such party with any Governmental Authority in
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connection with this Agreement and the other Transaction Agreements and the
transactions contemplated hereby and thereby; and
(g) Pennzoil, PPC and Quaker State shall provide such further
assistance as the other party may reasonably request in connection with the
foregoing. Each of PPC, Pennzoil and Quaker State shall furnish to the
other's counsel all such information as may be reasonably required to
effect the foregoing actions.
6.4 Proxy Statement/Prospectus. If, at any time after the mailing of the
definitive Proxy Statement/ Prospectus and prior to the Quaker State
Stockholders Meeting, any event should occur that results in the Proxy
Statement/Prospectus or the Registration Statements containing an untrue
statement of a material fact or omitting to state any material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they are made, not misleading, or that otherwise
should be described in an amendment or supplement to the Proxy
Statement/Prospectus or the Registration Statements, PPC, Pennzoil and Quaker
State shall promptly notify each other of the occurrence of such event and then
promptly prepare, file and clear with the SEC and mail to Quaker State's
stockholders each such amendment or supplement.
6.5 Letter of PPC's Accountants. In connection with the information
regarding PPC or its Subsidiaries or the transactions contemplated by this
Agreement provided by PPC specifically for inclusion in, or incorporation by
reference into, the Proxy Statement/Prospectus and the Registration Statements,
PPC shall use all commercially reasonable efforts to cause to be delivered to
Quaker State a letter of Arthur Andersen LLP, dated the date on which the
Registration Statements shall become effective and addressed to Quaker State, in
form and substance reasonably satisfactory to Quaker State and customary in
scope and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statements.
6.6 Letter of Quaker State's Accountants. In connection with the
information regarding Quaker State or its Subsidiaries or the transactions
contemplated by this Agreement provided by Quaker State specifically for
inclusion in, or incorporation by reference into, the Proxy Statement/Prospectus
and the Registration Statements, Quaker State shall use all commercially
reasonable efforts to cause to be delivered to PPC a letter of Coopers & Lybrand
L.L.P., dated the date on which the Registration Statements shall become
effective and addressed to PPC, in form and substance reasonably satisfactory to
PPC and customary in scope and substance for letters delivered by independent
public accountants in connection with registration statements similar to the
Registration Statements.
6.7 PPC Employee Stock Options, Incentive and Benefit Plans.
(a) Pursuant to the Employee Benefits Agreement, (i) on or prior to the
Distribution Date, PPC shall have adopted, and Pennzoil, as sole stockholder of
PPC, shall have approved, the PPC 1998 Incentive Plan, (ii) each outstanding
employee stock option award of Pennzoil granted under any Pennzoil stock option
program and outstanding the day before the Distribution Date ("Pennzoil Option")
shall be fully vested and exercisable as of such date and, if not exercised
prior to the Distribution Date, the exercise price and the number of shares
subject to such option shall be adjusted as provided in the Employee Benefits
Agreement, (iii) the holder of each Pennzoil Option outstanding and not
exercised as of the time immediately after the Distribution Date shall receive
as of such time an option ("PPC Option") under the PPC 1998 Incentive Plan for
such number of shares and having an exercise price determined in accordance with
the Employee Benefits Agreement, such PPC Option shall have terms and conditions
substantially the same as the Pennzoil Option in respect of which it is granted
(including being fully vested and exercisable), (iv) for purposes of determining
when a Pennzoil Option or a PPC Option shall expire, service with Pennzoil and
its affiliates shall be treated as service with PPC and its affiliates and vice
versa, (v) effective immediately prior to the Distribution Date, each
conditional stock award of Pennzoil granted under a conditional stock award
program of Pennzoil ("Pennzoil CSAU") shall be fully vested and matured (but
payable at the conclusion of the end of the program under which it has been
granted) and (vi) effective as of a time immediately after the Distribution Date
the holder of a Pennzoil CSAU shall be granted a conditional stock award under
the PPC 1998 Incentive Plan ("PPC CSAU") and such PPC CSAU shall have terms and
conditions substantially the
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same as the Pennzoil CSAU in respect of which it is granted (including being
fully vested and matured). Prior to the Effective Time, no awards shall be made
under the PPC 1998 Incentive Plan except as provided in this Section 6.7(a).
(b) As of the Distribution Date, outstanding awards under Pennzoil's 1996,
1997 and 1998 Long Term Incentive Plans and Pennzoil's 1998 Annual Incentive
Plan shall be vested and earned with the Distribution Date constituting the end
of each respective award period, measuring performance levels as of the
Distribution Date and prorating such awards for the portion of the award period
completed as of the Distribution Date. Such vested and earned awards shall be
paid in cash as soon as is practicable following the Distribution Date without
regard to whether the holder of an award is then employed by either Pennzoil or
PPC.
(c) Notwithstanding anything in Section 6.7(a), the number of shares
subject to options or stock appreciation rights with respect to PPC Common Stock
issued under the PPC 1998 Incentive Plan shall not exceed the number of shares
that would have been subject to PPC awards assuming the conversion solely into
awards with respect to PPC Common Stock (applying the formulas set forth in the
Employee Benefits Agreement as of the date hereof) of Pennzoil options and stock
appreciation rights covering 2.5 million shares (minus 68% of the number of
shares subject to any such options and stock appreciation rights that are
exercised between the date of the Merger Agreement and the Distribution Date)
and having an average exercise price (or reference appreciation price) equal to
that determined in clause (x) below, and the total aggregate spread of such
awards shall not exceed the product of (x) the excess of the Pennzoil Pre-
Distribution Stock Price (as defined in the Employee Benefits Agreement as of
the date hereof) over the average exercise price (or reference appreciation
price) per share of all Pennzoil options and stock appreciation rights
outstanding immediately prior to the Distribution Date and (y) 2.5 million minus
68% of the number of shares subject to any Pennzoil options and stock
appreciation rights that are exercised between the date of the Merger Agreement
and the Distribution Date.
(d) Except as provided in this Section 6.7, neither Pennzoil nor PPC nor
any of their respective affiliates or subsidiaries will make any determination
or otherwise take any action that will result in the acceleration of vesting or
the timing of payments under any Pennzoil executive severance plan, change in
control agreements, benefit acceleration agreements, conditional stock award
program, the PPC 1998 Incentive Plan or any other employee stock or incentive
plans, employment agreement or any other similar agreements with respect to any
PPC Employee.
6.8 Employee Benefit Plans. With respect to each Quaker State Employee and
each PPC Employee, for a period of at least one year following the Effective
Time, PPC shall (or shall cause Quaker State to) provide each such Employee with
(i) the same basic compensation (including base salary, wages or commissions)
and annual incentive opportunity, to the extent applicable, and (ii) benefits
which, in the aggregate, are substantially comparable to the benefits that were
provided to such Employee under the Quaker State Benefit Plans, if he or she
will have been a Quaker State Employee immediately prior to the Effective Time,
or under the PPC Benefit Plans, if he or she will have been a PPC Employee
immediately prior to the Effective Time. The commitment set forth in the
preceding sentence shall apply only during such Quaker State or PPC Employee's
continued employment with PPC and its Subsidiaries (including, after the
Effective Time, Quaker State), except where benefits are provided after such
termination of employment under the terms of the respective PPC Benefit Plan or
Quaker State Benefit Plan. Nothing in this Section shall require PPC or any of
its Subsidiaries (including, after the Effective Time, Quaker State) to continue
any PPC Employee or Quaker State Employee in its employ following the Effective
Time, provided, however, that, in the event that any such Employee is terminated
involuntarily following the Effective Time and prior to the first anniversary
thereof by action of PPC or any of its Subsidiaries, such Employee shall receive
at least the same severance and termination benefits as he or she would have
received under the terms of the applicable PPC Benefit Plans or Quaker State
Benefit Plans, as the case may be, as in effect immediately prior to the
Effective Time.
6.9 Investigation. Upon reasonable notice, each of PPC and Quaker State
shall afford to each other and to its respective officers, employees,
accountants, counsel and other authorized representatives, full and complete
access during normal business hours, throughout the period prior to the earlier
of the Effective Time
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or the Termination Date, to its and its Subsidiaries' plants, properties,
Contracts, commitments, books, records (including tax returns) and any report,
schedule or other document filed or received by it pursuant to the requirements
of the federal or state securities laws, and shall use all commercially
reasonable efforts to cause its respective representatives to furnish promptly
to the other such additional financial and operating data and other information,
including environmental information, as to its and its Subsidiaries' respective
businesses and properties as the other or its duly authorized representatives,
as the case may be, may reasonably request. The parties hereby agree that the
provisions of the Confidentiality Agreement, including, without limitation,
Section 2.2 thereof, shall apply to all information and material furnished by
any party or its representatives thereunder and hereunder.
6.10 Reasonable Efforts; Further Assurances, Etc.
(a) Subject to the terms and conditions of this Agreement, each of
Pennzoil, PPC and Quaker State shall use all commercially reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including providing
information and using all commercially reasonable efforts to obtain all
necessary exemptions, rulings, consents, authorizations, approvals and waivers
to effect all necessary registrations and filings and to lift any injunction or
other legal bar to the Merger and the other transactions contemplated hereby as
promptly as practicable, and to take all other actions necessary to consummate
the transactions contemplated hereby in a manner consistent with applicable law.
Without limiting the generality of the foregoing, Pennzoil, PPC and Quaker State
agree, and shall cause each of their respective Subsidiaries, to cooperate and
to use their respective commercially reasonable best efforts to obtain any
government clearances required to consummate the Merger (including through
compliance with the HSR Act and any applicable foreign government reporting
requirements), to respond to any government requests for information, and to
contest and resist any action, including any legislative, administrative or
judicial action, and to have vacated, lifted, reversed or overturned any decree,
judgment, injunction or other order (whether temporary, preliminary or
permanent) (an "Order") that restricts, prevents or prohibits the consummation
of the Merger or any other transactions contemplated by this Agreement,
including, without limitation, by vigorously pursuing all available avenues of
administrative and judicial appeal and all available legislative action. The
parties hereto will consult and cooperate with one another, and consider in good
faith the views of one another, in connection with any analyses, appearances,
presentations, memoranda, briefs, arguments, opinions and proposals made or
submitted by or on behalf of any party hereto in connection with proceedings
under or relating to the HSR Act or any other federal, state or foreign
antitrust or fair trade law. Notwithstanding anything to the contrary in this
Section 6.10, neither PPC, Pennzoil nor Quaker State nor any of their respective
Subsidiaries shall be required to take any action that would reasonably be
expected to substantially impair the overall benefits expected, as of the date
hereof, to be realized from the consummation of the Merger.
(b) Subject to Section 6.10(a), in case at any time any further action is
reasonably necessary to carry out the purposes of this Agreement, Pennzoil, PPC
and Quaker State shall take all such commercially reasonable necessary action.
6.11 No Solicitation.
(a) Quaker State agrees that neither it nor any Quaker State Subsidiary
shall, and that it shall use its best efforts to cause its and each Quaker State
Subsidiary's officers, directors, employees, advisors and agents not to,
directly or indirectly, solicit, initiate or encourage any inquiry or proposal
that constitutes or could reasonably be expected to lead to a Quaker State
Acquisition Proposal, provide any non-public information or data to any Person
relating to a Quaker State Acquisition Proposal, engage in any discussions or
negotiations concerning a Quaker State Acquisition Proposal, or otherwise
knowingly facilitate any effort or attempt to make or implement a Quaker State
Acquisition Proposal or agree to, recommend or accept a Quaker State Acquisition
Proposal; provided, however, that nothing contained in this Agreement shall
prevent Quaker State or Quaker State's Board of Directors from, prior to the
adoption of this Agreement by the holders of Quaker State Capital Stock,
engaging in any discussions or negotiations with, or providing any non-public
information to, any Person in response to an unsolicited bona fide Quaker State
Acquisition Proposal by any such Person,
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if and only to the extent that (i) Quaker State receives a Superior Proposal (as
defined below), (ii) Quaker State's Board of Directors determines in good faith
(after consultation with its legal and financial advisors) that it is advisable
to do so in order for the Quaker State Board of Directors to comply with its
fiduciary duties to Quaker State's shareholders under applicable law, (iii)
prior to providing any information or data to any Person in connection with a
proposal by any such Person, Quaker State's Board of Directors receives from
such Person a customary and reasonable executed confidentiality agreement and
(iv) prior to providing any non-public information or data to any Person or
entering into discussions or negotiations with any Person, Quaker State's Board
of Directors notifies Pennzoil promptly of such inquiries, proposal or offers
received by, any such information requested from, or any such discussions or
negotiations sought to be initiated or continued with, Quaker State, any Quaker
State Subsidiary or any of their officers, directors, employees, advisors and
agents indicating, in connection with such notice, the name of such Person and
the material terms and conditions of any proposals or offers. Quaker State
agrees that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any Quaker State Acquisition Proposal. Quaker State agrees that
it shall keep Pennzoil informed, on a current basis, of the status and material
terms of any such proposals or offers and the status of any such discussions or
negotiations.
(b) Notwithstanding the foregoing, prior to the adoption of this Agreement
by the holders of Quaker State Capital Stock, the Board of Directors of Quaker
State may, if it has received a Superior Proposal, and if it concludes in good
faith (after consultation with its legal and financial advisors) that it is
advisable to do so in order to comply with its fiduciary duties to Quaker
State's shareholders under applicable law, (i) withdraw or modify its approval
or recommendation of the Merger or this Agreement or (ii) approve or recommend
such Superior Proposal or, subject to compliance with the requirements of
Section 8.3(a), terminate this Agreement (and concurrently with or after such
termination, if it so chooses, cause Quaker State to enter into any agreement
with respect to any Superior Proposal) but only at a time that is after the
second business day following Pennzoil's receipt of written notice from Quaker
State advising Pennzoil that the Board of Directors of Quaker State has received
a Superior Proposal, specifying the material terms and conditions of such
Superior Proposal and identifying the Person making such Superior Proposal. For
purposes of this Agreement, a "Superior Proposal" means any proposal or offer
made by a third party to acquire, directly or indirectly, for consideration
consisting of cash and/or securities, more than 50% of the combined voting power
of the shares of Quaker State Capital Stock then outstanding or a substantial
portion of the assets of Quaker State and its subsidiaries and otherwise on
terms which the Board of Directors of Quaker State determines in its good faith
judgment to be more favorable to the Quaker State shareholders than the Merger.
(c) Nothing contained in this Section 6.11 shall prohibit Quaker State from
taking and disclosing to its shareholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to
Quaker State shareholders if, in the good faith judgment of the Board of
Directors of Quaker State (after consultation with its legal and financial
advisors), determines that it is advisable to do so in order to comply with its
fiduciary duties to the Quaker State shareholders under applicable law;
provided, however, that neither Quaker State nor its Board of Directors nor any
committee thereof shall, except as permitted by Section 6.11(b), withdraw or
modify, or propose publicly to withdraw or modify, its position with respect to
this Agreement or the Merger or approve or recommend, or propose publicly to
approve or recommend, a Quaker State Acquisition Proposal.
6.12 Director and Officer Indemnification; Insurance.
(a) Without limiting the rights that any indemnified person may have under
applicable law, the parties agree that all rights of indemnification existing as
of the date hereof as provided in the respective charters and bylaws of PPC and
Quaker State shall survive the Merger and shall continue in full force and
effect in accordance with their terms for a period of six years following the
Effective Time.
(b) For a period of six years following the Effective Time, PPC shall
maintain in effect the current directors' and officers' liability insurance
policies maintained by Quaker State with respect to claims arising from facts or
events that occurred up to and including the Effective Time to the extent
available; provided, however, that PPC may substitute therefor policies of at
least the same coverage and amounts containing
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terms and conditions that are no less advantageous to the covered persons;
provided further that PPC shall not be required to pay an annual premium for
such insurance in excess of 200% of the higher of (i) the last annual premium
paid by Quaker State or (ii) the last annual premium paid by or on behalf of PPC
prior to the date hereof, but in such case shall purchase as much coverage as
possible for such amount.
(c) For a period of six years following the Effective Time, Pennzoil will
maintain in effect directors' and officers' liability insurance policies with
respect to claims arising out of facts or events that occurred up to and
including the Effective Time to the extent available; provided, however, that
Pennzoil may substitute therefor policies of at least the same coverage and
amounts and containing terms and conditions that are no less advantageous to the
PPC covered persons; provided further that to the extent Pennzoil incurs
increased premium costs to continue coverage on behalf of PPC covered persons,
PPC will pay Pennzoil the increased premium costs related thereto; provided
further that neither PPC nor Pennzoil shall be required to pay any such amounts
to the extent such increased annual premiums are in excess of 200% of the higher
of (i) the last annual premium paid by Pennzoil or (ii) the last annual premium
paid by or on behalf of PPC prior to the date hereof, but in such case Pennzoil
shall purchase as much coverage as possible for such amount, and PPC will
reimburse such costs.
(d) This Section 6.12 is intended to be for the benefit of, and shall be
enforceable by, the persons for whom indemnification is provided pursuant to
this Section 6.12, their heirs and personal representatives, and shall be
binding on Pennzoil, PPC and Quaker State and their respective successors and
assigns.
6.13 Rule 145 Affiliates. Quaker State shall, at least 10 days prior to
the Effective Time, cause to be delivered to PPC a list, reviewed by its
counsel, identifying all persons who are, in its reasonable judgment, at the
time of the Quaker State Stockholders Meeting, "affiliates" of Quaker State for
purposes of Rule 145 promulgated by the SEC under the Securities Act (each, a
"Rule 145 Affiliate"). Quaker State shall furnish such information and documents
as PPC may reasonably request for the purpose of reviewing such list. Quaker
State shall use all commercially reasonable efforts to cause each person who is
identified as a Rule 145 Affiliate in the list furnished pursuant to this
Section 6.14 to execute a written agreement (each, a "Rule 145 Affiliate
Agreement"), substantially in the form of Exhibit F to this Agreement, at or
prior to the Effective Time.
6.14 Public Announcements. Pennzoil, PPC and Quaker State shall consult
with each other and shall mutually agree upon any press release or public
announcement relating to the transactions contemplated by this Agreement and
shall not issue any such press release or make any such public announcement
prior to such consultation and agreement, except as may be required by
applicable law or by obligations pursuant to any listing agreement with any
national securities exchange, in which case the party proposing to issue such
press release or make such public announcement shall use all commercially
reasonable efforts to consult in good faith with the other party before issuing
any such press release or making any such public announcement.
6.15 Defense of Litigation. Each of Pennzoil, PPC and Quaker State shall
use all commercially reasonable efforts to defend against all actions, suits or
proceedings in which such party is named as a defendant that challenge or
otherwise seek to enjoin, restrain or prohibit the transactions contemplated by
this Agreement or seek damages with respect to such transactions. None of
Pennzoil, PPC or Quaker State shall settle any such action, suit or proceeding
or fail to perfect on a timely basis any right to appeal any judgment rendered
or order entered against such party therein without having previously consulted
with the other party. Each of Pennzoil, PPC and Quaker State shall use all
commercially reasonable efforts to cause each of its Affiliates, directors and
officers to use all commercially reasonable efforts to defend any such action,
suit or proceeding in which such Affiliate, director or officer is named as a
defendant and which seeks any such relief to comply with this Section 6.15 to
the same extent as if such Person was a party.
6.16 Notification.
(a) From time to time prior to the Effective Time, each of Pennzoil, PPC
and Quaker State shall supplement or amend its respective Disclosure Schedule
with respect to any matter hereafter arising that, if existing or occurring at
the date of this Agreement, would have been required to be set forth or
described in such Disclosure Schedule or that is necessary to complete or
correct (i) any information in such Disclosure
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Schedule that is or has been rendered untrue, inaccurate, incomplete or
misleading, (ii) any representation or warranty of such party in this Agreement
that contains a qualification as to materiality or Material Adverse Effect that
has been rendered untrue or inaccurate, in any respect, thereby or (iii) any
representation or warranty of such party in this Agreement that is not so
qualified and that has been rendered untrue or inaccurate, in any material
respect, thereby. Delivery of such supplements shall be for informational
purposes only and shall not expand or limit the rights or affect the obligations
of any party hereunder. Such supplements shall not constitute a part of the
Pennzoil Disclosure Schedule, the PPC Disclosure Schedule or the Quaker State
Disclosure Schedule, as the case may be, for purposes of this Agreement.
(b) Each of Pennzoil, PPC and Quaker State shall give prompt notice to the
other of the occurrence or nonoccurrence of any event the occurrence or
nonoccurrence of which has caused or is reasonably likely to cause (i) any
covenant or agreement of such party contained in this Agreement not to be
performed or complied with, in any material respect or (ii) any condition
contained in Article 7 to become incapable of being fulfilled at or prior to the
Effective Time; provided, however, that the delivery of any notice pursuant to
this Section 6.16(b) shall not cure such breach or noncompliance or limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
(c) Status of Transactions. Each of the parties hereto shall keep the
others informed on a timely basis as to the status of the transactions
contemplated by the Transaction Agreements and the obtaining of all necessary
and appropriate exemptions, rulings, consents, authorizations and waivers
related thereto.
6.17 Debt Instruments. Prior to or at the Effective Time, PPC and each of
its Subsidiaries, and Quaker State and each of its Subsidiaries (except for the
matters set forth in Section 5.3 of the Quaker State Disclosure Schedule), shall
use all commercially reasonable efforts to prevent the occurrence, as a result
of the Merger and the other transactions contemplated by this Agreement, of a
change in control or any event that constitutes a default (or an event that,
with notice or lapse of time or both, would become a default) under any debt
instrument of any such entity, including debt securities registered under the
Securities Act.
6.18 Quaker State Rights Plan. Quaker State covenants and agrees with PPC
that, until the earlier of the Effective Time and the Termination Date, except
(a) as contemplated by Section 5.19 or (b) if the Quaker State Board of
Directors shall have taken actions permitted by Section 6.11(b), Quaker State
shall not (i) amend the Quaker State Rights Agreements, (ii) make a
determination under Section 11(a)(ii) of the Quaker State Rights Agreement that
any proposed or outstanding transaction (other than the Distribution and the
Merger) in which any Person shall become an Acquiring Person is not a "Section
11(a)(ii) Event" or a "Section 13 Event" (each as defined in the Quaker State
Rights Agreement), (iii) redeem the Quaker State Rights or (iv) take any other
action to make the Quaker State Rights Agreement or the Quaker State Rights
inapplicable to a Quaker State Acquisition Proposal.
ARTICLE 7
CONDITIONS TO THE MERGER
7.1 Conditions to the Obligations of PPC, Pennzoil and Quaker State to
Effect the Merger. The respective obligations of PPC, Pennzoil and Quaker State
to consummate the Merger shall be subject to the fulfillment (or waiver by PPC
and Quaker State) at or prior to the Effective Time of the following conditions:
(a) The Distribution shall have been consummated in accordance with
the Distribution Agreement and the conditions to the consummation of the
Distribution set forth in Section 8.01 of the Distribution Agreement shall
have been satisfied or shall have been waived with a Quaker State Consent.
(b) All consents, approvals and authorizations of any Governmental
Authority legally required for the consummation of the transactions
contemplated by this Agreement and the other Transaction Agreements shall
have been obtained and be in effect at the Effective Time, except those
consents the failure to obtain would not be reasonably likely to have a
Material Adverse Effect on PPC or Quaker State;
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(c) Any waiting period (including any extended waiting period arising
as a result of a request for additional information by either HSR Agency)
under the HSR Act shall have expired or been terminated and no court of
competent jurisdiction or other Governmental Authority shall have issued an
Order that is in effect restraining, enjoining, prohibiting or otherwise
imposing any material restrictions or limitations on the Distribution or
the Merger;
(d) The Registration Statements shall have become effective in
accordance with the Securities Act and the Exchange Act and shall not be
the subject of any stop order or proceedings seeking a stop order; all
necessary permits and authorizations under state securities or Blue Sky
laws, the Securities Act and the Exchange Act relating to the issuance and
trading of shares of PPC Common Stock to be issued in connection with the
Distribution and the Merger shall have been obtained and shall be in
effect; and such shares of PPC Common Stock and such other shares required
to be reserved for issuance in connection with the Distribution and the
Merger shall have been Approved for Listing;
(e) The Requisite Approval shall have been obtained;
(f) No court of competent jurisdiction or other Governmental Authority
shall have issued an order, decree, ruling or judgment that is still in
effect restraining, enjoining or prohibiting the Merger;
(g) No action, proceeding or investigation by any Governmental
Authority with respect to the Merger shall be pending that seeks to
restrain, enjoin, prohibit or delay consummation of the transactions
contemplated by this Agreement or to impose any material restrictions or
requirements thereon or on either PPC or Quaker State with respect thereto;
(h) No action shall have been taken, and no statute, rule, regulation
or executive order shall have been enacted, entered, promulgated or
enforced by any Governmental Authority with respect to the Merger that,
individually or in the aggregate, would (i) restrain, prohibit or delay the
consummation of the Merger or (ii) impose material restrictions or
requirements thereon or on either PPC or Quaker State with respect thereto;
(i) The Pennzoil Board of Directors shall have received an opinion of
a nationally recognized investment banking or appraisal firm in form and
substance reasonably satisfactory to such Board of Directors and to Quaker
State to the effect that, after giving effect to the transactions set forth
in the Distribution Agreement, Pennzoil will not be insolvent (such opinion
to be dated as of the date of this Agreement, the date the Board of
Directors of Pennzoil declares the Distribution and the Distribution Date)
and such opinion shall entitle Quaker State to rely on such opinion as if
the opinion were addressed to Quaker State; and
(j) Pennzoil shall have received the Section 355 Ruling.
7.2 Additional Conditions to the Obligations of PPC. The obligation of PPC
to consummate the Merger shall be subject to the fulfillment (or waiver by PPC)
at or prior to the Effective Time of the following additional conditions:
(a) Quaker State shall have performed in all material respects its
covenants and agreements contained in this Agreement required to be
performed at or prior to the Effective Time and the representations and
warranties of Quaker State contained in this Agreement shall be true and
correct in all respects as of the date of this Agreement and as of the
Effective Time as if made as of the Effective Time (except to the extent
such representations and warranties address matters as of a particular
date), except in each case (i) where the failure to be true and correct,
individually or in the aggregate, would not be reasonably likely to have a
Material Adverse Effect on PPC or Quaker State or (ii) to the extent
specifically contemplated or permitted by this Agreement;
(b) Quaker State shall have obtained the consent or approval of each
Person whose consent or approval shall be required for the consummation of
the Merger under any Contract to which Quaker State shall be a party or by
which its properties and assets are bound, except (i) where the failure to
so obtain such consents and approvals, individually or in the aggregate,
would not be reasonably likely to have a Material Adverse Effect on Quaker
State or upon the consummation of the transactions
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contemplated by this Agreement or (ii) to the extent that alternative
arrangements (reasonably acceptable to PPC) relating to the failure to
obtain any such consent or approval are otherwise provided for;
(c) Quaker State shall have delivered to PPC a certificate, dated as
of the Effective Time, of a senior officer of Quaker State certifying the
satisfaction by Quaker State of the conditions set forth in subsection (a)
of this Section 7.2;
(d) PPC shall have received from each Rule 145 Affiliate of Quaker
State an executed copy of a Rule 145 Affiliate Agreement as contemplated by
Section 6.14; and
(e) Pennzoil and PPC shall have received an opinion of Baker & Botts,
L.L.P., a copy of which will be furnished to Quaker State, to the effect
that the Merger will constitute a reorganization for federal income tax
purposes within the meaning of Section 368(a) of the Code. In rendering
such opinion, Baker & Botts may require and rely upon representations
contained in certificates of officers of PPC, Merger Sub, Quaker State and
others.
7.3 Additional Conditions to the Obligations of Quaker State. The
obligation of Quaker State to consummate the Merger shall be subject to the
fulfillment (or waiver by Quaker State) at or prior to the Effective Time of the
following additional conditions:
(a) PPC and Pennzoil shall have performed in all material respects
their respective covenants and agreements contained in the Transaction
Agreements required to be performed at or prior to the Effective Time and
the representations and warranties of PPC and Pennzoil contained in the
Transaction Agreements shall be true and correct in all respects as of the
date of this Agreement and as of the Effective Time as if made as of the
Effective Time (except to the extent such representations and warranties
address matters as of a particular date), except in each case (i) where the
failure to be true and correct, individually or in the aggregate, would not
be reasonably likely to have a Material Adverse Effect on PPC or Quaker
State or (ii) to the extent specifically contemplated or permitted by this
Agreement;
(b) PPC shall have obtained the consent or approval of each Person
whose consent or approval shall be required for the consummation of the
Merger under any Contract to which PPC shall be a party or by which its
properties and assets are bound, except (i) where the failure to so obtain
such consents and approvals, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect on PPC or the Surviving
Corporation or upon the consummation of the transactions contemplated by
this Agreement or (ii) to the extent that alternative arrangements
(reasonably acceptable to Quaker State) relating to the failure to obtain
any such consent or approval are otherwise provided for;
(c) PPC shall have delivered to Quaker State a certificate, dated as
of the Effective Time, of a senior officer of PPC certifying the
satisfaction by PPC of the conditions set forth in subsection (a) of this
Section 7.3;
(d) Prior to the Distribution Date, PPC shall have adopted a Rights
Agreement in form and substance reasonably satisfactory to Quaker State,
which agreement shall be in full force and effect;
(e) Quaker State shall have received an opinion from Debevoise &
Plimpton, a copy of which will be furnished to Pennzoil and PPC, to the
effect that the Merger will constitute a reorganization for federal income
tax purposes within the meaning of Section 368(a) of the Code. In rendering
such opinion, Debevoise & Plimpton may require and rely upon
representations contained in certificates of officers of PPC, Merger Sub,
Quaker State and others;
(f) PPC shall have delivered a copy of the Section 355 Ruling to
Quaker State, and Quaker State shall have been reasonably satisfied that
the Distribution has taken place in accordance with the terms set forth in
the Distribution Agreement and the Section 355 Ruling; and
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(g) PPC and Pennzoil shall have entered into the Trademark License
Agreement, the Tax Separation Agreement, the Employee Benefits Agreement,
the Transition Services Agreement and the Distribution Agreement and each
such agreement shall be in full force and effect.
ARTICLE 8
TERMINATION, AMENDMENT AND WAIVERS
8.1 Termination. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned at any time prior to the Effective Time
whether before or after the Requisite Approval:
(a) by the mutual consent of each party hereto, which consent shall be
effected by action of the Board of Directors of each such Party;
(b) by any party if the Effective Time shall not have occurred on or
before December 15, 1998, provided that the right to terminate this
Agreement pursuant to this clause (b) shall not be available to any party
whose failure to perform any of its obligations under this Agreement
required to be performed by it at or prior to such date has been a cause
of, or contributed to, the failure of the Merger to have become effective
on or before such date;
(c) by any party if any court of competent jurisdiction or any other
Governmental Authority shall have issued an order, decree, ruling or
judgment (other than a temporary restraining order) restraining, enjoining
or otherwise prohibiting the Merger and such order, decree, ruling or
judgment shall have become final and nonappealable, provided that, if the
party seeking to terminate this Agreement pursuant to this clause (c) is a
party to the applicable proceeding, such party shall have used all
commercially reasonable efforts to remove such order, decree, ruling or
judgment;
(d) by Quaker State if (i) either Pennzoil or PPC shall have failed to
perform in all material respects its respective covenants and agreements
contained in this Agreement required to be performed at or prior to the
Effective Time, or (ii) the respective representations and warranties of
Pennzoil or PPC contained in this Agreement are or shall become untrue in
any respect (except to the extent such representations and warranties
address matters as of a particular date), except where the failure to be
true and correct, individually or in the aggregate, would not be reasonably
likely to have a Material Adverse Effect on PPC or Quaker State; provided
that the right of Quaker State to terminate this Agreement pursuant to this
subsection (d) shall not be available unless Pennzoil and PPC shall have
been unable to cure such failure or such untruth for 30 calendar days after
Quaker State shall have given Pennzoil and PPC notice of such failure or
such untruth;
(e) by Pennzoil if (i) Quaker State shall not have performed in all
material respects its covenants and agreements contained in this Agreement
required to be performed at or prior to the Effective Time, or (ii) the
representations and warranties of Quaker State contained in this Agreement
are or shall become untrue in any respect (except to the extent such
representations and warranties address matters as of a particular date),
except (x) where the failure to be true and correct, individually or in the
aggregate, would not be reasonably likely to have a Material Adverse Effect
on Quaker State or PPC or (y) to the extent specifically contemplated or
permitted by this Agreement; provided that the right of Pennzoil to
terminate this Agreement pursuant to this subsection (e) shall not be
available unless Quaker State shall have been unable to cure such failure
or such untruth for 30 calendar days after Pennzoil shall have given Quaker
State notice of such failure or such untruth;
(f) by Quaker State in accordance with Section 6.11(b) hereof,
provided that it has complied with all the provisions thereof and it has
complied with the requirements of Section 8.3(a);
(g) by Pennzoil or Quaker State if, at the Quaker State Stockholders'
Meeting (including any adjournment, continuation or postponement thereof),
the Requisite Approval shall not be obtained; or
(h) by Pennzoil, if (i) the Board of Directors of Quaker State (or any
committee thereof), pursuant to Section 6.11(b) hereof, shall have
withdrawn or modified its approval or recommendation of the
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Merger or this Agreement, approved or recommended to Quaker State
stockholders a Superior Proposal or resolved to do any of the foregoing,
(ii) after the receipt by Quaker State of a Quaker State Acquisition
Proposal, Pennzoil requests in writing that the Board of Directors of
Quaker State reconfirm its recommendation of this Agreement to the Quaker
State stockholders and the Board of Directors of Quaker State fails to do
so within ten business days after its receipt of Pennzoil's request, (iii)
Quaker State fails to call and hold the Quaker State Stockholders Meeting
within 60 days after the effectiveness of PPC's Registration Statement on
Form S-4, or (iv) any failure of PPC's Registration Statement on Form S-4
to become effective due to the inability of PPC to complete such
Registration Statement solely as a result of actions or non-actions by
Quaker State.
8.2 Effect of Termination. In the event of termination of this Agreement
pursuant to Section 8.1, this Agreement shall terminate (except to the extent
set forth in the last sentence of Section 9.1(a) and Section 9.2), without any
liability on the part of any party or its directors, officers or stockholders
except as set forth in Section 8.3; provided, that nothing in this Agreement
other than the provisions of Section 8.3(b) shall relieve any party of liability
for breach of this Agreement or prejudice the ability of the non-breaching party
to seek damages from any other party for any breach of this Agreement, including
without limitation, attorneys' fees and the right to pursue any remedy at law or
in equity.
8.3 Termination Fee.
(a) In the event of termination of this Agreement by Quaker State pursuant
to Section 8.1(f), such termination shall not be effective unless and until
Quaker State shall have paid to Pennzoil a fee, in immediately available funds,
of $20,000,000 (the "Termination Fee"). In the event of termination of this
Agreement pursuant to Section 8.1(g), Quaker State shall pay to Pennzoil the
Termination Fee in immediately available funds, within two business days after
such termination, if and only if, at the time of such termination, the Board of
Directors of Quaker State shall have failed to recommend that Quaker State
stockholders approve the Merger and adopt this Agreement or such recommendation
shall have been withdrawn or modified in a manner that is adverse to Pennzoil.
In the event of termination of this Agreement by Pennzoil pursuant to Section
8.1(h)(i), Quaker State shall pay to Pennzoil the Termination Fee within two
business days after such termination.
(b) The Termination Fee shall constitute liquidated damages and such
party's sole and exclusive remedy for any and all liabilities and obligations
for damages arising under or in connection with this Agreement and the other
Transaction Agreements, and upon the payment of such Termination Fee, no party
to this Agreement shall have any liability or further obligation to the other
party under or in connection with this Agreement (excluding the Confidentiality
Agreement) or the termination hereof, provided that this sentence is intended to
limit the remedies available to a party only when the Termination Fee is paid or
payable to such party. The provisions of this Section 8.3 shall not impose any
limitation with respect to any claim that any party may have against any Person
who is not a party. The parties hereby acknowledge that the agreements made in
this Section 8.3 are integral to this Agreement and without such agreements,
they would not enter into this Agreement.
8.4 Amendment. This Agreement may be amended by Pennzoil, PPC and Quaker
State at any time before or after adoption of this Agreement by the stockholders
of Quaker State; provided, however, that after such adoption, no amendment shall
be made that by law requires further approval by such stockholders without such
further approval. This Agreement may not be amended except by an instrument in
writing signed by Pennzoil, PPC and Quaker State.
8.5 Waivers. At any time prior to the Effective Time, Pennzoil, PPC and
Quaker State may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or acts of the other party; (ii) waive any
inaccuracies in the representations and warranties of the other party contained
herein or in any document delivered pursuant to this Agreement and (iii) waive
compliance with any of the agreements or conditions of the other party contained
herein; provided, however, that no failure or delay by Pennzoil, PPC or Quaker
State in exercising any right hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right
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hereunder. Any agreement on the part of Pennzoil, PPC or Quaker State to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE 9
MISCELLANEOUS
9.1 Survival of Representations, Warranties and Agreements;
Indemnification.
(a) Except as set forth in this Section 9.1(a) and for the agreements set
forth in Sections 6.8 and 6.12, none of the agreements in this Agreement or in
any certificate or instrument delivered pursuant to this Agreement shall survive
the Effective Time. None of the representations or warranties in this Agreement
or in any certificate or instrument delivered pursuant to this Agreement shall
survive the Effective Time. The Confidentiality Agreement shall survive the
execution and delivery of this Agreement and any termination of this Agreement,
and the provisions of the Confidentiality Agreement shall apply to all
information and material furnished by any party or its representatives
thereunder or hereunder.
(b) Following the Effective Time, Pennzoil will indemnify, defend and hold
harmless PPC, Quaker State and each Person, if any, who controls, within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
(any such person being hereinafter referred to as a "Controlling Person"), PPC
or Quaker State from and against, and pay or reimburse each of the foregoing
for, all losses, claims, damages, liabilities, actions, costs and expenses,
joint or several, including reasonable attorneys' fees (collectively, "Losses"),
arising out of or resulting from, directly or indirectly, of in connection with:
(i) any assets or liabilities of, or the operations of, Pennzoil or
any of its Subsidiaries (other than PPC and its Subsidiaries).
(ii) any untrue statement or alleged untrue statement of a material
fact contained in or incorporated by reference into either of the
Registration Statements or in the Proxy Statement/Prospectus (or any
amendment or supplement thereto) or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading provided, however, that Pennzoil shall not be
responsible for information provided by Quaker State specifically for
inclusion in, or incorporation by reference into, any such Proxy
Statement/Prospectus or Registration Statement.
(iii) any financial advisory, broker's, finder's or similar fee or
commission, reimbursement of expenses or indemnification or contribution
payable in connection with the transactions contemplated by this Agreement
and the other Transaction Agreements to any agent, broker, investment
banker, financial advisor or other similar Person (x) by Pennzoil or (y) by
PPC in excess of the amount set forth in Section 4.17 of the PPC Disclosure
Schedule.
(c) Following the Effective Time, PPC and Quaker State will jointly and
severally indemnify, defend and hold harmless Pennzoil and each controlling
person of Pennzoil from and against, and pay or reimburse each of the foregoing
for, all Losses arising out of or resulting from, directly or indirectly, of in
connection with:
(i) any assets or liabilities of, or the operations of, PPC and Quaker
State or any of their Subsidiaries;
(ii) any untrue statement or alleged untrue statement of a material
fact contained in or incorporated by reference into either of the
Registration Statements or in the Proxy Statement/Prospectus (or any
amendment or supplement thereto) or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, but only with respect to information provided by
Quaker State specifically for inclusion in, or incorporation by reference
into, any such Proxy Statement/ Prospectus or Registration Statement.
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9.2 Expenses. Except as otherwise provided in the Distribution Agreement,
whether or not the Merger or the other transactions contemplated by this
Agreement are consummated, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such costs or expenses.
9.3 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given upon (a) a transmitter's confirmation of a
receipt of a facsimile transmission (but only if followed by confirmed delivery
of a standard overnight courier the following business day or if delivered by
hand the following business day), (b) confirmed delivery of a standard overnight
courier or when delivered by hand or (c) the expiration of five business days
after the date mailed by certified or registered mail (return receipt
requested), postage prepaid, to the parties at the following addresses (or at
such other addresses for a party as shall be specified by like notice):
If to Pennzoil, to:
Pennzoil Company
Pennzoil Place
P.O. Box 2967
Houston, Texas 77252-2967
Attention: Corporate Secretary
Facsimile: 713-546-3757
If to PPC or Merger Sub, to:
Pennzoil Products Company
P.O. Box 2967
Houston, Texas 77252-2967
Attention: Corporate Secretary
Facsimile: 713-546-3757
If to Quaker State, to:
Quaker State Corporation
225 E. John Carpenter Freeway
Irving, Texas 75062
Attention: Paul E. Konney
Facsimile: 972-868-0440
with a copy (which shall not constitute effective notice) to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention: Richard Bohm
Facsimile: 212-909-6836
9.4 Certain Construction Rules. The article and section headings and the
table of contents contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.
As used in this Agreement, unless otherwise provided to the contrary, (a) all
references to days or months shall be deemed references to calendar days or
months and (b) any reference to a "Section," "Article," "Exhibit" or "Schedule"
shall be deemed to refer to a section or article of this Agreement or an exhibit
or schedule to this Agreement. The words "hereof," "herein" and "hereunder" and
words of similar import referring to this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation." Unless otherwise
specifically provided for herein, the term "or" shall not be deemed to be
exclusive. Information contained in a Section or Subsection of
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the PPC Disclosure Schedule, the Pennzoil Disclosure Schedule or the Quaker
State Disclosure Schedule (or expressly incorporated into such Section or
Subsection) shall qualify only those representations, warranties and agreements
of PPC, Pennzoil or Quaker State, as the case may be, made in the identically
numbered Section or Subsection of this Agreement, and shall not be deemed to
qualify the representations, warranties or agreements made in any other Section
or Subsection.
9.5 Severability. If any provision of this Agreement or the application of
any such provision to any Person or circumstance, shall be declared judicially
to be invalid, unenforceable or void, such decision shall not have the effect of
invalidating or voiding the remainder of this Agreement, it being the intent and
agreement of PPC, Pennzoil, Merger Sub and Quaker State that this Agreement
shall be deemed amended by modifying such provision to the extent necessary to
render it valid, legal and enforceable while preserving its intent or, if such
modification is not possible, by substituting therefor another provision that is
legal and enforceable and that achieves the same objective.
9.6 Assignment; Binding Effect. Neither this Agreement nor any of the
rights, benefits or obligations hereunder may be assigned by PPC, Pennzoil,
Merger Sub or Quaker State (whether by operation of law or otherwise) without
the prior written consent of all of the other parties. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by PPC, Pennzoil, Merger Sub and Quaker State and their respective
successors and permitted assigns.
9.7 No Third Party Beneficiaries. Except as provided in Section 6.12,
nothing in this Agreement, express or implied, is intended to or shall confer
upon any Person (other than Pennzoil, Merger Sub, PPC and Quaker State or their
respective successors or permitted assigns) any legal or equitable right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement,
and no Person (other than as so specified) shall be deemed a third party
beneficiary under or by reason of this Agreement.
9.8 Limited Liability. Notwithstanding any other provision of this
Agreement, no stockholder, director, officer, Affiliate, agent or representative
of PPC, Pennzoil, Merger Sub or Quaker State, in its capacity as such, shall
have any liability in respect of or relating to the covenants, obligations,
representations or warranties of such party under this Agreement or in respect
of any certificate delivered with respect hereto or thereto and, to the fullest
extent legally permissible, each of PPC, Pennzoil, Merger Sub and Quaker State,
for itself and its stockholders, directors, officers and Affiliates, waives and
agrees not to seek to assert or enforce any such liability that any such Person
otherwise might have pursuant to applicable law.
9.9 Entire Agreement. This Agreement (together with the other Transaction
Agreements, the Confidentiality Agreement, the exhibits and the Disclosure
Schedules and the other documents delivered pursuant hereto) constitute the
entire agreement of all the parties hereto and supersedes all prior and
contemporaneous agreements and understandings, both written and oral, between
the parties, or either of them, with respect to the subject matter hereof. All
exhibits and schedules attached to this Agreement and the Disclosure Schedules
are expressly made a part of, and incorporated by reference into, this
Agreement.
9.10 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware without giving effect to the
conflicts of law principles thereof. EACH OF THE PARTIES TO THIS AGREEMENT
HEREBY IRREVOCABLY AND UNCONDITIONALLY (i) AGREES TO BE SUBJECT TO, AND HEREBY
CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE STATE OF DELAWARE
AND OF THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE, (ii) TO THE EXTENT
SUCH PARTY IS NOT OTHERWISE SUBJECT TO SERVICE OF PROCESS IN THE STATE OF
DELAWARE, HEREBY APPOINTS THE CORPORATION TRUST COMPANY, AS SUCH PARTY'S AGENT
IN THE STATE OF DELAWARE FOR ACCEPTANCE OF LEGAL PROCESS AND (iii) AGREES THAT
SERVICE MADE ON ANY SUCH AGENT SET FORTH IN (ii) ABOVE SHALL HAVE THE SAME LEGAL
FORCE AND EFFECT AS IF SERVED UPON SUCH PARTY PERSONALLY WITHIN THE STATE OF
DELAWARE.
9.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one agreement binding on PPC,
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Pennzoil and Quaker State, notwithstanding that not all parties are signatories
to the original or the same counterpart.
9.12 Retention Pay Program. After the date hereof, Quaker State shall
implement a retention pay program in the form of Exhibit G attached hereto
("Retention Pay Program") for certain Quaker State Employees, which shall
provide for payments to such Quaker State Employees if such employees remain in
the employ of Quaker State or its Subsidiaries until the earlier of (i) the
Effective Time and (ii) the Termination Date. Pennzoil will fund up to
$15,000,000 from time to time for the Retention Program. Once paid, any such
amount funded by Pennzoil with respect to the Retention Program will not be
refundable by Quaker State, provided that if the Termination Fee is required to
be paid by Quaker State to Pennzoil, the full amounts previously funded by
Pennzoil shall be immediately repaid by Quaker State to Pennzoil. Pennzoil will
fund the amounts required by Quaker State to pay the Quaker State Employees
participating in the Retention Program as such amounts become payable by Quaker
State to the participating Quaker State Employees. If Pennzoil's retention pay
obligations have not been fully funded at the time of any termination of this
Agreement or at the Effective Time, the balance of such retention pay amount
will be paid by Pennzoil to Quaker State upon such termination or upon the
Effective Time, subject to the proviso above. The Quaker State Employees
participating in the Retention Program will be determined by Quaker State
following consultation with Pennzoil. Pennzoil and PPC acknowledge that such
payment is for good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PENNZOIL PRODUCTS COMPANY
By: /s/ DAVID P. ALDERSON, II
----------------------------------
Name: David P. Alderson, II
Title: Vice President
DOWNSTREAM MERGER COMPANY
By: /s/ DAVID P. ALDERSON, II
----------------------------------
Name: David P. Alderson, II
Title: Vice President
QUAKER STATE CORPORATION
By: /s/ HERBERT M. BAUM
----------------------------------
Name: Herbert M. Baum
Title: Chairman of the Board and
Chief Executive Officer
PENNZOIL COMPANY
By: /s/ JAMES L. PATE
----------------------------------
Name: James L. Pate
Title: Chairman of the Board and
Chief Executive Officer
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ANNEX B
DISTRIBUTION AGREEMENT
DATED AS OF APRIL 14, 1998
BETWEEN
PENNZOIL COMPANY
AND
PENNZOIL PRODUCTS COMPANY
<PAGE> 188
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I DEFINITIONS................................................. B-1
Section 1.01 General..................................................... B-1
Section 1.02 References to Time.......................................... B-6
ARTICLE II PRELIMINARY TRANSACTIONS.................................... B-6
Section 2.01 Completed Transactions...................................... B-6
Section 2.02 Business Separation......................................... B-6
Section 2.03 Certificate of Incorporation; By-laws....................... B-8
Section 2.04 Issuance of Stock........................................... B-8
Section 2.05 Other Agreements............................................ B-8
Section 2.06 Financing................................................... B-8
Section 2.07 Registration and Listing.................................... B-8
Section 2.08 Transfers Not Effected Prior to the Distribution; Transfers
Deemed Effective as of the Distribution Date.............. B-9
ARTICLE III THE DISTRIBUTION............................................ B-9
Section 3.01 Record Date and Distribution Date........................... B-9
Section 3.02 The Agent................................................... B-9
Section 3.03 Delivery of Share Certificates to the Agent................. B-9
Section 3.04 The Distribution............................................ B-10
ARTICLE IV SURVIVAL AND INDEMNIFICATION................................ B-10
Section 4.01 Survival of Agreements...................................... B-10
Section 4.02 Indemnification............................................. B-10
Section 4.03 Procedures for Indemnification for Third-Party Claims....... B-10
Section 4.04 Remedies Cumulative......................................... B-11
ARTICLE V CERTAIN ADDITIONAL COVENANTS................................ B-11
Section 5.01 Notices to Third Parties.................................... B-11
Section 5.02 Licenses and Permits........................................ B-12
Section 5.03 Intercompany Agreements..................................... B-12
Section 5.04 Further Assurances.......................................... B-12
Section 5.05 Guarantee Obligations and Liens............................. B-12
Section 5.06 Non-Competition............................................. B-13
Section 5.07 Exclusive Management........................................ B-13
ARTICLE VI ACCESS TO INFORMATION....................................... B-13
Section 6.01 Provision of Corporate Records.............................. B-13
Section 6.02 Access to Information....................................... B-14
Section 6.03 Production of Witnesses..................................... B-14
Section 6.04 Retention of Records........................................ B-15
Section 6.05 Confidentiality............................................. B-15
Section 6.06 Cooperation with Respect to Government Reports and
Filings................................................... B-15
ARTICLE VII NO REPRESENTATIONS OR WARRANTIES............................ B-16
Section 7.01 No Representations or Warranties............................ B-16
ARTICLE VIII MISCELLANEOUS............................................... B-16
Section 8.01 Conditions to the Distribution.............................. B-16
Section 8.02 Complete Agreement.......................................... B-17
Section 8.03 Expenses.................................................... B-17
Section 8.04 Governing Law............................................... B-17
Section 8.05 Notices..................................................... B-17
</TABLE>
B-i
<PAGE> 189
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 8.06 Amendment and Modification.................................. B-18
Section 8.07 Successors and Assigns; No Third-Party Beneficiaries........ B-18
Section 8.08 Counterparts................................................ B-18
Section 8.09 Interpretation.............................................. B-18
Section 8.10 Severability................................................ B-18
Section 8.11 References; Construction.................................... B-18
Section 8.12 Termination................................................. B-18
Section 8.13 Quaker State Reasonable Consent............................. B-19
Section 8.14 Consent to Jurisdiction and Service of Process.............. B-19
Section 8.15 Certain Litigation.......................................... B-19
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Form of Employee Benefits Agreement
Exhibit B Form of Tax Separation Agreement
Exhibit C Form of Trademark License Agreement
Exhibit D Form of Transition Services Agreement
</TABLE>
B-ii
<PAGE> 190
DISTRIBUTION AGREEMENT
This DISTRIBUTION AGREEMENT (this "Agreement"), dated as of April 14, 1998,
by and between Pennzoil Company, a Delaware corporation ("Pennzoil"), and
Pennzoil Products Company, a Delaware corporation and a wholly owned subsidiary
of Pennzoil ("PPC").
RECITALS
A. The Merger Agreement. Pennzoil, PPC, Downstream Merger Company, a
Delaware corporation and wholly owned subsidiary of PPC ("Merger Sub"), and
Quaker State Corporation, a Delaware corporation ("Quaker State"), have entered
into an Agreement and Plan of Merger, dated as of April 14, 1998 (the "Merger
Agreement"), pursuant to which, at the Effective Time (as defined therein),
Merger Sub will merge with and into Quaker State, with Quaker State being the
surviving corporation (the "Merger"), and Quaker State will become a wholly
owned subsidiary of PPC.
B. The Transaction Agreements. This Agreement and the other Transaction
Agreements (as defined herein) set forth certain transactions that are
conditions to consummation of the Merger.
C. Business Separation. PPC has heretofore distributed to Pennzoil certain
oil and gas assets that have historically been operated by Pennzoil. Prior to
the Distribution Date (as defined herein), and subject to the terms and
conditions set forth in this Agreement, Pennzoil intends to cause the transfer
to PPC or a wholly owned subsidiary of PPC of the capital stock of certain
Pennzoil subsidiaries that are engaged in phases of the PPC Business (as defined
herein), heretofore carried on by PPC (the "Contribution"); and Pennzoil and PPC
shall take the further steps set forth in Section 2.02 hereof intended to
separate more completely the PPC Business from the Pennzoil Business and to
ensure that the active business requirement of Section 355(b)(2) of the Internal
Revenue Code of 1986, as amended (the "Code"), is satisfied.
D. Financing. To apportion equitably the existing liabilities of Pennzoil
and all its Subsidiaries, including PPC, PPC shall enter into new financing
arrangements and, as described herein, shall use a portion of the loan proceeds
to repay existing indebtedness of PPC to Pennzoil, and PPC shall be relieved of
all other liabilities owed to Pennzoil.
E. The Distribution. Subject to the conditions set forth in this Agreement,
all of the issued and outstanding shares of common stock of PPC, par value $.10
per share ("PPC Common Stock"), will be distributed on a pro rata basis (the
"Distribution") to the holders as of the Record Date (as defined herein) of the
outstanding common stock of Pennzoil, par value $0.83 1/3 per share ("Pennzoil
Common Stock").
F. Intended Tax Consequences. The parties to this Agreement intend that the
Contribution and the Distribution qualify under Sections 355 and 368 of the
Code, that the Merger qualify under Section 368 of the Code, and that no gain or
loss for federal income tax purposes be recognized as a result of the
transactions described herein.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 General. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
Actuarial Study: as defined in Section 2.02(d) of this Agreement.
Affiliate: with respect to any specified Person, any other Person that
directly or indirectly, controls, is controlled by, or is under common
control with, such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power
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to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by contract or
otherwise; provided, however, that, for purposes of this Agreement, no
member of either Group shall be deemed to be an Affiliate of any member of
the other Group.
Agent: the distribution agent to be appointed by Pennzoil to
distribute the shares of PPC Common Stock pursuant to the Distribution.
Agreement: as defined in the preamble to this Agreement.
Approved for Listing: as defined in the Merger Agreement.
Asset: any and all assets and properties, tangible or intangible,
including, without limitation, the following: (i) cash, notes and accounts
and notes receivable (whether current or non-current); (ii) certificates of
deposit, banker's acceptances, stock, debentures, evidences of
indebtedness, certificates of interest or participation in profit-sharing
agreements, collateral-trust certificates, preorganization certificates or
subscriptions, transferable shares, investment contracts, voting-trust
certificates, fractional undivided interests in oil, gas or other mineral
rights, puts, calls, straddles, options and other securities of any kind;
(iii) intangible property rights, inventions, discoveries, know-how, United
States and foreign patents and patent applications, trade secrets,
confidential information, registered and unregistered trademarks, service
marks, service names, trade styles and trade names and associated goodwill;
statutory, common law and registered copyrights; applications for any of
the foregoing, rights to use the foregoing and other rights in, to and
under the foregoing; (iv) rights under leases, contracts, licenses,
permits, distribution arrangements, sales and purchase agreements, other
agreements and business arrangements; (v) real estate and buildings and
other improvements thereon; (vi) leasehold improvements, fixtures, trade
fixtures, machinery, equipment (including transportation and office
equipment), tools, dies and furniture; (vii) office supplies, production
supplies, spare parts, other miscellaneous supplies and other tangible
property of any kind; (viii) computer equipment and software; (ix) raw
materials, work-in-process, finished goods, consigned goods and other
inventories; (x) prepayments or prepaid expenses; (xi) claims, causes of
action, choses in action, rights under express or implied warranties,
rights of recovery and rights of setoff of any kind; (xii) the right to
receive mail, payments on accounts receivable and other communications;
(xiii) lists of customers, records pertaining to customers and accounts,
personnel records, lists and records pertaining to customers, suppliers and
agents, and books, ledgers, files and business records of every kind; (xiv)
advertising materials and other printed or written materials; (xv) goodwill
as a going concern and other intangible properties; (xvi) employee
contracts, including any rights thereunder to restrict an employee from
competing in certain respects; and (xvii) licenses and authorizations
issued by any governmental authority.
Automotive Aftermarket Business: as defined in Section 5.06 of this
Agreement.
Business: the PPC Business or the Pennzoil Business, as the case may
be.
Code: as defined in the Recitals to this Agreement.
Contribution: as defined in the Recitals to this Agreement.
Distribution: as defined in the Recitals to this Agreement.
Distribution Date: the date and time as of which the Distribution
shall be effected, to be determined by, or under the authority of, the
Board of Directors of Pennzoil consistent with this Agreement and the
Merger Agreement.
Effective Time: as defined in the Merger Agreement.
Employee Benefits Agreement: the Employee Benefits Agreement to be
entered into prior to the Distribution between Pennzoil and PPC,
substantially in the form of Exhibit A hereto, with such changes as are
acceptable to Pennzoil and PPC, with a Quaker State Consent.
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<PAGE> 192
Exchange Act: the Securities Exchange Act of 1934, as amended,
together with the rules and regulations of the SEC promulgated thereunder.
Governmental Authorities: as defined in the Merger Agreement.
Group: the Pennzoil Group or the PPC Group, as the case may be.
HSR Act: as defined in the Merger Agreement.
HSR Agencies: as defined in the Merger Agreement.
Indebtedness for Borrowed Money: as applied to PPC, means all
indebtedness, whether or not represented by bonds, debentures, notes or
other securities, created or assumed by PPC for the repayment of money
borrowed and, in accordance with generally accepted accounting principles,
recorded as a liability on PPC's balance sheet, and obligations, computed
in accordance with generally accepted accounting principles, as lessee
under leases that should be, in accordance with generally accepted
accounting principles, recorded as capital leases on PPC's balance sheet,
including, without limitation, the indebtedness and obligations listed on
Schedule 1.01(e) hereto.
Indemnifiable Losses: all losses, Liabilities, damages, claims,
demands, judgments or settlements of any nature or kind, including all
reasonable costs and expenses (legal, accounting or otherwise as such costs
are incurred) relating thereto, suffered (and not actually reimbursed by
insurance proceeds) by an Indemnitee, including any reasonable costs or
expenses of enforcing any indemnity hereunder.
Indemnifying Party: a Person that is obligated under this Agreement to
provide indemnification.
Indemnitee: a Person that may seek indemnification under this
Agreement.
Indemnity Payment: an amount that an Indemnifying Party is required to
pay to or in respect of an Indemnitee pursuant to Article IV.
Information: all records, books, contracts, instruments, computer data
and other data and information.
Intercompany Indebtedness: as defined in Section 2.06(b) of this
Agreement.
JLI: Jiffy Lube International, Inc., a Nevada corporation.
Liabilities: all debts, liabilities and obligations, whether absolute
or contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising, and whether or not the same
would properly be reflected on a balance sheet.
Litigation Matters: actual, threatened or future litigations,
investigations, claims or other legal matters that have been or may be
asserted against, or otherwise adversely affect, Pennzoil and/or PPC (or
members of either Group).
Losses: as defined in the Merger Agreement.
Material Adverse Effect: as defined in the Merger Agreement.
Merger: as defined in the Recitals to this Agreement.
Merger Agreement: as defined in the Recitals to this Agreement.
Merger Sub: as defined in the Recitals of this Agreement.
NYSE: New York Stock Exchange, Inc.
Oil and Gas Assets: the oil and gas assets and properties described on
Schedule 2.01(a) hereto.
Oil and Gas Liabilities: all Liabilities arising from or attributable
to the Oil and Gas Assets, including those Liabilities listed on Schedule
2.01(b) hereto.
Order: as defined in the Merger Agreement.
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Payment Amount: as defined in Section 2.06(b) of this Agreement.
Pennzoil: as defined in the preamble to this Agreement.
Pennzoil Assets: collectively, (i) all of the right, title and
interest immediately prior to the Distribution Date of Pennzoil and the
Pennzoil Subsidiaries in all Assets that are predominantly used or held for
use in, predominantly relating to or to the extent arising from, the
Pennzoil Business, (ii) the rights to use shared Assets as provided in
Article II hereof, (iii) all other Assets of Pennzoil and its Subsidiaries
to the extent specifically assigned to or retained by any member of the
Pennzoil Group pursuant to this Agreement or any other Transaction
Agreement, (iv) the capital stock of each Pennzoil Subsidiary, (v) all
rights of Pennzoil under the Transaction Agreements, (vi) the Oil and Gas
Assets and (vii) any additional Assets set forth on Schedule 1.01(c)
hereto.
Pennzoil Business: all of the businesses and operations conducted by
Pennzoil and its Subsidiaries (other than the PPC Business) at any time,
whether prior to, on or after the Distribution Date.
Pennzoil Common Stock: as defined in the Recitals to this Agreement.
Pennzoil Group: Pennzoil and the Pennzoil Subsidiaries immediately
after the Distribution Date.
Pennzoil Indemnitees: Pennzoil, each Affiliate of Pennzoil immediately
after the Distribution Date and each of their respective present and former
Representatives and each of the heirs, executors, successors and assigns of
any of the foregoing.
Pennzoil Liabilities: collectively, (i) all Liabilities of Pennzoil,
any Pennzoil Subsidiary or any Affiliate of Pennzoil, or arising out of the
Pennzoil Business, or arising out of or related to Assets of any of the
foregoing, whether incurred or occurring before, on or after the
Distribution Date, including the liabilities of Pennzoil under the
Transaction Agreements, (ii) the Oil and Gas Liabilities, (iii) all
Liabilities set forth on Schedule 1.01(d) hereto and (iv) all expenses
allocated to Pennzoil on Schedule 8.03 hereto.
Pennzoil Subsidiaries: all direct and indirect Subsidiaries of
Pennzoil immediately after the Distribution Date.
Person: an individual, a partnership, a joint venture, a corporation,
a limited liability company, a trust, an unincorporated organization or any
other entity or a government or any department or agency thereof.
PPC: as defined in the preamble to this Agreement.
PPC Assets: collectively, (i) all of the right, title and interest
immediately prior to the Distribution Date of PPC and the PPC Subsidiaries
in all Assets that are predominantly used or held for use in, predominantly
relating to or to the extent arising from, the PPC Business, (ii) the
rights to use shared Assets as provided in Article II hereof, (iii) all
other Assets of PPC and its Subsidiaries to the extent specifically
assigned to or retained by any member of the PPC Group pursuant to this
Agreement or any other Transaction Agreement, (iv) the capital stock of
each PPC Subsidiary, (v) all rights of PPC under the Transaction Agreements
and (vi) any additional Assets set forth on Schedule 1.01(a) hereto.
PPC Business: all of the businesses and operations conducted by PPC
and its Subsidiaries and JLI and its Subsidiaries prior to the Distribution
Date.
PPC Common Stock: as defined in the Recitals to this Agreement.
PPC Group: PPC and the PPC Subsidiaries.
PPC Indemnitees: PPC, each Affiliate of PPC immediately after the
Distribution Date and each of their respective present and former
Representatives and each of the heirs, executors, successors and assigns of
any of the foregoing.
PPC Liabilities: collectively, (i) all Liabilities of PPC, any PPC
Subsidiary or any Affiliate of PPC, or arising out of the PPC Business, or
arising out of or related to Assets of any of the foregoing, whether
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incurred or occurring before, on or after the Distribution Date, including
the liabilities of PPC under the Transaction Agreements, (ii) all
Liabilities set forth on Schedule 1.01(b) hereto and (iii) all expenses
allocated to PPC on Schedule 8.03 hereto; provided, that PPC Liabilities
shall not include the Oil and Gas Liabilities or the Pennzoil Liabilities.
PPC Subsidiaries: all direct and indirect Subsidiaries of PPC
immediately after the Distribution Date.
Privileged Information: with respect to either Group, Information
regarding a member of such Group, or any of its operations, Assets or
Liabilities (whether in documents or stored in any other form or known to
its employees or agents) that is or may be protected from disclosure
pursuant to the attorney-client privilege, the work product doctrine or
other applicable privileges, that a member of the other Group may come into
possession of or obtain access to pursuant to this Agreement or otherwise.
Pro Forma Financial Statements: as defined in the Merger Agreement.
Proxy Statement/Prospectus: as defined in the Merger Agreement.
Quaker State: as defined in the Recitals to this Agreement.
Quaker State Consent: as defined in the Merger Agreement.
Record Date: the close of business on the date to be determined by the
Board of Directors of Pennzoil as the record date for determining
stockholders of Pennzoil entitled to receive the Distribution, which date
shall be the day of, or the business day immediately preceding the day of,
the Effective Time, but the close of business on such date shall in any
event precede the Effective Time.
Registration Statements: a Registration Statement on Form 10 (or, if
such form is not appropriate, the appropriate form pursuant to the Exchange
Act) to be filed by PPC with the SEC to effect the registration of the PPC
Common Stock pursuant to the Exchange Act in connection with the
Distribution (and, if applicable, pursuant to the Securities Act) and the
registration statement to be filed by PPC with the SEC in connection with
the Merger pursuant to the Securities Act.
Requisite Approval: as defined in the Merger Agreement.
Representative: with respect to any Person, any of such Person's
directors, officers, employees, agents, consultants, advisors, accountants,
attorneys and representatives.
Richland: Richland Development Corporation, a Nevada corporation.
Savannah: Savannah Company Limited, a Bermuda corporation.
Savannah II: as defined in Section 2.02(d) of this Agreement.
SEC: the U.S. Securities and Exchange Commission.
Section 355 Ruling: as defined in the Merger Agreement.
Securities Act: the Securities Act of 1933, as amended, together with
the rules and regulations of the SEC promulgated thereunder.
Shared Facilities: any production, manufacturing, sales office or
other facility (whether owned or leased) of Pennzoil or any of its
Subsidiaries in which operations of both the Pennzoil Business and the PPC
Business are conducted as of the Distribution Date, all of which are listed
on Schedule 1.01(f) hereto.
Subsidiary: as defined in the Merger Agreement.
Tax Separation Agreement: the Tax Separation Agreement to be entered
into prior to the Distribution between Pennzoil and PPC, substantially in
the form of Exhibit B hereto, with such changes as are mutually agreed upon
by Pennzoil, PPC and Quaker State.
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Third-Party Claim: any claim, suit, derivative suit, arbitration,
inquiry, proceeding or investigation by or before any court, any
governmental or other regulatory or administrative agency or commission or
any arbitration tribunal asserted by a Person who or which is neither a
party hereto nor an Affiliate of a party hereto.
Trademark License Agreement: the Trademark License Agreement to be
entered into prior to the Distribution between Pennzoil and PPC,
substantially in the form of Exhibit C hereto, with such changes as are
acceptable to Pennzoil and PPC, with a Quaker State Consent.
Transaction Agreements: this Agreement, the Employee Benefits
Agreement, the Merger Agreement, the Tax Separation Agreement, the
Trademark License Agreement, the Transition Services Agreement and the
other agreements, if any, entered into or to be entered into in connection
with the Distribution as contemplated by Article II or Section 8.15 of this
Agreement.
Transition Services Agreement: the Transition Services Agreement to be
entered into prior to the Distribution between Pennzoil and PPC,
substantially in the form of Exhibit D hereto, with such changes as are
acceptable to Pennzoil and PPC, with a Quaker State Consent.
Section 1.02 References to Time. All references in this Agreement to times
of the day shall be to New York time.
ARTICLE II
PRELIMINARY TRANSACTIONS
Section 2.01 Completed Transactions. Subsequent to December 31, 1997, but
prior to the date hereof, (i) PPC shall have transferred the Oil and Gas Assets
to Pennzoil or a Pennzoil Subsidiary and (ii) Pennzoil shall have assumed and
agreed to pay, perform and discharge, as and when due, the Oil and Gas
Liabilities.
Section 2.02 Business Separation. On or prior to the Distribution Date,
the following transactions shall occur:
(a) Pennzoil shall transfer or cause to be transferred to PPC (i) all
of the capital stock of JLI, (ii) all of the capital stock of Pennzoil
Sales Corporation, a Delaware corporation, and (iii) all the capital stock
of Pennzoil Petroleums Ltd., a Delaware corporation.
(b) Pennzoil Receivables Company, a Delaware corporation, shall resell
all of the accounts receivable previously purchased from the Pennzoil
Business to Pennzoil or Pennzoil's designee, and after such sale, Pennzoil
shall contribute all the capital stock of Pennzoil Receivables Company to
PPC or PPC's designee.
(c) Separation of Assets. The Pennzoil Assets and the PPC Assets
(including Assets that are, or are contained in, the Shared Facilities)
shall, to the extent reasonably practicable (including taking into account
the costs of any actions taken), be severed, divided or otherwise separated
from each other so that a member of the Pennzoil Group or the PPC Group
will own and control the Pennzoil Assets and the PPC Assets, respectively,
as of the Distribution Date, provided that neither Pennzoil nor PPC shall
be obligated to make significant expenditures to effect such separation
prior to the Distribution Date. Actions taken and expenditures incurred to
separate the Shared Facilities shall be subject to the agreement of
Pennzoil and PPC and a Quaker State Consent. Such separation may include
transfer or subdivision of real property (including, without limitation,
the real property listed on Schedule 2.02(c) hereto), transfers of
registered intellectual property, subleasing or other division of shared
buildings or premises and allocation of shared working capital, equipment
and other Assets. Such separation shall be effected in a manner that does
not unreasonably disrupt either the Pennzoil Business or the PPC Business
and minimizes, to the extent practicable, current and future costs (and
losses of tax or other economic benefits) of the respective Businesses. To
the extent the separation of Assets cannot be achieved in a reasonably
practicable manner, the parties will enter into appropriate arrangements
regarding the shared Asset. Any costs related to the use of a shared Asset
that is not separated as of the Distribution Date shall
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be allocated using such reasonable manner as agreed by PPC and Pennzoil,
subject to a Quaker State Consent.
(d) Insurance. (i) Pennzoil shall cause the capital stock of Savannah
to be transferred from Richland to Pennzoil; (ii) Pennzoil shall
incorporate or cause to be incorporated a corporation ("Savannah II"), to
be wholly owned, directly or indirectly, by Pennzoil, with corporate power
and authority to conduct business substantially similar to that of
Savannah; (iii) Pennzoil shall cause Savannah to transfer to Savannah II
such portion of the Assets of Savannah, and shall cause Savannah II to
assume and be substituted in place of Savannah (and Savannah to be released
from) such portion of the Liabilities of Savannah, as determined in
accordance with the Actuarial Study, subject to the consent, approval or
authorization (a) of any such Governmental Authority the consent, approval
or authorization of which is legally required to be obtained for the
consummation of such transfer and assumption, (b) of Savannah's ceding
insurers and (c) of other relevant third parties; (iv) Pennzoil shall take
or cause to be taken all reasonably necessary action with respect to
Governmental Authorities ceding insurers and other relevant third parties
to effect the transfer of such Assets and the assumption of such
Liabilities; and (v) after such transfer and assumption, Pennzoil shall
transfer or cause to be transferred to PPC or its designee the capital
stock of Savannah. In addition, Pennzoil shall cause Richland and Savannah
to take such further action, including the sale of certain Liabilities of
Savannah to ceding or third-party insurers, as may be necessary to
facilitate the operations of Savannah and Savannah II as going concerns. In
connection with the transfer of Assets and the assumption of Liabilities
described in this Section 2.02(d), an independent actuary of recognized
standing jointly selected by Pennzoil and PPC shall conduct an actuarial
study (the "Actuarial Study") to determine reserves for the portion of
Savannah's existing Liabilities attributable to the Pennzoil Business, the
PPC Business and Richland, respectively. The Liabilities (taking
appropriate account of any sales made in accordance with the preceding
sentence) attributable to (i) the Pennzoil Business shall be assumed by
Savannah II, (ii) the PPC Business shall be retained by Savannah, and (iii)
Richland shall be allocated between Savannah and Savannah II in the
proportion based on the ratio of actuarially estimated Liabilities
attributable to the Pennzoil Business to actuarially estimated Liabilities
attributable to the PPC Business. Assets of Savannah shall be allocated in
the same proportion as Liabilities.
(e) Separation of Contractual Arrangements. On or prior to the
Distribution Date, Pennzoil and PPC will use their best efforts to amend,
in form and substance reasonably satisfactory to Quaker State, all
contractual arrangements between or among Pennzoil, PPC, their respective
Affiliates and any other Person (other than the contractual arrangements
relating to the Distribution and the Merger) that either (i) relate to both
the Pennzoil Business and the PPC Business or (ii) relate solely to the PPC
Business, but, by their terms, contain provisions relating to a member of
the Pennzoil Group, so that, after the Distribution Date, such contractual
arrangements (x) will relate solely to the PPC Business and (y) will
eliminate any provisions relating to a member of the Pennzoil Group and, in
either event, will inure to the benefit of the PPC Group on substantially
the same economic terms as such arrangements exist as of the date hereof.
By way of example, and not limitation, contractual arrangements of a type
described in the preceding sentence include (1) the real property leases
listed on Schedule 2.02(e), (2) all agreements relating to the business of
Pennzoil Receivables Company and (3) all agreements relating to the
purchase by non-Affiliates of Pennzoil of loans made to Persons who
participate in the PPC Business. If such amendments cannot be obtained, or
if an attempted amendment thereof would be ineffective or would adversely
affect the rights of PPC thereunder, Pennzoil and PPC will cooperate in
negotiating a mutually agreeable arrangement, in form and substance
reasonably satisfactory to Quaker State, under which PPC will obtain the
benefits and assume the obligations thereunder, including sub-contracting,
sub-licensing or sub-leasing to PPC, or under which Pennzoil will enforce
for the benefit of PPC, with PPC assuming Pennzoil's obligations, any and
all rights of Pennzoil against a third party thereto.
(f) Costs. Except as provided in the Tax Separation Agreement or
Section 2.05(b) hereof, the costs (and other out-of-pocket losses)
attributable to the separation of the Assets, including, without
limitation, the Shared Facilities, shall be allocated pursuant to Section
8.03 hereof.
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Section 2.03 Certificate of Incorporation; By-laws.
(a) Prior to the Distribution Date, the parties hereto shall take all
action necessary so that, at the Distribution Date, PPC's name shall be changed
as provided in Section 2.1(d) of the Merger Agreement.
(b) The Certificate of Incorporation and Bylaws of PPC immediately prior to
the Effective Time will be in the forms attached as Exhibits B and C,
respectively, to the Merger Agreement. Pennzoil and PPC shall take all corporate
and other necessary actions to ensure that all necessary amendments to the
current Certificate of Incorporation and Bylaws of PPC are duly authorized and
validly take effect prior to the Distribution Date.
Section 2.04 Issuance of Stock. Prior to the Distribution Date, the
parties hereto shall take all steps necessary so that the number of shares of
PPC Common Stock outstanding and held by Pennzoil shall equal the number of
shares of Pennzoil Common Stock outstanding on the Record Date.
Section 2.05 Other Agreements.
(a) Each of Pennzoil and PPC shall, prior to the Distribution Date, enter
into, or cause the appropriate members of the Group of which it is a member to
enter into, the other Transaction Agreements.
(b) The parties hereto acknowledge and agree that operation by members of
the Pennzoil Group or PPC Group of the Shared Facilities after the Distribution
Date may continue to require the joint occupation or use by the parties of
certain related premises or facilities (such as waste disposal, utilities,
security and other matters). The parties hereto shall enter into appropriate
arrangements regarding cost allocation and service provision with respect to
these matters and such arrangements shall be subject to a Quaker State Consent.
The agreements described in this paragraph (b) shall be included in the
definition of Transaction Agreements.
Section 2.06 Financing.
(a) Prior to the Distribution Date, PPC shall enter into third-party
financing arrangements, which shall be on terms reasonably acceptable to
Pennzoil and Quaker State. No member of the Pennzoil Group shall have any
Liability or obligation with respect to such financing arrangements.
(b) Immediately prior to the Distribution Date, PPC shall repay the
intercompany indebtedness and other intercompany accounts owed by PPC to
Pennzoil ("Intercompany Indebtedness"); provided, however, that Intercompany
Indebtedness shall not include trade payables in the aggregate amount of not
greater than $60 million owed by PPC to Pennzoil or any Pennzoil Subsidiary in
respect of crude oil; and provided, further, that the amount of such repayment
(the "Payment Amount") shall not exceed the lesser of (i) the amount of
Intercompany Indebtedness then owed by PPC to Pennzoil and (ii)(a) $500 million
plus (b) the cash or cash equivalents of PPC on hand at the Distribution Date
minus (c) the sum of (1) all the outstanding Indebtedness for Borrowed Money of
PPC as of the Distribution Date and (2) an amount equal to the cash paid or
payable to PPC pursuant to Section 2.06(c). Except as provided in Section 2.2(a)
of the Tax Separation Agreement, any Intercompany Indebtedness owed by PPC to
Pennzoil that exceeds the Payment Amount shall be contributed by Pennzoil to the
capital of PPC (as evidenced in writing in form and substance reasonably
satisfactory to Quaker State) and no payment shall be due thereon prior to, on
or after the Distribution Date.
(c) Notwithstanding anything herein to the contrary, PPC shall be entitled
to, and, no later than immediately before the Distribution, Pennzoil shall
transfer or cause to be transferred to PPC, an amount of cash or other readily
available funds equal to 68% of the aggregate total of the exercise prices per
share of any Pennzoil stock option that is exercised in the period commencing on
the date hereof and ending immediately prior to the Distribution.
