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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10/A
(AMENDMENT NO. 1)
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
PENNZOIL PRODUCTS COMPANY
(BEING RENAMED "PENNZOIL-QUAKER STATE COMPANY")
(Exact name of registrant as specified in its charter)
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DELAWARE 74-159720
(State of incorporation) (I.R.S. Employer
Identification Number)
PENNZOIL PLACE, P.O. BOX 2967
HOUSTON, TEXAS 77252-2967
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (713) 546-4000
Securities to be registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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Common Stock, par value $.10 per share New York Stock Exchange, Inc.
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Securities to be registered pursuant to Section 12(g) of the Act:
None
(TITLE OF CLASS)
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PENNZOIL PRODUCTS COMPANY
(BEING RENAMED "PENNZOIL-QUAKER STATE COMPANY")
I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN
REGISTRATION STATEMENT ON FORM 10 BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
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ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
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1. Business.................... "Summary"; "Business of Pennzoil-Quaker State Company";
"Business of Pennzoil Products Group" and "Management's
Discussion and Analysis of Financial Condition and Results
of Operations for Pennzoil Products Group."
2. Financial Information....... "Summary Selected Historical and Pro Forma Financial Data";
"Pennzoil Products Group Selected Combined Financial
Information"; "Management's Discussion and Analysis of
Financial Condition and Results of Operations for Pennzoil
Products Group"; "Pennzoil-Quaker State Company Unaudited
Pro Forma Condensed Combined Financial Statements" and
Pennzoil Products Group Combined Financial Statements and
the notes thereto.
3. Properties.................. "Business of Pennzoil-Quaker State Company" and "Business of
Pennzoil Products Group."
4. Security Ownership of
Certain Beneficial Owners
and Management............ "Security Ownership of Certain Beneficial Owners."
5. Directors and Executive
Officers.................. "Management of Pennzoil-Quaker State Company."
6. Executive Compensation...... "Management of Pennzoil-Quaker State Company."
7. Certain Relationships and
Related Transaction....... "Relationship Between Pennzoil-Quaker State Company and
Pennzoil After the Merger -- Employee Benefits Agreement";
"Management of Pennzoil-Quaker State Company" and "Interest
of Certain Persons."
8. Legal Proceedings........... "The Transactions -- Litigation" and "Business of Pennzoil
Products Group -- Legal Proceedings."
9. Market Price of and
Dividends on the
Registrant's Common Equity
and Related Stockholder
Matters................... "Summary"; "Risk Factors"; "The Transactions -- Structure of
the Transactions"; "The Transactions -- Listing and Trading
of Pennzoil-Quaker State Common Stock"; "Relationship
Between Pennzoil-Quaker State Company and Pennzoil After the
Merger -- Employee Benefits Agreement" and "Security
Ownership of Certain Beneficial Owners."
11. Description of Registrant's
Securities to be
Registered................ "Description of Pennzoil-Quaker State Company Capital
Stock."
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ITEM
NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
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12. Indemnification of Directors
and Officers.............. "Management of Pennzoil-Quaker State Company -- Officer and
Director Indemnification"; "Interests of Certain Persons --
Indemnification of Officers and Directors" and "Description
of Pennzoil-Quaker State Company Capital Stock -- Limitation
on Directors' and Officers' Liability."
13. Financial Statements and
Supplementary Data........ "Summary Selected Historical and Pro Forma Financial Data";
"Pennzoil Products Group Selected Combined Financial
Information"; "Management's Discussion and Analysis of
Financial Condition and Results of Operations for Pennzoil
Products Group"; "Pennzoil-Quaker State Company Unaudited
Pro Forma Condensed Combined Financial Statements" and
Pennzoil Products Group Combined Financial Statements and
the notes thereto.
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II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
On March 26, 1998, Pennzoil Products Company, a Delaware corporation
("PPC"), issued 1,000 shares of its common stock to Pennzoil Products Company, a
Nevada corporation ("PPC Nevada"), its direct parent, for consideration of
$1,000. On March 27, 1998, PPC Nevada merged with and into PPC, with PPC
surviving as a wholly owned subsidiary of Pennzoil Company ("Pennzoil"). In the
merger, each share of PPC common stock was canceled, and each of the 41,476,490
outstanding shares of PPC Nevada Class B common stock held by Pennzoil (the only
capital stock of PPC Nevada outstanding) was converted into one share of PPC
common stock. In the opinion of PPC, these transactions are exempt from
registration under the Securities Act of 1933, as amended, by virtue of Section
4(2) thereof in that such transactions did not involve any public offering.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
The following is a list of financial statements included in the Information
Statement and filed as part of this Registration Statement on Form 10:
(1) Summary Selected Historical and Pro Forma Financial Data
(A) Pennzoil Products Group Selected Combined Financial Information
(B) Quaker State Corporation Selected Financial Information
(C) Pennzoil-Quaker State Company Selected Unaudited Pro Forma
Combined Financial Information
(2) Pennzoil Products Group Selected Combined Financial Information
(3) Pennzoil-Quaker State Company Unaudited Pro Forma Condensed Combined
Financial Statements
(A) Unaudited Pro Forma Condensed Combined Balance Sheet as of
September 30, 1998
(B) Unaudited Pro Forma Condensed Combined Income Statement for the
nine months ended September 30, 1998
(C) Unaudited Pro Forma Condensed Combined Income Statement for the
year ended December 31, 1997
(D) Notes to Pennzoil-Quaker State Company Unaudited Pro Forma
Condensed Combined Financial Statements
(4) Pennzoil Products Group Combined Financial Statements.
(A) Combined Statement of Income for the nine months ended September
30, 1998 and 1997 and for the years ended December 31, 1997, 1996
and 1995
(B) Combined Balance Sheet as of September 30, 1998 and December 31,
1997 and 1996
(C) Combined Statement of Shareholder's Equity for the nine months
ended September 30, 1998 and for the years ended December 31,
1997, 1996 and 1995
(D) Combined Statement of Cash Flows for the nine months ended
September 30, 1998 and 1997 and for the years ended December 31,
1997, 1996 and 1995
(E) Combined Statement of Comprehensive Income for the nine months
ended September 30, 1998 and 1997 and for the years ended December
31, 1997, 1996 and 1995
(F) Notes to Combined Financial Statements
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(b) Exhibits:
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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+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
(filed as Annex A to the Proxy Statement/Prospectus of
Pennzoil Products Company dated August 17, 1998
constituting a part of the Registration Statement of
Pennzoil Products Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+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 (filed as Annex F to the Proxy
Statement/Prospectus of Pennzoil Products Company dated
August 17, 1998 constituting a part of the Registration
Statement of Pennzoil Products Company on Form S-4
(Registration No. 333-61541) and incorporated herein by
reference).
+2.3 -- Distribution Agreement, dated as of April 14, 1998,
between Pennzoil Company and Pennzoil Products Company
(filed as Annex B to the Proxy Statement/ Prospectus of
Pennzoil Products Company dated August 17, 1998
constituting a part of the Registration Statement of
Pennzoil Products Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+3.1 -- Pennzoil Products Company Certificate of Incorporation,
as amended (filed as Exhibit 3.1 to the Registration
Statement of Pennzoil Products Company on Form S-4
(Registration No. 333-61541) and incorporated herein by
reference).
+3.2 -- Form of Pennzoil-Quaker State Company Restated
Certificate of Incorporation (filed as Annex E to the
Proxy Statement/Prospectus of Pennzoil Products Company
dated August 17, 1998 constituting a part of the
Registration Statement of Pennzoil Products Company on
Form S-4 (Registration No. 333-61541) and incorporated
herein by reference).
+3.3 -- Pennzoil Products Company By-Laws (filed as Exhibit 3.3
to the Registration Statement of Pennzoil Products
Company on Form S-4 (Registration No. 333-61541) and
incorporated herein by reference).
+3.4 -- Form of Pennzoil-Quaker State Company Amended and
Restated By-Laws (filed as Exhibit 3.4 to the
Registration Statement of Pennzoil Products Company on
Form S-4 (Registration No. 333-61541) and incorporated
herein by reference).
+3.5 -- Form of Common Stock Certificate of Pennzoil-Quaker State
Company (filed as Exhibit 3.5 to the Registration
Statement of Pennzoil Products Company on Form S-4
(Registration No. 333-61541) and incorporated herein by
reference).
+3.6 -- Form of Pennzoil-Quaker State Company Rights Agreement
(filed as Exhibit 3.6 to the Registration Statement of
Pennzoil Products Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+10.1 -- Form of Employee Benefits Agreement between Pennzoil
Company and Pennzoil Products Company (filed as Exhibit
10.1 to the Registration Statement of Pennzoil Products
Company on Form S-4 (Registration No. 333-61541) and
incorporated herein by reference).
+10.2 -- Form of Tax Separation Agreement between Pennzoil Company
and Pennzoil Products Company (filed as Exhibit 10.2 to
the Registration Statement of Pennzoil Products Company
on Form S-4 (Registration No. 333-61541) and incorporated
herein by reference).
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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+10.3 -- Form of Trademark License Agreement between Pennzoil
Company and Pennzoil Products Company (filed as Exhibit
10.3 to the Registration Statement of Pennzoil Products
Company on Form S-4 (Registration No. 333-61541) and
incorporated herein by reference).
+10.4 -- Form of Transition Services Agreement between Pennzoil
Company and Pennzoil Products Company (filed as Exhibit
10.4 to the Registration Statement of Pennzoil Products
Company on Form S-4 (Registration No. 333-61541) and
incorporated herein by reference).
10.5 -- Crude Oil Supply Agreement, dated as of September 1,
1998, between Pennzoil Company and Pennzoil Products
Company.
+10.6 -- Form of Pennzoil-Quaker State Company 1998 Incentive Plan
(filed as Exhibit 10.6 to the Registration Statement of
Pennzoil Products Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+10.7 -- Form of Indemnification Agreement between Pennzoil-Quaker
State Company and certain directors (filed as Exhibit
10.7 to the Registration Statement of Pennzoil Products
Company on Form S-4 (Registration No. 333-61541) and
incorporated herein by reference).
+10.8 -- Form of Quaker State Corporation Retention Pay Plan
(filed as Exhibit 10.8 to the Registration Statement of
Pennzoil Products Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+21.1 -- Subsidiaries of Pennzoil Products Company (filed as
Exhibit 21.1 to the Registration Statement of Pennzoil
Products Company on Form S-4 (Registration No. 333-61541)
and incorporated herein by reference).
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
27 -- Financial Data Schedule.
*99.1 -- Financial Statements of Excel Paralubes.
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* Previously filed.
+ Incorporated by reference as indicated.
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SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
PENNZOIL PRODUCTS COMPANY
By: /s/ DAVID P. ALDERSON II
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David P. Alderson II
Vice President
December 1, 1998
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INFORMATION STATEMENT
PENNZOIL PRODUCTS COMPANY
(BEING RENAMED "PENNZOIL-QUAKER STATE COMPANY")
COMMON STOCK
This Information Statement is being provided to the stockholders of
Pennzoil Company ("Pennzoil") to provide them with information with respect to
the spin-off to Pennzoil stockholders (the "Spin-off") of the common stock of
Pennzoil Products Company ("PPC"), which is being renamed "Pennzoil-Quaker State
Company."
The Spin-off and related transactions are contemplated by the Agreement and
Plan of Merger (as amended, the "Merger Agreement") among Pennzoil, PPC,
Downstream Merger Company, a wholly owned subsidiary of PPC ("Merger Sub"), and
Quaker State 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, the renaming of PPC as Pennzoil-Quaker State Company, the Spin-off of
Pennzoil-Quaker State Company to Pennzoil's stockholders and the merger of
Merger Sub with and into Quaker State (the "Merger"), with the result that
Quaker State will become a subsidiary of Pennzoil-Quaker State Company.
