<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 30, 1998
---------------
PENNZOIL-QUAKER STATE COMPANY
(Exact name of issuer as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-14501 76-0200625
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification Number)
</TABLE>
PENNZOIL PLACE, P.O. BOX 2967 77252-2967
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 546-4000
<PAGE>
Introductory Note:
This Amendment on Form 8-K/A amends the Current Report on Form 8-K filed by
Pennzoil-Quaker State Company on January 13, 1999 (the "Form 8-K") with respect
to the Company's acquisition of Quaker State Corporation. This Amendment is
being filed for the sole purpose of filing the following Exhibit which was
previously incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
Exhibit
No. Description
- --- -----------
99.1 The consolidated balance sheet as of December 31, 1997 and 1996, the
consolidated statement of income, the consolidated statement of
shareholders' equity and the consolidated statement of cash flows for
the years ended December 31, 1997, 1996 and 1995 of Quaker State
Corporation and the unaudited condensed consolidated balance sheet as
of September 30, 1998 and the unaudited condensed consolidated
statement of income and the unaudited condensed consolidated statement
of cash flows for the quarter ended September 30, 1998 of Quaker State
Corporation
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PENNZOIL-QUAKER STATE COMPANY
Date: January 19, 1999 By: /s/ David P. Alderson II
__________________________________
David P. Alderson II
Group Vice President and Chief Financial
Officer and Treasurer
<PAGE>
EXHIBIT 99.1
Index to Financial Statements
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.................................. 1
Financial Statements of Quaker State Corporation and Subsidiaries:
Consolidated Statement of Income for the years ended
December 31, 1997, 1996, 1995...................................... 2
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996, 1995...................................... 3
Consolidated Balance Sheet as of December 31, 1997 and 1996........ 4
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1997, 1996, 1995................................ 5
Notes to Consolidated Financial Statements......................... 6
Condensed Consolidated Statement of Income for the quarter ended
September 30, 1998 (unaudited)..................................... 20
Condensed Consolidated Statement of Cash Flows for the
quarter ended September 30, 1998 (unaudited)....................... 21
Condensed Consolidated Balance Sheet as of
September 30, 1998 (unaudited)..................................... 22
Notes to Condensed Consolidated Financial Statements (unaudited)... 24
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders Quaker State Corporation:
We have audited the consolidated financial statements and the financial
statement schedule of Quaker State Corporation and Subsidiaries listed in the
index on page 19 of this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Quaker State
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Dallas, Texas
January 27, 1998
1
<PAGE>
QUAKER STATE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(in thousands, except per share data) 1997 1996 1995
===================================================================================================
<S> <C> <C> <C>
REVENUES
Sales and operating revenues $1,193,971 $1,113,504 $945,258
Other, net 6,372 7,674 9,782
---------- ---------- --------
1,200,343 1,121,178 955,040
---------- ---------- --------
COSTS AND EXPENSES
Cost of sales and operating costs 761,317 759,912 654,564
Selling, general and administrative 337,342 280,818 241,561
Depreciation and amortization 41,266 35,781 30,460
Interest 26,913 12,609 7,178
Restructuring, systems integration and
other special charges (Note 3) 48,411 14,507 27,000
---------- ---------- --------
1,215,249 1,103,627 960,763
---------- ---------- --------
Gain on sale of joint venture interests 3,517 -- --
---------- ---------- --------
Income (loss) from continuing operations before income
taxes and extraordinary item (11,389) 17,551 (5,723)
Provision for (benefit from) income taxes (Note 4)
Current 12,500 25,300 7,800
Deferred (16,500) (17,400) (9,300)
---------- ---------- --------
(4,000) 7,900 (1,500)
---------- ---------- --------
Income (loss) from continuing operations