Section 2.07 Registration and Listing. Prior to the Distribution Date:
(a) The parties shall take such efforts regarding the Registration
Statements and the Proxy Statement/Prospectus as provided in the Merger
Agreement.
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(b) The parties hereto shall use reasonable efforts to take all such
action as may be necessary or appropriate under state securities and blue
sky laws in connection with the transactions contemplated by this
Agreement.
(c) PPC and Pennzoil shall prepare, and PPC and Pennzoil shall file
and seek to make effective, an application for the listing of the PPC
Common Stock on the NYSE, subject to official notice of issuance.
(d) The parties hereto shall cooperate in preparing, filing with the
SEC and causing to become effective any registration statements or
amendments thereto which are necessary or appropriate to reflect the
establishment of, or amendments to, any employee benefit plans contemplated
by the Employee Benefits Agreement requiring registration under the
Securities Act.
Section 2.08 Transfers Not Effected Prior to the Distribution; Transfers
Deemed Effective as of the Distribution Date. To the extent that any transfers
contemplated by this Article II shall not have been consummated on or prior to
the Distribution Date, the parties shall cooperate to effect such transfers as
promptly following the Distribution Date as shall be practicable. Nothing herein
shall be deemed to require the transfer of any Assets or the assumption of any
Liabilities which by their terms or operation of law cannot be transferred or
assumed; provided, however, that Pennzoil and PPC and their respective
Subsidiaries shall cooperate to obtain any necessary consents or approvals for
the transfer of all Assets and the assumption of all Liabilities contemplated to
be transferred or assumed pursuant to this Article II. In the event that any
such transfer of Assets or assumption of Liabilities has not been consummated,
effective as of and after the Distribution Date, the party retaining such Asset
or Liability shall thereafter hold such Asset in trust for the use and benefit
of the party entitled thereto (at the expense of the party entitled thereto) and
retain such Liability for the account of the party by whom such Liability is to
be assumed pursuant hereto, and take such other action as may be reasonably
requested by the party to which such Asset is to be transferred, or by whom such
Liability is to be assumed, as the case may be, in order to place such party,
insofar as reasonably possible, in the same position as would have existed had
such Asset or Liability been transferred or assumed as contemplated hereby. As
and when any such Asset becomes transferable or such Liability can be assumed,
such transfer or assumption shall be effected forthwith. Subject to the
foregoing, the parties agree that, as of the Distribution Date (or such earlier
time as any such Asset may have been acquired or Liabilities assumed), each
party hereto shall be deemed to have acquired complete and sole beneficial
ownership over all of the Assets, together with all rights, powers and
privileges incident thereto, and shall be deemed to have assumed in accordance
with the terms of this Agreement all of the Liabilities, and all duties,
obligations and responsibilities incident thereto, which such party is entitled
to acquire or required to assume pursuant to the terms of this Agreement.
ARTICLE III
THE DISTRIBUTION
Section 3.01 Record Date and Distribution Date. Subject to the
satisfaction of the conditions set forth in Section 8.01, the Board of Directors
of Pennzoil, consistent with the Merger Agreement and Delaware law, shall
establish the Record Date and the Distribution Date and any appropriate
procedures in connection with the Distribution.
Section 3.02 The Agent. Prior to the Distribution Date, Pennzoil shall
enter into an agreement with the Agent providing for, among other things, the
Distribution to the holders of Pennzoil Common Stock in accordance with this
Article III.
Section 3.03 Delivery of Share Certificates to the Agent. Prior to the
Distribution Date, Pennzoil shall deliver to the Agent a share certificate
representing (or authorize the related book-entry transfer of) all of the
outstanding shares of PPC Common Stock to be distributed in connection with the
Distribution. After the Distribution Date, upon the request of the Agent, PPC
shall provide all certificates for shares (or book-entry transfer
authorizations) of PPC Common Stock that the Agent shall require in order to
effect the Distribution.
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Section 3.04 The Distribution. Subject to the terms and conditions of this
Agreement, PPC shall instruct the Agent to distribute, as of the Distribution
Date, certificates representing one share of PPC Common Stock in respect of each
outstanding share of Pennzoil Common Stock held by holders of record of Pennzoil
Common Stock on the Record Date.
ARTICLE IV
SURVIVAL AND INDEMNIFICATION
Section 4.01 Survival of Agreements. All representations, warranties,
covenants and agreements of the parties hereto contained in this Agreement shall
survive the Distribution Date.
Section 4.02 Indemnification.
(a) Except as specifically otherwise provided in the other Transaction
Agreements, the PPC Group shall indemnify, defend and hold harmless the Pennzoil
Indemnitees from and against all Indemnifiable Losses arising out of or due to
the failure or alleged failure of any member of the PPC Group to pay or satisfy
any PPC Liabilities, whether such Indemnifiable Losses relate to events,
occurrences or circumstances occurring or existing, or whether such
Indemnifiable Losses are asserted, before, on or after the Distribution Date, or
to perform any of its obligations under this Agreement.
(b) Except as specifically otherwise provided in the other Transaction
Agreements, the Pennzoil Group shall indemnify, defend and hold harmless the PPC
Indemnitees from and against (i) all Indemnifiable Losses arising out of or due
to the failure or alleged failure of any member of the Pennzoil Group to pay or
satisfy any Pennzoil Liabilities, whether such Indemnifiable Losses relate to
events, occurrences or circumstances occurring or existing, or whether such
Indemnifiable Losses are asserted, before, on or after the Distribution Date, or
to perform any of its obligations under this Agreement; (ii) all Indemnifiable
Losses arising from or relating to all litigation brought by pre-Merger
stockholders of Pennzoil and relating to any events or transactions occurring on
or prior to the Distribution Date or relating to the transactions contemplated
by the Transaction Agreements; (iii) all Indemnifiable Losses arising out of or
due to the failure of Pennzoil or the Pennzoil Subsidiaries to transfer to PPC
good and marketable title, free and clear of all liens and encumbrances, to all
Assets (including stock) transferred or to be transferred to PPC pursuant to
Section 2.01 or Section 2.02 hereof; and (iv) all Indemnifiable Losses arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact, or omission or alleged omission to state a material fact required
to be stated, in the Registration Statements or the Proxy Statement/Prospectus
or any preliminary or final form thereof or any amendment thereto, or necessary
to make the statements therein not misleading; provided, however, that Pennzoil
shall not be responsible for information, if any, provided by Quaker State
specifically for inclusion in, or incorporation by reference into, any such
Proxy Statement/Prospectus or Registration Statement.
(c) Notwithstanding anything to the contrary set forth herein,
indemnification relating to any arrangements between any member of the Pennzoil
Group and any member of the PPC Group for the provision after the Distribution
Date of goods and services in the ordinary course shall be governed by the terms
of such arrangements and not by this Section or as otherwise set forth in this
Agreement and the other Transaction Agreements.
Section 4.03 Procedures for Indemnification for Third-Party Claims.
(a) Pennzoil shall, and shall cause the other Pennzoil Indemnitees to,
notify PPC in writing promptly after learning of any Third-Party Claim for which
any Pennzoil Indemnitee intends to seek indemnification from PPC under this
Agreement. PPC shall, and shall cause the other PPC Indemnitees to, notify
Pennzoil in writing promptly after learning of any Third-Party Claim for which
any PPC Indemnitee intends to seek indemnification from Pennzoil under this
Agreement. The failure of any Indemnitee to give such notice shall not relieve
any Indemnifying Party of its obligations under this Article except to the
extent that such Indemnifying Party or its Affiliate is actually prejudiced by
such failure to give notice. Such notice shall describe such Third-Party Claim
in reasonable detail considering the Information provided to the Indemnitee.
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(b) Except as otherwise provided in paragraph (c) of this Section, an
Indemnifying Party may, by notice to the Indemnitee and to Pennzoil, if PPC is
the Indemnifying Party, or to the Indemnitee and PPC, if Pennzoil is the
Indemnifying Party, at any time after receipt by such Indemnifying Party of such
Indemnitee's notice of a Third-Party Claim, undertake (itself or through another
member of the Group of which the Indemnifying Party is a member) the defense or
settlement of such Third-Party Claim. If an Indemnifying Party undertakes the
defense of any Third-Party Claim, such Indemnifying Party shall control the
investigation and defense or settlement thereof, and the Indemnitee may not
settle or compromise such Third-Party Claim, except that such Indemnifying Party
shall not (i) require any Indemnitee, without its prior written consent, to take
or refrain from taking any action in connection with such Third-Party Claim, or
make any public statement, which such Indemnitee reasonably considers to be
against its interests, nor (ii) without the prior written consent of the
Indemnitee and of Pennzoil, if the Indemnitee is a Pennzoil Indemnitee, or the
Indemnitee and of PPC, if the Indemnitee is a PPC Indemnitee, consent to any
settlement that does not include as a part thereof an unconditional release of
the Indemnitees from liability with respect to such Third-Party Claim or that
requires the Indemnitee or any of its Representatives or Affiliates to make any
payment that is not fully indemnified under this Agreement or to be subject to
any non-monetary remedy; and subject to the Indemnifying Party's control rights,
as specified herein, the Indemnitees may participate in such investigation and
defense, at their own expense. Following the provision of notices to the
Indemnifying Party, until such time as an Indemnifying Party has undertaken the
defense of any Third-Party Claim as provided herein, such Indemnitee shall
control the investigation and defense or settlement thereof, without prejudice
to its right to seek indemnification hereunder.
(c) An Indemnifying Party shall not be entitled to assume the defense of
any Third-Party Claim (and shall be liable for the reasonable fees and expenses
of counsel (including legal counsel) incurred by the Indemnitee in defending
such Third-Party Claim) if, in the Indemnitee's reasonable judgment, a conflict
of interest between such Indemnitee and such Indemnifying Party exists in
respect of such Third-Party Claim.
(d) In no event shall an Indemnifying Party be liable for the fees and
expenses of more than one counsel for all Indemnitees (in addition to local
counsel and its own counsel, if any) in connection with any one action, or
separate but similar or related actions, in the same jurisdiction arising out of
the same general allegations or circumstances.
(e) If the Indemnifying Party undertakes the defense or settlement of a
Third-Party Claim, the Indemnitee shall make available to the Indemnifying Party
and its counsel all information and documents reasonably available to it which
relate to any Third-Party Claim, and otherwise cooperate as may reasonably be
required in connection with the investigation, defense and settlement thereof,
subject to the terms and conditions of a mutually acceptable joint defense
agreement. Any joint defense agreement entered into by PPC or Pennzoil with any
third party relating to any Third-Party Claim shall provide that PPC or Pennzoil
may, if requested, provide information obtained through any such agreement to
the PPC Indemnitees and/or the Pennzoil Indemnitees.
Section 4.04 Remedies Cumulative. The remedies provided in this Article IV
shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any other remedies against any Indemnifying
Party. However, the procedures set forth in Section 4.03 shall be the exclusive
procedures governing any indemnity action brought under this Agreement, except
as otherwise specifically provided in any of the other Transaction Agreements.
ARTICLE V
CERTAIN ADDITIONAL COVENANTS
Section 5.01 Notices to Third Parties. In addition to the actions
described in Section 5.02, the members of the Pennzoil Group and the members of
the PPC Group shall cooperate to make all other filings and give notice to and
obtain consents from all third parties that may reasonably be required to
consummate the transactions contemplated by this Agreement and the other
Transaction Agreements.
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Section 5.02 Licenses and Permits. Each party hereto shall cause the
appropriate members of its Group to prepare and file with the appropriate
licensing and permitting authorities applications for the transfer or issuance,
as may be necessary or advisable in connection with the transactions
contemplated by this Agreement and the other Transaction Agreements, to its
Group of all material governmental licenses and permits required for the members
of its Group to operate its Business after the Distribution Date. The members of
the PPC Group and the members of the Pennzoil Group shall cooperate and use all
reasonable efforts to secure the transfer or issuance of the licenses and
permits.
Section 5.03 Intercompany Agreements.
(a) Except as set forth on Schedule 5.03 hereto, all contracts, licenses,
agreements, commitments or other arrangements, formal or informal, between any
member of the Pennzoil Group, on the one hand, and any member of the PPC Group,
on the other hand, in existence as of the Distribution Date, pursuant to which
any member of either Group makes payments in respect of taxes to any member of
the other Group or provides to any member of the other Group goods or services
(including, without limitation, management, administrative, legal, financial,
accounting, data processing, insurance or technical support), or the use of any
Assets of any member of the other Group, or the secondment of any employee, or
pursuant to which rights, privileges or benefits are afforded to members of
either Group as Affiliates of the other Group, shall terminate as of the close
of business on the day prior to the Distribution Date, except as specifically
provided herein or in the other Transaction Agreements. From and after the
Distribution Date, no member of either Group shall have any rights under any
such contract, license, agreement, commitment or arrangement with any member of
the other Group, except as specifically provided herein or in the other
Transaction Agreements.
(b) Each contract, license, agreement, commitment or other arrangement
listed on Schedule 5.03 hereto was or will be negotiated on an arm's-length
basis, or contains or will contain terms that are at least as favorable to PPC
as could have been obtained had such contract, license, agreement, commitment or
other arrangement been negotiated on an arm's-length basis.
Section 5.04 Further Assurances. In addition to the actions specifically
provided for elsewhere in this Agreement, each of the parties hereto shall use
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things reasonably necessary, proper or advisable under
applicable laws, regulations and agreements to consummate and make effective the
transactions contemplated by this Agreement and the other Transaction
Agreements. Without limiting the foregoing, each party hereto shall cooperate
with the other party, and execute and deliver, or use reasonable efforts to
cause to be executed and delivered, all instruments, and to make all filings
with, and to obtain all consents, approvals or authorizations of, any
governmental or regulatory authority or any other Person under any permit,
license, agreement, indenture or other instrument, and take all such other
actions as such party may reasonably be requested to take by any other party
hereto from time to time, consistent with the terms of this Agreement and the
other Transaction Agreements, in order to effectuate the provisions and purposes
of this Agreement.
Section 5.05 Guarantee Obligations and Liens.
(a) Pennzoil and PPC shall cooperate, and shall cause their respective
Groups to cooperate, (x) to terminate, or to cause a member of the PPC Group to
be substituted in all respects for any member of Pennzoil Group in respect of,
all obligations of any member of the Pennzoil Group under any PPC Liabilities
for which such member of the Pennzoil Group may be liable, as guarantor,
original tenant, primary obligor or otherwise, and (y) to terminate, or to cause
PPC Assets to be substituted in all respects for any Pennzoil Assets in respect
of, any liens or encumbrances on Pennzoil Assets which are securing any PPC
Liabilities. If such a termination or substitution is not effected by the
Distribution Date, (i) PPC shall indemnify and hold harmless the Pennzoil
Indemnitees for any Indemnifiable Loss arising from or relating thereto, and
(ii) without the prior written consent of Pennzoil, from and after the
Distribution Date, PPC shall not, and shall not permit any member of the PPC
Group to, renew or extend the term of, increase its obligations under, or
transfer to a third party, any loan, lease, contract or other obligation for
which a member of the Pennzoil Group is or may be liable or for which any
Pennzoil Asset is or may be encumbered unless all obligations of the Pennzoil
Group and all liens and encumbrances on any Pennzoil Asset with respect thereto
are thereupon terminated by documentation reasonably satisfactory in form and
substance to Pennzoil.
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(b) Pennzoil and PPC shall cooperate, and shall cause their respective
Groups to cooperate, (x) to terminate, or to cause a member of the Pennzoil
Group to be substituted in all respects for any member of PPC Group in respect
of, all obligations of any member of the PPC Group under any Pennzoil
Liabilities for which such member of the PPC Group may be liable, as guarantor,
original tenant, primary obligor or otherwise, and (y) to terminate, or to cause
Pennzoil Assets to be substituted in all respects for any PPC Assets in respect
of, any liens or encumbrances on PPC Assets which are securing any Pennzoil
Liabilities. If such a termination or substitution is not effected by the
Distribution Date, (i) Pennzoil shall indemnify and hold harmless the PPC
Indemnitees for any Indemnifiable Loss arising from or relating thereto, and
(ii) without the prior written consent of PPC, from and after the Distribution
Date, Pennzoil shall not, and shall not permit any member of the Pennzoil Group
to, renew or extend the term of, increase its obligations under, or transfer to
a third party, any loan, lease, contract or other obligation for which a member
of the PPC Group is or may be liable or for which any PPC Asset is or may be
encumbered unless all obligations of the PPC Group and all liens and
encumbrances on any PPC Asset with respect thereto are thereupon terminated by
documentation reasonably satisfactory in form and substance to PPC.
Section 5.06 Non-Competition. Pennzoil agrees that, for a period of 5
years after the Distribution Date, it shall not, and it shall not permit its
Subsidiaries to, anywhere in the world where the PPC Business or the Quaker
State Business is currently conducted, directly or indirectly, engage in the
Automotive Aftermarket Business; provided, however, that nothing herein shall
prevent Pennzoil from acquiring the assets or equity of, or being acquired by, a
Person after the Distribution Date, if, after such acquisition, the combined
entity derives less than 15% of its revenues from the Automotive Aftermarket
Business. The "Automotive Aftermarket Business" includes, but is not limited to,
(a) the marketing of (i) lubricating oils, (ii) carburetor cleaners, (iii) oil,
air and fuel filters or (iv) fuel and oil additives, (b) the rendering of
marketing, consulting or other services with respect to the operation of
automobile fast lubrication and fluid maintenance centers, (c) the production or
marketing of tire inflaters or tire repair products and (d) the production or
marketing of (i) automotive air fresheners, (ii) automotive sun shades, (iii)
automotive organizers and other accessories, (iv) automotive glass treatment,
(v) glass cleaners, (vi) glass polishes, (vii) automotive waxes, (viii)
automotive protectants, (ix) tire or wheel cleaners and treatments, (x) coolant
and cooling system additives, (xi) car wash supplies and equipment systems,
(xii) used oil, filters and fluid collection and recycling services and (xiii)
any other product or products sold, produced or marketed in the automotive
aftermarket business.
Section 5.07 Exclusive Management. Pennzoil and PPC agree that, following
the Distribution Date, none of the officers of Pennzoil or any Pennzoil
Subsidiary will simultaneously hold a position as an officer of PPC or any PPC
Subsidiary.
ARTICLE VI
ACCESS TO INFORMATION
Section 6.01 Provision of Corporate Records. Prior to or as promptly as
practicable after the Distribution Date, Pennzoil may retain complete and
accurate copies of but shall deliver to PPC all corporate books and records of
the PPC Group in its possession and copies of the relevant portions of all
corporate books and records of the Pennzoil Group relating directly and
predominantly to the PPC Assets, the PPC Business, or the Liabilities of the PPC
Group, including, in each case, all active agreements, active litigation files
and government filings. From and after the Distribution Date, all such books,
records and copies shall be the property of PPC. Prior to or as promptly as
practicable after the Distribution Date, PPC may retain complete and accurate
copies of but shall deliver to Pennzoil all corporate books and records of the
Pennzoil Group in its possession and copies of the relevant portions of all
corporate books and records of the PPC Group relating directly and predominantly
to the Pennzoil Assets, the Pennzoil Business, or the Liabilities of the
Pennzoil Group, including, in each case, all active agreements, active
litigation files and government filings. From and after the Distribution Date,
all such books, records and copies shall be the property of Pennzoil. The costs
and expenses incurred in the provision of records or other information to a
party shall be paid for (including reimbursement of costs incurred by the
providing party) by Pennzoil.
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Section 6.02 Access to Information. From and after the Distribution Date,
each of Pennzoil and PPC shall afford to the other and to the other's
Representatives reasonable access and duplicating rights during normal business
hours to all Information within the possession or control of such party's Group
relating to the other party's Group's pre-Distribution business, Assets or
Liabilities or relating to or arising in connection with the relationship
between the Groups on or prior to the Distribution Date, insofar as such access
is reasonably required for a reasonable purpose, subject to the provisions below
regarding Privileged Information. Without limiting the foregoing, Information
may be requested under this Section 6.02 for audit, accounting, claims,
litigation and tax purposes, as well as for purposes of fulfilling disclosure
and reporting obligations.
In furtherance of the foregoing:
(a) Each party hereto acknowledges that: (i) each of Pennzoil and PPC
(and the members of the Pennzoil Group and the PPC Group, respectively) has
or may obtain Privileged Information; (ii) there are a number of Litigation
Matters affecting each or both of Pennzoil and PPC; (iii) both Pennzoil and
PPC have a common legal interest in Litigation Matters, in the Privileged
Information and in the preservation of the confidential status of the
Privileged Information, in each case relating to the pre-Distribution
business of the Pennzoil Group or the PPC Group or relating to or arising
in connection with the relationship between the Groups on or prior to the
Distribution Date; and (iv) both Pennzoil and PPC intend that the
transactions contemplated hereby and by the Merger Agreement and the other
Transaction Agreements and any transfer of Privileged Information in
connection therewith shall not operate as a waiver of any potentially
applicable privilege.
(b) Each of Pennzoil and PPC agrees, on behalf of itself and each
member of the Group of which it is a member, not to disclose or otherwise
waive any privilege attaching to any Privileged Information relating to the
pre-Distribution business of the PPC Group or the Pennzoil Group,
respectively, or relating to or arising in connection with the relationship
between the Groups on or prior to the Distribution Date, without providing
prompt written notice to and obtaining the prior written consent of the
other, which consent shall not be unreasonably withheld and shall not be
withheld if the other party certifies that such disclosure is to be made in
response to a likely threat of suspension or debarment or similar action;
provided, however, that Pennzoil and PPC shall not be required to give any
such notice or obtain any such consent and may make such disclosure or
waiver with respect to Privileged Information if such Privileged
Information relates solely to the pre-Distribution business of the Pennzoil
Group in the case of Pennzoil or the PPC Group in the case of PPC. In the
event of a disagreement between any member of the Pennzoil Group and any
member of the PPC Group concerning the reasonableness of withholding such
consent, no disclosure shall be made prior to a resolution of such
disagreement by a court of competent jurisdiction, provided that the
limitations in this sentence shall not apply in the case of disclosure
required by law and so certified as provided in the first sentence of this
paragraph.
(c) Upon any member of the Pennzoil Group or any member of the PPC
Group receiving any subpoena or other compulsory disclosure notice from a
court, other governmental agency or otherwise which requests disclosure of
Privileged Information, in each case relating to pre-Distribution business
of the PPC Group or the Pennzoil Group, respectively, or relating to or
arising in connection with the relationship between the Groups on or prior
to the Distribution Date, the recipient of the notice shall promptly
provide to the other Group (following the notice provisions set forth
herein) a copy of such notice, the intended response, and all materials or
information relating to the other Group that might be disclosed. In the
event of a disagreement as to the intended response or disclosure, unless
and until the disagreement is resolved as provided in paragraph (b) of this
Section, the parties shall cooperate to assert all defenses to disclosure
claimed by either party's Group, and shall not disclose any disputed
documents or information until all legal defenses and claims of privilege
have been finally determined, except as otherwise required by a court order
requiring such disclosure.
Section 6.03 Production of Witnesses. Subject to Section 6.02, after the
Distribution Date, each of Pennzoil and PPC shall, and shall cause each member
of the Pennzoil Group and the PPC Group, respectively, to make available to PPC
or Pennzoil or any member of the PPC Group or of the Pennzoil Group, as the case
may be, upon written request, such Group's directors, officers, employees and
agents as
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witnesses to the extent that any such Person may reasonably be required in
connection with any Litigation Matters, administrative or other proceedings in
which the requesting party may from time to time be involved and relating to the
pre-Distribution business of the Pennzoil Group or the PPC Group or relating to
or in connection with the relationship between the Groups on or prior to the
Distribution Date. The costs and expenses incurred in the provision of such
witnesses shall be paid by the party requesting the availability of such
persons.
Section 6.04 Retention of Records. Except as otherwise agreed in writing,
or as otherwise provided in the other Transaction Agreements, each of Pennzoil
and PPC shall, and shall cause the members of the Group of which it is a member
to, retain all Information in such party's Group's possession or under its
control relating directly and predominantly to the pre-Distribution business,
Assets or Liabilities of the other party's Group until such Information is at
least ten years old or until such later date as may be required by law, except
that if, prior to the expiration of such period, any member of either party's
Group wishes to destroy or dispose of any such Information that is at least
three years old, prior to destroying or disposing of any of such Information,
(a) the party whose Group is proposing to dispose of or destroy any such
Information shall provide no less than 30 days' prior written notice to the
other party, specifying the Information proposed to be destroyed or disposed of,
and (b) if, prior to the scheduled date for such destruction or disposal, the
other party requests in writing that any of the Information proposed to be
destroyed or disposed of be delivered to such other party, the party whose Group
is proposing to dispose of or destroy such Information promptly shall arrange
for the delivery of the requested Information to a location specified by, and at
the expense of, the requesting party.
Section 6.05 Confidentiality. Subject to Section 6.02, which shall govern
Privileged Information, from and after the Distribution Date, each of Pennzoil
and PPC shall hold, and shall use reasonable efforts to cause its Affiliates and
Representatives to hold, in strict confidence all Information concerning the
other party's Group obtained by it prior to the Distribution Date or furnished
to it by such other party's Group pursuant to this Agreement or the other
Transaction Agreements and shall not release or disclose such Information to any
other Person, except its Affiliates and Representatives, who shall be advised of
the provisions of this Section 6.05, and each party shall be responsible for a
breach by any of its Affiliates or Representatives; provided, however, that any
member of the Pennzoil Group or the PPC Group may disclose such Information to
the extent that (a) disclosure is compelled by judicial or administrative
process or, based on advice of such Person's counsel, by other requirements of
law, or (b) such party can show that such Information was (i) available to such
Person on a nonconfidential basis (other than from a member of the other party's
Group) prior to its disclosure by the other party's Group, (ii) in the public
domain through no fault of such Person or (iii) lawfully acquired by such Person
from another source after the time that it was furnished to such Person by the
other party's Group, and not acquired from such source subject to any
confidentiality obligation on the part of such source known to the acquiror.
Notwithstanding the foregoing, each of Pennzoil and PPC shall be deemed to have
satisfied its obligations under this Section 6.05 with respect to any
Information (other than Privileged Information) if it exercises the same care
with regard to such Information as it takes to preserve confidentiality for its
own similar Information.
Section 6.06 Cooperation with Respect to Government Reports and
Filings. Pennzoil, on behalf of itself and each member of the Pennzoil Group,
agrees to provide any member of the PPC Group, and PPC, on behalf of itself and
each member of the PPC Group, agrees to provide any member of the Pennzoil
Group, with such cooperation and Information as may be reasonably requested by
the other in connection with the preparation or filing of any government report
or other government filing contemplated by this Agreement or in conducting any
other government proceeding relating to the pre-Distribution business of the
Pennzoil Group or the PPC Group, Assets or Liabilities of either Group or
relating to or in connection with the relationship between the Groups on or
prior to the Distribution Date. Such cooperation and Information shall include,
without limitation, promptly forwarding copies of appropriate notices and forms
or other communications received from or sent to any government authority which
relate to the Pennzoil Group, in the case of the PPC Group, or the PPC Group, in
the case of the Pennzoil Group. Each party shall make its employees and
facilities available during normal business hours and on reasonable prior notice
to provide explanation of any documents or Information provided hereunder.
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ARTICLE VII
NO REPRESENTATIONS OR WARRANTIES
Section 7.01. No Representations or Warranties. Except as expressly set
forth herein or in any other Transaction Agreement, PPC and Pennzoil understand
and agree that no member of the Pennzoil Group is representing or warranting to
PPC or any member of the PPC Group in any way as to the PPC Assets, the PPC
Business or the PPC Liabilities. Except as expressly set forth herein or in any
other Transaction Agreement, Pennzoil and PPC understand and agree that no
member of the PPC Group is representing or warranting to Pennzoil or any member
of the Pennzoil Group in any way as to the Pennzoil Assets, the Pennzoil
Business or the Pennzoil Liabilities.
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Conditions to the Distribution. The obligations of Pennzoil
pursuant to this Agreement to effect the Distribution shall be subject to the
fulfillment (or waiver by Pennzoil) at or prior to the Distribution Date of the
following conditions:
(a) All consents, approvals and authorizations of any Governmental
Authority legally required for the making of the Distribution and the
consummation of the other transactions contemplated by the Transaction
Agreements, in form and substance reasonably satisfactory to Pennzoil,
shall have been obtained and be in effect at the Distribution Date;
(b) Any waiting period applicable to the Distribution or the Merger
(including any extended waiting period arising as a result of a request for
additional information by either HSR Agency) under the HSR Act shall have
expired or been terminated and no court of competent jurisdiction or other
Governmental Authority shall have issued an Order that is in effect
restraining, enjoining, prohibiting or otherwise imposing any material
restrictions or limitations on the Distribution or the Merger;
(c) The Registration Statements shall have become effective in
accordance with the Exchange Act and the Securities Act and shall not be
the subject of any stop order or proceedings seeking a stop order; all
necessary permits and authorizations under state securities or Blue Sky
laws, the Securities Act and the Exchange Act relating to the issuance and
trading of shares of PPC Common Stock to be issued in connection with the
Distribution and the Merger shall have been obtained and shall be in
effect; and such shares of PPC Common Stock and such other shares required
to be reserved for issuance in connection with the Distribution and the
Merger shall have been Approved for Listing;
(d) The Requisite Approval shall have been obtained.
(e) No action, proceeding or investigation by any Governmental
Authority with respect to the Distribution or the Merger shall be pending
that seeks to restrain, enjoin, prohibit or delay the making of the
Distribution, the consummation of the Merger or the consummation of the
other transactions contemplated by the Merger Agreement or to impose any
material restrictions or requirements thereon or on any of the parties with
respect thereto;
(f) No action shall have been taken, and no statute, rule, regulation
or executive order shall have been enacted, entered, promulgated or
enforced by any Governmental Authority with respect to the Distribution or
the Merger that, individually or in the aggregate, would (i) restrain,
prohibit or delay the making of the Distribution or the consummation of the
Merger, (ii) impose any material restrictions or requirements thereon or on
any of the parties with respect thereto or (iii) be reasonably likely to
have a Material Adverse Effect on Pennzoil if it proceeds with the
Distribution;
(g) Pennzoil shall have received the Section 355 Ruling, in form and
substance reasonably satisfactory to Pennzoil.
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(h) Quaker State shall have performed in all material respects its
covenants and agreements contained in the Merger Agreement required to be
performed at or prior to the Distribution Date;
(i) The representations and warranties of Quaker State contained in
the Merger Agreement shall have been true and correct in all respects when
made and as of the Distribution Date as if made at such time (except to the
extent such representations and warranties address matters as of a
particular date), except in each case (i) where the failure to be true and
correct, individually or in the aggregate, would not be reasonably likely
to have a Material Adverse Effect on any of the parties thereto or (ii) to
the extent specifically contemplated by the Merger Agreement; and
(j) PPC and Quaker State shall have irrevocably confirmed to Pennzoil
and each other that each condition in Sections 7.1 (other than 7.1(a)), 7.2
and 7.3 of the Merger Agreement to PPC's and Quaker State's respective
obligations to effect the Merger have been fulfilled or will be fulfilled
at the Effective Time or are or have been waived by PPC or Quaker State, as
the case may be.
Section 8.02 Complete Agreement. This Agreement, the Exhibits and
Schedules hereto, the other Transaction Agreements and other documents referred
to herein shall constitute the entire agreement between the parties hereto with
respect to the subject matter hereof (other than the Merger Agreement and the
schedules and exhibits thereto) and shall supersede all previous negotiations,
commitments and writings with respect to such subject matter. In the case of any
conflict between the terms of this Agreement and the terms of any other
Transaction Agreement, the terms of such other Transaction Agreement shall be
applicable.
Section 8.03 Expenses. Except as set forth in Schedule 8.03 hereto,
whether or not the Distribution or the other transactions contemplated by this
Agreement are consummated, all costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such costs or expenses.
Section 8.04 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware (other than the
laws regarding choice of laws and conflicts of laws that would apply the
substantive laws of any other jurisdiction) as to all matters, including matters
of validity, construction, effect, performance and remedies.
Section 8.05 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by standard
form of telecommunications, by courier, or by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to Pennzoil or any member of the Pennzoil Group, to:
Pennzoil Company
Pennzoil Place
P.O. Box 2967
Houston, Texas 77252-2967
Attention: Corporate Secretary
Facsimile: 713-546-3757
If to PPC or any member of the PPC Group, to:
Pennzoil Products Company
P.O. Box 2967
Houston, Texas 77252-2967
Attention: Corporate Secretary
Facsimile: 713-546-3757
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If to Quaker State prior to the Distribution Date, to:
Quaker State Corporation
225 E. John Carpenter Freeway
Irving, Texas 75062
Attention: Paul E. Konney
Facsimile: 972-868-0440
with a copy (which shall not constitute effective notice) to:
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Attention: Richard Bohm
Facsimile: 212-909-6836
or to such other address as any party hereto may have furnished to the other
parties by a notice in writing in accordance with this Section.
Section 8.06 Amendment and Modification. This Agreement may be amended,
modified or supplemented only by a written agreement signed by all of the
parties hereto and subject to the consent of Quaker State, which consent shall
not be unreasonably withheld.
Section 8.07 Successors and Assigns; No Third-Party Beneficiaries. This
Agreement and all of the provisions hereof shall be binding upon and inure to
the benefit of the parties hereto and their successors and permitted assigns,
but neither this Agreement nor any of the rights, interests and obligations
hereunder shall be assigned by any party hereto without the prior written
consent of the other parties. Except for the provisions of Sections 4.02 and
4.03 relating to indemnities, which are also for the benefit of the Indemnitees,
and except for those provisions of the Agreement that give consent, approval or
similar rights to Quaker State, which are also for the benefit of Quaker State,
this Agreement is solely for the benefit of the parties hereto and their
Subsidiaries and Affiliates and is not intended to confer upon any other Persons
any rights or remedies hereunder.
Section 8.08 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
Section 8.09 Interpretation. The Article and Section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties hereto and shall not in any way affect the meaning or
interpretation of this Agreement.
Section 8.10 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance is determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions hereof, or the application of such provision to persons or
circumstances other than those as to which it has been held invalid or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party.
Section 8.11 References; Construction. References to any "Article,"
"Exhibit," "Schedule" or "Section," without more, are to Articles, Exhibits,
Schedules and Sections to or of this Agreement. Unless otherwise expressly
stated, clauses beginning with the term "including" set forth examples only and
in no way limit the generality of the matters thus exemplified.
Section 8.12 Termination. Notwithstanding any provision hereof, following
termination of the Merger Agreement, this Agreement may be terminated and the
Distribution abandoned at any time prior to the Distribution Date by and in the
sole discretion of the Board of Directors of Pennzoil. In the event of such
termination, no party hereto or to any other Transaction Agreement (other than
the Merger Agreement) shall have any Liability to any Person by reason of this
Agreement or any other Transaction Agreement (other than the Merger Agreement).
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Section 8.13 Quaker State Reasonable Consent. The parties hereto agree
that any actions to be taken by Pennzoil or PPC under this Agreement on or prior
to the Effective Time that are not specifically required herein and that relate
to PPC or the PPC Business are subject to a Quaker State Consent.
Section 8.14 Consent to Jurisdiction and Service of Process. Each of the
parties to this Agreement hereby irrevocably and unconditionally (i) agrees to
be subject to, and hereby consent and submits to, the jurisdiction of the courts
of the State of Delaware and of the federal courts sitting in the State of
Delaware, (ii) to the extent such party is not otherwise subject to service of
process in the State of Delaware, hereby appoints the Corporation Trust Company
as such party's agent in the State of Delaware for acceptance of legal process
and (iii) agrees that service made on any such agent set forth in (ii) above
shall have the same legal force and effect as if served upon such party
personally within the State of Delaware.
Section 8.15 Certain Litigation. Pennzoil and PPC agree to enter into a
joint defense agreement with respect to the litigation listed in Schedule 8.15
hereto. The joint defense agreement, which will be included in the definition of
"Transaction Agreements," will govern the allocation of responsibility and
expenses with respect to the joint defense of the referenced litigation and will
be subject to a Quaker State Consent. The parties agree, and agree to reflect in
the joint defense agreement, that PPC will control all strategic decisions with
respect to the conduct of such litigation and will make all final decisions
regarding the course of such litigation.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
PENNZOIL COMPANY
By: /s/ JAMES L. PATE
----------------------------------
Name: James L. Pate
Title: Chairman of the Board and
Chief Executive Officer
PENNZOIL PRODUCTS COMPANY
By: /s/ DAVID P. ALDERSON, II
---------------------------------
Name: David P. Alderson, II
Title: Vice President
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ANNEX C
[LETTERHEAD OF CHASE SECURITIES INC.]
PERSONAL AND CONFIDENTIAL
- ------------------------------------------
April 14, 1998
Board of Directors
Quaker State Corporation
225 East John Carpenter Freeway
Irving, Texas 750602
Madam and Gentlemen:
You have requested our opinion as to the fairness to the holders of the
outstanding shares of capital stock, par value $1.00 per share (the "Company
Common Stock"), of Quaker State Corporation (the "Company") of the Exchange
Ratio (as defined below) to be received for each share of Company Common Stock
pursuant to the Agreement and Plan of Merger (the "Merger Agreement" and,
together with the ancillary agreements thereto, the "Agreement") dated as of
April 14, 1998 among Pennzoil Company ("Parent"), Pennzoil Products Company
("PPC"), a wholly-owned subsidiary of PPC ("Merger Sub") and the Company.
Pursuant to the Merger Agreement, Merger Sub will be merged with and into the
Company (the "Merger"). Prior to the effectiveness of the Merger, pursuant to
the Distribution Agreement (the "Distribution Agreement") dated as of April 14,
1998 between Parent and PPC, Parent will contribute (the "Contribution") certain
assets and liabilities (as more fully described in the Distribution Agreement)
related to its downstream business to PPC (PPC having previously distributed to
Parent certain oil and gas assets). All of the outstanding shares of PPC common
stock, par value $0.10 per share (the "PPC Common Stock"), will then be
distributed (the "Distribution") on a one-for-one basis to holders of the
outstanding shares of common stock, par value $0.83 1/3 per share (the "Parent
Common Stock") of Parent. In the Merger, each issued and outstanding share of
Company Common Stock will be canceled and converted into the right to receive
that number of newly-issued shares (the "Exchange Ratio") of PPC Common Stock
determined as set forth in Section 2.2(a) of the Merger Agreement.
Chase Securities Inc. ("CSI"), as part of its investment banking business,
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having acted as its financial advisor in connection
with the Agreement.
CSI provides a full range of financial advisory and securities services
and, in the course of its normal trading activities, may from time to time
effect transactions and hold securities, including derivative securities, of the
Company or Parent for its own account and for the accounts of customers and at
any time may have a long or short position in such securities. CSI may provide
investment banking services to the Company, Parent, PPC or any of their
respective subsidiaries in the future.
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In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of the
Company and Parent for the five years ended December 31, 1997; certain interim
reports to stockholders and Quarterly Reports on Form 10-Q of the Company and
Parent; certain other communications from the Company and Parent to their
respective stockholders; audited historical and unaudited pro forma financial
statements with respect to PPC referred to in Section 4.5 of the Merger
Agreement and certain internal financial analyses and forecasts for the Company
and PPC prepared by the managements of the Company and Parent, respectively,
including forecasts of certain cost savings (the "Synergies") expected to be
achieved as a result of the Merger. We also have held discussions with members
of the senior management of the Company and Parent regarding the strategic
rationale for, and the potential benefits of, the transaction contemplated by
the Agreement and the past and current business operations, financial condition
and future prospects of the Company and PPC. In addition, we have reviewed the
reported price and trading activity for the Company Common Stock, compared
certain financial and stock market information for the Company and Parent with
similar information for certain other companies the securities of which are
publicly traded and performed such other studies and analyses as we considered
appropriate.
We have relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by us for
purposes of this opinion. In that regard, we have assumed, with your consent,
that the financial forecasts provided by the respective managements of the
Company and Parent have been reasonably prepared on a basis reflecting the best
currently available judgments and estimates of the managements of the Company
and Parent as to the future financial performance of the Company and PPC, as
applicable. Further, in that regard, we have assumed, with your consent, that
the estimates of Synergies resulting from the Merger have been reasonably
prepared on a basis reflecting the best currently available judgments and
estimates of the managements of the Company and Parent. We have also assumed,
with your consent, that obtaining any necessary regulatory or third-party
approvals for the Distribution or the Merger will not have a material adverse
effect on the Company or PPC, as applicable. We have not reviewed the JV
Agreements (as defined in the Merger Agreement) or financial information
specifically relating thereto and we have assumed, with your consent, that there
are no material liabilities under the JV Agreements that are not reflected in
historical or projected financial information regarding PPC and that there is no
other information regarding the JV Agreements that would have a material adverse
effect on PPC. In addition, we have not made, nor assumed any responsibility for
making, an independent evaluation or appraisal of the assets and liabilities of
the Company or PPC or any of their respective subsidiaries or divisions, and we
were not furnished with any such evaluation or appraisal. With your consent, we
have assumed that, except as set forth in Section 4.12 of the Downstream
Disclosure Schedule to the Merger Agreement, both the Contribution and the
Distribution will be tax-free to PPC and that the Merger will be treated as
tax-free to each of the Company, PPC and the holders of Company Common Stock
(other than with respect to any cash received in lieu of fractional shares of
PPC Common Stock). We were not requested to solicit, and did not solicit,
interest from other parties with respect to an acquisition of or other business
combination with the Company. We are not expressing any opinion herein as to the
price at which the shares of PPC Common Stock may trade if and when they are
issued. Our advisory services and the opinion expressed herein are provided for
the information and assistance of the Board of Directors of the Company in
connection with its consideration of the transaction contemplated by the
Agreement and such opinion does not constitute a recommendation as to how any
holder of shares of Company Common Stock should vote with respect to such
transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof the
Exchange Ratio is fair from a financial point of view to the holders of Company
Common Stock.
Very truly yours,
/s/ Chase Securities Inc.
CHASE SECURITIES INC.
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ANNEX D
[GOLDMAN, SACHS & CO. LETTERHEAD]
April 14, 1998
Board of Directors
Quaker State Corporation
225 East John Carpenter Freeway
Irving, Texas 75062
Ladies and Gentlemen:
You have requested our opinion as to the fairness to the holders of the
outstanding shares of capital stock, par value $1.00 per share (the "Company
Common Stock"), of Quaker State Corporation (the "Company") of the Exchange
Ratio (as defined below) to be received for each share of Company Common Stock
pursuant to the Agreement and Plan of Merger (the "Merger Agreement" and,
together with the ancillary agreements thereto, the "Agreement") dated as of
April 14, 1998 among Pennzoil Company ("Parent"), Pennzoil Products Company
("Green Downstream"), Downstream Merger Company ("Merger Sub") and the Company.
Pursuant to the Merger Agreement, Merger Sub will be merged with and into the
Company (the "Merger"). Prior to the effectiveness of the Merger, pursuant to
the Distribution Agreement (the "Distribution Agreement") dated as of April 14,
1998 between Parent and Green Downstream, Parent will contribute (the
"Contribution") certain assets and liabilities (as more fully described in the
Distribution Agreement) related to its downstream business to Green Downstream
(Green Downstream having previously distributed to Parent certain oil and gas
assets). All of the outstanding shares of Green Downstream common stock, par
value $0.10 per share (the "Green Downstream Common Stock"), will then be
distributed (the "Distribution") on a one-for-one basis to holders of the
outstanding shares of common stock, par value $0.83 1/3 per share (the "Parent
Common Stock") of Parent. In the Merger, each issued and outstanding share of
Company Common Stock will be canceled and converted into the right to receive
that number of newly-issued shares (the "Exchange Ratio") of Green Downstream
Common Stock determined as set forth in Section 2.2(a) of the Merger Agreement.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having acted as its financial advisor in connection
with the Agreement.
Goldman, Sachs & Co. provides a full range of financial advisory and
securities services and, in the course of its normal trading activities, may
from time to time effect transactions and hold securities, including derivative
securities, of the Company or Parent for its own account and for the accounts of
customers. As of the date hereof, Goldman, Sachs & Co. accumulated (i) a long
position of 1,000 shares of Company Common Stock against which Goldman, Sachs &
Co. is short 6,100 shares of Company Common Stock; (ii) a long position of
15,734 shares of Parent Common Stock, against which Goldman, Sachs & Co. is
short 8,148 shares of Parent Common Stock; and (iii) $21,326,000 of 6.50% bonds
due November 15, 2003 and $1,285,000 of 4.75% bonds due October 1, 2003, each of
which is convertible into shares of Company Common Stock.
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Goldman, Sachs & Co. may provide investment banking services to the Company,
Parent, Green Downstream or any of their respective subsidiaries in the future.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of the
Company and Parent of the five years ended December 31, 1997; certain interim
reports to stockholders and Quarterly Reports on Form 10-Q of the Company and
Parent; certain other communications from the Company and Parent to their
respective stockholders; audited historical and unaudited pro forma financial
statements with respect to Green Downstream referred to in Section 4.5 of the
Merger Agreement, and certain internal financial analyses and forecasts for the
Company and Green Downstream prepared by the managements of the Company and
Parent, respectively, including forecasts of certain cost savings (the
"Synergies") expected to be achieved as a result of the Merger. We also have
held discussions with members of the senior management of the Company and Parent
regarding the strategic rationale for, and the potential benefits of, the
transaction contemplated by the Agreement and the past and current business
operations, financial condition and future prospects of the Company and Green
Downstream. In addition, we have reviewed the reported price and trading
activity for the Company Common Stock, compared certain financial and stock
market information for the Company and Parent with similar information for
certain other companies the securities of which are publicly traded and
performed such other studies and analyses as we considered appropriate.
We have relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by us for
purposes of this opinion. In that regard, we have assumed, with your consent,
that the financial forecasts, including, without limitation, the Synergies, of
the Company and Parent have been reasonably prepared on a basis reflecting the
best currently available judgments and estimates of the managements of the
Company and Parent, as applicable. We have also assumed, with your consent, that
obtaining any necessary regulatory or third-party approvals for the Distribution
or the Merger will not have an adverse effect on the Company or Green
Downstream, as applicable. We have not reviewed the JV Agreements (as defined in
the Merger Agreement) or financial information specifically relating thereto and
we have assumed, with your consent, that there are no material liabilities under
the JV Agreements that are not reflected in historical or projected financial
information regarding Green Downstream and that there is no other information
regarding the JV Agreements that would have an adverse effect on Green
Downstream. In addition, we have not made an independent evaluation or appraisal
of the assets and liabilities of the Company or Green Downstream or any of their
respective subsidiaries or divisions, and we were not furnished with any such
evaluation or appraisal. We have assumed, with your consent, that the Merger
will be treated as tax-free to each of the Company and Green Downstream. We were
not requested to solicit, and did not solicit, interest from other parties with
respect to an acquisition of or other business combination with the Company. We
are not expressing any opinion herein as to the price at which the shares of
Green Downstream Common Stock may trade if and when they are issued. Our
advisory services and the opinion expressed herein are provided for the
information and assistance of the Board of Directors of the Company in
connection with its consideration of the transaction contemplated by the
Agreement and such opinion does not constitute a recommendation as to how any
holder of shares of Company Common Stock should vote with respect to such
transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that as of the date hereof the
Exchange Ratio is fair from a financial point of view to the holders of Company
Common Stock.
Very truly yours,
/s/ GOLDMAN, SACHS & CO.
GOLDMAN, SACHS & CO.
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ANNEX E
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
PENNZOIL-QUAKER STATE COMPANY
ARTICLE I
Name
The name of this corporation (the "Corporation") is Pennzoil-Quaker State
Company.
ARTICLE II
Definitions
For the purposes of this Certificate of Incorporation:
A. A "person" shall mean any individual, firm, corporation, partnership,
limited liability company, trust, unincorporated organization or other entity.
B. "Public Status Date" shall mean the first date on which the Corporation
has outstanding a class of equity securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended.
C. "Voting Stock" means all outstanding shares of capital stock of the
Corporation that pursuant to or in accordance with this Certificate of
Incorporation are entitled to vote generally in the election of directors of the
Corporation, and each reference herein, where appropriate, to a percentage or
portion of shares of Voting Stock shall refer to such percentage or portion of
the voting power of such shares entitled to vote.
ARTICLE III
Registered Office
The address of the registered office of the Corporation in the State of
Delaware is at 1209 Orange Street, in the City of Wilmington, County of New
Castle, and the name of its registered agent at that address is The Corporation
Trust Company.
ARTICLE IV
Business
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware (the "General Corporation Law").
ARTICLE V
Authorized Capital Stock
A. The Corporation shall be authorized to issue a total of 110,000,000
shares of capital stock divided into classes as follows:
(1) One hundred million (100,000,000) shares of Common Stock, par
value $0.10 per share ("Common Stock"), and
(2) Ten million (10,000,000) shares of Preferred Stock, par value
$1.00 per share ("Preferred Stock").
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B. Shares of Preferred Stock may be issued from time to time in one or more
series as may from time to time be determined by the Board of Directors of the
Corporation (the "Board"), each of said series to be distinctly designated. The
voting powers, preferences and relative, participating, optional and other
special rights, and the qualifications, limitations or restrictions thereof, if
any, of each such series may differ from those of any and all other series of
Preferred Stock at any time outstanding, and the Board is hereby expressly
granted authority to fix or alter, by resolution or resolutions, the
designation, number, voting powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, of each such series, including, but without limiting the
generality of the foregoing, the following:
(1) The distinctive designation of, and the number of shares of
Preferred Stock that shall constitute, such series, which number (except
where otherwise provided by the Board in the resolution establishing such
series) may be increased or decreased (but not below the number of shares
of such series then outstanding) from time to time by action of the Board;
(2) The rights in respect of dividends, if any, of such series of
Preferred Stock, the extent of the preference or relation, if any, of such
dividends to the dividends payable on any other class or classes or any
other series of the same or other class or classes of capital stock of the
Corporation, and whether or in what circumstances such dividends shall be
cumulative;
(3) The right, if any, of the holders of such series of Preferred
Stock to convert the same into, or exchange the same for, shares of any
other class or classes or of any other series of the same or any other
class or classes of capital stock or other securities of the Corporation or
any other person, and the terms and conditions of such conversion or
exchange;
(4) Whether or not shares of such series of Preferred Stock shall be
subject to redemption, and, if so, the terms and conditions of such
redemption (including whether such redemption shall be optional or
mandatory), including the date or dates or event or events upon or after
which they shall be redeemable, and the amount and type of consideration
payable upon redemption, which may vary under different conditions and at
different redemption dates;
(5) The rights, if any, of the holders of such series of Preferred
Stock upon the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation or in the event of any merger or
consolidation of or sale of assets by the Corporation;
(6) The terms of any sinking fund or redemption or purchase account,
if any, to be provided for shares of such series of the Preferred Stock;
(7) The voting powers, if any, of the holders of any series of
Preferred Stock generally or with respect to any particular matter, which
may be less than, equal to or greater than one vote per share, and which
may, without limiting the generality of the foregoing, include the right,
voting as a series by itself or together with the holders of any other
series of Preferred Stock or all series of Preferred Stock as a class, to
elect one or more directors of the Corporation generally or under such
specific circumstances and on such conditions, as shall be provided in the
resolution or resolutions of the Board adopted pursuant hereto, including,
without limitation, in the event there shall have been a default in the
payment of dividends on or redemption of any one or more series of
Preferred Stock; and
(8) Any other powers, preferences and relative, participating,
optional or other rights, and qualifications, limitations or restrictions
of shares of such series of Preferred Stock.
C. (1) After the provisions with respect to preferential dividends on
any series of Preferred Stock (fixed in accordance with the provisions of
Paragraph B of this Article V), if any, shall have been satisfied and after
the Corporation shall have complied with all the requirements, if any, with
respect to redemption of, or the setting aside of sums as sinking funds or
redemption or purchase accounts with respect to, any series of Preferred
Stock (fixed in accordance with the provisions of Paragraph B of this
Article V), and subject further to any other conditions that may be fixed
in accordance with the
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provisions of Paragraph B of this Article V, then and not otherwise the
holders of Common Stock shall be entitled to receive such dividends as may
be declared from time to time by the Board.
(2) In the event of the voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation, after distribution in full of
the preferential amounts, if any (fixed in accordance with the provisions
of Paragraph B of this Article V), to be distributed to the holders of
Preferred Stock by reason thereof, the holders of Common Stock shall,
subject to the additional rights, if any (fixed in accordance with the
provisions of Paragraph B of this Article V), of the holders of any
outstanding shares of Preferred Stock, be entitled to receive all of the
remaining assets of the Corporation, tangible and intangible, of whatever
kind available for distribution to stockholders ratably in proportion to
the number of shares of Common Stock held by them respectively.
(3) Except as may otherwise be required by law, and subject to the
provisions of such resolution or resolutions as may be adopted by the Board
pursuant to Paragraph B of this Article V granting the holders of one or
more series of Preferred Stock exclusive voting powers with respect to any
matter, each holder of Common Stock shall have one vote in respect of each
share of Common Stock held on all matters voted upon by the stockholders.
(4) The authorized amount of shares of Common Stock and of Preferred
Stock may, without a class or series vote, be increased or decreased from
time to time by the affirmative vote of the holders of a majority of the
combined voting power of the then-outstanding shares of Voting Stock,
voting together as a single class.
D. No stockholder of the Corporation shall by reason of his holding shares
of any class or series of stock of the Corporation have any preemptive or
preferential right to purchase, acquire, subscribe for or otherwise receive any
additional, unissued or treasury shares (whether now or hereafter acquired) of
any class or series of stock of the Corporation now or hereafter to be
authorized, or any notes, debentures, bonds or other securities convertible into
or carrying any right, option or warrant to purchase, acquire, subscribe for or
otherwise receive shares of any class or series of stock of the Corporation now
or hereafter to be authorized, whether or not the issuance of any such shares,
or such notes, debentures, bonds or other securities, would adversely affect the
dividends or voting or other rights of such stockholder, and the Board may issue
or authorize the issuance of shares of any class or series of stock of the
Corporation, or any notes, debentures, bonds or other securities convertible
into or carrying rights, options or warrants to purchase, acquire, subscribe for
or otherwise receive shares of any class or series of stock of the Corporation,
without offering any such shares of any such class, either in whole or in part,
to the existing stockholders of any class.
E. Cumulative voting of shares of any class or series of capital stock of
the Corporation having voting rights is not permitted.
ARTICLE VI
Election of Directors
A. The business and affairs of the Corporation shall be conducted and
managed by, or under the direction of, the Board. Except as otherwise provided
for or fixed pursuant to the provisions of Article V relating to the rights of
the holders of any one or more series of Preferred Stock to elect additional
directors, the total number of directors constituting the entire Board shall be
not less than three nor more than fifteen, with the then-authorized number of
directors being fixed from time to time by or pursuant to a resolution passed by
the Board.
B. On and after the Public Status Date, the Board, other than those
directors elected by the holders of any series of Preferred Stock as provided
for or fixed pursuant to the provisions of Article V, shall be divided into
three classes, Class I, Class II and Class III, and the Board, by resolution or
resolutions adopted on or prior to the Public Status Date, shall designate the
directors who shall first serve in Class I, Class II and Class III, effective as
of the Public Status Date. Such classes shall be as nearly equal in number as
possible. Each director shall serve for a term ending on the third annual
meeting following the annual meeting at which such director was elected;
provided, however, that the directors first designated to Class I shall serve
for a term expiring at the annual meeting next following the date of their
designation as Class I Directors, the directors
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first designated to Class II shall serve for a term expiring at the second
annual meeting next following the date of their designation as Class II
Directors, and the directors first designated to Class III shall serve for a
term expiring at the third annual meeting next following the date of their
designation as Class III Directors. At each annual election of directors, the
directors chosen to succeed those whose terms then expire shall be of the same
class as the directors of the Corporation they succeed, unless, by reason of any
intervening changes in the authorized number of directors, the Board of
Directors shall designate one or more directorships whose term then expires as
directorships of another class in order more nearly to achieve equality of
number of directors among the classes. In the event of any change in the
authorized number of Directors of the Corporation, each Director of the
Corporation then continuing to serve as such shall nevertheless continue as a
Director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal.
C. Except as otherwise provided for or fixed pursuant to the provisions of
Article V relating to the rights of the holders of any series of Preferred Stock
to elect additional directors, and subject to the provisions hereof, newly
created directorships resulting from any increase in the authorized number of
directors, and any vacancies on the Board resulting from death, resignation,
disqualification, removal, or other cause, may be filled only by the affirmative
vote of a majority of the remaining directors then in office, even though less
than a quorum of the Board. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
class of directors in which the new directorship was created or in which the
vacancy occurred, and until such director's successor shall have been duly
elected and qualified, subject to his earlier death, disqualification,
resignation or removal. Except as otherwise provided pursuant to Article V of
this Certificate of Incorporation relating to additional directors elected by
the holders of one or more series of Preferred Stock, no decrease in the number
of directors constituting the Board shall shorten the term of any incumbent
director.
D. During any period when the holders of any series of Preferred Stock have
the right to elect additional directors as provided for or fixed pursuant to the
provisions of Article V, then upon commencement and for the duration of the
period during which such right continues (i) the then otherwise total authorized
number of directors of the Corporation shall automatically be increased by such
specified number of directors, and the holders of such Preferred Stock shall be
entitled to elect the additional directors so provided for or fixed pursuant to
said provisions, and (ii) each such additional director shall serve until such
director's successor shall have been duly elected and qualified, or until such
director's right to hold such office terminates pursuant to said provisions,
whichever occurs earlier, subject to his earlier death, disqualification,
resignation or removal. Except as otherwise provided by the Board in the
resolution or resolutions establishing such series, whenever the holders of any
series of Preferred Stock having such right to elect additional directors are
divested of such right pursuant to the provisions of such stock, the terms of
office of all such additional directors elected by the holders of such stock, or
elected to fill any vacancies resulting from the death, resignation,
disqualification or removal of such additional directors, shall forthwith
terminate and the total and authorized number of directors of the Corporation
shall be reduced accordingly.
E. Except for such additional directors, if any, as are elected by the
holders of any series of Preferred Stock as provided for or fixed pursuant to
the provisions of Article V of this Certificate of Incorporation, any director
may be removed from office only for cause and only by the affirmative vote of
the holders of 75% or more of the combined voting power of the then-outstanding
shares of Voting Stock at a meeting of stockholders called for that purpose,
voting together as a single class.
ARTICLE VII
Meetings of Stockholders
A. Meetings of stockholders of the Corporation may be held within or
without the State of Delaware, as the By-laws of the Corporation may provide.
Except as otherwise provided for or fixed pursuant to the provisions of Article
V relating to the rights of the holders of any series of Preferred Stock,
special meetings of stockholders of the Corporation may be called only by the
Chairman of the Board, the President or the Board pursuant to a resolution
adopted by a majority of the then-authorized number of directors of the
Corporation.
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Special meetings of stockholders may not be called by any other person or
persons or in any other manner. Elections of directors need not be by written
ballot unless the By-laws of the Corporation shall so provide.
B. In addition to the powers conferred on the Board by this Certificate of
Incorporation and by the General Corporation Law, and without limiting the
generality thereof, the Board is specifically authorized from time to time, by
resolution of the Board without additional authorization by the stockholders of
the Corporation, to adopt, amend or repeal the By-laws of the Corporation, in
such form and with such terms as the Board may determine, including, without
limiting the generality of the foregoing, By-laws relating to (i) regulation of
the procedure for submission by stockholders of nominations of persons to be
elected to the Board, (ii) regulation of the attendance at annual or special
meetings of the stockholders of persons other than holders of record or their
proxies, and (iii) regulation of the business that may properly be brought by a
stockholder of the Corporation before an annual or special meeting of
stockholders of the Corporation.
ARTICLE VIII
Stockholder Consent
Except as otherwise provided for or fixed pursuant to the provisions of
Article V relating to the rights of the holders of any series of Preferred
Stock, no action required to be taken or that may be taken at any annual or
special meeting of stockholders of the Corporation may be taken without a
meeting, and the power of the stockholders of the Corporation to consent in
writing, without a meeting, to the taking of any action is specifically denied,
provided, however, that prior to the Public Status date stockholders may take
action on any matter by written consent of all the holders of Voting Stock
entitled to vote on such matters.
ARTICLE IX
Limitation of Liability
A director of this Corporation shall not be liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the General Corporation Law as the same exists or
may hereafter be amended. Any repeal or modification of the foregoing paragraph
shall not adversely affect any right or protection of a director of the
Corporation existing hereunder with respect to any act or omission occurring
prior to such repeal or modification.
ARTICLE X
Executive Committee
The Board, pursuant to the By-laws of the Corporation or by resolution
passed by a majority of the then-authorized number of directors, may designate
any of their number to constitute an Executive Committee, which Executive
Committee, to the fullest extent permitted by law and provided for in said
resolution or in the By-laws of the Corporation, shall have and may exercise all
of the powers of the Board in the management of the business and affairs of the
Corporation, and shall have power to authorize the seal of the Corporation to be
affixed to all papers that may require it.
ARTICLE XI
Amendment Of Corporate Documents
A. Certificate of Incorporation
In addition to any affirmative vote required by applicable law and in
addition to any vote of the holders of any series of Preferred Stock provided
for or fixed pursuant to the provisions of Article V, any alteration, amendment,
repeal or rescission (a "Change") of any provision of this Certificate of
Incorporation must be
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approved by at least a majority of the then-authorized number of directors and
by the affirmative vote of the holders of at least a majority of the combined
voting power of the then-outstanding shares of Voting Stock, voting together as
a single class; provided, however, that if any such Change relates to Article
II, V, VI, VII, VIII or IX hereof or to this Article XI, such Change must also
be approved by the affirmative vote of the holders of at least 80% of the
combined voting power of the then-outstanding shares of Voting Stock, voting
together as a single class. Subject to the provisions hereof, the Corporation
reserves the right at any time, and from time to time, to amend, alter, repeal
or rescind any provision contained in this Certificate of Incorporation in the
manner now or hereafter prescribed by law, and other provisions authorized by
the laws of the State of Delaware at the time in force may be added or inserted,
in the manner now or hereafter prescribed by law; and all rights, preferences
and privileges of whatsoever nature conferred upon stockholders, directors or
any other persons whomsoever by and pursuant to this Certificate of
Incorporation in its present form or as hereafter amended are granted subject to
the rights reserved in this article.
B. By-Laws
In addition to any affirmative vote required by law, any Change of the
By-laws of the Corporation may be adopted either (i) by the Board by the
affirmative vote of at least a majority of the then-authorized number of
directors or (ii) by the stockholders by the affirmative vote of the holders of
at least 66 2/3% of the combined voting power of the then-outstanding shares of
Voting Stock, voting together as a single class.
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ANNEX F
AMENDMENT NUMBER ONE
Amendment Number One, dated as of August 11, 1998, to the Agreement and
Plan of Merger (the "Merger Agreement"), dated as of April 14, 1998, among
Pennzoil Company, a Delaware corporation ("Pennzoil"), Pennzoil Products
Company, a Delaware corporation ("PPC"), Downstream Merger Company, a Delaware
corporation ("Merger Sub"), and Quaker State Corporation, a Delaware corporation
("Quaker State"). Any capitalized term used herein without definition shall have
the meaning assigned thereto in the Merger Agreement.
Pursuant to Section 8.4 of the Merger Agreement, Pennzoil, PPC and Quaker
State hereby agree to amend the Merger Agreement as follows:
1. Amendment to Section 2.1(d). Section 2.1(d) of the Merger Agreement is
hereby amended and restated to read in its entirety as follows:
"The directors of Quaker State at the Effective Time shall, from and
after the Effective Time, be the initial directors of the Surviving
Corporation, the officers of Quaker State at the Effective Time shall, from
and after the Effective Time, be the initial officers of the Surviving
Corporation, and such directors and officers shall serve until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Surviving
Corporation's Certificate of Incorporation and Bylaws. The Board of
Directors of PPC immediately after the Effective Time shall consist of
twelve directors, seven of whom will be designated by PPC, five of whom
will be designated by Quaker State. The number of directors serving on the
Board of Directors of PPC shall be increased by one and the President and
Chief Operating Officer of PPC shall be added as a director, effective upon
his or her appointment after the Effective Time. At least three of the
directors designated by Quaker State and at least five of the directors
designated by PPC will be independent directors. The Certificate of
Incorporation and Bylaws of PPC immediately prior to the Effective Time
will be substantially in the forms attached hereto as Exhibit B and Exhibit
C, respectively, except (i) for such changes that are agreed to by Pennzoil
and PPC, with a Quaker State Consent, and (ii) that prior to the
Distribution Date, the name of PPC will be changed to Pennzoil-Quaker State
Company. The initial officers of PPC after the Effective Time shall be as
set forth in Exhibit D hereto. The President and Chief Operating Officer of
PPC will be selected by a committee of the Board of Directors of PPC
comprised of two directors selected by Quaker State and two directors
selected by PPC, acting by the affirmative vote of a majority of the
members of such committee. PPC's Board of Directors shall create an
executive committee, which shall initially include three directors
designated by Quaker State, four directors designated by Pennzoil and the
President and Chief Operating Officer of PPC. PPC's Board of Directors
shall create a compensation committee and an audit committee, both of which
shall initially include one director designated by Quaker State and two
directors designated by Pennzoil. Notwithstanding anything to the contrary
in the Bylaws of PPC, each of the directors designated by Quaker State who
are included on the executive, compensation and audit committees,
respectively, shall serve on such committees at least until the end of his
first terms as director, or his prior death, resignation or removal
pursuant to Section E of Article VI of the Certificate of Incorporation of
PPC, which is Exhibit B to this Agreement."
2. Amendment to Section 2.9. The first sentence of Section 2.9 of the
Merger Agreement is hereby amended and restated to read in its entirety as
follows:
"In accordance with the terms of the Quaker State 1994 Stock Incentive
Plan, 1994 Non-Employee Directors Stock Option Plan, 1986 Stock Option
Plan, and Employment Agreement, dated June 9, 1993, as restated August 1,
1994 and subsequently amended, between Quaker State and Herbert M. Baum
(such plans and agreements, the "Quaker State Stock Plans") and of the
issuances of restricted stock to certain non-employee directors in lieu of
annual retirement benefits as approved at the 1998 annual meeting of Quaker
State stockholders (the "Retirement Stock Issuance"), each option to
acquire shares of Quaker State Capital Stock (each, an "Option") and
restricted or performance share award (each, a "Share Award") granted to an
employee, officer or director of Quaker State under the Quaker State Stock
Plans or pursuant to the Retirement Stock Issuance and outstanding
immediately prior to the
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<PAGE> 220
Effective Time (an Option or a Share Award, an "Award") shall, immediately
prior to the Effective Time, become vested or exercisable."
3. Amendment to Section 6.1(c). The first sentence of Section 6.1(c) of the
Merger Agreement is hereby amended and restated to read in its entirety as
follows:
"Quaker State shall not, nor shall it permit any of its Subsidiaries
to, issue, deliver or sell, or authorize or propose to issue, deliver or
sell, any shares of its capital stock of any class, any Quaker State Voting
Debt or any securities convertible into, or any rights, warrants or options
to acquire, any such shares, Quaker State Voting Debt or convertible
securities, other than (i) the issuance of shares of Quaker State Capital
Stock (and associated Quaker State Rights) upon the exercise of stock
options or satisfaction of other Awards granted under the Quaker State
Benefit Plans that are outstanding on the date hereof pursuant to the
Quaker State Benefit Plans or based upon the employment, executive
termination or other agreements identified in Section 6.1(c) of the Quaker
State Disclosure Schedule; (ii) issuances by a wholly owned Subsidiary of
its capital stock to Quaker State; (iii) issuances under the 1994
Non-Employee Directors' Stock Option Plan; and (iv) issuances to certain
non-employee directors in lieu of annual retirement benefits as approved at
the 1998 annual meeting of Quaker State stockholders."
4. Amendment to Section 6.1(h). The introductory clause to Section 6.1(h)
of the Merger Agreement is hereby amended and restated to read in its entirety
as follows:
"Except as required pursuant to the collective bargaining process and
as consistent with the historic bargaining practices of Quaker State and
its Subsidiaries, and except as permitted by clauses (iii) and (iv) of
Section 6.1(c), Quaker State and its Subsidiaries shall not:"
5. Amendment to Distribution Agreement. Section 2.02(a) of the Distribution
Agreement, Exhibit A to the Merger Agreement, is hereby amended and restated to
read in its entirety as follows:
"(a) Pennzoil shall transfer or cause to be transferred to PPC or a
direct or indirect wholly owned subsidiary of PPC (i) all of the capital
stock of JLI, (ii) all of the capital stock of Pennzoil Sales Corporation,
a Delaware corporation, and (iii) all the assets and liabilities of
Pennzoil Petroleums Ltd., a Delaware corporation."
6. Amendment to Exhibit B. Exhibit B to the Merger Agreement, the
Certificate of Incorporation of PPC, is replaced in its entirety with the
amended Certificate of Incorporation of PPC attached hereto as Exhibit A.
7. Amendment to Exhibit C. Exhibit C to the Merger Agreement, the Bylaws of
PPC, is replaced in its entirety with the amended Bylaws of PPC attached hereto
as Exhibit B.
8. Amendment to Exhibit G. Exhibit G to the Merger Agreement, the Retention
Pay Program, is replaced in its entirety with the amended Quaker State
Corporation Retention Pay Plan attached hereto as Exhibit C.
9. Amendment to Trademark License Agreement. Exhibit C to the Distribution
Agreement, the Trademark License Agreement, is hereby replaced in its entirety
with the form of Trademark License Agreement attached hereto as Exhibit D.
10. Full Force and Effect. Except as provided in this Amendment Number One,
the Merger Agreement shall continue in full force and effect in accordance with
the provisions thereof.
11. Governing Law. This Amendment Number One shall be governed by, and
construed in accordance with, the laws of the State of Delaware without giving
effect to the conflicts of laws principles thereof.
12. Miscellaneous. The section headings contained in this Amendment Number
One are for reference purposes only and shall not affect in any way the meaning
or interpretation of this Amendment Number One. This Amendment Number One may be
executed in two or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
F-2
<PAGE> 221
IN WITNESS WHEREOF, the undersigned have executed this Amendment Number One
as of the date first above written.
PENNZOIL PRODUCTS COMPANY
By: /s/ DAVID P. ALDERSON II
----------------------------------
Name: David P. Alderson II
Title: Vice President
DOWNSTREAM MERGER COMPANY
By: /s/ DAVID P. ALDERSON II
----------------------------------
Name: David P. Alderson II
Title: Vice President
QUAKER STATE CORPORATION
By: /s/ HERBERT M. BAUM
----------------------------------
Name: Herbert M. Baum
Title: Chairman of the Board and
Chief Executive Officer
PENNZOIL COMPANY
By: /s/ JAMES L. PATE
----------------------------------
Name: James L. Pate
Title: Chairman of the Board and
Chief Executive Officer
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<PAGE> 222
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article 9 of the By-Laws of Pennzoil Products Company provides for
indemnification of and advancement of expenses to officers, directors, agents
and employees of Pennzoil Products Company to the extent permitted by applicable
law, including, but not limited to, the Delaware General Corporation Law
("DGCL"). Pursuant to Section 145 of the DGCL, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses and liabilities incurred by them in connection with any
suit to which they are, or are threatened to be made, a party by reason of their
serving in such positions so long as they acted in good faith and in a manner
they reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. With respect to suits by or in the
right of a corporation, however, indemnification is generally limited to
attorneys' fees and other expenses and is not available if such person is
adjudged to be liable to the corporation unless the court determines that
indemnification is appropriate. In addition, a corporation has the power to
purchase and maintain insurance for such persons. The statute also expressly
provides that the power to indemnify authorized thereby is not exclusive of any
rights granted under any bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise.
Pennzoil-Quaker State Company's Bylaws will provide for the indemnification
of its officers and directors, and the advancement to them of expenses in
connection with proceedings and claims, to the fullest extent permitted by
applicable law. The Bylaws will include related provisions meant to facilitate
the indemnitee's receipt of such benefits. These provisions will cover, among
other things: (i) specification of the method of determining entitlement to
indemnification and the selection of independent counsel that will in some cases
make such determination; (ii) specification of certain time periods by which
certain payments or determinations must be made and actions must be taken and
(iii) the establishment of certain presumptions in favor of an indemnitee. The
benefits of certain of these provisions will be available to an indemnitee only
if there has been a change in control (as defined in the Bylaws). In addition,
Pennzoil-Quaker State Company will obtain insurance coverage for directors' and
officers' liability prior to the consummation of the Merger. Pennzoil-Quaker
State Company will enter agreements with each of its directors providing for
similar indemnification as provided by Pennzoil Products Company's By-Laws.
Article IX of the Certificate of Incorporation of Pennzoil Products Company
eliminates in certain circumstances the monetary liability of directors of
Pennzoil Products Company for a breach of their fiduciary duty as directors,
except to the extent such exemption from liability or limitation thereof is not
permitted by the DGCL. The DGCL does not permit the elimination of the liability
of a director (i) for a breach of the director's duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law; (iii) under
Section 174 of the DGCL (relating to the declaration of dividends and purchase
or redemption of shares in violation of the DGCL); or (iv) for transactions from
which the director derived an improper personal benefit.
The above discussion of Pennzoil Products Company's Certificate of
Incorporation and By-Laws and of Section 145 of the DGCL is not intended to be
exhaustive and is respectively qualified in its entirety by such Certificate of
Incorporation, By-Laws and statute.
The Merger Agreement provides that, following the Effective Time, Pennzoil
will indemnify, defend and hold harmless PPC, Quaker State and each controlling
person of PPC or Quaker State (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) from and against, and pay or
reimburse each of the foregoing for, all losses arising out of or resulting from
or in connection with:
- any assets or liabilities of, or the operations of, Pennzoil or any of
its subsidiaries (other than PPC and its subsidiaries).
II-1
<PAGE> 223
- any untrue statement or alleged untrue statement of a material fact
contained in or incorporated by reference into this Proxy
Statement/Prospectus, the Registration Statement of which this Proxy
Statement/Prospectus is part or the Registration Statement on Form 10 (or
any amendment or supplement thereto) or any omission or alleged omission
to state herein or therein a material fact required to be stated herein
or therein or necessary to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading,
other than information provided by Quaker State specifically for
inclusion in, or incorporation by reference into, this Proxy
Statement/Prospectus or any such Registration Statement.
- financial advisory, broker's, finder's or similar fees or commissions,
reimbursement of expenses or indemnification or contribution above $6
million payable in connection with the transactions contemplated by the
Merger Agreement to any agent, broker, investment banker, financial
advisor or other similar person by Pennzoil or by PPC.
The Merger Agreement also provides that, following the Effective Time, PPC
and Quaker State will jointly and severally indemnify, defend and hold harmless
Pennzoil and each controlling person of Pennzoil from and against, and pay or
reimburse each of the foregoing for, all losses arising out of or resulting from
or in connection with:
- any assets or liabilities of, or the operations of, PPC and Quaker State
or any of their subsidiaries.
- any untrue statement or alleged untrue statement of a material fact
contained in or incorporated by reference into this Proxy
Statement/Prospectus, the Registration Statement of which this Proxy
Statement/Prospectus is part or the Registration Statement on Form 10 (or
any amendment or supplement thereto) or any omission or alleged omission
to state herein or therein a material fact required to be stated herein
or therein or necessary to make the statements herein or therein, in
light of the circumstances under which they were made, not misleading,
but only with respect to information provided by Quaker State
specifically for inclusion in, or incorporation by reference into, this
Proxy Statement/Prospectus or any such Registration Statement.
In addition, the Merger Agreement provides that all rights of
indemnification provided in the respective charters and bylaws of PPC and Quaker
State will continue for a period of six years following the Effective Time. The
Merger Agreement further requires PPC and Pennzoil to maintain for a period of
six years following the Effective Time liability insurance for officers and
directors of PPC with respect to claims arising out of facts or events occurring
prior to or at the Effective Time.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of April 14, 1998,
among Pennzoil Company, Pennzoil Products Company,
Downstream Merger Company and Quaker State Corporation
(included as Annex A to the Proxy Statement/ Prospectus
that constitutes a part of this Registration Statement).
2.2 -- Amendment Number One to Agreement and Plan of Merger,
dated as of August 11, 1998, among Pennzoil Company,
Pennzoil Products Company, Downstream Merger Company and
Quaker State Corporation (included as Annex F to the
Proxy Statement/Prospectus that constitutes a part of
this Registration Statement).
2.3 -- Distribution Agreement, dated as of April 14, 1998,
between Pennzoil Company and Pennzoil Products Company
(included as Annex B to the Proxy Statement/ Prospectus
that constitutes a part of this Registration Statement).
</TABLE>
II-2
<PAGE> 224
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
3.1 -- Pennzoil Products Company Certificate of Incorporation,
as amended.
3.2 -- Form of Pennzoil-Quaker State Company Restated
Certificate of Incorporation (included as Annex E to the
Proxy Statement/Prospectus that constitutes a part of
this Registration Statement).
3.3 -- Pennzoil Products Company By-Laws.
3.4 -- Form of Pennzoil-Quaker State Company Amended and
Restated By-Laws.
3.5 -- Form of Common Stock Certificate of Pennzoil-Quaker State
Company.
3.6 -- Form of Pennzoil-Quaker State Company Rights Agreement.