In connection with the Spin-off, Pennzoil stockholders are receiving one
share of Pennzoil-Quaker State Company common stock for each share of Pennzoil
common stock held. In connection with the Merger, Quaker State stockholders will
be entitled to receive .8204 of a share of Pennzoil-Quaker State Company common
stock in exchange for each share of Quaker State capital stock held. This
Information Statement relates to the shares of common stock of Pennzoil-Quaker
State Company being issued in the Spin-off.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
YOU SHOULD CONSIDER IN CONNECTION WITH PENNZOIL-QUAKER STATE COMPANY COMMON
STOCK.
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THE SECURITIES DISTRIBUTED IN CONNECTION WITH THE SPIN-OFF 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
INFORMATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
The date of this Information Statement is December , 1998.
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TABLE OF CONTENTS
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE
TRANSACTIONS............................ 1
SUMMARY................................... 3
SUMMARY SELECTED HISTORICAL AND PRO FORMA
FINANCIAL DATA.......................... 5
DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS.............................. 9
RISK FACTORS.............................. 9
THE TRANSACTIONS.......................... 12
Structure of the Transactions............. 12
Accounting Treatment and Considerations... 13
Certain United States Federal Income Tax
Consequences............................ 13
Regulatory Matters........................ 14
Litigation................................ 14
Listing and Trading of Pennzoil-Quaker
State Company Common Stock.............. 15
BUSINESS OF PENNZOIL-QUAKER STATE
COMPANY................................. 16
BUSINESS OF QUAKER STATE.................. 16
General................................... 16
Lubricants and Lubricant Services......... 17
Consumer Products......................... 18
Discontinued Operations................... 18
Further Information....................... 18
BUSINESS OF PENNZOIL PRODUCTS GROUP....... 19
Motor Oil and Refined Products............ 19
Fast Lube Operations...................... 21
Competition............................... 22
Patents and Trademarks.................... 22
Research and Development.................. 22
Legal Proceedings......................... 23
Governmental Regulation................... 23
Employees................................. 24
PENNZOIL PRODUCTS GROUP SELECTED COMBINED
FINANCIAL INFORMATION................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR PENNZOIL PRODUCTS
GROUP................................... 26
Segment Financial Information............. 26
Results of Operations..................... 27
Overhead Charges.......................... 30
Interest Charges, Net..................... 31
Capital Resources and Liquidity........... 31
Year 2000 Issues.......................... 33
PENNZOIL-QUAKER STATE COMPANY UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS.............................. 35
PENNZOIL-QUAKER STATE COMPANY SUPPLEMENTAL
FINANCIAL DATA.......................... 41
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RELATIONSHIP BETWEEN PENNZOIL-QUAKER STATE
COMPANY AND PENNZOIL AFTER THE MERGER... 43
Tax Separation Agreement.................. 43
Employee Benefits Agreement............... 43
Crude Oil Supply Agreement................ 44
Other Agreements.......................... 45
CREDIT ARRANGEMENTS....................... 47
MANAGEMENT OF PENNZOIL-QUAKER STATE
COMPANY................................. 48
Directors and Executive Officers.......... 48
Compensation of Directors................. 50
Officer and Director Indemnification...... 51
Executive Compensation.................... 51
INTERESTS OF CERTAIN PERSONS.............. 56
Existing Officers and Directors Who Will
Join Pennzoil-Quaker State Company at
the Effective Time...................... 56
Indemnification of Officers and
Directors............................... 56
Quaker State Officers' and Directors'
Interests Under Stock Plans............. 57
Pennzoil Officers' Interests Under Stock
Plans................................... 57
Baum Employment Agreement................. 58
Barr Consulting Agreement................. 58
Employment Continuation Agreements........ 58
Rabbi Trust............................... 59
Long-Term Incentive Program............... 59
Other Severance Benefits.................. 60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS.................................. 60
Security Ownership of Pennzoil............ 60
Security Ownership of Quaker State........ 62
DESCRIPTION OF CAPITAL STOCK OF
PENNZOIL-QUAKER STATE COMPANY........... 63
Pennzoil-Quaker State Company Common
Stock................................... 63
Pennzoil-Quaker State Company Preferred
Stock................................... 64
Stockholder Rights Plan................... 64
Limitation on Directors' and Officers'
Liability............................... 67
Section 203 of Delaware General
Corporation Law......................... 68
Certain Bylaw Provisions.................. 68
Amendments to Charter and Bylaws.......... 68
No Stockholder Action By Written
Consent................................. 69
Special Meetings of Stockholders.......... 69
Classification of Board of Directors...... 69
Removal of Directors...................... 69
No Cumulative Voting...................... 70
Limitation on Changes in Control.......... 70
Transfer Agent and Registrar.............. 70
EXPERTS................................... 70
WHERE YOU CAN FIND MORE INFORMATION....... 70
INDEX TO FINANCIAL STATEMENTS............. F-1
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QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS
The following questions and answers highlight selected information
regarding the Spin-off, Merger and related transactions described in this
Information Statement. For a more complete description of the terms of the
Spin-off, Merger and related transactions, please read this entire Information
Statement and the documents it refers to. See "Where You Can Find More
Information" on page 70.
Q: PLEASE BRIEFLY DESCRIBE THE PROPOSED SPIN-OFF, MERGER AND RELATED
TRANSACTIONS.
A: Pennzoil is consolidating its motor oil, refined products and Jiffy Lube(R)
fast lube operations under one company and spinning off that company to
Pennzoil's stockholders. The company to be spun off, formerly called
Pennzoil Products Company, will be known as "Pennzoil-Quaker State Company"
after the Spin-off. 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 Information Statement:
- 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"
Q: WHAT AM I RECEIVING IN THE SPIN-OFF?
A: As a result of the Spin-off, for every share of Pennzoil common stock you
own, you are receiving one share of Pennzoil-Quaker State Company common
stock, together with an associated preferred stock purchase right similar to
the rights you have with your existing Pennzoil shares. After the Spin-off,
you also will continue to own your shares of Pennzoil common stock.
Q: HOW MANY PENNZOIL-QUAKER STATE COMPANY SHARES WILL BE OUTSTANDING AFTER THE
SPIN-OFF AND MERGER?
A: When the Spin-off and Merger are 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: Pennzoil currently pays an annual dividend of $1.00 per share on its common
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.
Q: WHERE WILL THE PENNZOIL-QUAKER STATE COMPANY SHARES BE LISTED?
A: The shares of Pennzoil-Quaker State Company common stock distributed in the
Spin-off have been approved for listing on the New York Stock Exchange and
the Pacific Exchange under the symbol "PZL."
Q:WHO WILL RUN PENNZOIL-QUAKER STATE COMPANY?
A: Mr. James L. Pate, the current Chairman and Chief Executive Officer of
Pennzoil, will be Chairman and Chief Executive Officer of Pennzoil-Quaker
State Company. Mr. James J. Postl will be the President and Chief Operating
Officer of Pennzoil-Quaker State Company. 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: Pennzoil currently expects that the 13 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;
five designees
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of Quaker State, including Mr. Baum, C. Frederick Fetterolf, Forrest R.
Haselton, L. David Myatt and Lorne R. Waxlax; and Mr. Postl, the President
and Chief Operating Officer of Pennzoil-Quaker State Company.
Q:WHAT ARE THE TAX CONSEQUENCES OF THE SPIN-OFF AND MERGER TO PENNZOIL
STOCKHOLDERS?
A: We believe these transactions will be tax-free to the stockholders of
Pennzoil for U.S. federal income tax purposes. A more detailed description of
the federal income tax consequences of these transactions appears beginning
on page 13.
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SUMMARY
This summary highlights selected information regarding the Spin-off, Merger
and related transactions described in this Information Statement. For a more
complete description of the terms of the Spin-off, Merger and related
transactions, please read this entire Information Statement and the documents it
refers to. See "Where You Can Find More Information" on page 70.
The description in this summary of Pennzoil-Quaker State Company after the
Spin-off and 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 Spin-off and 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 9
and "Pennzoil-Quaker State Company Unaudited Pro Forma Condensed Combined
Financial Statements" beginning on page 35.
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 19 and "Business of
Quaker State" beginning on page 16.
THE PROPOSED TRANSACTIONS (SEE PAGE 12)
Pennzoil Products Group is being spun off to Pennzoil's stockholders as a
new public company that will be known as "Pennzoil-Quaker State Company" after
the Spin-off.
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.
PENNZOIL-QUAKER STATE COMPANY AFTER THE MERGER
The proposed Merger of Pennzoil Products Group and Quaker State 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 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 September 30, 1998).
WHAT PENNZOIL STOCKHOLDERS ARE RECEIVING
Pennzoil stockholders are receiving one share of Pennzoil-Quaker State
Company common stock for each share of Pennzoil common stock that they own.
After the Spin-off, Pennzoil stockholders also will continue to own their shares
of Pennzoil common stock.
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BOARD OF DIRECTORS AND MANAGEMENT OF PENNZOIL-QUAKER STATE COMPANY AFTER THE
MERGER (SEE PAGE 48)
Pennzoil currently expects that Pennzoil-Quaker State Company will be
initially governed by a Board of 13 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; five
designees of Quaker State, including Herbert M. Baum, C. Frederick Fetterolf,
Forrest R. Haselton, L. David Myatt and Lorne R. Waxlax; and Mr. James J. Postl,
the President and Chief Operating Officer of Pennzoil-Quaker State Company.
Mr. Pate, the current Chairman and Chief Executive Officer of Pennzoil,
will be Chairman and Chief Executive Officer of Pennzoil-Quaker State Company.
Mr. Postl will be the 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.
ACCOUNTING TREATMENT AND CONSIDERATIONS (SEE PAGE 13)
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 13)
We have received 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. In addition, Pennzoil-Quaker State Company and its
stockholders will recognize no gain or loss as a result of Merger.
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.
LISTING OF PENNZOIL-QUAKER STATE COMPANY STOCK (SEE PAGE 15)
Pennzoil-Quaker State Company common stock has been approved for listing on
the New York Stock Exchange and on the Pacific Exchange under the symbol "PZL."
4
<PAGE> 14
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. 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 in this Information Statement or filed by Quaker
State with the SEC. See "Where You Can Find More Information" on page 70, "Index
to Financial Statements" on page F-1, and "Pennzoil-Quaker State Company
Unaudited Pro Forma Condensed Combined Financial Statements" beginning on page
35.
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 Transactions -- Accounting Treatment and Considerations"
on page 13 and "Pennzoil-Quaker State Company Supplemental Financial Data"
beginning on page 41.
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 35.
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 Spin-off,
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
41.
5
<PAGE> 15
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 nine months ended September 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 Information Statement.
<TABLE>
<CAPTION>
AS OF AND FOR
THE NINE MONTHS
ENDED SEPTEMBER 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)............. $1,417,264 $1,544,971 $2,013,160 $1,968,013 $1,807,702 $1,748,330 $1,711,123
Income (loss) from
continuing
operations............ 7,285 6,850 (589) (9,189) (53,242) (16,048) 3,406
Net income (loss)(3).... 7,285 6,850 (589) (9,189) (53,242) (16,048) 3,406
COMBINED BALANCE SHEET DATA
Cash and cash
equivalents........... $ 6,643 $ 8,503 $ 9,132 $ 15,797 $ 10,468 $ 12,514 $ 14,562
Total assets............ 1,582,493 1,503,660 1,559,623 1,370,499 1,278,667 1,056,102 1,007,364
Total debt and capital
lease
obligations(4)........ 446,906 451,076 458,620 458,452 435,213 140,031 168,362
Shareholder's equity.... 290,894 244,304 256,380 235,741 224,795 211,741 169,427
</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 nine months ended September 30, 1998
compared to the nine months ended September 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.