before extraordinary item (7,389) 9,651 (4,223)
Discontinued operations (Note 5)
Discontinued operations, net of taxes 4,570 4,072 7,767
Income on disposition, net of taxes 25,907 -- 12,695
---------- ---------- --------
30,477 4,072 20,462
---------- ---------- --------
Income before extraordinary item 23,088 13,723 16,239
Extraordinary item, net of taxes (Note 10) -- -- (4,139)
---------- ---------- --------
NET INCOME $ 23,088 $ 13,723 $ 12,100
===================================================================================================
PER SHARE (BASIC AND DILUTED):
Income (loss) from continuing operations
before extraordinary item $(.21) $.28 $ (.13)
Income from discontinued operations .87 .12 .64
Extraordinary item -- -- (.13)
---------- ---------- --------
NET INCOME $.66 $.40 $ .38
===================================================================================================
Weighted average shares outstanding - Basic 35,213 34,352 32,119
Weighted average shares outstanding - Diluted 35,213 34,531 32,119
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
QUAKER STATE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(in thousands) 1997 1996 1995
===============================================================================================================
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 23,088 $ 13,723 $ 12,100
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 44,085 38,578 38,330
Noncurrent special charges 19,698 17,712 7,864
Gain on disposition of discontinued operations (Note 5) (25,907) -- (12,695)
Changes in discontinued operations 249 (1,418) (6,728)
Net gain on sale of assets and joint venture interests (3,680) (806) --
Gain on settlement of long-term receivable -- (5,053) --
Extraordinary loss on extinguishment of debt, net of taxes -- -- 4,139
Deferred income taxes and investment tax credit (16,051) (10,547) (17,937)
Increase (decrease) from changes in:
Receivables (5,924) (6,559) (24,511)
Inventories 4,574 (14,802) 2,479
Other current assets 6,201 6,885 (7,424)
Accounts payable (5,771) 11,896 (5,373)
Accrued liabilities 9,727 304 8,810
Other assets and liabilities and other (12,945) (6,129) 5,874
--------- --------- --------
Net cash provided by operating activities 37,344 43,784 4,928
--------- --------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (71,185) (60,123) (45,130)
Proceeds from disposal of property and equipment and refinery 36,992 2,953 4,910
Proceeds from settlement of long-term receivable, net of taxes paid -- 15,380 --
Acquisition of businesses, net of cash acquired (Note 2) (108,892) (234,106) (31,008)
Proceeds from sale of discontinued operations, net of
discontinued operations cash and taxes paid (Note 5) 81,612 -- 47,213
Other, net (978) (8,046) (5,685)
--------- --------- --------
Net cash used in investing activities (62,451) (283,942) (29,700)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (14,117) (13,762) (12,867)
Proceeds from debt 210,999 282,774 99,375
Payments on debt (181,569) (6,990) (60,882)
Purchase of treasury stock (151) (25,313) --
Other 753 2,187 --
--------- --------- --------
Net cash provided by financing activities 15,915 238,896 25,626
--------- --------- --------
Net increase (decrease) in cash and cash equivalents (9,192) (1,262) 854
Total cash and cash equivalents at beginning of year 29,397 30,659 29,805
--------- --------- --------
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,205 $ 29,397 $ 30,659
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
QUAKER STATE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
<TABLE>
<CAPTION>
DECEMBER 31
(in thousands, except share data) 1997 1996
===================================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,205 $ 29,397
Accounts and notes receivable, less allowance of $4,696 and $4,140 in 1997 and 1996 186,654 161,246
Inventories (Note 6) 90,821 97,522
Other current assets 20,068 26,082
Net assets of discontinued operations -- 19,809
---------- ----------
Total current assets 317,748 334,056
---------- ----------
Property, plant and equipment, at cost (Note 7) 247,073 210,465
Goodwill, brands and other assets (Note 8) 604,894 468,711
Net assets of discontinued operations -- 15,777
---------- ----------
TOTAL ASSETS $1,169,715 $1,029,009
====================================================================================================================
LIABILITIES
Current liabilities:
Accounts payable $ 70,805 $ 71,651
Accrued liabilities (Note 9) 130,088 82,825
Debt payable within one year 11,477 17,204
Debt to be refinanced (Note 10) -- 142,000
---------- ----------
Total current liabilities 212,370 313,680
---------- ----------
Long-term debt (Note 10) 429,198 241,619
Other long-term liabilities (Note 11) 196,246 175,041
---------- ----------
Total liabilities 837,814 730,340
---------- ----------
Commitments and contingencies (Note 12)
STOCKHOLDERS' EQUITY
Capital stock $1.00 par value; authorized shares, 250,000,000 and 95,000,000
in 1997 and 1996; issued shares, 37,977,144 and 36,322,312 in 1997 and 1996 37,977 36,322
Additional capital 210,734 187,560
Retained earnings 112,451 103,480
Cumulative foreign currency translation adjustment 133 411
Treasury stock, at cost, 1,699,593 and 1,593,582 shares in 1997 and 1996 (26,924) (25,433)
Unearned compensation (2,470) (3,671)
---------- ----------
Total stockholders' equity 331,901 298,669
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,169,715 $1,029,009
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
QUAKER STATE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Foreign
Currency Unearned
(in thousands except shares and Capital Additional Retained Translation Treasury Compen-
per share) Stock Capital Earnings Adjustment Stock sation Total
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $31,517 $120,131 $104,286 $(709) $ (467) $(2,908) $251,850
Net income -- -- 12,100 -- -- -- 12,100
Cash dividends ($.40 per share) -- -- (12,867) -- -- -- (12,867)
103,030 shares of capital stock
issued under incentive plans 47 661 -- -- 789 (117) 1,380
Change in foreign currency
translation -- -- -- 598 -- -- 598
1,260,403 shares issued
for acquisitions 1,260 18,276 -- -- -- -- 19,536
Purchase of 30,529 shares -- -- -- -- (442) -- (442)
-------- ---------- --------- ----------- -------- -------- --------
BALANCE, DECEMBER 31, 1995 32,824 139,068 103,519 (111) (120) (3,025) 272,155
-------- ---------- --------- ----------- -------- -------- --------
Net income -- -- 13,723 -- -- -- 13,723
Cash dividends ($.40 per share) -- -- (13,762) -- -- -- (13,762)
187,453 shares of capital stock
issued under incentive plans 187 2,345 -- -- -- (646) 1,886
Change in foreign currency
translation -- -- -- 522 -- -- 522
3,310,702 shares issued
for acquisitions 3,311 46,147 -- -- -- -- 49,458
Purchase of 1,585,135 shares -- -- -- -- (25,313) -- (25,313)
-------- ---------- --------- ----------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 36,322 187,560 103,480 411 (25,433) (3,671) 298,669
-------- ---------- --------- ----------- -------- -------- --------
Net income -- -- 23,088 -- -- -- 23,088
Cash dividends ($.40 per share) -- -- (14,117) -- -- -- (14,117)
90,611 shares of capital stock
issued under incentive plans 91 1,229 -- -- -- (139) 1,181
Change in foreign currency
translation -- -- -- (278) -- -- (278)
1,564,203 shares issued
for acquisitions 1,564 21,945 -- -- -- -- 23,509
96,477 restricted shares
forfeited -- -- -- -- (1,340) 1,340 --
Purchase of 9,534 shares -- -- -- -- (151) -- (151)
-------- ---------- --------- ----------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 $ 37,977 $ 210,734 $ 112,451 $ 133 $(26,924) $ (2,470) $331,901
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
QUAKER STATE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Quaker State Corporation and Subsidiaries (the "Company") is principally a
producer of motor oil and lubricants for passenger cars, fleets, commercial and
industrial applications. The Company also is a manufacturer and marketer of
products and services in the automotive aftermarket and offers a full range of
high-quality automotive chemical treatment, appearance, accessory and air
freshener products. The Company's products are sold primarily to distributors
and national and regional retailers.
a. BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Quaker State Corporation and all of its subsidiaries more than 50%
owned. The preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities and
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
b. CASH EQUIVALENTS: The Company considers all highly liquid financial
instruments purchased with a maturity of three months or less to be cash
equivalents.
c. INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined on the last-in, first-out ("LIFO") basis for manufactured products.