5.1 -- Opinion of Baker & Botts, L.L.P. with respect to legality
of securities.
8.1 -- Opinion of Baker & Botts, L.L.P. with respect to certain
federal income tax matters.
8.2 -- Opinion of Debevoise & Plimpton with respect to certain
federal income tax matters.
10.1 -- Form of Employee Benefits Agreement between Pennzoil
Company and Pennzoil Products Company.
10.2 -- Form of Tax Separation Agreement between Pennzoil Company
and Pennzoil Products Company.
10.3 -- Form of Trademark License Agreement between Pennzoil
Company and Pennzoil Products Company.
10.4 -- Form of Transition Services Agreement between Pennzoil
Company and Pennzoil Products Company.
10.5 -- Term Sheet for Crude Oil Supply Agreement between
Pennzoil Company and Pennzoil Products Company.
10.6 -- Form of Pennzoil-Quaker State Company 1998 Incentive
Plan.
10.7 -- Form of Indemnification Agreement between Pennzoil-Quaker
State Company and certain directors.
10.8 -- Form of Quaker State Corporation Retention Pay Plan.
21.1 -- Subsidiaries of Pennzoil Products Company.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
23.3 -- Consent of PricewaterhouseCoopers LLP.
23.4 -- Consent of Baker & Botts, L.L.P. (contained in Exhibits
5.1 and 8.1).
23.5 -- Consent of Debevoise & Plimpton (contained in Exhibit
8.2).
24.1 -- Powers of Attorney.
27 -- Financial Data Schedule.
99.1 -- Form of Proxy Card of Quaker State Corporation.
99.2 -- Chairman's Letter and Notice for the Special Meeting of
Stockholders of Quaker State Corporation to be held on
September 18, 1998.
99.3 -- Consent of Chase Securities Inc.
99.4 -- Consent of Goldman, Sachs & Co.
99.6 -- Consents of persons named as future directors of
Pennzoil-Quaker State Company.
99.7 -- Financial Statements of Excel Paralubes.
</TABLE>
II-3
<PAGE> 225
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(b) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(d) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(e) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (d) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(f) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling person of
the registrant pursuant to the provisions described under Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
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<PAGE> 226
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, the State of
Texas, on August 14, 1998.
PENNZOIL PRODUCTS COMPANY
By: /s/ JAMES L. PATE
----------------------------------
James L. Pate,
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES L. PATE Principal Executive Officer August 14, 1998
- ----------------------------------------------------- and Director
(James L. Pate,
President)
/s/ DAVID P. ALDERSON II Principal Financial and August 14, 1998
- ----------------------------------------------------- Accounting Officer and Director
(David P. Alderson II
Vice President)
/s/ JAMES W. SHADDIX Director August 14, 1998
- -----------------------------------------------------
(James W. Shaddix)
</TABLE>
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<PAGE> 227
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of April 14, 1998,
among Pennzoil Company, Pennzoil Products Company,
Downstream Merger Company and Quaker State Corporation
(included as Annex A to the Proxy Statement/ Prospectus
that constitutes a part of this Registration Statement).
2.2 -- Amendment Number One to Agreement and Plan of Merger,
dated as of August 11, 1998, among Pennzoil Company,
Pennzoil Products Company, Downstream Merger Company and
Quaker State Corporation (included as Annex F to the
Proxy Statement/Prospectus that constitutes a part of
this Registration Statement).
2.3 -- Distribution Agreement, dated as of April 14, 1998,
between Pennzoil Company and Pennzoil Products Company
(included as Annex B to the Proxy Statement/ Prospectus
that constitutes a part of this Registration Statement).
3.1 -- Pennzoil Products Company Certificate of Incorporation,
as amended.
3.2 -- Form of Pennzoil-Quaker State Company Restated
Certificate of Incorporation (included as Annex E to the
Proxy Statement/Prospectus that constitutes a part of
this Registration Statement).
3.3 -- Pennzoil Products Company By-Laws.
3.4 -- Form of Pennzoil-Quaker State Company Amended and
Restated By-Laws.
3.5 -- Form of Common Stock Certificate of Pennzoil-Quaker State
Company.
3.6 -- Form of Pennzoil-Quaker State Company Rights Agreement.
5.1 -- Opinion of Baker & Botts, L.L.P. with respect to legality
of securities.
8.1 -- Opinion of Baker & Botts, L.L.P. with respect to certain
federal income tax matters.
8.2 -- Opinion of Debevoise & Plimpton with respect to certain
federal income tax matters.
10.1 -- Form of Employee Benefits Agreement between Pennzoil
Company and Pennzoil Products Company.
10.2 -- Form of Tax Separation Agreement between Pennzoil Company
and Pennzoil Products Company.
10.3 -- Form of Trademark License Agreement between Pennzoil
Company and Pennzoil Products Company.
10.4 -- Form of Transition Services Agreement between Pennzoil
Company and Pennzoil Products Company.
10.5 -- Term Sheet for Crude Oil Supply Agreement between
Pennzoil Company and Pennzoil Products Company.
10.6 -- Form of Pennzoil-Quaker State Company 1998 Incentive
Plan.
10.7 -- Form of Indemnification Agreement between Pennzoil-Quaker
State Company and certain directors.
10.8 -- Form of Quaker State Corporation Retention Pay Plan.
21.1 -- Subsidiaries of Pennzoil Products Company.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
23.3 -- Consent of PricewaterhouseCoopers LLP.
</TABLE>
<PAGE> 228
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
23.4 -- Consent of Baker & Botts, L.L.P. (contained in Exhibits
5.1 and 8.1).
23.5 -- Consent of Debevoise & Plimpton (contained in Exhibit
8.2).
24.1 -- Powers of Attorney.
27 -- Financial Data Schedule.
27.1 -- Restated Financial Data Schedule
27.2 -- Restated Financial Data Schedule
27.3 -- Restated Financial Data Schedule
27.4 -- Restated Financial Data Schedule
99.1 -- Form of Proxy Card of Quaker State Corporation.
99.2 -- Chairman's Letter and Notice for the Special Meeting of
Stockholders of Quaker State Corporation to be held on
September 18, 1998.
99.3 -- Consent of Chase Securities Inc.
99.4 -- Consent of Goldman, Sachs & Co.
99.6 -- Consents of persons named as future directors of
Pennzoil-Quaker State Company.
99.7 -- Financial Statements of Excel Paralubes.
</TABLE>
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
PPC REINCORP COMPANY
The undersigned incorporator hereby certifies:
ARTICLE I
Name
The name of this corporation (the "Corporation") is PPC
Reincorp Company.
ARTICLE II
Definitions
For the purposes of this Certificate of Incorporation:
A. "Affiliate" shall have the meaning ascribed to such
term in Rule 12b-2 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended, as in effect on March 23, 1998.
B. "Associate" shall mean, with reference to any person,
(1) any corporation, firm, partnership, association, unincorporated
organization or other entity (other than the Corporation or a Subsidiary) of
which such person is an officer or general partner (or officer or general
partner of a general partner) or is, directly or indirectly, the Beneficial
Owner of 10% or more of any class of equity securities, (2) any trust or other
estate in which such person has a substantial beneficial interest or as to
which such person serves as trustee or in a similar fiduciary capacity and (3)
any relative or spouse of such person, or any relative of such spouse, who has
the same home as such person.
C. A person shall be deemed the "Beneficial Owner" of,
and to "Beneficially Own," shares of Voting Stock (1) that such person or any
of its Affiliates and Associates beneficially owns, directly or indirectly,
(2) that such person or any of its Affiliates or Associates has (i) the right
to acquire or to dispose of (whether such right is exercisable immediately or
only after the passage of time or only upon the occurrence or nonoccurrence of
a contingency or event), or to direct the acquisition or disposition of,
pursuant to any agreement, arrangement, understanding or relationship or upon
the exercise of conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote or to direct the voting of pursuant to any
agreement, arrangement,
<PAGE> 2
understanding or relationship, or (3) that are beneficially owned, directly or
indirectly, by any other person with which such first mentioned person or any
of its Affiliates or Associates has any agreement, arrangement, understanding
or relationship for the purpose of acquiring, holding, voting or disposing of
any shares of capital stock of the Corporation.
D. "Business Combination" means (a) any merger or
consolidation of the Corporation or any Subsidiary with or into (i) any
Related Person or (ii) any other corporation (whether or not itself a Related
Person) that, after such merger or consolidation, would be an Affiliate or
Associate of a Related Person, or (b) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition (in one transaction or a series of
related transactions) to or with or for the benefit of any Related Person of
any assets of the Corporation or any Subsidiary having an aggregate Fair Market
Value of $5,000,000 or more, or (c) the issuance or transfer by the Corporation
or any Subsidiary (in one transaction or a series of related transactions, and
other than by way of a pro rata distribution to all stockholders or a
reclassification, dividend or subdivision of such securities and other than in
connection with the exercise or conversion of securities exercisable for or
convertible into securities of the Corporation or a Subsidiary that have been
distributed pro rata to stockholders) of any securities of the Corporation or
any Subsidiary to any Related Person in exchange for cash, securities or other
property (or a combination thereof) having an aggregate Fair Market Value of
$5,000,000 or more, or (d) the adoption of any plan or proposal proposed by or
on behalf of a Related Person for the liquidation or dissolution of the
Corporation, or (e) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with or into any of its Subsidiaries or any
similar transaction (whether or not with or into or otherwise involving a
Related Person) that has the effect, directly or indirectly, of increasing by
more than 1% the proportionate share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any Subsidiary that are
directly or indirectly owned by any Related Person or otherwise increasing the
voting power of any outstanding shares of any class of series of capital stock
of the Corporation or any Subsidiary possessed by any such Related Person.
E. "Continuing Director" means, as to any Related
Person, any member of the Board of Directors of the Corporation (the "Board")
who (i) is neither the Related Person nor affiliated with the Related Person
and (ii) (A) was a member of the Board prior to the Public Status Date or (B)
thereafter became a member of the Board prior to the time that the Related
Person became a Related Person or (C) was recommended or nominated to become a
member of the Board by a majority of Continuing Directors then on the Board,
acting separately or as part of any action taken by the Board or any committee
thereof. Without limiting the generality of the foregoing, a director shall be
deemed for purposes of this definition to be affiliated with a Related Person
if such director (i) is or at any previous time has been an officer, director,
employee or general partner of such Related Person; (ii) is or at any previous
time has been an Affiliate or Associate of such Related Person; (iii) is or at
any previous time has been a relative or spouse of such Related Person or of
any such officer, director, general partner, Affiliate or Associate; (iv)
performs services for, or is a member, employee, greater than 5% stockholder or
other equity owner of any organization (other than the Corporation and its
Subsidiaries) that performs services for, such Related Person or any
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Affiliate of such Related Person, or is a relative or spouse of any such
Person; or (v) was nominated for election as a director by such Related Person.
F. "Disinterested Shares" means, as to any Related
Person, shares of Voting Stock that are Beneficially Owned or owned of record
by stockholders other than such Related Person.
G. "Fair Market Value" means: (a) in the case of shares
of stock and other securities, the highest closing sale price during the
thirty-day period immediately preceding and including the date in question of a
share of such stock or other security, on the principal United States
securities exchange registered under the Securities Exchange Act of 1934, as
amended, on which such stock or other security is listed or admitted to
trading, or, if such stock or other security is not listed on any such
exchange, the highest closing bid quotation with respect to a share of such
stock or other security during the thirty-day period preceding and including
the date in question on the National Association of Securities Dealers, Inc.
Automated Quotation System or any other quotation reporting system then in
general use, or, if no such quotations are available, the fair market value on
the date in question of a share of such stock or other security as determined
by the Board in good faith; and (b) in the case of property other than stock or
other securities, the fair market value of such property on the date in
question as determined by the Board in good faith.
H. "Pennzoil" shall mean Pennzoil Company, a Delaware
corporation.
I. A "person" shall mean any individual, firm,
corporation, partnership, limited liability company, trust, unincorporated
organization or other entity.
J. "Public Status Date" shall mean the first date on
which the Corporation has outstanding a class of equity securities registered
under Section 12 of the Securities Exchange Act of 1934, as amended.
K. "Related Person" means and includes (1) any
individual, corporation, partnership or other person or entity, or any group of
two or more of the foregoing that act together or have agreed to act together,
that, itself or themselves or together with its or their Affiliates and
Associates, Beneficially Owns, directly or indirectly, in the aggregate, 10% or
more of the combined voting power of the then-outstanding shares of Voting
Stock, and any Affiliate or Associate of any such individual, firm,
corporation, partnership or other person or entity; (2) an Affiliate of the
Corporation that at any time within two years prior thereto Beneficially Owned,
directly or indirectly, ten percent (10%) or more of the combined voting power
of the outstanding shares of Voting Stock; or (3) an assignee of or successor
to any shares of capital stock of the Corporation that were at any time within
two years prior thereto Beneficially Owned by any Related Person, if such
assignment or succession shall have occurred other than pursuant to a "public
offering" within the meaning of the Securities Act of 1933, as amended;
provided, however, that the term "Related Person" shall not include the
Corporation, any Subsidiary, Pennzoil, any employee benefit plan or employee
stock plan of the Corporation or of any Subsidiary, or any person or entity
organized,
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appointed, established or holding Voting Stock for or pursuant to the terms of
any such plan, nor shall such term encompass shares of Voting Stock held by any
of the foregoing (whether or not held in a fiduciary capacity or otherwise).
L. "Subsidiary" means any corporation or other entity of
which the Corporation owns, directly or indirectly, securities that entitle the
Corporation to elect a majority of the board of directors or other persons
performing similar functions of such corporation or entity or that otherwise
give to the Corporation the power to control such corporation or entity.
M. "Voting Stock" means all outstanding shares of
capital stock of the Corporation that pursuant to or in accordance with this
Certificate of Incorporation are entitled to vote generally in the election of
directors of the Corporation, and each reference herein, where appropriate, to
a percentage or portion of shares of Voting Stock shall refer to such
percentage or portion of the voting power of such shares entitled to vote. The
outstanding shares of Voting Stock shall include shares owned through
application of Paragraph C of Article II of this Certificate of Incorporation,
where applicable, but shall not otherwise include any other shares of Voting
Stock that may be issuable pursuant to any agreement, or upon the exercise or
conversion of any rights, warrants or options or otherwise.
ARTICLE III
Registered Office
The address of the registered office of the Corporation in the
State of Delaware is at 1209 Orange Street, in the City of Wilmington, County
of New Castle, and the name of its registered agent at that address is The
Corporation Trust Company.
ARTICLE IV
Business
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "General Corporation Law").
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ARTICLE V
Authorized Capital Stock
A. The Corporation shall be authorized to issue a total
of 110,000,000 shares of capital stock divided into classes as follows:
(1) One hundred million (100,000,000) shares of Common
Stock, par value $0.10 per share ("Common Stock"), and
(2) Ten million (10,000,000) shares of Preferred Stock,
par value $1.00 per share ("Preferred Stock").
B. Shares of Preferred Stock may be issued from time to
time in one or more series as may from time to time be determined by the Board,
each of said series to be distinctly designated. The voting powers,
preferences and relative, participating, optional and other special rights, and
the qualifications, limitations or restrictions thereof, if any, of each such
series may differ from those of any and all other series of Preferred Stock at
any time outstanding, and the Board is hereby expressly granted authority to
fix or alter, by resolution or resolutions, the designation, number, voting
powers, preferences and relative, participating, optional and other special
rights, and the qualifications, limitations and restrictions thereof, of each
such series, including, but without limiting the generality of the foregoing,
the following:
(1) The distinctive designation of, and the number of
shares of Preferred Stock that shall constitute, such series, which
number (except where otherwise provided by the Board in the resolution
establishing such series) may be increased or decreased (but not below
the number of shares of such series then outstanding) from time to
time by action of the Board;
(2) The rights in respect of dividends, if any, of such
series of Preferred Stock, the extent of the preference or relation,
if any, of such dividends to the dividends payable on any other class
or classes or any other series of the same or other class or classes
of capital stock of the Corporation, and whether or in what
circumstances such dividends shall be cumulative;
(3) The right, if any, of the holders of such series of
Preferred Stock to convert the same into, or exchange the same for,
shares of any other class or classes or of any other series of the
same or any other class or classes of capital stock or other
securities of the Corporation or any other person, and the terms and
conditions of such conversion or exchange;
(4) Whether or not shares of such series of Preferred
Stock shall be subject to redemption, and, if so, the terms and
conditions of such redemption (including whether such
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redemption shall be optional or mandatory), including the date or
dates or event or events upon or after which they shall be redeemable,
and the amount and type of consideration payable upon redemption,
which may vary under different conditions and at different redemption
dates;
(5) The rights, if any, of the holders of such series of
Preferred Stock upon the voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation or in the event of any
merger or consolidation of or sale of assets by the Corporation;
(6) The terms of any sinking fund or redemption or
purchase account, if any, to be provided for shares of such series of
the Preferred Stock;
(7) The voting powers, if any, of the holders of any
series of Preferred Stock generally or with respect to any particular
matter, which may be less than, equal to or greater than one vote per
share, and which may, without limiting the generality of the
foregoing, include the right, voting as a series by itself or together
with the holders of any other series of Preferred Stock or all series
of Preferred Stock as a class, to elect one or more directors of the
Corporation generally or under such specific circumstances and on such
conditions, as shall be provided in the resolution or resolutions of
the Board adopted pursuant hereto, including, without limitation, in
the event there shall have been a default in the payment of dividends
on or redemption of any one or more series of Preferred Stock; and
(8) Any other powers, preferences and relative,
participating, optional or other rights, and qualifications,
limitations or restrictions of shares of such series of Preferred
Stock.
C. (1) After the provisions with respect to
preferential dividends on any series of Preferred Stock (fixed in
accordance with the provisions of Paragraph B of this Article V), if
any, shall have been satisfied and after the Corporation shall have
complied with all the requirements, if any, with respect to redemption
of, or the setting aside of sums as sinking funds or redemption or
purchase accounts with respect to, any series of Preferred Stock
(fixed in accordance with the provisions of Paragraph B of this page
Article V), and subject further to any other conditions that may be
fixed in accordance with the provisions of Paragraph B of this Article
V, then and not otherwise the holders of Common Stock shall be
entitled to receive such dividends as may be declared from time to
time by the Board.
(2) In the event of the voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, after
distribution in full of the preferential amounts, if any (fixed in
accordance with the provisions of Paragraph B of this Article V), to
be distributed to the holders of Preferred Stock by reason thereof,
the holders of Common Stock shall, subject to the additional rights,
if any (fixed in accordance with the provisions of Paragraph B of this
Article V), of the holders of any outstanding shares of Preferred
Stock, be entitled to receive all of the remaining assets of the
Corporation, tangible and intangible, of whatever
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kind available for distribution to stockholders ratably in proportion
to the number of shares of Common Stock held by them respectively.
(3) Except as may otherwise be required by law, and
subject to the provisions of such resolution or resolutions as may be
adopted by the Board pursuant to Paragraph B of this Article V
granting the holders of one or more series of Preferred Stock
exclusive voting powers with respect to any matter, each holder of
Common Stock shall have one vote in respect of each share of Common
Stock held on all matters voted upon by the stockholders.
(4) The authorized amount of shares of Common Stock and
of Preferred Stock may, without a class or series vote, be increased
or decreased from time to time by the affirmative vote of the holders
of a majority of the combined voting power of the then-outstanding
shares of Voting Stock, voting together as a single class.
D. No stockholder of the Corporation shall by reason of
his holding shares of any class or series of stock of the Corporation have any
preemptive or preferential right to purchase, acquire, subscribe for or
otherwise receive any additional, unissued or treasury shares (whether now or
hereafter acquired) of any class or series of stock of the Corporation now or
hereafter to be authorized, or any notes, debentures, bonds or other securities
convertible into or carrying any right, option or warrant to purchase, acquire,
subscribe for or otherwise receive shares of any class or series of stock of
the Corporation now or hereafter to be authorized, whether or not the issuance
of any such shares, or such notes, debentures, bonds or other securities, would
adversely affect the dividends or voting or other rights of such stockholder,
and the Board may issue or authorize the issuance of shares of any class or
series of stock of the Corporation, or any notes, debentures, bonds or other
securities convertible into or carrying rights, options or warrants to
purchase, acquire, subscribe for or otherwise receive shares of any class or
series of stock of the Corporation, without offering any such shares of any
such class, either in whole or in part, to the existing stockholders of any
class.
E. Cumulative voting of shares of any class or series of
capital stock of the Corporation having voting rights is not permitted.
ARTICLE VI
Election of Directors
A. The business and affairs of the Corporation shall be
conducted and managed by, or under the direction of, the Board. Except as
otherwise provided for or fixed pursuant to the provisions of Article V of this
Certificate of Incorporation relating to the rights of the holders of any one
or more series of Preferred Stock to elect additional directors, the total
number of directors constituting the entire Board shall be not less than three
nor more than eleven, with the then-authorized number of directors being fixed
from time to time by or pursuant to a resolution passed by the Board.
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B. On and after the Public Status Date, the Board, other
than those directors elected by the holders of any series of Preferred Stock as
provided for or fixed pursuant to the provisions of Article V of this
Certificate of Incorporation, shall be divided into three classes, Class I,
Class II and Class III, and the Board, by resolution or resolutions adopted on
or prior to the Public Status Date, shall designate the directors who shall
first serve in Class I, Class II and Class III, effective as of the Public
Status Date. Such classes shall be as nearly equal in number as possible.
Each director shall serve for a term ending on the third annual meeting
following the annual meeting at which such director was elected; provided,
however, that the directors first designated to Class I shall serve for a term
expiring at the annual meeting next following the date of their designation as
Class I Directors, the directors first designated to Class II shall serve for a
term expiring at the second annual meeting next following the date of their
designation as Class II Directors, and the directors first designated to Class
III shall serve for a term expiring at the third annual meeting next following
the date of their designation as Class III Directors. At each annual election
of directors, the directors chosen to succeed those whose terms then expire
shall be of the same class as the directors of the Corporation they succeed,
unless, by reason of any intervening changes in the authorized number of
directors, the Board of Directors shall designate one or more directorships
whose term then expires as directorships of another class in order more nearly
to achieve equality of number of directors among the classes. In the event of
any change in the authorized number of Directors of the Corporation, each
Director of the Corporation then continuing to serve as such shall nevertheless
continue as a Director of the class of which he is a member until the
expiration of his current term, or his prior death, resignation or removal.
C. Except as otherwise provided for or fixed pursuant to
the provisions of Article V of this Certificate of Incorporation relating to
the rights of the holders of any series of Preferred Stock to elect additional
directors, and subject to the provisions hereof, newly created directorships
resulting from any increase in the authorized number of directors, and any
vacancies on the Board resulting from death, resignation, disqualification,
removal, or other cause, may be filled only by the affirmative vote of a
majority of the remaining directors then in office, even though less than a
quorum of the Board. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or in which the vacancy
occurred, and until such director's successor shall have been duly elected and
qualified, subject to his earlier death, disqualification, resignation or
removal. Except as otherwise provided pursuant to Article V of this
Certificate of Incorporation relating to additional directors elected by the
holders of one or more series of Preferred Stock, no decrease in the number of
directors constituting the Board shall shorten the term of any incumbent
director.
D. During any period when the holders of any series of
Preferred Stock have the right to elect additional directors as provided for or
fixed pursuant to the provisions of Article V of this Certificate of
Incorporation, then upon commencement and for the duration of the period during
which such right continues (i) the then otherwise total authorized number of
directors of the Corporation shall automatically be increased by such specified
number of directors, and the holders of such Preferred Stock shall be entitled
to elect the additional directors so provided for or fixed pursuant to said
provisions, and (ii) each such additional director shall serve until such
director's
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successor shall have been duly elected and qualified, or until such director's
right to hold such office terminates pursuant to said provisions, whichever
occurs earlier, subject to his earlier death, disqualification, resignation or
removal. Except as otherwise provided by the Board in the resolution or
resolutions establishing such series, whenever the holders of any series of
Preferred Stock having such right to elect additional directors are divested of
such right pursuant to the provisions of such stock, the terms of office of all
such additional directors elected by the holders of such stock, or elected to
fill any vacancies resulting from the death, resignation, disqualification or
removal of such additional directors, shall forthwith terminate and the total
and authorized number of directors of the Corporation shall be reduced
accordingly.
E. Except for such additional directors, if any, as are
elected by the holders of any series of Preferred Stock as provided for or
fixed pursuant to the provisions of Article V of this Certificate of
Incorporation, any director may be removed from office only for cause and only
by the affirmative vote of the holders of 75% or more of the combined voting
power of the then-outstanding shares of Voting Stock at a meeting of
stockholders called for that purpose, voting together as a single class.
ARTICLE VII
Meetings of Stockholders
A. Meetings of stockholders of the Corporation may be
held within or without the State of Delaware, as the By-laws of the Corporation
may provide. Except as otherwise provided for or fixed pursuant to the
provisions of Article V of this Certificate of Incorporation relating to the
rights of the holders of any series of Preferred Stock, special meetings of
stockholders of the Corporation may be called only by the Chairman of the
Board, the President or the Board pursuant to a resolution adopted by a
majority of the then-authorized number of directors of the Corporation;
provided, however, that on and after the Public Status Date, where such special
meeting of stockholders is called for the purpose of acting upon a proposal
made by or on behalf of a Related Person or, at any time that one or more
Related Persons exist, by or at the request of a director who is not a
Continuing Director as to all Related Persons, or where a Related Person
otherwise seeks action requiring approval of stockholders, then, in addition to
the aforesaid vote of directors, the affirmative vote of a majority of the
Continuing Directors, if any, shall also be required to call such special
meeting of stockholders. Special meetings of stockholders may not be called by
any other person or persons or in any other manner. Elections of directors
need not be by written ballot unless the By-laws of the Corporation shall so
provide.
B. In addition to the powers conferred on the Board by
this Certificate of Incorporation and by the General Corporation Law, and
without limiting the generality thereof, the Board is specifically authorized
from time to time, by resolution of the Board without additional authorization
by the stockholders of the Corporation, to adopt, amend or repeal the By-laws
of the Corporation, in such form and with such terms as the Board may
determine, including, without limiting the generality of the foregoing, By-laws
relating to (i) regulation of the procedure for
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submission by stockholders of nominations of persons to be elected to the
Board, (ii) regulation of the attendance at annual or special meetings of the
stockholders of persons other than holders of record or their proxies, and
(iii) regulation of the business that may properly be brought by a stockholder
of the Corporation before an annual or special meeting of stockholders of the
Corporation.
ARTICLE VIII
Stockholder Consent
Except as otherwise provided for or fixed pursuant to the
provisions of Article V of this Certificate of Incorporation relating to the
rights of the holders of any series of Preferred Stock, no action required to
be taken or that may be taken at any annual or special meeting of stockholders
of the Corporation may be taken without a meeting, and the power of the
stockholders of the Corporation to consent in writing, without a meeting, to
the taking of any action is specifically denied, provided, however, that prior
to the Public Status date stockholders may take action on any matter by written
consent of all the holders of Voting Stock entitled to vote on such matters.
ARTICLE IX
Limitation of Liability
A director of this Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law as the
same exists or may hereafter be amended. Any repeal or modification of the
foregoing paragraph shall not adversely affect any right or protection of a
director of the Corporation existing hereunder with respect to any act or
omission occurring prior to such repeal or modification.
ARTICLE X
Executive Committee
The Board, pursuant to the By-laws of the Corporation or by
resolution passed by a majority of the then-authorized number of directors, may
designate any of their number to constitute an Executive Committee, which
Executive Committee, to the fullest extent permitted by law and provided for in
said resolution or in the By-laws of the Corporation, shall have and may
exercise all of the powers of the Board in the management of the business and
affairs of the Corporation, and shall have power to authorize the seal of the
Corporation to be affixed to all papers that may require it.
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ARTICLE XI
Business Combinations
A. In addition to any affirmative vote required by law,
and except as otherwise expressly provided in Paragraph B of this Article XI,
on and after the Public Status Date, a Business Combination shall require the
affirmative vote of the holders of (1) 80% or more of the combined voting power
of the then-outstanding shares of Voting Stock, voting together as a single
class and (2) at least a majority of the Disinterested Shares, voting together
as a single class. Such affirmative vote shall be required notwithstanding the
fact that no vote may be required, or that some lesser percentage may be
specified, by law or in any agreement with any national securities exchange or
otherwise.
B. The provisions of Paragraph A of this Article XII
shall not be applicable to any particular Business Combination, and such
Business Combination shall require only such affirmative vote as is required by
law and any other provisions of this Certificate of Incorporation or the
By-laws, if there are one or more Continuing Directors then in office and if
such Business Combination has been approved by the Board by (i) the affirmative
vote of at least a majority of the then-authorized number of directors and (ii)
the affirmative vote of at least a majority of the Continuing Directors then in
office.
ARTICLE XII
Amendment Of Corporate Documents
A. CERTIFICATE OF INCORPORATION
In addition to any affirmative vote required by applicable law
and in addition to any vote of the holders of any series of Preferred Stock
provided for or fixed pursuant to the provisions of Article V of this
Certificate of Incorporation, any alteration, amendment, repeal or rescission
(a "Change") of any provision of this Certificate of Incorporation must be
approved by at least a majority of the then-authorized number of directors and
by the affirmative vote of the holders of at least a majority of the combined
voting power of the then-outstanding shares of Voting Stock, voting together as
a single class; provided, however, that if any such Change relates to Articles
II, V, VI, VII, VIII, IX, X or XI hereof or to this Article XII, such Change
must also be approved by the affirmative vote of the holders of at least 80% of
the combined voting power of the then-outstanding shares of Voting Stock,
voting together as a single class and, if at the time there exist one or more
Related Persons, such Change must also be approved by the affirmative vote of
the holders of at least a majority of the combined voting power of the
Disinterested Shares; provided further, however, that the vote(s) required by
the immediately preceding proviso shall not be required if such Change has been
first approved by at least two-thirds of the then-authorized number of
directors and, if at the time there exist one or more Related Persons, by a
majority of the Continuing Directors then in office, if any. Subject to the
provisions hereof, the Corporation reserves the right at any time, and
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from time to time, to amend, alter, repeal or rescind any provision contained
in this Certificate of Incorporation in the manner now or hereafter prescribed
by law, and other provisions authorized by the laws of the State of Delaware at
the time in force may be added or inserted, in the manner now or hereafter
prescribed by law; and all rights, preferences and privileges of whatsoever
nature conferred upon stockholders, directors or any other persons whomsoever
by and pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the rights reserved in this article.
B. BY-LAWS
In addition to any affirmative vote required by law, any
Change of the By-laws of the Corporation may be adopted either (i) by the Board
by the affirmative vote of at least a majority of the then-authorized number of
directors and, if at the time there exist one or more Related Persons, by the
affirmative vote of at least a majority of the Continuing Directors then in
office, if any, or (ii) by the stockholders by the affirmative vote of the
holders of at least 80% of the combined voting power of the then-outstanding
shares of Voting Stock, voting together as a single class and, if at the time
there exist one or more Related Persons, by the affirmative vote of the holders
of at least a majority of the combined voting power of the Disinterested
Shares.
ARTICLE XIII
Incorporator; Initial Board
The name and mailing address of the incorporator is:
Linda F. Condit
P.O. Box 2967
Houston, Texas 77252-2967
The initial members of the Board (who shall serve until the
first annual meeting of the stockholders of the Corporation or until their
successors are elected and qualify), and their mailing addresses, are:
David P. Alderson, II
P.O. Box 2967
Houston, TX 77252-2967
James L. Pate
P.O. Box 2967
Houston, TX 77252-2967
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James W. Shaddix
P.O. Box 2967
Houston, TX 77252-2967
The powers of the incorporator shall cease upon the filing of
this Certificate of Incorporation.
/s/ LINDA F. CONDIT
----------------------------
Linda F. Condit
Incorporator
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CERTIFICATE OF MERGER
MERGING
PENNZOIL PRODUCTS COMPANY
(A NEVADA CORPORATION)
WITH AND INTO
PPC REINCORP COMPANY
(A DELAWARE CORPORATION)
(UNDER THE NAME PENNZOIL PRODUCTS COMPANY)
PPC Reincorp Company, a Delaware corporation, DOES HEREBY CERTIFY:
1. The name and state of incorporation of each of the
constituent corporations are:
Pennzoil Products Company, a Nevada corporation; and
PPC Reincorp Company, a Delaware corporation.
2. An agreement of merger has been approved, adopted,
certified, executed and acknowledged by each of the constituent corporations in
accordance with Section 252(c) of the General Corporation Law of the State of
Delaware.
3. The surviving corporation is PPC Reincorp Company, a
Delaware corporation, the name of which shall be changed in accordance with the
amendment to its certificate of incorporation hereinafter described.
4. The Certificate of Incorporation of the surviving
corporation is amended by changing Article I thereof to read in its entirety as
follows:
"ARTICLE I
Name
The name of this corporation (the "Corporation") is Pennzoil Products Company."
5. The executed agreement of merger is on file at the
office of the surviving corporation at P.O. Box 2967, Houston, Texas
77252-2967.
<PAGE> 15
6. A copy of the agreement of merger will be furnished
by the surviving corporation, Pennzoil Products Company, a Delaware
corporation, on request and without cost, to any stockholder of any constituent
corporation in the merger.
7. The authorized capital stock of Pennzoil Products
Company, a Nevada corporation, is 250,000,000 shares, divided into 50,000,000
shares of Preferred Stock, $1.00 par value, 100,000,000 shares of Class A
Common Stock, $0.10 par value, and 100,000,000 shares of Class B Common Stock,
$0.10 par value.
8. This Certificate of Merger shall be effective at
11:59 p.m., Eastern Standard time on March 27, 1998.
IN WITNESS WHEREOF, PPC Reincorp Company has caused this
Certificate to be signed by Linda F. Condit, Vice President and Secretary, on
the 25th day of March, 1998
PPC REINCORP COMPANY
By /s/ LINDA F. CONDIT
----------------------------
Linda F. Condit
Vice President and Secretary
-2-
<PAGE> 1
EXHIBIT 3.3
BY-LAWS
PENNZOIL PRODUCTS COMPANY
ARTICLE 1
STOCKHOLDERS' MEETINGS
Section 1. ANNUAL MEETING. The annual meeting of the
stockholders shall be held at 10:00 a.m., Houston time on the fourth Thursday
in April in each year at the principal office of the Corporation or at such
other date, time or place as may be designated by resolution of the Board of
Directors.
Section 2. SPECIAL MEETINGS. Subject to the provisions of the
Certificate of Incorporation (the "Certificate"), special meetings of the
stockholders may be called only by the Chairman of the Board of Directors, the
President, or by the Board of Directors pursuant to a resolution adopted by a
majority of the then-authorized number of directors.
Section 3. NOTICE. Notice of all meetings of the stockholders
shall be given by mailing to each stockholder, at least ten days, or such
greater number of days as shall be required by law, before said meeting, at his
last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. QUORUM. The presence in person or by proxy of the
holders of a majority of the voting power of the then-outstanding shares of
Voting Stock (as defined in the Certificate) on the record date, as herein
determined, shall constitute a quorum at all meetings of stockholders for the
transaction of any business, but, in the absence of a quorum, the holders of a
smaller number of shares of Voting Stock may adjourn a meeting from time to
time, without further notice (unless otherwise required herein or by law),
until a quorum is secured. Unless otherwise provided in the Certificate, at
each annual or special meeting of stockholders, each stockholder shall be
entitled to one vote, either in person or by proxy, for each share of Common
Stock registered in the stockholder's name on the books of the Corporation on
the record date for any such meeting as determined herein.
Section 5. ADJOURNMENT. Any meeting of stockholders, annual
or special, may adjourn from time to time to reconvene at the same or some
other place, and, unless otherwise required by law and subject to the
provisions hereof, notice need not be given of any such adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting the Corporation may transact any
business that might have been transacted at the original meeting. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
Section 6. PROCEDURES. Meetings of stockholders shall be
presided over by the Chairman of the Board or in his absence by the President,
or in his absence by a Vice President, or
<PAGE> 2
in the absence of the foregoing persons by a chairman designated by the Board
of Directors, or in the absence of such designation by a chairman chosen at the
meeting. The Secretary of the Corporation shall act as secretary of the
meeting, but in his absence the chairman of the meeting may appoint any person
to act as secretary of the meeting.
The date and time of the opening and the closing of the polls
for each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting by the person presiding over the meeting. The Board of
Directors of the Corporation may adopt by resolution such rules and regulations
for the conduct of the meeting of stockholders as it shall deem appropriate.
Except to the extent inconsistent with such rules and regulations as adopted by
the Board of Directors, the chairman of any meeting of stockholders shall have
the right and authority to prescribe such rules, regulations and procedures and
to do all such acts as, in the judgment of such chairman, are appropriate for
the proper conduct of the meeting. Such rules, regulations or procedures,
whether adopted by the Board of Directors or prescribed by the chairman of the
meeting, may include, without limitation, the following: (i) the establishment
of an agenda or order of business for the meeting; (ii) rules and procedures
for maintaining order at the meeting and the safety of those present; (iii)
limitations on attendance at or participation in the meeting to stockholders of
record of the Corporation, their duly authorized and constituted proxies or
such other persons as the chairman of the meeting shall determine; (iv)
restrictions on entry to the meeting after the time fixed for the commencement
thereof; and (v) limitations on the time allotted to questions or comments by
participants. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with the rules of parliamentary procedure.
Section 7. PROXIES; REQUIRED VOTE. Each stockholder entitled
to vote at a meeting of stockholders may authorize another person or persons to
act for him by proxy, but no such proxy shall be voted or acted upon after three
years from its date, unless the proxy provides for a longer period. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and if,
and only as long as, it is coupled with an interest sufficient in law to support
an irrevocable power. A stockholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary of the corporation. At all meetings of
stockholders for the election of directors plurality of the voting power of the
Voting Stock present at the meeting shall be sufficient to elect. In the case of
a matter submitted for action by the stockholders at the direction of the Board
of Directors as to which a stockholder approval requirement is applicable under
a rule or policy of a national stock exchange or any provision of the Internal
Revenue Code, in each case for which no higher voting requirement is specified
by law, the Certificate or these By-laws, the vote required for approval shall
be the requisite vote specified in such rule or policy or Internal Revenue Code
provision, as the case may be (or the highest such requirement if more than one
is applicable). For approval of the appointment of independent public
accountants (if submitted for a vote at the direction of the Board of
Directors), the vote required for approval shall be a majority of the votes cast
on the matter. All other elections and questions shall, unless otherwise
provided by law, the
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Certificate or these By-laws, be decided by the vote of the holders of shares
of stock having a majority of the voting power of the then-outstanding shares
of Voting Stock.
Section 8. NOMINATIONS. Except for directors elected by the
holders of any series of Preferred Stock as provided for or fixed pursuant to
the provisions of Article V of the Certificate, or for directors otherwise
elected pursuant to the provisions of Section C of Section VI of the
Certificate, only individuals nominated for election to the Board of Directors
pursuant to and in accordance with the provision of this Section 8 may be
elected to and may serve upon the Board of Directors of the Corporation.
Subject to the rights of holders of any series of Preferred Stock of the
Corporation to elect directors under specified circumstances, nominations for
the election of directors may be made only (i) by or at the direction of the
Board of Directors (or any duly authorized committee thereof) or (ii) by any
stockholder of record entitled to vote in the election of directors generally
who complies with the procedures set forth in this Section 8. Subject to the
foregoing, only a stockholder of record entitled to vote in the election of
directors generally may nominate persons for election as a director at a
meeting of stockholders and only if written notice of such stockholder's intent
to make a nomination or nominations has been given, either by personal delivery
or by United States mail, postage prepaid, to the Secretary of the Corporation
and has been received by the Secretary at the principal executive offices of
the Corporation, (i) with respect to an election to be held at an annual
meeting of stockholders not less than 90 days nor more than 120 days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within 30 days before or after such anniversary
date, notice by the stockholder, in order to be timely, must be so received not
later than the close of business on the tenth day following the day on which
such notice of such meeting is first mailed by the Corporation to stockholders
or public disclosure of the date of the annual meeting was made, whichever
first occurs; and (ii) with respect to an election to be held at a special
meeting of stockholders for the election of directors, the close of business on
the tenth day following the date on which notice of such meeting is first
mailed by the Corporation to stockholders or public disclosure of the date and
purpose of such special meeting was made, whichever first occurs. In no event
shall the public disclosure of an adjournment or postponement of a meeting
commence a new time period for the giving of a stockholder's notice as
described above.
To be in proper written form, a stockholder's notice to the
Secretary must set forth (a) as to each person whom the stockholder proposes to
nominate for election as a director (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment
of such person, (iii) the class or series and number of shares of capital stock
of the Corporation which are owned beneficially or of record by such person and
(iv) any other information relating to such person that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors pursuant to
Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder; and (b) as to the
stockholder giving the notice (i) the name and record address of such
stockholder, (ii) the number of shares of each class or series of capital
stock of the Corporation that are owned beneficially or of record by such
stockholder, (iii) a
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description of all arrangements or understandings between such stockholder and
each proposed nominee and any other person or persons (including their names)
pursuant to which the nomination(s) are to be made by such stockholder, (iv) a
representation that such stockholder intends to appear in person or by proxy at
the meeting to nominate the persons named in its notice and (v) any other
information relating to such stockholder that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of the directors pursuant to Section 14
of the Exchange Act and the rules and regulations promulgated thereunder. To be
effective, such notice must be accompanied by a written consent of each
proposed nominee to be named as a nominee and to serve as a director if
elected.
The chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not properly brought
before the meeting in accordance with the provisions hereof and, if he should
so determine, he shall declare to the meeting that such nomination was not
properly brought before the meeting and shall not be considered.
Notwithstanding anything in the first paragraph of this
Section 8 to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public disclosure by the Corporation naming all of the nominees for director
or specifying the size of the increased Board of Directors at least 100 days
prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 8 shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the Corporation not later than the close of business on the 10th day
following the day on which such public disclosure is first made by the
Corporation.
Nothing in this Section 8 shall be interpreted or construed
to require the inclusion of information about any such nominee in any proxy
statement distributed by, at the direction of, or on behalf of the Board or the
Corporation.
For purposes of this Section 8 and Section 9 of these
by-laws, "public disclosure" shall mean disclosure in a press release reported
by the Dow Jones News Service, Associated Press, PR Newswire, Bloomberg or
comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
Section 9. PROPER BUSINESS. At a meeting of the stockholders,
only such business shall be conducted as shall be a proper subject for the
meeting and shall have been properly brought before the meeting. To be properly
brought before a meeting, business must (a) be specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board
of Directors (or any duly authorized committee thereof), (b) otherwise be
properly brought before the meeting by or at the direction of the Board of
Directors (or any duly authorized committee thereof), or (c) otherwise (i) be
properly requested to be brought before the meeting by a stockholder of record
entitled to vote in the election of directors generally, in compliance with the
provisions of this
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Section 9; and (ii) constitute a proper subject to be brought before such
meeting. For business to be properly brought before a meeting of stockholders,
any stockholder who intends to bring any matter (other than the election of
directors) before a meeting of stockholders and is entitled to vote on such
matter must deliver written notice of such stockholder's intent to bring such
matter before the meeting of stockholders, either by personal delivery or by
United States mail, postage prepaid, to the Secretary of the Corporation. Such
notice must be received by the Secretary, with respect to an annual meeting of
stockholders, not less than 90 days nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting of shareholders;
provided, however, that in the event that the annual meeting is called for a
date that is not within 30 days before or after such anniversary date, notice
by the stockholder, in order to be timely, must be so received not later than
the close of business on the tenth day following the day on which such notice
of such meeting is first mailed by the Corporation to stockholders or public
disclosure (as defined in Section 8) of the date of the annual meeting was
made, whichever first occurs. In no event shall the public disclosure of an
adjournment of a meeting commence a new time period for the giving of a
stockholder's notice as described above.
To be in proper written form, a stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the meeting of stockholders (a) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting (which, in case the proposal is for any alteration,
amendment, rescission or repeal of these By-laws, shall include the text of the
resolution which will be proposed to implement the same), (b) the name and
record address of the stockholder proposing such business, (c) the number of
shares of each class or series of capital stock of the Corporation that are
owned beneficially or of record by such stockholder, (d) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such
business by such stockholder and any material interest of such stockholder in
such business and (e) a representation that such stockholder intends to appear
in person or by proxy at the annual meeting to bring such business before the
meeting. No business shall be conducted at a meeting of stockholders except in
accordance with the procedures set forth in this Section 9.
The chairman of a meeting shall, if the facts warrant,
determine and declare to the meeting that (i) the business proposed to be
brought before a meeting is not a proper subject therefor and/or (ii) such
business was not properly brought before the meeting in accordance with the
provisions hereof and, if he should so determine, he shall declare to the
meeting that (i) the business proposed to be brought before a meeting is not a
proper subject therefor and/or (ii) such business was not properly brought
before the meeting and shall not be transacted.
Nothing in this Section 9 shall be interpreted or construed
to require the inclusion of information about any such proposal in any proxy
statement distributed by, at the direction of, or on behalf of the Board or the
Corporation.
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Section 10. STOCKHOLDER LIST. The Secretary shall cause to be
prepared and made, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present.
Section 11. PROPER BUSINESS - SPECIAL MEETING. At any special
meeting of stockholders, only such business shall be conducted as shall have
been stated in the notice of such meeting.
Section 12. INSPECTORS OF ELECTION. The Corporation shall, in
advance of any meeting of stockholders, appoint one or more inspectors of
election, who may be employees of the Corporation, to act at the meeting or any
adjournment thereof and to make a written report thereof. The Corporation may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. In the event that no inspector so appointed or designated is
able to act at a meeting of stockholders, the person presiding at the meeting
shall appoint one or more inspectors to act at the meeting. Each inspector,
before entering upon the discharge of his or her duties, shall take and sign an
oath to execute faithfully the duties of inspector with strict impartiality and
according to the best of his or her ability.
The inspector or inspectors so appointed or designated shall
(i) ascertain the number of shares of capital stock of the Corporation
outstanding and the voting power of each such share, (ii) determine the shares
of capital stock of the Corporation represented at the meeting and the validity
of proxies and ballots, (iii) count all votes and ballots, (iv) determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors, and (v) certify their
determination of the number of shares of capital stock of the Corporation
represented at the meeting and such inspectors' count of all votes and ballots.
Such certification and report shall specify such other information as may be
required by law. In determining the validity and counting of proxies and
ballots cast at any meeting of stockholders of the Corporation, the inspectors
may consider such information as is permitted by applicable law. No person who
is a candidate for an office at an election may serve as an inspector at such
election.
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ARTICLE 2
DIRECTORS
Section 1. MANAGEMENT. The affairs and business of the
Corporation shall be managed by or under the direction of the Board of
Directors.
Section 2. NUMBER. The authorized number of directors that
shall constitute the Board of Directors shall be fixed from time to time by or
pursuant to a resolution passed by a majority of the Board within the
parameters set by the Certificate.
Section 3. QUALIFICATION. Except as provided in these
By-laws or as otherwise required by law, there shall be no qualifications for
directors of the Corporation.
Section 4. MEETINGS. The Board of Directors shall meet at the
principal office of the Corporation or elsewhere in its discretion at such
times to be determined by a majority of its members, or at the call of the
Chairman of the Board or the President.
Section 5. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board or by the
President, and shall be called upon the written request of a majority of the
then-authorized number of directors.
Section 6. QUORUM. Unless otherwise provided by law, a
majority of the directors elected and qualified shall be necessary to
constitute a quorum for the transaction of business at any meeting of the Board
of Directors.
Section 7. NOTICE. Written notice of any special meeting of
the Board of Directors, and of any change in the time or place of any regular
meeting of the Board of Directors, shall be given to each director addressed or
directed to him at his residence or usual place of business, by telegram,
cablegram, facsimile transmission or other means of electronic transmission, or
shall be given to him personally or by telephone, not later than the day before
the day on which the meeting is to be held. Such notice shall state the time
and place of such meeting, but need not state the purpose or purposes for which
the meeting is called, unless otherwise required by statute.
Section 8. VACANCIES. Subject to the provisions of the
Certificate, newly created directorships resulting from any increase in the
number of directors and any vacancies on the Board resulting from death,
resignation, disqualification, removal or other cause shall be filled only by
the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum. Any director elected pursuant hereto shall hold
office for the remainder of the full term of the class of directors in which
the new directorship was created or in which the vacancy occurred, and until
such director's successor shall have been elected and qualified.
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Section 9. REMOVAL. The Board of Directors may at any time
remove, with or without cause, any member of any Committee appointed by it or
any officer elected by it and may appoint or elect his successor.
ARTICLE 3
COMMITTEES OF THE BOARD OF DIRECTORS
Section 1. EXECUTIVE COMMITTEE.
(A) COMPOSITION. The Executive Committee shall be composed of
at least two members who shall be selected by the Board of Directors from its
own members and who shall hold office at the pleasure of the Board.
(B) POWERS. The Executive Committee shall have and may
exercise, to the fullest extent permitted by law, all the powers of the Board
of Directors when it is not in session in the management of the business and
affairs of the Corporation to transact all business for and on behalf of the
Corporation that may be brought before it.
(C) MEETINGS. The Executive Committee shall meet at the
principal office of the Corporation or elsewhere in its discretion at such
times to be determined by a majority of its members. A majority of its members
shall be necessary to constitute a quorum for the transaction of business.
Special meetings of the Executive Committee may be held at any time when a
quorum is present.
(D) MINUTES. Minutes of each meeting of the Executive
Committee shall be kept and submitted to the Board of Directors at its next
meeting.
Section 2. OTHER COMMITTEES.
The Board of Directors may, by resolutions adopted by a
majority of the entire Board, designate one or more of its members to
constitute any other committee or committees with such powers, duties,
responsibilities and term of existence as the Board of Directors shall
determine.
Section 3. ABSENCE OR DISQUALIFICATION OF ANY MEMBER OF A
COMMITTEE. In the absence or disqualification of any member of any Committee
created under Article 3 of the By-laws of this Corporation, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
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ARTICLE 4
OFFICERS
Section 1. The officers of the Corporation shall consist of a
Chairman of the Board, President, Secretary, Treasurer and such Executive,
Group, Senior or other Vice Presidents, and other officers as may be elected or
appointed by the Board of Directors. Any number of offices may be held by the
same person. All officers shall hold office until their successors are elected
or appointed, except that the Board of Directors may remove any officer at any
time at its discretion.
Section 2. The officers of the Corporation shall have such
powers and duties as generally pertain to their offices, except as modified
herein or by the Board of Directors, as well as such powers and duties as from
time to time may be conferred by the Board of Directors. The Chairman of the
Board shall be the chief executive officer of the Corporation and shall have
general supervision over the business, affairs, and property of the Corporation
and over its several officers, and shall preside at meetings of the Board and
at meetings of the stockholders. The President shall be the chief operating
officer of the Corporation and shall have such duties as may be assigned to him
by the Board of Directors.
ARTICLE 5
STOCK AND STOCK CERTIFICATES
Section 1. TRANSFER. Shares of stock shall be transferable
on the books of the Corporation, and a transfer book shall be kept in which all
transfers of stock shall be recorded.
Section 2. CERTIFICATES. Every holder of stock shall be
entitled to have a certificate signed by or in the name of the Corporation by
the Chairman of the Board, the President or a Vice President, and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary,
of the Corporation. The corporate seal affixed thereto, and any of or all the
signatures on the certificate, may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
Section 3. RECORD DATE. The Board of Directors is authorized
to fix in advance a record date for the determination of the stockholders
entitled to notice of, and to vote at any meeting of stockholders and any
adjournment, or entitled to receive payment of any dividend, or to any
allotment of, or to exercise any rights in respect of any change, conversion or
exchange of capital stock, which record date shall not, unless otherwise
required by law, be more than 60 nor less than 10 days preceding the date of
any meeting of stockholders nor more than 60 days preceding the date for the
payment of any dividend, or the date for the allotment of rights, or the date
when any change or conversion or exchange of capital stock shall go into
effect.
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ARTICLE 6
SEAL
The corporate seal of the Corporation shall be in such form
as the Board of Directors shall prescribe.
ARTICLE 7
FISCAL YEAR
The fiscal year of the Corporation shall be the calendar
year.
ARTICLE 8
COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES
Directors of the Corporation, other than salaried officers of
the Corporation, shall be paid such reasonable fees for their services and for
attending meetings of the Board of Directors or committees thereof as the Board
of Directors may from time to time determine. Directors may be employed by the
Corporation for such special services as the Board of Directors may from time
to time determine and shall be paid for such special services so performed
reasonable compensation as may be determined by the Board of Directors.
Article 9
INDEMNIFICATION
SECTION 1. The Corporation shall indemnify, and advance
Expenses to, each Indemnitee to the fullest extent permitted by applicable law
in effect on March 23, 1998, and to such greater extent as applicable law may
thereafter permit. The rights of an Indemnitee provided under the preceding
sentence shall include, but not be limited to, the right to be indemnified to
the fullest extent permitted by Section 145(b) of the Delaware General
Corporation Law ("D.G.C.L.") in Proceedings by or in the right of the
Corporation and to the fullest extent permitted by Section 145(a) of the
D.G.C.L. in all other Proceedings.
SECTION 2. If an Indemnitee is, by reason of his Corporate
Status, a witness in or a party to and is successful, on the merits or
otherwise, in any Proceeding, he shall be indemnified against all Expenses
actually and reasonably incurred by him or on his behalf in connection
therewith. If an Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to any Matter in such Proceeding,
the Corporation shall indemnify such Indemnitee against all Expenses actually
and reasonably incurred by him or on his behalf relating
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to each Matter. The termination of any Matter in such a Proceeding by
dismissal, with or without prejudice, shall be deemed to be a successful result
as to such Matter.
SECTION 3. An Indemnitee shall be advanced Expenses within 10
days after requesting them to the fullest extent permitted by Section 145(e) of
the D.G.C.L.
SECTION 4. To obtain indemnification an Indemnitee shall
submit to the Corporation a written request with such relevant information as
is reasonably available to Indemnitee. The Secretary of the Corporation shall
promptly advise the Board of Directors of such request.
SECTION 5. If there has been no Change of Control at the time
the request for indemnification is sent, an Indemnitee's entitlement to
indemnification shall be determined in accordance with Section 145(d) of the
D.G.C.L. If entitlement to indemnification is to be determined by Independent
Counsel, the Corporation shall furnish notice to the Indemnitee within 10 days
after receipt of the request for indemnification, specifying the identity and
address of Independent Counsel. The Indemnitee may, within 14 days after
receipt of such written notice of selection, deliver to the Corporation a
written objection to such selection. Such objection may be asserted only on the
ground that the Independent Counsel so selected does not meet the requirements
of the definition of Independent Counsel and the objection shall set forth with
particularity the factual basis of such assertion. If there is an objection to
the selection of Independent Counsel, either the Corporation or the Indemnitee
may petition the Court of Chancery of the State of Delaware or any other court
of competent jurisdiction for a determination that the objection is without a
reasonable basis and/or for the appointment of Independent Counsel selected by
the Court.
SECTION 6. If there has been a Change of Control at the time
the request for indemnification is sent, an Indemnitee's entitlement to
indemnification shall be determined in a written opinion by Independent Counsel
selected by the Indemnitee. The Indemnitee shall give the Corporation written
notice advising of the identity and address of the Independent Counsel so
selected. The Corporation may, within seven days after receipt of such written
notice of selection, deliver to the Indemnitee a written objection to such
selection. The Indemnitee may, within 5 days after the receipt of such
objection from the Corporation, submit the name of another Independent Counsel
and the Corporation may, within seven days after receipt of such written notice
of selection, deliver to the Indemnitee a written objection to such selection.
Any objection is subject to the limitations in Section 5. The Indemnitee may
petition the Court of Chancery of the State of Delaware or any other Court of
competent jurisdiction for a determination that the Corporation's objection to
the first and/or second selection of Independent Counsel is without a
reasonable basis and/or for the appointment as Independent Counsel of a person
selected by the Court.
SECTION 7. If a Change of Control shall have occurred before
the request for indemnification is sent by the Indemnitee, the Indemnitee shall
be presumed (except as otherwise expressly provided in this Article) to be
entitled to indemnification upon submission of a request for indemnification in
accordance with Section 4 of this Article, and thereafter the Corporation shall
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have the burden of proof to overcome the presumption in reaching a
determination contrary to the presumption. The presumption shall be used by
Independent Counsel as a basis for a determination of entitlement to
indemnification unless the Corporation provides information sufficient to
overcome such presumption by clear and convincing evidence or the
investigation, review and analysis of Independent Counsel convinces him by
clear and convincing evidence that the presumption should not apply.
Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or persons
empowered under Section 5 or 6 of this Article to determine entitlement to
indemnification shall not have made and furnished to the Indemnitee in writing
a determination within 60 days after receipt by the Corporation of the request
therefor, the requisite determination of entitlement to indemnification shall
be deemed to have been made and the Indemnitee shall be entitled to such
indemnification unless the Indemnitee knowingly misrepresented a material fact
in connection with the request for indemnification or such indemnification is
prohibited by law. The termination of any Proceeding or of any Matter therein,
by judgment, order, settlement or conviction, or upon a plea of nolo contendere
or its equivalent, shall not (except as otherwise expressly provided in this
Article) of itself adversely affect the right of an Indemnitee to
indemnification or create a presumption that the Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, or with respect to any criminal
Proceeding, that the Indemnitee had reasonable cause to believe that his
conduct was unlawful.
SECTION 8. The Corporation shall pay any and all reasonable
fees and expenses of Independent Counsel incurred acting pursuant to this
Article and in any proceeding to which it is a party or witness in respect of
its investigation and written report and shall pay all reasonable fees and
expenses incident to the procedures in which such Independent Counsel was
selected or appointed. No Independent Counsel may serve if a timely objection
has been made to his selection until a Court has determined that such objection
is without a reasonable basis.
SECTION 9. In the event that (i) a determination is made
pursuant to Section 5 or 6 that an Indemnitee is not entitled to
indemnification under this Article, (ii) advancement of Expenses is not timely
made pursuant to Section 3 of this Article, (iii) Independent Counsel has not
made and delivered a written opinion determining the request for
indemnification (a) within 90 days after being appointed by the Court, or (b)
within 90 days after objections to his selection have been overruled by the
Court, or (c) within 90 days after the time for the Corporation or the
Indemnitee to object to his selection, or (iv) payment of indemnification is
not made within five days after a determination of entitlement to
indemnification has been made or deemed to have been made pursuant to Section
5, 6 or 7 of this Article, the Indemnitee shall be entitled to an adjudication
in an appropriate court of the State of Delaware, or in any other court of
competent jurisdiction, of his entitlement to such indemnification or
advancement of Expenses. In the event that a determination shall have been made
that the Indemnitee is not entitled to indemnification, any judicial proceeding
or arbitration commenced pursuant to this Section shall be conducted in all
respects as a de novo trial on the merits and the Indemnitee shall not be
prejudiced by reason of that adverse determination.
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If a Change of Control shall have occurred, in any judicial proceeding
commenced pursuant to this Section, the Corporation shall have the burden of
proving that the Indemnitee is not entitled to indemnification or advancement
of Expenses, as the case may be. If a determination shall have been made or
deemed to have been made that the Indemnitee is entitled to indemnification,
the Corporation shall be bound by such determination in any judicial proceeding
commenced pursuant to this Section 9, or otherwise, unless the Indemnitee
knowingly misrepresented a material fact in connection with the request for
indemnification, or such indemnification is prohibited by law.
The Corporation shall be precluded from asserting in any
judicial proceeding commenced pursuant to this Section 9 that the procedures
and presumptions of this Article are not valid, binding and enforceable and
shall stipulate in any such court that the Corporation is bound by all
provisions of this Article. In the event that an Indemnitee, pursuant to this
Section 9, seeks a judicial adjudication to enforce his rights under, or to
recover damages for breach of, this Article, the Indemnitee shall be entitled
to recover from the Corporation, and shall be indemnified by the Corporation
against, any and all Expenses actually and reasonably incurred by him in such
judicial adjudication, but only if he prevails therein. If it shall be
determined in such judicial adjudication that the Indemnitee is entitled to
receive part but not all of the indemnification or advancement of Expenses
sought, the Expenses incurred by the Indemnitee in connection with such
judicial adjudication or arbitration shall be appropriately prorated.
SECTION 10. The rights of indemnification and to receive
advancement of Expenses as provided by this Article shall not be deemed
exclusive of any other rights to which an Indemnitee may at any time be
entitled under applicable law, the Certificate, these By-laws, any agreement, a
vote of stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Article or any provision thereof shall be
effective as to any Indemnitee for acts, events and circumstances that
occurred, in whole or in part, before such amendment, alteration or repeal. The
provisions of this Article shall continue as to an Indemnitee whose Corporate
Status has ceased and shall inure to the benefit of his heirs, executors and
administrators.
SECTION 11. If any provision or provisions of this Article
shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby; and, to the
fullest extent possible, the provisions of this Article shall be construed so
as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable.
SECTION 12. For purposes of this Article:
A "Change of Control", shall be deemed to have occurred if,
after the Public Status Date, (1) there shall have occurred an event required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or
in response to any similar item on any similar schedule or form) promulgated
under the Exchange Act, whether or not the Corporation is then subject to such
reporting requirement; (2) any "person" (as such term is used in Section 13(d)
and 14(d) of the Exchange Act) shall have become the "beneficial owner" (as
defined in Rule 13d-3 under the
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Exchange Act), directly or indirectly, of securities of the Corporation
representing 40% or more of the combined voting power of the Corporation's then
outstanding voting securities without prior approval of at least two-thirds of
the members of the Board of Directors in office immediately prior to such
person attaining such percentage interest; (3) the Corporation is a party to a
merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which members of the Board of Directors in office
immediately prior to such transaction or event constitute less than a majority
of the Board of Directors thereafter; or (4) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (including for this purpose any new director whose
election or nomination for election by the Corporation's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Board of Directors.
"Corporate Status" describes the status of a person who (a)
is or was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, in each
case which is controlled by the Corporation, or (b) is or was serving, at the
written request of the Corporation or pursuant to an agreement in writing with
the Corporation which request or agreement provides for indemnification under
these By-laws, as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise not controlled by the
Corporation, provided that if such written request or agreement referred to in
this clause (b) provides for a lesser degree of indemnification by the
Corporation than that provided pursuant to this Article 9, the provisions
contained in or made pursuant to such written request or agreement shall
govern. References above to "other enterprises" shall include employee benefit
plans and references to "serving at the request of the Corporation" shall
include any service as a director, officer or employee which imposes duties on,
or involves services by, such director, officer or employee with respect to an
employee benefit plan or its participants or beneficiaries.
"Disinterested Director" means a director of the Corporation
who is not and was not a party to the Proceeding in respect of which
indemnification is sought by indemnitee.
"Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a witness in
a Proceeding.
"Indemnitee" includes any person who is, or is threatened to
be made, a witness in or a party to any Proceeding as described in Section 1 or
2 of this Article by reason of his Corporate Status.
"Independent Counsel" means a law firm, or member of a law
firm, that is experienced in matters of corporation law and neither presently
is, nor in the five years previous to
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his selection or appointment has been, retained to represent: (i) the
Corporation or the relevant Indemnitee in any matter material to either such
party, or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder.
"Matter" is a claim, a material issue, or a substantial
request for relief.
"Proceeding" includes any action, suit, arbitration,
alternate dispute resolution mechanism, investigation, administrative hearing
or any other proceeding whether civil, criminal, administrative or
investigative, except one initiated by an Indemnitee (a) pursuant to Section 9
of this Article to enforce his rights under this Article or (b) otherwise than
pursuant to clause (a) of this sentence and not authorized by the Board of
Directors.
"Public Status Date" shall mean the first date on which the
Corporation has outstanding a class of equity securities registered under
Section 12 of the Exchange Act.
SECTION 13. Any communication required or permitted to the
Corporation shall be addressed to the Secretary of the Corporation and any such
communication to Indemnitee shall be addressed to his home address unless he
specifies otherwise and shall be personally delivered or delivered by overnight
mail delivery.
ARTICLE 10
AMENDMENTS TO BY-LAWS
Subject to the provisions of the Certificate, and in addition
to any affirmative vote required by law, any alteration, amendment, repeal or
rescission (any "Change") of these By-laws occurring after the Public Status
Date (as defined in Section 12 of Article 9) must be approved either (i) by the
Board of Directors by the affirmative vote of at least a majority of the
then-authorized number of directors or (ii) by the stockholders by the
affirmative vote of the holders of at least 662/3% of the combined voting power
of the then-outstanding shares of Voting Stock, voting together as a single
class.
Subject to the foregoing, the Board of Directors of the
Corporation is expressly authorized to make, alter, amend, repeal or rescind
the By-laws of the Corporation.
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EXHIBIT 3.4
FORM OF AMENDED AND RESTATED BY-LAWS
PENNZOIL-QUAKER STATE COMPANY
ARTICLE 1
STOCKHOLDERS' MEETINGS
Section 1. ANNUAL MEETING. The annual meeting of the stockholders
shall be held at 10:00 a.m., Houston time on the fourth Thursday in April in
each year at the principal office of the Corporation or at such other date,
time or place as may be designated by resolution of the Board of Directors.
Section 2. SPECIAL MEETINGS. Subject to the provisions of the
Certificate of Incorporation (the "Certificate"), special meetings of the
stockholders may be called only by the Chairman of the Board of Directors, the
President, or by the Board of Directors pursuant to a resolution adopted by a
majority of the then-authorized number of directors.
Section 3. NOTICE. Notice of all meetings of the stockholders
shall be given by mailing to each stockholder, at least ten days, or such
greater number of days as shall be required by law, before said meeting, at his
last known address, a written or printed notice fixing the time and place of
such meeting.
Section 4. QUORUM. The presence in person or by proxy of the
holders of a majority of the voting power of the then-outstanding shares of
Voting Stock (as defined in the Certificate) on the record date, as herein
determined, shall constitute a quorum at all meetings of stockholders for the
transaction of any business, but, in the absence of a quorum, the holders of a
smaller number of shares of Voting Stock may adjourn a meeting from time to
time, without further notice (unless otherwise required herein or by law),
until a quorum is secured. Unless otherwise provided in the Certificate, at
each annual or special meeting of stockholders, each stockholder shall be
entitled to one vote, either in person or by proxy, for each share of Common
Stock registered in the stockholder's name on the books of the Corporation on
the record date for any such meeting as determined herein.
Section 5. ADJOURNMENT. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and, unless otherwise required by law and subject to the provisions
hereof, notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
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Section 6. PROCEDURES. Meetings of stockholders shall be presided
over by the Chairman of the Board or in his absence by the President, or in his
absence by a Vice President, or in the absence of the foregoing persons by a
chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary of the
Corporation shall act as secretary of the meeting, but in his absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
The date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting by the person presiding over the meeting. The Board
of Directors of the Corporation may adopt by resolution such rules and
regulations for the conduct of the meeting of stockholders as it shall deem
appropriate. Except to the extent inconsistent with such rules and regulations
as adopted by the Board of Directors, the chairman of any meeting of
stockholders shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of such
chairman, are appropriate for the proper conduct of the meeting. Such rules,
regulations or procedures, whether adopted by the Board of Directors or
prescribed by the chairman of the meeting, may include, without limitation,
the following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and the
safety of those present; (iii) limitations on attendance at or participation in
the meeting to stockholders of record of the Corporation, their duly authorized
and constituted proxies or such other persons as the chairman of the meeting
shall determine; (iv) restrictions on entry to the meeting after the time fixed
for the commencement thereof; and (v) limitations on the time allotted to
questions or comments by participants. Unless and to the extent determined by
the Board of Directors or the chairman of the meeting, meetings of
stockholders shall not be required to be held in accordance with the rules of
parliamentary procedure.
Section 7. PROXIES; REQUIRED VOTE. Each stockholder entitled to
vote at a meeting of stockholders may authorize another person or persons to
act for him by proxy, but no such proxy shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period. A
duly executed proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law
to support an irrevocable power. A stockholder may revoke any proxy which is
not irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary of the corporation. At all meetings of
stockholders for the election of directors, a plurality of the voting power of
the Voting Stock present at the meeting shall be sufficient to elect. In the
case of a matter submitted for action by the stockholders at the direction of
the Board of Directors as to which a stockholder approval requirement is
applicable under a rule or policy of a national stock exchange or any provision
of the Internal Revenue Code, in each case for which no higher voting
requirement is specified by law, the Certificate or these By-laws, the vote
required for approval shall be the requisite vote specified in such rule or
policy or Internal Revenue Code provision, as the case may be (or the highest
such requirement if more than one is applicable). For approval of the
appointment of independent public accountants (if submitted for a vote at the
direction of the Board of Directors), the vote required for approval shall be a
majority of the votes
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cast on the matter. All other elections and questions shall, unless otherwise
provided by law, the Certificate or these By-laws, be decided by the vote of
the holders of shares of stock having a majority of the voting power of the
then-outstanding shares of Voting Stock.
Section 8. NOMINATIONS. Except for directors elected by the
holders of any series of Preferred Stock as provided for or fixed pursuant to
the provisions of Article V of the Certificate, or for directors otherwise
elected pursuant to the provisions of Section C of Section VI of the
Certificate, only individuals nominated for election to the Board of Directors
pursuant to and in accordance with the provision of this Section 8 may be
elected to and may serve upon the Board of Directors of the Corporation.
Subject to the rights of holders of any series of Preferred Stock of the
Corporation to elect directors under specified circumstances, nominations for
the election of directors may be made only (i) by or at the direction of the
Board of Directors (or any duly authorized committee thereof) or (ii) by any
stockholder of record entitled to vote in the election of directors generally
who complies with the procedures set forth in this Section 8. Subject to the
foregoing, only a stockholder of record entitled to vote in the election of
directors generally may nominate persons for election as a director at a
meeting of stockholders and only if written notice of such stockholder's intent
to make a nomination or nominations has been given, either by personal delivery
or by United States mail, postage prepaid, to the Secretary of the Corporation
and has been received by the Secretary at the principal executive offices of
the Corporation, (i) with respect to an election to be held at an annual
meeting of stockholders not less than 90 days nor more than 120 days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within 30 days before or after such anniversary
date, notice by the stockholder, in order to be timely, must be so received not
later than the close of business on the tenth business day following the day on
which such notice of such meeting is first mailed by the Corporation to
stockholders or public disclosure of the date of the annual meeting was made,
whichever first occurs; and (ii) with respect to an election to be held at a
special meeting of stockholders for the election of directors, the close of
business on the tenth business day following the date on which notice of such
meeting is first mailed by the Corporation to stockholders or public disclosure
of the date and purpose of such special meeting was made, whichever first
occurs. In no event shall the public disclosure of an adjournment or
postponement of a meeting commence a new time period for the giving of a
stockholder's notice as described above.
To be in proper written form, a stockholder's notice to the
Secretary must set forth (a) as to each person whom the stockholder proposes to
nominate for election as a director (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment
of such person, (iii) the class or series and number of shares of capital stock
of the Corporation which are owned beneficially or of record, if any, by such
person and (iv) any other information relating to such person that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations promulgated thereunder; and (b)
as to the stockholder giving the notice (i) the name and record address of such
stockholder, (ii) the number of shares of each class or series of capital
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stock of the Corporation that are owned beneficially or of record by such
stockholder, (iii) a description of all arrangements or understandings between
such stockholder and each proposed nominee and any other person or persons
(including their names) pursuant to which the nomination(s) are to be made by
such stockholder, (iv) a representation that such stockholder intends to appear
in person or by proxy at the meeting to nominate the persons named in its
notice and (v) any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of the directors
pursuant to Section 14 of the Exchange Act and the rules and regulations
promulgated thereunder. To be effective, such notice must be accompanied by a
written consent of each proposed nominee to be named as a nominee and to serve
as a director if elected.
The chairman of the meeting shall, if the facts warrant, determine
that a nomination was not properly brought before the meeting in accordance with
the provisions hereof and, if he should so determine, he shall declare to the
meeting that such nomination was not properly brought before the meeting and
shall not be considered.
Notwithstanding anything in the first paragraph of this Section 8 to
the contrary, in the event that the number of directors to be elected to the
Board of Directors of the Corporation is increased and there is no public
disclosure by the Corporation naming all of the nominees for director or
specifying the size of the increased Board of Directors at least 100 days prior
to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 8 shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the Secretary at the principal executive
offices of the Corporation not later than the close of business on the tenth
business day following the day on which such public disclosure is first made by
the Corporation.
Nothing in this Section 8 shall be interpreted or construed to
require the inclusion of information about any such nominee in any proxy
statement distributed by, at the direction of, or on behalf of the Board or the
Corporation.
For purposes of this Section 8 and Section 9 of these by-laws,
"public disclosure" shall mean disclosure in a press release reported by the
Dow Jones News Service, Associated Press, PR Newswire, Bloomberg or comparable
national news service or in a document publicly filed by the Corporation with
the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of
the Exchange Act.
Section 9. PROPER BUSINESS. At a meeting of the stockholders, only
such business shall be conducted as shall be a proper subject for the meeting
and shall have been properly brought before the meeting. To be properly
brought before a meeting, business must (a) be specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board
of Directors (or any duly authorized committee thereof), (b) otherwise be
properly brought before the meeting by or at the direction of the Board of
Directors (or any duly authorized committee thereof), or (c) otherwise (i) be
properly requested to be brought before the meeting by a stockholder of record
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entitled to vote in the election of directors generally, in compliance with the
provisions of this Section 9; and (ii) constitute a proper subject to be
brought before such meeting. For business to be properly brought before a
meeting of stockholders, any stockholder who intends to bring any matter (other
than the election of directors) before a meeting of stockholders and is
entitled to vote on such matter must deliver written notice of such
stockholder's intent to bring such matter before the meeting of stockholders,
either by personal delivery or by United States mail, postage prepaid, to the
Secretary of the Corporation. Such notice must be received by the Secretary,
with respect to an annual meeting of stockholders, not less than 90 days nor
more than 120 days prior to the anniversary date of the immediately preceding
annual meeting of shareholders; provided, however, that in the event that the
annual meeting is called for a date that is not within 30 days before or after
such anniversary date, notice by the stockholder, in order to be timely, must
be so received not later than the close of business on the tenth business day
following the day on which such notice of such meeting is first mailed by the
Corporation to stockholders or public disclosure (as defined in Section 8) of
the date of the annual meeting was made, whichever first occurs. In no event
shall the public disclosure of an adjournment of a meeting commence a new time
period for the giving of a stockholder's notice as described above.
To be in proper written form, a stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the meeting of stockholders (a) a brief description of the business
desired to be brought before the meeting and the reasons for conducting such
business at the meeting (which, in case the proposal is for any alteration,
amendment, rescission or repeal of these By-laws, shall include the text of the
resolution which will be proposed to implement the same), (b) the name and
record address of the stockholder proposing such business, (c) the number of
shares of each class or series of capital stock of the Corporation that are
owned beneficially or of record by such stockholder, (d) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such
business by such stockholder and any material interest of such stockholder in
such business and (e) a representation that such stockholder intends to appear
in person or by proxy at the annual meeting to bring such business before the
meeting. No business shall be conducted at a meeting of stockholders except in
accordance with the procedures set forth in this Section 9.
The chairman of a meeting shall, if the facts warrant, determine that
(i) the business proposed to be brought before a meeting is not a proper subject
therefor and/or (ii) such business was not properly brought before the meeting
in accordance with the provisions hereof and, if he should so determine, he
shall declare to the meeting that (i) the business proposed to be brought
before a meeting is not a proper subject therefor and/or (ii) such business was
not properly brought before the meeting and shall not be transacted.
Nothing in this Section 9 shall be interpreted or construed to
require the inclusion of information about any such proposal in any proxy
statement distributed by, at the direction of, or on behalf of the Board or
the Corporation.
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Section 10. STOCKHOLDER LIST. The Secretary shall cause to be
prepared and made, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present.
Section 11. PROPER BUSINESS - SPECIAL MEETING. At any special
meeting of stockholders, only such business shall be conducted as shall have
been stated in the notice of such meeting.
Section 12. INSPECTORS OF ELECTION. The Corporation shall, in
advance of any meeting of stockholders, appoint one or more inspectors of
election, who may be employees of the Corporation, to act at the meeting or
any adjournment thereof and to make a written report thereof. The Corporation
may designate one or more persons as alternate inspectors to replace any
inspector who fails to act. In the event that no inspector so appointed or
designated is able to act at a meeting of stockholders, the person presiding at
the meeting shall appoint one or more inspectors to act at the meeting. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath to execute faithfully the duties of inspector with strict
impartiality and according to the best of his or her ability.
The inspector or inspectors so appointed or designated shall (i)
ascertain the number of shares of capital stock of the Corporation outstanding
and the voting power of each such share, (ii) determine the shares of capital
stock of the Corporation represented at the meeting and the validity of
proxies and ballots, (iii) count all votes and ballots, (iv) determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors, and (v) certify their
determination of the number of shares of capital stock of the Corporation
represented at the meeting and such inspectors' count of all votes and ballots.
Such certification and report shall specify such other information as may be
required by law. In determining the validity and counting of proxies and
ballots cast at any meeting of stockholders of the Corporation, the inspectors
may consider such information as is permitted by applicable law. No person who
is a candidate for an office at an election may serve as an inspector at such
election.
ARTICLE 2
DIRECTORS
Section 1. MANAGEMENT. The affairs and business of the Corporation
shall be managed by or under the direction of the Board of Directors.