6
<PAGE> 16
QUAKER STATE CORPORATION
SELECTED FINANCIAL INFORMATION
(EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AND FOR
THE NINE MONTHS
ENDED SEPTEMBER 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.................... $ 914,028 $ 921,534 $1,203,860 $1,121,178 $955,040 $641,316 $532,434
Income (loss) from
continuing
operations before
extraordinary item(1)..... 4,379 17,170 (7,389) 9,651 (4,223) 2,345 3,510
Income from discontinued
operations(2)............. -- 3,848 30,477 4,072 20,462 16,421 10,192
Income before extraordinary
item...................... 4,379 21,018 23,088 13,723 16,239 18,766 13,702
Extraordinary item, net of
taxes(3).................. -- -- -- -- (4,139) -- --
Net income.................. $ 4,379 $ 21,018 $ 23,088 $ 13,723 $ 12,100 $ 18,766 $ 13,702
Per share (basic and
diluted)
Income (loss) from
continuing operations
before extraordinary
item.................... $ .12 $ .49 $ (.21) $ .28 $ (.13) $ .08 $ .12
Income from discontinued
operations.............. -- .11 .87 .12 .64 .58 .38
Extraordinary item, net of
taxes................... -- -- -- -- (.13) -- --
Net income per share........ $ .12 $ .60 $ .66 $ .40 $ .38 $ .66 $ .50
CONSOLIDATED BALANCE SHEET
DATA
Cash and cash equivalents... $ 17,305 $ 16,706 $ 20,205 $ 29,397 $ 30,659 $ 29,805 $ 15,628
Total assets................ 1,191,860 1,121,703 1,169,715 1,029,009 707,651 614,991 776,007
Total debt and capital lease
obligations(4)............ 502,370 470,706 455,695 407,408 125,758 72,667 50,163
Stockholders' equity........ 328,671 316,753 331,901 298,669 272,155 251,850 188,750
</TABLE>
- ---------------
(1) In the first nine months of 1998 and 1997, Quaker State recorded pretax
charges of $32.6 million and $5.3 million, respectively, related to system
integration, merger, restructuring and other special charges. In 1997,
Quaker State recorded pretax charges of $48.4 million related to system
integration, restructuring 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.
7
<PAGE> 17
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 Spin-off and Merger. This pro forma financial
information is based on the historical financial statements of Pennzoil Products
Group included in this Information Statement, the historical financial
statements of Quaker State filed by Quaker State with the SEC 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 Spin-off and Merger occurred on September 30,
1998. The unaudited pro forma combined income statement data have been prepared
as if the Spin-off and 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 Spin-off and Merger had
occurred on September 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) 20,086 14,353
Income (loss) from continuing operations........ (589) (7,389) 8,070 92
Basic and diluted earnings per share............ --
Basic average shares outstanding................ 76,008
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 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............................................. $1,417,264 $914,028 $ -- $2,331,292
Income from continuing operations before income
tax................................................ 15,619 8,929 31,276 55,824
Income from continuing operations.................... 7,285 4,379 16,103 27,767
Basic earnings per share............................. 0.36
Diluted earnings per share........................... 0.35
Basic average shares outstanding..................... 77,531
Diluted average shares outstanding................... 78,440
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 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.......................... $ 6,643 $ 17,305 $ -- $ 23,948
Total assets....................................... 1,582,493 1,191,860 461,450 3,235,803
Total debt and capital lease obligations(3)........ 446,906 502,370 130,270 1,079,546
Shareholders' equity............................... 290,894 328,671 787,011 1,406,576
</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 39.
(3) Includes current maturities of long-term debt and current portion of capital
lease obligations.
8
<PAGE> 18
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Information Statement includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), 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 Information
Statement, you should carefully consider the following risk factors in
connection with Pennzoil-Quaker State Company common stock.
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 Spin-off
and Merger. Pennzoil-Quaker State Company 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
9
<PAGE> 19
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 Spin-off and Merger. See
"Pennzoil-Quaker State Company Unaudited Pro Forma Condensed Combined Financial
Statements" and the related notes thereto beginning on page 35, "Pennzoil
Products Group Selected Combined Financial Information" on page 25 and the
Pennzoil Products Group Combined Financial Statements and the related notes
thereto included elsewhere in this Information Statement.
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 common stock being issued in the
Spin-Off has been approved for listing on the New York Stock Exchange (the
"NYSE") and the Pacific Exchange.
We cannot predict the prices at which Pennzoil-Quaker State Company common
stock may trade, either before the Spin-off 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-Quaker State Company "affiliates," as
that term is defined under the Securities Act. See "The Transactions -- Listing
and Trading of Pennzoil-Quaker State Company Common Stock" on page 15.
PENNZOIL STOCKHOLDERS' PERCENTAGE OWNERSHIP SUBJECT TO ADJUSTMENT
Stockholders of Pennzoil will receive shares initially representing
approximately 61.5% 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 increases to the extent that Pennzoil
options are exercised prior to the Merger and decrease to the extent that Quaker
State 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.
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
10
<PAGE> 20
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 33.
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 43, 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 63.
11
<PAGE> 21
THE TRANSACTIONS
The discussion in this Information Statement of the Spin-off and Merger and
the principal terms of the Merger Agreement, the Distribution Agreement and
certain related agreements is subject to, and qualified in its entirety by
reference to, the Merger Agreement, the Distribution Agreement and such related
agreements, all of which have been filed by PPC with the Securities and Exchange
Commission (the "SEC"). See "Where You Can Find More Information."
Holders of record of Pennzoil common stock with inquiries relating to the
Spin-off should contact Linda F. Condit, Corporate Secretary, Pennzoil Company,
Pennzoil Place, P.O. Box 2967, Houston, Texas 77252-2967, telephone number (713)
546-4000.
STRUCTURE OF THE TRANSACTIONS
The Spin-off and Merger of Quaker State and a subsidiary of Pennzoil-Quaker
State Company involves the following steps:
- Restructuring. The Distribution Agreement provides for the consolidation
by Pennzoil of its motor oil, refined products and Jiffy Lube(R) 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, is reselling
to Pennzoil the receivables it holds that are not related to Pennzoil
Products Group, (ii) Savannah Company Limited ("Savannah"), Pennzoil's
captive insurance subsidiary, is transferring to Pennzoil certain assets
and liabilities that are not attributable to Pennzoil Products Group,
(iii) Pennzoil is contributing 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, are being transferred to an indirect wholly
owned subsidiary of PPC. Pennzoil and PPC also are entering 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. The actions described in this paragraph constitute the
"Restructuring."
- Spin-off. In the Spin-off, the Distribution Agent (as defined in the
Distribution Agreement) is distributing certificates representing one
share of common stock, par value $.10 per share ("Pennzoil-Quaker State
Company Common Stock"), of PPC (being renamed "Pennzoil-Quaker State
Company") in respect of each outstanding share of Pennzoil common stock
held by holders of record of Pennzoil common stock on December 10, 1998.
No holder of Pennzoil common stock will be required to pay any cash or
other consideration for the shares of Pennzoil-Quaker State Company
Common Stock, or to surrender or exchange shares of Pennzoil common
stock, in order to receive shares of Pennzoil-Quaker State Company Common
Stock. Certificates representing shares of Pennzoil-Quaker State Company
Common Stock are being mailed with this Information Statement to holders
of Pennzoil common stock.
- Merger. Following the Spin-off, a wholly owned subsidiary of
Pennzoil-Quaker State Company is merging with Quaker State. In connection
with the Merger, Quaker State stockholders are to 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 are to be paid in cash instead of shares of Pennzoil-Quaker
State Company Common Stock. It is expected that the Merger will become
effective immediately after completion of the Spin-off.
Following the Spin-off and 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
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- 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
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
September 30, 1998, held options and restricted share awards for 4,231,101
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
September 30, 1998, there were outstanding options to purchase 3,489,246 shares
of Pennzoil common stock.
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 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 Information
Statement, such purchase price is estimated to be $790.2 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 value of shares of Pennzoil-Quaker State Company Common Stock to be
received in connection with the Spin-off and 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 and its 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 Pennzoil common stock
will hold their stock as a capital asset as of the effective time of the
Spin-off. 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 Information Statement. 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. Each stockholder of Pennzoil 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.
Consequences to Stockholders. The Restructuring will not have any direct
tax consequences to Pennzoil stockholders. Pennzoil has received a letter ruling
from the Internal Revenue Service ("IRS") that the Spin-
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off will be a tax-free distribution under section 355 of the Code. Accordingly,
the Spin-off will have the following tax consequences to stockholders receiving
Pennzoil-Quaker State Company Common Stock in the Spin-off:
- No gain or loss will be recognized by such stockholders upon the receipt
of shares of Pennzoil-Quaker State Company Common Stock in the Spin-off.
- Each stockholder's basis in the Pennzoil common stock he or she owns
before the Spin-off will be allocated between that Pennzoil common stock
and the Pennzoil-Quaker State Company Common Stock he or she receives in
the Spin-off in proportion to the fair market value of each.
- Each stockholder's holding period in the Pennzoil-Quaker State Company
Common Stock received in the Spin-off will include the period he or she
held the Pennzoil common stock with respect to which the distribution is
made.
Pennzoil-Quaker State Company stockholders will recognize no gain or loss
as a result of the Merger.
Consequences to Pennzoil Products Group and Pennzoil-Quaker State
Company. Pennzoil has received 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 under section 355 of the Code.
Accordingly, Pennzoil Products Group and Pennzoil-Quaker State Company generally
will not recognize gain or loss upon the Restructuring or the Spin-off. 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 between
Pennzoil and PPC, will be less than $3 million. See "Relationship Between
Pennzoil-Quaker State Company and Pennzoil after the Merger -- Tax Separation
Agreement." Pennzoil Products Group and Pennzoil-Quaker State Company will not
recognize gain or loss upon the Merger.
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
(and accordingly the Spin-off) 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.
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
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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. On October 30,
1998, the District Court granted Quaker State and Pennzoil's motion to dismiss
the claims with respect to markets for quick lubrication services. Quaker State
and Pennzoil intend to contest the claims with respect to markets for motor oil
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.
LISTING AND TRADING OF PENNZOIL-QUAKER STATE COMPANY COMMON STOCK
Pennzoil-Quaker State Company Common Stock has been approved for listing on
the NYSE and the Pacific Exchange under the symbol "PZL." The prices at which
Pennzoil-Quaker State Company Common Stock may trade cannot be predicted. See
"Risk Factors -- No Prior Market for Pennzoil-Quaker State Company Common
Stock."
After the effective time of the Spin-off, Pennzoil-Quaker State Company
expects to have approximately 15,100 stockholders of record, based upon the
number of holders of record of Pennzoil common stock as of November 20, 1998.
All shares of Pennzoil-Quaker State Company Common Stock distributed to
stockholders of Pennzoil in connection with the Spin-off are to be freely
transferable, except for certain restrictions applicable to "affiliates" of
Pennzoil-Quaker State Company under the Securities Act. Persons who may be
deemed to be affiliates of Pennzoil-Quaker State Company generally include its
directors and executive officers, as well as any principal stockholders of
Pennzoil-Quaker State Company. Affiliates of Pennzoil-Quaker State Company may
sell their shares of Pennzoil-Quaker State Company Common Stock only pursuant to
an effective registration statement under the Securities Act or an exemption
from the registration requirements of the Securities Act, such as the exemptions
afforded by Section 4(2) of the Securities Act and Rule 144 under the Securities
Act. Pennzoil-Quaker State Company does not currently intend to file any such
registration statement under the Securities Act.
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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 Pennzoil(R) and Quaker State(R), fast lubes 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.
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. 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
20
<PAGE> 30
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 75 service centers throughout the United States, of which about 10
will be company owned. As of September 30, 1998, Jiffy Lube had opened 58
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> 31
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
22
<PAGE> 32
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
23
<PAGE> 33
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.
From January 1995 through December 1997, capital outlays of approximately
$17.9 million have been made by Pennzoil Products Group 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> 34
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 nine months ended September 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 Information Statement.