For other inventories, such as purchased finished lubricating oils and purchased
automotive aftermarket products, cost is determined on the first-in, first-out
("FIFO") basis.
d. DEPRECIATION, AMORTIZATION AND VALUATION OF INTANGIBLES: Depreciation is
recorded on a straight-line basis. Goodwill, brands and other intangible assets
are amortized on a straight-line basis. When factors indicate an intangible
asset may not be recoverable, the Company evaluates the related undiscounted
future cash flows compared to the carrying value of the intangible asset to
determine if an impairment exists. The following table summarizes the years over
which significant assets are generally depreciated or amortized:
Fast lube, office and other equipment 3 to 10 years
Software and other intangible assets 3 to 10 years
Fast lube rental properties and improvements 5 to 20 years
Buildings and improvements 20 to 40 years
Goodwill and brands 20 to 40 years
e. FOREIGN CURRENCY TRANSLATION: For all foreign operations, the functional
currency is the local currency. The assets and liabilities of the Company's
foreign operations are translated into U.S. dollars using current exchange
rates. Income statement items are translated at average exchange rates
prevailing during the period. Exchange gains or losses are not material.
f. ADVERTISING COSTS: Advertising costs are expensed as incurred. Advertising
costs were $129.3 million, $122.2 million, and $91.8 million in 1997, 1996,
and 1995, respectively.
g. ENVIRONMENTAL EXPENDITURES: Costs in connection with compliance and
monitoring of compliance with existing environmental regulations as they relate
to ongoing operations are expensed or capitalized as appropriate. Costs
associated with remediation and reclamation efforts resulting from prior
operations are recorded no later than at the completion of an environmental site
assessment. A liability is recorded earlier if it is probable that a liability
exists and a cost can be reasonably estimated. All cleanup estimates are based
on current technology and are on an undiscounted basis. Actual results could
differ from those estimates.
h. INCOME TAXES AND INVESTMENT CREDIT: The Company uses the liability method of
accounting for income taxes. The Company accounts for investment credit on the
deferral method which recognizes the investment credit as a reduction of the
provision for income taxes over the life of the related assets.
i. EARNINGS PER SHARE: As of December 31, 1997, the Company adopted Statement of
financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This
6
<PAGE>
statement establishes new standards for computing and presenting earnings per
share. The adoption of the SFAS No. 128 did not have a material impact on the
Company's earnings per share. Basic earnings per share and diluted earnings per
share are based on the weighted average number of shares of capital stock
outstanding and capital stock equivalents. The difference between basic and
diluted weighted average shares of capital stock outstanding is due to
outstanding capital stock options.
2. ACQUISITIONS:
In 1997, the Company acquired substantially all the net assets of Auto-Shade,
L.L.C. and Auto-Shade (Overseas) L.L.C. ("Axius") for $51.3 million in cash. The
acquisition resulted in $40.5 million of goodwill, brands and other intangible
assets. In connection with the acquisition, the Company recorded reserves of
$2.4 million primarily related to severance and facility exit costs. In
addition, the Company acquired substantially all the stock of Rain-X Corporation
("Rain-X") for $23.2 million in cash, the issuance of 1,104,203 shares of
capital stock with a market value of $16.8 million, and the payment of $1.8
million to satisfy certain indebtedness. The acquisition resulted in $40.1
million of goodwill, brands and other intangible assets. Additional
consideration may be payable by the Company depending upon the sales performance
of Rain-X products during the next 15 years.
The Company also made various other acquisitions in 1997 for $33.5 million in
cash, 460,000 shares of capital stock with a market value of $6.7 million and a
note payable for $10.3 million. These acquisitions resulted in $48.6 million of
goodwill, brands and other intangible assets.
In 1996, the Company acquired all the stock of Blue Coral, Inc. ("Blue Coral")
for $43.5 million in cash, the issuance of 2,956,328 shares of capital stock
with a market value of $43.5 million, and the payment of $27.9 million to
satisfy certain Blue Coral indebtedness. The acquisition resulted in $84.7
million of goodwill, brands and other intangible assets. In 1996, the Company
sold one of the Blue Coral businesses for $7.2 million in cash. Also in 1996,
the Company acquired all the stock of Medo Industries, Inc. and its affiliated
companies ("Medo") for $142.3 million in cash and the payment of $17.7 million
to satisfy certain Medo indebtedness. The acquisition resulted in $145.9 million
of goodwill, brands and other intangible assets.
In 1995, the Company acquired all the stock of Slick 50, Inc. ("Slick 50") for
$22.6 million in cash, the issuance of 1,260,403 shares of capital stock with a
market value of $19.5 million, and the payment of $11 million to satisfy certain
Slick 50 indebtedness. In December 1996, under performance consideration terms
of the Merger Agreement, additional consideration of 354,374 shares of capital
stock with a market value of $6 million was paid to the former Slick 50
stockholders. The total goodwill, brands and other intangible assets resulting
from the Slick 50 acquisition was $82.1 million.