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Section 2. NUMBER. The authorized number of directors that shall
constitute the Board of Directors shall be fixed from time to time by or
pursuant to a resolution passed by a majority of the Board within the
parameters set by the Certificate.
Section 3. QUALIFICATION. Except as provided in these By-laws or
as otherwise required by law, there shall be no qualifications for directors of
the Corporation.
Section 4. MEETINGS. The Board of Directors shall meet at the
principal office of the Corporation or elsewhere in its discretion at such
times to be determined by a majority of its members, or at the call of the
Chairman of the Board or the President.
Section 5. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board or by the
President, and shall be called upon the written request of a majority of the
then-authorized number of directors.
Section 6. QUORUM. Unless otherwise provided by law, a majority of
the directors elected and qualified shall be necessary to constitute a quorum
for the transaction of business at any meeting of the Board of Directors.
Section 7. NOTICE. Written notice of any special meeting of the
Board of Directors, and of any change in the time or place of any regular
meeting of the Board of Directors, shall be given to each director addressed or
directed to him at his residence or usual place of business, by telegram,
cablegram, facsimile transmission or other means of electronic transmission,
or shall be given to him personally or by telephone, not later than the day
before the day on which the meeting is to be held. Such notice shall state the
time and place of such meeting, but need not state the purpose or purposes for
which the meeting is called, unless otherwise required by statute.
Section 8. VACANCIES. Subject to the provisions of the
Certificate, newly created directorships resulting from any increase in the
number of directors and any vacancies on the Board resulting from death,
resignation, disqualification, removal or other cause shall be filled only by
the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum. Any director elected pursuant hereto shall
hold office for the remainder of the full term of the class of directors in
which the new directorship was created or in which the vacancy occurred, and
until such director's successor shall have been elected and qualified.
Section 9. REMOVAL. The Board of Directors may at any time remove,
with or without cause, any member of any Committee appointed by it or any
officer elected by it and may appoint or elect his successor.
7
<PAGE> 8
ARTICLE 3
COMMITTEES OF THE BOARD OF DIRECTORS
Section 1. EXECUTIVE COMMITTEE.
(A) COMPOSITION. The Executive Committee shall be composed of at
least two members who shall be selected by the Board of Directors from its own
members and who shall hold office at the pleasure of the Board.
(B) POWERS. The Executive Committee shall have and may exercise,
to the fullest extent permitted by law, all the powers of the Board of
Directors when it is not in session in the management of the business and
affairs of the Corporation to transact all business for and on behalf of the
Corporation that may be brought before it.
(C) MEETINGS. The Executive Committee shall meet at the principal
office of the Corporation or elsewhere in its discretion at such times to be
determined by a majority of its members. A majority of its members shall be
necessary to constitute a quorum for the transaction of business. Special
meetings of the Executive Committee may be held at any time when a quorum is
present.
(D) MINUTES. Minutes of each meeting of the Executive Committee
shall be kept and submitted to the Board of Directors at its next meeting.
Section 2. OTHER COMMITTEES.
The Board of Directors may, by resolutions adopted by a majority of
the entire Board, designate one or more of its members to constitute any other
committee or committees with such powers, duties, responsibilities and term of
existence as the Board of Directors shall determine.
Section 3. ABSENCE OR DISQUALIFICATION OF ANY MEMBER OF A
COMMITTEE. In the absence or disqualification of any member of any Committee
created under Article 3 of the By-laws of this Corporation, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
ARTICLE 4
OFFICERS
Section 1. The officers of the Corporation shall consist of a
Chairman of the Board, President, Secretary, Treasurer and such Executive,
Group, Senior or other Vice Presidents, and
8
<PAGE> 9
other officers as may be elected or appointed by the Board of Directors. Any
number of offices may be held by the same person. All officers shall hold
office until their successors are elected or appointed, except that the Board
of Directors may remove any officer at any time at its discretion.
Section 2. The officers of the Corporation shall have such powers
and duties as generally pertain to their offices, except as modified herein or
by the Board of Directors, as well as such powers and duties as from time to
time may be conferred by the Board of Directors. The Chairman of the Board
shall be the chief executive officer of the Corporation and shall have general
supervision over the business, affairs, and property of the Corporation and
over its several officers, and shall preside at meetings of the Board and at
meetings of the stockholders. The President shall be the chief operating
officer of the Corporation and shall have such duties as may be assigned to him
by the Board of Directors.
ARTICLE 5
STOCK AND STOCK CERTIFICATES
Section 1. TRANSFER. Shares of stock shall be transferable on the
books of the Corporation, and a transfer book shall be kept in which all
transfers of stock shall be recorded.
Section 2. CERTIFICATES. Every holder of stock shall be entitled
to have a certificate signed by or in the name of the Corporation by the
Chairman of the Board, the President or a Vice President, and by the Treasurer
or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the
Corporation. The corporate seal affixed thereto, and any of or all the
signatures on the certificate, may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
Section 3. RECORD DATE. The Board of Directors is authorized to
fix in advance a record date for the determination of the stockholders entitled
to notice of and to vote at any meeting of stockholders and any adjournment,
or entitled to receive payment of any dividend, or to any allotment of, or to
exercise any rights in respect of any change, conversion or exchange of capital
stock, which record date shall not, unless otherwise required by law, be more
than 60 nor less than 10 days preceding the date of any meeting of stockholders
nor more than 60 days preceding the date for the payment of any dividend, or
the date for the allotment of rights, or the date when any change or conversion
or exchange of capital stock shall go into effect.
9
<PAGE> 10
ARTICLE 6
SEAL
The corporate seal of the Corporation shall be in such form as the
Board of Directors shall prescribe.
ARTICLE 7
FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year.
ARTICLE 8
COMPENSATION OF DIRECTORS AND MEMBERS OF COMMITTEES
Directors of the Corporation, other than salaried officers of the
Corporation, shall be paid such reasonable fees for their services and for
attending meetings of the Board of Directors or committees thereof as the Board
of Directors may from time to time determine. Directors may be employed by the
Corporation for such special services as the Board of Directors may from time
to time determine and shall be paid for such special services so performed
reasonable compensation as may be determined by the Board of Directors.
Article 9
INDEMNIFICATION
SECTION 1. The Corporation shall indemnify, and advance Expenses
to, each Indemnitee to the fullest extent permitted by applicable law in effect
on March 23, 1998, and to such greater extent as applicable law may thereafter
permit. The rights of an Indemnitee provided under the preceding sentence
shall include, but not be limited to, the right to be indemnified to the
fullest extent permitted by Section 145(b) of the Delaware General Corporation
Law ("D.G.C.L.") in Proceedings by or in the right of the Corporation and to
the fullest extent permitted by Section 145(a) of the D.G.C.L. in all other
Proceedings.
SECTION 2. If an Indemnitee is, by reason of his Corporate Status,
a witness in or a party to and is successful, on the merits or otherwise, in
any Proceeding, he shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection therewith. If an
Indemnitee is not wholly successful in such Proceeding but is successful, on
the merits or otherwise, as to any Matter in such Proceeding, the Corporation
shall indemnify such Indemnitee against all Expenses actually and reasonably
incurred by him or on his behalf relating
10
<PAGE> 11
to each Matter. The termination of any Matter in such a Proceeding by
dismissal, with or without prejudice, shall be deemed to be a successful result
as to such Matter.
SECTION 3. An Indemnitee shall be advanced Expenses within 10 days
after requesting them to the fullest extent permitted by Section 145(e) of the
D.G.C.L.
SECTION 4. To obtain indemnification an Indemnitee shall submit to
the Corporation a written request with such relevant information as is
reasonably available to Indemnitee. The Secretary of the Corporation shall
promptly advise the Board of Directors of such request.
SECTION 5. If there has been no Change of Control at the time the
request for indemnification is sent, an Indemnitee's entitlement to
indemnification shall be determined in accordance with Section 145(d) of the
D.G.C.L. If entitlement to indemnification is to be determined by Independent
Counsel, the Corporation shall furnish notice to the Indemnitee within 10 days
after receipt of the request for indemnification, specifying the identity and
address of Independent Counsel. The Indemnitee may, within 14 days after
receipt of such written notice of selection, deliver to the Corporation a
written objection to such selection. Such objection may be asserted only on
the ground that the Independent Counsel so selected does not meet the
requirements of the definition of Independent Counsel and the objection shall
set forth with particularity the factual basis of such assertion. If there is
an objection to the selection of Independent Counsel, either the Corporation or
the Indemnitee may petition the Court of Chancery of the State of Delaware or
any other court of competent jurisdiction for a determination that the
objection is without a reasonable basis and/or for the appointment of
Independent Counsel selected by the Court.
SECTION 6. If there has been a Change of Control at the time the
request for indemnification is sent, an Indemnitee's entitlement to
indemnification shall be determined in a written opinion by Independent Counsel
selected by the Indemnitee. The Indemnitee shall give the Corporation written
notice advising of the identity and address of the Independent Counsel so
selected. The Corporation may, within seven days after receipt of such written
notice of selection, deliver to the Indemnitee a written objection to such
selection. The Indemnitee may, within 5 days after the receipt of such
objection from the Corporation, submit the name of another Independent Counsel
and the Corporation may, within seven days after receipt of such written notice
of selection, deliver to the Indemnitee a written objection to such selection.
Any objection is subject to the limitations in Section 5. The Indemnitee may
petition the Court of Chancery of the State of Delaware or any other Court of
competent jurisdiction for a determination that the Corporation's objection to
the first and/or second selection of Independent Counsel is without a
reasonable basis and/or for the appointment as Independent Counsel of a person
selected by the Court.
SECTION 7. If a Change of Control shall have occurred before the
request for indemnification is sent by the Indemnitee, the Indemnitee shall be
presumed (except as otherwise expressly provided in this Article) to be
entitled to indemnification upon submission of a request for indemnification in
accordance with Section 4 of this Article, and thereafter the Corporation shall
11
<PAGE> 12
have the burden of proof to overcome the presumption in reaching a
determination contrary to the presumption. The presumption shall be used by
Independent Counsel as a basis for a determination of entitlement to
indemnification unless the Corporation provides information sufficient to
overcome such presumption by clear and convincing evidence or the
investigation, review and analysis of Independent Counsel convinces him by
clear and convincing evidence that the presumption should not apply.
Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or persons
empowered under Section 5 or 6 of this Article to determine entitlement to
indemnification shall not have made and furnished to the Indemnitee in writing
a determination within 60 days after receipt by the Corporation of the request
therefor, the requisite determination of entitlement to indemnification shall
be deemed to have been made and the Indemnitee shall be entitled to such
indemnification unless the Indemnitee knowingly misrepresented a material fact
in connection with the request for indemnification or such indemnification is
prohibited by law. The termination of any Proceeding or of any Matter therein,
by judgment, order, settlement or conviction, or upon a plea of nolo contendere
or its equivalent, shall not (except as otherwise expressly provided in this
Article) of itself adversely affect the right of an Indemnitee to
indemnification or create a presumption that the Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, or with respect to any criminal
Proceeding, that the Indemnitee had reasonable cause to believe that his
conduct was unlawful.
SECTION 8. The Corporation shall pay any and all reasonable fees
and expenses of Independent Counsel incurred acting pursuant to this Article
and in any proceeding to which it is a party or witness in respect of its
investigation and written report and shall pay all reasonable fees and expenses
incident to the procedures in which such Independent Counsel was selected or
appointed. No Independent Counsel may serve if a timely objection has been
made to his selection until a Court has determined that such objection is
without a reasonable basis.
SECTION 9. In the event that (i) a determination is made pursuant
to Section 5 or 6 that an Indemnitee is not entitled to indemnification under
this Article, (ii) advancement of Expenses is not timely made pursuant to
Section 3 of this Article, (iii) Independent Counsel has not made and delivered
a written opinion determining the request for indemnification (a) within 90
days after being appointed by the Court, or (b) within 90 days after objections
to his selection have been overruled by the Court, or (c) within 90 days after
the time for the Corporation or the Indemnitee to object to his selection, or
(iv) payment of indemnification is not made within five days after a
determination of entitlement to indemnification has been made or deemed to have
been made pursuant to Section 5, 6 or 7 of this Article, the Indemnitee shall
be entitled to an adjudication in an appropriate court of the State of
Delaware, or in any other court of competent jurisdiction, of his entitlement
to such indemnification or advancement of Expenses. In the event that a
determination shall have been made that the Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section shall be conducted in all respects as a de novo trial on the
merits and the Indemnitee shall not be prejudiced by reason of that adverse
determination.
12
<PAGE> 13
If a Change of Control shall have occurred, in any judicial proceeding
commenced pursuant to this Section, the Corporation shall have the burden of
proving that the Indemnitee is not entitled to indemnification or advancement
of Expenses, as the case may be. If a determination shall have been made or
deemed to have been made that the Indemnitee is entitled to indemnification,
the Corporation shall be bound by such determination in any judicial proceeding
commenced pursuant to this Section 9, or otherwise, unless the Indemnitee
knowingly misrepresented a material fact in connection with the request for
indemnification, or such indemnification is prohibited by law.
The Corporation shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 9 that the procedures and
presumptions of this Article are not valid, binding and enforceable and shall
stipulate in any such court that the Corporation is bound by all provisions of
this Article. In the event that an Indemnitee, pursuant to this Section 9,
seeks a judicial adjudication to enforce his rights under, or to recover
damages for breach of, this Article, the Indemnitee shall be entitled to
recover from the Corporation, and shall be indemnified by the Corporation
against, any and all Expenses actually and reasonably incurred by him in such
judicial adjudication, but only if he prevails therein. If it shall be
determined in such judicial adjudication that the Indemnitee is entitled to
receive part but not all of the indemnification or advancement of Expenses
sought, the Expenses incurred by the Indemnitee in connection with such
judicial adjudication or arbitration shall be appropriately prorated.
SECTION 10. The rights of indemnification and to receive
advancement of Expenses as provided by this Article shall not be deemed
exclusive of any other rights to which an Indemnitee may at any time be
entitled under applicable law, the Certificate, these By-laws, any agreement, a
vote of stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Article or any provision thereof shall be
effective as to any Indemnitee for acts, events and circumstances that
occurred, in whole or in part, before such amendment, alteration or repeal. The
provisions of this Article shall continue as to an Indemnitee whose Corporate
Status has ceased and shall inure to the benefit of his heirs, executors and
administrators.
SECTION 11. If any provision or provisions of this Article shall be
held to be invalid, illegal or unenforceable for any reason whatsoever, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby; and, to the fullest extent possible,
the provisions of this Article shall be construed so as to give effect to the
intent manifested by the provision held invalid, illegal or unenforceable.
SECTION 12. For purposes of this Article:
A "Change of Control", shall be deemed to have occurred if, after
the Public Status Date, (1) there shall have occurred an event required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated under
the Exchange Act, whether or not the Corporation is then subject to such
reporting requirement; (2) any "person" (as such term is used in Section 13(d)
and 14(d) of the Exchange Act) shall have become the "beneficial owner" (as
defined in Rule 13d-3 under the
13
<PAGE> 14
Exchange Act), directly or indirectly, of securities of the Corporation
representing 40% or more of the combined voting power of the Corporation's then
outstanding voting securities without prior approval of at least two-thirds of
the members of the Board of Directors in office immediately prior to such
person attaining such percentage interest; (3) the Corporation is a party to a
merger, consolidation, sale of assets or other reorganization, or a proxy
contest, as a consequence of which members of the Board of Directors in office
immediately prior to such transaction or event constitute less than a majority
of the Board of Directors thereafter; or (4) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (including for this purpose any new director whose
election or nomination for election by the Corporation's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Board of Directors.
"Corporate Status" describes the status of a person who (a) is or
was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, in each
case which is controlled by the Corporation, or (b) is or was serving, at the
written request of the Corporation or pursuant to an agreement in writing with
the Corporation which request or agreement provides for indemnification under
these By-laws, as a director, officer or employee of another corporation,
partnership, joint venture, trust or other enterprise not controlled by the
Corporation, provided that if such written request or agreement referred to in
this clause (b) provides for a lesser degree of indemnification by the
Corporation than that provided pursuant to this Article 9, the provisions
contained in or made pursuant to such written request or agreement shall
govern. References above to "other enterprises" shall include employee benefit
plans and references to "serving at the request of the Corporation" shall
include any service as a director, officer or employee which imposes duties on,
or involves services by, such director, officer or employee with respect to an
employee benefit plan or its participants or beneficiaries.
"Disinterested Director" means a director of the Corporation who is
not and was not a party to the Proceeding in respect of which indemnification
is sought by indemnitee.
"Expenses" shall include all reasonable attorneys' fees, retainers,
court costs, transcript costs, fees of experts, witness fees, travel expenses,
duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending, preparing to
prosecute or defend, investigating, or being or preparing to be a witness in a
Proceeding.
"Indemnitee" includes any person who is, or is threatened to be
made, a witness in or a party to any Proceeding as described in Section 1 or 2
of this Article by reason of his Corporate Status.
"Independent Counsel" means a law firm, or member of a law firm,
that is experienced in matters of corporation law and neither presently is, nor
in the five years previous to
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<PAGE> 15
his selection or appointment has been, retained to represent: (i) the
Corporation or the relevant Indemnitee in any matter material to either such
party, or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder.
"Matter" is a claim, a material issue, or a substantial request for
relief.
"Proceeding" includes any action, suit, arbitration, alternate
dispute resolution mechanism, investigation, administrative hearing or any
other proceeding whether civil, criminal, administrative or investigative,
except one initiated by an Indemnitee (a) pursuant to Section 9 of this Article
to enforce his rights under this Article or (b) otherwise than pursuant to
clause (a) of this sentence and not authorized by the Board of Directors.
"Public Status Date" shall mean the first date on which the
Corporation has outstanding a class of equity securities registered under
Section 12 of the Exchange Act.
SECTION 13. Any communication required or permitted to the
Corporation shall be addressed to the Secretary of the Corporation and any such
communication to Indemnitee shall be addressed to his home address unless he
specifies otherwise and shall be personally delivered or delivered by overnight
mail delivery.
ARTICLE 10
AMENDMENTS TO BY-LAWS
Subject to the provisions of the Certificate, and in addition to any
affirmative vote required by law, any alteration, amendment, repeal or
rescission (any "Change") of these By-laws occurring after the Public Status
Date (as defined in Section 12 of Article 9) must be approved either (i) by the
Board of Directors by the affirmative vote of at least a majority of the
then-authorized number of directors or (ii) by the stockholders by the
affirmative vote of the holders of at least 66 2/3% of the combined voting
power of the then-outstanding shares of Voting Stock, voting together as a
single class.
Subject to the foregoing, the Board of Directors of the Corporation
is expressly authorized to make, alter, amend, repeal or rescind the By-laws of
the Corporation.
15
<PAGE> 1
EXHIBIT 3.5
<TABLE>
<S> <C> <C>
COMMON STOCK
$0.10 PAR VALUE
INCORPORATED UNDER THE LAWS SEE REVERSE SIDE
OF THE STATE OF DELAWARE FOR LEGEND
CUSIP ______
THIS CERTIFICATE IS TRANSFERABLE IN
HOUSTON TX AND NEW YORK, NY SEE REVERSE SIDE
FOR CERTAIN CONDITIONS
PENNZOIL-QUAKER STATE COMPANY
THIS CERTIFIES THAT
FULLY-PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK
Pennzoil-Quaker State Company transferable on the books of the Corporation by
the holder hereof in person or by duly authorized attorney upon surrender of
this certificate properly endorsed. The shares represented hereby are issued and
shall be held subject to the provisions of the Certificate of Incorporation of
the Corporation, copies of which are on file with the Transfer Agents, to all of
which the holder by acceptance hereof assents. This certificate is not valid
unless countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile signatures of its duly authorized officers.
Dated:
/s/ LINDA F. CONDIT /s/ JAMES L. PATE
- -------------------------------------- ---------------------------------
VICE PRESIDENT AND CORPORATE SECRETARY CHAIRMAN OF THE BOARD AND
REGISTERED CHIEF EXECUTIVE OFFICER
HARRIS TRUST AND SAVINGS BANK COUNTERSIGNED
REGISTRAR PENNZOIL COMPANY
By [HOUSTON, TX] TRANSFER AGENT
BY
AUTHORIZED SIGNATURE
AUTHORIZED SIGNATURE
</TABLE>
<PAGE> 2
PENNZOIL-QUAKER STATE COMPANY
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _____________ Custodian ___________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF THE
CORPORATION, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS. SUCH REQUEST MAY BE MADE TO THE CORPORATION IN
HOUSTON, TEXAS OR TO EITHER TRANSFER AGENT.
For Value received, ______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the Capital stock represented by the within certificate, and do hereby
irrevocably constitute and appoint ____________________________________________
___________________________________________________________________ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated, ______________________________
Signature:
NOTICE: X ________________________________________
THE SIGNATURE TO THIS (SIGNATURE)
ASSIGNMENT MUST CORRES-
POND WITH THE NAME AS
WRITTEN UPON THE FACE
OF THE CERTIFICATE IN
EVERY PARTICULAR,
WITHOUT ALTERATION OR
ENLARGEMENT OR ANY
CHANGE WHATEVER. X ________________________________________
(SIGNATURE)
________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-16,
________________________________________
SIGNATURE(S) GUARANTEED BY:
________________________________________
This certificate also __________ and causes the holder hereof to certain Rights
as set forth in the Rights Agreement (the "Rights Agreement") between
Pennzoil-Quaker State Company (the "Company") and ___________, the "Rights
Agent"), the terms of which are hereby incorporated herein by reference and a
copy of which is on file at the principal offices of the Company. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will be
evidenced by separate certificates and will no longer be evidenced by this
certificate. The Company or the Rights Agent will mail to the holder of this
certificate a copy of the Rights Agreement as in effect on the date of mailing,
without charge promptly after receipt of a written request therefor. Under
certain circumstances set forth in the Rights Agreement, Rights beneficially
owned by or transferred to any Person who is, was or becomes an Acquiring Person
or an Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement, and certain transferees thereof, will become null and void and will
no longer be transferable.
<PAGE> 1
EXHIBIT 3.6
================================================================================
________________________ COMPANY
AND
[NAME OF RIGHTS AGENT],
RIGHTS AGENT
________________
RIGHTS AGREEMENT
DATED AS OF _________________, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Appointment of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3. Issue of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4. Form of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 5. Countersignature and Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 6. Transfer, Split-Up, Combination and Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen Rights Certificates . . . . . . . . . . . . . . . . . . . . . 12
Section 7. Exercise of Rights; Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 8. Cancellation and Destruction of Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 9. Reservation and Availability of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 10. Preferred Stock Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of
Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 12. Certificate of Adjusted Purchase Price or Number of Shares . . . . . . . . . . . . . . . . . . . . 26
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power . . . . . . . . . . . . . . . 27
Section 14. Fractional Rights and Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 15. Rights of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 16. Agreement of Rights Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 17. Rights Certificate Holder Not Deemed a Stockholder . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 18. Concerning the Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 19. Merger or Consolidation or Change of Name of Rights Agent . . . . . . . . . . . . . . . . . . . . . 32
Section 20. Duties of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 21. Change of Rights Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 22. Issuance of New Rights Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 23. Redemption and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 24. Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 25. Notice of Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 26. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 27. Supplements and Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 28. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 29. Determinations and Actions by the Board of Directors, etc. . . . . . . . . . . . . . . . . . . . . 41
Section 30. Benefits of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 31. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 32. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 33. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 34. Descriptive Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>
Exhibit A - Form of Certificate of Designations of Series A Junior
Participating Preferred Stock
Exhibit B - Form of Rights Certificate
Exhibit C - Summary of Rights to Purchase Preferred Stock
-ii-
<PAGE> 4
RIGHTS AGREEMENT
This Rights Agreement, dated as of _________________, 1998 (the
"Agreement"), between __________________ Company, a Delaware corporation (the
"Company"), and [NAME OF RIGHTS AGENT][, a national banking association] (the
"Rights Agent"),
W I T N E S S E T H:
WHEREAS, on [DATE OF DECLARATION OF RIGHTS DISTRIBUTION] (the
"Rights Dividend Declaration Date"), the Board of Directors of the Company
authorized and declared a dividend of one Right for each share of common stock,
par value $0.10 per share, of the Company (the "Common Stock") outstanding at
[the close of business] on [RECORD DATE FOR RIGHTS DISTRIBUTION] (the "Record
Date"), and has authorized the issuance of one Right (as such number may
hereinafter be adjusted pursuant to the provisions of Section 11(p) hereof) for
each share of Common Stock of the Company issued (whether originally issued or
delivered from the Company's treasury) between the Record Date and the earlier
of the Distribution Date (as hereinafter defined) and the Expiration Date (as
hereinafter defined), and, in certain circumstances provided for in Section 22
hereof, after the Distribution Date, each Right initially representing the
right to purchase one Fractional Share (as hereinafter defined) of Series A
Junior Participating Preferred Stock of the Company, upon the terms and subject
to the conditions hereinafter set forth (the "Rights");
WHEREAS, it is contemplated that Pennzoil Company, a Delaware
corporation ("Pennzoil"), the holder of all of the issued and outstanding
Common Stock on the date hereof, will cause to be effected a distribution of
all of such issued and outstanding Common Stock, together with the Rights
distributed to it by virtue of being such holder on the Record Date, to the
holders of the outstanding common stock of Pennzoil, par value $0.83-1/3 per
share (the "Pennzoil Common Stock") and that Rights will also be issued in
respect of all shares of Common Stock that are issued to holders of capital
stock, par value $1.00 per share ("Quaker State Capital Stock"), of Quaker
State Corporation, a Delaware corporation ("Quaker State") upon conversion of
such Capital Stock in the merger of a subsidiary of the Company with and into
Quaker State;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement,
the following terms shall have the meanings indicated:
"Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
15% or more of the shares of Common Stock then outstanding, but shall not
include any Exempt Person; provided, however, that a Person shall not be or
become an Acquiring Person if such Person, together with its Affiliates and
Associates, shall become the Beneficial Owner of 15% or more of the shares of
Common Stock then outstanding solely as a result of a reduction in the number
of shares of Common Stock outstanding due to the repurchase of Common Stock by
the Company, unless and until such time as such Person
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<PAGE> 5
or any Affiliate or Associate of such Person shall purchase or otherwise become
the Beneficial Owner of additional shares of Common Stock constituting 1% or
more of the then outstanding shares of Common Stock or any other Person (or
Persons) who is (or collectively are) the Beneficial Owner of shares of Common
Stock constituting 1% or more of the then outstanding shares of Common Stock
shall become an Affiliate or Associate of such Person, unless, in either such
case, such Person, together with all Affiliates and Associates of such Person,
is not then the Beneficial Owner of 15% or more of the shares of Common Stock
then outstanding; and provided, further, that if the Board of Directors, with
the concurrence of a majority of the members of the Board of Directors who are
not, and are not representatives, nominees, Affiliates or Associates of, such
Person or an Acquiring Person, determines in good faith that a Person that
would otherwise be an "Acquiring Person" has become such inadvertently
(including, without limitation, because (i) such Person was unaware that it
beneficially owned a percentage of Common Stock that would otherwise cause such
Person to be an "Acquiring Person" or (ii) such Person was aware of the extent
of its Beneficial Ownership of Common Stock but had no actual knowledge of the
consequences of such Beneficial Ownership under this Agreement) and without any
intention of changing or influencing control of the Company, and if such Person
as promptly as practicable divested or divests itself of Beneficial Ownership
of a sufficient number of shares of Common Stock so that such Person would no
longer be an "Acquiring Person," then such Person shall not be deemed to be or
to have become an "Acquiring Person" for any purposes of this Agreement.
Notwithstanding anything in this definition of "Acquiring Person" to
the contrary, neither Pennzoil nor any Affiliate or Associate of Pennzoil shall
be an Acquiring Person by virtue of Pennzoil's being the Beneficial Owner of
Common Stock on the date hereof or at any time prior to ceasing to be the
Beneficial Owner of such Common Stock in the Spin-Off.
"Adjustment Shares" shall have the meaning set forth in Section
11(a)(ii) hereof.
"Affiliate" shall have the meaning ascribed to such term in Rule
12b-2 of the General Rules and Regulations under the Exchange Act, as in effect
on the date of this Agreement.
"Associate" shall mean, with reference to any Person, (1) any
corporation, firm, partnership, association, unincorporated organization or
other entity (other than the Company or a Subsidiary of the Company) of which
such Person is an officer or general partner (or officer or general partner of
a general partner) or is, directly or indirectly, the Beneficial Owner of 10%
or more of any class of equity securities, (2) any trust or other estate in
which such Person has a substantial beneficial interest or as to which such
Person serves as trustee or in a similar fiduciary capacity and (3) any
relative or spouse of such Person, or any relative of such spouse, who has the
same home as such Person.
A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
(i) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, is the "beneficial owner" of (as
determined pursuant to Rule 13d-3 of the General
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<PAGE> 6
Rules and Regulations under the Exchange Act as in effect on the date of
this Agreement) or otherwise has the right to vote or dispose of,
including pursuant to any agreement, arrangement or understanding (whether
or not in writing); provided, however, that a Person shall not be deemed
the "Beneficial Owner" of, or to "beneficially own," any security under
this subparagraph (i) as a result of an agreement, arrangement or
understanding to vote such security if such agreement, arrangement or
understanding: (A) arises solely from a revocable proxy or consent given
in response to a public (i.e., not including a solicitation exempted by
Rule 14a-2(b)(2) of the General Rules and Regulations under the Exchange
Act as in effect on the date of this Agreement) proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
provisions of the General Rules and Regulations under the Exchange Act and
(B) is not then reportable by such Person on Schedule 13D under the
Exchange Act (or any comparable or successor report);
(ii) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right or obligation to acquire
(whether such right or obligation is exercisable or effective immediately
or only after the passage of time or the occurrence of an event) pursuant
to any agreement, arrangement or understanding (whether or not in writing)
or upon the exercise of conversion rights, exchange rights, other rights,
warrants or options, or otherwise; provided, however, that a Person shall
not be deemed the "Beneficial Owner" of, or to "beneficially own," (A)
securities tendered pursuant to a tender or exchange offer made by such
Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or exchange, (B) securities
issuable upon exercise of Rights at any time prior to the occurrence of a
Triggering Event, or (C) securities issuable upon exercise of Rights from
and after the occurrence of a Triggering Event which Rights were acquired
by such Person or any of such Person's Affiliates or Associates prior to
the Distribution Date or pursuant to Section 3(a) or Section 22 hereof
(the "Original Rights") or pursuant to Section 11(i) or (p) hereof in
connection with an adjustment made with respect to any Original Rights; or
(iii) that are beneficially owned, directly or indirectly, by (A)
any other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's Affiliates or Associates has any agreement,
arrangement or understanding (whether or not in writing) for the purpose
of acquiring, holding, voting (except as set forth in the proviso to
subparagraph (i) of this definition) or disposing of any voting securities
of the Company or (B) any group (as that term is used in Rule 13d-5(b) of
the General Rules and Regulations under the Exchange Act) of which such
Person is a member;
provided, however, that nothing in this definition shall cause a Person engaged
in business as an underwriter of securities to be the "Beneficial Owner" of, or
to "beneficially own," any securities acquired through such Person's
participation in good faith in a firm commitment underwriting (including,
without limitation, securities acquired pursuant to stabilizing transactions to
facilitate a public offering in accordance with Regulation M promulgated under
the Exchange Act, or to cover overallotments created in connection with a
public offering) until the expiration of forty days after the date of such
acquisition. For purposes of this Agreement, "voting" a security shall include
voting,
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<PAGE> 7
granting a proxy, acting by consent, making a request or demand relating to
corporate action (including, without limitation, calling a stockholder meeting)
or otherwise giving an authorization (within the meaning of Section 14(a) of
the Exchange Act as in effect on the date of this Agreement) in respect of such
security.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"close of business" on any given date shall mean 5:00 p.m., New York
City time, on such date; provided, however, that if such date is not a Business
Day, it shall mean 5:00 p.m., New York City time, on the next succeeding
Business Day.
"Closing Price" of a security for any day shall mean the last sales
price, regular way, on such day or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, on such day,
in either case as reported in the principal transaction reporting system with
respect to securities listed or admitted to trading on the New York Stock
Exchange, 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 such security is not
listed or admitted to trading on any national securities exchange but sales
price information is reported for such security, as reported by NASDAQ or such
other self-regulatory organization or registered securities information
processor (as such terms are used under the Exchange Act) that then reports
information concerning such security, or, if sales price information is not so
reported, the average of the high bid and low asked prices in the
over-the-counter market on such day, as reported by NASDAQ or such other
entity, or, if on such day such security is not quoted by any such entity, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in such security selected by the Board of
Directors of the Company. If on such day no market maker is making a market in
such security, the fair value of such security on such day as determined in
good faith by the Board of Directors of the Company shall be used.
"Common Stock" shall mean the common stock, par value $0.10 per
share, of the Company, except that "Common Stock" when used with reference to
equity interests issued by any Person other than the Company shall mean the
capital stock of such Person with the greatest voting power, or the equity
securities or other equity interest having power to control or direct the
management, of such Person.
"Common Stock Equivalents" shall have the meaning set forth in
Section 11(a)(iii) hereof.
"Company" shall mean the Person named as the "Company" in the
preamble of this Agreement until a successor Person shall have become such or
until a Principal Party shall assume, and thereafter be liable for, all
obligations and duties of the Company hereunder, pursuant to the
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<PAGE> 8
applicable provisions of this Agreement, and thereafter "Company" shall mean
such successor Person or Principal Party.
"Current Market Price" shall have the meaning set forth in Section
11(d) hereof.
"Current Value" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Distribution Date" shall mean the earlier of (i) the close of
business on the tenth day (or, if such Stock Acquisition Date results from the
consummation of a Permitted Offer, such later date as may be determined by the
Company's Board of Directors as set forth below before the Distribution Date
occurs) after the Stock Acquisition Date (or, if the tenth day after the Stock
Acquisition Date occurs before the Record Date, the close of business on the
Record Date) or (ii) the close of business on the tenth Business Day (or such
later date as may be determined by the Company's Board of Directors as set
forth below before the Distribution Date occurs) after the date that a tender
offer or exchange offer by any Person (other than any Exempt Person) is first
published or sent or given within the meaning of Rule 14d-2(a) of the General
Rules and Regulations under the Exchange Act as then in effect, if upon
consummation thereof, such Person would be an Acquiring Person, other than a
tender or exchange offer that is determined before the Distribution Date occurs
to be a Permitted Offer. The Board of Directors of the Company may, to the
extent set forth in the preceding sentence, defer the date set forth in clause
(i) or (ii) of the preceding sentence to a specified later date or to an
unspecified later date to be determined by a subsequent action or event (but in
no event to a date later than the close of business on the tenth day after the
first occurrence of a Triggering Event).
"Equivalent Preferred Stock" shall have the meaning set forth in
Section 11(b) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Ratio" shall have the meaning set forth in Section 24
hereof.
"Exempt Person" shall mean the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company, and any Person organized, appointed or established by the Company for
or pursuant to the terms of any such plan or for the purpose of funding any
such plan or funding other employee benefits for employees of the Company or
any Subsidiary of the Company.
"Expiration Date" shall mean the earliest of (i) the Final
Expiration Date, (ii) the time at which the Rights are redeemed as provided in
Section 23 hereof, (iii) the time at which the Rights expire pursuant to
Section 13(d) hereof and (iv) the time at which all Rights then outstanding and
exercisable are exchanged pursuant to Section 24 hereof.
"Final Expiration Date" shall mean the close of business on
[EXPIRATION DATE].
"Flip-In Event" shall mean an event described in Section 11(a)(ii)
hereof.
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<PAGE> 9
"Flip-In Trigger Date" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Flip-Over Event" shall mean any event described in clause (x), (y)
or (z) of Section 13(a) hereof, but excluding any transaction described in
Section 13(d) hereof that causes the Rights to expire.
"Fractional Share" with respect to the Preferred Stock shall mean
one one-hundredth of a share of Preferred Stock.
"NASDAQ" shall mean the National Association of Securities Dealers,
Inc. Automated Quotations System.
"Original Rights" shall have the meaning set forth in the definition
of "Beneficial Owner."
"Permitted Offer" shall mean a tender offer or an exchange offer for
all outstanding shares of Common Stock at a price and on terms determined by at
least a majority of the members of the Board of Directors who are not officers
or employees of the Company and who are not, and are not representatives,
nominees, Affiliates or Associates of, an Acquiring Person or the person making
the offer, after receiving advice from one or more investment banking firms, to
be (a) at a price and on terms that are fair to stockholders (taking into
account all factors that such members of the Board deem relevant including,
without limitation, prices that could reasonably be achieved if the Company or
its assets were sold on an orderly basis designed to realize maximum value) and
(b) otherwise in the best interests of the Company and its stockholders.
"Person" shall mean any individual, firm, corporation, partnership,
limited liability company, association, trust, unincorporated organization or
other entity.
"Preferred Stock" shall mean shares of Series A Junior Participating
Preferred Stock, par value $1.00 per share, of the Company having the rights,
powers and preferences set forth in the form of Certificate of Designations
attached hereto as Exhibit A and, to the extent that there is not a sufficient
number of shares of Series A Junior Participating Preferred Stock authorized to
permit the full exercise of the Rights, any other series of Preferred Stock,
par value $1.00 per share, of the Company designated for such purpose
containing terms substantially similar to the terms of the Series A Junior
Participating Preferred Stock.
"Principal Party" shall have the meaning set forth in Section 13(b)
hereof.
"Purchase Price" shall have the meaning set forth in Section 4(a)
hereof.
"Record Date" shall have the meaning set forth in the recitals
clause at the beginning of this Agreement.
"Redemption Price" shall have the meaning set forth in Section 23(a)
hereof.
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<PAGE> 10
"Rights" shall have the meaning set forth in the recitals clause at
the beginning of this Agreement.
"Rights Agent" shall mean the Person named as the "Rights Agent" in
the preamble of this Agreement until a successor Rights Agent shall have become
such pursuant to the applicable provisions hereof, and thereafter "Rights
Agent" shall mean such successor Rights Agent. If at any time there is more
than one Person appointed by the Company as Rights Agent pursuant to the
applicable provisions of this Agreement, "Rights Agent" shall mean and include
each such Person.
"Rights Certificates" shall mean the certificates evidencing the
Rights.
"Rights Dividend Declaration Date" shall have the meaning set forth
in the recitals clause at the beginning of this Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Spin-off" shall mean the distribution by Pennzoil of all the issued
and outstanding Common Stock, together with Rights associated therewith, to the
holders of the outstanding Pennzoil Common Stock referred to in the second
recital of this Agreement.
"Spread" shall have the meaning set forth in Section 11(a)(iii)
hereof.
"Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition and Section 23, shall
include, without limitation, a report filed pursuant to Section 13(d) of the
Exchange Act) by the Company or an Acquiring Person that an Acquiring Person
has become such.
"Subsidiary" shall mean, with reference to any Person, any
corporation or other Person of which an amount of voting securities sufficient
to elect at least a majority of the directors or other persons performing
similar functions is beneficially owned, directly or indirectly, by such
Person, or otherwise controlled by such Person.
"Substitution Period" shall have the meaning set forth in Section
11(a)(iii) hereof.
"Summary of Rights" shall mean the Summary of Rights to Purchase
Preferred Stock sent pursuant to Section 3(b) hereof.
"Trading Day" with respect to a security shall mean a day on which
the principal national securities exchange on which such security is listed or
admitted to trading is open for the transaction of business, or, if such
security is not listed or admitted to trading on any national securities
exchange but is quoted by NASDAQ, a day on which NASDAQ reports trades, or, if
such security is not so quoted, a Business Day.
"Triggering Event" shall mean any Flip-In Event or any Flip-Over
Event.
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<PAGE> 11
Section 2. Appointment of Rights Agent. The Company hereby
appoints the Rights Agent (i) to act as agent for the Company and (ii) to take
certain actions in respect of the holders of the Rights (who, in accordance
with Section 3 hereof, shall prior to the Distribution Date also be the holders
of the Common Stock)(although it is expressly agreed that the Rights Agent
shall not act as agent for such holders) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable.
Section 3. Issue of Rights Certificates.
(a) Until the Distribution Date, (x) the Rights will be evidenced
(subject to the provisions of paragraph (b) of this Section 3) by the
certificates for Common Stock registered in the names of the holders of the
Common Stock and not by separate certificates, and (y) the Rights will be
transferable only in connection with the transfer of the underlying shares of
Common Stock (including a transfer to the Company). As soon as practicable
after the Distribution Date, the Rights Agent will send by first-class,
insured, postage prepaid mail, to each record holder of the Common Stock as of
the close of business on the Distribution Date (other than any Person referred
to in the first sentence of Section 7(e)), at the address of such holder shown
on the records of the Company, one or more Rights Certificates, evidencing one
Right for each share of Common Stock so held, subject to adjustment as provided
herein. In the event that an adjustment in the number of Rights per share of
Common Stock has been made pursuant to Section 11(p) hereof, at the time of
distribution of the Rights Certificates, the Company shall make the necessary
and appropriate rounding adjustments (in accordance with Section 14(a) hereof)
so that Rights Certificates representing only whole numbers of Rights are
distributed and cash is paid in lieu of any fractional Rights. As of and after
the Distribution Date, the Rights will be evidenced solely by such Rights
Certificates.
(b) On the Record Date, the Company will deliver a copy of a
Summary of Rights to Purchase Preferred Stock, in substantially the form
attached hereto as Exhibit C, to Pennzoil as record holder of the Common Stock
as of [THE CLOSE OF BUSINESS] on the Record Date, at the address of such holder
shown on the records of the Company and the Rights associated with the shares
of Common Stock represented by certificates for such Common Stock held by
Pennzoil shall be evidenced by such certificates for Common Stock together with
the Summary of Rights, and Pennzoil as registered holder of the Common Stock
shall also be the registered holder of the associated Rights. Until the earlier
of the Distribution Date or the Expiration Date, the transfer of any of the
certificates for Common Stock outstanding on the Record Date, with or without a
copy of the Summary of Rights, including without limitation the transfer
thereof in the Spin-off, shall also constitute the transfer of the Rights
associated with the Common Stock represented by such certificates.
(c) Rights shall be issued in respect of all shares of Common
Stock that are issued (whether originally issued or delivered from the
Company's treasury) after the Record Date (including without limitation all
shares of Common Stock issued upon conversion of Quaker State Capital Stock in
the merger of a subsidiary of the Company with and into Quaker State) but prior
to the earlier of the Distribution Date or the Expiration Date or, in certain
circumstances provided
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<PAGE> 12
in Section 22 hereof, after the Distribution Date. Certificates issued for
shares of Common Stock that shall so become outstanding or shall be transferred
or exchanged after the Record Date but prior to the earlier of the Distribution
Date or the Expiration Date shall also be deemed to be certificates for Rights,
and shall bear the following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the Rights Agreement between
__________________ Company (the "Company") and [NAME OF RIGHTS AGENT] (the
"Rights Agent") dated as of _________________, 1998 as it may from time to
time be supplemented or amended (the "Rights Agreement"), the terms of
which are hereby incorporated herein by reference and a copy of which is
on file at the principal offices of the Company. Under certain
circumstances, as set forth in the Rights Agreement, such Rights may be
redeemed, may be exchanged, may expire or may be evidenced by separate
certificates and will no longer be evidenced by this certificate. The
Company or the Rights Agent will mail to the holder of this certificate a
copy of the Rights Agreement, as in effect on the date of mailing, without
charge promptly after receipt of a written request therefor. UNDER CERTAIN
CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS BENEFICIALLY OWNED
BY OR TRANSFERRED TO ANY PERSON WHO IS, WAS OR BECOMES AN ACQUIRING PERSON
OR AN AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT), AND CERTAIN TRANSFEREES THEREOF, WILL BECOME NULL AND
VOID AND WILL NO LONGER BE TRANSFERABLE.
With respect to such certificates containing the foregoing legend, until the
earlier of the Distribution Date or the Expiration Date, the Rights associated
with the Common Stock represented by such certificates shall be evidenced by
such certificates alone, and registered holders of Common Stock shall also be
the registered holders of the associated Rights, and the transfer of any of
such certificates shall also constitute the transfer of the Rights associated
with the Common Stock represented by such certificates.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase
and of assignment to be printed on the reverse thereof), when, as and if
issued, shall be substantially in the form set forth in Exhibit B hereto and
may have such marks of identification or designation and such legends,
summaries or endorsements printed thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any applicable law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange or
quotation system on which the Rights may from time to time be listed or quoted,
or to conform to usage. Subject to the provisions of Section 11 and Section 22
hereof, the Rights Certificates, whenever issued, shall be dated as of the
Record Date and on their face shall entitle the holders thereof to purchase
such number of Fractional Shares of Preferred Stock as shall be set forth
therein at the price set forth therein (such exercise price per Fractional
Share (or, as set forth in this Agreement, for other securities), the "Purchase
Price"), but the amount and type of
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<PAGE> 13
securities purchasable upon the exercise of each Right and the Purchase Price
thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or
Section 22 hereof that represents Rights beneficially owned by a Person
described in the first sentence of Section 7(e), and any Rights Certificate
issued pursuant to Section 6 or Section 11 hereof upon transfer, exchange,
replacement or adjustment of any such Rights, shall contain (to the extent
feasible) the following legend, modified as applicable to apply to such Person:
The Rights represented by this Rights Certificate are or were beneficially
owned by a Person who was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring Person (as such terms are defined in the Rights
Agreement). Accordingly, this Rights Certificate and the Rights
represented hereby [will] [have] become null and void in the circumstances
and with the effect specified in Section 7(e) of such Agreement.
The provisions of Section 7(e) of this Agreement shall be operative whether or
not the foregoing legend is contained on any such Rights Certificate. The
Company shall give notice to the Rights Agent promptly after it becomes aware
of the existence of any Acquiring Person or any Associate or Affiliate thereof.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President or any Vice President,
either manually or by facsimile signature, and shall have affixed thereto the
Company's seal or a facsimile thereof, which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. The Rights Certificates shall be countersigned by the Rights Agent,
either manually or by facsimile signature, and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Rights Certificates shall cease to be such officer of
the Company before countersignature by the Rights Agent and issuance and
delivery by the Company, such Rights Certificates, nevertheless, may be
countersigned by the Rights Agent and issued and delivered by the Company with
the same force and effect as though the person who signed such Rights
Certificates had not ceased to be such officer of the Company; and any Rights
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Rights Certificate, shall be a proper
officer of the Company to sign such Rights Certificate, although at the date of
the execution of this Rights Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the names and addresses of the respective
holders of the
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Rights Certificates, the number of Rights evidenced on its face by each of the
Rights Certificates and the certificate number and the date of each of the
Rights Certificates.
Section 6. Transfer, Split-Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e),
Section 13(d), Section 14 and Section 24 hereof, at any time after the close of
business on the Distribution Date, and at or prior to the close of business on
the Expiration Date, any Rights Certificate or Rights Certificates may be
transferred, split up, combined or exchanged for another Rights Certificate or
Rights Certificates, entitling the registered holder to purchase a like number
of Fractional Shares of Preferred Stock (or, following a Triggering Event,
Common Stock, other securities, cash or other assets, as the case may be) as
the Rights Certificate or Rights Certificates surrendered then entitled such
holder (or former holder in the case of a transfer) to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Rights
Certificate or Rights Certificates shall make such request in writing delivered
to the Rights Agent, and shall surrender the Rights Certificate or Rights
Certificates to be transferred, split up, combined or exchanged at the
principal office or offices of the Rights Agent designated for such purpose.
Neither the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) thereof or of the
Affiliates or Associates thereof as the Company shall reasonably request.
Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e),
Section 13(d), Section 14 and Section 24 hereof, countersign and deliver to the
Person entitled thereto a Rights Certificate or Rights Certificates, as the
case may be, as so requested. The Company may require payment by the holder of
a sum sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer, split- up, combination or exchange of Rights
Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation
of a Rights Certificate, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to them, and reimbursement to the
Company and the Rights Agent of all reasonable expenses incidental thereto, and
upon surrender to the Rights Agent and cancellation of the Rights Certificate
if mutilated, the Company will, subject to Section 4(b), Section 7(e), Section
13(d), Section 14 and Section 24, execute and deliver a new Rights Certificate
of like tenor to the Rights Agent for countersignature and delivery to the
registered owner in lieu of the Rights Certificate so lost, stolen, destroyed
or mutilated.
Section 7. Exercise of Rights; Purchase Price.
(a) Subject to Section 7(e) hereof, the registered holder of any
Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section
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<PAGE> 15
23(a) hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly completed and executed, to the
Rights Agent at the principal office or offices of the Rights Agent designated
for such purpose, together with payment of the aggregate Purchase Price with
respect to the total number of Fractional Shares of Preferred Stock (or other
securities, cash or other assets, as the case may be) as to which such
surrendered Rights are then exercisable, at or prior to the Expiration Date.
(b) The Purchase Price for each Fractional Share of Preferred
Stock pursuant to the exercise of a Right shall initially be $[EXERCISE PRICE],
and shall be subject to adjustment from time to time as provided in Sections 11
and 13(a) hereof and shall be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase and the certificate on the
reverse side thereof duly executed, accompanied by payment, with respect to
each Right so exercised, of the Purchase Price per Fractional Share of
Preferred Stock (or other shares, securities, cash or other assets, as the case
may be) to be purchased as set forth below and an amount equal to any
applicable transfer tax, the Rights Agent shall, subject to Section 20(k)
hereof, thereupon promptly (i)(A) requisition from any transfer agent of the
shares of Preferred Stock (or make available, if the Rights Agent is the
transfer agent for such shares) certificates for the total number of Fractional
Shares of Preferred Stock to be purchased, and the Company hereby irrevocably
authorizes its transfer agent to comply with all such requests, or (B) if the
Company, in its sole discretion, shall have elected to deposit the shares of
Preferred Stock issuable upon exercise of the Rights hereunder with a
depositary agent, requisition from the depositary agent depositary receipts
representing interests in such number of Fractional Shares of Preferred Stock
as are to be purchased (in which case certificates for the shares of Preferred
Stock represented by such receipts shall be deposited by the transfer agent
with the depositary agent) and the Company will direct the depositary agent to
comply with such request, (ii) requisition from the Company the amount of cash,
if any, to be paid in lieu of fractional shares in accordance with Section 14
hereof, (iii) after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Rights Certificate, registered in such name or names as may be designated by
such holder and (iv) after receipt thereof, deliver such cash, if any, to or
upon the order of the registered holder of such Rights Certificate. The payment
of the Purchase Price (as such amount may be reduced pursuant to Section
11(a)(iii) hereof) may be made in cash or by certified check, cashier's or
official bank check or bank draft payable to the order of the Company or the
Rights Agent. In the event that the Company is obligated to issue other
securities (including Common Stock) of the Company, pay cash and/or distribute
other property pursuant to Section 11(a) or Section 13(a) hereof, the Company
will make all arrangements necessary so that such other securities, cash and/or
other property are available for distribution by the Rights Agent, if and when
appropriate. The Company reserves the right to require prior to the occurrence
of a Triggering Event that, upon exercise of Rights, a number of Rights be
exercised so that only whole shares of Preferred Stock would be issued.
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<PAGE> 16
(d) In case the registered holder of any Rights Certificate shall
exercise fewer than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be
issued by the Rights Agent and delivered to, or upon the order of, the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder, subject to the provisions of Section 14
hereof.
(e) Notwithstanding anything in this Agreement to the contrary,
from and after the first occurrence of a Triggering Event, any Rights
beneficially owned by or transferred to (i) an Acquiring Person or an Associate
or Affiliate of an Acquiring Person other than any such Person that became such
pursuant to a Permitted Offer and the Board of Directors in good faith
determines was not involved in and did not cause or facilitate, directly or
indirectly, such Triggering Event, (ii) a direct or indirect transferee of such
Rights from such Acquiring Person (or any such Associate or Affiliate) who
becomes a transferee after such Triggering Event or (iii) a direct or indirect
transferee of such Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with such Triggering Event and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from such Acquiring Person (or such Affiliate or Associate) to
holders of equity interests in such Acquiring Person (or such Affiliate or
Associate) or to any Person with whom such Acquiring Person (or such Affiliate
or Associate) has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer that the Board of Directors
of the Company determines is part of a plan, arrangement or understanding that
has as a primary purpose or effect the avoidance of this Section 7(e), shall
become null and void without any further action, no holder of such Rights shall
have any rights whatsoever with respect to such Rights, whether under any
provision of this Agreement or otherwise, and such Rights shall not be
transferable. The Company shall use all reasonable efforts to ensure that the
provisions of this Section 7(e) and Section 4(b) hereof are complied with, but
shall have no liability to any holder of Rights Certificates or other Person as
a result of its failure to make any determinations with respect to an Acquiring
Person or its Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall
have (i) completed and signed the certificate contained in the form of election
to purchase set forth on the reverse side of the Rights Certificate surrendered
for such exercise and (ii) provided such additional evidence of the identity of
the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates.
All Rights Certificates surrendered for the purpose of exercise, transfer,
split-up, combination or exchange shall, if surrendered to the Company or any
of its agents, be delivered to the Rights Agent for cancellation or in canceled
form, or, if surrendered to the Rights Agent, shall be canceled by it, and no
Rights Certificates shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Agreement. The Company shall deliver
to the Rights Agent for cancellation and retirement, and the Rights Agent shall
so cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all canceled
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<PAGE> 17
Rights Certificates to the Company, or shall, at the written request of the
Company, destroy such canceled Rights Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and, following the occurrence of a Triggering Event, out of
its authorized and unissued shares of Common Stock and/or other securities or
out of its authorized and issued shares held in its treasury), the number of
shares of Preferred Stock (and, following the occurrence of a Triggering Event,
Common Stock and/or other securities) that, as provided in this Agreement,
including Section 11(a)(iii) hereof, will be sufficient to permit the exercise
in full of all outstanding Rights.
(b) So long as any shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities)
issuable and deliverable upon the exercise of the Rights are listed on any
national securities exchange or quoted on any trading system, the Company shall
use its best efforts to cause, from and after such time as the Rights become
exercisable, all shares reserved for such issuance to be listed on such
exchange, or quoted on such system, upon official notice of issuance upon such
exercise. Following the occurrence of a Triggering Event, the Company will use
its best efforts to list (or continue the listing of) the Rights and the
securities issuable and deliverable upon the exercise of the Rights on one or
more national securities exchanges or to cause the Rights and the securities
purchasable upon exercise of the Rights to be reported by NASDAQ or such other
transaction reporting system then in use.
(c) The Company shall use its best efforts to (i) prepare and
file, as soon as practicable following the first occurrence of a Flip-In Event
or, if applicable, as soon as practicable following the earliest date after the
first occurrence of a Flip-In Event on which the consideration to be delivered
by the Company upon exercise of the Rights has been determined pursuant to this
Agreement (including in accordance with Section 11(a)(iii) hereof), a
registration statement on an appropriate form under the Securities Act with
respect to the securities purchasable upon exercise of the Rights, (ii) cause
such registration statement to become effective as soon as practicable after
such filing, and (iii) cause such registration statement to remain effective
(with a prospectus at all times meeting the requirements of the Securities Act)
until the earlier of (A) the date as of which the Rights are no longer
exercisable for such securities and (B) the Expiration Date. The Company will
also take such action as may be appropriate under, or to ensure compliance
with, the securities or "blue sky" laws of the various states in connection
with the exercisability of the Rights. The Company may temporarily suspend, for
a period of time not to exceed 90 days after the date set forth in clause (i)
of the first sentence of this Section 9(c), the exercisability of the Rights in
order to prepare and file such registration statement and permit it to become
effective. In addition, if the Company shall determine that the Securities Act
requires an effective registration statement under the Securities Act following
the Distribution Date, the Company may temporarily suspend the exercisability
of the Rights until such time as such a registration statement has been
declared effective. Upon any such suspension, the Company shall issue a public
announcement stating that
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<PAGE> 18
the exercisability of the Rights has been temporarily suspended, as well as a
public announcement at such time as the suspension is no longer in effect.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction if the requisite qualification in
such jurisdiction shall not have been obtained, the exercise thereof shall not
be permitted under applicable law or any required registration statement shall
not have been declared effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all Fractional Shares of Preferred
Stock (and, following the occurrence of a Triggering Event, Common Stock and/or
other securities) delivered upon exercise of Rights shall, at the time of
delivery of the certificates for such shares (subject to payment of the
Purchase Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges that
may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificates for a number of Fractional Shares of
Preferred Stock (or Common Stock and/or other securities, as the case may be)
upon the exercise of Rights. The Company shall not, however, be required to pay
any transfer tax that may be payable in respect of any transfer or delivery of
Rights Certificates to a Person other than, or the issuance or delivery of a
number of Fractional Shares of Preferred Stock (or Common Stock and/or other
securities, as the case may be) in respect of a name other than that of, the
registered holder of the Rights Certificates evidencing Rights surrendered for
exercise or to issue or deliver any certificates for a number of Fractional
Shares of Preferred Stock (or Common Stock and/or other securities, as the case
may be) in a name other than that of the registered holder upon the exercise of
any Rights until such tax shall have been paid (any such tax being payable by
the holder of such Rights Certificate at the time of surrender) or until it has
been established to the Company's satisfaction that no such tax is due.
Section 10. Preferred Stock Record Date. Each Person in whose
name any certificate for a number of Fractional Shares of Preferred Stock (or
Common Stock and/or other securities, as the case may be) is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder
of record of such shares (fractional or otherwise) of Preferred Stock (or
Common Stock and/or other securities, as the case may be) represented thereby
on, and such certificate shall be dated, the date upon which the Rights
Certificate evidencing such Rights was duly surrendered and payment of the
Purchase Price (and all applicable transfer taxes) was made; provided, however,
that if the date of such surrender and payment is a date upon which the
Preferred Stock (or Common Stock and/or other securities, as the case may be)
transfer books of the Company are closed, such Person shall be deemed to have
become the record holder of such shares (fractional or otherwise) on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Stock (or Common Stock and/or other securities, as the case may be)
transfer books of the Company are open. Prior to the exercise of the Rights
evidenced thereby, the holder of a Rights Certificate, as such, shall not be
entitled to any rights of a stockholder of the Company with respect to shares
for which the Rights shall be exercisable, including, without limitation, the
right to vote,
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<PAGE> 19
to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights. The Purchase Price, the number and kind of shares
or other securities subject to purchase upon exercise of each Right and the
number of Rights outstanding are subject to adjustment from time to time as
provided in this Section 11.
(a)(i) In the event the Company shall at any time after the
Rights Dividend Declaration Date (A) declare a dividend on the outstanding
shares of Preferred Stock payable in shares of Preferred Stock, (B)
subdivide the outstanding shares of Preferred Stock, (C) combine the
outstanding shares of Preferred Stock into a smaller number of shares or
(D) otherwise reclassify the outstanding shares of Preferred Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a) and Section 7(e)
hereof, the Purchase Price in effect at the time of the record date for
such dividend or of the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of Preferred Stock or
capital stock, as the case may be, issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised after
such time shall be entitled to receive, upon payment of the Purchase Price
then in effect, the aggregate number and kind of shares of Preferred Stock
or capital stock, as the case may be, which, if such Right had been
exercised immediately prior to such date and at a time when the Preferred
Stock transfer books of the Company were open, he would have owned upon
such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification. If an event occurs that
would require an adjustment under both this Section 11(a)(i) and Section
11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i)
shall be in addition to, and shall be made prior to, any adjustment
required pursuant to Section 11(a)(ii) hereof.
(ii) Subject to Sections 23 and 24 of this Agreement, in
the event any Person shall, at any time after the Rights Dividend
Declaration Date, become an Acquiring Person, unless the event causing
such Person to become an Acquiring Person is (1) a Flip-Over Event or (2)
an acquisition of shares of Common Stock pursuant to a Permitted Offer
(provided that this clause (2) shall cease to apply if such Acquiring
Person thereafter becomes the Beneficial Owner of any additional shares of
Common Stock other than pursuant to such Permitted Offer or a transaction
set forth in Section 13(a) or 13(d) hereof), then, (x) the Purchase Price
shall be adjusted to be the Purchase Price immediately prior to the first
occurrence of a Flip-In Event multiplied by the number of Fractional
Shares of Preferred Stock for which a Right was exercisable immediately
prior to such first occurrence and (y) each holder of a Right (except as
provided below in Section 11(a)(iii) and in Section 7(e) hereof) shall
thereafter have the right to receive, upon exercise thereof at a price
equal to the Purchase Price in accordance with the terms of this
Agreement, in lieu of shares of Preferred Stock, such number of shares of
Common Stock of the Company as shall equal the result obtained by dividing
the Purchase Price by 50% of the Current Market Price per
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<PAGE> 20
share of Common Stock on the date of such first occurrence (such number of
shares, the "Adjustment Shares"); provided that the Purchase Price and the
number of Adjustment Shares shall be further adjusted as provided in this
Agreement to reflect any events occurring after the date of such first
occurrence.
(iii) In the event that the number of shares of Common
Stock that are authorized by the Company's certificate of incorporation
but not outstanding or reserved for issuance for purposes other than upon
exercise of the Rights is not sufficient to permit the exercise in full of
the Rights in accordance with the foregoing subparagraph (ii) of this
Section 11(a), the Company shall, to the extent permitted by applicable
law and regulation, (A) determine the excess of (1) the value of the
Adjustment Shares issuable upon the exercise of a Right (computed using
the Current Market Price used to determine the number of Adjustment
Shares) (the "Current Value") over (2) the Purchase Price (such excess is
herein referred to as the "Spread"), and (B) with respect to each Right,
make adequate provision to substitute for the Adjustment Shares, upon the
exercise of the Rights and payment of the applicable Purchase Price, (1)
cash, (2) a reduction in the Purchase Price, (3) Common Stock or other
equity securities of the Company (including, without limitation, shares,
or units of shares, of preferred stock (including, without limitation, the
Preferred Stock) that the Board of Directors of the Company has determined
to have the same value as shares of Common Stock (such shares of preferred
stock are herein referred to as "Common Stock Equivalents")), (4) debt
securities of the Company, (5) other assets or (6) any combination of the
foregoing, having an aggregate value equal to the Current Value, where
such aggregate value has been determined by the Board of Directors of the
Company based upon the advice of a nationally recognized investment
banking firm selected by the Board of Directors of the Company; provided,
however, if the Company shall not have made adequate provision to deliver
value pursuant to clause (B) above within 30 days following the later of
(x) the first occurrence of a Flip-In Event and (y) the date on which the
Company's right of redemption pursuant to Section 23(a) expires (the later
of (x) and (y) being referred to herein as the "Flip-In Trigger Date"),
then the Company shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of the Purchase Price,
shares of Common Stock (to the extent available) and then, if necessary,
cash, which shares and/or cash have an aggregate value equal to the
Spread. If the Board of Directors of the Company shall determine in good
faith that it is likely that sufficient additional shares of Common Stock
could be authorized for issuance upon exercise in full of the Rights, the
30-day period set forth above may be extended to the extent necessary, but
not more than 90 days after the Flip-In Trigger Date, in order that the
Company may seek stockholder approval for the authorization of such
additional shares (such period, as it may be extended, the "Substitution
Period"). To the extent that the Company or the Board of Directors
determines that some action need be taken pursuant to the first and/or
second sentences of this Section 11(a)(iii), the Company (x) shall
provide, subject to Section 7(e) hereof, that such action shall apply
uniformly to all outstanding Rights, and (y) may suspend the
exercisability of the Rights until the expiration of the Substitution
Period in order to seek any authorization of additional shares and/or to
decide the appropriate form of distribution to be made pursuant to such
first sentence and to determine the value thereof. In the event of any
such suspension, the
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Company shall issue a public announcement stating that the exercisability
of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. For
purposes of this Section 11(a)(iii), the value of the Common Stock shall
be the Current Market Price per share of the Common Stock on the Flip-In
Trigger Date and the value of any Common Stock Equivalent shall be deemed
to have the same value as the Common Stock on such date.
(b) In case the Company shall fix a record date for the issuance
of rights, options or warrants to all holders of Preferred Stock entitling them
to subscribe for or purchase (for a period expiring within 45 calendar days
after such record date) Preferred Stock (or shares having the same rights,
privileges and preferences as the shares of Preferred Stock ("Equivalent
Preferred Stock")) or securities convertible into Preferred Stock or Equivalent
Preferred Stock at a price per share of Preferred Stock or per share of
Equivalent Preferred Stock (or having a conversion price per share, if a
security convertible into Preferred Stock or Equivalent Preferred Stock) less
than the Current Market Price per share of Preferred Stock on such record date,
the Purchase Price to be in effect after such record date shall be determined
by multiplying the Purchase Price in effect immediately prior to such record
date by a fraction, the numerator of which shall be the number of shares of
Preferred Stock outstanding on such record date, plus the number of shares of
Preferred Stock that the aggregate offering price of the total number of shares
of Preferred Stock and/or Equivalent Preferred Stock so to be offered (and/or
the aggregate initial conversion price of the convertible securities so to be
offered) would purchase at such Current Market Price, and the denominator of
which shall be the number of shares of Preferred Stock outstanding on such
record date, plus the number of additional shares of Preferred Stock and/or
Equivalent Preferred Stock to be offered for subscription or purchase (or into
which the convertible securities so to be offered are initially convertible).
In case such subscription price may be paid by delivery of consideration, part
or all of which may be in a form other than cash, the value of such
consideration shall be as determined in good faith by the Board of Directors of
the Company, whose determination shall be described in a statement filed with
the Rights Agent and shall be binding on the Rights Agent and the holders of
the Rights. Shares of Preferred Stock owned by or held for the account of the
Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed, and in the event that such rights or warrants are not so issued,
the Purchase Price shall be adjusted to be the Purchase Price that would then
be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution
to all holders of Preferred Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the
continuing or surviving corporation) of evidences of indebtedness, cash (other
than a regular quarterly cash dividend out of the earnings or retained earnings
of the Company), assets (other than a dividend payable in Preferred Stock, but
including any dividend payable in stock other than Preferred Stock) or
subscription rights or warrants (excluding those referred to in Section 11(b)
hereof), the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be the Current
Market Price per share of Preferred Stock on such record date, less the fair
market value (as determined in good faith by the Board of Directors
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<PAGE> 22
of the Company, whose determination shall be described in a statement filed
with the Rights Agent and shall be binding on the Rights Agent) of the portion
of the cash, assets or evidences of indebtedness so to be distributed or of
such subscription rights or warrants applicable to a share of Preferred Stock
and the denominator of which shall be such Current Market Price per share of
Preferred Stock. Such adjustments shall be made successively whenever such a
record date is fixed, and in the event that such distribution is not so made,
the Purchase Price shall be adjusted to be the Purchase Price that would have
been in effect if such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the "Current
Market Price" per share of Common Stock of a Person on any date shall be
deemed to be the average of the daily Closing Prices per share of such
Common Stock for the 30 consecutive Trading Days immediately prior to such
date, and for purposes of computations made pursuant to Section 11(a)(iii)
hereof, the "Current Market Price" per share of Common Stock on any date
shall be deemed to be the average of the daily Closing Prices per share of
such Common Stock for the 10 consecutive Trading Days immediately
following such date; provided, however, that in the event that the Current
Market Price per share of Common Stock is determined during a period
following the announcement of (A) a dividend or distribution on such
Common Stock other than a regular quarterly cash dividend or the dividend
of the Rights, or (B) any subdivision, combination or reclassification of
such Common Stock, and the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, shall not have occurred prior to the commencement of the
requisite 30 Trading Day or 10 Trading Day period, as set forth above,
then, and in each such case, the Current Market Price shall be properly
adjusted to take into account ex-dividend trading. If the Common Stock is
not publicly held or not so listed or traded, "Current Market Price" per
share shall mean the fair value per share as determined in good faith by
the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be
conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the
"Current Market Price" per share (or Fractional Share) of Preferred Stock
shall be determined in the same manner as set forth above for the Common
Stock in clause (i) of this Section 11(d) (other than the last sentence
thereof). If the Current Market Price per share (or Fractional Share) of
Preferred Stock cannot be determined in the manner provided above or if
the Preferred Stock is not publicly held or listed or traded in a manner
described in clause (i) of this Section 11(d), the "Current Market Price"
per share of Preferred Stock shall be conclusively deemed to be an amount
equal to 100 (as such number may be appropriately adjusted for such events
as stock splits, stock dividends and recapitalizations with respect to the
Common Stock occurring after the date of this Agreement) multiplied by the
Current Market Price per share of the Common Stock. If neither the Common
Stock nor the Preferred Stock is publicly held or so listed or traded,
Current Market Price per share of the Preferred Stock shall mean the fair
value per share as determined in good faith by the Board of Directors of
the Company, whose determination shall be described in a statement filed
with the Rights Agent and shall be conclusive for all purposes. For all
purposes of this Agreement, the Current Market Price
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of a Fractional Share of Preferred Stock shall be equal to the Current
Market Price of one share of Preferred Stock divided by 100.
(e) Anything herein to the contrary notwithstanding, no adjustment
in the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments that by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest ten-thousandth of a share of Common Stock or other share
or to the nearest ten-thousandth of a Fractional Share of Preferred Stock, as
the case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which mandates such
adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)
or Section 13(a) hereof, the holder of any Right thereafter exercised shall
become entitled to receive in respect of such Right any shares of capital stock
other than Preferred Stock, thereafter the number of such other shares so
receivable upon exercise of any Right and the Purchase Price thereof shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Preferred Stock
contained in Sections 11(a), (b), (c), (e), (f), (g), (h), (i), (j), (k) and
(m) hereof, and the provisions of Sections 7, 9, 10, 13 and 14 hereof with
respect to the Preferred Stock shall apply on like terms to any such other
shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of Fractional Shares of
Preferred Stock purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
Fractional Shares of Preferred Stock (calculated to the nearest one
ten-thousandth of a Fractional Share) obtained by (i) multiplying (x) the
number of Fractional Shares of Preferred Stock covered by a Right immediately
prior to this adjustment by (y) the Purchase Price in effect immediately prior
to such adjustment of the Purchase Price, and (ii) dividing the product so
obtained by the Purchase Price in effect immediately after such adjustment of
the Purchase Price.
(i) The Company may elect, on or after the date of any adjustment
of the Purchase Price, to adjust the number of Rights in lieu of any adjustment
in the number of Fractional Shares of Preferred Stock purchasable upon the
exercise of a Right. Each of the Rights outstanding after the adjustment in the
number of Rights shall be exercisable for the number of Fractional Shares of
Preferred Stock for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number of
Rights shall become that number of
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<PAGE> 24
Rights (calculated to the nearest ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Rights Certificates have been issued, shall be at least 10 days
later than the date of the public announcement. If Rights Certificates have
been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company shall, as promptly as practicable, cause to be
distributed to holders of record of Rights Certificates on such record date
Rights Certificates evidencing, subject to Section 14 hereof, the additional
Rights to which such holders shall be entitled as a result of such adjustment,
or, at the option of the Company, shall cause to be distributed to such holders
of record in substitution and replacement for the Rights Certificates held by
such holders prior to the date of adjustment, and upon surrender thereof, if
required by the Company, new Rights Certificates evidencing all the Rights to
which such holders shall be entitled after such adjustment. Rights Certificates
so to be distributed shall be issued, executed and countersigned in the manner
provided for herein (and may bear, at the option of the Company, the adjusted
Purchase Price) and shall be registered in the names of the holders of record
of Rights Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price
or the number of Fractional Shares of Preferred Stock issuable upon the
exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per Fractional Share and the
number of Fractional Shares that were expressed in the initial Rights
Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then par value, if any, or the stated
capital of the number of Fractional Shares of Preferred Stock or of the number
of shares of Common Stock or other securities issuable upon exercise of a
Right, the Company shall take any corporate action that may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable such number of Fractional Shares of
Preferred Stock or such number of shares of Common Stock or other securities at
such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of Fractional Shares of Preferred Stock and other capital stock or
securities of the Company, if any, issuable upon such exercise over and above
the number of Fractional Shares of Preferred Stock and other capital stock or
securities of the Company, if any, issuable upon such exercise on the basis of
the Purchase Price in effect prior to such adjustment; provided, however, that
the Company shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares
(fractional or otherwise) or securities upon the occurrence of the event
requiring such adjustment.
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<PAGE> 25
(m) Anything in this Section 11 to the contrary notwithstanding,
the Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment the Board of Directors of the
Company shall determine to be advisable in order that any (i) consolidation or
subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares
of Preferred Stock at less than the current market price, (iii) issuance wholly
for cash of shares of Preferred Stock or securities that by their terms are
convertible into or exchangeable for shares of Preferred Stock, (iv) stock
dividends or (v) issuance of rights, options or warrants referred to in this
Section 11 hereafter made by the Company to holders of its Preferred Stock
shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any
time that there is an Acquiring Person, (i) consolidate with any other Person,
(ii) merge with or into any other Person, or (iii) sell, lease or transfer (or
permit one or more Subsidiaries to sell, lease or transfer), in one transaction
or a series of related transactions, assets or earning power aggregating more
than 50% of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person or Persons, if (x) at the time of or
immediately after such consolidation, merger, sale, lease or transfer there are
any rights, warrants or other instruments or securities of the Company or any
other Person outstanding or agreements, arrangements or understandings in
effect that would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights, (y) prior to, simultaneously with or
immediately after such consolidation, merger, sale, lease or transfer, the
stockholders or other equity owners of the Person who constitutes, or would
constitute, the "Principal Party" for purposes of Section 13(a) hereof shall
have received a distribution of Rights previously owned by such Person or any
of its Affiliates or Associates, or (z) the identity, form or nature of
organization of the Principal Party (including, without limitation, the
selection of the Person that will be the Principal Party as a result of the
Company's entering into one or more consolidations, mergers, sales, leases,
transfers or transactions with more than one party) would preclude or limit the
exercise of Rights or otherwise diminish substantially or eliminate the
benefits intended to be afforded by the Rights.
(o) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by Section 23, Section 24 or Section 27
hereof, take (or permit any Subsidiary to take) any action if the purpose of
such action is to, or if at the time such action is taken it is reasonably
foreseeable that such action will, diminish substantially or eliminate the
benefits intended to be afforded by the Rights.
(p) Notwithstanding Section 3(c) hereof or any other provision of
this Agreement to the contrary, in the event that the Company shall at any time
after the Rights Dividend Declaration Date and prior to the Distribution Date
(i) declare a dividend on the outstanding shares of Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock,
(iii) combine the outstanding shares of Common Stock into a smaller number of
shares or (iv) otherwise reclassify the outstanding shares of Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation), the
number of Rights associated with each share of Common Stock then outstanding,
or issued or delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted
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<PAGE> 26
so that the number of Rights thereafter associated with each share of Common
Stock following any such event shall equal the result obtained by multiplying
the number of Rights associated with each share of Common Stock immediately
prior to such event by a fraction (the "Adjustment Fraction") the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
following the occurrence of such event. In lieu of such adjustment in the
number of Rights associated with one share of Common Stock, the Company may
elect to adjust the number of Fractional Shares of Preferred Stock purchasable
upon the exercise of one Right and the Purchase Price. If the Company makes
such election, the number of Rights associated with one share of Common Stock
shall remain unchanged, and the number of Fractional Shares of Preferred Stock
purchasable upon exercise of one Right and the Purchase Price shall be
proportionately adjusted so that (i) the number of Fractional Shares of
Preferred Stock purchasable upon exercise of a Right following such adjustment
shall equal the product of the number of Fractional Shares of Preferred Stock
purchasable upon exercise of a Right immediately prior to such adjustment
multiplied by the Adjustment Fraction and (ii) the Purchase Price following
such adjustment shall equal the product of the Purchase Price immediately prior
to such adjustment multiplied by the Adjustment Fraction.