<TABLE>
<CAPTION>
AS OF AND FOR
THE NINE MONTHS
ENDED SEPTEMBER 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)............. $1,417,264 $1,544,971 $2,013,160 $1,968,013 $1,807,702 $1,748,330 $1,711,123
Income (loss) from
continuing
operations............ 7,285 6,850 (589) (9,189) (53,242) (16,048) 3,406
Net income (loss)(3).... 7,285 6,850 (589) (9,189) (53,242) (16,048) 3,406
COMBINED BALANCE SHEET DATA
Cash and cash
equivalents........... $ 6,643 $ 8,503 $ 9,132 $ 15,797 $ 10,468 $ 12,514 $ 14,562
Total assets............ 1,582,493 1,503,660 1,559,623 1,370,499 1,278,667 1,056,102 1,007,364
Total debt and capital
lease
obligations(4)........ 446,906 451,076 458,620 458,452 435,213 140,031 168,362
Shareholder's equity.... 290,894 244,304 256,380 235,741 224,795 211,741 169,427
</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 nine months ended September 30, 1998
compared to the nine months ended September 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
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.
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<PAGE> 35
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 NINE MONTHS
ENDED SEPTEMBER 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..................... $1,153,794 $1,304,905 $1,700,856 $1,701,069 $1,536,867
Fast lube operations............ 244,310 237,045 316,068 290,219 277,331
Intersegment sales(1)........... (28,201) (25,740) (34,776) (29,972) (27,131)
---------- ---------- ---------- ---------- ----------
1,369,903 1,516,210 1,982,148 1,961,316 1,787,067
---------- ---------- ---------- ---------- ----------
Other income, net
Motor oil and refined
products..................... 35,930 22,550 18,484 (6,784) 8,744
Fast lube operations............ 11,431 6,211 12,528 13,481 11,891
---------- ---------- ---------- ---------- ----------
47,361 28,761 31,012 6,697 20,635
---------- ---------- ---------- ---------- ----------
Total revenues.......... $1,417,264 $1,544,971 $2,013,160 $1,968,013 $1,807,702
========== ========== ========== ========== ==========
OPERATING INCOME (LOSS)
Motor oil and refined products.... $ 67,406 $ 54,010 $ 65,336 $ 36,539 $ (11,259)
Fast lube operations.............. (396) 5,452 2,100 8,240 (5,210)
---------- ---------- ---------- ---------- ----------
Total operating income
(loss)................ 67,010 59,462 67,436 44,779 (16,469)
Interest expense, net............. 51,391 44,129 61,780 55,071 60,816
Income tax provision (benefit).... 8,334 8,483 6,245 (1,103) (24,043)
---------- ---------- ---------- ---------- ----------
Net income (loss)................. $ 7,285 $ 6,850 $ (589) $ (9,189) $ (53,242)
========== ========== ========== ========== ==========
DEPRECIATION AND AMORTIZATION
Motor oil and refined products.... $ 38,993 $ 31,311 $ 43,051 $ 32,078 $ 34,000
Fast lube operations.............. 17,336 15,848 21,439 19,840 21,549
IDENTIFIABLE ASSETS
Motor oil and refined products.... $1,195,633 $1,133,014 $1,190,731 $1,003,180 $ 915,818
Fast lube operations.............. 386,860 370,646 368,892 367,319 362,849
CAPITAL EXPENDITURES
Motor oil and refined products.... $ 26,860 $ 99,010 $ 121,958 $ 231,677 $ 134,883
Fast lube operations.............. 16,489 15,856 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> 36
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997. Net sales for Pennzoil Products Group were $1,369.9 million
for the nine months ended September 30, 1998, a decrease of $146.3 million, or
approximately 9.6%, 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 $121.2 million during the nine months ended September 30, 1997.
Excluding the net sales associated with the contributed specialty
industrial products operations in 1997, net sales decreased $25.1 million, or
1.8%, for the nine months ended September 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 11.9% and 9.1%, respectively, for the nine months ended
September 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 $24.8 million, primarily the result of
lower petroleum feedstock costs.
Net income for Pennzoil Products Group was $7.3 million for the nine months
ended September 30, 1998 compared to $6.9 million for the same period in 1997.
Higher income related to Excel Paralubes, up $14.0 million during the first nine
months of 1998 compared to 1997, was offset by higher depreciation expense.
Depreciation expense was up $9.2 million over the same period in 1997 primarily
due to depreciation on the new Shreveport manufacturing facility upgrade.
Overhead charges from Richland Development Corporation ("Richland") increased
$3.9 million for the first nine 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 gross margin for 1996 compared to 1995 was
primarily due to several nonrecurring or unusual charges
27
<PAGE> 37
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 11.6%
for the first nine 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
3.7% for the nine months ended September 30, 1998 compared to the same period in
1997.
Gross margin, excluding the impact of specialty industrial products
contributed to Penreco, increased $28.0 million for the nine months ended
September 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 $67.4 million for the nine months
ended September 30, 1998, compared to $54.0 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 $14.0 million for
the nine months ended September 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 Penreco(R) 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 segment sells more fuels than it manufactures; therefore, it purchases
for resale volumes needed to meet
28
<PAGE> 38
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 nine months of 1998
increased 3.1% 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 $37.8 million to $610.4 million for
the first nine 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 $36.62 for the nine months ended September 30, 1998, compared with
$35.74 for the same period in 1997, as customers take advantage of additional
authorized services and products available at service centers. There were 1,574
service centers (including 589 Jiffy Lube company-operated service centers) open
as of September 30, 1998.
The fast lube operations segment reported operating loss of $.4 million for
the nine months ended September 30, 1998 compared to operating income of $5.5
million for the same period in 1997. The decrease in operating income was due to
a legal settlement and increased expenses for labor and advertising. Excluding
overhead charges, operating income was $12.5 million for the nine months ended
September 30, 1998, compared to $18.4 million for the same period in 1997. 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.
29
<PAGE> 39
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 $36.3 million and
$32.4 million for the nine months ended September 30, 1998 and 1997,
respectively. Overhead charges were down in the first nine 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
30
<PAGE> 40
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 $7.3 million
for the nine months ended September 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)
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31
----------------- ---------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest expense..................... $ 9,233 $ 9,353 $12,847 $12,208 $13,243
Affiliated interest charges.......... 42,413 41,794 56,374 52,966 50,618
Less: Interest capitalized........... 255 7,018 7,441 10,103 3,045
------- ------- ------- ------- -------
$51,391 $44,129 $61,780 $55,071 $60,816
======= ======= ======= ======= =======
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW. Pennzoil Products Group had cash and cash equivalents of $6.6
million, $9.1 million and $15.8 million at September 30, 1998 and December 31,
1997 and 1996, respectively. Cash flow generated from operating activities
before changes in operating assets and liabilities was $105.1 million for the
nine months ended September 30, 1998, compared to $83.1 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 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. Capital expenditures in 1997 also
included $17.0 million for the installation of facilities near Pennzoil Products
Group's motor oil packaging facilities to store base oils manufactured by Excel
Paralubes and $12.8 million for the implementation of SAP software. In addition,
1996 and 1995 capital expenditures included $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 $8.8 million, $7.7
million and $7.4 million at September 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 September 30, 1998 and
December 31, 1997 and 1996.
31
<PAGE> 41
At September 30, 1998 and December 31, 1997 and 1996, current receivables
included notes receivable of $11.9 million, $12.4 million and $11.9 million,
respectively. Other assets included long-term notes receivable of $34.1 million,
$41.4 million and $39.3 million at September 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. The facility was further amended in September 1998 to extend the
expiration date of the facility to January 1999. Pennzoil Products Group net
accounts receivable sold under the facility totaled $119.1 million, $103.3
million and $111.2 million as of September 30, 1998 and December 31, 1997 and
1996, respectively. Pennzoil Products Group is currently in negotiations to
create a new receivables sale facility to replace its portion of the current
Pennzoil facility. 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 September 30, 1998, Pennzoil Products
Group had a working capital deficit of $295.2 million, which included affiliated
payables of $266.3 million, and $247.7 million of notes payable to Pennzoil.
Excluding these affiliated accounts, Pennzoil Products Group had positive
working capital of $218.8 million at September 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.
32
<PAGE> 42
PPC has entered into a $1 billion syndicated credit facility that will be
used to repay existing intercompany indebtedness of Pennzoil Products Group to
Pennzoil (approximately $383 million), repay indebtedness under the existing
revolving credit facility of Quaker State (approximately $378 million), fund
certain Merger-related expenses (approximately $71 million) and fund future
working capital requirements. Intercompany indebtedness to be paid to Pennzoil
by Pennzoil Products Group will not exceed the sum of $500 million plus the
outstanding cash and cash equivalents of Pennzoil Products Group on hand at the
date of the Spin-off, less existing third-party debt and capital lease
obligations of Pennzoil Products Group as of such date.
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 has conducted a review of its key computer systems
and has identified a number of systems that were affected by the year 2000
issue. Pennzoil Products Group is undertaking or has completed conversion of
these non-compliant financial, operating, human resources and payroll systems to
the compliant SAP system in 1998. In addition, Pennzoil Products Group is
currently upgrading electronic commerce systems to compliant versions in 1998.
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 to and
33
<PAGE> 43
standardization of network, infrastructure, desktop and communications systems
to make these systems 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 compliance issues. Contingency planning is expected to
commence 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 has conducted 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, storage and the movement of 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 by December 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 the
potential for environmental, safety or business interruption impact will be
tested during scheduled maintenance. 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.
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 co-operative
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 program.
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.
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.
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. The implementation of the major IT systems was not accelerated to
remedy year 2000 problems. Independent quality assurance services and tools are
to be used to assure the reliability of the assessment and costs. These services
will be supplemented with Pennzoil Products Group resources. Costs for all year
2000 activities are estimated to be less than $7 million.
Pennzoil Products Group has a June 30, 1999 target readiness date for all
major phases of its year 2000 preparations. Pennzoil Products Group's existing
emergency response plan will be re-evaluated in the fourth quarter of 1999 using
the latest information available for infrastructure services such as utilities.
Adjustments to this plan will be made based on this information. Pennzoil
Products Group expects to be fully compliant by December 31, 1999.
34
<PAGE> 44
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 Spin-off and Merger. These pro forma financial
statements are based on the historical financial statements of Pennzoil Products
Group included in this Information Statement, the historical financial
statements of Quaker State filed by Quaker State with the SEC 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 $790.2
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 value of shares of Pennzoil-Quaker State
Company Common Stock to be received in connection with the Spin-off and Merger.
The unaudited pro forma condensed combined balance sheet has been prepared
as if the Spin-off and Merger occurred on September 30, 1998. The unaudited pro
forma condensed combined statements of income have been prepared as if the
Spin-off and 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 Spin-off and Merger had been consummated as of
September 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 Information Statement or filed by Quaker
State with the SEC.
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."
35
<PAGE> 45
PENNZOIL-QUAKER STATE COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 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............. $ 6,643 $ 17,305 $ -- $ 23,948
Accounts receivable................... 152,139 197,636 -- 349,775
Inventories........................... 199,597 98,012 -- 297,609
Other current assets.................. 45,565 21,722 -- 67,287
---------- ---------- --------- ----------
TOTAL CURRENT ASSETS.................... 403,944 334,675 -- 738,619
---------- ---------- --------- ----------
NET PROPERTY, PLANT AND EQUIPMENT....... 800,394 258,279 -- 1,058,673
GOODWILL, BRANDS AND OTHER ASSETS....... 378,155 598,906 400,721(a) 1,438,511
60,729(b)
---------- ---------- --------- ----------
TOTAL ASSETS.................. $1,582,493 $1,191,860 $ 461,450 $3,235,803
========== ========== ========= ==========
CURRENT LIABILITIES
Current maturities of long-term
debt............................... $ 677 $ 4,350 $ -- $ 5,027
Accounts payable...................... 137,997 121,675 8,000(a) 267,672
Payable to affiliate.................. 514,025 -- (454,025)(c) 60,000
Other current liabilities............. 46,404 69,095 (13,806)(b) 101,693
---------- ---------- --------- ----------
TOTAL CURRENT LIABILITIES..... 699,103 195,120 (459,831) 434,392
---------- ---------- --------- ----------
Long-term debt, less current
maturities......................... 47,637 478,528 388,409(d) 985,109
70,535(b)
Long-term debt affiliated............. 328,674 -- (328,674)(d) --
Capital lease obligations............. 66,217 19,492 -- 85,709
Other liabilities..................... 149,968 170,049 4,000(b) 324,017
---------- ---------- --------- ----------
TOTAL LIABILITIES............. 1,291,599 863,189 (325,561) 1,829,227
---------- ---------- --------- ----------
SHAREHOLDERS' EQUITY.................... 290,894 328,671 787,011(e) 1,406,576
---------- ---------- --------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........ $1,582,493 $1,191,860 $ 461,450 $3,235,803
========== ========== ========= ==========
</TABLE>
See Notes to Pennzoil-Quaker State Company Unaudited Pro Forma
Condensed Combined Financial Statements.