The following summary is prepared on a pro forma basis as though Axius, Rain-X,
Blue Coral and Medo had been acquired as of January 1, 1996 and Truck-Lite Co.,
Inc. ("Truck-Lite") was sold as of January 1, 1996 (see Note 5) after including
the impact of adjustments, such as amortization of goodwill, brands and other
intangible assets, interest expense and related tax effects.
(unaudited, in thousands except per share amounts) 1997 1996
- --------------------------------------------------------------------------------
Revenues $1,245,338 $1,282,043
Income from continuing operations (5,806) 13,882
Income per share from continuing operations (.16) .39
================================================================================
7
<PAGE>
The pro forma results are not necessarily indicative of what would have occurred
if the acquisitions had been in effect for the entire periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combining the operations.
3. RESTRUCTURING, SYSTEMS INTEGRATION AND OTHER SPECIAL CHARGES:
Restructuring, systems integration and other special charges consists of:
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
Restructuring and integration:
Severance and other employee related costs $10,097 $ 1,753 $11,556
Facility closure and other costs 9,604 -- 11,044
Systems integration 5,579 -- --
Refinery write-down and related exit costs 5,587 15,380 --
Environmental charges 8,612 -- --
Pension obligations 4,437 -- --
Asset write-downs and other 4,495 2,427 --
Gain on settlement of long-term receivable -- (5,053) --
Settlement of class action lawsuit -- -- 4,400
------- ------- -------
Total $48,411 $14,507 $27,000
===============================================================================
In 1997, the Company announced plans to restructure its organization, integrate
recent acquisitions and manufacturing and distribution facilities and
consolidate management and administrative activities. A charge of $19.7 million
($12 million after tax) was recorded in the fourth quarter of 1997, which
primarily related to employee severance and employee benefit reserves, the
write-down of various facilities to net realizable value and other facility exit
costs for certain manufacturing and distribution facilities. The restructuring
includes a reduction of approximately 200 selling, operational and
administrative positions at the affected units. The restructuring program is
expected to be completed by 1999. In connection with the restructuring, the
Company is implementing SAP information systems. The Company incurred $5.6
million ($3.4 million after tax) in 1997 in connection with the implementation
of the SAP information systems. The implementation is scheduled to be completed
by 1999. The Company also incurred $4.9 million of capital expenditures in 1997
relating to licenses and hardware in connection with the implementation of the
SAP information systems.
In 1997, the Company sold its West Virginia refinery and related inventory for
$34.8 million in cash and a $5 million note receivable. The sale resulted in a
charge of $5.6 million ($3.4 million after tax) primarily related to certain
contractual obligations and other exit costs. In the fourth quarter, the Company
conducted various environmental studies at formerly owned refineries which
resulted in an $8.6 million ($5.3 million after tax) increase in the Company's
environmental reserves. The Company also recognized a $4.4 million ($2.7 million
after tax) charge in connection with previously unrecorded pension obligations,
which were not material to any previous year, and $4.5 million ($2.8 million
after tax) in connection with the write-down of certain assets to net realizable
value.
In 1996, the Company recorded pretax charges of $19.5 million ($12.4 million
after tax) primarily related to the write-down of certain assets to net
realizable value and restructuring costs. The asset write-downs related
primarily to the Company's decision to sell its West Virginia refinery.
Additionally, the Company settled a $19.5 million long-term receivable for $24.5
million, resulting in a pretax gain of $5 million ($3.1 million after tax).
In 1995, the Company recognized pretax costs and expenses associated with the
restructuring and relocation of the motor oil division and corporate
headquarters of $22.6 million ($13.8 million after tax) and settled a class
action lawsuit for $4.4 million ($2.7 million after tax).