Section 12. Certificate of Adjusted Purchase Price or Number of
Shares. Whenever an adjustment is made as provided in Section 11 or Section 13
hereof, the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Stock and the Common Stock, a copy of such certificate and (c) mail a
brief summary thereof to each registered holder of a Rights Certificate (or, if
prior to the Distribution Date, to each registered holder of a certificate
representing shares of Common Stock) in accordance with Section 26 hereof. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) In the event that, from and after the time an Acquiring Person
has become such, directly or indirectly, (x) the Company shall consolidate
with, or merge with and into, any other Person, and the Company shall not be
the continuing or surviving corporation of such consolidation or merger, (y)
any Person shall consolidate with, or merge with or into, the Company, and the
Company shall be the continuing or surviving corporation of such consolidation
or merger, and, in connection with such consolidation or merger, all or part of
the outstanding shares of Common Stock shall be changed into or exchanged for
stock or other securities of the Company or any other Person or cash or any
other property, or (z) the Company shall sell, lease or otherwise transfer (or
one or more of its Subsidiaries shall sell, lease or otherwise transfer), in
one transaction or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons (other than the
Company or any wholly owned Subsidiary of the Company or any combination
thereof in one or more transactions each of which complies (and all of which
together comply) with
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<PAGE> 27
Section 11(o) hereof), then, and in each such case (except as may be
contemplated by Section 13(d) hereof), proper provision shall be made so that:
(i) the Purchase Price shall be adjusted to be the Purchase Price immediately
prior to the first occurrence of a Triggering Event multiplied by the number of
Fractional Shares of Preferred Stock for which a Right was exercisable
immediately prior to such first occurrence; (ii) on and after the Distribution
Date, each holder of a Right, except as provided in Section 7(e) hereof, shall
thereafter have the right to receive, upon the exercise thereof at the Purchase
Price in accordance with the terms of this Agreement, in lieu of shares of
Preferred Stock or Common Stock of the Company, such number of validly
authorized and issued, fully paid, nonassessable and freely tradeable shares of
Common Stock of the Principal Party (as such term is hereinafter defined), not
subject to any liens, encumbrances, rights of first refusal or other adverse
claims, as shall be equal to the result obtained by dividing the Purchase Price
by 50% of the Current Market Price per share of the Common Stock of such
Principal Party on the date of consummation of such Flip-Over Event; provided
that the Purchase Price and the number of shares of Common Stock of such
Principal Party issuable upon exercise of each Right shall be further adjusted
as provided in this Agreement to reflect any events occurring after the date of
such first occurrence of a Triggering Event or after the date of such Flip-Over
Event, as applicable; (iii) such Principal Party shall thereafter be liable
for, and shall assume, by virtue of such Flip-Over Event, all the obligations
and duties of the Company pursuant to this Agreement; (iv) the term "Company"
shall thereafter be deemed to refer to such Principal Party, it being
specifically intended that the provisions of Section 11 hereof shall apply only
to such Principal Party following the first occurrence of a Flip-Over Event;
(v) such Principal Party shall take such steps (including, but not limited to,
the reservation of a sufficient number of shares of its Common Stock) in
connection with the consummation of any such transaction as may be necessary to
assure that the provisions hereof shall thereafter be applicable, as nearly as
reasonably may be, in relation to its shares of Common Stock thereafter
deliverable upon the exercise of the Rights; and (vi) the provisions of Section
11(a)(ii) hereof shall be of no effect following the occurrence of any
Flip-Over Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x) or (y)
of the first sentence of Section 13(a), (A) the Person that is the issuer
of any securities into which shares of Common Stock of the Company are
converted in such merger or consolidation, or, if there is more than one
such issuer, the issuer the Common Stock of which has the greatest
aggregate market value, or (B) if no securities are so issued, (x) the
Person that survives such consolidation or is the other party to the
merger and survives such merger, or, if there is more than one such
Person, the Person the Common Stock of which has the greatest aggregate
market value or (y) if the Person that is the other party to the merger
does not survive the merger, the Person that does survive the merger
(including the Company if it survives); and
(ii) in the case of any transaction described in clause (z) of the
first sentence of Section 13(a), the Person that is the party receiving
the greatest portion of the assets or earning power transferred pursuant
to such transaction or transactions, or, if each Person that is a party to
such transaction or transactions receives the same portion of the assets
or earning power so transferred, or if the Person receiving the greatest
portion of the assets or earning
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<PAGE> 28
power cannot be determined, the Person the Common Stock of which has the
greatest aggregate market value;
provided, however, that in any such case, if the Common Stock of such Person is
not at such time and has not been continuously over the preceding twelve-month
period registered under Section 12 of the Exchange Act, and if (1) such Person
is a direct or indirect Subsidiary of another Person the Common Stock of which
is and has been so registered, "Principal Party" shall refer to such other
Person; (2) such Person is a Subsidiary, directly or indirectly, of more than
one Person, the Common Stocks of all of which are and have been so registered,
"Principal Party" shall refer to whichever of such Persons is the issuer of the
Common Stock having the greatest aggregate market value; and (3) such Person is
owned, directly or indirectly, by a joint venture formed by two or more Persons
that are not owned, directly or indirectly, by the same Person, the rules set
forth in (1) and (2) above shall apply to each of the chains of ownership
having an interest in such joint venture as if such party were a "Subsidiary"
of both or all of such joint venturers and the Principal Parties in each such
chain shall bear the obligations set forth in this Section 13 in the same ratio
as their direct or indirect interests in such Person bear to the total of such
interests.
(c) The Company shall not consummate any Flip-Over Event unless
each Principal Party (or Person that may become a Principal Party as a result
of such Flip-Over Event) shall have a sufficient number of authorized shares of
its Common Stock that have not been issued or reserved for issuance to permit
the exercise in full of the Rights in accordance with this Section 13 and
unless prior thereto the Company and each such Principal Party shall have
executed and delivered to the Rights Agent a supplemental agreement providing
for the terms set forth in paragraphs (a) and (b) of this Section 13 and
further providing that, as soon as practicable after the date of such Flip-Over
Event, the Principal Party at its own expense will
(i) prepare and file a registration statement under the Securities
Act with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, and will use its best
efforts to cause such registration statement to (A) become effective as
soon as practicable after such filing and (B) remain effective (with a
prospectus at all times meeting the requirements of the Securities Act)
until the Expiration Date;
(ii) use its best efforts to qualify or register the Rights and the
securities purchasable upon exercise of the Rights under the "blue sky"
laws of such jurisdictions as may be necessary or appropriate;
(iii) use its best efforts, if the Common Stock of the Principal
Party is or shall become listed on a national securities exchange, to list
(or continue the listing of) the Rights and the securities purchasable
upon exercise of the Rights on such securities exchange and, if the Common
Stock of the Principal Party shall not be listed on a national securities
exchange, to cause the Rights and the securities purchasable upon exercise
of the Rights to be reported by NASDAQ or such other transaction reporting
system then in use; and
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<PAGE> 29
(iv) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates that comply
in all respects with the requirements for registration on Form 10 under
the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers
or consolidations or sales or other transfers. In the event that a Flip-Over
Event shall occur at any time after the occurrence of a Flip-In Event, the
Rights that have not theretofore been exercised shall thereafter become
exercisable in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary,
Section 13 shall not be applicable to a transaction described in subparagraphs
(x) and (y) of Section 13(a) if (i) such transaction is consummated with a
Person or Persons who acquired shares of Common Stock pursuant to a Permitted
Offer (or a wholly owned subsidiary of any such Person or Persons), (ii) the
price per share of Common Stock offered in such transaction is not less than
the price per share of Common Stock paid to all holders of Common Stock whose
shares were purchased pursuant to such Permitted Offer, and (iii) the form of
consideration being offered to the remaining holders of shares of Common Stock
pursuant to such transaction is the same as the form of consideration paid
pursuant to such Permitted Offer. Upon consummation of any such transaction
contemplated by this Section 13(d), all Rights hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of
Rights, except prior to the Distribution Date as provided in Section 11(p)
hereof, or to distribute Rights Certificates or scrip evidencing fractional
Rights. In lieu of such fractional Rights, there shall be paid to the
registered holders of the Rights Certificates with regard to which such
fractional Rights would otherwise be issuable, an amount in cash equal to the
same fraction of the Closing Price of one Right for the Trading Day immediately
prior to the date on which such fractional Rights would have been otherwise
issuable.
(b) The Company shall not be required to issue fractions of shares
of Preferred Stock (other than, except as provided in Section 7(c) hereof,
fractions that are integral multiples of a Fractional Share of Preferred Stock)
upon exercise of the Rights or to distribute certificates or scrip evidencing
fractional shares of Preferred Stock (other than, except as provided in Section
7(c) hereof, fractions that are integral multiples of a Fractional Share of
Preferred Stock). Interests in fractions of shares of Preferred Stock in
integral multiples of a Fractional Share of Preferred Stock may, at the
election of the Company in its sole discretion, be evidenced by depositary
receipts, pursuant to an appropriate agreement between the Company and a
depositary selected by it, provided that such agreement shall provide that the
holders of such depositary receipts shall have all the rights, privileges and
preferences to which they are entitled as beneficial owners of the shares of
Preferred Stock represented by such depositary receipts. In lieu of fractional
shares of Preferred Stock that are not integral multiples of a Fractional Share
of Preferred Stock, the Company may pay to the registered holders of Rights
Certificates at the time such Rights are exercised as herein provided an
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<PAGE> 30
amount in cash equal to the same fraction of one one-hundredth of the Closing
Price of a share of Preferred Stock for the Trading Day immediately prior to
the date of such exercise.
(c) Following the occurrence of a Triggering Event, the Company
shall not be required to issue fractions of shares of Common Stock upon
exercise of the Rights or to distribute certificates or scrip evidencing
fractional shares of Common Stock. In lieu of fractional shares of Common
Stock, the Company may pay to the registered holders of Rights Certificates at
the time such Rights are exercised as herein provided an amount in cash equal
to the same fraction of the Closing Price of one share of Common Stock for the
Trading Day immediately prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of
this Agreement, other than rights of action vested in the Rights Agent pursuant
to Section 18 hereof, are vested in the respective registered holders of the
Rights Certificates (and, prior to the Distribution Date, the registered
holders of the Common Stock) and, where applicable, the Company; and any
registered holder of any Rights Certificate (or, prior to the Distribution
Date, of the Common Stock), without the consent of the Rights Agent or of the
holder of any other Rights Certificate (or, prior to the Distribution Date, of
the Common Stock), may, in his own behalf and for his own benefit, enforce, and
may institute and maintain any suit, action or proceeding against the Company
to enforce, or otherwise act in respect of, his right to exercise the Rights
evidenced by such Rights Certificate in the manner provided in such Rights
Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and shall be entitled to specific performance of the
obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this
Agreement. After a Triggering Event, holders of Rights shall be entitled to
recover the reasonable costs and expenses, including attorneys' fees, incurred
by them in any action to enforce the provisions of this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right
by accepting the same consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will not be
evidenced by Rights Certificates and will be transferable only in connection
with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates will be
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument
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<PAGE> 31
of transfer and with the form of assignment set forth on the reverse side
thereof and the certificate contained therein duly completed and fully
executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company
and the Rights Agent may deem and treat the Person in whose name a Rights
Certificate (or, prior to the Distribution Date, the associated Common Stock
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Stock certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent shall be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; provided, however, the Company must use its
best efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Stockholder.
No holder, as such, of any Rights Certificate shall be entitled to vote,
receive dividends or be deemed for any purpose the holder of the number of
Fractional Shares of Preferred Stock or any other securities of the Company
that may at any time be issuable upon the exercise of the Rights represented
thereby, nor shall anything contained herein or in any Rights Certificate be
construed to confer upon the holder of any Rights Certificate, as such, any of
the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in Section 25 hereof), or to receive dividends or subscription rights,
or otherwise, until the Right or Rights evidenced by such Rights Certificate
shall have been exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other reasonable disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent,
for anything done or omitted by the Rights Agent in connection with the
acceptance and administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the premises.
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<PAGE> 32
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any
Rights Certificate or certificate for Common Stock or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement or other paper or document believed by it, after proper inquiry or
examination, to be genuine and to be signed, executed and, where necessary,
guaranteed, verified or acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights
Agent.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust or stock transfer business of the Rights
Agent or any successor Rights Agent, shall be the successor to the Rights Agent
under this Agreement without the execution or filing of any paper or any
further act on the part of any of the parties hereto; provided, however, that
such corporation would be eligible for appointment as a successor Rights Agent
under the provisions of Section 21 hereof. In case at the time such successor
Rights Agent shall succeed to the agency created by this Agreement, any of the
Rights Certificates shall have been countersigned but not delivered, any such
successor Rights Agent may adopt the countersignature of a predecessor Rights
Agent and deliver such Rights Certificates so countersigned; and in case at
that time any of the Rights Certificates shall not have been countersigned, any
successor Rights Agent may countersign such Rights Certificates either in the
name of the predecessor or in the name of the successor Rights Agent; and in
all such cases such Rights Certificates shall have the full force provided in
the Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Rights Certificates so
countersigned; and in case at that time any of the Rights Certificates shall
not have been countersigned, the Rights Agent may countersign such Rights
Certificates either in its prior name or in its changed name; and in all such
cases such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes
the duties and obligations imposed by this Agreement upon the following terms
and conditions, by all of which the Company and the holders of Rights
Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
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<PAGE> 33
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "Current Market Price") be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed)
may be deemed to be conclusively proved and established by a certificate signed
by the Chairman of the Board, the President, any Vice President, the Treasurer,
any Assistant Treasurer, the Secretary or any Assistant Secretary of the
Company and delivered to the Rights Agent; and such certificate shall be full
authorization to the Rights Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct. In no event shall the Rights Agent
be liable for special, indirect or consequential loss or damage of any kind
whatsoever (including but not limited to lost profits), even if the Rights
Agent has been advised of the likelihood of such loss or damage and regardless
of the form of action.
(d) The Rights Agent shall not be liable for or by reason of any
of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Rights Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Rights Certificate;
nor shall it be responsible for any adjustment required under the provisions of
Section 11 or Section 13 hereof or responsible for the manner, method or amount
of any such adjustment or the ascertaining of the existence of facts that would
require any such adjustment (except with respect to the exercise of Rights
evidenced by Rights Certificates after receipt of actual knowledge of any such
adjustment); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any shares
of Preferred Stock or Common Stock or other securities to be issued pursuant to
this Agreement or any Rights Certificate or as to whether any shares of
Preferred Stock or Common Stock or other securities will, when so issued, be
validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered all
such further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President,
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<PAGE> 34
any Vice President, the Secretary, any Assistant Secretary, the Treasurer or
any Assistant Treasurer of the Company, and to apply to such officers for
advice or instructions in connection with its duties, and it shall not be
liable for any action taken or suffered to be taken by it in good faith in
accordance with instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other legal
entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, omission, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, omission, default, neglect or misconduct; provided, however, that
reasonable care was exercised in the selection and continued employment
thereof.
(j) No provision of this Agreement shall require the Rights Agent
to expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder or in the exercise of its rights
if there shall be reasonable grounds for believing that repayment of such funds
or adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to
such requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' notice in writing mailed to the Company, and to each
transfer agent of the Common Stock and the Preferred Stock, by registered or
certified mail, and to the registered holders, if any, of the Rights
Certificates by first-class mail. The Company may remove the Rights Agent or
any successor Rights Agent (with or without cause) upon 30 days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Stock and the Preferred Stock, by
registered or certified mail, and to the registered holders of the Rights
Certificates, if any, by first-class mail. If the Rights Agent shall resign or
be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Rights Agent. Notwithstanding the foregoing
provisions of this Section 21, in no event shall the resignation or removal of
a Rights Agent be effective until a successor Rights Agent shall have been
appointed and have accepted such appointment. If the Company shall fail to make
such appointment within a period of 30 days after
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<PAGE> 35
giving notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the registered holder of a Rights Certificate (who shall, with such notice,
submit his Rights Certificate for inspection by the Company), then the Rights
Agent or the registered holder of any Rights Certificate may apply to any court
of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be (a) a corporation organized and doing business under the laws of the
United States or of the State of New York (or of any other state of the United
States so long as such corporation is authorized to conduct a stock transfer or
corporate trust business in the State of New York), in good standing, which is
authorized under such laws to exercise corporate trust or stock transfer powers
and is subject to supervision or examination by federal or state authority and
which has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $100,000,000 or (b) an affiliate of a corporation described
in clause (a) of this sentence. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver
any further assurance, conveyance, act or deed necessary for the purpose. Not
later than the effective date of any such appointment, the Company shall file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent of the Common Stock and the Preferred Stock, and mail a notice thereof in
writing to the registered holders of the Rights Certificates. Failure to give
any notice provided for in this Section 21, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
Rights Agent or the appointment of the successor Rights Agent, as the case may
be.
Section 22. Issuance of New Rights Certificates. Notwithstanding
any of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any
adjustment or change in the Purchase Price and the number or kind or class of
shares or other securities or property purchasable under the Rights
Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of shares of Common Stock
following the Distribution Date and prior to the Expiration Date, the Company
(a) shall, with respect to shares of Common Stock so issued or sold pursuant to
the exercise of stock options or under any employee plan or arrangement granted
or awarded on or prior to the Distribution Date, or upon the exercise,
conversion or exchange of securities issued by the Company on or prior to the
Distribution Date, and (b) may, in any other case, if deemed necessary or
appropriate by the Board of Directors of the Company, issue Rights Certificates
representing the appropriate number of Rights in connection with such issuance
or sale; provided, however, that (i) no such Rights Certificate shall be issued
if, and to the extent that, the Company shall be advised by counsel that such
issuance would create a significant risk of material adverse tax consequences
to the Company or the Person to whom such Rights Certificate would be issued,
and (ii) no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
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<PAGE> 36
Section 23. Redemption and Termination.
(a) The Board of Directors of the Company may, at its option, at
any time prior to the earlier of (i) the close of business on the tenth day
following the first date of public announcement of the occurrence of a Flip-In
Event (or, if such date shall have occurred prior to the Record Date, the close
of business on the tenth day following the Record Date) and (ii) the Expiration
Date, cause the Company to redeem all but not less than all the then
outstanding Rights at a redemption price of $0.01 per Right, as such amount may
be appropriately adjusted, if necessary, to reflect any stock split, stock
dividend or similar transaction occurring after the Rights Dividend Declaration
Date (such redemption price being hereinafter referred to as the "Redemption
Price"); provided, however, that the Rights may not be redeemed following any
merger to which the Company is a party that (i) occurs when there is an
Acquiring Person and (ii) was not approved prior to such merger by the Board of
Directors of the Company and by the stockholders of the Company at a
stockholders' meeting. Notwithstanding anything contained in this Agreement to
the contrary, the Rights shall not be exercisable after the first occurrence of
a Flip-In Event until such time as the Company's right of redemption hereunder
has expired. The Company may, at its option, pay the Redemption Price in cash,
shares of Common Stock (based on the Current Market Price of the Common Stock
at the time of redemption) or any other form of consideration deemed
appropriate by the Board of Directors.
(b) Immediately upon the effectiveness of the action of the Board
of Directors of the Company ordering the redemption of the Rights (the
effectiveness of which action may be conditioned on the occurrence of one or
more events or on the existence of one or more facts or may be effective at
some future time), evidence of which shall be filed with the Rights Agent and
without any further action and without any notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price for each Right so held. Promptly
after the effectiveness of the action of the Board of Directors ordering the
redemption of the Rights, the Company shall give notice of such redemption to
the Rights Agent and the registered holders of the then outstanding Rights by
mailing such notice to all such holders at each holder's last address as it
appears upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the Company for the Common Stock.
Any notice that is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
shall state the method by which the payment of the Redemption Price will be
made.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option, at
any time and from time to time after the occurrence of a Flip-In Event,
exchange all or part of the then outstanding and exercisable Rights (which
shall not include Rights that have become void pursuant to the provisions of
Section 7(e) hereof) for shares of Common Stock or Common Stock Equivalents or
any combination thereof, at an exchange ratio of one share of Common Stock, or
such number of Common Stock Equivalents or units representing fractions thereof
as would be deemed to have the same value as one share of Common Stock, per
Right, appropriately adjusted, if necessary, to reflect
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<PAGE> 37
any stock split, stock dividend or similar transaction occurring after the
Rights Dividend Declaration Date (such exchange ratio being hereinafter
referred to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board
of Directors may not effect such exchange at any time after (i) any Person
(other than an Exempt Person), together with all Affiliates and Associates of
such Person, becomes the Beneficial Owner of 50% or more of the shares of
Common Stock then outstanding or (ii) the occurrence of a Flip-Over Event.
(b) Immediately upon the effectiveness of the action of the Board
of Directors of the Company ordering the exchange of any Rights pursuant to and
in accordance with subsection (a) of this Section 24 (the effectiveness of
which action may be conditioned on the occurrence of one or more events or on
the existence of one or more facts or may be effective at some future time) and
without any further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of shares of Common Stock and/or Common Stock
Equivalents equal to the number of such Rights held by such holder multiplied
by the Exchange Ratio. The Company shall promptly give public notice of any
such exchange; provided, however, that the failure to give, or any defect in,
such notice shall not affect the validity of such exchange. The Company
promptly shall mail a notice of any such exchange to all of the registered
holders of such Rights at their last addresses as they appear upon the registry
books of the Rights Agent. Any notice which is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of exchange will state the method by which the exchange of the
shares of Common Stock and/or Common Stock Equivalents for Rights will be
effected and, in the event of any partial exchange, the number of Rights that
will be exchanged. Any partial exchange shall be effected as nearly pro rata as
possible based on the number of Rights (other than Rights that have become void
pursuant to the provisions of Section 7(e) hereof) held by each holder of
Rights.
(c) In the event that the number of shares of Common Stock that
are authorized by the Company's certificate of incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise of
the Rights is not sufficient to permit an exchange of Rights as contemplated in
accordance with this Section 24, the Company may, at its option, take all such
action as may be necessary to authorize additional shares of Common Stock for
issuance upon exchange of the Rights.
(d) The Company shall not be required to issue fractions of shares
of Common Stock or to distribute certificates or scrip evidencing fractional
shares of Common Stock. In lieu of such fractional shares of Common Stock, the
Company shall pay to the registered holders of Rights with regard to which such
fractional shares of Common Stock would otherwise be issuable an amount in cash
equal to the same fraction of the value of a whole share of Common Stock. For
purposes of this Section 24, the value of a whole share of Common Stock shall
be the Closing Price per share of Common Stock for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24, and the value of any
Common Stock Equivalent shall be deemed to have the same value as the Common
Stock on such date.
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Section 25. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Stock or to make any other distribution to the holders of
Preferred Stock (other than a regular quarterly cash dividend out of earnings
or retained earnings of the Company), or (ii) to offer to the holders of
Preferred Stock rights or warrants to subscribe for or to purchase any
additional shares of Preferred Stock or shares of stock of any class or any
other securities, rights or options, or (iii) to effect any reclassification of
its Preferred Stock (other than a reclassification involving only the
subdivision of outstanding shares of Preferred Stock), or (iv) to effect any
consolidation or merger into or with any other Person (other than a wholly
owned Subsidiary of the Company in a transaction that complies with Section
11(o) hereof), or to effect any sale, lease or other transfer of all or
substantially all the Company's assets to any other Person or Persons (other
than a wholly owned Subsidiary of the Company in a transaction that complies
with Section 11(o) hereof), or (v) to effect the liquidation, dissolution or
winding up of the Company, then, in each such case, the Company shall give to
each holder of record of a Rights Certificate, to the extent feasible and in
accordance with Section 26 hereof, a notice of such proposed action, which
shall specify the record date for the purposes of such stock dividend,
distribution of rights or warrants, or the date on which such reclassification,
consolidation, merger, sale, lease, transfer, liquidation, dissolution or
winding up is to take place and the date of participation therein by the
holders of the shares of Preferred Stock, if any such date is to be fixed, and
such notice shall be so given in the case of any action covered by clause (i)
or (ii) above at least 20 days prior to the record date for determining holders
of the shares of Preferred Stock for purposes of such action, and in the case
of any such other action, at least 20 days prior to the date of the taking of
such proposed action or the date of participation therein by the holders of the
shares of Preferred Stock, whichever shall be the earlier. The failure to give
notice required by this Section 25 or any defect therein shall not affect the
legality or validity of the action taken by the Company or the vote upon any
such action.
(b) In case any Flip-In Event or Flip-Over Event shall occur, then
(i) the Company shall as soon as practicable thereafter give to each registered
holder of a Rights Certificate (or if occurring prior to the Distribution Date,
the registered holders of Common Stock), in accordance with Section 26 hereof,
a notice of the occurrence of such event, which shall specify the event and the
consequences of the event to holders of Rights under Section 11(a)(ii) or
Section 13(a) hereof, and (ii) all references in the preceding paragraph to
Preferred Stock shall be deemed thereafter to refer to Common Stock and/or, if
appropriate, other securities.
Section 26. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any
Rights Certificate to or on the Company shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Rights Agent) as follows:
__________________ Company
Pennzoil Place, P.O. Box 2967
Houston, Texas 77252-2967
Attention: Corporate Secretary
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<PAGE> 39
Subject to the provisions of Section 21, any notice or demand authorized by
this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or
made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
[NAME OF RIGHTS AGENT]
----------------------------
----------------------------
Attention:
-----------------
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
Section 27. Supplements and Amendments. Except as provided in the
last sentence of this Section 27, at any time when the Rights are then
redeemable, the Company may in its sole and absolute discretion and the Rights
Agent shall, if the Company so directs, supplement or amend any provision of
this Agreement in any respect without the approval of any holders of Rights or
holders of Common Stock. At any time when the Rights are not redeemable, except
as provided in the last sentence of this Section 27, the Company may and the
Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Rights in order (i) to cure
any ambiguity, (ii) to correct or supplement any provision contained herein
that may be defective or inconsistent with any other provisions herein, (iii)
to shorten or lengthen any time period hereunder or (iv) to change or
supplement the provisions hereunder in any manner that the Company may deem
necessary or desirable; provided that no such amendment or supplement shall
materially adversely affect the interests of the holders of Rights (other than
an Acquiring Person or an Affiliate or Associate of an Acquiring Person); and
further provided that this Agreement may not be supplemented or amended
pursuant to this sentence to lengthen (A) a time period relating to when the
Rights may be redeemed or (B) any other time period unless the lengthening of
such other time period is for the purpose of protecting, enhancing or
clarifying the rights of, and/or the benefits to, the holders of Rights (other
than any Acquiring Person and its Affiliates and Associates). Upon the delivery
of a certificate from an appropriate officer of the Company which states that
the proposed supplement or amendment is in compliance with the terms of this
Section 27, the Rights Agent shall execute such supplement or amendment;
provided, however, that the Rights Agent may, but shall not be obligated to,
enter into any such supplement or amendment that affects the Rights Agent's own
rights, duties or immunities under this Agreement. Notwithstanding anything
contained in this Agreement to the contrary, no supplement or amendment shall
be made that decreases the Redemption Price.
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<PAGE> 40
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors,
etc. For all purposes of this Agreement, any calculation of the number of
shares of Common Stock outstanding at any particular time, including for
purposes of determining the particular percentage of such outstanding shares of
Common Stock of which any Person is the Beneficial Owner, shall be made in
accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules
and Regulations under the Exchange Act as in effect on the date of this
Agreement. The Board of Directors of the Company (or, as set forth herein,
certain specified members thereof) shall have the exclusive power and authority
to administer this Agreement and to exercise all rights and powers specifically
granted to the Board of Directors of the Company or to the Company, or as may
be necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the provisions of this
Agreement and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including, without limitation, a
determination to redeem or not redeem the Rights or to amend this Agreement).
All such actions, calculations, interpretations and determinations (including,
for purposes of clause (y) below, all omissions with respect to the foregoing)
that are done or made by the Board of Directors of the Company in good faith,
shall (x) be final, conclusive and binding on the Company, the Rights Agent,
the holders of the Rights, as such, and all other parties, and (y) not subject
the Board of Directors to any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing
the invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, then, unless there has occurred any merger referred
to in the proviso to the first sentence of Section 23(a), the right of
redemption set forth in Section 23 hereof shall be reinstated and shall not
expire until the close of business on the tenth day following the date of such
determination by the Board of Directors of the Company or, if earlier,
immediately prior to any such merger. Without limiting the foregoing, if any
provision requiring that a determination be made by
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<PAGE> 41
less than the entire Board of Directors of the Company is held by a court of
competent jurisdiction or other authority to be invalid, void or unenforceable,
such determination shall then be made by the entire Board of Directors of the
Company.
Section 32. Governing Law. This Agreement, each Right and each
Rights Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts
made and to be performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
COMPANY
------------------------
By
----------------------------
Name:
Title:
[NAME OF RIGHTS AGENT]
By
----------------------------
Name:
Title:
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<PAGE> 42
Exhibit A
FORM OF
CERTIFICATE OF DESIGNATIONS
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
________________________ COMPANY
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
________________________ COMPANY, a corporation organized and
existing under the General Corporation Law of the State of Delaware, in
accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors in
accordance with the provisions of the Restated Certificate of Incorporation of
the said Corporation, the said Board of Directors on [DATE OF DECLARATION OF
RIGHTS DISTRIBUTION] adopted the following resolution creating a series of
[NumberSharesPreferred] shares of Preferred Stock designated as "Series A
Junior Participating Preferred Stock":
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of the
Restated Certificate of Incorporation, a series of Preferred Stock, par
value $1.00 per share, of the Corporation be and hereby is created, and
that the designation and number of shares thereof and the voting and other
powers, preferences and relative, participating, optional or other rights
of the shares of such series and the qualifications, limitations and
restrictions thereof are as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. Designation and Amount. There shall be a series of Preferred
Stock that shall be designated as "Series A Junior Participating Preferred
Stock," and the number of shares constituting such series shall be
[NumberSharesPreferred]. Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, however, that no decrease shall
reduce the number of shares of Series A Junior Participating Preferred Stock to
less than the number of shares then issued and outstanding plus the number of
shares issuable upon exercise of outstanding rights, options or warrants or
upon conversion of outstanding securities issued by the Corporation.
A-1
<PAGE> 43
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 A Junior Participating Preferred Stock with respect to
dividends, the holders of shares of Series A Junior Participating Preferred
Stock, in preference to the holders of shares of any class or series of stock
of the Corporation ranking junior to the Series A Junior Participating
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 on the [1st/15th day of _______, ______, ______ and
_____] 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 A
Junior Participating Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $[DividendPref] or (b) the Adjustment
Number (as defined below) times the aggregate per share amount of all cash
dividends, and the Adjustment Number 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 or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), declared on the
Common Stock, par value $0.10 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 A Junior Participating
Preferred Stock. The "Adjustment Number" shall initially be 100. In the event
the Corporation shall at any time after [DATE OF DECLARATION OF RIGHTS
DISTRIBUTION] (the "Rights Declaration Date") (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.
(B) The Corporation shall declare a dividend or distribution on
the Series A Junior Participating Preferred Stock as provided in paragraph (A)
above immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock); provided that,
in the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $[DividendPref]
per share on the Series A Junior Participating Preferred Stock shall
nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such shares
of Series A Junior Participating 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
A-2
<PAGE> 44
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 A Junior Participating 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 A Junior Participating
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 A Junior Participating 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.
3. Voting Rights. The holders of shares of Series A Junior
Participating Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Participating Preferred Stock
shall entitle the holder thereof to a number of votes equal to the Adjustment
Number on all matters submitted to a vote of the stockholders of the
Corporation.
(B) Except as otherwise provided herein, in the Restated
Certificate of Incorporation or by law, the holders of shares of Series A
Junior Participating Preferred Stock, the holders of shares of any other class
or series entitled to vote with the Common Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a
vote of stockholders of the Corporation.
(C)(i) If at any time dividends on any Series A Junior
Participating Preferred Stock shall be in arrears in an amount equal to six
quarterly dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (herein called a "default period") that shall extend
until such time when all accrued and unpaid dividends for all previous
quarterly dividend periods and for the current quarterly dividend period on all
shares of Series A Junior Participating Preferred Stock then outstanding shall
have been declared and paid or set apart for payment. During each default
period, (1) the number of Directors shall be increased by two, effective as of
the time of election of such Directors as herein provided, and (2) the holders
of Preferred Stock (including holders of the Series A Junior Participating
Preferred Stock) upon which these or like voting rights have been conferred and
are exercisable (the "Voting Preferred Stock") with dividends in arrears in an
amount equal to six quarterly dividends thereon, voting as a class,
irrespective of series, shall have the right to elect such two Directors.
(ii) During any default period, such voting right of the holders of
Series A Junior Participating Preferred Stock may be exercised initially at a
special meeting called pursuant to subparagraph (iii) of this Section 3(C) or
at any annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that such voting right shall not be exercised unless the
holders of at least one-third in number of the shares of Voting Preferred Stock
outstanding shall be
A-3
<PAGE> 45
present in person or by proxy. The absence of a quorum of the holders of Common
Stock shall not affect the exercise by the holders of Voting Preferred Stock of
such voting right.
(iii) Unless the holders of Voting Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than ten percent of the total number of shares
of Voting Preferred Stock outstanding, irrespective of series, may request, the
calling of a special meeting of the holders of Voting Preferred Stock, which
meeting shall thereupon be called by the Chairman of the Board, the President,
a Vice President or the Secretary of the Corporation. Notice of such meeting
and of any annual meeting at which holders of Voting Preferred Stock are
entitled to vote pursuant to this paragraph (C)(iii) shall be given to each
holder of record of Voting Preferred Stock by mailing a copy of such notice to
him at his last address as the same appears on the books of the Corporation.
Such meeting shall be called for a time not earlier than 20 days and not later
than 60 days after such order or request or, in default of the calling of such
meeting within 60 days after such order or request, such meeting may be called
on similar notice by any stockholder or stockholders owning in the aggregate
not less than ten percent of the total number of shares of Voting Preferred
Stock outstanding. Notwithstanding the provisions of this paragraph (C)(iii),
no such special meeting shall be called during the period within 60 days
immediately preceding the date fixed for the next annual meeting of the
stockholders.
(iv) In any default period, after the holders of Voting Preferred
Stock shall have exercised their right to elect Directors voting as a class,
(x) the Directors so elected by the holders of Voting Preferred Stock shall
continue in office until their successors shall have been elected by such
holders or until the expiration of the default period, and (y) any vacancy in
the Board of Directors may be filled by vote of a majority of the remaining
Directors theretofore elected by the holders of the class or classes of stock
which elected the Director whose office shall have become vacant. References in
this paragraph (C) to Directors elected by the holders of a particular class or
classes of stock shall include Directors elected by such Directors to fill
vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Voting Preferred Stock as a class to elect Directors
shall cease, (y) the term of any Directors elected by the holders of Voting
Preferred Stock as a class shall terminate and (z) the number of Directors
shall be such number as may be provided for in the Restated Certificate of
Incorporation or By-Laws irrespective of any increase made pursuant to the
provisions of paragraph (C) of this Section 3 (such number being subject,
however, to change thereafter in any manner provided by law or in the Restated
Certificate of Incorporation or By-Laws). Any vacancies in the Board of
Directors effected by the provisions of clauses (y) and (z) in the preceding
sentence may be filled by a majority of the remaining Directors.
(D) Except as set forth herein, holders of Series A Junior
Participating 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.
A-4
<PAGE> 46
4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Junior Participating 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 A Junior Participating 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 A Junior
Participating 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
A Junior Participating Preferred Stock, except dividends paid ratably on
the Series A Junior Participating 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;
or
(iii) redeem or purchase or otherwise acquire for
consideration any shares of Series A Junior Participating Preferred Stock,
or any shares of stock ranking on a parity with the Series A Junior
Participating 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 Series A Junior Participating Preferred
Stock, or to all such holders and the holders of any such shares ranking
on a parity therewith, 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 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and canceled 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 any conditions and restrictions on issuance set forth
herein.
6. Liquidation, Dissolution or Winding Up. (A) Upon any
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the
A-5
<PAGE> 47
holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Junior Participating
Preferred Stock unless, prior thereto, the holders of shares of Series A Junior
Participating Preferred Stock shall have received $[LiquidationPref] 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 A Liquidation
Preference"). Following the payment of the full amount of the Series A
Liquidation Preference, no additional distributions shall be made to the
holders of shares of Series A Junior Participating 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 A Liquidation Preference by (ii) the Adjustment Number.
Following the payment of the full amount of the Series A Liquidation Preference
and the Common Adjustment in respect of all outstanding shares of Series A
Junior Participating Preferred Stock and Common Stock, respectively, holders of
Series A Junior Participating Preferred Stock and holders of shares of Common
Stock shall, subject to the prior rights of all other series of Preferred
Stock, if any, ranking prior thereto, receive their ratable and proportionate
share of the remaining assets to be distributed in the ratio of the Adjustment
Number to 1 with respect to such Series A Junior Participating 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 A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
that rank on a parity with the Series A Junior Participating Preferred Stock,
then such remaining assets shall be distributed ratably to the holders of such
parity shares in proportion to their respective liquidation preferences. In the
event, however, that there are not sufficient assets available to permit
payment in full of the Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock.
(C) Neither the merger or consolidation of the Corporation into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
6, but the sale, lease or conveyance of all or substantially all the
Corporation's assets shall be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of this Section 6.
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 each share of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share equal to the Adjustment
Number 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.
8. Redemption. (A) The Corporation, at its option, may redeem
shares of the Series A Junior Participating Preferred Stock in whole at any
time and in part from time to time, at a redemption price equal to the
Adjustment Number times the current per share market price (as such
A-6
<PAGE> 48
term is hereinafter defined) of the Common Stock on the date of the mailing of
the notice of redemption, together with unpaid accumulated dividends to the
date of such redemption. The "current per share market price" on any date shall
be deemed to be the average of the closing price per share of such Common Stock
for the ten consecutive Trading Days (as such term is hereinafter defined)
immediately prior to such date; provided, however, that in the event that the
current per share market price of the Common Stock is determined during a
period following the announcement of (A) a dividend or distribution on the
Common Stock other than a regular quarterly cash dividend or (B) any
subdivision, combination or reclassification of such Common Stock and the
ex-dividend date for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, shall not have occurred prior to
the commencement of such ten Trading Day period, then, and in each such case,
the current per share market price shall be properly adjusted to take into
account ex-dividend trading. The closing price for each day shall be the last
sales price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange, or, if
the Common Stock is not listed or admitted to trading on the New York Stock
Exchange, on the principal national securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed
or admitted to trading on any national securities exchange but sales price
information is reported for such security, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ")
or such other self-regulatory organization or registered securities information
processor (as such terms are used under the Securities Exchange Act of 1934, as
amended) that then reports information concerning the Common Stock, or, if
sales price information is not so reported, the average of the high bid and low
asked prices in the over-the- counter market on such day, as reported by NASDAQ
or such other entity, or, if on any such date the Common Stock is not quoted by
any such entity, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in the Common Stock selected by
the Board of Directors of the Corporation. If on any such date no such market
maker is making a market in the Common Stock, the fair value of the Common
Stock on such date as determined in good faith by the Board of Directors of the
Corporation shall be used. The term "Trading Day" shall mean a day on which the
principal national securities exchange on which the Common Stock is listed or
admitted to trading is open for the transaction of business, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
but is quoted by NASDAQ, a day on which NASDAQ reports trades, or, if the
Common Stock is not so quoted, a Monday, Tuesday, Wednesday, Thursday or Friday
on which banking institutions in the State of New York are not authorized or
obligated by law or executive order to close.
(B) In the event that fewer than all the outstanding shares of the
Series A Junior Participating Preferred Stock are to be redeemed, the number of
shares to be redeemed shall be determined by the Board of Directors and the
shares to be redeemed shall be determined by lot or pro rata as may be
determined by the Board of Directors or by any other method that may be
determined by the Board of Directors in its sole discretion to be equitable.
(C) Notice of any such redemption shall be given by mailing to the
holders of the shares of Series A Junior Participating Preferred Stock to be
redeemed a notice of such redemption,
A-7
<PAGE> 49
first class postage prepaid, not later than the fifteenth day and not earlier
than the sixtieth day before the date fixed for redemption, at their last
address as the same shall appear upon the books of the Corporation. Each such
notice shall state: (i) the redemption date; (ii) the number of shares 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 payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on the close of
business on such redemption date. Any notice that is mailed in the manner
herein provided shall be conclusively presumed to have been duly given, whether
or not the stockholder received such notice, and failure duly to give such
notice by mail, or any defect in such notice, to any holder of Series A Junior
Participating Preferred Stock shall not affect the validity of the proceedings
for the redemption of any other shares of Series A Junior Participating
Preferred Stock that are to be redeemed. On or after the date fixed for
redemption as stated in such notice, each holder of the shares called for
redemption shall surrender the certificate evidencing such shares to the
Corporation at the place designated in such notice and shall thereupon be
entitled to receive payment of the redemption price. If fewer than all the
shares represented by any such surrendered certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
(D) The shares of Series A Junior Participating Preferred Stock
shall not be subject to the operation of any purchase, retirement or sinking
fund.
9. Ranking. The Series A Junior Participating Preferred Stock
shall rank junior to all other series of the Corporation's Preferred Stock as
to the payment of dividends and the distribution of assets, unless the terms of
any such series shall provide otherwise, and shall rank senior to the Common
Stock as to such matters.
10. Amendment. At any time that any shares of Series A Junior
Participating Preferred Stock are outstanding, the Restated 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 A Junior Participating Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of two-thirds or more of the
outstanding shares of Series A Junior Participating Preferred Stock, voting
separately as a class.
11. Fractional Shares. Series A Junior Participating Preferred
Stock may be issued in fractions of a share that 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 A Junior Participating Preferred Stock.
A-8
<PAGE> 50
IN WITNESS WHEREOF, the undersigned has executed this Certificate
and does affirm the foregoing as true this ___ day of _______, 199_.
----------------------------
[Vice] President
A-9
<PAGE> 51
Exhibit B
[Form of Rights Certificate]
Certificate No. R- ________ Rights
NOT EXERCISABLE AFTER [EXPIRATION DATE] OR EARLIER IF REDEEMED OR EXCHANGED BY
THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS
BENEFICIALLY OWNED BY OR TRANSFERRED TO ANY PERSON WHO IS, WAS OR BECOMES AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT) AND CERTAIN TRANSFEREES THEREOF WILL BECOME
NULL AND VOID AND WILL NO LONGER BE TRANSFERABLE.
RIGHTS CERTIFICATE
________________________ COMPANY
This certifies that _____________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of _________________, 1998 as it may from time
to time be supplemented or amended (the "Rights Agreement"), between
__________________ Company, a Delaware corporation (the "Company"), and [NAME
OF RIGHTS AGENT], a national banking association (the "Rights Agent"), to
purchase from the Company at any time prior to 5:00 p.m. (New York City time)
on [EXPIRATION DATE] at the principal office or offices of the Rights Agent
designated for such purpose, or its successors as Rights Agent, one
one-hundredth of a fully paid, nonassessable share (a "Fractional Share") of
Series A Junior Participating Preferred Stock (the "Preferred Stock") of the
Company, at a purchase price of $[EXERCISE PRICE] per one one-hundredth of a
share (the "Purchase Price"), upon presentation and surrender of this Rights
Certificate with the Form of Election to Purchase and related Certificate set
forth on the reverse hereof duly executed. The Purchase Price may be paid in
cash or by certified check, cashier's or official bank check or bank draft
payable to the order of the Company or the Rights Agent. The number of Rights
evidenced by this Rights Certificate (and the number of shares which may be
purchased upon exercise thereof) set forth above, and the Purchase Price per
Fractional Share set forth above, are the number and Purchase Price as of
_________________, 1998, based on the Preferred Stock as constituted at such
date. The Company reserves the right to require prior to the occurrence of a
Triggering Event (as such term is defined in the Rights Agreement) that a
number of Rights be exercised so that only whole shares of Preferred Stock will
be issued.
B-1
<PAGE> 52
From and after the first occurrence of a Triggering Event (as such
term is defined in the Rights Agreement), if the Rights evidenced by this
Rights Certificate are beneficially owned by or transferred to (i) an Acquiring
Person or an Associate or Affiliate of an Acquiring Person (as such terms are
defined in the Rights Agreement), (ii) a transferee of any such Acquiring
Person, Associate or Affiliate, or (iii) under certain circumstances specified
in the Rights Agreement, a transferee of a person who, concurrently with or
after such transfer, became an Acquiring Person or an Affiliate or Associate of
an Acquiring Person, such Rights shall, with certain exceptions, become null
and void in the circumstances set forth in the Rights Agreement, and no holder
hereof shall have any rights whatsoever with respect to such Rights from and
after the occurrence of such Triggering Event.
As provided in the Rights Agreement, the Purchase Price and the
number and kind of shares of Preferred Stock or other securities or assets that
may be purchased upon the exercise of the Rights evidenced by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events, including Triggering Events.
This Rights Certificate is subject to all of the terms, provisions
and conditions of the Rights Agreement, which terms, provisions and conditions
are hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the above-mentioned office of the
Rights Agent and are also available upon written request to the Company or the
Rights Agent.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the principal office or offices of the Rights Agent
designated for such purpose, may be exchanged for another Rights Certificate or
Rights Certificates of like tenor and date evidencing Rights entitling the
holder to purchase a like aggregate number of Fractional Shares of Preferred
Stock as the Rights evidenced by the Rights Certificate or Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate (i) may be redeemed by the Company at its option
at a redemption price of $0.01 per Right, payable, at the election of the
Company, in cash or shares of Common Stock or such other consideration as the
Board of Directors may determine, at any time prior to the earlier of the close
of business on (a) the tenth day following the first public announcement of the
occurrence of a Flip-In Event (as such time period may be extended or shortened
pursuant to the Rights Agreement) and (b) the Expiration Date (as such term is
defined in the Rights Agreement) or (ii) may be exchanged in whole or in part
for shares of the Company's Common Stock, par value $0.10 per share, and/or
other equity securities of the Company deemed to have the same value as shares
of Common Stock,
B-2
<PAGE> 53
at any time prior to a person's becoming the beneficial owner of 50% or more of
the shares of Common Stock outstanding or the occurrence of a Flip-Over Event.
No fractional shares of Preferred Stock are required to be issued
upon the exercise of any Right or Rights evidenced hereby (other than, except
as set forth above, fractions that are integral multiples of a Fractional Share
of Preferred Stock, which may, at the election of the Company, be evidenced by
depositary receipts), but in lieu thereof a cash payment may be made, as
provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of shares of
Preferred Stock or of any other securities of the Company that may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal.
Dated as of [RECORD DATE FOR RIGHTS DISTRIBUTION]
ATTEST: COMPANY
--------------------------
By
- ---------------------------- ------------------------------
Secretary Title:
Countersigned:
[NAME OF RIGHTS AGENT]
By
----------------------------
Authorized Signature
B-3
<PAGE> 54
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires
to transfer any Rights evidenced by the Rights Certificate.)
FOR VALUE RECEIVED hereby sells,
----------------------------------------
assigns and transfers unto
----------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
_________ Rights evidenced by this Rights Certificate, together with all right,
title and interest therein, and does hereby irrevocably constitute and appoint
__________________ Attorney, to transfer the said Rights on the books of the
within-named Company, with full power of substitution.
Dated: , 199
----------------- --
---------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a national securities
exchange, a member of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or another eligible guarantor institution (as defined pursuant to
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended).
B-4
<PAGE> 55
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ]
are not being sold, assigned and transferred by or on behalf of a Person who is
or was an Acquiring Person or an Affiliate or Associate of an Acquiring Person
(as such terms are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or subsequently became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person or who is a direct
or indirect transferee of an Acquiring Person or of an Affiliate or Associate
of an Acquiring Person.
Dated: , 199
------------- --
-------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a national securities
exchange, a member of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or another eligible guarantor institution (as defined pursuant to
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended).
NOTICE
The signatures to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-5
<PAGE> 56
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate.)
To: COMPANY
------------------------
The undersigned hereby irrevocably elects to exercise _________
Rights represented by this Rights Certificate to purchase the shares of
Preferred Stock issuable upon the exercise of the Rights (or such other
securities of the Company or of any other person that may be issuable upon the
exercise of the Rights) and requests that certificates for such shares (or
other securities) be issued in the name of and delivered to:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by
this Rights Certificate, a new Rights Certificate for the balance of such
Rights shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
Dated: , 199
------------
----------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a national securities
exchange, a member of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or another eligible guarantor institution (as defined pursuant to
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended).
B-6
<PAGE> 57
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are
not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as such terms are
defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person or who is a direct or indirect
transferee of an Acquiring Person or of an Affiliate or Associate of an
Acquiring Person.
Dated: , 199
------------- --- ------------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a national securities
exchange, a member of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or another eligible guarantor institution (as defined pursuant to
Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended).
NOTICE
The signatures to the foregoing Election to Purchase and Certificate
must correspond to the name as written upon the face of this Rights Certificate
in every particular, without alteration or enlargement or any change
whatsoever.
B-7
<PAGE> 58
Exhibit C
UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS
BENEFICIALLY OWNED BY OR TRANSFERRED TO ANY PERSON WHO IS, WAS OR BECOMES AN
ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT), AND CERTAIN TRANSFEREES THEREOF, WILL BECOME
NULL AND VOID AND WILL NO LONGER BE TRANSFERABLE.
SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK
On [DATE OF DECLARATION OF RIGHTS DISTRIBUTION], the Board of
Directors of __________________ Company (the "Company") declared a dividend of
one right to purchase preferred stock ("Right") for each outstanding share of
the Company's Common Stock, par value $0.10 per share ("Common Stock"), to
stockholders of record at the close of business on [RECORD DATE FOR RIGHTS
DISTRIBUTION]. Each Right entitles the registered holder to purchase from the
Company a unit consisting of one one-hundredth of a share (a "Fractional
Share") of Series A Junior Participating Preferred Stock, par value $1.00 per
share (the "Preferred Stock"), at a purchase price of $[EXERCISE PRICE] per
Fractional Share, subject to adjustment (the "Purchase Price"). The description
and terms of the Rights are set forth in a Rights Agreement dated as of
_________________, 1998 as it may from time to time be supplemented or amended
(the "Rights Agreement") between the Company and [NAME OF RIGHTS AGENT], as
Rights Agent.
Initially, the Rights will be attached to all certificates
representing outstanding shares of Common Stock, and no separate certificates
for the Rights ("Rights Certificates") will be distributed. The Rights will
separate from the Common Stock and a "Distribution Date" will occur, with
certain exceptions, upon the earlier of (i) ten days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of Common Stock (the date of
the announcement being the "Stock Acquisition Date"), or (ii) ten business days
following the commencement of a tender offer or exchange offer that would
result in a person's becoming an Acquiring Person. However, neither Pennzoil
Company, a Delaware corporation ("Pennzoil") nor any Affiliate or Associate of
Pennzoil shall be an Acquiring Person by virtue of Pennzoil's being the
beneficial owner of Common Stock on _________________, 1998 or at any time
prior to ceasing to be the beneficial owner of such Common Stock in the
spin-off distribution of all the issued and outstanding Common Stock, together
with associated Rights, to the holders of the outstanding Common Stock of
Pennzoil. In certain circumstances, the Distribution Date may be deferred by
the Board of Directors. Certain inadvertent acquisitions will not result in a
person's becoming an Acquiring Person if the person promptly divests itself of
sufficient Common Stock. Until the Distribution Date, (a) the Rights will be
evidenced by the Common Stock certificates (together with a copy of this
Summary of Rights or bearing the notation referred to below) and will be
transferred with and only with such Common Stock certificates, (b) new Common
Stock certificates issued after [RECORD DATE FOR RIGHTS DISTRIBUTION] will
contain a notation incorporating the Rights Agreement by reference and (c) the
surrender for transfer of any certificate for Common Stock (with or without a
copy of this Summary of Rights) will also constitute the transfer of the Rights
associated with the Common Stock represented by such certificate.
C-1
<PAGE> 59
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on [EXPIRATION DATE], unless earlier redeemed
or exchanged by the Company as described below.
As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of Common Stock as of the
close of business on the Distribution Date and, from and after the Distribution
Date, the separate Rights Certificates alone will represent the Rights. All
shares of Common Stock issued prior to the Distribution Date will be issued
with Rights. Shares of Common Stock issued after the Distribution Date in
connection with certain employee benefit plans or upon conversion of certain
securities will be issued with Rights. Except as otherwise determined by the
Board of Directors, no other shares of Common Stock issued after the
Distribution Date will be issued with Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring
Person (except pursuant to a tender or exchange offer for all outstanding
shares of Common Stock at a price and on terms that a majority of the
independent directors of the Company determines to be fair to and otherwise in
the best interests of the Company and its stockholders (a "Permitted Offer")),
each holder of a Right will thereafter have the right to receive, upon exercise
of such Right, a number of shares of Common Stock (or, in certain
circumstances, cash, property or other securities of the Company) having a
Current Market Price (as defined in the Rights Agreement) equal to two times
the exercise price of the Right. Notwithstanding the foregoing, following the
occurrence of any Triggering Event, all Rights that are, or (under certain
circumstances specified in the Rights Agreement) were, beneficially owned by or
transferred to an Acquiring Person (or by certain related parties) will be null
and void in the circumstances set forth in the Rights Agreement. However,
Rights are not exercisable following the occurrence of any Flip-In Event until
such time as the Rights are no longer redeemable by the Company as set forth
below.
For example, at an exercise price of $[EXERCISE PRICE] per Right,
each Right not owned by an Acquiring Person (or by certain related parties)
following an event set forth in the preceding paragraph would entitle its
holder to purchase $[EXERCISE PRICE X 2] worth of Common Stock (or other
consideration, as noted above), based upon its then Current Market Price, for
$[EXERCISE PRICE]. Assuming that the Common Stock had a Current Market Price of
$_____ per share at such time, the holder of each valid Right would be entitled
to purchase _ shares of Common Stock for $[EXERCISE PRICE].
In the event (a "Flip-Over Event") that, at any time from and after
the time an Acquiring Person becomes such, (i) the Company is acquired in a
merger or other business combination transaction (other than [certain mergers
that follow a Permitted Offer]), or (ii) 50% or more of the Company's assets or
earning power is sold or transferred, each holder of a Right (except Rights
that are voided as set forth above) shall thereafter have the right to receive,
upon exercise, a number of shares of common stock of the acquiring company
having a Current Market Price equal to two times the exercise price of the
Right. Flip-In Events and Flip-Over Events are collectively referred to as
"Triggering Events."
C-2
<PAGE> 60
The number of outstanding Rights associated with a share of Common
Stock, or the number of Fractional Shares of Preferred Stock issuable upon
exercise of a Right and the Purchase Price, are subject to adjustment in the
event of a stock dividend on, or a subdivision, combination or reclassification
of, the Common Stock occurring prior to the Distribution Date. The Purchase
Price payable, and the number of Fractional Shares of Preferred Stock or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution in the event of certain
transactions affecting the Preferred Stock.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Preferred Stock that are not integral multiples
of a Fractional Share are required to be issued and, in lieu thereof, an
adjustment in cash may be made based on the market price of the Preferred Stock
on the last trading date prior to the date of exercise. Pursuant to the Rights
Agreement, the Company reserves the right to require prior to the occurrence of
a Triggering Event that, upon any exercise of Rights, a number of Rights be
exercised so that only whole shares of Preferred Stock will be issued.
At any time until ten days following the first date of public
announcement of the occurrence of a Flip-In Event, the Company may redeem the
Rights in whole, but not in part, at a price of $0.01 per Right, payable, at
the option of the Company, in cash, shares of Common Stock or such other
consideration as the Board of Directors may determine. Immediately upon the
effectiveness of the action of the Board of Directors ordering redemption of
the Rights, the Rights will terminate and the only right of the holders of
Rights will be to receive the $0.01 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a
person's becoming the beneficial owner of 50% or more of the shares of Common
Stock then outstanding or the occurrence of a Flip-Over Event, the Company may
exchange the Rights (other than Rights owned by an Acquiring Person or an
affiliate or an associate of an Acquiring Person, which will have become void),
in whole or in part, at an exchange ratio of one share of Common Stock, and/or
other equity securities deemed to have the same value as one share of Common
Stock, per Right, subject to adjustment.
Until a Right is exercised, the holder thereof, as such, will have
no rights as a stockholder of the Company, including, without limitation, the
right to vote or to receive dividends. While the distribution of the Rights
should not be taxable to stockholders or to the Company, stockholders may,
depending upon the circumstances, recognize taxable income in the event that
the Rights become exercisable for Common Stock (or other consideration) of the
Company or for the common stock of the acquiring company as set forth above or
are exchanged as provided in the preceding paragraph.
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors of the Company as long as
the Rights are redeemable. Thereafter, the provisions of the Rights Agreement
other than the redemption price may be amended by the Board of Directors in
order to cure any ambiguity, defect or inconsistency, to make changes
C-3
<PAGE> 61
that do not materially adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or to shorten or lengthen
any time period under the Rights Agreement; provided, however, that no
amendment to lengthen the time period governing redemption shall be made at
such time as the Rights are not redeemable.
A copy of the Rights Agreement is available free of charge from the
Company. This summary description of the Rights does not purport to be complete
and is qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.
C-4
<PAGE> 1
EXHIBIT 5.1
[BAKER & BOTTS, L.L.P. LETTERHEAD]
002276.1278 August 14, 1998
Pennzoil Products Company
Pennzoil Place
P.O. Box 2967
Houston, Texas 77252-2967
Gentlemen:
As set forth in the Registration Statement on Form S-4 (the
"Registration Statement") to be filed by Pennzoil Products Company, a Delaware
corporation (the "Company"), with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), relating
to the proposed issuance of up to 33,282,860 shares (the "Shares") of the
Company's common stock, par value $.10 per share ("Common Stock"), we are
passing upon certain legal matters in connection with the Common Stock for the
Company. The Shares are to be issued pursuant to the terms and provisions of the
Agreement and Plan of Merger dated as of April 14, 1998, as amended by Amendment
Number One thereto dated as of August 11, 1998 (as amended, the "Merger
Agreement"), among Pennzoil Company, the Company, Downstream Merger Company and
Quaker State Corporation. At your request, we are furnishing this opinion to you
for filing as Exhibit 5.1 to the Registration Statement.
In our capacity as your counsel in the connection referred to above, we
have examined the Certificate of Incorporation and Bylaws of the Company, the
proposed forms of Restated Certificate of Incorporation and Amended and Restated
Bylaws of the Company to become effective before the closing of the transactions
contemplated by the Merger Agreement (the "Closing"), each in the form filed as
exhibits to the Registration Statement, and the originals, or copies certified
or otherwise identified, of corporate records of the Company, including minute
books of the Company as furnished to us by the Company, certificates of public
officials and of representatives of the Company, statutes and other instruments
and documents as a basis for the opinions hereinafter expressed. In giving such
opinions, we have relied upon certificates of officers of the Company and of
public officials with respect to the accuracy of the material factual matters
contained in such certificates. We have also assumed that the forms of Restated
Certificate of Incorporation and Amended and Restated Bylaws of the Company
filed as exhibits to the Registration Statement will be the Restated Certificate
of Incorporation and Amended and Restated Bylaws of the Company effective before
the Closing without any changes, additions or deletions thereto.
<PAGE> 2
Pennzoil Products Company -2- August 14, 1998
Based on our examination as aforesaid, we are of the opinion that:
1. The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware.
2. Upon the issuance by the Company of the Shares upon
consummation of the Merger (as defined in the Merger Agreement)
pursuant to the Merger Agreement, such Shares will be duly authorized,
validly issued, fully paid and nonassessable.
We hereby consent to the reference to our Firm under the caption "Legal
Matters" in the Proxy Statement/Prospectus included in the Registration
Statement and to the filing of this opinion with the Commission as Exhibit 5.1
to the Registration Statement. In giving such consent, we do not admit that we
are within the category of persons whose consent is required under Section 7 of
the Act or the rules and regulations of the Commission thereunder.
Very truly yours,
BAKER & BOTTS, L.L.P.
<PAGE> 1
EXHIBIT 8.1
[BAKER & BOTTS, L.L.P. LETTERHEAD]
002276.1278
August 14, 1998
Pennzoil Company
Pennzoil Place
P.O. Box 2967
Houston, TX 77252-2967
Pennzoil Products Company
Pennzoil Place
P.O. Box 2967
Houston, TX 77252-2967
Re: Pennzoil Products Company
Quaker State Corporation
Proxy Statement/Prospectus
Dated as of August 14, 1998
Gentlemen:
We have acted as counsel to Pennzoil Company, a Delaware corporation
("Pennzoil"), and Pennzoil Products Company, a Delaware corporation ("PPC"), in
connection with the proposed merger (the "Merger") of Downstream Merger Company
("Merger Sub"), a Delaware corporation and a direct, wholly-owned subsidiary of
PPC, with and into Quaker State Corporation, a Delaware corporation ("Quaker
State"), pursuant to the Agreement and Plan of Merger among Pennzoil, PPC,
Merger Sub and Quaker State, dated as of April 14, 1998, as amended by the
Amendment Number One, dated as of August 11, 1998, among the same parties (as
amended, the "Merger Agreement").
The following opinion is based on our review of the Merger
Agreement, the Proxy Statement/Prospectus of Quaker State and PPC relating to
the proposed Merger and related transactions filed with the Securities and
Exchange Commission on August 14, 1998 (the "Proxy Statement") and such other
materials and documents as we have deemed appropriate. In rendering our
opinion, we have assumed that the Merger will be consummated as described in
the Merger Agreement and Proxy Statement, that the Restructuring and Spin-off
will be consummated as described in the Proxy Statement, that the facts,
representations and warranties set forth in the Merger Agreement and the Proxy
Statement are accurate, that the covenants, conditions and obligations set
forth in the Merger Agreement and the other Transaction Agreements will be
fulfilled, and that there are no agreements, arrangements, or understandings
among any of Pennzoil, PPC, Merger Sub or Quaker State or the stockholders of
Quaker State relating to the Restructuring, Spin-off or Merger other than the
Merger Agreement and those described or referenced in the Merger Agreement or
the Proxy Statement. We have not, however, undertaken any independent
investigation of any factual matter set forth in any of the foregoing.
Capitalized items not otherwise
<PAGE> 2
Pennzoil Company and
Pennzoil Products Company - 2 - August 14, 1998
defined herein shall have the same meanings as they have for purposes of the
Proxy Statement and the Merger Agreement.
Subject to the foregoing and to the assumptions and limitations set forth
herein and in the Proxy Statement under the caption "THE MERGER AND RELATED
TRANSACTIONS -- Certain United States Federal Income Tax Consequences," and
assuming that the Merger is consummated in accordance with the Merger Agreement
and the Restructuring, Spin-off and Merger are consummated as described in the
Proxy Statement, the discussion under the caption "THE MERGER AND RELATED
TRANSACTIONS -- Certain United States Federal Income Tax Consequences --
Consequences to Pennzoil Products Group and Pennzoil-Quaker State Company," to
the extent it describes matters of law and legal conclusions, is an accurate
summary of the material federal income tax consequences of the Restructuring,
Spin-off and Merger to PPC and those of its post-Merger subsidiaries that were,
prior to the Spin-off, members of the affiliated group of corporations filing a
consolidated federal income tax return of which Pennzoil is the common parent
(which includes Pennzoil-Quaker State Company and the entities conducting the
operations referred to as "Pennzoil Products Group" in the Proxy Statement).
This opinion is limited solely to the federal law of the United States as
in effect on the date hereof and the relevant facts that exist as of the date
hereof. No assurance can be given that the law or facts will not change, and we
have not undertaken to advise you or any other person with respect to any event
subsequent to the date hereof.
We are delivering this opinion to you and, without our prior written
consent, no other persons are entitled to rely on this opinion. We hereby
consent to the filing of this opinion as an exhibit to the Proxy Statement. In
giving such consent, we do not thereby concede that we are within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933 or the Rules and Regulations of the Securities and Exchange Commission
thereunder.
We express no opinion as to any tax consequences of or relating to the
Restructuring, Spin-off or Merger other than the federal income tax
consequences which are specifically addressed in the foregoing opinion.
Very truly yours,
BAKER & BOTTS, L.L.P.
By: /s/ STUART F. SCHAFFER
-------------------------------------
<PAGE> 1
August 14, 1998
Quaker State Corporation
255 E. John Carpenter Freeway
Irving, Texas 75062
Quaker State Corporation
Pennzoil Products Company
Proxy Statement/Prospectus
Dated as of August 14, 1998
Ladies and Gentlemen:
We have acted as counsel to Quaker State Corporation, a
Delaware corporation ("Quaker State"), in connection with the proposed merger
(the "Merger") of Downstream Merger Company ("Merger Sub"), a Delaware
corporation and a wholly-owned subsidiary of Pennzoil Products Company ("PPC"),
a Delaware corporation, with and into Quaker State pursuant to the Agreement
and Plan of Merger (the "Merger Agreement") among Pennzoil Company
("Pennzoil"), a Delaware corporation, PPC, a wholly-owned subsidiary of
Pennzoil, Merger Sub and Quaker State, dated as of April 14, 1998, as amended
(the "Merger Agreement").
In so acting, we have participated in the preparation of the
Merger Agreement and the preparation and filing with the Securities and
Exchange Commission of a Proxy Statement/Prospectus of Quaker State and PPC
relating to the proposed Merger and related transactions (the "Proxy
<PAGE> 2
Quaker State Corporation 2 August 14, 1998
Statement"). We have also examined and relied upon the representations and
warranties as to factual matters set forth in the documents referred to above,
and the originals, or copies certified or otherwise identified to our
satisfaction, of such records, documents, certificates or other instruments as
in our judgment are necessary or appropriate to enable us to render the opinion
set forth below. We have not, however, undertaken any independent
investigation of any factual matter set forth in any of the foregoing.
Subject to the foregoing and to the assumptions and
limitations set forth herein and in the Proxy Statement under the caption "THE
MERGER AND RELATED TRANSACTIONS--Certain United States Federal Income Tax
Consequences", and assuming that the Merger is consummated in accordance with
the Merger Agreement and as described in the Proxy Statement, the discussion
under the caption "THE MERGER AND RELATED TRANSACTIONS--Certain United States
Federal Income Tax Consequences--Consequences to Quaker State Shareholders", to
the extent it describes matters of law and legal conclusions, is an accurate
summary of the material federal income tax consequences of the Merger to the
shareholders of Quaker State.
This opinion is limited solely to the federal law of the
United States as in effect on the date hereof and the relevant facts that exist
as of the date hereof. No assurance can be given that the law or facts will
not change, and we have not undertaken to advise you or any other person with
respect to any event subsequent to the date hereof.
We are delivering this opinion to you and, without our prior
written consent, no other persons are entitled to rely on this opinion. We
hereby consent to the filing of this opinion as an exhibit to the Proxy
Statement and to the use of our name under the captions "THE MERGER AND RELATED
TRANSACTIONS -- Certain Federal Income Tax Consequences of the Merger" and
"LEGAL MATTERS" in the Proxy Statement. In giving such consent, we do not
thereby concede that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the Rules and
Regulations of the Securities and Exchange Commission thereunder.
We are members of the Bar of the State of New York, and we do
not express any opinion herein concerning any law other than the federal law of
the United States.
Very truly yours,
DEBEVOISE & PLIMPTON
<PAGE> 1
EXHIBIT 10.1
EMPLOYEE BENEFITS AGREEMENT, dated as of _____ __, 1998, between
Pennzoil Company, a Delaware corporation ("Pennzoil"), and Pennzoil Products
Company, a Delaware corporation ("Downstream").
WHEREAS, Pennzoil has decided to consolidate the operations of
its worldwide businesses of refining, processing and marketing of motor oil,
refined products and industrial specialties and franchising, owning and
operating fast lubrication centers (collectively, the "Downstream Businesses")
into Downstream and Downstream's subsidiaries and affiliates and to distribute
the common stock of Downstream to the stockholders of Pennzoil (the
"Distribution");
WHEREAS, immediately following the Distribution, Downstream
Merger Company, a Delaware corporation and a wholly-owned subsidiary of
Downstream ("Merger Sub"), will merge (the "Merger") with and into Quaker State
Corporation, a Delaware corporation ("Quaker State"), pursuant to the terms of
the Agreement and Plan of Merger dated as of April 14, 1998, by and among
Pennzoil, Downstream, Merger Sub and Quaker State (the "Merger Agreement");
WHEREAS, Pennzoil and Downstream have entered into a Distribution
Agreement, dated April 14, 1998 (the "Distribution Agreement"), and certain
other agreements that will govern certain matters relating to the Distribution
and the relationship of Pennzoil and Downstream and their respective
Subsidiaries following the Distribution;
WHEREAS, pursuant to the Services Agreement to be entered into
between Richland Services Company ("ServiceCo"), Pennzoil and Downstream, the
form of which is attached as an exhibit to the Distribution Agreement (the
"Services Agreement"). ServiceCo will provide certain services to Downstream
for the period commencing on the Distribution Date and ending on the first
anniversary thereof (unless earlier terminated in accordance with the terms of
such Services Agreement); and
WHEREAS, pursuant to the Distribution Agreement, Pennzoil and
Downstream have agreed to enter into this Agreement for the purpose of
allocating current and former employees and assets, liabilities, and
responsibilities with respect to employee compensation, benefit and other
matters;
<PAGE> 2
NOW, THEREFORE, in consideration of the mutual promises contained
herein and in the Distribution Agreement, the Parties (as that term is defined
in the Distribution Agreement) agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions
For purposes of this Agreement, capitalized terms used herein
shall have the following respective meanings:
"Aggregate Spread" means: (a) in the case of a Pennzoil Stock
Option, the difference between the exercise price per share of Pennzoil Common
Stock covered by such Pennzoil Stock Option and the Pennzoil Pre-Distribution
Stock Price, multiplied by the number of shares of Pennzoil Common Stock
covered by such Pennzoil Stock Option; and (b) in the case of a Pennzoil SAR,
the difference between the reference appreciation price per share of Pennzoil
Common Stock covered by such Pennzoil SAR and the Pennzoil Pre-Distribution
Stock Price, multiplied by the number of shares of Pennzoil Common Stock
covered by such Pennzoil SAR.
"Agreement" means this Employee Benefits Agreement, and all
exhibits, schedules, appendices and annexes hereto.
"ASO Contract" means an administrative services only contract,
related prior practice, or related understanding with a third-party
administrator that pertains to any Pennzoil Health and Welfare Plan or
Downstream Health and Welfare Plan.
"Close of the Distribution Date" means 11:59:59 P.M., Eastern
Standard Time or Eastern Daylight Time (whichever shall then be in effect), on
the Distribution Date.
"Conversion Award" has the meaning given in Section 7.1(c).
"Distribution" has the meaning given in the first recital to this
Agreement.
"Distribution Agreement" has the meaning given in the third
recital to this Agreement.
2
<PAGE> 3
"Distribution Date" has the meaning given in the Distribution
Agreement.
"Downstream" has the meaning given in the first paragraph of this
Agreement.
"Downstream Businesses" has the meaning given in the Distribution
Agreement.
"Downstream Common Stock" has the meaning given in the
Distribution Agreement.
"Downstream Employee" means any individual who, as of the Close
of the Distribution Date, is actively employed by, or on an approved leave of
absence or lay-off with right of recall from, a member of the Downstream Group.
"Downstream Employee" shall, as of the date provided in Section 2.1(b), also
include any Transition Employee.
"Downstream Executive Plans" means the Plans established by
Downstream pursuant to Section 3.1 that correspond to the Pennzoil Executive
Plans.
"Downstream Former Employee" means any individual who as of the
Close of the Distribution Date, is neither then actively employed by, nor then
on an approved leave of absence or lay-off with the right of recall from, a
member of the Downstream Group, but (i) whose most recent (through the Close of
the Distribution Date) active employment with Pennzoil or a past or present
affiliate of Pennzoil was with an entity or a corporate division of the
Downstream Businesses, and the predecessors of any such entities, to the extent
such information is available, and whose employment was primarily related to
the Downstream Businesses or (ii) who otherwise is identified pursuant to a
methodology approved by Pennzoil, Downstream and Quaker State prior to the
Distribution Date, which methodology shall be consistent with the intent of the
parties that former employees of Pennzoil or a past or present affiliate of
Pennzoil will be the responsibility of Downstream if such former employee's
employment had related primarily to the Downstream Businesses. "Downstream
Former Employee" shall, from and after the date provided in Section 2.1(c),
also include any Transition Former Employee.
"Downstream Group" has the meaning given in the Distribution
Agreement.
3
<PAGE> 4
"Downstream Health and Welfare Plans" means the Plans established
by Downstream pursuant to Section 3.1 that correspond to the Pennzoil Health
and Welfare Plans.
"Downstream Incentive Plan" means the Downstream 1998 Incentive
Plan, in the form attached as an Exhibit to the Merger Agreement (as it may be
amended or modified prior to the Distribution Date in accordance with the terms
of the Merger Agreement) which shall be established as provided herein and
pursuant to which Conversion Awards shall be granted, on the terms and subject
to the conditions provided herein and in such Plan.
"Downstream Individual" means each Downstream Employee and each
Downstream Former Employee. In addition, during the period from the signing of
the Merger Agreement through the Distribution Date, Pennzoil, Downstream and
Quaker State shall negotiate in good faith to identify former employees of
Pennzoil (or classes thereof) that were employed in discontinued operations of
Pennzoil that shall be Downstream Individuals, and former employees of such
discontinued operations (or classes thereof) that shall be treated as Pennzoil
Individuals, so that the assets and liabilities with respect to such employees
of such discontinued operations shall generally be shared following the
Distribution in a ratio that approximates 65 (Downstream) to 35 (Pennzoil).
"Downstream Liabilities" has the meaning given in Section 2.2(a).
"Downstream Mirror Plans" means the Downstream Pension Plans, the
Downstream Health and Welfare Plans, the Downstream Savings Plan and the
Downstream Executive Plans.
"Downstream Plans" means the Downstream Mirror Plans, the
Downstream 1998 Incentive Plan and the Downstream Stand-Alone Plans.
"Downstream Pension Plans" means the Plans established by
Downstream pursuant to Section 3.1 that correspond to the Pennzoil Pension
Plans.
"Downstream Post-Distribution Stock Price" means the average of
the closing prices per share of Downstream Common Stock as reported on the
principal stock exchange on which the Downstream stock is listed on the first
three full trading dates following the Distribution Date.
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"Downstream Savings Plan" means the Plan established by
Downstream that corresponds to the Pennzoil Savings and Investment Plan.
"Downstream Stand-Alone Plan" means any Plan maintained by any
member of the Downstream Group for the exclusive benefit of Downstream
Individuals, including but not limited to those Plans set forth on Schedule 1
hereto.
"Final Asset Transfer" has the meaning given in Section
4.2(c)(ii).
"Foreign Plans" are listed on Schedule 2 hereto.
"HMO" means a health maintenance organization that provides
benefits under the Pennzoil Health and Welfare Plans or the Downstream Health
and Welfare Plans, as applicable.
"HMO Agreements" means contracts, letter agreements, practices,
and understandings with HMOs that provide medical services under the Pennzoil
Health and Welfare Plans or the Downstream Health and Welfare Plans, as
applicable.
"Indemnitee" has the meaning given in Section 9.12.
"Indemnitor" has the meaning given in Section 9.12.
"Individual Agreement" means an individual employment contract or
other similar agreement that specifically pertains to any Downstream
Individual, including but not limited to the employment agreements set forth on
Schedule 6 hereto.
"Initial Asset Transfer" has the meaning given in Section
4.2(c)(i).
"Liabilities" means any and all losses, claims, charges, debts,
demands, actions, costs and expenses (including administrative and related
costs and expenses of any plan, program, or arrangement), of any nature
whatsoever, whether absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising.
"Merger" has the meaning given in the second recital to this
Agreement.
"Merger Sub" has the meaning given in the second recital to this
Agreement.
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"Non-parties" has the meaning given in Section 9.4(b)(ii).
"Participating Company" means any Person (other than an
individual) that is participating in a Plan sponsored by a member of the
Pennzoil Group or a member of the Downstream Group, as the context requires.
"Pennzoil" has the meaning given in the first paragraph of this
Agreement.
"Pennzoil Award" means an award under a Pennzoil Incentive Plan.
"Pennzoil Common Stock" has the meaning given in the Distribution
Agreement.
"Pennzoil CSAU" has the meaning given in Section 7.1(e).
"Pennzoil Executive Plans" means (a) the Pennzoil Executive
Severance Plan, (b) the Pennzoil Change in Control Agreements, (c) the Pennzoil
Benefit Acceleration Agreements, (d) the Pennzoil Section 415 Excess Benefits
Agreements, (e) the Pennzoil Salary Continuation Plan, (f) the Pennzoil 1981
Deferred Compensation Plan, (g) the Pennzoil Medical Expenses Reimbursement
Plan, (h) the Pennzoil Supplemental Disability Plan, (i) the Pennzoil
Supplemental Life Insurance Plan, (j) the six individual agreements providing
for supplemental retirement and medical benefits set forth on Schedule 3 hereto
and (k) the Pennzoil Tax Protection Agreements.
"Pennzoil Group" has the meaning given in the Distribution
Agreement.
"Pennzoil Health and Welfare Plans" are set forth on Schedule 4
hereto [Pennzoil Health and Welfare Plans that will be mirrored by Downstream,
including, for these purposes, the Pennzoil Supplemental Life Insurance Plan].
"Pennzoil Incentive Plans" means (a) the Pennzoil 1998 Annual
Incentive Plan, (b) the Pennzoil 1998, 1997 and 1996 Long Term Incentive Plans,
(c) the Pennzoil 1997 Incentive Plan, (d) the Pennzoil 1997 Stock Option Plan,
(e) the Pennzoil 1995 Stock Option Plan, (f) the Pennzoil 1992 Stock Option
Plan, (g) the Pennzoil 1990 Stock Option Plan, (h) the Pennzoil 1982 Stock
Option Plan, (i) the Pennzoil 1981 Stock Option Plan, (j) the Pennzoil 1978
Stock Option Plan, (k) the Pennzoil 1993 Conditional Stock Award Program, (l)
the Pennzoil 1990 Conditional Stock Award Program, (m) the Pennzoil 1985
Conditional Stock Award Program and (n) the Pennzoil 1998 Stock Option Plan.
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"Pennzoil Pension Plans" are set forth on Schedule 5 hereto
[Pennzoil Pension Plans that will be mirrored by Downstream].
"Pennzoil Plan" means any Plan maintained or sponsored by
Pennzoil or any of its subsidiaries or affiliates (or any of their respective
predecessors) at any time on or prior to the Distribution Date for the benefit
of any current or former employee of any such person.
"Pennzoil Post-Distribution Stock Price" means the average of the
closing prices per share of Pennzoil Common Stock as reported on the principal
stock exchange on which the Pennzoil stock is listed on the first three full
trading dates following the Distribution Date.
"Pennzoil Pre-Distribution Stock Price" means the average of the
closing prices per share for Pennzoil Common Stock on the three business days
occurring before the Distribution Date on the principal stock exchange is then
listed, provided that if any such closing stock price is an ex dividend price
with respect to the special dividend of Downstream Common Stock to be made in
connection with the Distribution, any such closing stock price shall be
increased by the Downstream Post-Distribution Stock Price.
"Pennzoil SAR" has the meaning given in Section 7.1(d).