36
<PAGE> 46
PENNZOIL-QUAKER STATE COMPANY
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 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.................................... $1,369,903 $907,917 $ -- $2,277,820
Other income, net............................ 47,361 6,111 -- 53,472
---------- -------- -------- ----------
Total................................ 1,417,264 914,028 -- 2,331,292
COSTS AND EXPENSES
Cost of sales................................ 920,258 551,836 -- 1,472,094
Purchases from affiliate..................... 109,839 -- -- 109,839
Selling, general and administrative.......... 254,777 263,369 -- 518,146
Depreciation and amortization................ 56,329 35,392 8,652(f) 100,373
Restructuring, systems integration and other
special charges........................... -- 32,603 (15,005)(l) 17,598
Taxes, other than income..................... 9,051 -- -- 9,051
Affiliated interest charges.................. 42,413 -- (42,413)(g) --
Interest charges, net........................ 8,978 21,899 17,490(h) 48,367
---------- -------- -------- ----------
Total................................ 1,401,645 905,099 (31,276) 2,275,468
---------- -------- -------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAX.......................................... 15,619 8,929 31,276 55,824
Income tax provision........................... 8,334 4,550 15,173(i) 28,057
---------- -------- -------- ----------
INCOME FROM CONTINUING OPERATIONS.............. $ 7,285 $ 4,379 $ 16,103 $ 27,767
========== ======== ======== ==========
Basic earnings per share....................... $ 0.12 $ 0.36(j)
======== ==========
Diluted earnings per share..................... $ 0.12 $ 0.35(k)
======== ==========
Basic -- Average shares outstanding............ 36,384 77,531(j)
======== ==========
Diluted -- Average shares outstanding.......... 36,829 78,440(k)
======== ==========
</TABLE>
See Notes to Pennzoil-Quaker State Company Unaudited Pro Forma
Condensed Combined Financial Statements.
37
<PAGE> 47
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 11,536(f) 117,292
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 (20,086) 3,202,667
---------- ---------- -------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX........................ 5,656 (11,389) 20,086 14,353
Income tax provision (benefit)............. 6,245 (4,000) 12,016(i) 14,261
---------- ---------- -------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS... $ (589) $ (7,389) $ 8,070 $ 92
========== ========== ======== ==========
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.
38
<PAGE> 48
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 $461.5 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 $790.2
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. Transaction costs include capitalized costs of $8.0 million
(pretax) to be incurred by Pennzoil Products Group and $60.7 million in
after-tax expenses ($74.5 million pretax) to be incurred and recorded by Quaker
State. As of September 30, 1998, Quaker State had incurred $4.4 million in
after-tax merger expenses ($7.1 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 $74.5 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 $60.7 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>
SEPTEMBER 30, 1998
PRO FORMA DEBT
------------------------
(EXPRESSED IN THOUSANDS)
<S> <C>
New borrowing by Pennzoil-Quaker State Company to repay debt
to Pennzoil(1)............................................ $382,744
Industrial revenue bonds transferred from Pennzoil.......... 5,665
--------
Total related to Pennzoil......................... 388,409
New borrowing to repay Quaker State debt subsequent to
Merger(1)................................................. 377,700
New borrowing to pay Quaker State expenses upon Merger(1)... 70,535
Previously existing long-term debt of Pennzoil Products
Group excluding current maturities........................ 47,637
Previously existing Quaker State debt excluding current
maturities, less amount repaid with new borrowings........ 100,828
--------
Total............................................. 985,109
Current maturities of long-term debt........................ 5,027
--------
Total long-term debt including current
maturities...................................... $990,136
========
</TABLE>
- ---------------
(1) New debt to be borrowed using the new credit facility initially.
39
<PAGE> 49
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 "Credit Arrangements."
(e) Shareholders' equity -- A reconciliation of the pro forma adjustment to
shareholders' equity is as follows:
<TABLE>
<CAPTION>
PRO FORMA AS OF
SEPTEMBER 30, 1998
------------------------
(EXPRESSED IN THOUSANDS)
<S> <C>
Capital contribution from Pennzoil:
Settlement of payable to affiliate........................ $ 454,025
Settlement of long-term debt affiliated................... 328,674
Less: Payment to be received from Pennzoil Products
Group.................................................. (388,409)
---------
Total contribution................................ 394,290
Excess purchase price over the book value of Quaker State
net assets (net of $8.0 million (pretax) of transaction
costs recorded in accounts payable)....................... 392,721
---------
Total pro forma adjustment to shareholders' equity.......... $ 787,011
=========
</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 49% and 60%
for the nine months ended September 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 September 30, 1998
are used to compute basic earnings per share. The unaudited 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 $7.1 million for transaction costs incurred
(see Note b) and $7.9 million for other costs primarily related to employee
retention programs.
40
<PAGE> 50
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 September 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
SEPTEMBER 30, 1998
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
-------------------------------------------------------------------------
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........................ $3,081.8 $3,081.8 $3,081.8
Operating income................ 75.6 165.6(1) 200.6(1)
Net income...................... (1.9) 53.9 75.6
Basic earnings per share(2)..... (0.02) 0.70 0.98
Diluted earnings per share(3)... (0.02) 0.69 0.96
OTHER DATA:
Earnings before interest and
income taxes.................. 75.6 165.6 200.6
Depreciation and amortization... 131.5 131.5 131.5
-------- -------- --------
EBITDA(4)....................... $ 207.1 $ 297.1 $ 332.1
</TABLE>
- ---------------
(1) Represents unaudited 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 $132
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.
41
<PAGE> 51
The adjustments to the unaudited historical combined statements of income
of Pennzoil Products Group and Quaker State for the twelve months ended
September 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.
42
<PAGE> 52
RELATIONSHIP BETWEEN PENNZOIL-QUAKER STATE COMPANY AND
PENNZOIL AFTER THE MERGER
PPC and Pennzoil, or their respective subsidiaries, are entering 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
The Tax Separation Agreement (which will become an agreement between
Pennzoil and Pennzoil-Quaker State Company after the Merger) provides, 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 also establishes, 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
The employee benefits agreement (the "Employee Benefits Agreement") (which
will become an agreement between Pennzoil and Pennzoil-Quaker State Company
after the Merger) allocates 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 provides 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 establish pension plans, health and
welfare plans, a savings (401(k)) plan, and executive compensation plans to
mirror the plans that Pennzoil sponsors for its employees. Pennzoil is
transferring 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 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
43
<PAGE> 53
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
The Crude Oil Supply Agreement (which will become an agreement between
Pennzoil and Pennzoil-Quaker State Company after the Merger) provides that
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 or exchange 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 Committed Crude,
if under certain circumstances 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-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
44
<PAGE> 54
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 the anticipated cost of plugging and abandonment
of such well and 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 for the plugging and abandonment of any wells drilled as described in
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 September 1, 1998 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 are entering 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. 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
Transition 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
45
<PAGE> 55
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. Pennzoil and PPC are entering 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.
46
<PAGE> 56
CREDIT ARRANGEMENTS
PPC has entered into a syndicated 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 $383
million), repay indebtedness under the existing revolving credit facility of
Quaker State (approximately $378 million), fund certain Merger-related expenses
(approximately $71 million) and fund future working capital requirements, if
required.
The Credit Facility is an unsecured 364-day revolving credit facility, with
an option to convert the facility into a one-year term loan. The Credit Facility
provides for LIBOR loans, base rate loans and bid rate loans. The Credit
Facility also provides 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 contains customary representations
and warranties, affirmative covenants and negative covenants, including, without
limitation, provisions concerning sale, lease or disposition of assets and liens
and encumbrances. Events of default are customary and include customary cure
periods.
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> 57
MANAGEMENT OF PENNZOIL-QUAKER STATE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
Pennzoil currently expects that the Board of Directors of Pennzoil-Quaker
State Company following the Merger will initially be composed of 13 directors,
seven of whom are to be designated by Pennzoil and five of whom are to be
designated by Quaker State. In addition, James J. Postl, the President and Chief
Operating Officer of Pennzoil-Quaker State Company, will be a director.
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
James J. Postl........................ 52 President, Chief Operating Officer 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
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> 58
JAMES J. POSTL will become the President, Chief Operating Officer and a
director of Pennzoil-Quaker State Company following the Merger. Prior to joining
Pennzoil-Quaker State Company, Mr. Postl served as President of Nabisco Biscuit
Company, a position he held from 1996 through February 1998. From 1994 through
1995, he served as President and Chief Executive Officer of Nabisco
International. Prior to joining Nabisco, Mr. Postl held various management
positions with PepsiCo, Inc. and brand manager positions at Proctor & Gamble
Company. Mr. Postl's term as a director of Pennzoil-Quaker State Company will
expire in 2001.
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.
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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<PAGE> 59
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, Myatt and Postl, 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 Postl. 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> 60
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> 61
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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<PAGE> 62
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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<PAGE> 63
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> 64
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).
55
<PAGE> 65
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.
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. 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.
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 of the
Merger, 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).
- any untrue statement or alleged untrue statement of a material fact
contained in or incorporated by reference into the Proxy
Statement/Prospectus relating to the special meeting of Quaker State
stockholders to adopt the Merger Agreement (the "Proxy
Statement/Prospectus"), the Registration Statement on Form S-4 relating
to the shares of Pennzoil-Quaker State Company Common Stock into which
shares of Quaker State capital stock will be converted in the Merger (the
"Form S-4") or the Registration Statement on Form 10 registering the
Pennzoil-Quaker State Common Stock under the Exchange Act (the "Form 10")
(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, other
56
<PAGE> 66
than information provided by Quaker State specifically for inclusion in,
or incorporation by reference into, the 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 of
the Merger, 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 the Proxy
Statement/Prospectus, the Form S-4 or the Form 10 (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, the 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 of
the Merger. The Merger Agreement further requires PPC and Pennzoil to maintain
for a period of six years following the effective time of the Merger 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 capital 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 capital 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.
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 is 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
additional option to purchase the same number of 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
57
<PAGE> 67
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, are being vested and earned with the date
of the Spin-off constituting the end of each respective award period. Such
vested and earned awards are being paid in cash 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 of the Merger, under
which Mr. Barr will perform services on behalf of Pennzoil-Quaker State Company
with respect to matters 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
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<PAGE> 68
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.
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.
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 of the Merger
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 September 30, 1998, there were 5,569,133
units outstanding.
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<PAGE> 69
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.
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>
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<PAGE> 70
- ---------------
(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 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%.
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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 of the Merger, 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 of the Merger: Mr. Barr, 467,500 shares;
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
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<PAGE> 72
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.
DESCRIPTION OF CAPITAL STOCK OF PENNZOIL-QUAKER STATE COMPANY
The authorized capital stock of Pennzoil-Quaker State Company immediately
after the Spin-off and Merger 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 Form 10.