8
<PAGE>
4. INCOME TAXES:
Income (loss) before income taxes from continuing operations consists of:
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------
Domestic $(12,929) $14,456 $(5,745)
Foreign 1,540 3,095 22
-------- ------- -------
Total $(11,389) $17,551 $(5,723)
========= ======= =======
The components of the provision for (benefit from) income taxes from continuing
operations are as follows:
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
Current:
Federal $ 8,700 $ 21,100 $ 5,800
State 2,400 2,800 1,300
Foreign 1,400 1,400 700
Deferred:
Federal (14,700) (15,200) (7,200)
State (1,700) (1,900) (1,300)
Foreign (100) (100) (600)
Tax credits amortized -- (200) (200)
-------- -------- -------
Total $ (4,000) $ 7,900 $(1,500)
===========================================================================
A reconciliation from the federal statutory tax rate to the effective tax rate
for continuing operations follows:
(% of pretax income) 1997 1996 1995
- --------------------------------------------------------------------
Federal statutory tax expense (benefit) (35.0) 35.0 (35.0)
Goodwill amortization 7.6 4.6 12.2
Investment credit -- (1.0) (2.7)
Other tax credits (6.3) (3.6) (6.5)
State and foreign income taxes (.8) 4.0 (1.2)
Other, net (.6) 6.0 7.0
----- ---- -----
Effective tax rate (35.1) 45.0 (26.2)
====================================================================
The deferred tax assets and liabilities as of December 31, 1997 and 1996 are as
follows:
(in thousands) 1997 1996
- --------------------------------------------------------
Deferred tax assets:
Employee benefits $58,373 $57,966
Environmental reserves 9,087 7,789
Other 21,219 26,746
------- -------
Gross deferred tax asset 88,679 92,501
Valuation allowance (274) (322)
------- -------
Total deferred tax assets 88,405 92,179
------- -------
Deferred tax liabilities
Depreciation 13,834 25,656
Other 5,654 10,708
------- -------
Total deferred tax liabilities 19,488 36,364
------- -------
Net deferred tax assets $68,917 $55,815
========================================================
9
<PAGE>
5. DISCONTINUED OPERATIONS:
In 1997, the Company sold Truck-Lite for $82 million. Accordingly, the operating
results of Truck-Lite have been reported as discontinued operations in the
accompanying Consolidated Statement of Income for the three years ended December
31, 1997. The sale resulted in a gain on disposition of $27.5 million, net of
taxes of $17.6 million. Additionally, the net assets of Truck-Lite are reported
as discontinued operation assets in the Consolidated Balance Sheet as of
December 31, 1996. Condensed income statements relating to Truck-Lite's
operations for the ten months ended October 31, 1997, and the years ended
December 31, 1996 and 1995 are presented below:
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------
Revenues $78,977 $86,521 $90,424
Costs and expenses 71,457 79,849 80,651
------- ------- -------
Income before income taxes 7,520 6,672 9,773
Provision for income taxes 2,950 2,600 3,800
------- ------- -------
Income from discontinued operations $ 4,570 $ 4,072 $ 5,973
====================================================================
Additionally in 1997, the Company recognized a charge of $2.7 million ($1.6
million after tax) relating to additional reserves associated with the Company's
previously discontinued coal and exploration and production businesses. These
reserves related to asset write-downs to net realizable value and environmental
obligations retained by the Company.
In 1995, the Company sold the assets of its Natural Gas Exploration and
Production division ("E&P") for $67.7 million. The sale resulted in a gain on
disposition of $12 million, net of taxes of $7.5 million. Condensed income
statements relating to the E&P operations for the seven months ended July 31,
1995 are presented below:
(in thousands) 1995
- -----------------------------------------------
Revenues $14,641
Costs and expenses 12,617
-------
Income before income taxes 2,024
Provision for income taxes 230
-------
Income from discontinued operations $ 1,794
===============================================
6. INVENTORIES:
Inventories consist of:
(in thousands) 1997 1996
- ----------------------------------------------------------------
Lubricants and related materials $59,242 $76,462
Consumer products 31,579 21,060
------- -------
Total $90,821 $97,522
================================================================
The reserve to reduce the carrying value of inventories from current costs to
the LIFO basis amounted to $7.5 million and $17.8 million in 1997 and 1996.
At December 31, 1997 and 1996, $24.5 million and $39.3 million, respectively, of
inventories were valued on the LIFO basis. Certain inventory quantities were
reduced resulting in liquidations of LIFO inventory which increased net income
by $2 million or $.06 per share in 1997, $650,000 or $.02 per share in 1996 and
$1.3 million or $.04 per share in 1995.