"Pennzoil Stock Option" has the meaning given in Section 7.1(d).
"Pennzoil Actuary" means William M. Mercer, Inc.
"Pension Plan Asset Transfer Amount" means, in the case of a
transfer of assets and liabilities from a Pennzoil Pension Plan to a Downstream
Pension Plan, the amount necessary to fund the projected benefit obligations
under the Pennzoil Pension Plans of the Downstream Individuals, determined in
accordance with the actuarial assumptions (including, without limitation, the
mortality tables, turnover assumptions and discount rates) used by the
applicable Pennzoil Pension Plan with respect to the last completed actuarial
report of such Pennzoil Plan, plus the applicable share of any assets in excess
of the liabilities calculated in accordance with the preceding parts of this
sentence under such Pennzoil Pension Plan, to be allocated between such
Pennzoil Plan and the applicable Downstream Plan using the principles
enumerated in Section 414(l)(2) of the Code (assuming for this purpose that the
amount of assets required to be transferred on the basis of projected benefit
obligations in accordance with the preceding part of this sentence were the
amount of assets required to be allocated to the applicable Downstream Plan
under Section 414(l)(1)) unless the Pennzoil Pension Plan has
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insufficient assets to fund all liabilities on a plan termination basis, in
which event the Pension Plan Asset Transfer Amount shall mean the minimum
amount required to be transferred to such plan in accordance with Section
414(l) of the Code and the regulations thereunder. To the extent that a
Pennzoil Pension Plan will be transferred in toto to Downstream, i.e., a
Downstream Stand-Alone Plan, the Pension Plan Asset Transfer shall mean all the
assets of such plan.
"Person" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a
limited liability entity, any other entity, and any governmental authority.
"Plan" means any plan, policy, program, payroll practice,
on-going arrangement, contract, trust, insurance policy or other agreement or
funding vehicle, whether written or unwritten, providing compensation or
benefits to employees, or former employees of the Downstream Group or the
Pennzoil Group.
"Quaker State" has the meaning given in the second recital to
this Agreement.
"Retained Individual" means any individual who, as of the Close
of the Distribution Date, is actively employed by, or on an approved leave of
absence or lay-off with right of recall from, a member of the Pennzoil Group or
any individual who was at any time on or prior to the Distribution Date
employed by Pennzoil or any of its subsidiaries or affiliates (and any
predecessor thereto) and who is not a Downstream Individual.
"Retained Liabilities" has the meaning given in Section 2.2(b).
"Services Agreement" has the meaning given the fourth recital to
this Agreement.
"Transition Employee" has the meaning given in Section 2.1(b).
"Transition Former Employee" has the meaning given in Section
2.1(c).
"Transition Individual" means any Transition Employee and any
Transition Former Employee.
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"Transition Period" means the period beginning immediately after
the Distribution Date and ending on the first anniversary of such date or, if
sooner, upon the termination of the Services Agreement in accordance with the
terms thereof.
ARTICLE II
EMPLOYEES; ASSUMPTION OF LIABILITIES
Section 2.1 Employees; Transition Individuals
(a) General. Effective as of the Distribution Date,
Downstream Employees shall be employees of the Downstream Group and Retained
Employees shall be employees of the Pennzoil Group. Notwithstanding the
foregoing, any individual who was employed by a member of the Pennzoil Group on
the date of the Merger Agreement and who is employed by a member of the
Downstream Group as of the Close of the Distribution Date shall not be a
Downstream Employee (and shall be a Retained Employee) except for (i) any such
individual whose employment duties prior to the date of the Merger Agreement
related primarily to the Downstream Businesses and (ii) any such individual
whose transfer to the Downstream Group was approved by Downstream and Quaker
State (whether a specific approval or an approval of reasonably identifiable
and limited class of employees), such approval not to be unreasonably withheld.
(b) Transition Employees. During the Transition Period,
Pennzoil and Downstream shall negotiate in good faith to determine which
individuals who are employed by ServiceCo during the Transition Period shall be
transferred to Downstream on or prior to the last day of the Transition Period.
Effective as of the date such transferred individual is hired by Downstream,
which date shall in any event be on or prior to the last day of the Transition
Period, such individual shall be a Downstream Employee.
(c) Transition Former Employees. During the Transition
Period, Pennzoil and Downstream shall negotiate in good faith to determine
which individuals who were employed by ServiceCo prior to the Distribution
Date, or who were actively employed by ServiceCo on the Distribution Date and
whose employment with ServiceCo terminated during the Transition Period (other
than as a result of becoming a Transition Employee), shall be designated
Transition Former Employees. Effective as of the last day of the Transition
Period such agreed upon individuals shall be Downstream Former Employees.
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(d) Non-Termination of Employment. Except as otherwise
expressly provided herein, no provision of this Agreement or the Distribution
Agreement shall be construed to create any right, or accelerate entitlement, to
any compensation or benefit whatsoever on the part of any Downstream Individual
or other future, present, or former employee of the Pennzoil Group or the
Downstream Group under any Pennzoil Plan or Downstream Plan or otherwise.
Without limiting the generality of the foregoing, neither the Distribution nor
the termination of the Participating Company status of a member of the
Downstream Group nor a transfer of a Transition Employee to Downstream shall
cause any employee to be deemed to have incurred a termination of employment
which entitles such individual to the commencement of benefits under any of the
Pennzoil Plans, any of the Downstream Plans, or any of the Individual
Agreements
(e) No Right to Continued Employment. Nothing contained in
this Section 2.1 shall confer on any Downstream Employee or Pennzoil Employee
any right to continued employment.
Section 2.2 Assumption of Liabilities
(a) By Downstream. Subject to the satisfaction by Pennzoil of
its obligations hereunder, Downstream hereby assumes and agrees to pay,
perform, fulfill, and discharge, in accordance with their respective terms, all
of the following, regardless of when or where such Liabilities arose or arise
or were or are incurred (collectively, the "Downstream Liabilities"):
(i) all Liabilities to or relating to Downstream
Individuals and other employees or former employees of a member
of the Downstream Group, and their dependents and beneficiaries,
to the extent relating to, arising out of or resulting from
future, present or former employment with a member of the
Downstream Group or Pennzoil while Downstream was owned by
Pennzoil or its affiliates (including Liabilities under Pennzoil
Plans and Downstream Plans);
(ii) all Liabilities under any Individual Agreements
relating to Downstream Individuals; and
(iii) all other Liabilities relating to, arising out of,
or resulting from obligations, liabilities, and responsibilities
expressly assumed or retained by a member of the Downstream
Group, or a Downstream Plan pursuant to this Agreement.
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Downstream shall have assumed all such Liabilities described in this Agreement,
unless the Liability is a Retained Liability or is otherwise explicitly
retained in writing by Pennzoil or excluded in writing by Pennzoil from those
being assumed by Downstream.
(b) By Pennzoil. All Liabilities with respect to Retained
Individuals shall be assumed or retained by Pennzoil, and Pennzoil agrees to
pay, perform, fulfill, and discharge, in accordance with their respective
terms, all of such Liabilities, regardless of when or where such Liabilities
arose or arise or were or are incurred ("Retained Liabilities").
ARTICLE III
DOWNSTREAM PLANS GENERALLY
Section 3.1 Establishment of Downstream Plans
Downstream shall have adopted, or shall have caused to be
adopted, before the Close of the Distribution Date, the Downstream Mirror Plans
and the Downstream 1998 Incentive Plan. Downstream shall become the plan
sponsor of, and from and after the Distribution Date, shall have sole
responsibility (together with its subsidiaries) for each Downstream Stand-Alone
Plan. The Downstream Mirror Plans as in effect immediately after the
Distribution Date shall be substantially identical in all material respects to
the corresponding Pennzoil Plans as in effect as of the Close of the
Distribution Date. The Downstream Incentive Plan shall be adopted by
Downstream and approved by Pennzoil as sole shareholder of Downstream, before
the Close of the Distribution Date.
Section 3.2 Terms of Participation by Downstream Individuals
The Downstream Plans shall be, with respect to Downstream
Individuals, in all respects the successors in interest to, shall recognize all
rights and entitlements as of the Close of the Distribution Date under, and
shall not provide benefits that duplicate benefits provided by, the
corresponding Pennzoil Plans for such Downstream Individuals. Pennzoil and
Downstream shall agree on methods and procedures, including amending the
respective Plan documents, to prevent Downstream Individuals from receiving
duplicative benefits from the Pennzoil Plans and the Downstream Plans.
Downstream shall not permit any Downstream Plan to commence benefit payments to
any Downstream Individual until it receives notice from Pennzoil regarding the
date on which payments under the corresponding Pennzoil Plan shall cease. With
respect to Downstream Individuals, each Downstream Plan shall provide that all
service, all
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compensation, and all other benefit-affecting determinations that, as of the
Close of the Distribution Date, were recognized under the corresponding
Pennzoil Plan (for periods immediately before the Close of the Distribution
Date) shall, as of immediately after the Distribution Date, receive full
recognition, credit, and validity and be taken into account under such
Downstream Plan to the same extent as if such items occurred under such
Downstream Plan, except to the extent that duplication of benefits would
result. All beneficiary designations made by Downstream Individuals for
Pennzoil Plans shall be transferred to and be in full force and effect under
the corresponding Downstream Plans until such beneficiary designations are
replaced or revoked by the Downstream Individual who made the beneficiary
designation. Notwithstanding the foregoing, nothing in this Agreement other
than those provisions specifically set forth herein to the contrary shall
preclude Downstream, at any time after the Close of the Distribution Date, from
amending, merging, modifying, terminating, eliminating, reducing, or otherwise
altering in any respect any Downstream Plan, any benefit under any Plan or any
trust, insurance policy or funding vehicle related to any Downstream Plan.
Section 3.3 Participation in Pennzoil Plans Prior to the
Distribution
(a) Participation in Pennzoil Plans. Subject to the terms and
conditions of this Agreement, each member of the Downstream Group that is, as
of the date of this Agreement, a Participating Company in any of the Pennzoil
Plans shall continue as such through the Close of the Distribution Date.
Effective as of any date before the Distribution Date, a member of the
Downstream Group not described in the preceding sentence may, at its request
and with the consent of Pennzoil (which shall not be unreasonably withheld),
become a Participating Company in any or all of the Pennzoil Plans.
(b) Pennzoil's General Obligations as Plan Sponsor. Pennzoil
shall continue through the Close of the Distribution Date to administer, or
cause to be administered, in accordance with their terms and applicable law,
the Pennzoil Plans; provided that Downstream shall be responsible for
administering, or causing to be administered, in accordance with their terms
and applicable law, the Downstream Stand-Alone Plans.
(c) Downstream's General Obligations as Participating Company.
Downstream shall perform with respect to its participation in the Pennzoil
Plans, and shall cause each other member of the Downstream Group that is a
Participating Company in any Pennzoil Plan to perform the duties of a
Participating Company as set forth in such Plans or any procedures adopted
pursuant thereto.
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Section 3.4 Termination of Participating Company Status
Effective as of the Close of the Distribution Date, Downstream
and each other member of the Downstream Group shall cease to be a Participating
Company in the Pennzoil Plans (other than the Downstream Stand-Alone Plans).
Any member of the Downstream Group that is a Participating Company in any
Downstream Stand-Alone Plans as of the Close of the Distribution Date shall not
cease to be a Participating Company therein as a result of the Distribution.
Section 3.5 Restriction on Plan Amendments
During the Transition Period, neither Pennzoil nor Downstream
shall adopt any amendment, or allow any amendment to be adopted, to any of
their respective Pension Plans or Savings Plans, except for any amendment that,
in the opinion of counsel acceptable to both Pennzoil and Downstream, is
required to continue to cause any such plan to meet the requirements of Section
401(a) of the Code, provided, however, either party may adopt such an amendment
with the prior written consent of both the other party and Quaker State.
ARTICLE IV
DEFINED BENEFIT PLANS
Section 4.1 Establishment of Mirror Pension Trusts
Downstream shall establish, or cause to be established, one or
more trusts which shall be qualified under Code Sec. 401(a), exempt from
taxation under Code Sec. 501(a)(1), and forming part of the Downstream Pension
Plans. In the case of pension assets and liabilities attributable to a
Pennzoil Pension Plan that, as of the date of the Merger Agreement, covers only
Downstream Individuals, i.e., a Downstream Stand-Alone Plan, Downstream shall
assume responsibility as plan sponsor and grantor under such Pennzoil Pension
Plan and related trust, effective as of a time not later than the Distribution
Date.
Section 4.2 Assumption of Pension Plan Liabilities and
Allocation of Interests in the Pennzoil Pension
Trusts.
(a) Assumption of Liabilities by Downstream Pension Plan.
Subject to the satisfaction of Pennzoil's obligations under this Section 4.2,
immediately after the Distribution Date, all Liabilities to or relating to
Downstream Individuals under the
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Pennzoil Pension Plans shall cease to be Liabilities of the Pennzoil Pension
Plans and shall be assumed in full and in all respects by the corresponding
Downstream Pension Plans.
(b) Calculation of Pension Plan Asset Allocation. As soon as
practicable after the Close of the Distribution Date, Pennzoil's Actuary shall
calculate and certify the Pension Plan Asset Transfer Amount for each such
Downstream Pension Plans as of the Close of the Distribution Date. Such
calculation shall be subject to audit as provided in Section 9.4(a).
(c) Transfer of Assets to Downstream Pension Trusts.
(i) Effective immediately after the Distribution Date,
Pennzoil shall cause to be transferred from the trusts
established under the Pennzoil Pension Plans (each, a "Pennzoil
Trust") to the trusts established under the corresponding
Downstream Pension Plan (each, a "Downstream Trust") an initial
amount of assets (the "Initial Asset Transfer"). The amount of
the Initial Asset Transfer shall be equal to 75% of the Pension
Plan Asset Transfer Amount with respect to such Downstream Plan,
as determined in good faith by the actuary referred to in Section
4.2(b).
(ii) As soon as practicable after the calculation of
each Downstream Plan's Pension Plan Asset Transfer Amount
pursuant to Section 4.2, Pennzoil will cause the appropriate
amount of assets to be transferred from such Pennzoil Trust to
the corresponding Downstream Trust (the "Final Asset Transfer").
If additional assets are necessary to be transferred, the amount
of assets to be transferred in the Final Asset Transfer shall be
equal to the Pension Plan Asset Transfer Amount with respect to
such Downstream Plan, less (A) the Initial Asset Transfer, less
(B) the aggregate amount of any actual benefit payments made in
respect of Downstream Individuals from and after the Distribution
Date by the Pennzoil Pension Plan plus (C) interest, compounded
monthly, from the date of the Initial Asset Transfer to the Final
Asset Transfer at an annual rate equal to the discount rate used
by the corresponding Pennzoil Plan for purposes of determining
the present value of the underlying benefit liabilities. If the
Initial Asset Transfer exceeds the Pension Plan Asset Transfer
Amount, such excess plus interest, compounded monthly at an
annual rate
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equal to the discount rate used by the corresponding Pennzoil
Plan for purposes of determining the present value of the
underlying benefit liabilities, shall be transferred to the
Pennzoil Pension Plan.
(iii) The assets to be transferred from any of the
Pennzoil Trusts to any of the Downstream Trusts in either the
Initial Asset Transfer or the Final Asset Transfer shall be made
in cash or in assets which represent a reasonable cross-section
of the asset classes in such Pennzoil Trust. If any assets are
to be transferred from any Downstream Trust to a Pennzoil Trust,
such assets shall consist of cash.
ARTICLE V
DEFINED CONTRIBUTION PLANS
Section 5.1 Savings Plan
(a) Savings Plan Trust. Effective immediately after the
Distribution Date, Downstream shall establish, or cause to be established, a
trust qualified under Code Sec. 401(a), exempt from taxation under Code Sec.
501(a)(1), and forming part of the Downstream Savings Plan.
(b) Assumption of Liabilities and Transfer of Assets.
Effective immediately after the Distribution Date: (i) the Downstream Savings
Plan shall assume and be solely responsible for all Liabilities to or relating
to Downstream Individuals under the Pennzoil Savings Plan; (ii) the Downstream
Savings Plan shall assume and be solely responsible for all ongoing rights of
or relating to Downstream Individuals for future participation (including the
right to make contributions through payroll deductions) in the Downstream
Savings Plan; and (iii) Pennzoil shall cause the accounts of the Downstream
Individuals under the Pennzoil Savings Plan which are held by its related trust
as of the Close of the Distribution Date to be transferred to the Downstream
Savings Plan and its related trust, and Downstream shall cause such transferred
accounts to be accepted by such plan and trust. Effective no later than
immediately after the Distribution Date, Downstream shall use its reasonable
best efforts to enter into such agreements to accomplish such assumptions and
transfers, the maintenance of the necessary participant records, the
appointment of an initial trustee under the Downstream Savings Plan, and the
engagement of an initial record keeper under such plans. As soon as
practicable after the Close of the Distribution Date, assets related to the
accounts of all Downstream Individuals shall be transferred from the Pennzoil
Savings Plan to the
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Downstream Savings Plan in cash or in kind, at Pennzoil's discretion, and to
the extent practicable, shall be invested in comparable investment options in
the Downstream Savings Plan as such accounts were invested immediately before
the Close of the Distribution Date.
(c) Non-Employer Stock Funds. Effective immediately after the
Distribution Date, a Downstream common stock fund shall be added as an
investment option to the Pennzoil Savings Plan and the Downstream Savings Plan
shall provide for both a Pennzoil common stock fund and a Downstream common
stock fund as investment options. The Downstream common stock fund in the
Pennzoil Savings Plan and the Pennzoil capital stock fund in the Downstream
Savings Plan are each referred to as a "Non-Employer Stock Fund" with respect
to the applicable plan. Each Non-Employer Stock Fund shall be maintained under
the respective Plan at least through December 31, 2000. The Pennzoil Savings
Plan and the Downstream Savings Plan shall each provide that, after the
Distribution Date, no new contributions may be invested in, and no amounts may
be transferred from other investment options to, the Non-Employer Stock Fund
under the respective Plan.
(d) Miscellaneous Funds. In the event that Pennzoil
determines that it is not feasible or appropriate to transfer in-kind the
assets of a particular investment fund from the Pennzoil Savings Plan to the
Downstream Savings Plan, then the value of the assets, as of the close of
business on the Distribution Date (plus earnings attributable to such amount
from the Distribution Date to the date the assets are actually transferred)
shall be transferred in cash to the Downstream Savings Plan and Downstream
shall, to the extent practicable, cause such cash to be invested in its plan
and trust in the same manner and proportion as it was invested in the Pennzoil
Savings Plan or otherwise at the direction of each affected participant.
ARTICLE VI
HEALTH AND WELFARE PLANS
Section 6.1 Assumption of Health and Welfare Plan Liabilities
Immediately after the Distribution Date, all Liabilities for or
relating to Downstream Individuals under the Pennzoil Health and Welfare Plans
shall cease to be Liabilities of Pennzoil or the Pennzoil Plans and shall be
assumed by Downstream and the Downstream Health and Welfare Plans; provided
that Pennzoil shall either (i) transfer to Downstream or cause to be
transferred or allocated for the benefit of Downstream or the Downstream
Individuals an amount equal to the value of any assets set aside by
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Pennzoil or any member of the Pennzoil Group for the payment of, or to meet the
obligations in respect of, any such health and welfare benefits or (ii)
represent in writing to Downstream that no such assets have set aside.
Section 6.2 Vendor Contracts
(a) ASO Contracts, Group Insurance Policies, HMO Agreements
and Letters of Understanding.
(i) Before the Distribution Date, Pennzoil shall use
its commercially reasonable best efforts to permit Downstream and
the other members of the Downstream Group to participate in the
terms and conditions of each ASO Contract, Group Insurance
Policy, HMO Agreement or letters of understanding and
arrangements in existence as of the date of this Agreement from
Immediately after the Distribution Date through the end of the
Transition Period. Pennzoil shall cause any ASO Contract, Group
Insurance Policy, HMO Agreement or letter of understanding into
which Pennzoil enters after the date of this Agreement, but
before the Close of the Distribution Date, to allow Downstream
and the other members of the Downstream Group to participate in
the terms and conditions thereof. Nothing contained in this
Section 6.2(a) shall preclude Pennzoil from choosing to enter
into ASO Contracts, Group Insurance Policies, HMO Agreements or
other letters of understandings and arrangements with new or
different vendors.
(ii) Pennzoil and Downstream shall cooperate to
determine the manner in which the Downstream Group's
participation in the terms and conditions of ASO Contracts, Group
Insurance Policies, HMO Agreements, letters of understanding and
arrangements as set forth above shall be effectuated.
(b) Effect of Change in Rates. Pennzoil and Downstream shall
use their reasonable best efforts to cause each of the insurance companies,
HMOs, paid provider organizations and third-party administrators providing
services and benefits under the Pennzoil Health and Welfare Plans and the
Downstream Health and Welfare Plans to maintain the premium and/or
administrative rates based on the aggregate number of participants in both the
Pennzoil Health and Welfare Plans, after the Close of the Distribution Date,
and the Downstream Health and Welfare Plans through the end of the Transition
Period, separately rated or adjusted for the demographics, experience or other
relevant factors related to the covered participants of the Pennzoil Group and
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Downstream Group, respectively. To the extent they are not successful in such
efforts, Pennzoil and Downstream shall each bear the revised premium or
administrative rates for health and welfare benefits attributable to the
individuals covered by their respective Plans.
Section 6.3 Postretirement and Welfare Health Benefits
Downstream shall be solely responsible for any and all
Liabilities relating to any post-retirement health and welfare benefits
available to any Downstream Individual, whether or not such Downstream
Individual qualified for such benefits under the terms and conditions of the
Pennzoil Health and Welfare Plans as of the Close of the Distribution Date,
provided that Pennzoil shall either (i) transfer to Downstream or cause to be
transferred or allocated for the benefit of Downstream or the Downstream
Individuals an amount equal to the value of any assets set aside by Pennzoil or
any member of the Pennzoil Group for the payment of, or to meet the obligations
in respect of, any such post-retirement health benefits or (ii) represent in
writing to Downstream that no such assets have been set aside.
Section 6.4 COBRA and HIPAA
Downstream shall be responsible for administering compliance with
the continuation coverage requirements for "group health plans" under Title X
of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and
the portability requirements under the Health Insurance Portability and
Accountability Act of 1996 with respect to Downstream Individuals for period
immediately after the Close of the Distribution Date.
Section 6.5 Leave of Absence Programs
Downstream shall be responsible for the administration and
compliance of all leaves of absences and related programs (including compliance
with the Family and Medical Leave Act) affecting Downstream Individuals for the
period immediately after the Close of the Distribution Date.
Section 6.6 Workers' Compensation Program
Effective as of immediately after the Distribute Date, Downstream
shall assume all Liabilities for Downstream Individuals related to any and all
workers' compensation matters under any law of any state, territory, or
possession of the U.S. or the District of Columbia and Downstream shall be
fully responsible for the administration
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of all such claims; provided that Pennzoil shall either (i) transfer to
Downstream or cause to be transferred or allocated for the benefit of
Downstream or the Downstream Individuals an amount equal to the value of any
assets set aside by Pennzoil or any member of the Pennzoil Group (including any
reserves established under any contract providing coverage against any such
claims) for the payment of, or to meet the obligations in respect of, any such
workers' compensation benefits or (ii) represent in writing to Downstream that
no such assets have been set aside. If Downstream is unable to assume any such
Liability or the administration of any such claim because of the operation of
applicable state law or for any other reason, Downstream shall fully indemnify
Pennzoil for all such Liabilities, including the costs of any administration
that Downstream has not been able to assume.
Section 6.7 Post-distribution Transitional Arrangements
(a) Continuance of Elections, Co-Payments and Maximum
Benefits.
(i) Downstream shall cause the Downstream Health and
Welfare Plans to recognize and maintain all coverage and
contribution elections made by Downstream Individuals under the
Pennzoil Health and Welfare Plans in effect for the period
immediately prior to the Distribution Date and shall apply such
elections under the Downstream Health and Welfare Plans for the
remainder of the period or periods for which such elections are
by their terms applicable.
(ii) Downstream shall cause the Downstream Health and
Welfare Plans to recognize and give credit for (A) all amounts
applied to deductibles, out-of-pocket maximums, and other
applicable benefit coverage limits with respect to such expenses
which have been incurred by Downstream Individuals under the
Pennzoil Health and Welfare Plans for the remainder of the
benefit limit year in which the Distribution occurs, and (B) all
benefits paid to Downstream Individuals under the Pennzoil Health
and Welfare Plans, during and prior to the benefit limit year in
which the Distribution occurs, for purposes of determining when
such persons have reached their lifetime maximum benefits under
the Downstream Health and Welfare Plans.
(iii) Downstream shall (A) provide coverage to Downstream
Individuals under the Downstream Health and Welfare Plans without
the need to undergo a physical examination or otherwise provide
evidence of insurability, and (B) recognize and maintain all
irrevocable assignments
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and elections made by Downstream Individuals in connection with
their life insurance coverage under the Pennzoil Health and
Welfare Plans and any predecessor plans.
ARTICLE VII
EXECUTIVE PLANS
Section 7.1 Pennzoil Incentive Plans
(a) Amendments to Pennzoil Incentive Plans. Pennzoil shall,
effective as of immediately before the Distribution Date (i) accelerate the
vesting of all Pennzoil Stock Options (as defined below), Pennzoil SARs (as
defined below) and Pennzoil CSAUs (as defined below) outstanding as of such
date under any Pennzoil Incentive Plan, whether such awards are held by a
Pennzoil Individual or a Downstream Individual, (ii) amend the terms of any
Pennzoil Incentive Plan under which any Downstream Employee holds any Pennzoil
Award to include employment by Downstream or any of its subsidiaries for
purposes of determining the expiration or time of payment of any such award,
(iii) take such other actions necessary to effectuate the provisions of this
Section 7.1. Any such amendments shall be subject to the prior review and
consent of Quaker State (such consent not to be unreasonably withheld). The
Downstream Incentive Plan shall provide that employment by Pennzoil or any of
its subsidiaries will be included in determining the expiration or time of
payment of any award granted under such plan pursuant to this Section 7.1.
(b) General. Pennzoil Awards shall be adjusted as provided in
this Section 7.1. The number of shares subject to options or stock
appreciation rights with respect to Downstream Common Stock shall not exceed
the number of shares that would have been subject to Downstream awards assuming
the conversion solely into awards with respect to Downstream Common Stock
(applying the formulas set forth in paragraphs (d) and (e) of this Section 7.1)
of Pennzoil Options and Pennzoil SARs covering 2.5 million shares (minus 68% of
the number of shares subject to any Pennzoil Options and Pennzoil SARs that are
exercised between the date of the Merger Agreement and the Distribution Date)
and having an average exercise price (or reference appreciation price) equal to
that determined in clause (x) below, and the total aggregate spread of such
awards shall not exceed the product of (x) the excess of the Pennzoil Pre-
Distribution Stock Price over the average exercise price (or reference
appreciation price) per share of all Pennzoil Options and Pennzoil SARs
outstanding immediately prior to the Distribution Date and (y) 2.5 million
minus 68% of the number of shares subject to any Pennzoil Options and Pennzoil
SARs that are exercised between the date of the Merger
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Agreement and the Distribution Date. Notwithstanding anything herein to the
contrary, Downstream shall be entitled to, and, no later than immediately
before the Distribution, Pennzoil shall transfer or cause to be transferred to
Downstream, an amount of cash or other readily available funds equal to 68% of
the aggregate total of the exercise prices per share of any Pennzoil Option
that is exercised in the period commencing on the date of the Merger Agreement
and ending immediately prior to the Distribution.
(c) Conversion Awards. A portion of each Pennzoil Award that
is outstanding as of the Close of the Distribution Date, effective immediately
after the Close of the Distribution Date, and without regard to whether the
holder of such Pennzoil Award is a Downstream Individual or a Pennzoil
Individual, shall be converted into an award of a similar nature with respect
to Downstream Common Stock, and the remaining portion of such Pennzoil Award
shall remain outstanding with respect to Pennzoil Common Stock (collectively,
"Conversion Awards"), the number of shares covered by, and the exercise or
reference appreciation price of, such Conversion Awards to be determined by
applying the rules set forth in paragraphs (d) and (e) of this Section 7.1, but
subject in all cases to the aggregate limitations set forth in the paragraph
(b) of this Section 7.1. To the extent possible, no holder of an Award having
any particular terms shall be treated any differently from any other holder of
an Award having the same terms. Each Conversion Award with respect to
Downstream Common Stock shall be issued under the Downstream Incentive Plan,
and shall have the same terms and conditions (including payment schedule in the
case of a Pennzoil CSAU) as the corresponding Pennzoil Award to which it
relates (except as adjusted as provided herein).
(d) Stock Options and Stock Appreciation Rights. With respect
to a Pennzoil Award consisting of an option to acquire Pennzoil Common Stock (a
"Pennzoil Stock Option") or a stock appreciation right with respect to Pennzoil
Common Stock (a "Pennzoil SAR"), the number of shares of Pennzoil Common Stock
and Downstream Common Stock and the exercise price per share of Pennzoil Common
Stock and Downstream Common Stock covered by the Conversion Award shall be
determined, as of the Close of the Distribution Date, in accordance with the
following conversion formula: The Aggregate Spread on each such Pennzoil Award
shall be maintained under the corresponding Conversion Awards by setting the
option prices (or reference appreciation prices) of the Conversion Award with
respect to the shares of Pennzoil Common Stock and Downstream Common Stock
subject to such Conversion Award, respectively, to ensure that the difference
between the total aggregate excesses of the applicable Pennzoil Post-
Distribution Stock Price or Downstream Post-Distribution Stock Price, as the
case may be, over the applicable exercise prices (or reference appreciation
prices), equals the Aggregate Spread. In addition, the option prices of the
Conversion Award (or reference appreciation prices) shall be set in such a way
that maintains the
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ratio of the per share exercise price (or reference appreciation prices) of
each Pennzoil Award being so converted to the Pennzoil Pre-Distribution Stock
Price. The number of shares of Pennzoil Common Stock and Downstream Common
Stock subject to such Conversion Award shall be adjusted as necessary to
maintain the Aggregate Spread and such ratio.
(e) Conditional Share Award. With respect to a Pennzoil Award
consisting of a conditional or restricted share unit award (a "Pennzoil CSAU"),
the number of shares of Downstream Common Stock and Pennzoil Common Stock that
are covered by the Conversion Award shall be determined based on the ratio used
in the distribution of Downstream Common Stock to the holders of Pennzoil
Common Stock in the Distribution.
(f) Performance Based Awards. Pennzoil Awards granted under
the Pennzoil 1998 Annual Incentive Plan or any of the Pennzoil 1996, 1997 or
1998 Long Term Incentive Plans shall be vested and earned as of the Close of
the Distribution Date, based on the actual results for the portion of such
incentive plan period(s) ending on the Close of the Distribution Date and pro
rated based on the proportionate number of days within such incentive period(s)
ending on the Close of the Distribution Date, and shall be paid in cash as
promptly as practicable following the Distribution Date (and without regard to
whether the holder of the Pennzoil Award is then employed by Pennzoil or
Downstream, or any of their respective subsidiaries).
(g) Administrative Matters. Pennzoil and Downstream shall
adopt such procedures and information sharing practices necessary or
appropriate to permit the other to administer any incentive or stock option
plan it maintains and under which an employee of the other has an award
(including, for example, timely informing the other of any termination of
employment that affects the exercise period or payment date of an award).
Section 7.2 Deferred Compensation Plan
(a) Pennzoil 1981 Deferred Compensation Plan. The liability
with respect to any Downstream Individual who is participating under the
Pennzoil Deferred Compensation Plan by reason of being the subject of a
Deferred Compensation Agreement as of the Close of the Distribution Date shall
be the sole responsibility of Downstream; provided that Pennzoil shall either
(i) transfer to Downstream or cause to be transferred or allocated for the
benefit of Downstream or the Downstream Individuals an amount equal to the
value of any assets set aside by Pennzoil or any member of the Pennzoil Group
for the payment of, or to meet the obligations in respect of, any such
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deferred compensation obligation or (ii) represent to Downstream in writing
that no such assets have been set aside.
Section 7.3 Other Executive Agreements
(a) Supplemental Retirement and Welfare Agreements. The
liability with respect to any Downstream Individual who is the subject of a
contract or agreement that is either a Pennzoil Section 415 Excess Benefit
Agreement or Pennzoil individual or other arrangement providing for retirement,
death or disability benefit as of the Distribution Date shall be the sole
responsibility of Downstream.
Section 7.4 Tax Protection Agreements
(a) Pennzoil Tax Protection Agreements. The liability with
respect to any Downstream Individual under Pennzoil's Tax Protection Agreements
as of the Distribution Date shall be the sole responsibility of Downstream.
ARTICLE VIII
CERTAIN MATTERS RELATING TO TRANSITION EMPLOYEES
Section 8.1 Transition Individuals/Recognition of Service
Subject to the satisfaction by Pennzoil of its obligations
hereunder, the Downstream Plans shall recognize service, compensation, and
other benefit determining factors with respect to Transition Individuals as if
the Transition Individual's service recognized by the Pennzoil Group or the had
been performed entirely for the Downstream Group.
Section 8.2 Pension Plans
(a) Assumption of Liabilities/Noncommencement of Pensions.
Effective as of the date a Transition Individual is transferred to a
Downstream: (i) Downstream's Pension Plan shall assume and be solely
responsible for all Liabilities to or relating to the Transition Individual
under the Pennzoil Pension Plan; and (ii) no pension benefits with respect to
the Transition Individual from the Pennzoil Pension Plan shall commence while
he or she is employed by the Downstream Group.
(b) Asset/Liability Allocations and Transfers. Pennzoil shall
arrange to transfer assets and liabilities relating to the projected benefit
obligations of each
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Transition Individual under the Pennzoil Pension Plans to the appropriate
Downstream Pension Plans. The liability related to each such Transition
Individual shall be calculated in accordance with the same procedures and
assumptions described in Section 4.2 effective as of the date the Transition
Individual is transferred to the Downstream Group. The transfer of assets
relating to such liability shall occur as soon as practicable after the
Transition Period and a single net aggregate transfer with respect to each such
pension plan shall take place in accordance with the procedures described in
the following paragraph.
The amount of assets related to each Transition Individual shall
be 100% of the benefit liability calculated at the effective date of the
transfer, adjusted to reflect interest from the effective date of the transfer
to the date the assets are transferred at a rate equal to the discount rate
used by Pennzoil's Actuary to determine the present value of such liabilities
in accordance with the provisions of Section 4.2, provided, however, if a
lesser amount is required to be transferred under the provision of Section
414(l) of the Code, then such lesser amount shall be transferred. The amount of
assets so calculated shall be aggregated with respect to each Pennzoil Pension
Plan for all Transition Individuals transferring from Pennzoil to Downstream.
Pennzoil shall arrange to transfer the net aggregate amount so calculated from
each Pennzoil Pension Plan and Pennzoil Trust to the appropriate Downstream
Pension Plan and related trust.
Section 8.3 Savings Plan
Upon a Transition Individual's transfer to the Downstream Group
(i) Pennzoil shall cause the accounts of the Transition Individual under the
Pennzoil Savings Plan which are held by their related trusts to be transferred
to the corresponding Downstream Savings Plan and their related trusts as soon
as practicable after the Transition Individual's date of transfer; and (ii)
Downstream shall cause the transferred accounts to be accepted by its plans and
trusts; and (iii) as soon as the assets relating to the Transition Individual's
account have been transferred, the Downstream Savings Plan shall assume and be
solely responsible for all Liabilities to or relating to the Transition
Individual under the Pennzoil Savings Plan. Assets may be transferred from the
Pennzoil Savings Plan to the Downstream Savings Plan in cash or in kind and, to
the extent practicable, the Transition Individual's accounts shall be invested
in comparable investment options under the Downstream Savings Plan as his or
her accounts were invested under the Pennzoil Savings Plan immediately before
the transfer.
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Section 8.4 Health and Welfare Plans
(a) Continuance of Elections, Co-Payments, and Maximum
Benefits. Downstream shall cause the Downstream Health and Welfare Plans to
recognize and maintain all coverage and contribution elections made by
Transition Individuals under the Pennzoil Health and Welfare Plans. Downstream
shall apply such elections under its Health and Welfare Plans for the remainder
of the period or periods for which the elections are by their terms originally
applicable. The Downstream Health and Welfare Plans shall recognize and give
credit for all amounts applied to deductibles, out-of-pocket maximums, and
other applicable benefit coverage limits with respect to the current year.
(b) Retiree Medical. If any Transition Former Employee is
eligible to receive postretirement health benefits under the Pennzoil Health
and Welfare Plans as of the end of the Transition Period, Downstream agrees to
provide substantially the same postretirement health benefits, on the same
terms and conditions (including the right to amend or terminate such
arrangement), provided that Pennzoil shall either (i) transfer to Downstream or
cause to be transferred or allocated for the benefit of Downstream or the
Transition Former Employees who are so eligible an amount equal to the value of
any assets set aside by Pennzoil or any member of the Pennzoil Group for the
payment of, or to meet the obligations in respect of, any such post-retirement
health benefits or (ii) represent in writing to Downstream that no such assets
have been set aside.
Section 8.5 Executive Plans
Effective as of the date a Transition Individual is transferred
to Downstream, any outstanding Pennzoil Award held by such Transition
Individual on such date shall be canceled and replaced by a Conversion Award on
the same terms and conditions as if such Transition Individual had been a
Downstream Individual immediately after the Distribution Date, using as the
value of the Pennzoil Common Stock, the average of the closing prices thereof
for the three trading days ended immediately prior to the date of such
transfer, and in the case of the Downstream Common Stock, the average of the
closing prices thereof on each of the first three trading days ended after the
date of such transfer.
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ARTICLE IX
GENERAL
Section 9.1 Payment of and Accounting Treatment for Expenses
and Balance Sheet Amounts
(a) Expenses. All expenses (and the accounting treatment
related thereto) through the Close of the Distribution Date regarding matters
addressed herein shall be handled and administered by Pennzoil and Downstream
in accordance with past Pennzoil accounting and financial practices and
procedures pertaining to such matters.
(b) Balance Sheet Amounts. The Downstream Liabilities shall
be reflected as liabilities on the Downstream Balance Sheet prepared under the
Distribution Agreement in accordance with GAAP (as defined in such agreement).
Section 9.2 Sharing of Participant Information
Pennzoil and Downstream shall share, Pennzoil shall cause each
applicable member of the Pennzoil Group to share, and Downstream shall cause
each applicable member of the Downstream Group to share, with each other and
their respective agents and vendors all participant information necessary for
the efficient and accurate administration of each of the Pennzoil Plans and the
Downstream Plans following the Distribution Date. Pennzoil and Downstream and
their respective authorized agents shall, subject to applicable laws on
confidentiality, be given reasonable and timely access to, and may make copies
of, all information relating to the subjects of this Agreement in the custody
of the other party, to the extent necessary for such administration.
Section 9.3 Non-solicitation of Employees
For a period of two years from the Close of the Distribution
Date, Downstream and its affiliates will not, without the prior written consent
of Pennzoil, and Pennzoil and its affiliates will not, without the prior
written consent of Downstream, whether directly or indirectly, solicit (in
writing or orally) for employment or other services, whether as an employee,
officer, director, agent, consultant or independent contractor, any person who
or which is at the time of such solicitation an employee, agent,
representative, officer or director of the other party; provided, however, that
this covenant shall continue to apply in the case of Persons who have left the
employ of either party within a thirty day period prior to being solicited by
the other party.
Section 9.4 Plan Audits
(a) Audit Rights with Respect to the Allocation or Transfer of
Plan Assets. The allocation of Pension Plan assets and liabilities pursuant to
this Agreement shall, at the election of Downstream, be audited on behalf of
both Pennzoil and Downstream by [NAME], or such other actuarial and benefit
consulting firm mutually
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selected by the parties. The actuarial and benefit consulting firm shall
provide its written report to both Pennzoil and Downstream. Each of Pennzoil
and Downstream, and their respective advisors and consultants, shall have the
right to make such presentations and present such information to such actuarial
and benefit consulting firm as deem appropriate. Downstream and Pennzoil shall
equally pay or shall be responsible for the payment of the costs of such audit.
To the extent such audit recommends a change to the value of assets allocated
to a Downstream Plan such recommendation shall be conclusive and binding on
Downstream and Pennzoil.
(b) Audit Rights With Respect to Information Provided.
(i) Each of Pennzoil and Downstream, and their duly
authorized representatives, shall have the right to conduct
audits at any time upon reasonable prior notice, at their own
expense, with respect to all information provided to it or to any
Plan record keeper or third party administrator by the other
party, provided, that audits with respect to the allocation or
transfer of Plan assets and liabilities shall be subject only to
Section 9.4(a). The auditing party shall have the right to make
copies of any records at its expense, subject to the
confidentiality provisions set forth in the Distribution
Agreement, which are incorporated by reference herein. The party
being audited shall provide the auditing party's representatives
with reasonable access during normal business hours to its
operations, computer systems and paper and electronic files, and
provide work space to its representatives. After any audit is
completed, the party being audited shall have the right to review
a draft of the audit findings and to comment on those findings in
writing within five business days after receiving such draft.
(ii) The auditing party's audit rights under this
Section 9.4(b) shall include the right to audit, or participate
in an audit facilitated by the party being audited, of any
subsidiaries and affiliates of the party being audited and of any
benefit providers and third parties with whom the party being
audited has a relationship, or agents of such party, to the
extent any such persons are affected by or addressed in this
Agreement (collectively, the "Non-parties"). The party being
audited shall, upon written request from the auditing party,
provide an individual (at the auditing party's expense) to
supervise any audit of any such benefit provider or third party.
The auditing party shall be responsible for supplying, at its
expense, additional personnel sufficient to complete the audit in
a reasonably timely manner.
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(c) Audits Regarding Vendor Contracts. From Immediately after
the Distribution Date until ninety (90) days after the end of the Transition
Period, Pennzoil and Downstream and their duly authorized representatives shall
have the right to conduct joint audits with respect to any vendor contracts
that relate to both the Pennzoil Health and Welfare Plans and the Downstream
Health and Welfare Plans. The scope of such audits shall encompass the review
of all correspondence, account records, claim forms, canceled drafts (unless
retained by the bank), provider bills, medical records submitted with claims,
billing corrections, vendor's internal corrections of previous errors and any
other documents or instruments relating to the services performed by the vendor
under the applicable vendor contracts. Pennzoil and Downstream shall agree on
the performance standards, audit methodology, auditing policy and quality
measures and reporting requirements relating to the audits described in this
Section 9.4(c) and the manner in which costs incurred in connection with such
audits will be shared.
Section 9.5 Requests for Internal Revenue Service Rulings and
United States Department of Labor Opinions
Downstream and Pennzoil shall cooperate on any issue relating to
the transactions contemplated by this Agreement for which Pennzoil or
Downstream elects to seek a determination letter or private letter ruling from
the Internal Revenue Service or an advisory opinion from the United States
Department of Labor.
Section 9.6 Collective Bargaining
To the extent any provision of this Agreement is contrary to the
provisions of any applicable collective bargaining agreement to which Pennzoil
or any affiliate of Pennzoil is a party, the terms of such collective
bargaining agreement shall prevail. Should any provisions of this Agreement be
deemed to relate to a topic determined by an appropriate authority to be a
mandatory subject of collective bargaining, Pennzoil or Downstream may be
obligated to bargain with the union representing affected employees concerning
those subjects. Neither party will agree to a modification of any applicable
collective bargaining agreement without the consent of the other. In the event
a force surplus affecting members of a bargaining unit in both the Pennzoil
Group (on the one hand) and the Downstream Group (on the other hand) directly
results, due to the provisions of such a collective bargaining agreement, in an
employee involuntarily leaving the payroll of the party not declaring the
surplus, then the party declaring the surplus shall bear the cost of any
severance payable to such employee.
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Section 9.7 Consent of Third Parties
If any provision of this Agreement is dependent on the consent of
any third party (such as a vendor or a union) and such consent is withheld,
Pennzoil and Downstream shall use their reasonable best efforts to implement
the applicable provisions of this Agreement to the full extent practicable. If
any provision of this Agreement cannot be implemented due to the failure of
such third party to consent, Pennzoil and Downstream shall negotiate in good
faith to implement the provision in a mutually satisfactory manner. The phrase
"reasonable best efforts" as used in this Agreement shall not be construed to
require the incurrence of any non-routine or unreasonable expense or liability
or the waiver of any right.
Section 9.8 Foreign Plans
As soon as practicable after the date of this Agreement, Pennzoil
and Downstream shall enter into an agreement regarding the treatment of Foreign
Plans consistent with this Section 9.8.
(a) Certain Terms. For purposes hereof, (i) "outside the
U.S." means outside the 50 United States, its territories and possessions, and
the District of Columbia, (ii) "employed outside the U.S." means compensated
under a payroll which is administered outside the U.S. and (iii) "legally
permitted" means permitted under the laws of the country, the labor union,
works council, or collective agreement without adverse consequences to
Pennzoil, Downstream or Downstream Individuals, as determined in good faith by
Pennzoil, including mandated waiting periods before which working conditions
(including benefits) cannot be changed, and upon receiving required agreement
from individual employees and/or Plan trustees, foundation boards and members,
and any other organizations having a recognized right to determine or affect
benefits and/or funding of the Plan.
(b) Plans Covering only Employees of Pennzoil or Downstream.
Effective as of the Close of the Distribution Date or such later date as may be
required by applicable law, union, or works council agreement, any Foreign Plan
that covers only individuals employed outside the U.S. by the Pennzoil Group
shall be the sole responsibility of the Pennzoil Group and no member of the
Downstream Group shall have any Liability with respect to such a Plan; and any
Foreign Plan that covers only individuals employed outside the U.S. by the
Downstream Group shall be the sole responsibility of the Downstream Group and
no member of the Pennzoil Group shall have any Liability with respect to such a
Plan.
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(c) Plans Covering Employees of Both Pennzoil and Downstream.
(i) TERMINATION OF PARTICIPATION. Effective as of the
Close of the Distribution Date, if legally permitted, or as soon
as possible thereafter, Downstream and each other applicable
member of the Downstream Group shall cease to be a Participating
Company in each Foreign Plan maintained by the Pennzoil Group and
Pennzoil and each other applicable member of the Pennzoil Group
shall cease to be a Participating Company in each Foreign Plan
maintained by the Downstream Group.
(ii) MIRROR PLANS.
(A) Effective immediately after the Distribution Date,
Downstream shall adopt, or cause to be adopted, Foreign Plans for
the benefit of employees of the Downstream Group employed outside
the United States who are eligible to participate in Pennzoil
Foreign Plans and shall cause such Downstream Foreign Plans to be
substantially identical in all material respects to the
corresponding Pennzoil Foreign Plans as in effect on the
Distribution Date; provided that Downstream may satisfy this
requirement by extending coverage to such individuals under a
Foreign Plan of the Downstream Group which was in effect before
the Distribution Date.
(B) Effective immediately after the Distribution Date,
Pennzoil shall adopt, or cause to be adopted, Plans for the
benefit of employees of the Pennzoil Group employed outside the
United States who are eligible to participate in Plans and shall
cause such Plans to be substantially identical in all material
respects to the corresponding Downstream Foreign Plans as in
effect on the Distribution Date; provided that Pennzoil may
satisfy this requirement by extending or continuing coverage to
such individuals under a Pennzoil Foreign Plan of the Pennzoil
Group which was in effect before the Distribution Date.
(C) The continuation by Pennzoil or Downstream of
separate employment terms and conditions for employees previously
covered by the other entity's Plans shall not continue beyond the
time legally required.
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(iii) TRANSFER OF ASSETS. As of the Close of the
Distribution Date, Pennzoil and Downstream will use their
reasonable best efforts to ensure that, to the extent legally
permitted: (i) Liabilities of the Foreign Plans of Pennzoil
relating to Downstream Individuals shall be assumed by the
appropriate Foreign Plans of Downstream; and (ii) an appropriate
portion of any assets of the Foreign Plans of Pennzoil shall be
transferred to the appropriate Foreign Plans of Downstream
(excluding any share of excess assets with respect to the Pension
Plan for Canadian Employees of Pennzoil Company), and vice versa.
Any such transfer shall be effected, to the extent legally
permitted, in accordance with the principles set forth in Section
4.2 with respect to the U.S. pension plans.
(d) Severance Issues. If under applicable law, any Downstream
Individual employed outside the U.S. is deemed to have incurred a termination
of employment as a result of the Distribution or any other transaction
contemplated by the Distribution Agreement or this Agreement, which entitles
such individual to receive any payment or benefit under any Foreign Plan,
governmental plan or arrangement or pursuant to any law or regulation,
including severance benefits, notwithstanding such individual's continued
employment by the Downstream Group, then Downstream shall be liable for any
such payment or benefit and, notwithstanding any other provision hereof, to the
extent legally permitted, appropriate adjustments shall be made to the
treatment of such individual during such continued employment, including not
giving such individual credit for prior service and/or treating such individual
as having been newly hired immediately after such deemed termination, for
purposes of all applicable Foreign Plans.
Section 9.9 Effect If Distribution Does Not Occur
If the Distribution does not occur, then all actions and events
that are, under this Agreement, to be taken or occur effective as of the Close
of the Distribution Date, immediately after the Distribution Date, or otherwise
in connection with the Distribution, shall not be taken or occur except to the
extent specifically agreed by Downstream and Pennzoil.
Section 9.10 Relationship of Parties
Nothing in this Agreement shall be deemed or construed by the
parties or any third party as creating the relationship of principal and agent,
partnership or joint venture between the parties, it being understood and
agreed that no provision contained
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herein, and no act of the parties, shall be deemed to create any relationship
between the parties other than the relationship set forth herein.
Section 9.11 Affiliates
Each of Pennzoil and Downstream shall cause to be performed, and
hereby guarantees the performance of, all actions, agreements and obligations
set forth in this Agreement to be performed by members of the Pennzoil Group or
members of the Downstream Group, respectively, where relevant.
Section 9.12 Indemnification
Effective on the Distribution Date, Downstream agrees to
indemnify and hold harmless each member of the Pennzoil Group and each of their
respective officers, directors, employees and agents and the Pennzoil Plans
from and against any and all Liabilities, claims, suits, damages, costs and
expenses (including without limitation, reasonable attorneys' fees and any and
all expenses reasonably incurred in investigating, preparing or defending
against any pending or seriously threatened litigation or claim) arising out of
or related to any Downstream Liability. Effective on the Distribution Date,
Pennzoil agrees to indemnify and hold harmless each member of the Downstream
Group and each of their respective officers, directors, employees and agents
and the Downstream Plans from and against any and all Liabilities, claims,
suits, damages, costs and expenses (including, without, limitation reasonable
attorneys' fees and any and all expenses reasonably incurred in investigating,
preparing or defending against any pending or seriously threatened litigation
or claim) arising out of or related to any Retained Liabilities.
If any action is brought or any claim is made against a member of
the Pennzoil Group or the Downstream Group or person in respect of which
indemnity may be sought pursuant to this Section 9.12 (the "Indemnitee"), the
Indemnitee shall, within ten days after the receipt of information indicating
that an action or claim is likely, notify in writing the person from whom
indemnification is sought (the "Indemnitor") of the institution of the action
or the making of the claim, and the Indemnitor shall have the right, and at the
request of the Indemnitee, shall have the obligation, to assume the defense of
the action or claim, including the employment of counsel. If the Indemnitor
assumes the defense of the action or claim, the Indemnitor shall be entitled to
settle the action or claim on behalf of the Indemnitee without the prior
written consent of the Indemnitee unless such settlement would, in addition to
the payment of money, materially affect the ongoing business or employment of
the Indemnitee.
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The Indemnitee shall have the right to employ its own counsel,
but the fees and expenses of that counsel shall be the responsibility of the
Indemnitee unless (i) the employment of that counsel shall have been authorized
in writing by the Indemnitor in connection with the defense of the action or
claim; (ii) the Indemnitor shall not have employed counsel to have charge of
the defense of such action or claim; or (iii) such Indemnitee shall have
reasonably concluded that there may be defenses available to it which are
different from or additional to those available to the Indemnitor (in which
case the Indemnitor shall not have the right to direct any different defense of
the action or claim on behalf of the Indemnitee). The Indemnitee shall, in any
event, be kept fully informed of the defense of any such action or claim.
Except as expressly provided above, in the event that the Indemnitor shall not
previously have assumed the defense of an action or claim, at such time as the
Indemnitor does assume the defense of the action or claim, the Indemnitor shall
not thereafter be liable to any Indemnitee for legal or other expenses
subsequently incurred by the Indemnitee in investigating, preparing or
defending against such action or claim.
Anything in this Section 9.12 to the contrary notwithstanding,
the Indemnitor shall not be liable for any settlement of any claim or action
effected without its written consent; provided, however, that if after due
notice the Indemnitor refuses to defend a claim or action, the Indemnitee shall
have the right to defend and/or settle such action, and the Indemnitee shall
not be precluded from making a claim against the Indemnitor for reasonable
expenses and liabilities resulting from such defense and/or settlement in
accordance with this Section 9.12.
Notwithstanding the foregoing provisions of this Section 9.12,
there may be particular actions or claims which reasonably could result in both
parties being liable to the other under the indemnification provisions of this
Agreement. In such events, the Parties shall endeavor, acting reasonably and
in good faith, to agree upon a manner of conducting the defense and settlement
of the action or claim with a view to minimizing the legal expenses and
associated costs that might otherwise be incurred by the parties, such as, by
way of illustration only, agreeing to use the same legal counsel.
The indemnification provisions of this Section 9.12 shall not
inure to the benefit of any third party. By way of illustration only, an
insurer who would otherwise be obligated to pay any claim shall not be relieved
of the responsibility with respect thereto, or, solely by virtue of the
indemnification provisions, hereof, have any subrogation rights with respect
thereto, it being expressly understood and agreed that no insurer or any other
third party shall be entitled to a "windfall" (i.e., a benefit they would not
be entitled to receive in the absence of the indemnification provisions) by
virtue of these indemnification provisions.
33
<PAGE> 34
Section 9.13 Survival
This Agreement shall survive the Distribution Date and the end of
the Transition Period.
Section 9.14 Notices
Any notice, demand, claim, or other communication under this
Agreement shall be in writing and shall given in accordance with the provisions
for giving notice under the Distribution Agreement.
Section 9.15 Interpretation
Words in the singular shall be held to include the plural and
vice versa and words of one gender shall be held to include the other genders
as the context requires. The terms "hereof," "herein," and "herewith" and words
of similar import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole (including all Exhibits hereto) and not to any particular
provision of this Agreement. The word "including" and words of similar import
when used in this Agreement shall mean "including, without limitation," unless
the context otherwise requires or unless otherwise specified. The word "or"
shall not be exclusive.
Section 9.16 GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO PRINCIPLES OF
CONFLICT OF LAWS.
Section 9.17 No Assignment
This Agreement may not be assigned by either party (except by
operation of law) without the written consent of the other, and shall bind and
inure to the benefit of the parties hereto (including, for the avoidance of
down, each member of the Pennzoil Group and the Downstream Group) and their
respective successors and permitted assignees. This Agreement may not be
amended or supplemented except by an agreement in writing signed by Pennzoil
and Downstream. This Agreement may be executed in counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same instrument.
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<PAGE> 35
The remainder of this page is intentionally blank.
35
<PAGE> 36
IN WITNESS WHEREOF, the parties have caused this Employee
Benefits Agreement to be duly executed as of the day and year first above
written.
PENNZOIL COMPANY
By:
----------------------------
Name:
Title:
PENNZOIL PRODUCTS COMPANY
By:
----------------------------
Name:
Title:
36
<PAGE> 1
EXHIBIT 10.2
TAX SEPARATION AGREEMENT
This agreement ("Agreement") is entered by and between Green and
Downstream to be effective as of the date of the Distribution referred to in
the recitals below (the "Effective Date"). Other capitalized terms used herein
are defined when first used in the Agreement or in paragraph 9.
WHEREAS, Green is the common parent of an affiliated group of
corporations filing a consolidated federal income tax return (the "Green
Group"); Downstream and its subsidiaries are members of the Green Group; and
the members of the Green Group are parties to the Tax Sharing Agreement;
WHEREAS, the stock of certain members of the Green Group will be
contributed to Downstream, and the stock of Downstream will be distributed to
the shareholders of Green (the "Distribution") in a transaction intended to
qualify for nonrecognition under section 355 of the Internal Revenue Code of
1986, as amended (the "Code");
WHEREAS, in connection with the Distribution, the parties desire
to terminate the application of the Tax Sharing Agreement to Downstream and the
Downstream Subsidiaries ("Downstream Group"), to provide an allocation of
liability for taxes between the Downstream Group on the one hand and Green and
the Green Subsidiaries ("New Green Group") on the other hand, and to agree as
to certain other tax matters;
NOW, THEREFORE, in consideration of the mutual premises and
covenants set forth herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Green and Downstream
agree as follows:
1. LIABILITY FOR TAXES.
1.1 NON-CONSOLIDATED TAXES. Each corporation shall be liable for its
own Non-Consolidated Taxes, whether incurred before or after the Distribution.
1.2 CONSOLIDATED TAXES. Green shall be liable for all Consolidated
Taxes and shall indemnify and hold each member of the Downstream Group
harmless from and against all Consolidated Taxes. Green shall pay each
Consolidated Tax not later than 30 days after the date on which Green has
received written notice from Downstream that the liability for the relevant tax
has been fixed by a Final Determination. Except as provided in part 2, the New
Green Group shall not be obligated to make any payments to the Downstream
Group, and the Downstream Group shall not be obligated to make any payments to
the New Green Group in respect of Consolidated Taxes.
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<PAGE> 2
2. INTER-GROUP ADJUSTMENTS.
2.1 PRIOR PERIODS. Insofar as it applies to the Downstream Group,
Green and Downstream shall cause each Tax Sharing Agreement to terminate and to
have no further force and effect as of the end of the day immediately preceding
the Effective Date. Except as provided in paragraph 2.4, no adjustments shall
be made in respect of all inter-company debits and credits heretofore made
pursuant to each Tax Sharing Agreement or otherwise with respect to all periods
ending before January 1, 1998 ("Prior Periods"). Except as provided in this
Agreement, neither Green nor any Green Subsidiary shall have any claim against
Downstream or any Downstream Subsidiary with respect to taxes on or after the
Effective Date and vice versa.
2.2 TRANSITION PERIOD. For the period from January 1, 1998, to the
Effective Date ("Transition Period"), Downstream shall owe Green an amount
equal to the Downstream Tax Obligation, which shall be paid as follows:
(a) Immediately prior to the Effective Date, Downstream shall
pay Green an amount equal to the excess of Green's estimate of the Downstream
Tax Obligation ("Estimated Obligation") over the aggregate amount of prior
payments by the Downstream Group with respect to Consolidated Taxes for the
Transition Period. For such purposes, a payment includes an offset through
accounting entry or other settlement of intercompany accounts.
(b) Within 30 days after the Downstream Tax Obligation is
calculated pursuant to paragraph 3, including the resolution of any disputed
items pursuant to paragraph 3.3 ("Calculated Obligation"), Downstream shall pay
to Green any excess of the Calculated Obligation over the Estimated Obligation,
and Green shall pay to Downstream any excess of the Estimated Obligation over
the Calculated Obligation.
2.3 DISQUALIFYING STOCK CHANGE. Downstream shall indemnify and hold
Green harmless from and against all taxes imposed in a Final Determination on
any gain recognized by Green pursuant to section 355(e) of the Code as a result
of a direct or indirect change in the stock ownership of Downstream following
the Distribution unless such change results from any act of Green, any Green
Subsidiary, or any affiliate thereof.
2.4 INVENTORY ADJUSTMENTS. Downstream shall indemnify and hold Green
harmless from and against all taxes resulting from a Final Determination that
adjusts the manner in which the Downstream Group accounts for its inventory for
tax purposes for the Transition Period or Prior Periods or any of them. The
indemnity is not only for taxes imposed for each year in which an adjustment is
made, but also for taxes for other years that would not have been imposed if
there had been no adjustment. The statute of limitations with respect to the
indemnity for an increase in tax for a year shall begin in the year in which
the tax is imposed and not the year for which the adjustment is made.
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<PAGE> 3
3. CALCULATION OF DOWNSTREAM TAX OBLIGATION.
3.1 PRO FORMA RETURNS. On or before the later of one year after the
Effective Date and 45 days before the filing of the last federal income tax
return that includes any part of the Transition Period, Green shall provide
Downstream with copies of pro forma stand-alone federal income tax returns for
the Downstream Group for the Transition Period. The obligation to furnish
returns is dealt with in part 5.
3.2 PRO FORMA RETURN CALCULATIONS. Each pro forma tax return shall
be prepared in accordance with the methodology set forth in the definition of
"Downstream Tax Obligation" and, except as expressly provided in such
definition, shall be consistent with the federal income tax returns filed by
the Green Group. The use of any method, election, or convention that is not
determined by past practice of the Green Group must be identified by Green in
writing and may be disputed by Downstream. Within 30 days of its receipt of
such pro forma returns, Downstream may dispute any amounts shown on such pro
forma returns by specifying in writing each disputed item and the amount
thereof in dispute. If Green and Downstream are unable to agree with respect
to any disputed item within 30 days, the dispute shall be resolved in
accordance with the resolution procedure prescribed in paragraph 3.3. Within
30 days after Downstream has received such pro forma returns and all disputes
have been resolved, the Downstream Tax Obligation shall be calculated on the
basis of such pro forma returns, as adjusted to conform to the manner in which
the disputes of issues were resolved. If the resolution procedure has not been
completed with respect to any such pro forma return prior to the due date
(including extensions) for filing the federal income tax return relating to
such pro forma return, Green shall file such tax return in the manner
determined by Green reflecting all disputed items that have been resolved in
the manner so resolved and reflecting all unresolved disputed items in the
manner proposed by Green. Upon the resolution of all such unresolved disputed
items, Green may file an amended tax return reflecting the resolution thereof
in the manner so resolved.
3.3 RESOLUTION PROCEDURE. Any disputed item shall be submitted to
the Tax Arbitrator. Green and Downstream shall present their arguments to the
Tax Arbitrator within 30 days after such submission. The Tax Arbitrator shall
resolve the dispute in a fair and equitable manner and in accordance with
applicable tax law. However, the Tax Arbitrator shall not resolve a legal
issue against Green unless the Tax Arbitrator is of the opinion that its
resolution would at least more likely than not be sustained by a court if
litigated or that Downstream's position with respect to such legal issue has
Substantial Authority and is consistent with the past practice of the Green
Group. The Tax Arbitrator's determination shall be binding on the parties.
Green and Downstream shall each be responsible for one-half of the cost and
fees of the Tax Arbitrator.
4. ALLOCATION OF UNUSED LOSSES AND CREDITS. The net operating losses
("NOL") and credits, of the Green Group that are not used or usable by the
Green Group for Prior Periods or for the Transition Period shall be apportioned
between the New Green Group and the Downstream Group in accordance with the
methods required by temporary or final Treasury Regulations under section 1502
of the Code. The alternative minimum tax credit carryovers that are not
prescribed by
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<PAGE> 4
temporary or final regulations shall be apportioned among the members of the
New Green Group and the Downstream Group in the ratio to which each would have
been entitled to such credit carryovers if each had filed a separate corporate
tax return for all relevant periods. Any disagreement as to the appropriate
method or as to proper application of a method shall be resolved by the Tax
Arbitrator.
5. FILING OF TAX RETURNS.
5.1 NON-CONSOLIDATED RETURNS. Each entity shall be responsible for
each Non-consolidated Tax Return that it is required to file. Green shall
cause each member in the Green Group to file each Non-consolidated Tax Return
that is due (after extensions) before the Effective Date.
5.2 CONSOLIDATED RETURNS. To the extent permitted by law, Green and
Downstream shall cause the Downstream Group to be included in the consolidated
federal income tax returns filed by the Green Group and in each Consolidated
State Return that includes a member of the Green Group for each period that
includes a portion of the Transition Period and for all Prior Periods. Green
may continue to file a separate tax return in jurisdictions in which the Green
Group is authorized to file either a separate or consolidated tax return and in
which Green has heretofore filed separate tax returns. Green shall furnish
Downstream with a copy of all such consolidated federal income tax returns and
Consolidated State Tax Returns as soon as completed. Such returns shall
include the customary schedules showing separate company income of each member
of the Green Group. If any such return is not completed within 30 days before
the extended filing date, Green shall furnish a copy of the then current draft
of such return and shall afford Downstream an opportunity to comment on any
such return or draft. Downstream shall file all consolidated returns of the
Downstream Group for any period beginning after the Effective Date.
6. AUDITS.
6.1 GENERAL. Except as provided in this part 6 below, Green shall
control the conduct of all stages of any audit or administrative or judicial
proceeding with respect to Consolidated Taxes, and Downstream shall control the
conduct of all other audits or administrative or judicial proceedings with
respect to the tax liability of the Downstream Group.
6.2 INVENTORY ADJUSTMENTS AUDIT. If the IRS on audit proposes any
inventory adjustment for which Downstream is liable pursuant to paragraph 2.4,
Green will notify Downstream of such proposed adjustments and shall allow
Downstream to assume control of the conduct of such audit or any further
administrative or judicial proceeding with respect to such proposed
adjustments, including, without limitation, by providing Downstream and its
counsel with powers of attorney or other appropriate documents that will enable
Downstream and its counsel to conduct such proceedings. If Downstream does not
elect to assume control of such audit or proceeding, Downstream shall
nevertheless be entitled to participate in such proceeding on the basis set
forth in clauses (a), (b) and (c) of paragraph 6.3.
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<PAGE> 5
6.3 DISQUALIFYING STOCK CHANGE AUDIT. If the IRS at any time
asserts that there has been a disqualifying stock ownership change for which
Downstream is liable pursuant to paragraph 2.2, Green shall (a) consult with
Downstream with respect to material action Green may take, (b) permit
Downstream to review and comment on any material written submission to any
taxing authority, and (c) permit Downstream to participate in conferences with
taxing authorities and submit pertinent material in support of Green's
position. Green shall not accept any proposed adjustment or enter into any
settlement or agreement in compromise without the written consent of
Downstream, subject to the following: if Green believes that a proposed
settlement is fair and properly takes into account the hazards of litigation,
Downstream must either agree to such settlement or pay to Green for payment to
the IRS or deposit in escrow the amount of taxes to be assessed by the IRS (or
post an acceptable bond). In such event, if Downstream agrees in writing that
it will be liable for any taxes that may be assessed, Green shall allow
Downstream at its cost to assume control of further administrative or judicial
proceedings concerning this issue including, without limitation, by providing
Downstream and its counsel with powers of attorney or other appropriate
documents that will enable Downstream and its counsel to conduct such
proceedings.
6.4 POST-TRANSITION PERIOD TAX IMPACT. Green shall give prompt
notice to Downstream of any tax adjustment proposed in writing pursuant to any
audit or other proceeding that, if consistently applied to the Transition
Period or periods after the Effective Date, would have an adverse effect on the
tax liability of Downstream or any Downstream Subsidiary for which Downstream
is responsible pursuant to this Agreement. If Downstream requests, Green shall
discuss with Downstream the position Green intends to take regarding any issue
concerning such taxes.
7. POST-EFFECTIVE DATE RELATIONS.
7.1 COOPERATION. The New Green Group and Downstream Group agree to
cooperate with each other in providing the information necessary to permit each
to determine its correct tax liability, to prepare all tax returns and other
documents to be filed with all taxing authorities, and to conduct any tax
audit or other proceeding. Such cooperation shall include making employees
available for consultation and making work papers and other records available
during regular business hours. One party may charge the other for the
information and other assistance furnished pursuant to the foregoing only for
out-of-pocket cost incurred for any duplication cost, travel costs, and similar
reasonable costs.
7.2 CONSISTENCY. No member of the New Green Group or the Downstream
Group shall take a position on a return or in dealings with taxing authorities
that is inconsistent with the returns as filed if such position could
reasonably be expected to adversely affect the past, present, or future tax
liability of the other party unless (a) both parties agree or (b) the Tax
Arbitrator concludes that the original position is not supported, and the
proposed change position is supported, by Substantial Authority.
8. EMPLOYEE STOCK OPTIONS. Green shall be entitled to any tax deduction or
other benefit attributable to the exercise, after the Effective Date, of any
option to acquire common stock of Green
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<PAGE> 6
that is held by an employee of any member of the Green Group as of the
Effective Date, and Downstream shall be entitled to any tax deduction or other
benefit attributable to the exercise, after the Effective Date, of any option
to acquire common stock of Downstream that is held by any such employee.
9. DEFINITIONS.
"Consolidated State Return" means any consolidated, combined, or unitary
income tax return that is required to be filed with a state, local, or foreign
jurisdiction and that includes any member of the New Green Group on the one
hand and any member of the Downstream Group on the other hand.
"Consolidated Taxes" means any taxes reportable on a consolidated
federal income tax return that includes any member of the New Green Group on
the one hand and any member of the Downstream Group on the other hand or on any
Consolidated State Return.
"Downstream Subsidiary" means any corporation or other legal entity in
which Downstream or any Downstream Subsidiary owns, directly or indirectly,
immediately after the Distribution and before any other transaction, more than
50% of the stock or other equity interest entitled to vote on the election of
members to the board of directors or similar governing body.
"Downstream Tax Obligation" means an amount equal to the greater of
(a) 38% of the aggregate net income of the members of the
Downstream Group for the Transition Period as determined for federal income tax
purposes, without regard (i) to any carryover or carryback of losses or credits
incurred in other periods (except for carryovers attributable to the Downstream
Group that are actually utilized by the Green Group in the Transition Period)
or any adjustments required in computing alternative minimum taxable income, or
(ii) to income, gains, and deductions attributable to receivables, oil and gas
assets, and other assets distributed (or otherwise transferred without full
consideration) during the Transition Period by a corporation that will be a
member of the Downstream Group after the Effective Date to a corporation that
will be a member of the New Green Group after the Effective Date and
(b) 24% of the net income as determined in clause (a) except
with the adjustments required in computing alternative minimum taxable income.
In making each calculation, the aggregate amount of taxable gain attributable
to intercompany transactions within the meaning of Treasury Regulations section
1.1502-13 shall not exceed the gain attributable to the Atlas Refinery and no
items of any income, gain, or interest attributable to the recapture of dual
consolidated losses within the meaning of Section 1503 of the Code shall be
taken into account.
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<PAGE> 7
"Final Determination" means the final resolution of liability for tax
for any tax period or for any tax issue as a result of (a) a final and
unappealable judgment or other order of a court of competent jurisdiction, (b)
a closing agreement or accepted offer in compromise under sections 7121 or 7122
of the Code, or a comparable agreement under the laws of other jurisdictions,
which resolves the entire liability for such tax or such issue for such tax
period, or (c) any other final disposition, including by reason of the
expiration of the applicable statute of limitations.
"Green Subsidiary" means any corporation or other legal entity in which
Green or any Green Subsidiary owns, directly or indirectly, immediately after
the Distribution and before any other transaction, more than 50% of the stock
or other equity interest entitled to vote on the election of members to the
board of directors or similar governing body.
"Non-Consolidated Taxes" means all taxes other than Consolidated Taxes.
"Substantial Authority" has the meaning provided in the Treasury
Regulations under section 6662 of the Code.
"Tax Arbitrator" means the national office of an independent accounting
firm of national reputation selected by Green and reasonably acceptable to
Downstream.
"Tax Sharing Agreement" means the Tax Sharing Agreement among the
members of the Green Group dated as of April 1, 1998, and any other Tax
allocation or Tax sharing agreement or arrangement that, prior to the Effective
Date, may have been entered into between any member of the New Green Group on
the one hand and any member of the Downstream Group on the other hand.
"taxes" means all federal, state, local and foreign taxes, and other
assessments of a similar nature (whether imposed directly or by way of
withholding), including any interest, penalties, and additions thereto.
10. GENERAL PROVISIONS.
10.1 ASSIGNABILITY. Neither this Agreement nor any right or interest
hereunder shall be assignable by any party hereto without each other party's
prior written consent.
10.2 LEVY. Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation, commutation, alienation,
sale, assignment, encumbrance, charge, pledge, execution, attachment, levy or
similar process or assignment by operation of law, and any attempt, voluntary
or involuntary, to effect such action shall be null, void and of no effect.
10.3 SUCCESSORS. This Agreement shall be binding upon and inure to
the benefit of the parties hereto, and their respective successors.
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10.4 ENTIRE AGREEMENT. This Agreement supersedes all prior written or
oral agreements between the parties with respect to the matters contemplated
herein, and is intended as a complete and exclusive statement of the terms of
the agreement between the parties with respect to the subject hereof. This
Agreement may not be modified or amended except by an instrument in writing
signed by the parties hereto. No term or condition of this Agreement shall be
deemed to have been waived, nor shall there be an estoppel against the
enforcement of any provision of this Agreement, except by written instrument of
the party charged with such waiver or estoppel.
10.5 SURVIVAL. The provisions of this Agreement shall survive the
Effective Date and remain in full force until all periods of limitations
(giving effect to any extension, wavier or mitigation thereof) have expired and
no further carry backs to such periods are possible and for 30 days thereafter.
At such time, all remaining payments required under this Agreement shall become
immediately due and payable.
10.6 APPLICABLE LAW. The validity, interpretation, performance, and
enforcement of this Agreement shall be governed by the laws of the State of
Delaware.
EXECUTED this _________ day of April, 1998
GREEN
By:
---------------------------------
Name:
Title:
DOWNSTREAM
By:
---------------------------------
Name:
Title:
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<PAGE> 1
EXHIBIT 10.3
TRADEMARK LICENSE AGREEMENT
This agreement ("Agreement") is made and entered into as of
the ____ day of _____ 1998, by and between Pennzoil Products Company, a
Delaware corporation ("Licensor"), and Pennzoil Company, a Delaware corporation
("Licensee").
WHEREAS, Licensor has rights in and to the mark PENNZOIL, and
certain design variations thereof, the use of which it wishes to license to
Licensee under the terms and conditions of this Agreement; and
WHEREAS, Licensee wishes to obtain such a license pursuant to
such terms and conditions.
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the terms defined below shall
have the indicated meanings:
1.1 "Affiliate" shall have the meaning set forth in the
Distribution Agreement between Licensor and Licensee dated April 14, 1998
("Distribution Agreement").
1.2 "Effective Date" of this Agreement shall mean the
date first written above.
1.3 "Services" shall mean the activities related to oil
and gas exploration, exploitation, development, production, and energy related
transportation, it being understood that such activities shall not include the
development, manufacture, production, exploitation, distribution, marketing or
sale of automotive consumer products or any other activity included within the
Downstream Business (as defined in the Distribution Agreement).
1.4 "Term" shall have the meaning set forth in Section
7.1 below.
1.5 "Territory" shall mean the world.
1.6 "Trademark" shall mean the trademarks PENNZOIL (words
only), PENNZOIL (bell design) as depicted in U.S. Serial No. 75/321,680
(without the oval), PENNZOIL (bell and oval design) as depicted in U.S. Serial
No. 75/321,680, and PENNZENERGY (words only).
<PAGE> 2
ARTICLE II
GRANT OF RIGHTS
2.1 For good and adequate consideration, the receipt and
sufficiency of which are hereby acknowledged, as of the Effective Date,
Licensor grants to Licensee and its Affiliates an exclusive, paid up, royalty
free license to use the Trademark in connection with the Services in the
Territory, with the right, subject to Licensor's consent which shall not be
unreasonably withheld, to grant sublicenses. Licensor agrees that it will not
use, and will not license any third party during the Term to use, the Trademark
in connection with the Services. Except as provided in the preceding sentence,
Licensor hereby retains the right to use and license third parties to use the
Trademark in any manner anywhere in the Territory.
ARTICLE III
QUALITY CONTROL
3.1 Licensee agrees to use the Trademark in the Territory
only in accordance with such quality standards and specifications as may be
established by Licensor and communicated to Licensee from time to time, it
being understood that Licensor has evaluated Licensee's Services and determined
that as of the date hereof they are of a quality that justifies this grant of a
license. Licensee recognizes the substantial goodwill associated with the
Trademark and will not permit the quality of the Services with which Licensee
uses the Trademark to deteriorate so as to adversely affect the goodwill
associated with the Trademark.
3.2 Licensor may inspect Licensee's premises upon
reasonable notice to ensure compliance with the foregoing requirement.
ARTICLE IV
USE OF TRADEMARK
4.1 All ownership of the Trademark, including without
limitation any and all registrations thereof in any and every country or
jurisdiction, shall at all times belong to Licensor and all use of the
Trademark by Licensee will inure to the benefit of Licensor.
4.2 Licensee shall use the Trademark only in connection
with the Services, in the manner and style which shall have the prior approval
of Licensor in writing, such approval not to be unreasonably withheld, and in
connection with such legends, markings and notices as Licensor may require;
provided, however, that the manner and style in which the Trademark is used on
the Effective Date shall be deemed to have Licensor's approval. With respect
to any written approval
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<PAGE> 3
requested of Licensor under this paragraph, failure of Licensor to respond to a
written request for approval within 45 business days of the request shall be
deemed to constitute approval.
4.3 Licensee shall cooperate in the execution of any
documents, and the taking of other actions that Licensor reasonably requests to
create, record or perfect Licensor's sole and exclusive ownership of the
Trademark, including without limitation execution and filing of appropriate
documents to qualify Licensee as a Registered User in any jurisdictions in
which such qualification is necessary or desirable and taking actions necessary
to apply for or obtain, defend, or protect trademark rights and registrations.