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
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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
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
One right to purchase Pennzoil-Quaker State Company preferred stock
("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 Form 10 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
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<PAGE> 74
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 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
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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 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.
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LIMITATION ON DIRECTORS' AND OFFICERS' 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 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.
Pennzoil-Quaker State Company's Bylaws will provide for indemnification of
and advancement of expenses to officers, directors, agents and employees of
Pennzoil-Quaker State Company to the extent permitted by applicable law,
including, but not limited to, the 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 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.
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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.
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
68
<PAGE> 78
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. 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.
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.
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.
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 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.
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.
69
<PAGE> 79
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. The
Pennzoil-Quaker State Company Restated Certificate of Incorporation does not
provide for cumulative voting.
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.
EXPERTS
The Pennzoil Products Group combined financial statements included in this
Information Statement to the extent and for the periods indicated in their
report have been audited by Arthur Andersen LLP, independent public accountants,
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
Pennzoil-Quaker State Company is subject to the informational requirements
of the Exchange Act and in accordance therewith will file annual, quarterly and
current reports, proxy statements and other information with the SEC. You may
read and copy any reports, statements or other information Pennzoil-Quaker State
Company and Quaker State 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.
Pennzoil-Quaker State Company's and 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
Pennzoil-Quaker State Company and 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 and Pennzoil-Quaker State Company
Common Stock will be listed.
PPC has filed the Form 10 with the SEC to register the Pennzoil-Quaker
State Company Common Stock under the Exchange Act. This Information Statement is
filed with the Form 10. As allowed by SEC rules, this Information Statement does
not contain all the information you can find in the Form 10 or the exhibits to
the Form 10.
PPC also has filed the Form S-4 with the SEC pursuant to the Securities Act
covering the shares of Pennzoil-Quaker State Common Stock issuable in connection
with the Merger.
Inquiries relating to the Spin-off, Merger, Pennzoil or Pennzoil-Quaker
State Company should be directed to Pennzoil Company, Pennzoil Place, P.O. Box
2967, Houston, Texas 77252-2967, telephone number (713) 546-4000.
70
<PAGE> 80
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 for the nine months ended
September 30, 1998 and 1997 and for the years ended
December 31, 1997, 1996 and 1995....................... F-3
Combined Balance Sheet as of September 30, 1998 and
December 31, 1997 and 1996............................. F-4
Combined Statement of Shareholder's Equity for the nine
months ended September 30, 1998 and for the years ended
December 31, 1997, 1996 and 1995....................... F-5
Combined Statement of Cash Flows for the nine months ended
September 30, 1998 and 1997 and for the years ended
December 31, 1997, 1996 and 1995....................... F-6
Combined Statement of Comprehensive Income for the nine
months ended September 30, 1998 and 1997 and for the
years ended December 31, 1997, 1996 and 1995........... F-7
Notes to Combined Financial Statements.................... F-8
</TABLE>
F-1
<PAGE> 81
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> 82
PENNZOIL PRODUCTS GROUP
COMBINED STATEMENT OF INCOME
(EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
----------------------- ------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales..................... $1,369,903 $1,516,210 $1,982,148 $1,961,316 $1,787,067
Other income, net............. 47,361 28,761 31,012 6,697 20,635
---------- ---------- ---------- ---------- ----------
1,417,264 1,544,971 2,013,160 1,968,013 1,807,702
COSTS AND EXPENSES
Cost of sales................. 920,258 920,372 1,182,742 1,202,909 1,278,565
Purchases from affiliate...... 109,839 254,030 336,413 342,046 130,834
Selling, general and
administrative............. 254,777 254,923 350,123 315,022 347,386
Depreciation and
amortization............... 56,329 47,159 64,490 51,918 55,549
Taxes, other than income...... 9,051 9,025 11,956 11,339 11,837
Interest charges.............. 9,233 9,353 12,847 12,208 13,243
Affiliated interest........... 42,413 41,794 56,374 52,966 50,618
Interest capitalized.......... (255) (7,018) (7,441) (10,103) (3,045)
---------- ---------- ---------- ---------- ----------
1,401,645 1,529,638 2,007,504 1,978,305 1,884,987
INCOME (LOSS) BEFORE INCOME
TAX........................... 15,619 15,333 5,656 (10,292) (77,285)
Income tax provision
(benefit)..................... 8,334 8,483 6,245 (1,103) (24,043)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS)............... $ 7,285 $ 6,850 $ (589) $ (9,189) $ (53,242)
========== ========== ========== ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-3
<PAGE> 83
PENNZOIL PRODUCTS GROUP
COMBINED BALANCE SHEET
(EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
SEPTEMBER 30 -----------------------
1998 1997 1996
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................... $ 6,643 $ 9,132 $ 15,797
Receivables............................................. 152,139 143,303 119,790
Inventories
Crude oil............................................ 8,450 14,245 18,710
Motor oil and refined products....................... 191,147 184,028 147,554
Materials and supplies, at average cost................. 12,419 11,814 12,374
Other current assets.................................... 33,146 36,838 33,862
---------- ---------- ----------
TOTAL CURRENT ASSETS............................ 403,944 399,360 348,087
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Motor oil and refined products.......................... 1,211,676 1,182,930 1,170,259
Fast lube operations and other.......................... 263,575 228,345 206,379
---------- ---------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT............. 1,475,251 1,411,275 1,376,638
Less accumulated depreciation and amortization.......... 674,857 621,098 632,507
---------- ---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT............... 800,394 790,177 744,131
---------- ---------- ----------
OTHER ASSETS
Goodwill................................................ 159,902 158,489 114,695
Other................................................... 218,253 211,597 163,586
---------- ---------- ----------
TOTAL OTHER ASSETS.............................. 378,155 370,086 278,281
---------- ---------- ----------
TOTAL ASSETS.............................................. 1,582,493 $1,559,623 $1,370,499
========== ========== ==========
CURRENT LIABILITIES
Current maturities of long-term debt.................... $ 677 $ 2,363 $ 1,181
Accounts payable........................................ 137,997 120,577 104,629
Payable to affiliates................................... 514,025 544,390 391,366
Payroll accrued......................................... 17,803 17,825 17,601
Other current liabilities............................... 28,601 46,161 34,095
---------- ---------- ----------
TOTAL CURRENT LIABILITIES....................... 699,103 731,316 548,872
LONG-TERM DEBT, less current maturities
Long-term debt-affiliated............................... 328,674 336,172 335,661
Other long-term debt.................................... 47,637 49,798 49,163
---------- ---------- ----------
TOTAL LONG-TERM DEBT, less current maturities... 376,311 385,970 384,824
DEFERRED INCOME TAXES..................................... 20,076 1,179 --
CAPITAL LEASE OBLIGATIONS................................. 66,217 67,136 70,404
OTHER LIABILITIES......................................... 129,892 117,642 130,658
---------- ---------- ----------
TOTAL LIABILITIES............................... 1,291,599 1,303,243 1,134,758
---------- ---------- ----------
SHAREHOLDER'S EQUITY
Common stock............................................ 4,148 4,148 4,148
Additional capital...................................... 425,281 395,870 367,290
Accumulated deficit..................................... (127,064) (134,349) (133,760)
Net unrealized holding loss on marketable securities.... (473) (1,768) --
Cumulative foreign currency translation adjustment...... (10,998) (7,521) (1,937)
---------- ---------- ----------
TOTAL SHAREHOLDER'S EQUITY...................... 290,894 256,380 235,741
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY................ $1,582,493 $1,559,623 $1,370,499
========== ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
F-4
<PAGE> 84
PENNZOIL PRODUCTS GROUP
COMBINED STATEMENT OF SHAREHOLDER'S EQUITY
(EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 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.... 29,411 28,580 21,231 1,604
--------- --------- --------- ---------
Balance at end of period....... 425,281 395,870 367,290 346,059
--------- --------- --------- ---------
ACCUMULATED DEFICIT
Balance at beginning of
period...................... (134,349) (133,760) (124,389) (71,147)
Net income (loss)........... 7,285 (589) (9,189) (53,242)
Dividends on common stock... -- -- (182) --
--------- --------- --------- ---------
Balance at end of period....... (127,064) (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...................... 1,295 (1,768) -- --
--------- --------- --------- ---------
Balance at end of period....... (473) (1,768) -- --
--------- --------- --------- ---------
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENT
Balance at beginning of
period...................... (7,521) (1,937) (1,023) 724
Translation adjustment...... (3,477) (5,584) (914) (1,747)
--------- --------- --------- ---------
Balance at end of period....... (10,998) (7,521) (1,937) (1,023)
--------- --------- --------- ---------
TOTAL SHAREHOLDER'S
EQUITY............... 41,477 $ 290,894 41,477 $ 256,380 41,477 $ 235,741 41,477 $ 224,795
====== ========= ====== ========= ====== ========= ====== =========
</TABLE>
See Notes to Combined Financial Statements.
F-5
<PAGE> 85
PENNZOIL PRODUCTS GROUP
COMBINED STATEMENT OF CASH FLOWS
(EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 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).................... $ 7,285 $ 6,850 $ (589) $ (9,189) $(53,242)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... 56,329 47,159 64,490 51,918 55,549
Deferred income taxes............. 20,421 22,921 36,029 28,628 (1,703)
(Gain) loss on sales of assets.... (9,716) (1,558) (3,072) (10,904) 1,238
Partnership distributions in
excess of earnings.............. 8,856 -- 23,774 -- --
Non-cash accruals................. 13,448 16,442 25,366 17,248 31,700
Other non-cash items.............. 8,506 (8,707) 3,555 8,558 4,566
Change in operating assets and
liabilities (see Notes 2 and
6).............................. (102,501) 19,256 35,227 111,949 135,004
--------- --------- --------- --------- --------
Net cash provided by
operating activities....... 2,628 102,363 184,780 198,208 173,112
--------- --------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................. (43,349) (114,866) (147,794) (251,186) (171,250)
Acquisition of Viscosity............. -- -- -- -- (33,642)
Acquisition of Snap.................. -- -- (41,000) -- --
Proceeds from sales of assets........ 17,982 10,384 14,350 13,457 8,900
Other investing activities........... 8,916 (22,560) (28,222) (3,043) (25,935)
--------- --------- --------- --------- --------
Net cash used in investing
activities................. (16,451) (127,042) (202,666) (240,772) (221,927)
--------- --------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt repayments...................... (7,858) (8,417) (10,457) (17,304) (5,802)
Proceeds from note payable to
affiliate......................... 17,735 25,802 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....... 11,334 17,385 11,221 47,893 46,769
--------- --------- --------- --------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................... (2,489) (7,294) (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............................... $ 6,643 $ 8,503 $ 9,132 $ 15,797 $ 10,468
========= ========= ========= ========= ========
</TABLE>
See Notes to Combined Financial Statements.
F-6
<PAGE> 86
PENNZOIL PRODUCTS GROUP
COMBINED STATEMENT OF COMPREHENSIVE INCOME
(EXPRESSED IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
----------------- -----------------------------
1998 1997 1997 1996 1995
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS)............................ $ 7,285 $ 6,850 $ (589) $ (9,189) $(53,242)
Foreign currency translation adjustment...... (3,477) (3,388) (5,584) (914) (1,747)
Unrealized gains (losses) on marketable
securities, net of tax..................... 1,295 -- (1,768) -- --
------- ------- ------- -------- --------
OTHER COMPREHENSIVE LOSS, NET OF TAX......... (2,182) (3,388) (7,352) (914) (1,747)
------- ------- ------- -------- --------
COMPREHENSIVE INCOME (LOSS).................. $ 5,103 $ 3,462 $(7,941) $(10,103) $(54,989)
======= ======= ======= ======== ========
</TABLE>
F-7
<PAGE> 87
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 (the "Spin-off"); 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. Quaker State's stockholders approved the
Merger on September 18, 1998, and the tax ruling from the Internal Revenue
Service has been received. In addition, the required waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 has expired. The Spin-off
and Merger are expected to occur during the fourth quarter of 1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information (Unaudited)
The interim financial statements as of September 30, 1998 and for the nine
month periods ended September 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
F-8
<PAGE> 88
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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. In September 1998, the facility was amended to extend the expiration date
of the facility to January 1999. 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.