10
<PAGE>
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of:
(in thousands) 1997 1996
- --------------------------------------------------------------------
Lubricants and lubricant services:
Marketing $181,904 $166,551
Refining -- 101,498
Fast lube 193,323 147,853
Consumer products 20,848 15,634
-------- --------
396,075 431,536
Less: Accumulated depreciation 149,002 221,071
-------- --------
Total $247,073 $210,465
====================================================================
Depreciation expense was $24 million, $24 million, and $25 million in 1997,
1996, and 1995, respectively.
8. GOODWILL, BRANDS AND OTHER ASSETS:
Goodwill, brands and other assets consist of:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill, net of accumulated amortization of $18,237 and $11,003 $346,968 $251,155
Brands, net of accumulated amortization of $5,989 and $2,885 141,865 113,715
Other intangible assets, net of accumulated amortization
of $19,357 and $12,544 22,903 21,510
Net deferred tax asset 62,725 50,259
Notes receivable 21,521 18,228
Other 8,912 13,844
-------- --------
Total $604,894 $468,711
================================================================================================
</TABLE>
9. ACCRUED LIABILITIES:
Accrued liabilities include accrued income taxes, restructuring reserves and
marketing accruals of $12.6 million, $15.9 million and $14.7 million,
respectively, at December 31, 1997 and $1.8 million, $458,000 and $14.8 million,
respectively, at December 31, 1996.
10. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS:
Long-term debt consists of:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
6.625% Notes due 2005, net of discount $ 99,518 $ 99,458
Variable rate revolving credit agreements 328,000 292,000
Other, 2.5% to 8.5% due in various installments through 2005 13,157 9,365
-------- --------
440,675 400,823
Less: Payments due within one year 11,477 17,204
Debt to be refinanced -- 142,000
-------- --------
Total $429,198 $241,619
================================================================================================
</TABLE>
11
<PAGE>
As of December 31, 1997, the Company had available $430 million of committed
revolving credit agreements. The credit agreements provide for various borrowing
rate options and expire from 1998 to 2002. The weighted-average interest rate on
borrowings on these credit agreements as of December 31, 1997 was 6.22%. The
credit agreements contain various covenants pertaining to financial ratios and
interest coverage.
In 1995, the Company issued $100 million of 6.625% Notes due 2005. A portion of
the proceeds of these notes was used to retire $50 million of 8.73% Senior Notes
due 2002. In connection with the early retirement of the notes, the Company paid
a premium of $6.5 million and wrote off $300,000 of unamortized debt issuance
costs. These transactions resulted in the extraordinary charge of $4.1 million,
net of tax benefits of $2.7 million.
The aggregate long-term debt maturing in the next five years is as follows:
1998-$11.5 million; 1999-$600,000; 2000-$160,000; 2001-$160,000; 2002-$328
million.
The fair value of debt at December 31, 1997 was $441 million and for other
financial instruments the fair value does not materially differ from the value
reflected in the financial statements. The fair value of the instruments was
based upon quoted market prices of the same or similar instruments or on a
discounted basis using the rates available to the Company for instruments of
similar maturity.
11. OTHER LONG-TERM LIABILITIES:
Other long-term liabilities consist of:
(in thousands) 1997 1996
- --------------------------------------------------------------------
Postretirement benefits $ 99,580 $ 97,955
Environmental reserves 19,881 13,203
Discontinued coal liabilities 44,946 46,248
Other 31,839 17,635
-------- --------
Total $196,246 $175,041
====================================================================
12. COMMITMENTS, CONTINGENCIES AND RELATED PARTIES:
The Company has operating leases in effect for equipment and facilities with
initial terms ranging from 2 to 20 years, with renewal options generally being
available. Future minimum annual rentals, net of estimated sublease rentals
under operating leases of $26.2 million, during each of the next five years are:
1998-$18 million; 1999-$17.4 million; 2000-$15.7 million; 2001-$13.2 million;
2002-$12.2 million and thereafter $73.6 million.
Rental expenses amounted to $28.1 million, $20.7 million, and $16.4 million for
1997, 1996, and 1995, respectively, net of sublease rentals of $4 million, $3.4
million, and $3.3 million for 1997, 1996, and 1995, respectively.