Licensor shall reimburse Licensee's reasonable out-of- pocket expenses in
taking actions requested by Licensor under this section.
4.4 Licensee agrees not to claim or to assert any right
of ownership in or to the Trademark and shall not initiate any regulatory or
other action that could destroy, damage, or impair in any way the ownership or
rights of Licensor in and to the Trademark. Licensee shall not register the
Trademark anywhere in the Territory in its own name, or on behalf of any other
person or entity, and shall not associate the Trademark with any article or
service other than the Services and shall, at the request and expense of
Licensor (with respect to reasonable out-of-pocket costs of Licensee), do all
such lawful acts and things and execute all such documents as Licensor shall,
in its reasonable discretion, consider necessary or proper to register the
Trademark in any country. Should usage of the Trademark in any country vest
title thereto in Licensee, then Licensee shall at Licensor's expense (with
respect to reasonable out-of-pocket costs of Licensee) immediately assign and
transfer such title to Licensor for no additional consideration.
ARTICLE V
INFRINGEMENT OF TRADEMARK
5.1 In the event that Licensee learns that the Trademark
is being misused or infringed or possibly infringed in the Territory by any
third party, it shall promptly notify Licensor of such infringement. Licensor
shall decide in its sole and exclusive discretion what action to take or not to
take in response, and Licensee shall take no action in response to any such
misuse or infringement unless instructed in writing to do so by Licensor.
Licensor shall have the right to act to terminate any such third-party
infringement, including, without limitation, prosecuting a lawsuit or other
legal proceeding at its own expense and Licensor may retain any recovery it may
receive as a result of its actions to terminate such infringement. Licensee
shall fully cooperate with Licensor in any such action taken by Licensor
including without limitation agreeing to be joined as party plaintiff and
approving any reasonable settlement agreement achieved by Licensor and shall be
reimbursed by Licensor for all reasonable out-of-pocket expenses incurred in
connection therewith.
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ARTICLE VI
WARRANTIES AND INDEMNITIES
6.1 Nothing contained in this Agreement shall be
construed as (a) a warranty or representation by Licensor as to the validity or
scope of the Trademark; (b) a warranty or representation that any good or
service using the Trademark will not infringe any trademark of any third party;
or (c) an agreement to defend the Licensee against actions or suits of any
nature brought by any third parties regarding the Trademark. Licensee
acknowledges that, based upon its information and belief, it is familiar with
the Trademark and the history and background thereof.
6.2 Licensee agrees that during the term of this
Agreement, Licensee shall be responsible for complying with and assuring
compliance with all laws and regulations applicable to its or its Licensees' or
designees' performance of the Services.
6.3 Licensee agrees to indemnify and hold Licensor and
its Affiliates harmless against any action, claims, damages, injuries, losses,
costs and expenses, including reasonable attorneys' fees and disbursements,
arising from or claimed to arise from (i) the Services and (ii) any material
breach by Licensee of its obligations or warranties under this Agreement.
6.4 The provisions and obligations of this Article VI
shall survive expiration or any termination of this Agreement.
ARTICLE VII
TERM AND TERMINATION
7.1 This Agreement shall become effective upon the
Effective Date and shall remain in full force and effect for a term of three
(3) years, unless earlier terminated in accordance with provision 7.2, 7.3, or
7.4 of this Article VII (the period from the Effective Date until termination,
the "Term").
7.2 This Agreement may be sooner terminated by Licensor
if Licensee materially breaches provisions 3.1 or 3.2 of Article III, or
Section 4.2 of Article IV, and such breach is not cured within 60 days after
delivery of a written notice thereof by Licensor to Licensee.
7.3 This Agreement may be sooner terminated by Licensor
if there has been a "Change of Control" of Licensee. For purposes of this
Agreement, "Change of Control" shall mean a change in control of the Licensee
after the date hereof in any one of the following circumstances (1) there shall
have occurred an event required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Securities Exchange Act of 1934
(the "Act"), whether or not the Licensee is then subject to such reporting
requirement; (2) any "person" (as such term is used in Section 13(d)
- 4 -
<PAGE> 5
and 14(d) of the Act) shall have become the "beneficial owner" (as defined in
Rule 13d-3 under the Act), directly or indirectly, of securities of the
Licensee representing 30% or more of the combined voting power of the
Licensee's then outstanding voting securities without prior approval of at
least two-thirds of the members of the Board of Directors in office immediately
prior to such person attaining such percentage interest; (3) the Licensee is a
party to a merger, consolidation, sale of assets or other reorganization, or a
proxy contest, as a consequence of which members of the Board of Directors in
office immediately prior to such transaction or event constitute less than a
majority of the Board of Directors thereafter; (4) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (including for this purpose any new director whose
election or nomination for election by the Licensee's stockholders was approved
by a vote of at least two-thirds of the directors then still in office who were
directors at the beginning of such period) cease for any reason to constitute
at least a majority of the Board of Directors.
7.4 If either party shall (i) become insolvent, (ii) make
an assignment for the benefit of creditors, (iii) file or become subject to a
filing for reorganization, receivership or bankruptcy under the insolvency or
bankruptcy laws of the U.S., provided that such filing is made without the
acquiescence of the party subject to such filing, and such filing remains
undismissed for 60 days, or (iv) be dissolved, liquidated, wound up or
otherwise cease or be compelled to cease business, then in any such event, this
Agreement shall automatically terminate.
7.5 Immediately upon the end of the Term, Licensee shall
cease and discontinue, effective upon the date of such termination, all use of
the Trademark in the Territory (including, without limitation, any use of the
Trademark as a company name) and Licensor may take (or require Licensee to
take) all commercially reasonable actions needed to evidence such
discontinuance of use, including without limitation filing any termination
statement with respect to d.b.a. elections filed by Licensee or its Affiliates.
Within 90 days of the end of the Term, Licensor shall receive a letter from
Licensee certifying that all materials of Licensee (or its Affiliates) bearing
the Trademark have been destroyed. All costs relating to the filing or
recordation of documents evidencing the termination of Licensee's permitted use
will be borne by Licensee. Licensee will take all action necessary (at
Licensee's expense) to authorize, no later than the shareholders' meeting
immediately preceding the anticipated end of the Term, an amendment to the
Certificate of Incorporation of Licensee to remove the Trademark.
ARTICLE VIII
MISCELLANEOUS
8.1 Licensee agrees to carry out this Agreement as an
independent contractor and not as an employee, servant, or agent of or joint
venturer with Licensor. Except as specifically provided herein, neither party
shall have authority to bind or otherwise render the other party liable in any
way, whether by agreement, contract, or representation, written or oral, or by
instrument or action of any kind. Unless otherwise specifically provided for
herein, the obligations undertaken by each party hereto and set forth in this
Agreement shall be at the expense of the party which incurred
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<PAGE> 6
the expense. All relationships entered into by Licensee shall be for its
exclusive account and risk and Licensee shall have no power to bind Licensor in
any way with respect to third parties unless previously authorized in writing.
8.2 This Agreement shall not be assignable by Licensee
without the prior written consent of Licensor, such consent not to be
unreasonably withheld. This Agreement shall be assignable by Licensor. In
connection with any such assignments, prior written notice shall be given by
the assigning party to the other party and shall not affect either party's
obligations under this Agreement.
8.3 All communications required or permitted to be given
by one party to the other hereunder (collectively, "notice") shall be given in
the manner and subject to the provisions of Section 8.05 of the Distribution
Agreement, which is incorporated herein by this reference.
8.4 Any part or provision of this Agreement which may be
held for any reason to be illegal, invalid, unenforceable, or in conflict with
the applicable laws or regulations of any jurisdiction shall be ineffective to
the extent of such illegality and validity and enforceability or conflict, and
shall be replaced with a part or provision that accomplishes, to the extent
possible, the original purpose of such part or provision in a valid and
enforceable manner without affecting, impairing, or invalidating the remaining
provisions in any other jurisdiction, which provisions shall remain binding
upon the parties hereto and in full force and effect.
8.5 Each party acknowledges that a breach of its
obligations under this Agreement would cause the other party irreparable and
significant harm and that, in addition to any other remedies available to it,
such party may obtain immediate injunctive relief.
8.6 No right or remedy given to a party under this
Agreement or by applicable law is intended to be exclusive of or constitute a
waiver of any other right or remedy. Each right or remedy may be pursued
singly, concurrently, successively or otherwise at the sole discretion of
either party.
8.7 This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without reference to the choice
of law principles thereof.
8.8 The provisions of this Agreement, together with the
provisions of the Transaction Agreements (as defined in the Distribution
Agreement) to the extent relevant to the Trademark, and in addition to the
extent incorporated herein by reference, represent the entire understanding and
agreement between the parties with respect to the subject matter hereof, and
supersede all previous agreements, statements, representations, promises,
warranties, covenants, undertakings, or writing related thereto, other than
those contained herein. Any changes in or amendments to this Agreement shall
be in writing and signed by duly authorized representatives of each of the
parties hereto.
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<PAGE> 7
IN WITNESS WHEREOF, the parties have through their duly
authorized representatives placed their respective names as of the date first
written above.
PENNZOIL COMPANY PENNZOIL PRODUCTS COMPANY
- ------------------------------- ----------------------------------
By: By:
---------------------------- -------------------------------
Title: Title:
------------------------- ----------------------------
Date: Date:
-------------------------- -----------------------------
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<PAGE> 1
EXHIBIT 10.4
TRANSITION SERVICES AGREEMENT
DATED AS OF __________, 1998,
AMONG
RICHLAND SERVICES COMPANY,
PENNZOIL COMPANY
AND
PENNZOIL PRODUCTS COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II SERVICES . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.1 Basic Services . . . . . . . . . . . . . . . . . 2
SECTION 2.2 Requested Services . . . . . . . . . . . . . . . 2
SECTION 2.3 Additional Services and Equipment . . . . . . . 3
SECTION 2.4 Standard of Performance . . . . . . . . . . . . 3
SECTION 2.5 Records . . . . . . . . . . . . . . . . . . . . 3
SECTION 2.6 Cooperation . . . . . . . . . . . . . . . . . . 4
ARTICLE III SERVICE CHARGES . . . . . . . . . . . . . . . . . . . . 4
SECTION 3.1 Compensation . . . . . . . . . . . . . . . . . . 4
SECTION 3.2 Payment Only for Services Received . . . . . . . 4
ARTICLE IV PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 4.1 Payment . . . . . . . . . . . . . . . . . . . . 4
ARTICLE V TERM . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 5.1 Term . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE VI CESSATION OF SERVICES . . . . . . . . . . . . . . . . . 5
SECTION 6.1 Discontinuation of Services . . . . . . . . . . 5
SECTION 6.2 Procedures Upon Discontinuation or Termination of
Services . . . . . . . . . . . . . . . . . . . . 5
ARTICLE VII DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 7.1 Termination for Default . . . . . . . . . . . . 5
ARTICLE VIII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . 6
SECTION 8.1 Construction Rules . . . . . . . . . . . . . . . 6
SECTION 8.2 Notices . . . . . . . . . . . . . . . . . . . . 6
SECTION 8.3 Assignment; Binding Effect . . . . . . . . . . . 7
SECTION 8.4 No Third Party Beneficiaries . . . . . . . . . . 8
SECTION 8.5 Amendment . . . . . . . . . . . . . . . . . . . 8
SECTION 8.6 Waiver . . . . . . . . . . . . . . . . . . . . . 8
SECTION 8.7 Severability . . . . . . . . . . . . . . . . . . 8
SECTION 8.8 Counterparts . . . . . . . . . . . . . . . . . . 8
SECTION 8.9 Governing Law . . . . . . . . . . . . . . . . . 8
SECTION 8.10 Indemnity; Liability for Acts of Employees . . . 8
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 8.11 Compliance with Laws . . . . . . . . . . . . . . . . . 9
SECTION 8.12 Confidentiality . . . . . . . . . . . . . . . . . . . . 9
SECTION 8.13 Force Majeure . . . . . . . . . . . . . . . . . . . . . 10
SECTION 8.14 Relationship of Parties . . . . . . . . . . . . . . . . 11
SECTION 8.15 Further Assurances . . . . . . . . . . . . . . . . . . 11
SECTION 8.16 Regulations . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 8.17 Audits . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 8.18 Pennzoil . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
APPENDIX
Appendix A Services Provided
ii
<PAGE> 4
TRANSITION SERVICES AGREEMENT
This TRANSITION SERVICES AGREEMENT (as amended or otherwise
modified from time to time, the "Agreement") effective as of _________ ____,
1998, is among Richland Services Company ("Richland"), a Delaware corporation
and an indirect wholly owned subsidiary of Pennzoil Company ("Pennzoil"), a
Delaware corporation, Pennzoil, and Pennzoil Products Company ("PPC"), a
Delaware corporation.
WITNESSETH:
WHEREAS, Pennzoil and PPC are parties to that certain
Distribution Agreement dated as of ________ ___, 1998 (the "Distribution
Agreement") pursuant to which, among other things, Pennzoil will distribute to
its stockholders all of the outstanding shares of common stock of PPC;
WHEREAS, in connection with the Distribution, Pennzoil has agreed
to cause Richland to provide PPC with certain services as more particularly
described herein upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the
agreements set forth in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties, intending to be legally bound hereby, agree as follows:
ARTICLE I
DEFINITIONS
"Affiliate" shall have the meaning set forth in the Distribution
Agreement; provided, however, that for purposes of this Agreement, neither PPC
nor any Person controlled by it shall be considered an Affiliate of Richland.
"Claim" means any losses, liabilities, claims, damages (including
without limitation, those arising out of any demand, assessment, settlement,
judgment or compromise relating to any action, complaint, petition,
investigation, suit or other proceeding, whether existing, future or
threatened, civil or criminal, in law or equity, or before any arbitrator,
mediator or governmental authority), costs and expenses (including, without
limitation, remediation costs, attorneys' fees, court costs and other costs
incurred in investigating, preparing or defending any of the foregoing).
"Force Majeure Event" shall have the meaning as set forth in
Section 8.15.
"Legal Requirements" means any law, statute, rule, ordinance,
decree, requirement, regulation, order, license, authorization, certification,
permit or judgment of any authority.
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<PAGE> 5
"Party" shall mean Pennzoil, Richland or PPC, as applicable, and
"Parties" shall mean Pennzoil, Richland and PPC.
"Person" shall have the meaning set forth in the Distribution
Agreement.
"Service Coordinator" shall have the meaning set forth in Section
2.1(b).
"Service Groups" shall mean the listed categories of Services set
forth in Appendix A hereto.
"Services" shall have the meaning set forth in Section 2.1(a).
All other capitalized terms used but not defined herein shall
have the meanings assigned to such terms in the Distribution Agreement.
ARTICLE II
SERVICES
SECTION 2.1 Basic Services.
(a) Subject to the terms and conditions of this Agreement,
Richland, through its employees, agents, contractors or independent third
parties, in each case reasonably acceptable to PPC, agrees to provide or cause
to be provided to PPC, and PPC agrees to purchase from Richland, the services
set forth in Appendix A hereto (including any additional services provided
pursuant to Section 2.3, the "Services"). At all times during the performance
of Services, all persons performing Services hereunder (including agents,
temporary employees, independent third parties and consultants) shall be
construed as being independent from PPC and not as employees of PPC and shall
not be entitled to any payment, benefit or perquisite from PPC on account of
such Services. Richland shall not be required to perform Services hereunder
that conflict with or violate any applicable Legal Requirement.
(b) Service Coordinators. Richland and PPC shall each
nominate a representative to act as the primary contact person with respect to
the accomplishment of the transactions contemplated by this Agreement (the
"Service Coordinators"). The initial Service Coordinators shall be
_________________ for Richland and _______________ for PPC. Unless Richland
and PPC otherwise agree, Richland and PPC agree that all communications
relating to this Agreement and the schedule of Services on Appendix A hereto
shall be directed to the Service Coordinators in accordance with Section 8.2
hereof.
SECTION 2.2 Requested Services. From time to time, PPC may
request additional services by providing Richland with written notice. Upon
mutual agreement between Richland and
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<PAGE> 6
PPC as to the cost and scope of such additional services, Richland and PPC may
supplement in writing Appendix A hereto, as necessary, to include such
additional services. To the extent that it can reasonably do so, Richland
shall provide the additional services on the basis requested by PPC and for the
fee agreed upon by Richland and PPC pursuant to the terms and conditions of
this Agreement.
SECTION 2.3 Additional Services and Equipment. In the event
that Richland shall deem it necessary in the performance of a Service to obtain
the services of any third party or to obtain additional leased equipment or
other facilities in connection therewith, other than such third-party services,
equipment or facilities as are obtained by Richland in the ordinary course of
business consistent with past practice with respect to PPC, Richland shall
provide all pertinent information regarding such third party, the need to
obtain such third party's services or such equipment or facilities and the
costs and other relevant terms relating thereto, and Richland shall obtain the
written approval of PPC prior to obtaining any such third-party services or
additional leased equipment or other facilities. Each of the Parties agrees
that any third-party agreement entered into by Richland for such purposes shall
be terminable upon written request by PPC. The cost of such additional third-
party services and/or additional equipment and facilities shall be billed to
and paid for by PPC in the manner set forth in Article IV hereof.
Notwithstanding the foregoing, the prior written approval of PPC shall not be
required in cases of emergency where the failure to obtain such third-party
services or equipment or other facilities, in the best judgment of Richland,
will cause economic harm to PPC in excess of the cost to be incurred in
obtaining such third-party services and/or additional equipment. Oral or
written notice shall be provided to PPC as soon as possible, but in any event
within 24 hours after an emergency.
SECTION 2.4 Standard of Performance. Richland shall perform the
Services for PPC with the same degree of care, skill and prudence customarily
exercised by it for its own operations and its provision of services to
Pennzoil and its subsidiaries, and in compliance with Section 8.11, and, in the
case of any legal services, in compliance with the applicable professional Code
of Conduct. Each Party shall perform its obligations under this Agreement
without undue delay and Richland shall keep its equipment and facilities
necessary or useful to the performance of its obligations hereunder in good
working condition and repair.
SECTION 2.5 Records. Richland shall maintain true and correct
records of all receipts, invoices, reports and such other documents relating to
the Services rendered hereunder in accordance with its standard accounting
practices and procedures, consistently applied, which practices and procedures
Richland represents and warrants are consistent with practices and procedures
employed by Richland in its provision of services to Pennzoil and Pennzoil's
Subsidiaries. Without limiting the generality of the foregoing, Richland's
accounting records shall be maintained in sufficient detail to enable an
auditor to verify the accuracy, completeness and appropriateness of the charges
for the Services hereunder. PPC shall have the right to inspect and (at its
expense) copy such records during Richland's regular office hours. PPC shall
give Richland reasonable prior notice of any such inspection and/or copying
request. Richland shall retain such accounting records and make them available
to PPC's auditors (subject to Section 8.17) for a period
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<PAGE> 7
of not less than 6 years from the close of each fiscal year of PPC; provided,
however, that Richland may, at its option, transfer such accounting records to
PPC.
SECTION 2.6 Cooperation. Richland and PPC shall cooperate with
one another and shall provide such further assistance as the other Party may
reasonably request in connection with the provision of Services hereunder.
ARTICLE III
SERVICE CHARGES
SECTION 3.1 Compensation. For each Service Group of Richland
that provides Services to PPC under the terms of this Agreement, PPC shall (i)
reimburse Richland for costs and expenses that are directly allocable to PPC
and (ii) compensate Richland for the Services at the rate of 65% of Richland's
aggregate unallocated costs reasonably attributable to such Service Group,
which costs shall include all severance costs, as determined in a manner
substantially consistent with Richland's recent historical practice; provided
that PPC will only be required to reimburse or compensate Richland once for
allocated or unallocated costs attributable to Services provided regardless of
any overlap among Service Groups.
SECTION 3.2 Payment Only for Services Received. PPC shall
compensate Richland only for Services actually received. PPC shall therefore
not pay, or shall receive an appropriate credit with respect to, payment for
Services that are not provided to PPC by Richland for any reason, including a
Force Majeure Event, other than PPC's own refusal to receive Services that
otherwise conform to the requirements of this Agreement. This Section 3.2
shall not serve to limit in any way the rights or remedies available to or
damages recoverable by PPC for breach of this Agreement by Richland or
Pennzoil.
ARTICLE IV
PAYMENT
SECTION 4.1 Payment. Charges for Services shall be invoiced
monthly, and payment shall be due thirty calendar days after receipt of the
invoice. Each invoice shall set forth in reasonable detail for the period
covered by such invoice: (i) the Services rendered by Richland hereunder, (ii)
the fee for each Service rendered hereunder, (iii) the basis for the
calculation of the unallocated cost as set forth in Section 3.1, (iv) the
amount actually paid by Richland to any third party providing services,
equipment or facilities pursuant to Section 2.3 hereof (and the invoice to
Richland from such third party for such services, equipment or facilities), and
(v) such additional information as PPC may reasonably request. PPC's
obligation to pay for Services rendered shall survive termination of this
Agreement.
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<PAGE> 8
ARTICLE V
TERM
SECTION 5.1 Term. The term of this Agreement shall commence at
the Distribution Date and shall continue in force for a term of 12 months;
provided, however, that this Agreement shall terminate when all Services
provided hereunder have been terminated pursuant to Article VI hereof.
ARTICLE VI
CESSATION OF SERVICES
SECTION 6.1 Discontinuation of Services. PPC may, without
cause, cause the discontinuation of any or all of the Services being provided
to it by any or all Service Groups of Richland by giving Richland at least 30
days' prior written notice of the discontinuation thereof; provided that no
discontinuation shall be effective prior to 90 days after the date hereof.
SECTION 6.2 Procedures Upon Discontinuation or Termination of
Services. Upon the discontinuation or termination of a Service hereunder, this
Agreement shall be of no further force and effect for such Service, except as
to obligations accrued prior to the date of discontinuation or termination;
provided, however that Article VIII of this Agreement shall survive such
discontinuation or termination. Richland shall furnish to PPC all such
information and take all such other actions as PPC shall reasonably request to
effectuate an orderly and systematic transfer of Richland's duties and
activities under this Agreement, provided that the reasonable costs of the same
shall be properly reimbursed to Richland by PPC.
ARTICLE VII
DEFAULT
SECTION 7.1 Termination for Default. In the event: (i) PPC
shall fail to pay for Services in accordance with the terms of this Agreement
(and such payment is not disputed by PPC in good faith); (ii) Richland shall
fail to perform the Services in accordance with the terms of this Agreement;
(iii) any Party shall default, in any material respect, in the due performance
or observance by it of any of the other terms, covenants or agreements
contained in this Agreement; or (iv) any Party shall become or be adjudicated
insolvent and/or bankrupt, or a receiver or trustee shall be appointed for any
Party or its property or a petition for reorganization or arrangement under any
bankruptcy or insolvency law shall be approved, or an assignment shall be made
for the benefit of creditors of any Party, or any Party shall file a voluntary
petition in bankruptcy or shall consent to the appointment of a receiver or
trustee, any non-defaulting Party shall have the right, at its sole discretion,
in the case of a default under clause (iv), to immediately terminate its
participation with the defaulting Party under this Agreement, and in the case
of a default under clause (i), (ii) or (iii),
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<PAGE> 9
to terminate its participation with the defaulting Party under this Agreement
if the defaulting Party has failed to (A) cure the default within 30 days of
written notice of default or if the default (except for defaults as a result of
failure to make payment) is such that it will take more than 30 days to cure,
within an extended time period which shall be not longer than what is
reasonably necessary to effect performance or compliance or (B) diligently
pursue the curing of the default, provided that, notwithstanding the foregoing
or anything else in this Agreement to the contrary, PPC may, without any
required prior written notice, cause the discontinuation of any or all of the
Services as to which such default relates. Richland and Pennzoil shall be
jointly and severally liable for any costs and expenses incurred by PPC in
obtaining replacement Services during any period of default by Richland in
performing such Services.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Construction Rules. The article and section
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. As used
in this Agreement, unless otherwise provided to the contrary, (a) all
references to days or months shall be deemed references to calendar days or
months and (b) any reference to a "Section," "Article" or "Appendix" shall be
deemed to refer to a section or article of this Agreement or an appendix to
this Agreement. The words "hereof," "herein" and "hereunder" and words of
similar import referring to this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation." Unless otherwise
specifically provided for herein, the term "or" shall not be deemed to be
exclusive.
SECTION 8.2 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given upon (a) a
transmitter's confirmation of a receipt of a facsimile transmission (but only
if followed by confirmed delivery of a standard overnight courier the following
business day or if delivered by hand the following business day), (b) confirmed
delivery of a standard overnight courier or when delivered by hand or (c) the
expiration of five business days after the date mailed by certified or
registered mail (return receipt requested), postage prepaid, to the parties at
the following addresses (or at such other addresses for a party as shall be
specified by like notice):
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<PAGE> 10
If to Richland, to:
Richland Services Company
------------------------------------
------------------------------------
------------------------------------
Attention:
-------------------------
Facsimile:
-------------------------
If to PPC, to:
Pennzoil Products Company
------------------------------------
------------------------------------
------------------------------------
Attention:
-------------------------
Facsimile:
-------------------------
If to Pennzoil, to:
Pennzoil Company
------------------------------------
------------------------------------
------------------------------------
Attention:
-------------------------
Facsimile:
-------------------------
SECTION 8.3 Assignment; Binding Effect. Neither this Agreement
nor any of the rights, benefits or obligations hereunder may be assigned or
delegated by PPC or Richland (whether by operation of law or otherwise) without
the prior written consent of the other party, which consent shall not be
unreasonably withheld; provided, however, that no such consent shall be
required for an assignment or delegation by PPC to an Affiliate or by any Party
hereto to a successor to all or a substantial portion of the assets or the
business of such Party so long as such assignee or delegee executes a written
assumption of such Party's obligations hereunder with respect to the rights or
obligations assigned or delegated, and delivers such written assumption to the
other Party within a reasonable period of time after the effective date of such
assignment or delegation. Notwithstanding the foregoing, Richland may not
assign or delegate any of its obligations hereunder unless the assignee or
delegee can demonstrate to the reasonable satisfaction of PPC that it is
capable of providing the same or better quality Services to PPC on terms and
conditions (including, without limitation, the cost to PPC of such Services) no
less favorable to PPC than the terms and conditions of this Agreement. Subject
to the preceding sentences, this Agreement will be binding upon, inure
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<PAGE> 11
to the benefit of and be enforceable by PPC and Richland and their respective
successors and permitted assigns.
SECTION 8.4 No Third Party Beneficiaries. Nothing in this
Agreement, express or implied, is intended to or shall confer upon any Person
(other than PPC and Richland or their respective successors or permitted
assigns) any legal or equitable right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement, and no Person (other than as
so specified) shall be deemed a third-party beneficiary under or by reason of
this Agreement.
SECTION 8.5 Amendment. No amendments, additions to,
alterations, modifications or waivers of all or any part of this Agreement
shall be of any effect, whether by course of dealing or otherwise, unless
explicitly set forth in writing and executed by both Parties hereto. If the
provisions of this Agreement and the provisions of any purchase order or order
acknowledgment written in connection with this Agreement conflict, the
provisions of this Agreement shall prevail.
SECTION 8.6 Waiver. The waiver by any party hereto of a breach
of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach. The failure of any Party to require
performance of any provision of this Agreement shall not affect any Party's
right to full performance thereof at any time thereafter.
SECTION 8.7 Severability. If any provision of this Agreement
or the application of any such provision to any Person or circumstance shall be
declared judicially to be invalid, unenforceable or void, such decision shall
not have the effect of invalidating or voiding the remainder of this Agreement,
it being the intent and agreement of PPC, Pennzoil and Richland that this
Agreement shall be deemed amended by modifying such provision to the extent
necessary to render it valid, legal and enforceable while preserving its intent
or, if such modification is not possible, by substituting therefor another
provision that is legal and enforceable and that achieves the same objective.
SECTION 8.8 Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one agreement binding on PPC, Pennzoil and
Richland, notwithstanding that all parties are not signatories to the original
or the same counterpart.
SECTION 8.9 Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of Texas without
giving effect to the conflicts of law principles thereof.
SECTION 8.10 Indemnity; Liability for Acts of Employees.
(a) Pennzoil and Richland Indemnification of PPC. Subject to
the provisions of Section 8.10(c), Pennzoil and Richland shall, jointly and
severally, defend, reimburse, indemnify,
-8-
<PAGE> 12
and hold harmless PPC and its Affiliates, agents, officers, directors,
employees and representatives from and against all claims that arise as a
result of or are related to Richland's or Pennzoil's performance of this
Agreement to the extent that such claims arise from the gross negligence,
wilful misconduct or intentional breach of this Agreement by Richland or
Pennzoil.
(b) PPC Indemnification of Richland. Subject to the
provisions of Section 8.10(c), PPC shall defend, reimburse, indemnify and hold
harmless Richland and its Affiliates, agents, officers, directors, employees
and representatives from and against all claims that arise as a result of or
are related to PPC's performance of this Agreement to the extent that such
claims arise from the gross negligence, wilful misconduct or intentional breach
of this Agreement by PPC.
(c) The indemnifying Party shall after consultation with the
other Party control the legal proceedings relating to any such Claims. The
indemnifying Party will not, without the other Party's written consent, settle
or compromise any Claim or consent to any entry of judgment.
SECTION 8.11 Compliance with Laws. The Parties shall use all
reasonable efforts to comply fully with all applicable Legal Requirements.
SECTION 8.12 Confidentiality.
(a) Generally. All Parties agree (i) to hold in trust and
maintain confidential, (ii) not to disclose to others without prior written
approval from the providing Party, (iii) not to use for any purpose, other than
such purpose as may be authorized in writing by the providing Party and (iv) to
prevent duplication of and disclosure to any other party, any information
received from the providing Party or developed, presently held or continued to
be held, or otherwise obtained at any time by the receiving Party. Such
information includes, without limitation, all results of Services, information
disclosed by either Party orally, visually, in writing, or in other tangible
form, and technical, economic and business data, know-how, flow sheets,
drawings, business plans, computer information data bases, legal memoranda and
other attorney work product, and the like received or otherwise obtained prior
to, on, or after the date hereof. To the extent that, in the course of
providing Services hereunder, Richland receives confidential information that
is governed by a confidentiality agreement between PPC and a third party,
Pennzoil and Richland shall be bound by such confidentiality agreement to the
same extent as PPC.
(b) Exceptions. The foregoing obligations of confidence,
nondisclosure and nonuse shall not apply to any information that:
(i) was in the public domain at the time of disclosure
by one Party to the other;
(ii) enters the public domain through no fault of the
disclosing party;
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<PAGE> 13
(iii) was communicated after the date hereof to one Party
by a third party free of any obligation of confidence known to the
recipient; or
(iv) was developed by officers, employees or agents of
or consultants to one Party independently of and without reference to
the proprietary information of another Party, and, in the case of
Richland, was not developed while performing the Services.
Specific information shall not be deemed to come under the above
exceptions merely because it is embraced by more general information that is or
becomes public knowledge.
(c) Required Disclosure. The receiving Party may disclose the
providing Party's information to the extent necessary to attorneys of litigants
or to governmental authorities to comply with any obligation imposed on the
receiving Party in connection with a proceeding in a court or other
governmental authority of competent jurisdiction, provided that the receiving
Party gives reasonably prompt notice to the providing Party of the need for
such disclosure, together with such other information about the proceeding as
will enable the providing Party to evaluate the obligation and the need and to
elect either to intervene or otherwise appear or act in the proceeding to
protect directly the providing Party's information at the expense of the
providing Party, or instead to request the receiving Party to, and if so
requested, the receiving Party shall, make a reasonable and diligent effort at
the expense of the providing Party to obtain a protective order or otherwise to
protect the confidentiality of information sought to be obtained in said
proceeding.
(d) Other Confidentiality Agreements. The Parties further
agree that any specific agreements between any of the Parties containing
confidentiality provisions shall supersede all provisions set forth in this
Section.
(e) Length of Confidentiality Obligation. The Parties agree
to maintain and protect the confidentiality of the information of the providing
Party for a period of 10 years from the date of termination of this Agreement.
SECTION 8.13 Force Majeure.
(a) Performance Excused. Continued performance of any
obligation (except payment of money due), may be suspended immediately to the
extent made impossible by any event or condition beyond the reasonable control
of the Party suspending such performance (except its inability to discharge
obligations of a financial nature), including without limitation (to the extent
beyond such control) acts of God, fire, labor or trade disturbance, war, civil
commotion, compliance in good faith with any applicable Legal Requirements
(whether or not it later proves to be invalid), unavailability of materials, or
other event or condition whether similar or dissimilar to the foregoing (a
"Force Majeure Event"). Upon and during the occurrence of a Force Majeure
Event, at PPC's sole option, the term of this Agreement shall be tolled with
respect to any Services that are not being provided by a third party in
accordance with Section 2.3. Notwithstanding the foregoing or anything
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<PAGE> 14
else in this Agreement to the contrary, PPC may, without any required prior
written notice, cause the discontinuation of any or all of the Services as to
which the Force Majeure Event relates.
(b) Notice and Cure. The Party claiming suspension due to a
Force Majeure Event will give prompt notice to the other of the occurrence of
the Force Majeure Event giving rise to the suspension and of its nature and
anticipated duration, and such Party will use its best efforts to cure the
cause of the suspension promptly, it being understood, however, that labor
disputes shall be a continuing cause of suspension, and settlement of the same
shall be entirely within the discretion of the Party experiencing such
difficulty. The Parties shall cooperate with each other to find alternative
means and methods for the provision of the suspended Service.
(c) Recommencement of Performance. Subject to the last
sentence of Section 8.13(a), upon termination of the Force Majeure Event,
performance will recommence and the tolling of the term of this Agreement shall
be discontinued.
SECTION 8.14 Relationship of Parties. This Agreement does not
create a partnership, joint venture or relationship of trust or agency among
the Parties.
SECTION 8.15 Further Assurances. From time to time, each Party
agrees to execute and deliver such additional documents, and will provide such
additional information and assistance as any Party may reasonably require to
carry out the terms of this Agreement.
SECTION 8.16 Regulations. All employees of Richland when on the
property of PPC will conform to the rules and regulations of PPC concerning
safety, health and security.
SECTION 8.17 Audits. Each of Richland and PPC and its duly
authorized representatives shall have access during customary business hours to
the accounting records and other documents maintained by the other Party that
relate to this Agreement and shall have the right to audit such records at any
reasonable time or times as provided in Section 2.5; provided, however, that
each such Party (with Richland and Pennzoil considered as one Party for
purposes of this Section 8.17) can only conduct one audit per year, and the
same year cannot be re-audited.
SECTION 8.18 Pennzoil. Pennzoil shall cause Richland to perform
each of its obligations under this Agreement. Pennzoil and Richland shall be
jointly and severally liable for the obligations of Richland hereunder,
including, without limitation, the indemnification provisions contained in
Section 8.10. Pennzoil hereby consents, and shall be deemed to have consented,
to any supplement to Appendix A that is mutually agreed upon by Richland and
PPC in accordance with Section 2.2 hereof.
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<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
RICHLAND SERVICES COMPANY
By:
----------------------------------
Name:
Title:
PENNZOIL PRODUCTS COMPANY
By:
----------------------------------
Name:
Title:
PENNZOIL COMPANY
By:
----------------------------------
Name:
Title:
<PAGE> 16
APPENDIX A
SERVICES PROVIDED
1. Legal
2. Environmental, Safety and Health
3. Human Resources
4. Finance/Treasury
5. Accounting
6. Information Technology
7. Corporate Communications
8. Executive Services (including Administrative Staff, Security and
Aviation)
9. Government Relations
10. Other Administration
a. Mail Services
b. Real Estate Management and Services
c. Records Management
d. Printing Services
e. Travel Services
A-1
<PAGE> 1
EXHIBIT 10.5
TERM SHEET
ERBU PROPERTY DISPOSITION AND SUPPLY COMMITMENT
1. All Oil and Gas Properties currently owned by Pennzoil Products
Company ("Products") in Michigan, New York, Ohio, Pennsylvania and West
Virginia (the "Eastern Properties") shall be transferred to Pennzoil
Exploration and Production Company ("E&P") effective April 13, 1998.
The term "Oil and Gas Properties" shall include all (a) oil, gas and
mineral fee and leasehold interests (including royalty and overiding
royalty interests); (b) related or adjoining surface fee, leasehold and
associated surface interests; (c) related personal property and
fixtures thereon or associated therewith; and (d) all rights and
obligations under all contracts associated therewith.
2. All Oil and Gas Property currently owned by Pennzoil Company
("Pennzoil") in the Bluebell - Altamont Field, Utah (the "Western
Properties") shall continue to be owned by Pennzoil Company.
3. E&P (which shall be defined, for purposes hereafter, to include
Pennzoil unless otherwise stated) will enter into a contractual
arrangement with Products granting Products the preferential right (but
not the obligation) to purchase on a month-to-month basis, at market
prices, up to one hundred percent (100%) of the crude oil produced and
saved attributable to E&P's interests in the Eastern and Western
Properties (the "Committed Crude"). Product's preferential right to
purchase shall extend until October 1, 2017 in the case of the Eastern
Properties, and until March 1, 2010 in the case of the Western
Properties. Throughout the term of Product's preferential right to
purchase, E&P shall have the right to solicit and/or entertain written
offers from purchasers other than Products ("third parties") for the
purchase of all or any portion of the Committed Crude. If E&P receives
a third party offer to purchase or exchange Committed Crude that it
wishes to accept, it shall notify Products in writing of such offer at
least fifteen (15) working days prior to the beginning of the calendar
month in which such third party purchase is to commence. Products shall
advise E&P within five (5) working days of its receipt of such
<PAGE> 2
notification whether or not it elects to match all substantive terms and
conditions of the third party offer. If Products does not elect to match
all substantive terms and conditions of the third party offer, E&P may
accept the third party offer for the full term contemplated and the crude
subject to the third party offer shall no longer be considered Committed
Crude.
4. Throughout the term of Products' preferential right to purchase, in the
event E&P elects to sell, exchange or otherwise assign to a third party all
or any portion of E&P's interest in any of the wells producing Committed
Crude, E&P shall, within ten (10) working days after reaching agreement
with the third party purchaser on the terms of such sale, exchange or
assignment, notify Products in writing of such election, with full
information concerning the proposed sale, exchange or assignment, which
shall include the name and address of the third party (who must be ready,
willing and able to purchase, exchange or take assignment), the purchase,
exchange or assignment price, and all other terms of the offer. Products
shall advise E&P within twenty (20) working days of Products' receipt of
such notification whether or not it elects to match all substantive terms
and conditions of such sale, exchange or assignment. If Products does not
elect to match all substantive terms and conditions of such sale, exchange
or assignment, E&P may accept such sale, exchange or assignment. Such sale,
exchange or assignment shall be free and clear of pre-existing contractual
commitments between Products and E&P.
5. Ninety (90) days prior to the end of each calendar year, E&P shall provide
Products with a development plan for the Eastern Properties and the Western
Properties showing planned recompletions and well abandonments for the
upcoming calendar year. For a period of thirty (30) days following the
receipt of the development plan, Products may elect to cause E&P to refrain
from implementing any or all of the planned recompletions and well
abandonments identified in the development plan. If Products so elects,
then E&P shall have the right:
(a) to continue to operate any such well at Products' expense. If
E&P exercises this option, Products shall, beginning on the first day
of the calendar
<PAGE> 3
year covered by the development plan, reimburse E&P for (a) the direct
expense (as described in Section II of the "Accounting Procedures Joint
Operations" 1984 COPAS-ONSHORE) of operating the well, and (b) fixed
overhead charges $300.00 (normal operations) and $3,000.00 (rig
operations) for Eastern Property wells and $1,500.00 per month (normal
operations) and $15,000.00 per month (rig operations) for Western
Property wells. Fixed overhead charges shall be adjusted annually to
reflect changes in the Producer Price Index. Products shall be entitled
to all revenues (net of royalty and severance taxes) attributable to
wells for which Products has assumed cost responsibility pursuant to this
paragraph. Once Products agrees to abandon the zones producing in a well
at the time operations were commenced on Products' behalf, such well
shall be returned to E&P; or
(b) to assign any such well to Products for operation by Products or
by a third party on Products' behalf; or
(c) withdraw its proposal to abandon or recomplete.
6. Products may elect to cause E&P to drill additional wells for the
production of Committed Crude by agreeing to fund all development costs
associated with such wells. On or before January 1 of each calendar year,
Products shall notify E&P of its desire to fund the drilling of new wells
(including associated pipelines, processing and support facilities) for
the production of Committed Crude. Within sixty (60) days following the
receipt of such an election, E&P shall furnish Products with a
recommended drilling plan consisting of a list of recommended drilling
locations, relevant technical information supporting such recommendations
and AFE's providing estimates for the proposed work. Within thirty (30)
days of its receipt of the recommended drilling plan, Products shall make
a final selection of the wells it desires to have drilled during the
remainder of the calendar year. E&P may elect to drill any of the
proposed wells for its own account. Products shall fund all capital
expenditures on the proposed wells (including associated pipelines,
processing and support activities) which E&P elects not to drill for its
own account (the "Joint
<PAGE> 4
Wells") and will receive one hundred percent (100%) of all revenues (net of
royalty and severance taxes) attributable to each of the Joint Wells until
"payout," which will occur when Products has recovered all of its capital
expenditures attributable to such well plus a return on its investment
calculated at the six-month LIBOR rate plus one percent (1%). Until payout,
Products shall bear all of the direct operating expenses attributable to
the Joint Wells (calculated as described in paragraph 6 above) plus monthly
fixed overhead charges of $300.00 (normal operations) and $3,000.00 (rig
operations) for Eastern Property Joint Wells and $1,500.00 (normal
operations) and $15,000.00 (rig operations) for Western Property Joint
Wells. Fixed overhead charges shall be adjusted annually to reflect changes
in the Producer Price Index. Products also shall bear all costs incurred
prior to payout for the plugging and abandonment of any wells drilled
pursuant to this paragraph. Products' obligation to bear costs and expenses
hereunder shall apply to all costs and expenses incurred, notwithstanding
the fact that such costs and expenses may exceed the estimates provided for
in any AFE. Following "payout," E&P shall bear all costs, and shall receive
all revenues, associated with the Joint Wells.
7. At any time after the second anniversary of a spin-off of Products from
Pennzoil Company, and until October 1, 2017 in the case of the Eastern
Properties, and until March 1, 2010 in the case of the Western Properties,
Products shall have the right to purchase the entirety of E&P's interest
in either the Eastern Properties or the Western Properties, or in both the
Eastern and Western Properties, including: (a) oil, gas and mineral fee
and leasehold interests (including royalty and overriding royalty
interests); (b) related or adjoining surface fee, leasehold and associated
surface interests; (c) related personal property and fixtures thereon or
associated therewith; and (d) all rights and obligations under all
contracts associated therewith. Within five (5) working days of the giving
of notice to make such a purchase by Products, the parties shall each name
a qualified independent appraiser, and such two named appraisers shall
choose a third independent appraiser, who shall each submit an appraisal of
the fair market value of the properties to be purchased. After receiving
such appraisals, in the event Products wishes to proceed with such
purchase, Products shall pay to E&P the higher of (i) the average of the
three independent appraisals of
<PAGE> 5
the properties, or (ii) the net book value (book value adjusted for DD&A plus
capital and other investments) of the properties at the purchase date, plus
the amount of any book value write-down(s) required by generally accepted
accounting practices taken subsequent to the date of this Agreement and prior
to the receipt by E&P of Products' notice to make such purchase.
8. The transfer described in paragraph 1 above shall be executed on or before
April 13, 1998. All other provisions of this term sheet shall, in substance,
be embodied in a separate definitive agreement between the parties which,
when executed, shall be made effective as of the date of the transfer
described in paragraph 1 above.
9. Nothing in this Term Sheet shall prevent E&P from complying fully with all
applicable rules, regulations and other legal requirements relating to the
production of oil, gas and minerals from the Easter and Western Properties
and to the payment of royalties thereon.
<PAGE> 1
EXHIBIT 10.6
1998 INCENTIVE PLAN
OF
PENNZOIL - QUAKER STATE COMPANY
1. Plan. This 1998 Incentive Plan of Pennzoil - Quaker
State Company ("Plan") was adopted by the Company to reward certain corporate
officers and key employees of the Company.
2. Objectives. This Plan is designed to attract and
retain key employees of the Company and its Subsidiaries, to encourage a sense
of proprietorship and to stimulate the active interest of such persons in the
development and financial success of the Company and its Subsidiaries. These
objectives are to be accomplished by making Awards under this Plan. This Plan
is also designed to provide for substitute awards issued to employees of the
Company in exchange for awards they previously held under a similar plan of the
Company's parent, formerly PennzEnergy Company, a Delaware corporation.
3. Definitions. As used herein, the terms set forth
below shall have the following respective meanings:
"Authorized Officer" means the Chairman of the Board or the
Chief Executive Officer of the Company (or any other senior officer of the
Company to whom either the Chairman or the Chief Executive Officer shall
delegate the authority to execute any Award Agreement).
"Award" means the grant of any Option, SAR, Stock Award, Cash
Award or Performance Award, whether granted singly, in combination or in
tandem, to a Participant pursuant to such applicable terms, conditions and
limitations as the Committee may establish in order to fulfill the objectives
of the Plan, and includes any award made in substitution for awards previously
granted to an employee of the Company by the Company's former parent,
PennzEnergy Company, when such awards are issued in connection with the
separation of the Company from PennzEnergy Company.
"Award Agreement" means a written agreement between the
Company and a Participant setting forth the terms, conditions and limitations
applicable to an Award.
"Board" means the Board of Directors of the Company.
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<PAGE> 2
"Cash Award" means an award denominated in cash.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Committee" means the Compensation Committee of the Board or
such other committee of the Board as is designated by the Board to administer
the Plan.
"Common Stock" means the Common Stock, par value $0.10 per
share, of the Company.
"Company" means Pennzoil - Quaker State Company, a Delaware
corporation.
"Director" means an individual serving as a member of the
Board.
"Dividend Equivalents" means, with respect to shares of
Restricted Stock that are to be issued at the end of the Restriction Period
(including conditional stock), an amount equal to all dividends and other
distributions (or the economic equivalent thereof) that are payable to
stockholders of record during the Restriction Period on a like number of shares
of Common Stock.
"Employee" means an employee of the Company or any of its
Subsidiaries.
"Fair Market Value" of a share of Common Stock means, as of a
particular date, (i) if shares of Common Stock are listed on a national
securities exchange, the mean between the highest and lowest sales price per
share of Common Stock reported on the consolidated transaction reporting system
for the principal national securities exchange on which shares of Common Stock
are listed on that date, or, if there shall have been no such sale so reported
on that date, on the last preceding date on which such a sale was so reported,
(ii) if shares of Common Stock are not so listed but are quoted on the Nasdaq
National Market, the mean between the highest and lowest sales price per share
of Common Stock reported by the Nasdaq National Market on that date, or, if
there shall have been no such sale so reported on that date, on the last
preceding date on which such a sale was so reported, (iii) if the Common Stock
is not so listed or quoted, the mean between the closing bid and asked price on
that date, or, if there are no quotations available for such date, on the last
preceding date on which such quotations are available, as reported by the
Nasdaq Stock Market, or, if not reported by the Nasdaq Stock Market, by the
National Quotation Bureau Incorporated or (iv) if shares of Common Stock are
not publicly traded, the most recent value determined by an independent
appraiser appointed by the Company for such purpose.
"Incentive Option" means an Option that is intended to comply
with the requirements set forth in Section 422 of the Code.
"Nonqualified Stock Option" means an Option that is not an
Incentive Option.
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<PAGE> 3
"Option" means a right to purchase a specified number of
shares of Common Stock at a specified price.
"Participant" means an individual to whom an Award has been
made under this Plan.
"Performance Award" means an Award made to a Participant
pursuant to this Plan that is subject to the attainment of one or more
Performance Goals.
"Performance Goal" means a standard established by the
Committee to determine in whole or in part whether a Performance Award shall be
earned.
"Plan" means this 1998 Incentive Plan of Pennzoil - Quaker
State Company, as amended from time to time.
"Restricted Stock" means any Common Stock that is restricted
or subject to forfeiture provisions.
"Restriction Period" means a period of time beginning as of
the date upon which an Award of Restricted Stock is made pursuant to this Plan
and ending as of the date upon which the Common Stock subject to such Award is
no longer restricted or subject to forfeiture provisions.
"SAR" means a right to receive a payment, in cash or Common
Stock, equal to the excess of the Fair Market Value (or other specified
valuation) of a specified number of shares of Common Stock on the date the
right is exercised over a specified strike price, in each case, as determined
by the Committee.
"Stock Award" means an award in the form of shares of Common
Stock or units denominated in shares of Common Stock.
"Stock Based Awards Limitations" shall have the meaning set
forth in Section 8(b)(ii).
"Subsidiary" means (i) in the case of a corporation, any
corporation of which the Company directly or indirectly owns shares
representing more than 50% of the combined voting power of the shares of all
classes or series of capital stock of such corporation which have the right to
vote generally on matters submitted to a vote of the stockholders of such
corporation and (ii) in the case of a partnership or other business entity not
organized as a corporation, any such business entity of which the Company
directly or indirectly owns more than 50% of the voting, capital or profits
interests (whether in the form of partnership interests, membership interests
or otherwise).
4. Eligibility. Individuals eligible for Awards under
this Plan are (i) those key Employees who hold positions of responsibility and
whose performance, in the judgment of the Committee, can have a significant
effect on the success of the Company and its Subsidiaries, and
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<PAGE> 4
(ii) individuals who are expected to become such Employees within six months of
the date of the Award.
5. Common Stock Available for Awards. Subject to the
provisions of Sections 8(c) and 14 hereof, there shall be available for Awards
under this Plan granted wholly or partly in Common Stock (including rights or
options that may be exercised for or settled in Common Stock) an aggregate of
1,000,000 [__________] shares of Common Stock. All 1,000,000 [__________]
shares of Common Stock shall be available for Incentive Options. The number of
shares of Common Stock that are the subject of Awards under this Plan, if
forfeited or terminated, unexercised upon expiration, are settled in cash in
lieu of Common Stock or in a manner such that all or some of the shares covered
by an Award are not issued to a Participant, or if exchanged for Awards that do
not involve Common Stock, shall again immediately become available for Awards
hereunder. The Committee may from time to time adopt and observe such
procedures concerning the counting of shares against the Plan maximum as it may
deem appropriate. The Board and the appropriate officers of the Company shall
from time to time take whatever actions are necessary to file any required
documents with governmental authorities, stock exchanges and transaction
reporting systems to ensure that shares of Common Stock are available for
issuance pursuant to Awards.
6. Administration.
(a) This Plan shall be administered by the Committee.
The Committee shall consist of at least two members of the Board.
(b) Subject to the provisions hereof, the Committee shall
have full and exclusive power and authority to administer this Plan
and to take all actions that are specifically contemplated hereby or
are necessary or appropriate in connection with the administration
hereof. The Committee shall also have full and exclusive power to
interpret this Plan and to adopt such rules, regulations and
guidelines for carrying out this Plan as it may deem necessary or
proper, all of which powers shall be exercised in the best interests
of the Company and in keeping with the objectives of this Plan. The
Committee may, in its discretion, provide for the extension of the
exercisability of an Award, accelerate the vesting or exercisability
of an Award, eliminate or make less restrictive any restrictions
contained in an Award, waive any restriction or other provision of
this Plan or an Award or otherwise amend or modify an Award in any
manner that is either (i) not adverse to the Participant to whom such
Award was granted or (ii) consented to by such Participant. The
Committee may make an award to an individual who it expects to become
an Employee within the next six months, provided that such award shall
be subject to the individual actually becoming an Employee within such
time period. The Committee may correct any defect or supply any
omission or reconcile any inconsistency in this Plan or in any Award
in the manner and to the extent the Committee deems necessary or
desirable to further the Plan purposes. Any decision of the Committee
in the interpretation and administration of this Plan shall lie within
its sole and absolute discretion and shall be final, conclusive and
binding on all parties concerned.
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<PAGE> 5
(c) No member of the Committee or officer of the Company
to whom the Committee has delegated authority in accordance with the
provisions of Section 7 of this Plan shall be liable for anything done
or omitted to be done by him or her, by any member of the Committee or
by any officer of the Company in connection with the performance of
any duties under this Plan, except for his or her own willful
misconduct or as expressly provided by statute.
7. Delegation of Authority. The Committee may delegate
to the Chief Executive Officer and to other senior officers of the Company its
duties under this Plan pursuant to such conditions or limitations as the
Committee may establish.
8. Awards.
(a) The Committee shall determine the type or types of
Awards to be made under this Plan and shall designate from time to
time the individuals who are to be the recipients of Awards. Each
Award may be embodied in an Award Agreement, which shall contain such
terms, conditions and limitations as shall be determined by the
Committee in its sole discretion and shall be signed by the
Participant to whom the Award is made and by an Authorized Officer for
and on behalf of the Company. Awards may consist of those listed in
this Section 8(a) and may be granted singly, in combination or in
tandem. Awards may also be made in combination or in tandem with, in
replacement of, or as alternatives to, grants or rights under this
Plan or any other employee plan of the Company or any of its
Subsidiaries, including the plan of any acquired entity. An Award may
provide for the grant or issuance of additional, replacement or
alternative Awards upon the occurrence of specified events, including
the exercise of the original Award granted to a Participant. All or
part of an Award may be subject to conditions established by the
Committee, which may include, but are not limited to, continuous
service with the Company and its Subsidiaries, achievement of specific
business objectives, increases in specified indices, attainment of
specified growth rates and other comparable measurements of
performance. Upon the termination of employment by a Participant who
is an Employee, any unexercised, deferred, unvested or unpaid Awards
shall be treated as set forth in the applicable Award Agreement.
(i) Option. An Award may be in the form of an
Option. An Option awarded pursuant to this Plan may consist
of an Incentive Option or a Nonqualified Stock Option. The
price at which shares of Common Stock may be purchased upon
the exercise of an Option shall be not less than the Fair
Market Value of the Common Stock on the date of grant.
Subject to the foregoing provisions, the terms, conditions and
limitations applicable to any Option awarded pursuant to this
Plan, including the term of any Option and the date or dates
upon which it becomes exercisable, shall be determined by the
Committee.
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<PAGE> 6
(ii) SAR. An Award may be in the form of an SAR.
The terms, conditions and limitations applicable to any SAR
awarded pursuant to this Plan, including the term of any SAR
and the date or dates upon which it becomes exercisable, shall
be determined by the Committee.
(iii) Stock Award. An Award may be in the form of
a Stock Award, including the award of Restricted Stock or
conditional stock units. The terms, conditions and
limitations applicable to any Stock Award granted pursuant to
this Plan shall be determined by the Committee.
(iv) Cash Award. An Award may be in the form of a
Cash Award. The terms, conditions and limitations applicable
to any Cash Award granted pursuant to this Plan shall be
determined by the Committee.
(v) Performance Award. Without limiting the type
or number of Awards that may be made under the other
provisions of this Plan, an Award may be in the form of a
Performance Award. A Performance Award shall be paid, vested
or otherwise deliverable solely on account of the attainment
of one or more pre-established, objective Performance Goals
established by the Committee prior to the earlier to occur of
(x) 90 days after the commencement of such period of service
to which the Performance Goal relates and (y) the lapse of 25%
of such period of service (as scheduled in good faith at the
time the goal is established), and in any event while the
outcome is substantially uncertain. A Performance Goal is
objective if a third party having knowledge of the relevant
facts could determine whether the goal is met. Such a
Performance Goal may be based on one or more business criteria
that apply to the individual, one or more business units of
the Company, or the Company as a whole, and may include one or
more of the following: increased revenue; net income; earnings
before interest, taxes, depreciation and amortization; other
earnings measures; economic value added; cash flow measures;
stock price; market share; return on equity or capital; return
on revenue measures; costs; oil and gas volumes; petroleum
reserve measures and safety and environmental performance
measures. Unless otherwise stated, such a Performance Goal
need not be based upon an increase or positive result under a
particular business criterion and could include, for example,
maintaining the status quo or limiting economic losses
(measured, in each case, by reference to specific business
criteria). In interpreting Plan provisions applicable to
Performance Goals and Performance Awards, it is the intent of
the Plan to conform with the standards of Section 162(m) of
the Code and Treasury Regulation Section 1.162- 27(e)(2)(i),
and the Committee in establishing such goals and interpreting
the Plan shall be guided by such provisions. Prior to the
payment of any compensation based on the achievement of
Performance Goals, the Committee must certify in writing that
applicable Performance Goals and any of the material terms
thereof were, in fact, satisfied. Subject to the foregoing
provisions, the terms,
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<PAGE> 7
conditions and limitations applicable to any Performance
Awards made pursuant to this Plan shall be determined by the
Committee.
(b) The following limitations shall apply to any
Award made hereunder:
(i) no Participant may be granted, during any one
calendar year period, Awards consisting of Options or SARs
that are exercisable for more than 250,000 shares of Common
Stock;
(ii) no Participant may be granted, during any one
calendar year period, Stock Awards covering or relating to
more than 10,000 [__________] shares of Common Stock (the
limitation set forth in this clause (ii), together with the
limitation set forth in clause (i) above, being hereinafter
collectively referred to as the "Stock Based Awards
Limitations"); and
(iii) no Participant may be granted Awards
consisting of cash or in any other form permitted under this
Plan (other than Awards consisting of Options or SARs or
otherwise consisting of shares of Common Stock or units
denominated in such shares) in respect of any one calendar
year period having a value determined on the date of grant in
excess of $2,000,000 [__________].
(c) Awards that are issued in substitution for an award
previously held by a Company employee by reason of his employment by
PennzEnergy Company, the Company's former parent, when such Awards are
issued in connection with the separation of the Company from
PennzEnergy Company, shall not be subject to the limitations in
Section 8(b), nor shall such Awards count against the limitations on
Common Stock available for Awards set forth in Section 5. Any such
Awards issued in substitution for prior awards held under any
PennzEnergy Company plan, program or practice shall be subject to such
terms and conditions as the Committee may establish, but shall in all
events comply with the applicable provisions of that certain Agreement
and Plan of Merger dated as of ___________, 1998 among _____________,
_____________ and _______________ and shall in all respects comply
with the provisions of Exhibit ___ thereto (Employee Benefits
Agreement).
9. Payment of Awards.
(a) General. Payment of Awards may be made in the form
of cash or Common Stock, or a combination thereof, and may include
such restrictions as the Committee shall determine, including, in the
case of Common Stock, restrictions on transfer and forfeiture
provisions. If payment of an Award is made in the form of Restricted
Stock, the applicable Award Agreement relating to such shares shall
specify whether they are to be issued at the beginning or end of the
Restriction Period. In the event that shares of Restricted Stock are
to be issued at the beginning of the Restriction Period, the
certificates evidencing such shares
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<PAGE> 8
(to the extent that such shares are so evidenced) shall contain
appropriate legends and restrictions that describe the terms and
conditions of the restrictions applicable thereto. In the event that
shares of Restricted Stock are to be issued at the end of the
Restricted Period, the right to receive such shares shall be evidenced
by book entry registration or in such other manner as the Committee
may determine.
(b) Deferral. With the approval of the Committee,
amounts payable in respect of Awards may be deferred and paid either
in the form of installments or as a lump-sum payment. The Committee
may permit selected Participants to elect to defer payments of some or
all types of Awards in accordance with procedures established by the
Committee. Any deferred payment of an Award, whether elected by the
Participant or specified by the Award Agreement or by the Committee,
may be forfeited if and to the extent that the Award Agreement so
provides.
(c) Dividends, Earnings and Interest. Rights to
dividends or Dividend Equivalents may be extended to and made part of
any Award consisting of shares of Common Stock or units denominated in
shares of Common Stock, subject to such terms, conditions and
restrictions as the Committee may establish. The Committee may also
establish rules and procedures for the crediting of interest and other
earnings on deferred cash payments and on Dividend Equivalents for
Awards consisting of shares of Common Stock or units denominated in
shares of Common Stock.
(d) Substitution of Awards. At the discretion of the
Committee, a Participant may be offered an election to substitute an
Award for another Award or Awards of the same or different type.
10. Option Exercise. The price at which shares of
Common Stock may be purchased under an Option shall be paid in full at the time
of exercise in cash or, if elected by the optionee, the optionee may purchase
such shares by means of tendering Common Stock or surrendering another Award,
including Restricted Stock, valued at Fair Market Value on the date of
exercise, or any combination thereof. The Committee shall determine acceptable
methods for Participants to tender Common Stock or other Awards; provided that
any Common Stock that is or was the subject of an Award may be so tendered only
if it has been held by the Participant for six months. The Committee may
provide for procedures to permit the exercise or purchase of such Awards by use
of the proceeds to be received from the sale of Common Stock issuable pursuant
to an Award. Unless otherwise provided in the applicable Award Agreement, in
the event shares of Restricted Stock are tendered as consideration for the
exercise of an Option, a number of the shares issued upon the exercise of the
Option, equal to the number of shares of Restricted Stock used as consideration
therefor, shall be subject to the same restrictions as the Restricted Stock so
submitted
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<PAGE> 9
as well as any additional restrictions that may be imposed by the Committee.
The Committee may adopt additional rules and procedures regarding the exercise
of Options from time to time, provided that such rules and procedures are not
inconsistent with the provisions of this paragraph.
11. Taxes. The Company shall have the right to deduct
applicable taxes from any Award payment and withhold, at the time of delivery
or vesting of cash or shares of Common Stock under this Plan, an appropriate
amount of cash or number of shares of Common Stock or a combination thereof for
payment of taxes required by law or to take such other action as may be
necessary in the opinion of the Company to satisfy all obligations for
withholding of such taxes. The Committee may also permit withholding to be
satisfied by the transfer to the Company of shares of Common Stock theretofore
owned by the holder of the Award with respect to which withholding is required.
If shares of Common Stock are used to satisfy tax withholding, such shares
shall be valued based on the Fair Market Value when the tax withholding is
required to be made. The Committee may provide for loans, on either a short
term or demand basis, from the Company to a Participant to permit the payment
of taxes required by law.
12. Amendment, Modification, Suspension or Termination.
The Board may amend, modify, suspend or terminate this Plan for the purpose of
meeting or addressing any changes in legal requirements or for any other
purpose permitted by law, except that (i) no amendment or alteration that would
adversely affect the rights of any Participant under any Award previously
granted to such Participant shall be made without the consent of such
Participant and (ii) no amendment or alteration shall be effective prior to its
approval by the stockholders of the Company to the extent such approval is
required by applicable legal requirements.
13. Assignability. Unless otherwise determined by the
Committee and provided in the Award Agreement, no Award or any other benefit
under this Plan shall be assignable or otherwise transferable, except by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder. The Committee may prescribe and
include in applicable Award Agreements other restrictions on transfer. Any
attempted assignment of an Award or any other benefit under this Plan in
violation of this Section 13 shall be null and void.
14. Adjustments.
(a) The existence of outstanding Awards shall not affect
in any manner the right or power of the Company or its stockholders to
make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the capital stock of the Company
or its business or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock
(whether or not such issue is prior to, on a parity with or junior to
the Common Stock) or the dissolution or liquidation of the Company, or
any sale or transfer of all or any part of its assets or business, or
any other corporate act or proceeding of any kind, whether or not of a
character similar to that of the acts or proceedings enumerated above.
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<PAGE> 10
(b) In the event of any subdivision or consolidation of
outstanding shares of Common Stock, declaration of a dividend payable
in shares of Common Stock or other stock split, then (i) the number of
shares of Common Stock reserved under this Plan, (ii) the number of
shares of Common Stock covered by outstanding Awards in the form of
Common Stock or units denominated in Common Stock, (iii) the exercise
or other price in respect of such Awards, (iv) the appropriate Fair
Market Value and other price determinations for such Awards and (v)
the Stock Based Awards Limitations shall each be proportionately
adjusted by the Board to reflect such transaction. In the event of
any other recapitalization or capital reorganization of the Company,
any consolidation or merger of the Company with another corporation or
entity, the adoption by the Company of any plan of exchange affecting
the Common Stock or any distribution to holders of Common Stock of
securities or property (other than normal cash dividends or dividends
payable in Common Stock), then (i) the number of shares of Common
Stock covered by outstanding Awards in the form of Common Stock or
units denominated in Common Stock, (ii) the exercise or other price in
respect of such Awards, (iii) the appropriate Fair Market Value and
other price determinations for such Awards and (iv) the Stock Based
Awards Limitations shall each be proportionately adjusted by the Board
to reflect such transaction; provided that such adjustments shall only
be such as are necessary to maintain the proportionate interest of the
holders of the Awards and preserve, without exceeding, the value of
such Awards. In the event of a corporate merger, consolidation,
acquisition of property or stock, separation, reorganization or
liquidation, the Board shall be authorized (i) to issue or assume
Awards by means of substitution of new substitute Awards, as
appropriate, for previously issued Awards or to assume previously
issued Awards as part of such adjustment or (ii) to cancel the Awards
that are Options or SARs by giving the holder notice and opportunity
to exercise for 30 days prior to such cancellation. Any substitute
Awards shall not be subject to the limitations on Common Stock
available for Awards under paragraph 5, nor the limitations of Section
8(b).
15. Restrictions. No Common Stock or other form of
payment shall be issued with respect to any Award unless the Company shall be
satisfied based on the advice of its counsel that such issuance will be in
compliance with applicable federal and state securities laws. Certificates
evidencing shares of Common Stock delivered under this Plan (to the extent that
such shares are so evidenced) may be subject to such stop transfer orders and
other restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the Securities and Exchange Commission,
any securities exchange or transaction reporting system upon which the Common
Stock is then listed or to which it is admitted for quotation and any
applicable federal or state securities law. The Committee may cause a legend
or legends to be placed upon such certificates (if any) to make appropriate
reference to such restrictions.
16. Unfunded Plan. Insofar as it provides for Awards of
cash, Common Stock or rights thereto, this Plan shall be unfunded. Although
bookkeeping accounts may be established with respect to Participants who are
entitled to cash, Common Stock or rights thereto under this Plan, any such
accounts shall be used merely as a bookkeeping convenience. The Company shall
not be required to segregate any assets that may at any time be represented by
cash, Common Stock or
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<PAGE> 11
rights thereto, nor shall this Plan be construed as providing for such
segregation, nor shall the Company, the Board or the Committee be deemed to be
a trustee of any cash, Common Stock or rights thereto to be granted under this
Plan. Any liability or obligation of the Company to any Participant with
respect to an Award of cash, Common Stock or rights thereto under this Plan
shall be based solely upon any contractual obligations that may be created by
this Plan and any Award Agreement, and no such liability or obligation of the
Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. Neither the Company nor the Board nor the Committee
shall be required to give any security or bond for the performance of any
obligation that may be created by this Plan.
17. Governing Law. This Plan and all determinations made
and actions taken pursuant hereto, to the extent not otherwise governed by
mandatory provisions of the Code or the securities laws of the United States,
shall be governed by and construed in accordance with the laws of the State of
Delaware.
18. Effectiveness. This Plan shall be effective on
______________, 1998. This Plan and all Awards made hereunder prior to the
next meeting of the Company's stockholders are conditioned upon the approval of
this Plan by the stockholders of the Company at such meeting. If the
stockholders of the Company should fail to so approve this Plan, this Plan
shall terminate and cease to be of any further force or effect and all grants
of Awards hereunder shall be null and void.
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<PAGE> 1
EXHIBIT 10.7
INDEMNIFICATION AGREEMENT
This AGREEMENT is made and entered into this ___ day of
_______, ____, by and between Pennzoil-Quaker State Company, a Delaware
corporation (the "Company"), and [NAME OF DIRECTOR] (the "Indemnitee").
WHEREAS, Indemnitee is a director of the Company;
WHEREAS, the Bylaws of the Company provide certain
indemnification rights to the directors of the Company, and its directors have
been otherwise assured indemnification, as provided by Delaware law;
WHEREAS, in recognition of Indemnitee's need for substantial
protection against personal liability in order to enhance Indemnitee's
continued service to the Company in an effective manner and Indemnitee's
reliance on past assurances of indemnification, the Company wishes to provide
in this Agreement for the indemnification of and the advancing of expenses
(whether partial or complete) to Indemnitee to the fullest extent permitted by
law and as set forth in this Agreement, and, to the extent insurance is
maintained, for the continued coverage of Indemnitee under the Company's
directors' and officers' liability insurance policies;
NOW, THEREFORE, in consideration of the premises, the mutual
covenants and agreements contained herein and Indemnitee's continuing to serve
as a director of the Company, the parties hereto agree as follows:
1. Requirement of Indemnity and Advancement of Expenses. The
Company shall indemnify, and advance Expenses (as this and all other
capitalized words are defined in Section 12) to, Indemnitee to the fullest
extent permitted by applicable law in effect on the date hereof, and to such
greater extent as applicable law may thereafter permit. The rights of
Indemnitee provided under the preceding sentence shall include, but not be
limited to, the right to be indemnified to the fullest extent permitted by
Section 145(b) of the D.G.C.L. in Proceedings by or in the right of the
Company and to the fullest extent permitted by Section 145(a) of the D.G.C.L.
in all other Proceedings.
2. Expenses as a Witness or Party. If Indemnitee is, by reason
of his Corporate Status, a witness in or a party to and is successful, on the
merits or otherwise, in any Proceeding, he shall be indemnified against all
Expenses actually and reasonably incurred by him or on his behalf in connection
therewith. If Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to any Matter in such Proceeding,
the Company shall indemnify Indemnitee against all Expenses actually and
reasonably incurred by him or on his behalf relating to each Matter. The
termination of any Matter in such a Proceeding by dismissal, with or without
prejudice, shall be deemed to be a successful result as to such Matter.
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<PAGE> 2
3. Advancement of Expenses. Indemnitee shall be advanced
Expenses within 10 days after requesting them to the fullest extent permitted
by Section 145(e) of the D.G.C.L.
4. Written Request. To obtain indemnification, Indemnitee shall
submit to the Company a written request with such information as is reasonably
available to Indemnitee. The Secretary of the Company shall promptly advise
the Board of Directors of such request.
5. Determination of Entitlement Prior to a Change in Control. If
there has been no Change of Control at the time the request for indemnification
is sent, Indemnitee's entitlement to indemnification shall be determined in
accordance with Section 145(d) of the D.G.C.L. If entitlement to
indemnification is to be determined by Independent Counsel, the Company shall
furnish notice to Indemnitee within 10 days after receipt of the request for
indemnification, specifying the identity and address of Independent Counsel.
The Indemnitee may, within 14 days after receipt of such written notice of
selection, deliver to the Company a written objection to such selection. Such
objection may be asserted only on the ground that the Independent Counsel so
selected does not meet the requirements of Independent Counsel and the
objection shall set forth with particularity the factual basis of such
assertion. If there is an objection to the selection of Independent Counsel,
either the Company or Indemnitee may petition the Court of Chancery of the
State of Delaware or any other court of competent jurisdiction for a
determination that the objection is without a reasonable basis and/or for the
appointment of Independent Counsel selected by the Court.
6. Determination of Entitlement After a Change in Control. If
there has been a Change of Control at the time the request for indemnification
is sent, Indemnitee's entitlement to indemnification shall be determined in a
written opinion by Independent Counsel selected by Indemnitee. Indemnitee
shall give the Company written notice advising of the identity and address of
the Independent Counsel so selected. The Company may, within 7 days after
receipt of such written notice of selection, deliver to the Indemnitee a
written objection to such selection. Indemnitee may, within 5 days after the
receipt of such objection from the Company, submit the name of another
Independent Counsel and the Company may, within 7 days after receipt of such
written notice of selection, deliver to the Indemnitee a written objection to
such selection. Any objection is subject to the limitations in Section 5.
Indemnitee may petition the Court of Chancery of the State of Delaware or any
other Court of competent jurisdiction for a determination that the Company's
objection to the first and/or second selection of Independent Counsel is
without a reasonable basis and/or for the appointment as Independent Counsel of
a person selected by the Court.
7. Presumption and Deemed Determination. If a Change of Control
shall have occurred before the request for indemnification is sent by
Indemnitee, Indemnitee shall be presumed (except as otherwise expressly
provided in this Agreement) to be entitled to indemnification upon submission
of a request for indemnification in accordance with Section 4 of this
Agreement, and thereafter the Company shall have the burden of proof to
overcome the presumption in reaching a determination contrary to the
presumption. The presumption shall be used by Independent Counsel as a basis
for a determination of entitlement to indemnification unless the Company
provides
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<PAGE> 3
information sufficient to overcome such presumption by clear and convincing
evidence or the investigation, review and analysis of Independent Counsel
convinces him by clear and convincing evidence that the presumption should not
apply.
Except in the event that the determination of entitlement to
indemnification is to be made by Independent Counsel, if the person or persons
empowered under Section 5 or 6 of this Agreement to determine entitlement to
indemnification shall not have made and furnished to Indemnitee in writing a
determination within 60 days after receipt by the Company of the request
therefor, the requisite determination of entitlement to indemnification shall
be deemed to have been made and Indemnitee shall be entitled to such
indemnification unless Indemnitee knowingly misrepresented a material fact in
connection with the request for indemnification or such indemnification is
prohibited by law. The termination of any Proceeding or of any Matter therein,
by judgment, order, settlement or conviction, or upon a plea of nolo contendere
or its equivalent, shall not (except as otherwise expressly provided in this
Agreement) of itself adversely affect the right of Indemnitee to
indemnification or create a presumption that Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company, or with respect to any criminal Proceeding,
that Indemnitee had reasonable cause to believe that his conduct was unlawful.
8. Fees and Expenses of Counsel. The Company shall pay any and
all reasonable fees and expenses of Independent Counsel incurred acting
pursuant to this Agreement and in any proceeding to which it is a party or
witness in respect of its investigation and written report and shall pay all
reasonable fees and expenses incident to the procedures in which such
Independent Counsel was selected or appointed. No Independent Counsel may
serve if a timely objection has been made to his selection until a Court has
determined that such objection is without a reasonable basis.
9. Judicial Determination. In the event that (i) a determination
is made pursuant to Section 5 or 6 that Indemnitee is not entitled to
indemnification under this Agreement, (ii) advancement of Expenses is not
timely made pursuant to Section 3 of this Agreement, (iii) Independent Counsel
has not made and delivered a written opinion determining the request for
indemnification (a) within 90 days after being appointed by the Court, or (b)
within 90 days after objections to his selection have been overruled by the
Court, or (c) within 90 days after the time for the Company or Indemnitee to
object to his selection, or (iv) payment of indemnification is not made within
5 days after a determination of entitlement to indemnification has been made or
deemed to have been made pursuant to Section 5, 6 or 7 of this Agreement,
Indemnitee shall be entitled to an adjudication in an appropriate court of the
State of Delaware, or in any other court of competent jurisdiction, of his
entitlement to such indemnification or advancement of Expenses. In the event
that a determination shall have been made that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section shall be conducted in all respects as a de novo trial on the
merits and Indemnitee shall not be prejudiced by reason of that adverse
determination. If a Change of Control shall have occurred, in any judicial
proceeding commenced pursuant to this Section, the Company shall have the
burden of proving that Indemnitee is not entitled to indemnification or
advancement of Expenses, as the case may be. If a
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<PAGE> 4
determination shall have been made or deemed to have been made that Indemnitee
is entitled to indemnification, the Company shall be bound by such
determination in any judicial proceeding commenced pursuant to this Section 9,
or otherwise, unless Indemnitee knowingly misrepresented a material fact in
connection with the request for indemnification, or such indemnification is
prohibited by law.
The Company shall be precluded from asserting in any judicial
proceeding commenced pursuant to this Section 9 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Company is bound by all provisions of this
Agreement. In the event that Indemnitee, pursuant to this Section 9, seeks a
judicial adjudication to enforce his rights under, or to recover damages for
breach of, this Agreement, Indemnitee shall be entitled to recover from the
Company, and shall be indemnified by the Company against, any and all Expenses
actually and reasonably incurred by him in such judicial adjudication, but only
if he prevails therein. If it shall be determined in such judicial
adjudication that Indemnitee is entitled to receive part but not all of the
indemnification or advancement of Expenses sought, the Expenses incurred by
Indemnitee in connection with such judicial adjudication or arbitration shall
be appropriately prorated.
10. Non-Exclusivity. The rights of indemnification and to receive
advancement of Expenses as provided by this Agreement shall not be deemed
exclusive of any other rights to which Indemnitee may at any time be entitled
under applicable law, the Certificate of Incorporation, the By-laws, any
agreement, a vote of stockholders or a resolution of directors, or otherwise.
No amendment, alteration or repeal of this Agreement or any provision hereof
shall be effective as to any Indemnitee for acts, events and circumstances that
occurred, in whole or in part, before such amendment, alteration or repeal.
The provisions of this Agreement shall continue as to an Indemnitee whose
Corporate Status has ceased.
11. Severability. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby; and, to the
fullest extent possible, the provisions of this Agreement shall be construed so
as to give effect to the intent manifested by the provision held invalid,
illegal or unenforceable.
12. Definitions. For purposes of this Agreement:
"Change of Control" means a change in control of the Company
after the date hereof in any one of the following circumstances (1) there shall
have occurred an event required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Securities Exchange Act of 1934
(the "Act"), whether or not the Company is then subject to such reporting
requirement; (2) any "person" (as such term is used in Section 13(d) and 14(d)
of the Act) shall have become the "beneficial owner" (as defined in Rule 13d-3
under the Act), directly or indirectly, of securities of the Company
representing 40% or more of the combined voting power of the Company's then
outstanding voting
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<PAGE> 5
securities without prior approval of at least two-thirds of the members of the
Board of Directors in office immediately prior to such person attaining such
percentage interest; (3) the Company is a party to a merger, consolidation,
sale of assets or other reorganization, or a proxy contest, as a consequence of
which members of the Board of Directors in office immediately prior to such
transaction or event constitute less than a majority of the Board of Directors
thereafter; (4) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (including for
this purpose any new director whose election or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of such
period) cease for any reason to constitute at least a majority of the Board of
Directors.