F-9
<PAGE> 89
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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>
NINE MONTHS
ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31
-------------------- ------------------------------
1998 1997 1997 1996 1995
--------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Receivables............................ $ (30,977) $(10,060) $(30,432) $118,567 $(41,159)
Inventories............................ (8,844) (29,195) (34,121) (13,115) (4,972)
Accounts payable and accrued
liabilities.......................... 21,561 (17,052) 12,747 (64,719) 57,631
Payable to affiliates.................. (37,863) 137,810 153,535 56,131 183,038
Other assets and liabilities........... (46,378) (62,247) (66,502) 15,085 (59,534)
--------- -------- -------- -------- --------
Decrease (increase) in operating assets
and liabilities...................... $(102,501) $ 19,256 $ 35,227 $111,949 $135,004
========= ======== ======== ======== ========
Cash paid during the period for:
Interest (net of amounts
capitalized)...................... $ 8,747 $ 1,997 $ 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.
F-10
<PAGE> 90
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 nine months ended
September 30, 1998 and year ended December 31, 1997, unrealized holding gains
(losses) on marketable securities includes income tax (benefit) of $.7 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
F-11
<PAGE> 91
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
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>
F-12
<PAGE> 92
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<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
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-13
<PAGE> 93
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-14
<PAGE> 94
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 September 30, 1998, Pennzoil Products Group had a working capital
deficit of $295.2 million, which included affiliated payables of $266.3 million
and $247.7 million of notes payable to Pennzoil. Excluding these affiliated
accounts, Pennzoil Products Group had positive working capital of $218.8 million
at September 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 has entered into a $1 billion syndicated loan
facility that will provide Pennzoil Products Group with sufficient funding to
settle obligations with Pennzoil and provide 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-15
<PAGE> 95
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-16
<PAGE> 96
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-17
<PAGE> 97
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-18
<PAGE> 98
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-19
<PAGE> 99
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-20
<PAGE> 100
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. In November 1998, Pennzoil reached a settlement with the
plaintiffs. Pennzoil Products Group's results of operations for the nine months
ended September 30, 1998 includes after-tax charges of $3.4 million for its
portion of the settlement.
F-21
<PAGE> 101
PENNZOIL PRODUCTS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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-22
<PAGE> 102
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-23
<PAGE> 103
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-24
<PAGE> 104
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-25
<PAGE> 105
EXHIBIT INDEX
<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
(filed as Annex A to the Proxy Statement/Prospectus of
Pennzoil Products Company dated August 17, 1998
constituting a part of the Registration Statement of
Pennzoil Products Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+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 (filed as Annex F to the Proxy
Statement/Prospectus of Pennzoil Products Company dated
August 17, 1998 constituting a part of the Registration
Statement of Pennzoil Products Company on Form S-4
(Registration No. 333-61541) and incorporated herein by
reference).
+2.3 -- Distribution Agreement, dated as of April 14, 1998,
between Pennzoil Company and Pennzoil Products Company
(filed as Annex B to the Proxy Statement/ Prospectus of
Pennzoil Products Company dated August 17, 1998
constituting a part of the Registration Statement of
Pennzoil Products Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+3.1 -- Pennzoil Products Company Certificate of Incorporation,
as amended (filed as Exhibit 3.1 to the Registration
Statement of Pennzoil Products Company on Form S-4
(Registration No. 333-61541) and incorporated herein by
reference).
+3.2 -- Form of Pennzoil-Quaker State Company Restated
Certificate of Incorporation (filed as Annex E to the
Proxy Statement/Prospectus of Pennzoil Products Company
dated August 17, 1998 constituting a part of the
Registration Statement of Pennzoil Products Company on
Form S-4 (Registration No. 333-61541) and incorporated
herein by reference).
+3.3 -- Pennzoil Products Company By-Laws (filed as Exhibit 3.3
to the Registration Statement of Pennzoil Products
Company on Form S-4 (Registration No. 333-61541) and
incorporated herein by reference).
+3.4 -- Form of Pennzoil-Quaker State Company Amended and
Restated By-Laws (filed as Exhibit 3.4 to the
Registration Statement of Pennzoil Products Company on
Form S-4 (Registration No. 333-61541) and incorporated
herein by reference).
+3.5 -- Form of Common Stock Certificate of Pennzoil-Quaker State
Company (filed as Exhibit 3.5 to the Registration
Statement of Pennzoil Products Company on Form S-4
(Registration No. 333-61541) and incorporated herein by
reference).
+3.6 -- Form of Pennzoil-Quaker State Company Rights Agreement
(filed as Exhibit 3.6 to the Registration Statement of
Pennzoil Products Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+10.1 -- Form of Employee Benefits Agreement between Pennzoil
Company and Pennzoil Products Company (filed as Exhibit
10.1 to the Registration Statement of Pennzoil Products
Company on Form S-4 (Registration No. 333-61541) and
incorporated herein by reference).
+10.2 -- Form of Tax Separation Agreement between Pennzoil Company
and Pennzoil Products Company (filed as Exhibit 10.2 to
the Registration Statement of Pennzoil Products Company
on Form S-4 (Registration No. 333-61541) and incorporated
herein by reference).
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
+10.3 -- Form of Trademark License Agreement between Pennzoil
Company and Pennzoil Products Company (filed as Exhibit
10.3 to the Registration Statement of Pennzoil Products
Company on Form S-4 (Registration No. 333-61541) and
incorporated herein by reference).
+10.4 -- Form of Transition Services Agreement between Pennzoil
Company and Pennzoil Products Company (filed as Exhibit
10.4 to the Registration Statement of Pennzoil Products
Company on Form S-4 (Registration No. 333-61541) and
incorporated herein by reference).
10.5 -- Crude Oil Supply Agreement, dated as of September 1,
1998, between Pennzoil Company and Pennzoil Products
Company.
+10.6 -- Form of Pennzoil-Quaker State Company 1998 Incentive Plan
(filed as Exhibit 10.6 to the Registration Statement of
Pennzoil Products Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+10.7 -- Form of Indemnification Agreement between Pennzoil-Quaker
State Company and certain directors (filed as Exhibit
10.7 to the Registration Statement of Pennzoil Products
Company on Form S-4 (Registration No. 333-61541) and
incorporated herein by reference).
+10.8 -- Form of Quaker State Corporation Retention Pay Plan
(filed as Exhibit 10.8 to the Registration Statement of
Pennzoil Products Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+21.1 -- Subsidiaries of Pennzoil Products Company (filed as
Exhibit 21.1 to the Registration Statement of Pennzoil
Products Company on Form S-4 (Registration No. 333-61541)
and incorporated herein by reference).
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
27 -- Financial Data Schedule.
*99.1 -- Financial Statements of Excel Paralubes.
</TABLE>
- ---------------
* Previously filed.
+ Incorporated by reference as indicated.
<PAGE> 1
EXHIBIT 10.5
CRUDE OIL SUPPLY AGREEMENT
This Agreement, dated September 1, 1998, is entered into by and among
Pennzoil Exploration and Production Company, a Delaware corporation ("E&P"),
Pennzoil Company, a Delaware Corporation, and Pennzoil Products Company, a
Delaware corporation ("Products").
W I T N E S S E T H
WHEREAS, Products wishes to transfer all of its oil and gas exploration
and production related assets and operations, and Products' staff and management
support associated with such assets and operations to E&P; and
WHEREAS, E&P wishes to accept the transfer of all of Products' oil and
gas exploration and production related assets and operations, and Products'
staff and management support associated with such assets and operations;
NOW THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereby agree as follows:
1. DEFINITIONS.
The following terms shall have the meanings hereinafter ascribed.
1.1 "Eastern Properties" shall mean all Oil and Gas Assets of
Products in Michigan, New York, Ohio, Pennsylvania and West
Virginia (the "Eastern Properties").
1.2 "Oil and Gas Assets" shall mean (i) all assets relating to the
exploration for and production of hydrocarbons including all
(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.
1.3 "Western Properties" shall mean all Oil and Gas Assets of
Pennzoil Company in the Bluebell Altamont Field, Duschesne and
Uintah Counties, Utah.
Page 1 of 12
<PAGE> 2
2. TRANSFER OF ASSETS.
Transfer of Oil and Gas Assets, etc. Effective as of 7:00 A.M. on the
thirteenth of April, 1998, Products shall transfer, assign, convey and
deliver the Eastern Properties to E&P.
3. OBTAINING CONSENTS OF THIRD PARTIES; GOVERNMENT APPROVALS.
(a) Certain leases, contracts and other agreements to which Products is
a party may require the consents of other parties thereto. Products
undertakes to use its best efforts to obtain all such requisite
consents with respect to such leases, contracts and other agreements.
Products shall cooperate fully in seeking and using their best efforts
to assist E&P in obtaining any governmental consents or approvals which
may be required as an incident to the transfer of Properties to, and
the assumption of liabilities by E&P. The parties intend that all such
assignments and transfers will be effective as of the effective date of
such assignments and transfers without regard to any such consents.
(b) Notwithstanding the last sentence of Section 3(a), it is
specifically understood that the transfer of the West Virginia Utility
Division assets from Products to E&P is conditioned upon and shall not
become effective until either (i) consent to such transfer is obtained
from the Public Service Commission of West Virginia pursuant to West
Virginia Code Section 24-2-12 or (ii) an exemption from the
requirements of such statute is obtained and until E&P shall have
obtained any necessary exemption under the Public Utility Holding
Company Act of 1935, including, without limitation, an exemption by
reason of a good faith filing pursuant to Section 2(a)(4) of such Act.
As used herein, "West Virginia Utility Division assets" means all of
the assets used in the natural gas utility business heretofore
conducted as the West Virginia Utility District in the Eastern Division
of the Eastern Refining Business Unit division of Products, consisting
primarily of approximately 250 miles of distribution pipeline serving
approximately 5,000 primarily residential customers.
4. CERTAIN EMPLOYMENT MATTERS; ADMINISTRATIVE MATTERS.
Products agrees that in connection with the transfers of assets
referred to in Section 2, E&P shall employ the Products work force
engaged in operating the respective assets. The parties will cooperate
in making necessary arrangements to effect such transfers of
Page 2 of 12
<PAGE> 3
employment in an orderly manner. The parties will cooperate in making
arrangements whereby Products will furnish transitional staff and
management support to E&P and its other subsidiaries with respect to
the Eastern and Western Properties.
5. PRODUCTS' PREFERENTIAL RIGHT TO PURCHASE CRUDE.
Products shall have 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 the
Eastern and Western Properties (the "Committed Crude"). This
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 Products'
preferential right to purchase, E&P (which shall be defined, for
purposes hereafter, to include Pennzoil Company, unless otherwise
stated) shall have the right to solicit and/or entertain written offers
from purchasers other than Products ("third parties") for the purchase
or exchange 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 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 within such five (5) working day period, 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.
6. PRODUCTS' PREFERENTIAL RIGHT TO PURCHASE OIL AND GAS ASSETS.
Throughout the term of Products' preferential right to purchase
Committed Crude, 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
Page 3 of 12
<PAGE> 4
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, including, without limitation, any contractual
commitments found in this Agreement. Except for the above notification
requirement, this preferential right to purchase Oil and Gas Assets
shall not apply in those cases where E&P wishes to mortgage its
interests, or to transfer title to its interests to its mortgagee in
lieu of or pursuant to foreclosure of a mortgage of its interests, or
to dispose of its interests by merger, reorganization, consolidation,
or by sale of all or substantially all of its Oil and Gas Assets to any
party, or by transfer of its interests to a subsidiary or parent
company or to a subsidiary of a parent company, or to any company in
which such party owns a majority of the stock. In the event of such
mortgage of E&P's interests, or transfer of title to E&P's interests to
its mortgagee in lieu of or pursuant to foreclosure of a mortgage of
its interests, or disposal of E&P's interests by merger,
reorganization, consolidation, or by sale of all or substantially all
of E&P's Oil and Gas Assets to any party, or transfer of E&P's
interests to a subsidiary or parent company or to a subsidiary of a
parent company, or to any company in which such party owns a majority
of the stock, Products shall retain its preferential right to purchase
Committed Crude.