"Corporate Status" describes the status of a person who (a) is
or was a director, officer or employee of the Company, or is or was serving at
the request of the Company as a director, officer or employee of another
Company, partnership, joint venture, trust or other enterprise, in each case
which is controlled by the Company, or (b) is or was serving, at the written
request of the Company or pursuant to an agreement in writing with the Company
which request or agreement provides for indemnification under these By-laws, as
a director, officer or employee of another Company, partnership, joint venture,
trust or other enterprise not controlled by the Company, provided that if such
written request or agreement referred to in this clause (b) provides for a
lesser degree of indemnification by the Company than that provided pursuant to
this Agreement, the provisions contained in or made pursuant to such written
request or agreement shall govern. References above to "other enterprises"
shall include employee benefit plans and references to "serving at the request
of the Company" shall include any service as a director, officer or employee
which imposes duties on, or involves services by, such director, officer or
employee with respect to an employee benefit plan or its participants or
beneficiaries.
"D.G.C.L." means the Delaware General Company Law.
"Disinterested Director" means a director of the Company who
is not and was not a party to the Proceeding in respect of which
indemnification is sought by indemnitee.
"Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a witness in
a Proceeding.
"Indemnitee" includes any person who is, or is threatened to
be made, a witness in or a party to any Proceeding as described in Section 1 or
2 of this Agreement by reason of his Corporate Status.
"Independent Counsel" means a law firm, or member of a law
firm, that is experienced in matters of Company law and neither presently is,
nor in the five years previous to his
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selection or appointment has been, retained to represent: (i) the Company or
Indemnitee in any matter material to either such party, or (ii) any other party
to the Proceeding giving rise to a claim for indemnification hereunder.
"Matter" is a claim, a material issue, or a substantial
request for relief.
"Proceeding" includes any action, suit, arbitration, alternate
dispute resolution mechanism, investigation, administrative hearing or any
other proceeding whether civil, criminal, administrative or investigative,
except one initiated by an Indemnitee pursuant to Section 9 of this Agreement
to enforce his rights under this Agreement.
13. Notices. Any communication required or permitted to the
Company under this Agreement shall be addressed to the Secretary of the Company
and any such communication to Indemnitee shall be addressed to his home address
unless he specifies otherwise and shall be personally delivered or delivered by
overnight mail delivery.
14. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company director or officer.
15. Waiver. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
16. Subrogation. In the event of payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to
bring suit to enforce such rights; provided however, that the Company shall not
enforce any of such rights in any manner or at any time as would prevent or
delay payment to Indemnitee of all amounts owing to him.
17. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors (including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
or assets of the Company), assigns, spouses, heirs, executors, administrators
and personal and legal representatives.
18. Effective Date. This Agreement shall be effective as of the
date hereof and shall apply to any claim for indemnification by the Indemnitee
on or after such date.
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<PAGE> 7
19. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed in such state without giving
effect to the principles of conflicts of laws thereof.
20. Captions; Headings. The captions and headings appearing
herein are included solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date set forth above.
PENNZOIL-QUAKER STATE COMPANY
By:
----------------------------------
Name:
Title:
----------------------------------
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<PAGE> 1
EXHIBIT 10.8
QUAKER STATE CORPORATION
RETENTION PAY PLAN
1. PURPOSE. The purpose of the Retention Pay Plan (the "Plan") is to
secure for Quaker State Corporation ("QSC") and its subsidiaries (collectively,
the "COMPANY") the continued services of key employees through the effective
date (the "CLOSING DATE") of the proposed merger between the Company, Pennzoil
Company ("PENNZOIL"), Pennzoil Products Company ("DOWNSTREAM"), which is to own
all of Pennzoil's motor oil, refined products, industrial specialties business
and fast lube businesses and which is to be spun off to the shareholders of
Pennzoil prior to the merger, and a newly formed subsidiary of Downstream,
pursuant to the Agreement and Plan of Merger dated as of April 14, 1998 (the
"MERGER AGREEMENT").
2. ANNUAL BONUS. Each employee who is eligible to participate in any of
the Company's Management Incentive Plan, New Quaker State Q Cash Plan or
business unit performance program who remains in the Company's, Downstream's or
Pennzoil's employ through December 31, 1998 shall receive an annual bonus (in
lieu of and not in addition to any amount otherwise payable as an annual bonus)
in an amount equal to 150% of the target performance bonus for 1998 for such
employee under the program applicable to such employee as of the Closing Date.
Such amount shall be payable without regard to the Company's performance in
respect of 1998 and shall be paid as soon as practicable after the end of
calendar year 1998, but not later than February 15, 1999. For purposes of
determining the "target performance" level under this Section 2, target
performance shall refer to the target performance under the Management Incentive
Plan, the target (also referred to as the EBIT) under the New Quaker State Q
Cash Plan, or the base target under the business unit performance program.
3. SPECIAL RETENTION POOLS. (a) CUSTOMER SERVICE. A special retention
pool shall be established from which retention bonuses will be paid to
individuals designated by QSC and identified in writing to Pennzoil who are
employed in the customer service functions of the Company's business. QSC may
designate subpools within such pool as specified in writing to Pennzoil. Each
designated employee who is still employed by the Company on the Closing Date
shall receive a retention bonus equal to the quotient of (i) the total amount
established for such pool (or subpool, if so designated) [less any amount paid
with respect to such pool (or subpool, if so designated) pursuant to Section
4(b) as a retention bonus under this Section 3] divided by (ii) the aggregate
number of listed customer service employees remaining eligible to participate in
the pool (or subpool, if so designated) on the Closing Date. If a subpool is
designated, then individuals designated for participation in the subpool shall
only receive benefits under this paragraph by reference to the subpool and not
the pool.
(b) INFORMATION TECHNOLOGY. A special retention pool shall be
established from which retention bonuses will be paid to individuals designated
by QSC and identified in writing to Pennzoil who are employed in the information
technology functions of the Company's business. QSC may designate subpools
within such pool as specified in writing to Pennzoil. Each designated employee
who is still employed by the Company on the Closing Date shall receive a
retention bonus equal to the quotient of (i) the total amount established for
such pool (or subpool, if so designated) [less any amount paid with respect to
such pool (or subpool, if so designated) pursuant to Section 4(b) as a
<PAGE> 2
retention bonus under this Section 3] divided by (ii) the aggregate number of
listed information technology employees remaining eligible to participate in the
pool (or subpool, if so designated) on the Closing Date. If a subpool is
designated, then individuals designated for participation in the subpool shall
only receive benefits under this paragraph by reference to the subpool and not
the pool.
(c) FINANCE. A special retention pool shall be established from which
retention bonuses will be paid to individuals designated by QSC and identified
in writing to Pennzoil who are employed in the finance functions of the
Company's business. QSC may designate subpools within such pool as specified in
writing to Pennzoil. Each designated employee who is still employed by the
Company on the Closing Date shall receive a retention bonus equal to the
quotient of (i) the total amount established for such pool (or subpool, if so
designated) [less any amount paid with respect to such pool (or subpool if so
designated) pursuant to Section 4(b) as a retention bonus under this Section 3]
divided by (ii) the aggregate number of listed finance employees remaining
eligible to participate in the pool (or subpool, if so designated) on the
Closing Date. If a subpool is designated, then individuals designated for
participation in the subpool shall only receive benefits under this paragraph by
reference to the subpool and not the pool.
(d) OPERATIONS. A special retention pool shall be established from
which retention bonuses will be paid to individuals designated by QSC and
identified in writing to Pennzoil who are employed in the operations functions
of the Company's business. QSC may designate subpools within such pool as
specified in writing to Pennzoil. Each designated employee who is still employed
by the Company on the Closing Date shall receive a retention bonus equal to the
quotient of (i) the total amount established for such pool (or subpool, if so
designated) [less any amount paid with respect to such pool (or subpool, if so
designated) pursuant to Section 4(b) as a retention bonus under this Section 3]
divided by (ii) the aggregate number of listed operations employees remaining
eligible to participate in the pool (or subpool, if so designated) on the
Closing Date. If a subpool is designated, then individuals designated for
participation in the subpool shall only receive benefits under this paragraph by
reference to the subpool and not the pool.
(e) Q LUBE. A special retention pool shall be established from which
retention bonuses will be paid to individuals designated by QSC and identified
in writing to Pennzoil who are employed in the Q Lube functions of the Company's
business. QSC may designate subpools within such pool as specified in writing to
Pennzoil. Each designated employee who is still employed by the Company on the
Closing Date shall receive a retention bonus equal to the quotient of (i) the
total amount established for such pool (or subpool, if so designated) [less any
amount paid with respect to such pool (or subpool, if so designated) pursuant to
Section 4(b) as a retention bonus under this Section 3] divided by (ii) the
aggregate number of listed Q Lube employees remaining eligible to participate in
the pool (or subpool, if so designated) on the Closing Date. If a subpool is
designated, then individuals designated for participation in the subpool shall
only receive benefits under this paragraph by reference to the subpool and not
the pool.
(f) ADDITIONAL POOLS. The Organization and Compensation Committee of
QSC's Board of Directors may establish such additional retention pools or
subpools in the aggregate for such other identified classes or groups of
employees as such committee determines to be appropriate and consistent with the
objectives of this Plan. The timing of and conditions (if any) with respect to
payments from such pool(s) or subpool(s) shall be the same as for the pools or
subpools described
-2-
<PAGE> 3
above. Such pool(s) or subpool(s) and the individuals eligible for bonuses under
such pool(s) or subpool(s) shall be identified in writing to Pennzoil.
(g) TERMINATION OF MERGER AGREEMENT. In the event that the Merger
Agreement is terminated in accordance with the terms thereof, the retention
bonus provided for in this Section 3 shall be payable, except in circumstances
where the Company is required to pay a termination fee to Pennzoil under such
Merger Agreement, as promptly as is practicable following the date of such
termination.
(h) POOL AMOUNTS. The amount of any specific retention pools to be
established hereunder shall be determined by the Company in consultation with
Downstream and shall be subject to the aggregate total limitation set forth in
the Merger Agreement.
(i) PAYMENT OF POOLS. The amount of any special retention pool shall be
paid in a single sum cash payment by check as soon as administratively
practicable after the Closing Date.
4. TERMINATION ENHANCEMENTS. (a) ALL EMPLOYEES. The severance benefits
payable under the Quaker State Corporation Severance Plan, as amended and
restated effective September 30, 1998 (the "Severance Plan"), which provides two
weeks of pay for each year of service, shall be increased by adding four weeks
of severance pay to the end of the total period of pay under the Severance Plan
with respect to each employee otherwise entitled to receive severance benefits
under the Severance Plan. Such additional amount shall be calculated and paid in
accordance with the terms of the Company's Severance Plan as if such amount were
payable under that Plan.
During such additional period of severance, such employee shall be
entitled to continue to receive the same medical and dental benefits that he and
his eligible dependents were receiving at the time he became entitled to receive
severance benefits under the Company's Severance Plan. Such medical and dental
expense will be at the Company's expense, or if the merger occurs Downstream's
expense, to the extent that the Company previously paid the cost for such
benefits. Any medical or dental expenses required to be paid by the employee
shall be paid on a pre-tax or after-tax basis as provided by the terms of the
applicable medical or dental plan. If, during such period of coverage, the
employee or one or more of his dependents becomes covered under another group
medical or dental plan which covers all preexisting conditions of the employee
and/or such dependent(s), such person or persons shall not be entitled to such
continued medical or dental coverage by the medical and dental plans of the
Company or Downstream, if the merger occurs, as applicable. The employee or
dependent(s) shall have the duty to advise the Company or Downstream prior to
the effective date of such alternate coverage and any failure to do so shall be
rectified pursuant to Section 12. The continued medical and dental coverage
provided under this paragraph 4 shall not be provided in lieu of or counted
against the 18 month continuation period (or 29 month continuation period if the
employee or dependent is disabled within the meaning of the Social Security Act)
provided under the Federal Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA"). Upon the expiration of such coverage, the employee and his
eligible dependents may elect to continue their medical and dental coverage for
the 18 month (or 29 month) period at their own
-3-
<PAGE> 4
expense pursuant to the terms of the applicable medical or dental plan. During
the entire severance period described in this Section 4(a), the employee will
not be eligible to continue his coverage under the Company's, or Downstream's if
the merger occurs, other welfare benefit plans, including but not limited to
accidental death and dismemberment plan, group life insurance plan, or the
Quaker State Corporation Thrift and Stock Purchase Plan in which he or she is a
participant.
(b) ANNUAL BONUS AND RETENTION PAYMENTS. Any employee who is eligible
to receive an annual bonus under any of the provisions of Section 2 whose
employment is terminated by the Company before December 31, 1998, other than for
Cause, shall receive, as additional severance (and not as a reduction or offset
to any other severance or termination benefits otherwise payable to such
employee), within 10 business days of such employee's termination of employment,
an amount equal to the annual bonus that would have been paid to such employee
under Section 2 had he or she remained employed until December 31, 1998. In
addition, any employee who is eligible to receive a retention bonus under any of
the provisions of Section 3 whose employment is terminated by the Company before
the Closing Date other than for Cause shall receive, as additional severance
(and not as a reduction or offset to any other severance or termination benefits
otherwise payable to such employee), within 10 business days of such employee's
termination of employment, an amount equal to the retention bonus that would
have been paid to such employee under Section 3 (calculated assuming all
employees initially designated to participate in the applicable pool receive
payments thereunder) had he or she remained employed until the Closing Date.
For purposes of this Plan, "Cause" shall mean the termination of
employment by the Company by reason of (i) the employee's willful, negligent, or
repeated failure to perform the material duties of his position (following
reasonable notice and an opportunity to cure) other than by reason of illness,
accident or other physical or mental incapacity; (ii) any willful misconduct or
gross negligence that is injurious to the Company or to any of its employees;
(iii) conviction or plea of nolo contendere/no contest to either (A) a felony or
(B) a misdemeanor involving fraud or moral turpitude; or (iv) failure to follow
the established, reasonable and material policies, standards and regulations of
the Company; provided that if the employee is a party to an employment agreement
with the Company or a subsidiary that provides a definition for "cause" (or
analogous term), then "Cause" shall have the meaning given in such agreement.
Company shall include Downstream if the employee is employed by Downstream
during the term of this Plan.
(c) OUTPLACEMENT SERVICES. All employees who are entitled to receive
severance or termination benefits under the Plan shall also be eligible to
receive the following outplacement services:
(i) workshops on resume writing, interviewing and networking;
(ii) job center access;
(iii) on-site counseling; and
(iv) clinical support.
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<PAGE> 5
QSC shall determine the provider or providers of such services. Such services
shall only be provided for such period of time and in such amounts, in each
case, as determined by QSC to be reasonable for purposes of securing employment.
(d) CONTINUED EMPLOYMENT. The Company shall, subject to Section 9,
provide a commitment of continued employment through but ending on December
31, 1998, to employees of the Company as of the date hereof. Such commitment
shall provide that in the event the Company terminates the affected employee in
a manner that would otherwise entitle such employee to receive severance
benefits under QSC's practices or policies, the Company or, if the merger
occurs, Downstream shall pay the employee his or her base salary through but
ending on December 31, 1998, in addition to (and not as a reduction or offset to
any other severance or termination benefits otherwise payable to such employee)
any severance benefits to which such employee is otherwise entitled.
(e) KEY EMPLOYEES. The Company recognizes the important goal of
retaining certain key employees and in furtherance of that goal desires to
provide an additional financial incentive to remain with the Company. Therefore,
in addition to (and not in lieu of) any other benefits being provided to such
employees, the Company or, if the merger occurs, Downstream shall pay such
employees who are selected by the Company a retention bonus in the amount of 100
percent of the current annual Base Pay, provided the individual (i) maintains
the confidentiality of such additional retention program in accordance with this
Section 4(e), and (ii) remains employed by the Company or, if the merger occurs,
Downstream until the earliest of the following dates:
(1) six months from the Closing Date;
(2) the date the Merger Agreement is terminated; or
(3) the date the employee's job is eliminated for reasons other than
Cause.
Base Pay shall be determined based on the salary in effect on the date
immediately before the event entitling such employee to the bonus specified in
(1) through (3) of this paragraph occurs. Base Pay means the annual base salary
with the Company, including any salary reduction contributions made by him under
a plan or arrangement which is designed to meet the requirements of sections 125
and 401(k) of the Internal Revenue Code of 1986, as amended, or any nonqualified
deferred compensation plan of the Company and excluding any payments made under
this Plan, any bonus, commission, incentive pay, overtime, auto or travel, stock
options or other similar payments or compensation.
Payment of the bonus will be made in a lump-sum cash payment by check
within 10 working days after the employee becomes entitled to payment.
In order to maintain the confidentiality of this program, an employee
may not disclose or discuss any of the terms of this program with any parties
other than the employee's immediate family or legal counsel. An employee may not
assume that any other colleague, associate, supervisor or manager is eligible
for benefits under this program or is privy to the details of this program.
-5-
<PAGE> 6
Violation of this confidentiality restriction is grounds, at QSC's election (or
Downstream's if the merger occurs), for forfeiture of benefits and termination
of employment for Cause.
5. CONDITIONS TO ELIGIBILITY FOR BENEFITS. In order to be eligible for
any benefit under this Plan, the employee must enter into a release and waiver
of claims ("release") or, in connection with the employee's receipt of any
termination enhancements provided under Section 4, a separation agreement
("agreement"). Such release or agreement shall be in the form and pursuant to
the procedures reasonably established by the Plan Administrator. The employee
will be required to enter into such a release or agreement each time the
employee is to receive, and as a condition for receiving, any benefit under the
Plan. Each subsequent release or agreement, if any, shall be in addition to, and
shall not supersede, any previous release or agreement.
6. DEATH OF EMPLOYEE. If the employee dies before receipt of the
benefits to which he or she is entitled under the Plan, such benefits shall be
paid to the employee's beneficiary. Beneficiary means the spouse (within the
meaning of the state law where the employee resides) of the employee, if any,
and if none, the lineal descendants, per stirpes, of the employee. If any
employee dies without either a spouse or lineal descendants then surviving,
there shall be no beneficiary and no benefits shall be payable under the Plan.
Spouse shall not include a common law spouse unless any and all documentation of
the common law marriage required by the Plan Administrator, in his or her
discretion, as permitted by the applicable state law, his been filed with the
Plan Administrator and the Plan Administrator determines in his or her sole and
absolute discretion that a common law marriage exists pursuant to the laws of
the State in which the participant resided at the time of his or her death.
7. ADMINISTRATION. The Plan Administrator of this Plan will be the QSC
Senior Vice President, Human Resources until the Closing Date and then the
corresponding officer of Downstream responsible for Human Resources. The Plan
Administrator shall have the power to make reasonable rules and regulations
required in the administration of the Plan, to make all determinations necessary
for the Plan's administration, except those determinations which the Plan
requires others to make. The Plan Administrator shall have full and complete
authority to construe and interpret the Plan wherever necessary to carry out its
intent and purpose and to facilitate its administration. In the exercise of such
discretionary powers, the Plan Administrator shall treat all employees uniformly
and equitably under the Plan. The Plan Administrator shall have the exclusive
right to make all determinations hereunder relating to the participation and
eligibility of employees for benefits, including, but not limited to, making
determinations as to eligibility for benefits, the amount of benefits payable,
the time at which benefits cease to be payable, and other comparable issues, and
the Plan Administrator's good faith interpretation of the Plan shall be binding
and conclusive on all persons. Any dispute as to eligibility, type, amount, or
duration of benefits under the Plan shall be resolved by the Plan Administrator
under and pursuant to the Plan, in his or her sole and absolute discretion, and
his or her decision of the dispute shall be binding and final on all parties to
the dispute. No action may be brought for benefits provided under this Plan or
any amendment or novation thereof, or to enforce any right hereunder, until
after the claim has been submitted to the Plan Administrator as provided above
and the appeal rights under Section 11 of this Plan have been exhausted.
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<PAGE> 7
8. AMENDMENT AND TERMINATION. This Plan may not be terminated, modified
or amended in any manner that reduces the benefits or rights of any person who
is eligible to receive benefits hereunder.
This Plan shall automatically terminate after payment of all benefits
payable to all employees or their beneficiaries or dependents under the Plan.
9. CONTINUED EMPLOYMENT. Nothing contained in this Plan shall give any
employee the right to be retained in the employ of the Company or Downstream or
to interfere with the right of the Company or Downstream, if the merger occurs,
to discharge any employee at any time for any reason.
10. WITHHOLDING. All amounts payable pursuant to the terms of this Plan
shall be subject to reduction for any and all applicable federal, state or local
income or employment taxes or any other withholdings required to be made
therefrom at law.
11. CLAIMS REVIEW PROCEDURE. If an employee, his or her dependent or
beneficiary objects to the Plan Administrator's determination of the amount of
benefits to which he or she is entitled under the Plan, such person may, within
60 days following denial of the benefits for which he or she has applied, file
with the Plan Administrator a written claim objecting to the determination of
the amount of his or her benefits payable under the Plan. The claimant or his or
her representative may review Plan documents which relate to the claim and may
submit written comments to the Plan Administrator. The Plan Administrator shall
render a written decision concerning the claim not later than 90 days after
receipt of such claim. If the claim is denied, in whole or in part, such
decision shall include (i) the reasons for the denial; (ii) a reference to the
Plan provision constituting the basis for the denial; (iii) a description of any
additional material or information necessary for the claimant to perfect his or
her claim; (iv) an explanation as to why such information or material is
necessary; and (v) an explanation of the Plan's appeal procedure. The claim
shall be deemed to be denied if no response is received by the end of the review
period. The claimant may file with the Plan Administrator a written notice of
appeal of the Plan Administrator's decision not later than 60 days after
receiving the Plan Administrator's written decision. The Plan Administrator
shall render a written decision on the appeal not later than 60 days after the
appeal. Such decision shall include the specific reasons for the decision,
including a reference to the Plan's specific provision where appropriate. The
Plan Administrator may extend the foregoing 90-day and 60-day periods during
which he or she must respond to the claimant by up to an additional 90 and 60
days, respectively, if special circumstances beyond his or her control so
require; provided that notice of such extension is given to the claimant prior
to the expiration of the initial 90-day or 60-day period, as the case may be.
12. RIGHT OF RECOVERY. The Company or Downstream, as applicable, shall
have the right to recover any payment made to an employee in excess of the
amount to which the employee is entitled under the terms of this Plan. Further,
the medical and dental plans of the Company or Downstream, as applicable, shall
have the right to recover any payment made in excess of the amount properly
payable under such plans after the employee or any of his or her dependents
become covered by any other group medical or dental plans. Such recovery may be
from the employee, the dependent, or any insurer or other organization or entity
thereby enriched.
-7-
<PAGE> 8
13. INDEMNIFICATION OF PLAN ADMINISTRATOR. To the extent permitted by
law, the Company or Downstream shall indemnify any person acting on its behalf
in fulfilling the duties of Plan Administrator against any and all claims,
losses, damages, expenses, or liabilities arising from his or her
responsibilities in connection with the Plan, unless the same is due to gross
negligence or intentional misconduct or such indemnification is prohibited by
the Employee Retirement Income Security Act of 1974, as amended.
14. SPENDTHRIFT PROVISIONS. No benefit, right or interest of any person
hereunder shall be subject to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge, seizure, attachment, or legal,
equitable, or other process, or be liable for, or subject to, the debts,
liabilities, or other obligations of such person, except as expressly authorized
or required by the Plan or otherwise required by a law enforceable with respect
to the Plan as determined in the sole and absolute discretion of the Plan
Administrator.
15. GOVERNING LAW. To the extent not preempted by federal law, the
provisions of the Plan shall be construed, enforced, and administered according
to the laws of the State of Texas without regard to its conflict of laws
principles.
16. SEVERABILITY. If any provision of the Plan is held invalid or
unenforceable, its invalidity or unenforceability shall not affect any other
provisions of the Plan and the Plan shall be construed and enforced as if such
provision had not been included herein.
17. CAPTIONS. The captions contained herein are inserted only as a
matter of convenience and for reference and in no way define, limit, enlarge or
describe the scope or intent of the Plan, and in no way shall affect the Plan or
the construction of any provisions thereof
18. NO DUPLICATE BENEFITS. No employee shall be entitled to benefits
under the Plan for more than one position. The benefits payable shall be the
highest level of benefits to which the Employee is entitled by virtue of his
title. If an employee becomes entitled to benefits under this Plan (not
including any additional bonus payments) or the Severance Plan of the Company,
such employee shall not also be entitled to severance benefits under a plan
sponsored by Downstream by virtue of the same termination of employment.
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<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF PENNZOIL PRODUCTS COMPANY
(AS OF AUGUST 11, 1998)
<TABLE>
<S> <C>
Atlas Processing Company (Delaware)......................... 100%
Excel Paralubes (Texas General Partnership)............... 50%
Pennzoil Deutschland GmbH Mineralolvertrieb (Germany)....... 100%
Pennzoil Products Australia Company (Nevada)................ 100%
Pennzoil Products Canada Company (Nova Scotia).............. 100%
Pennzoil Products Europe GmbH (Germany)..................... 99%
Pennzoil Products Mediterraneo, S.L. (Spain)................ 100%
Pennzoil Wax Partner Company (Nevada)....................... 100%
Bareco Asia Pacific Pte. Ltd. (Singapore)................. 50%
Bareco Products (South Carolina General Partnership)...... 50%
Bareco International Sales Corporation (U.S. Virgin
Islands).............................................. 100%
UMW Pennzoil Distributors SDN. BHD. (Malaysia).............. 50%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
Proxy Statement/Prospectus included as part of this Registration Statement on
Form S-4.
ARTHUR ANDERSEN LLP
Houston, Texas
August 11, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated March 11, 1998, except as
to the second paragraph to Note 11 which is as of July 10, 1998, relating to the
financial statements of Excel Paralubes, which appears in such Prospectus.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
August 10, 1998
<PAGE> 1
EXHIBITS 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
on Form S-4 of our report dated January 27, 1998, on our audits of the financial
statements and the financial statement schedule of Quaker State Corporation and
subsidiaries as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, which is included in the Annual Report on
Form 10-K. We also consent to the references to our firm under the captions
"Experts."
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Dallas, Texas
August 11, 1998
<PAGE> 1
EXHIBIT 24.1
PENNZOIL PRODUCTS COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL PRODUCTS COMPANY, a Delaware corporation
(the "Company"), intends to file with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"), a
Registration Statement on Form S-4, including a proxy statement/prospectus,
with such amendment or amendments thereto, whether pre-effective or
post-effective, including without limitation any registration statement of the
type contemplated by Rule 462(b) of the Act, in each case as may be necessary
or appropriate, together with any and all exhibits and other documents having
relation to said Registration Statement (collectively, the "Registration
Statement"), relating to the registration under the Act of shares of common
stock, par value $.10 per share, of the Company to be issuable in connection
with the Agreement and Plan of Merger, dated as of April 14, 1998, among
Pennzoil Company, a Delaware corporation, the Company, Downstream Merger
Company, a Delaware corporation and wholly owned subsidiary of the Company
("Merger Sub"), and Quaker State Corporation, a Delaware corporation ("Quaker
State"), pursuant which Merger Sub will be merged with and into Quaker State,
with Quaker State surviving as a wholly owned subsidiary of the Company;
NOW, THEREFORE, the undersigned, in his capacity as a director
or officer, or both, as the case may be, of the Company, does hereby appoint
DAVID P. ALDERSON II, JAMES W. SHADDIX and JAMES L. PATE, and each of them
severally, his true and lawful attorneys or attorney with power to act with or
without the others and with full power of substitution and resubstitution, to
execute in his name, place and stead, in his capacity as a director or officer
or both, as the case may be, of the Company, the Registration Statement,
including without limitation any registration statement of the type
contemplated by Rule 462(b) of the Act, and all instruments necessary or
incidental in connection therewith, with such amendment or amendments thereto
in each case as may be necessary or appropriate, together with any and all
exhibits and other documents relating thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith, and to file the
same or cause the same to be filed with the Commission. Each of said attorneys
shall have full power and authority to do and perform in the name and on behalf
of the undersigned, in any and all capacities, every act whatsoever necessary
or desirable to be done to the premises, as fully and to all intents and
purposes as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this
instrument on this 14th day of August, 1998.
/s/ DAVID P. ALDERSON II
-----------------------------
David P. Alderson II
<PAGE> 2
PENNZOIL PRODUCTS COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL PRODUCTS COMPANY, a Delaware corporation
(the "Company"), intends to file with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"), a
Registration Statement on Form S-4, including a proxy statement/prospectus,
with such amendment or amendments thereto, whether pre-effective or
post-effective, including without limitation any registration statement of the
type contemplated by Rule 462(b) of the Act, in each case as may be necessary
or appropriate, together with any and all exhibits and other documents having
relation to said Registration Statement (collectively, the "Registration
Statement"), relating to the registration under the Act of shares of common
stock, par value $.10 per share, of the Company to be issuable in connection
with the Agreement and Plan of Merger, dated as of April 14, 1998, among
Pennzoil Company, a Delaware corporation, the Company, Downstream Merger
Company, a Delaware corporation and wholly owned subsidiary of the Company
("Merger Sub"), and Quaker State Corporation, a Delaware corporation ("Quaker
State"), pursuant which Merger Sub will be merged with and into Quaker State,
with Quaker State surviving as a wholly owned subsidiary of the Company;
NOW, THEREFORE, the undersigned, in his capacity as a director
or officer, or both, as the case may be, of the Company, does hereby appoint
DAVID P. ALDERSON II, JAMES W. SHADDIX and JAMES L. PATE, and each of them
severally, his true and lawful attorneys or attorney with power to act with or
without the others and with full power of substitution and resubstitution, to
execute in his name, place and stead, in his capacity as a director or officer
or both, as the case may be, of the Company, the Registration Statement,
including without limitation any registration statement of the type
contemplated by Rule 462(b) of the Act, and all instruments necessary or
incidental in connection therewith, with such amendment or amendments thereto
in each case as may be necessary or appropriate, together with any and all
exhibits and other documents relating thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith, and to file the
same or cause the same to be filed with the Commission. Each of said attorneys
shall have full power and authority to do and perform in the name and on behalf
of the undersigned, in any and all capacities, every act whatsoever necessary
or desirable to be done to the premises, as fully and to all intents and
purposes as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this
instrument on this 14th day of August, 1998.
/s/ JAMES W. SHADDIX
-----------------------------
James W. Shaddix
<PAGE> 3
PENNZOIL PRODUCTS COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL PRODUCTS COMPANY, a Delaware corporation
(the "Company"), intends to file with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"), a
Registration Statement on Form S-4, including a proxy statement/prospectus,
with such amendment or amendments thereto, whether pre-effective or
post-effective, including without limitation any registration statement of the
type contemplated by Rule 462(b) of the Act, in each case as may be necessary
or appropriate, together with any and all exhibits and other documents having
relation to said Registration Statement (collectively, the "Registration
Statement"), relating to the registration under the Act of shares of common
stock, par value $.10 per share, of the Company to be issuable in connection
with the Agreement and Plan of Merger, dated as of April 14, 1998, among
Pennzoil Company, a Delaware corporation, the Company, Downstream Merger
Company, a Delaware corporation and wholly owned subsidiary of the Company
("Merger Sub"), and Quaker State Corporation, a Delaware corporation ("Quaker
State"), pursuant which Merger Sub will be merged with and into Quaker State,
with Quaker State surviving as a wholly owned subsidiary of the Company;
NOW, THEREFORE, the undersigned, in his capacity as a director
or officer, or both, as the case may be, of the Company, does hereby appoint
DAVID P. ALDERSON II, JAMES W. SHADDIX and JAMES L. PATE, and each of them
severally, his true and lawful attorneys or attorney with power to act with or
without the others and with full power of substitution and resubstitution, to
execute in his name, place and stead, in his capacity as a director or officer
or both, as the case may be, of the Company, the Registration Statement,
including without limitation any registration statement of the type
contemplated by Rule 462(b) of the Act, and all instruments necessary or
incidental in connection therewith, with such amendment or amendments thereto
in each case as may be necessary or appropriate, together with any and all
exhibits and other documents relating thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith, and to file the
same or cause the same to be filed with the Commission. Each of said attorneys
shall have full power and authority to do and perform in the name and on behalf
of the undersigned, in any and all capacities, every act whatsoever necessary
or desirable to be done to the premises, as fully and to all intents and
purposes as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this
instrument on this 14th day of August, 1998.
/s/ JAMES L. PATE
-----------------------------
James L. Pate
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,162
<SECURITIES> 0
<RECEIVABLES> 164,788
<ALLOWANCES> 8,355
<INVENTORY> 193,705
<CURRENT-ASSETS> 408,239
<PP&E> 1,424,824
<DEPRECIATION> 643,518
<TOTAL-ASSETS> 1,553,744
<CURRENT-LIABILITIES> 690,796
<BONDS> 441,524
0
0
<COMMON> 4,148
<OTHER-SE> 280,588
<TOTAL-LIABILITY-AND-EQUITY> 1,553,744
<SALES> 912,199
<TOTAL-REVENUES> 942,411
<CGS> 688,573
<TOTAL-COSTS> 688,573
<OTHER-EXPENSES> 42,759
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,157
<INCOME-PRETAX> 13,475
<INCOME-TAX> 6,829
<INCOME-CONTINUING> 6,646
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,646
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Earnings per share have been omitted from the combined statement of income
because Pennzoil Products Group consists of wholly owned subsidiaries of
Pennzoil and is not a separate legal entity.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 1,010,508
<TOTAL-REVENUES> 1,029,315
<CGS> 795,437
<TOTAL-COSTS> 795,437
<OTHER-EXPENSES> 35,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,104
<INCOME-PRETAX> 5,252
<INCOME-TAX> 3,601
<INCOME-CONTINUING> 1,651
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,651
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>Earnings per share have been omitted from the combined statement of income
because Pennzoil Products Group consists of wholly owned subsidiaries of
Pennzoil and is not a separate legal entity.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,132
<SECURITIES> 0
<RECEIVABLES> 150,992
<ALLOWANCES> 7,689
<INVENTORY> 198,273
<CURRENT-ASSETS> 399,360
<PP&E> 1,411,275
<DEPRECIATION> 621,098
<TOTAL-ASSETS> 1,559,623
<CURRENT-LIABILITIES> 731,316
<BONDS> 453,106
0
0
<COMMON> 4,148
<OTHER-SE> 252,232
<TOTAL-LIABILITY-AND-EQUITY> 1,559,623
<SALES> 1,982,148
<TOTAL-REVENUES> 2,013,160
<CGS> 1,519,155
<TOTAL-COSTS> 1,519,155
<OTHER-EXPENSES> 76,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,780
<INCOME-PRETAX> 5,656
<INCOME-TAX> 6,245
<INCOME-CONTINUING> (589)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (589)
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>Earnings per share have been omitted from the combined statement of income
because Pennzoil Products Group consists of wholly owned subsidiaries of
Pennzoil and is not a separate legal entity.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,797
<SECURITIES> 0
<RECEIVABLES> 127,176
<ALLOWANCES> 7,386
<INVENTORY> 166,264
<CURRENT-ASSETS> 348,087
<PP&E> 1,376,638
<DEPRECIATION> 632,507
<TOTAL-ASSETS> 1,370,499
<CURRENT-LIABILITIES> 548,872
<BONDS> 455,228
0
0
<COMMON> 4,148
<OTHER-SE> 231,593
<TOTAL-LIABILITY-AND-EQUITY> 1,370,499
<SALES> 1,961,316
<TOTAL-REVENUES> 1,968,013
<CGS> 1,544,955
<TOTAL-COSTS> 1,544,955
<OTHER-EXPENSES> 63,257
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,071
<INCOME-PRETAX> (10,292)
<INCOME-TAX> (1,103)
<INCOME-CONTINUING> (9,189)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,189)
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>Earnings per share have been omitted from the combined statement of income
because Pennzoil Products Group consists of wholly owned subsidiaries of
Pennzoil and is not a separate legal entity.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 1,787,067
<TOTAL-REVENUES> 1,807,702
<CGS> 1,409,399
<TOTAL-COSTS> 1,409,399
<OTHER-EXPENSES> 67,386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,816
<INCOME-PRETAX> (77,285)
<INCOME-TAX> (24,043)
<INCOME-CONTINUING> (53,242)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,242)
<EPS-PRIMARY> 0.00<F1>
<EPS-DILUTED> 0.00<F1>
<FN>
<F1>Earnings per share have been omitted from the combined statement of income
because Pennzoil Products Group consists of wholly owned subsidiaries of
Pennzoil and is not a separate legal entity.
</FN>
</TABLE>
<PAGE> 1
QUAKER STATE CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS
FOUR SEASONS HOTEL
120 EAST DELAWARE PLACE
CHICAGO, ILLINOIS 60611
SEPTEMBER 18, 1998 -- 1:00 P.M. C.D.T.
The undersigned stockholder of Quaker State Corporation (the
"Corporation") hereby (1) acknowledges receipt of the Notice of the Special
Meeting of Stockholders of the Corporation, to be held on September 18, 1998, at
1:00 p.m. Central Daylight Time (the "Special Meeting"), at the Four Seasons
Hotel, 120 East Delaware Place, Chicago, Illinois 60611, and the Proxy
Statement in connection therewith and (2) appoints Herbert M. Baum, John D.
Barr and Conrad A. Conrad, or each of them acting individually, each with full
power of substitution, as proxies of the undersigned to vote, as designated
below, at the Special Meeting, and at any adjournments or postponements thereof,
all the shares of Capital Stock of the Corporation which the undersigned would
be entitled to vote, on the matter set out on the reverse side of this card and,
at their discretion, on any other business which may properly come before the
Special Meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
STOCKHOLDER. IF NO DIRECTION IS GIVEN, SUCH SHARES WILL BE VOTED "FOR" ITEM 1
AND IN ACCORDANCE WITH THE JUDGEMENT OF THE PROXIES ON ANY OTHER MATTERS THAT
PROPERLY COME BEFORE THE SPECIAL MEETING.
(Continued and to be signed on the other side)
<PAGE> 2
Please mark
your votes as
indicated in
this example [X]
1. To adopt the Agreement and Plan of Merger, dated as of April 14, 1998,
as amended, among Pennzoil Company, Pennzoil Products Company, Downstream
Merger Company and the Corporation, and the transactions contemplated
thereby.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Signature _____________________ Signature (if held jointly) _________________
Date ______________________, 1998
Please date and sign exactly as your name appears hereon and return in the
enclosed envelope. If acting as attorney, executor, administrator, guardian or
trustee, please so indicated with your full title when signing. If a
corporation or partnership, please sign in full corporate or partnership name,
by duly authorized officer. If shares are held jointly, each stockholder named
should sign.
<PAGE> 1
[QUAKER STATE CORPORATION LETTERHEAD]
- --------------------------------------------------------------------------------
AUGUST 17, 1998
DEAR SHAREOWNERS:
You are cordially invited to attend a Special Meeting of Stockholders of
Quaker State Corporation ("Quaker State") to be held at the Four Seasons Hotel,
120 East Delaware Place, Chicago, Illinois 60611, on September 18, 1998,
starting at 1:00 p.m., local time. The purpose of the Special Meeting is set
forth below and in the accompanying Notice of Special Meeting of Stockholders,
and is described in detail in the accompanying Proxy Statement/Prospectus.
On April 14, 1998, Quaker State entered into an Agreement and Plan of
Merger (as amended, the "Merger Agreement"), with Pennzoil Company ("Pennzoil"),
Pennzoil Products Company ("PPC") and Downstream Merger Company ("Merger Sub"),
pursuant to which Merger Sub will be merged (the "Merger") with and into Quaker
State, with Quaker State surviving as a wholly owned subsidiary of PPC. The
Merger will take place after Pennzoil has consolidated its motor oil, refined
products and fast lube operations under PPC and spun off PPC to its
stockholders. PPC will be renamed "Pennzoil-Quaker State Company" prior to the
Merger.
As a Quaker State shareowner, you will be entitled to receive .8204 of a
share of common stock of Pennzoil-Quaker State Company in exchange for each
share of Quaker State capital stock that you own. You will receive only whole
shares of Pennzoil-Quaker State Company common stock. Cash will be paid instead
of any fractional shares you would otherwise receive.
In order to accomplish the Merger, shareowners of Quaker State are being
asked to adopt the Merger Agreement. Consummation of the Merger is subject to,
among other things, approval and adoption of the Merger Agreement by Quaker
State shareowners and review by, or receipt of certain approvals from,
regulatory authorities. Information concerning the Special Meeting, the Merger
and related matters is contained in the accompanying Proxy Statement/Prospectus.
A copy of the Merger Agreement is attached as Annex A to the accompanying Proxy
Statement/Prospectus. We urge you to read the enclosed material carefully.
QUAKER STATE'S BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE
MERGER IS ADVISABLE AND IN THE BEST INTERESTS OF QUAKER STATE AND ITS
SHAREOWNERS AND HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT. THE BOARD
UNANIMOUSLY RECOMMENDS THAT QUAKER STATE SHAREOWNERS VOTE "FOR" ADOPTION OF THE
MERGER AGREEMENT. The Quaker State Board reached this decision after careful
consideration of a number of factors more fully described in the accompanying
Proxy Statement/Prospectus. The Quaker State Board received written opinions
from Quaker State's financial advisors, Chase Securities Inc. ("Chase") and
Goldman, Sachs & Co. ("Goldman Sachs"), to the effect that, as of the date of
the Merger Agreement, and based upon certain assumptions, limitations and
qualifications stated therein, the exchange ratio set forth in the Merger
Agreement was fair from a financial point of view to the Quaker State
shareowners. Full opinions of Chase and Goldman Sachs are included as Annexes C
and D to the accompanying Proxy Statement/Prospectus and should be read
carefully in their entirety.
<PAGE> 2
It is important for your shares to be represented at the Special Meeting.
Whether or not you plan to attend the Special Meeting in person, we urge you
promptly to mark, sign and date the enclosed proxy card and mail it in the
enclosed postage-paid envelope, so that your vote can be recorded. If you attend
the Special Meeting, you may vote your shares personally whether or not you have
previously submitted a proxy. Your prompt cooperation will be greatly
appreciated.
Thank you for your time and attention to the accompanying Notice of Special
Meeting and Proxy Statement/Prospectus.
Sincerely,
Herbert M. Baum
Chairman and Chief Executive Officer
2
<PAGE> 3
QUAKER STATE CORPORATION
225 East John Carpenter Freeway
Irving, Texas 75062
Notice of Special Meeting of Stockholders
to be held on September 18, 1998
To the Stockholders of
Quaker State Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Quaker State Corporation, a Delaware corporation ("Quaker State"),
will be held at the Four Seasons Hotel, 120 East Delaware Place, Chicago,
Illinois 60611, on September 18, 1998, starting at 1:00 p.m., local time, for
the following purposes, as more fully described in the accompanying Proxy
Statement/Prospectus:
1. To consider and vote upon adoption of the Agreement and Plan of Merger,
dated as of April 14, 1998 (as amended, the "Merger Agreement"), among
Pennzoil Company, a Delaware corporation ("Pennzoil"), Pennzoil Products
Company, a Delaware corporation to be renamed Pennzoil-Quaker State
Company, Downstream Merger Company, a Delaware corporation and a wholly
owned subsidiary of Pennzoil-Quaker State Company ("Merger Sub"), and
Quaker State, which provides for the merger of Merger Sub with and into
Quaker State (the "Merger"), and the conversion of each share of Capital
Stock, par value $1.00 per share, of Quaker State into the right to receive
.8204 of a share of Common Stock, par value $.10 per share, of
Pennzoil-Quaker State Company. Cash will be paid in lieu of fractional
shares of Pennzoil-Quaker State Company Common Stock. As a result of the
Merger, Quaker State will become a wholly owned subsidiary of
Pennzoil-Quaker State Company. The Merger and related matters are described
in greater detail in the accompanying Proxy Statement/Prospectus, to which
a copy of the Merger Agreement is attached as Annex A.
2. To transact such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
The close of business on August 10, 1998 (the "Quaker State Record Date")
has been established as the record date for Quaker State stockholders entitled
to notice of and to vote at the Special Meeting. Only holders of record of
shares of Quaker State Capital Stock on the Quaker State Record Date are
entitled to notice of and to vote at the Special Meeting.
The affirmative vote of the holders of a majority of the outstanding shares
of Quaker State Capital Stock is required to adopt the Merger Agreement.
A list of stockholders entitled to vote at the Special Meeting will be
available for inspection by any stockholder for any purpose germane to the
Special Meeting during ordinary business hours for ten days preceding the
Special Meeting at the offices of Wildman, Harrold, Allen & Dixon, 225 W. Wacker
Drive, 30th Floor, Chicago, Illinois 60606.
IT IS IMPORTANT FOR YOUR SHARES TO BE REPRESENTED AT THE SPECIAL MEETING.
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. HOWEVER,
WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE PROMPTLY MARK, SIGN AND DATE THE
ENCLOSED PROXY CARD AND MAIL IT IN THE ENCLOSED RETURN ENVELOPE, SO THAT YOUR
VOTE CAN BE RECORDED. THE ENVELOPE REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. A stockholder may revoke his or her proxy at any time prior to its use
by delivering to the Secretary of Quaker State a signed notice of revocation or
a later-dated, signed proxy card or by attending the Special Meeting and voting
in person. Please see the accompanying Proxy Statement/Prospectus for further
details regarding the treatment of proxies at the Special Meeting.
<PAGE> 4
Please do not mail any stock certificates at this time.
By Order of the Board of Directors.
/s/ PAUL E. KONNEY
Paul E. Konney
Senior Vice President, General
Counsel and Secretary
Irving, Texas
August 17, 1998
YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY CARD AS SOON AS POSSIBLE
YOUR ATTENTION IS DIRECTED TO THE ACCOMPANYING
PROXY STATEMENT/PROSPECTUS
2
<PAGE> 1
EXHIBIT 99.3
CONSENT OF CHASE SECURITIES INC.
Chase Securities Inc. hereby consents to the use of our name and to the
description of our opinion letter, dated as of April 14, 1998 in, and to the
inclusion of such opinion letter as Annex C to, the Proxy Statement/Prospectus
of Quaker State Corporation and Pennzoil Products Company, which Proxy
Statement/Prospectus is part of the Registration Statement on Form S-4 of
Pennzoil Products Company. By giving such consent, we do not hereby admit that
we are experts with respect to any part of such Registration Statement within
the meaning of the term "expert" as used in, or that we come within the category
of persons whose consent is required under, the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
CHASE SECURITIES INC.
New York, New York
August 12, 1998
<PAGE> 1
EXHIBIT 99.4
CONSENT OF GOLDMAN, SACHS & CO.
PERSONAL AND CONFIDENTIAL
August 13, 1998
Board of Directors
Quaker State Corporation
225 East John Carpenter Freeway
Irving, Texas 75062
Re: Registration Statement of Pennzoil Products Company relating to shares of
Common Stock being registered in connection with its merger of Quaker State
Corporation.
Ladies and Gentlemen:
Reference is made to our opinion letter dated April 14, 1998 with respect
to the fairness to the holders of the outstanding shares of capital stock, par
value $1.00 per share (the "Company Common Stock"), of Quaker State Corporation
(the "Company") of the Exchange Ratio (as defined in such opinion letter) to be
received for each share of Company Common Stock pursuant to the Agreement and
Plan of Merger, dated as of April 14, 1998, among Pennzoil Company, Pennzoil
Products Company, Downstream Merger Company and the Company.
The foregoing opinion letter is provided for the information and assistance
of the Board of Directors of the Company in connection with its consideration of
the transaction contemplated therein and is not to be used, circulated, quoted
or otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or any other document, except in accordance with our prior
written consent. We understand that the Company has determined to include our
opinion in the above-referenced Registration Statement.
In that regard, we hereby consent to the reference to the opinion of our
Firm under the captions "Summary," "Background," "Quaker State's Reasons for the
Merger" and "Role of Quaker State's Financial Advisors" and to the inclusion
of the foregoing opinion in the Proxy Statement/Prospectus included in the
above-mentioned Registration Statement. In giving such consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
GOLDMAN, SACHS & CO.
<PAGE> 1
CONSENT OF PERSON TO BECOME DIRECTOR
Pursuant to Rule 438 of the Securities Act of 1933, as amended, the
undersigned hereby consents to the use of his name and to being named in the
Proxy Statement/Prospectus constituting a part of this Registration Statement
on Form S-4 of Pennzoil Products Company as a person to become a director of
Pennzoil Products Company (to be renamed Pennzoil- Quaker State Company) upon
consummation of the merger of Downstream Merger Company with and into Quaker
State Corporation.
/s/ ERNEST H. COCKRELL
----------------------------------
Ernest H. Cockrell
August 14, 1998
<PAGE> 2
EXHIBIT 99.6
CONSENT OF PERSON TO BECOME DIRECTOR
Pursuant to Rule 438 of the Securities Act of 1933, as amended, the
undersigned hereby consents to the use of his name and to being named in the
Proxy Statement/Prospectus constituting a part of this Registration Statement
on Form S-4 of Pennzoil Products Company as a person to become a director of
Pennzoil Products Company (to be renamed Pennzoil-Quaker State Company) upon
consummation of the merger of Downstream Merger Company with and into Quaker
State Corporation.
/s/ HOWARD H. BAKER, JR.
--------------------------
Howard H. Baker, Jr.
August 14, 1998
<PAGE> 3
CONSENT OF PERSON TO BECOME DIRECTOR
Pursuant to Rule 438 of the Securities Act of 1933, as amended, the
undersigned hereby consents to the use of his name and to being named in the
Proxy Statement/Prospectus constituting a part of this Registration Statement
on Form S-4 of Pennzoil Products Company as a person to become a director of
Pennzoil Products Company (to be renamed Pennzoil-Quaker State Company) upon
consummation of the merger of Downstream Merger Company with and into Quaker
State Corporation.
/s/ W.L. LYONS BROWN, JR.
--------------------------
W.L. Lyons Brown, Jr.
August 14, 1998
<PAGE> 4
CONSENT OF PERSON TO BECOME DIRECTOR
Pursuant to Rule 438 of the Securities Act of 1933, as amended, the
undersigned hereby consents to the use of his name and to being named in the
Proxy Statement/Prospectus constituting a part of this Registration Statement
on Form S-4 of Pennzoil Products Company as a person to become a director of
Pennzoil Products Company (to be renamed Pennzoil- Quaker State Company) upon
consummation of the merger of Downstream Merger Company with and into Quaker
State Corporation.
/s/ ALFONSO FANJUL
----------------------------------
Alfonso Fanjul
August 14, 1998
<PAGE> 5
CONSENT OF PERSON TO BECOME DIRECTOR
Pursuant to Rule 438 of the Securities Act of 1933, as amended, the
undersigned hereby consents to the use of his name and to being named in the
Proxy Statement/Prospectus constituting a part of this Registration Statement
on Form S-4 of Pennzoil Products Company as a person to become a director of
Pennzoil Products Company (to be renamed Pennzoil- Quaker State Company) upon
consummation of the merger of Downstream Merger Company with and into Quaker
State Corporation.
/s/ BERDON LAWRENCE
----------------------------------
Berdon Lawrence
August 14, 1998
<PAGE> 6
CONSENT OF PERSON TO BECOME DIRECTOR
Pursuant to Rule 438 of the Securities Act of 1933, as amended, the
undersigned hereby consents to the use of his name and to being named in the
Proxy Statement/Prospectus constituting a part of this Registration Statement
on Form S-4 of Pennzoil Products Company as a person to become a director of
Pennzoil Products Company (to be renamed Pennzoil- Quaker State Company) upon
consummation of the merger of Downstream Merger Company with and into Quaker
State Corporation.
/s/ GERALD B. SMITH
----------------------------------
Gerald B. Smith
August 14, 1998
<PAGE> 7
EXHIBIT 99.6
CONSENT OF PERSON DESIGNATED TO BECOME A DIRECTOR
The undersigned hereby consents to the use of his name in the Registration
Statement on Form S-4 of Pennzoil Products Company (to be renamed
"Pennzoil-Quaker State Company" under the heading "MANAGEMENT OF
PENNZOIL-QUAKER STATE COMPANY" as a designee to become a director of
Pennzoil-Quaker State Company.
/s/ L. DAVID MYATT Aug. 10, 1998
- ------------------------------- -----------------------------
L. David Myatt Date:
<PAGE> 8
EXHIBIT 99.6
CONSENT OF PERSON DESIGNATED TO BECOME A DIRECTOR
The undersigned hereby consents to the use of his name in the Registration
Statement on Form S-4 of Pennzoil Products Company (to be renamed
"Pennzoil-Quaker State Company" under the heading "MANAGEMENT OF
PENNZOIL-QUAKER STATE COMPANY" as a designee to become a director of
Pennzoil-Quaker State Company.
/s/ FORREST R. HASELTON 8/7/98
- ------------------------------- -----------------------------
Forrest R. Haselton Date:
<PAGE> 9
EXHIBIT 99.6
CONSENT OF PERSON DESIGNATED TO BECOME A DIRECTOR
The undersigned hereby consents to the use of his name in the Registration
Statement on Form S-4 of Pennzoil Products Company (to be renamed
"Pennzoil-Quaker State Company" under the heading "MANAGEMENT OF
PENNZOIL-QUAKER STATE COMPANY" as a designee to become a director of
Pennzoil-Quaker State Company.
/s/ LORNE R. WAXLAX 7 August 1998
- ------------------------------- -----------------------------
Lorne R. Waxlax Date:
<PAGE> 10
EXHIBIT 99.6
CONSENT OF PERSON DESIGNATED TO BECOME A DIRECTOR
The undersigned hereby consents to the use of his name in the Registration
Statement on Form S-4 of Pennzoil Products Company (to be renamed
"Pennzoil-Quaker State Company" under the heading "MANAGEMENT OF
PENNZOIL-QUAKER STATE COMPANY" as a designee to become a director of
Pennzoil-Quaker State Company.
/s/ C. FREDERICK FETTEROLF Aug. 8-98
- ------------------------------- -----------------------------
C. Frederick Fetterolf Date:
<PAGE> 11
EXHIBIT 99.6
CONSENT OF PERSON DESIGNATED TO BECOME A DIRECTOR
The undersigned hereby consents to the use of his name in the Registration
Statement on Form S-4 of Pennzoil Products Company (to be renamed
"Pennzoil-Quaker State Company" under the heading "MANAGEMENT OF
PENNZOIL-QUAKER STATE COMPANY" as a designee to become a director of
Pennzoil-Quaker State Company.
/s/ HERBERT M. BAUM 8/10/98
- ------------------------------- -----------------------------
Herbert M. Baum Date:
<PAGE> 1
EXHIBIT 99.7
EXCEL PARALUBES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Excel Paralubes
In our opinion, the accompanying consolidated balance sheet and the related
statements of operations, of partners' deficit and of cash flows present fairly,
in all material respects, the financial position of Excel Paralubes (the
Partnership), at December 31, 1997 and 1996 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Notes 7 and 10 to the consolidated financial statements,
the Partnership has significant transactions with its partners.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 11, 1998, except as to the second paragraph
to Note 11 which is as of July 10, 1998
<PAGE> 3
EXCEL PARALUBES
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 46,520 $ 88,960
Accounts receivable -- related parties.................... 41,716,048 20,150,548
Inventory................................................. 13,897,549 10,352,691
Other current assets...................................... 785,742 736,549
------------ ------------
Total current assets.............................. 56,445,859 31,328,748
Property, plant and equipment, net........................ 418,578,734 404,653,755
Intangible assets and deferred charges, net............... 38,977,671 33,016,853
------------ ------------
$514,002,264 $468,999,356
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities -- related
party.................................................. $ 22,871,297 $ 20,145,277
Short-term notes payable.................................. 52,800,000 21,800,000
Interest payable.......................................... 5,945,833 5,755,833
------------ ------------
Total current liabilities......................... 81,617,130 47,701,110
Long-term debt.............................................. 490,000,000 490,000,000
Long-term liabilities....................................... 17,163,828
Commitments and contingencies (Note 9)......................
Partners' deficit........................................... (74,778,694) (68,701,754)
------------ ------------
$514,002,264 $468,999,356
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
EXCEL PARALUBES
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales -- related parties..................... $254,726,101 $ 12,492,524
Processing fees -- related party................. 9,662,000 2,035,166
Other............................................ 433,563 97,897 $ 189,000
------------ ------------ ------------
Total revenues........................... 264,821,664 14,625,587 189,000
------------ ------------ ------------
Costs and expenses:
Cost of goods sold -- related party.............. 164,487,535 10,181,471
Operating expense................................ 48,712,682 30,409,209 11,375,490
General and administrative expense............... 1,057,665 665,197 586,208
Project construction expenses.................... 368,532 5,876,000 4,828,000
Depreciation and amortization.................... 17,738,395 3,165,247 311,821
Interest expense................................. 38,133,795 13,041,253 1,042,403
------------ ------------ ------------
Total costs and expenses................. 270,498,604 63,338,377 18,143,922
------------ ------------ ------------
Net loss........................................... $ (5,676,940) $(48,712,790) $(17,954,922)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
EXCEL PARALUBES
STATEMENT OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
CONOCO, INC. ATLAS PROCESSING CO. TOTAL
------------ -------------------- ------------
<S> <C> <C> <C>
Balance, December 31, 1994..................... $ (1,017,021) $ (1,017,021) $ (2,034,042)
Net operating loss for the year ended December
31, 1995..................................... (8,977,461) (8,977,461) (17,954,922)
------------ ------------ ------------
Balance, December 31, 1995..................... (9,994,482) (9,994,482) (19,988,964)
Net operating loss for the year ended December
31, 1996..................................... (24,356,395) (24,356,395) (48,712,790)
------------ ------------ ------------
Balance, December 31, 1996..................... (34,350,877) (34,350,877) (68,701,754)
Contributions.................................. 12,500,000 12,500,000 25,000,000
Distributions.................................. (12,700,000) (12,700,000) (25,400,000)
Net operating loss for the year ended December
31, 1997..................................... (2,838,470) (2,838,470) (5,676,940)
------------ ------------ ------------
Balance, December 31, 1997..................... $(37,389,347) $(37,389,347) $(74,778,694)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
EXCEL PARALUBES
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net operating loss............................. $ (5,676,940) $ (48,712,790) $ (17,954,922)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization............... 17,738,395 3,523,482 389,723
Increase in accounts receivable............. (21,565,500) (20,150,548)
Increase in inventory....................... (3,544,858) (10,352,691)
Increase in other current assets............ (49,193) (730,788) (5,761)
(Decrease) increase in accounts payable and
accrued
liabilities............................... (12,023,980) (15,056,882) 21,014,815
Increase in interest payable................ 190,000 2,917,986 2,837,847
Increase in other liabilities (long-term)... 11,913,828
Gain on sale of asset....................... (48,069)
------------ ------------- -------------
Net cash used in operating
activities........................... (13,066,317) (88,562,231) 6,281,702
------------ ------------- -------------
Cash flows from investing activities:
Additions to property, plant and equipment..... (10,602,742) (158,072,969) (217,588,266)
Acquisition of license agreements.............. (8,260,140) (12,000,000)
Proceeds from sale of asset.................... 1,286,759
------------ ------------- -------------
Net cash used in investing
activities........................... (17,576,123) (170,072,969) (217,588,266)
------------ ------------- -------------
Cash flows from financing activities:
Cash distributions to partners................. (25,400,000)
Cash contributions from partners............... 25,000,000
Advance repayments to partners................. (110,500,000)
Advances from partners......................... 83,150,000
Net proceeds from issuance of commercial
paper....................................... 31,000,000 19,800,000 2,000,000
Proceeds from issuance of bonds................ 240,000,000 250,000,000
Debt issue costs............................... (2,851,869) (4,818,790)
Deferred loss from interest rate hedge......... (6,750,372)
------------ ------------- -------------
Net cash provided by financing
activities........................... 30,600,000 256,948,131 213,080,838
------------ ------------- -------------
Net (decrease) increase in cash flow............. (42,440) (1,687,069) 1,774,274
Cash balance at beginning of year or period...... 88,960 1,776,029 1,755
------------ ------------- -------------
Cash balance at end of year or period............ $ 46,520 $ 88,960 $ 1,776,029
============ ============= =============
Supplementary cash flow information:
Cash paid for interest......................... $ 37,943,795 $ 23,677,350 $ 3,096,847
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 7
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION
Excel Paralubes (Excel), a general partnership, was formed pursuant to the
laws of the state of Texas on August 2, 1994 and was created for the purpose of
constructing and operating a $500 million lube oil hydrocracker facility. Excel
is a partnership which is equally owned by Conoco Inc. (Conoco) and Atlas
Processing Company (Atlas Processing), a 100% owned subsidiary of Pennzoil
Products Company. Excel Paralubes Funding Corporation (Excel Funding), a
Delaware corporation, was formed to execute and administer the financing
arrangements of the Partnership and is a wholly-owned subsidiary of Excel.
Excel was in the development stage as defined in Statement of Financial
Accounting Standards No. 7 until early 1997. Although Excel produced and sold
some base oil and co-products in late 1996, full commercial operations did not
commence until the first quarter of 1997. As more fully described in Notes 7 and
10, Excel and its partners have entered into several long-term purchase and
supply contracts, processing agreements and partner guarantees. Additionally,
the credit facility with a syndicate of banks expires on May 4, 1998 and Excel
has submitted a request to extend this facility through May 1999 (see Note 11).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES
The accompanying financial statements have been prepared on the accrual
basis in accordance with generally accepted accounting principles. Preparation
of financial statements in conformity with generally accepted accounting
principles 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 these estimates.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Excel and its
wholly-owned subsidiary. All intercompany accounts and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS
Cash consists of cash on deposit at financial institutions and cash
equivalents in the form of time deposits with maturities of three months or
less. There were no time deposits at December 31, 1997 or 1996.
INVENTORIES
Inventories consist principally of feedstocks. All inventories are valued
at lower of cost or market, cost being determined by the last-in, first-out
(LIFO) method. At December 31, 1997, the excess of current cost over book value
of inventories valued under the LIFO method was $3,242,306. At December 31,
1996, current cost approximated the LIFO value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost and consists primarily of
roads, parking lots, buildings, furniture and refining equipment in service at
year end. These long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of affected assets
may not be recoverable. Long-lived assets are tested for impairment by comparing
carrying amounts with estimated future pre-tax cash flows expected from use of
the assets and from their disposition. Work-in-progress is the ongoing
<PAGE> 8
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sustaining capital costs associated with the hydrocracker facility which was
completed in 1997. Property, plant and equipment is being depreciated on a
straight-line basis principally over 28 years, the life of the assets.
CATALYST RECLAIMATION AND TURNAROUND COSTS
Catalyst reclaimation and turnaround costs are accrued as a long-term
liability over the period between reclaimations and turnarounds based on
estimates of the scope and the future cost for these activities.
INTANGIBLE ASSETS AND DEFERRED CHARGES
Intangible assets and deferred charges consist of license fees, deferred
bond termination fees and debt issue costs. License fees are being amortized on
a straight-line basis principally over the life of the license agreement.
Deferred bond termination fees and debt issue costs are being amortized over the
life of the bonds using a method which approximates the interest method.
Intangible assets are reassessed annually to determine whether any potential
impairment exists.
REVENUE RECOGNITION
Revenues from the sale of base oil and co-products are recognized in the
period of delivery.
OPERATING COSTS
Operating costs are expensed as incurred and consist primarily of labor,
utilities, maintenance, turnaround accruals, catalyst replacement, pilot plant,
environmental remediation, land rental and other miscellaneous costs associated
with operating the hydrocracker facility.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are recorded in operating expenses
and primarily represent pilot plant costs surrounding the preoperating
activities of the hydrocracker facility. For the years ended December 31, 1997,
1996 and 1995, Excel recorded $763,943, $2,295,000 and $2,929,000, respectively,
for research and development expenditures.
INCOME TAXES
Excel is treated as a tax partnership under the provisions of Subchapter K
of the Internal Revenue Code. Accordingly, the accompanying financial statements
do not reflect a provision for income taxes since Excel's results of operations
and related credits and deductions will be passed through to and taken into
account by its partners in computing their respective tax liabilities. No income
taxes have been recorded for Excel's wholly-owned subsidiary as it has had no
taxable income since its inception.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Accruals for environmental matters are recorded in operating expenses when
it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated.
REPORTING COMPREHENSIVE INCOME (FAS 130)
The Financial Accounting Standards Board ("FASB") has issued FAS 130 to be
effective for fiscal years beginning after December 15, 1997. FAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. The application of the new standard will not have
a material effect on Excel's consolidated financial position or results of
operations.
<PAGE> 9
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF RISK
All of Excel's trade receivables are from Conoco and Atlas Processing.
Although collection of these receivables could be influenced by economic factors
affecting the petroleum industry, the risk of significant loss is considered
remote.
RECLASSIFICATIONS
Certain reclassifications of prior years' data have been made to conform to
1997 classifications. 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1997 and 1996 is summarized
below:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Plant and equipment..................................... $412,017,100 $344,698,493
Buildings............................................... 7,180,879 7,180,879
Improvements............................................ 12,419,040 12,909,061
Office furniture and equipment.......................... 1,271,330 1,326,145
Construction in progress................................ 4,200,353 41,658,141
------------ ------------
437,088,702 407,772,719
Less -- accumulated depreciation........................ 18,509,968 3,118,964
------------ ------------
$418,578,734 $404,653,755
============ ============
</TABLE>
Depreciation expense was $15,439,073 for the year ended December 31, 1997,
$2,807,143 for the year ended December 31, 1996 and $311,821 for the year ended
December 31, 1995.
4. INTANGIBLE ASSETS AND DEFERRED CHARGES
Intangible assets and deferred charges at December 31, 1997 and 1996 are
summarized below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
License fees.............................................. $27,650,202 $19,390,062
Deferred bond termination fees (Note 6)................... 6,750,372 6,750,372
Debt issue costs.......................................... 7,670,659 7,670,659
----------- -----------
42,071,233 33,811,093
Less -- accumulated amortization.......................... 3,093,562 794,240
----------- -----------
$38,977,671 $33,016,853
=========== ===========
</TABLE>
Amortization cost associated with intangible assets and deferred charges
was $2,299,322, $716,339 and $77,901 in 1997, 1996 and 1995, respectively.
5. DEBT
On November 5, 1996, Excel Funding issued $240 million of 7.125% senior
bonds. These bonds are due in 2011 with interest payable on May 1 and November 1
each year. The first interest payment was paid on May 1, 1997 and the first
principal payments of $1,828,800 are due on May 1 and November 1, 2001. Proceeds
were applied to repay outstanding short-term borrowings of $202 million and to
finance operations through December 1996.
<PAGE> 10
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 6, 1995, Excel Funding issued $250 million of 7.43% senior
bonds. These bonds are due in 2015 with interest payable on May 1 and November 1
each year. The first interest payment was paid on May 1, 1996 and the first
principal payment is due on May 1, 2011. Proceeds were applied to repay
outstanding short-term borrowings of $201 million and to finance operations
through December 1995.
Recourse under the bonds is limited to the revenues and assets of Excel.
Certain restrictive covenants may limit the ability of Excel to incur debt, make
distributions to the partners, make investments or create liens.
On May 22, 1995, Excel entered into a variable rate $300 million line of
credit with a syndicate of banks which expires May 4, 1998 (see Note 11). This
credit facility is intended for support of commercial notes. Through the credit
facility, the commercial notes can be converted to term loans with the related
bank syndicate at Excel's discretion for a period not to exceed one year. During
1997 this line of credit was reduced to $145 million. On June 21, 1995, Excel
began issuing commercial paper as short-term financing for the construction of
the lube oil hydrocracker. Additional commercial paper was sold during 1997 in
order to finance operations. The weighted-average interest rate on the $52.8
million and $21.8 million of commercial paper outstanding at December 31, 1997
and 1996, respectively, was 6.5%. Excel has submitted a request to extend the
facility through May 1999. At December 31 1997 and 1996, the line of credit
remained unused.
Interest costs incurred in 1997, 1996 and 1995 totaled $38,133,795,
$26,519,620 and $5,934,694, respectively. Interest costs incurred during the
period required to bring assets to the condition and location for their intended
use are capitalized as part of acquisition costs. In 1997 there were no interest
costs capitalized and in 1996 capitalized interest costs totaled $13,901,399. In
1997 there were no debt issue costs capitalized and in 1996 debt issue costs
capitalized were $2,851,869 which are being amortized over the life of the
bonds.
6. DERIVATIVES AND OTHER HEDGING INSTRUMENTS
Excel Funding entered into certain forward treasury contracts as part of
its program to hedge the interest rate risk related to the 1995 senior bond
offering. These contracts were primarily forward contracts with a syndicate of
investment banks to sell 30-year treasury bonds at 7.625%. On October 30, 1995,
Excel Funding locked in the lower rate of 7.43% on the issuance of $250 million
of senior bonds and, hence, terminated the contracts for a fee of approximately
$6.7 million. Excel Funding capitalized the termination fee as a deferred asset
and is amortizing the balance over the life of the bonds as an adjustment to
interest expense. Deferred bond termination fees amortized during 1997, 1996 and
1995 were $378,767, $358,232 and $77,901, respectively.
7. RELATED PARTY TRANSACTIONS
One of Excel's partners, Conoco, has been designated as the operator of the
partnership and in that capacity provides substantially all technical and
administrative assistance and services in connection with Excel's operations.
Charges for these services were approximately $8,400,000, $11,200,000 and
$3,900,000 during 1997, 1996 and 1995, respectively, and are included in
operating and general and administrative expenses. Included in such charges are
the costs of the operators' salaries and wages which include related benefits
such as pensions and other postretirement benefits, allocable to Excel. Excel
has no employees.
Excel and Conoco have joint ownership of certain processing units
constructed at or adjacent to Conoco's Lake Charles Refinery. Variable costs
associated with certain of these units are allocated on the basis of usage.
Fixed costs are allocated based on the ownership percentage of the applicable
units.
As operator, Conoco is responsible for processing and paying Excel's
invoices. Disbursements made by the partner on Excel's behalf are reimbursed
semimonthly by Excel. Such amounts due to Conoco totaled $2,937,658 at December
31, 1997 and $6,501,221 at December 31, 1996. Accrued liabilities which
primarily
<PAGE> 11
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
represent capital expenditures incurred, but not yet invoiced, totaled
$19,933,639 at December 31, 1997 and $13,644,056 at December 31, 1996.
On May 12, 1995, Excel entered into a long-term sale and purchase agreement
whereby Conoco and Atlas Processing have agreed to purchase from Excel (and in
the case of Atlas Processing, Pennzoil Products Company) all base oil production
(within certain specifications), and at least the amount taken by the other
party, up to a maximum of 50% each of Excel's expected output, at a market-based
price (less an annual rebate which is subordinate in right of payment to the
senior debt of Excel). If either Conoco or Atlas Processing fails to purchase
its required amount of Excel's output, that party is obligated to pay to Excel
the amount that Excel would have earned had the party made such purchases. Base
oil sales made to the partners, net of rebates, were $166,093,946 for 1997 and
$3,307,954 for 1996.
Excel and Conoco entered into a long-term sale and purchase agreement dated
May 12, 1995 which requires Conoco to purchase all co-products (within certain
specifications) produced by Excel, with the exception of sulfur, at market-based
prices as specified in the agreement. Co-product sales made to Conoco were
$87,499,331 during 1997 and $9,069,668 during 1996.
On May 12, 1995, Excel and Conoco entered into a long-term feedstock sale
and purchase agreement whereby Excel agrees to purchase from Conoco all of the
required volume of VGO and hydrogen needed by the hydrocracker facility. These
feedstocks must meet certain quality specifications and are purchased at a
market-based price as specified in the agreement. Feedstocks purchased by Excel
under the agreement were $168,032,393 during 1997 and $20,534,162 during 1996.
Excel and Conoco entered into long-term processing agreements dated May 12,
1995 which require Conoco to pay processing fees for the use of the vacuum unit
and hydrogen supply facilities. The fee for the vacuum unit is equal to $1.50
for each barrel of VGO produced from the unit not to exceed $6,740,000 in any
one year. Fees for the hydrogen supply facilities are $23,000 per day for each
day the facilities are utilized not to exceed $4,202,000 in any one year.
Processing fees received for these facilities were $9,662,000 during 1997 and
$2,035,166 during 1996.
Both partners of Excel advanced substantial amounts to Excel to facilitate
the construction process. Until short-term financing was obtained in June 1995,
the partners had contributed $110,500,000 ($55,250,000 by each partner). These
amounts were repaid from the proceeds of the Credit Agreement, dated May 22,
1995, among Chemical Bank, as Syndication Agent; The Chase Manhattan Bank, as
Administrative Agent; and Excel and Excel Funding.
In accordance with a long-term agreement between Excel and Conoco dated
October 24, 1994, Excel agreed to pay Conoco a fixed monthly fee of $58,850 for
use of Conoco's wastewater facility. This fee will continue through December 31,
2024 and amounted to $706,200 in 1997 and $529,650 in 1996.
Excel leases the project site land from Conoco. The lease expires on
December 31, 2024, at which time, the lease will automatically be extended for
successive renewal terms of five years each unless either the lessee or lessor
elects to terminate the lease at such time. The following details the future
lease payments required of Excel for the five succeeding years:
<TABLE>
<S> <C>
1998................................................... $ 2,481,600
1999................................................... 2,481,600
2000................................................... 2,481,600
2001................................................... 2,481,600
2002................................................... 2,481,600
Thereafter............................................. 54,595,200
-----------
$67,003,200
===========
</TABLE>
<PAGE> 12
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense under operating leases was $2,481,600 for both 1997 and 1996
and $2,433,000 for 1995.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
At both December 31, 1997 and 1996, Excel had outstanding long-term debt
with a carrying value of $490 million. Based on borrowing rates currently
available, the carrying amount of this debt approximates fair value. The
reported amounts of financial instruments such as cash equivalents, accounts
receivable and short-term notes payable approximate fair value because of their
short maturities.
9. COMMITMENTS AND CONTINGENCIES
Excel does not maintain general liability (including sudden and accidental
pollution) insurance coverage. However, Excel's respective partners maintain
general insurance policies and/or are self-insured.
On July 31, 1995, a Petition for Class Action was filed in the 14th
Judicial District Court, Parish of Calcasieu, State of Louisiana, against Conoco
and a contractor that excavated soil from the project site, by persons upon
whose property such soil was placed, alleging that the soil contained harmful
and dangerous materials including asbestos and/or lead. The plaintiffs seek
unspecified damages, including punitive or exemplary, compensatory and clean-up
damages and attorneys' fees. Conoco intends to vigorously defend the litigation.
Conoco is voluntarily removing and replacing contaminated soils from affected
properties. Based on the agreements that Excel has with Conoco, management of
Excel determined that Excel was potentially obligated to Conoco for a portion of
the amounts paid by Conoco in connection with this litigation and related
remediation. As such, management agreed to reimburse Conoco for a portion of the
costs. Excel paid $368,532, $1.3 million and $2.3 million in 1997, 1996 and
1995, respectively. Excel has accrued $712,140 and $1.5 million as of December
31, 1997 and 1996, respectively, for anticipated remediation and litigation
costs for this matter. Management does not believe that the litigation or future
remediation expenses will have a material adverse effect on Excel's financial
condition or results of operations.
10. GUARANTEES
Conoco and Atlas Processing entered into a Completion Undertaking to (i)
severally make capital contributions and/or subordinated loans to the
Partnership to cover any cash shortfalls prior to the Completion as defined in
the Completion Undertaking, (ii) severally repay the principal amount of the
senior bonds, in proportion to their respective partnership interests in the
event the project be abandoned prior to Completion and (iii) to severally make
equity contributions to Excel equal to their respective partnership interest
percentage multiplied by $25 million. Prior to Completion, Pennzoil Company
agreed to guarantee the obligations of Atlas Processing to Excel, and following
Completion, Pennzoil Products Company has agreed to guarantee such obligations
of Atlas Processing. E. I. duPont de Nemours and Company (DuPont) has agreed to
guarantee the obligations of Conoco to Excel.
Project completion, certified by an independent engineering firm in the
third quarter of 1997, as associated with the Completion Undertaking, released
the Pennzoil Company and DuPont from their precompletion guarantees.
Conoco and Atlas Processing have entered into a Partner Loan Agreement with
Excel and the First National Bank of Chicago, as agent on behalf of holders of
certain debt of Excel, pursuant to which Conoco and Atlas Processing agreed: (i)
prior to Completion, to make capital contributions or subordinated loans to
Excel to fund cash shortfalls in respect of certain payments and (ii) following
Completion, during the existence of a liquidity cash flow deficit, to provide
liquidity support to Excel up to an aggregate amount of $60 million outstanding
at any time.
<PAGE> 13
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS
Excel sold additional commercial paper in the net amount of approximately
$25 million for the period from January 1, 1998 through March 6, 1998 in order
to finance operations. The commercial paper is supported by a $145 million
revolving line of credit provided by a syndicate of commercial banks (Note 5).
On May 12, 1998, the credit facility discussed in Notes 1 and 5 was
extended through May 1999.