7. PRODUCTS' RIGHT TO EXTEND PRODUCTION FOR EXISTING ZONES.
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 Products' 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
at its sole option to either:
Page 4 of 12
<PAGE> 5
(a) withdraw its plan for recompletion or abandonment; or
(b) continue to operate any such well at Products' expense; or
(c) assign any such well to Products for operation by Products or
by a third party on Products' behalf (in which event Products
shall thereafter be liable for the cost of operating and
maintaining such well, and Products will receive all revenues
attributable to such well).
If Pennzoil E&P exercises option (b) above, Products shall, beginning
on the first day of the calendar 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 average weekly
earnings of Crude Petroleum and Gas Production Workers, as published by
the United States Department of Labor, Bureau of Labor Statistics and
referenced in the 1984 COPAS Accounting Procedure for Joint Operations.
Products shall be entitled to all revenues (net of royalty, ad valorem
and severance taxes) attributable to wells for which it has assumed
operational and/or cost responsibility pursuant to this paragraph.
Production from any such well shall be limited to the zones producing
at the time Pennzoil Products assumed cost responsibility for such
well. In the event that Products has assumed cost responsibility for a
well pursuant to this paragraph, and thereafter intends to relinquish
such responsibility and to abandon all zones producing in such well,
Products shall provide E&P with thirty (30) written notice of such
intention. Upon the expiration of such notice period, all rights and
obligations regarding such well shall be returned to E&P, but rights
and obligations (including Products' pro-rata share of plugging and
abandonment costs based on total production derived from the well)
attributable to the period of time in which the well was operated on
Products' behalf shall remain with Products.
Page 5 of 12
<PAGE> 6
8. PRODUCTS' RIGHT TO FUND DEVELOPMENT.
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 Authorizations For Expenditure
(AFE's) providing estimates for the proposed work. Any such plan shall
be provided to Products only as a convenience to Products and in
accepting such plan, Products agrees that it shall not rely on the
accuracy or completeness thereof, and that E&P shall never be deemed to
have made any warranty or representation, express or implied, as to the
accuracy or completeness of any data, information, estimates,
projections or materials furnished in association therewith, or as to
the quality or quantity of hydrocarbon reserves (if any) to be
discovered or developed in association with any such plan, except in
such instances of gross negligence or willful misconduct on the part of
E&P. 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 Wells") and will
receive one hundred percent (100%) of all revenues (net of royalty, ad
valorem 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 E&P's good faith
estimate of the anticipated cost of plugging and abandonment of such
well, plus a discounted cash flow return on Products' 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 7
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)
Page 6 of 12
<PAGE> 7
for Western Property Joint Wells. Fixed overhead charges shall be
adjusted annually to reflect changes in the average weekly earnings of
Crude Petroleum and Gas Production Workers, as published by the United
States Department of Labor, Bureau of Labor Statistics and referenced
in the 1984 COPAS Accounting Procedure for Joint Operations. Products
also shall bear all costs incurred 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, with the exception of costs attributable to the
plugging and abandonment of the well. However, at any time after
payout, Products may relieve itself of such responsibility to pay for
plugging and abandonment by paying E&P the amount of E&P's original
good faith estimate to plug and abandon the well.
9. PRODUCTS' RIGHT TO PURCHASE OIL AND GAS ASSETS.
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 the Eastern Properties, and/or Pennzoil Company's
interest in the 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 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
Page 7 of 12
<PAGE> 8
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.
10. E&P'S OBLIGATION TO COMPLY WITH LAWS AND CONTRACTUAL DUTIES.
Nothing in this agreement shall prevent E&P (including Pennzoil
Company in the case of the Western Properties) from complying fully
with all applicable rules, regulations and other legal requirements
relating to the production of oil, gas and minerals from the Eastern
Properties and Western Properties, and to the payment of royalty
thereon.
11. EVENTS SUBSEQUENT TO THE CLOSING.
On and after the date hereof, Products will cause to be executed and
delivered from time to time at the reasonable request of E&P all such
further instruments of conveyance, assignments and further assurances
as may be reasonably required to transfer and assign to E&P the title
to the properties, assets, rights and interests hereby agreed and
intended to be conveyed to E&P pursuant to this Agreement. The parties
shall take all such other action before and after the date hereof as
may be necessary or appropriate to carry out and consummate the
transactions contemplated by this Agreement.
12. MISCELLANEOUS.
12.1 Expenses. Except as may be otherwise specifically provided
herein, all expenses incidental to the consummation of the
transactions contemplated hereby shall be borne by the party
incurring such expenses.
12.2 Entire Agreement. This Agreement constitutes the entire
contract between the parties hereto and no party shall be
liable or bound to any other party in any manner by any
warranties, representations or guaranties (whether expressed,
implied or otherwise) except as specifically set forth herein.
Nothing in this Agreement, express or implied, is intended to
or shall confirm upon any party, other than the parties
hereto, and their respective successors and assigns, any
rights remedies, obligations or liabilities under or by reason
of this Agreement, except with respect to liabilities
expressly assumed herein or as may be
Page 8 of 12
<PAGE> 9
otherwise expressly provided herein. This Agreement shall be
binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns.
12.3 Invalidity. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein
shall not in any way be affected or impaired thereby.
12.4 Dispute Resolution. Except as expressly provided elsewhere in
this Agreement, any controversy or claim relating to the
interpretation of this Agreement shall be settled by
arbitration in accordance with the Commercial Arbitration
Rules of the AAA as such rules may be modified herein or as
otherwise agreed by the parties in such controversy. The forum
for arbitration shall be Houston, Texas, and the parties
acknowledge that such venue is appropriate. The governing law
for such arbitration shall be the laws of the State of Texas.
Following thirty (30) days' notice by any party of intention
to invoke arbitration, any dispute arising under this
Agreement and not mutually resolved within such thirty (30)
day period shall be determined by a single arbitrator upon
which the parties agree, or, if the parties cannot agree on a
single arbitrator within five (5) business days following such
thirty (30) day period, then by a board of three (3)
arbitrators, which arbitrator(s) shall be selected for each
such controversy so arising hereunder. In the event it is
necessary to proceed with a board of three (3) arbitrators in
order to resolve any controversy arising hereunder, then
either party to the arbitration proceeding may apply to the
AAA for the appointment of arbitrators to be selected by the
parties to the arbitration from a list of ten (10) qualified
potential arbitrators supplied by the AAA, which shall include
a resume of qualifications, background and experience. For a
period of fifteen (15) days after the AAA's list is delivered
to a party, such party shall have the right to strike three
names from the list of arbitrators and the AAA shall pick
three arbitrators from the names not stricken, who shall be
the arbitrators hereunder. Any party who is unable to
unwilling to so strike a name timely shall forfeit his right
to participate in the selection process. If a selected
arbitrator is unable or unwilling to act, or if for
Page 9 of 12
<PAGE> 10
any other reason an appointment of the requisite number of
arbitrators cannot be made from the list submitted to the
parties by the AAA, the AAA may be requested to submit another
list of potential arbitrators and the same procedures shall
apply. If the arbitrators are not appointed from the second
list submitted by the AAA, then any party, on behalf of all
the parties, may request such appointment by the United States
District Judge for the Southern District of Texas, who is then
senior in service (acting as an individual and not in his
judicial capacity). In the event of any subsequent withdrawal,
by death, incapacity or resignation, of an arbitrator, the AAA
may be requested to supply a list of three qualified
arbitrators and each party shall have the right to strike one
name from the list and the arbitrator not stricken shall be
the replacement arbitrator; if, for any reason, more than one
arbitrator's name remains on the list, the replacement
arbitrator shall be chosen by the AAA. The arbitrator or
arbitrators shall be guided, but not bound, by the Federal
Rules of Evidence and by the discovery rules of the Federal
Rules of Civil Procedure. Any discovery shall be limited to
information directly relevant to the controversy or claim in
arbitration. Such board shall determine the matters submitted
to it pursuant to the provisions of this Agreement and render
a decision thereon no later than sixty (60) days after such
board (or single arbitrator, as the case may be) has been
appointed. The action of the sole arbitrator, or of a majority
of the members of the board of arbitrators, as the case may
be, shall govern and their decisions in writing shall be
final, nonappealable, and binding on the parties hereto. Each
party shall pay costs of the arbitration as allocated by the
arbitrators in their decision. The arbitrators shall have the
right, in rendering their decision with regard to remedies
available to the parties to utilize any rights or remedies
available at contract, law or equity, including, without
limitation, assessing damages or specific performance.
12.5 Notices: All notices provided for herein shall be addressed
to:
Pennzoil Exploration and Production Company
P. O. Box 2967
Houston, Texas 77252-2967
Attn: Donald A. Frederick
(713) 546-3772
Page 10 of 12
<PAGE> 11
Pennzoil Products Company
P. O. Box 2967
Houston, Texas 77252-2967
Attn: William M. Robb
(713) 546-6665
Pennzoil Company
P. O. Box 2967
Houston, Texas 77252-2967
Attn: Donald A. Frederick
(713) 546-3772
12.6 Further Assurances. After Closing, each of the parties shall
execute, acknowledge and deliver to the others such further
instruments, and take such other actions as may be reasonably
necessary to carry out the provisions of this Agreement.
Page 11 of 12
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly
authorized, have executed this Agreement as of the day and year above written.
PENNZOIL COMPANY
BY: /s/ S.D. CHESEBRO'
-----------------------------------
NAME: S.D. Chesebro'
-----------------------------------
TITLE: President
-----------------------------------
PENNZOIL EXPLORATION AND
PRODUCTION COMPANY
BY: /s/ D.A. FREDERICK
-----------------------------------
NAME: D.A. Frederick
-----------------------------------
TITLE: President
-----------------------------------
PENNZOIL PRODUCTS COMPANY
BY: /s/ W.M. ROBB
-----------------------------------
NAME: W.M. Robb
-----------------------------------
TITLE: Group Vice President
-----------------------------------
Page 12 of 12
<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
Information Statement constituting part of this Registration Statement on Form
10/A.
ARTHUR ANDERSEN LLP
Houston, Texas
November 30, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Information Statement constituting part
of this Registration Statement on Form 10/A 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
Information Statement.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
November 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 6,643 0
<SECURITIES> 0 0
<RECEIVABLES> 160,937 0
<ALLOWANCES> 8,798 0
<INVENTORY> 199,597 0
<CURRENT-ASSETS> 403,944 0
<PP&E> 1,441,251 0
<DEPRECIATION> 640,857 0
<TOTAL-ASSETS> 1,582,493 0
<CURRENT-LIABILITIES> 699,103 0
<BONDS> 442,528 0
0 0
0 0
<COMMON> 4,148 0
<OTHER-SE> 286,746 0
<TOTAL-LIABILITY-AND-EQUITY> 1,582,493 0
<SALES> 1,369,904 1,516,210
<TOTAL-REVENUES> 1,417,264 1,544,971
<CGS> 1,030,097 1,174,402
<TOTAL-COSTS> 1,030,097 1,174,402
<OTHER-EXPENSES> 65,380 56,184
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 51,391 44,129
<INCOME-PRETAX> 15,619 15,333
<INCOME-TAX> 8,334 8,483
<INCOME-CONTINUING> 7,285 6,850
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,285 6,850
<EPS-PRIMARY> 0.00<F1> 0.00<F1>
<EPS-DILUTED> 0.00<F1> 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>