The Company leases certain real property from a company that is owned, in part,
by a director and employee of the Company. The Company paid $439,000, $465,000,
and $1.5 million in 1997, 1996, and 1995, respectively, for rental of the
property.
The Company regularly purchases lubricant stocks from a company, the president
of which is a director of the Company. The Company purchased $709,000, $3.3
million, and $1.6 million in 1997, 1996 and 1995, respectively for lubricant
stocks.
12
<PAGE>
The Company retained an advertising firm of which a director of the Company was
the vice chairman. The Company paid $14.9 million and $1.2 million in 1997 and
1996 for advertising and services.
In 1996, the Company entered into a long-term lube base stock supply agreement
with a major oil company. This agreement requires the Company to purchase a
certain volume of lube base stock based on a price formula.
In December 1996, the Company paid $24.8 million for 1,550,934 shares of its
capital stock to a former owner of Blue Coral, who was a director of the
Company, and to an affiliated trust.
In 1993, the United States commenced a lawsuit against the Company alleging that
the Company violated the federal Resource Conservation and Recovery Act and the
federal Clean Air Act at the West Virginia refinery. In 1996, a $2.9 million
settlement was reached that required the Company to pay a cash penalty and
complete certain supplemental environmental projects. In addition, the Company
was required to make certain capital improvements to the facility. The Company
incurred $12.2 million in 1997 in connection with these capital expenditures.
The Company sold the refinery in 1997 (see Note 3) but retained certain past
environmental liabilities associated with this facility. The Company expects to
complete the projects required by the environmental settlement in 1998. All
costs to complete these projects are provided for in the Company's environmental
reserves.
The Company has received notices from the United States Environmental Protection
Agency ("USEPA") and others that it is a potentially responsible party relative
to certain waste disposal sites identified by the USEPA and that it may be
required to share in the cost of clean-up. The Company anticipates some
liability for long-term remediation at formerly owned facilities including four
refineries and various coal operations.
At December 31, 1997, the Company had $28.2 million accrued for all
environmental matters which are probable and can be reasonably estimated. The
Company currently expects most of these costs to be paid over the next five to
ten years.
In 1996, the Federal Trade Commission ("FTC") filed an administrative proceeding
seeking an order that Slick 50 cease from making certain product claims and
refrain from making other product claims without adequate substantiation. In
addition, class action suits were filed against Slick 50 alleging false,
misleading, deceptive and/or unsubstantiated claims relating to Slick 50(R)
engine treatment. These actions seek damages on behalf of the purported classes.
In December 1997, the FTC approved and entered a consent decree settling the
administrative proceeding. The consent decree includes restrictions on the
future advertising of Slick 50(R) products and an agreement by the FTC not to
seek consumer redress provided Slick 50 makes available at least $10 million in
consumer redress in the form of coupons, refunds or free products for former
purchasers of Slick 50 products. The Company has reached a tentative settlement
with counsel in all of the above actions except one, under which the Company
would make available to class members $20 million in cash rebates usable against
future purchases of a variety of the products or services of the Company and its
subsidiaries and to pay attorneys' fees to counsel for the class as approved by
the court but not in any event to exceed $3.25 million. The Company will also
pay all costs of notice and settlement administration. The tentative settlement
will be presented for approval to the District Court for Dallas County, Texas.
The tentative settlement of the class action suits would fulfill the consumer
redress requirements under the FTC consent decree.
Contingent liabilities of an indeterminate amount exist in connection with suits
and claims arising in the ordinary course of business.
In the opinion of management, all matters discussed above are adequately accrued
for or covered by insurance or, if not so provided for, are without merit or the
disposition is not anticipated to have a material effect on the Company's
13
<PAGE>
financial position; however, one or more of these matters could have a material
effect on future quarterly or annual results of operations or cash flow when
resolved.
13. STOCK OPTIONS AND MANAGEMENT COMPENSATION:
The Company has various stock option, incentive and award plans. The Company
applies APB Opinion 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for stock options issued under the plans. Had compensation
cost for the Company's plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No.
123, "Accounting for Stock-Based Compensation" the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
(in thousands, except per share amount) 1997 1996
- -----------------------------------------------------------------
Net income $ 21,308 $13,225
Earnings per share .61 .38
=================================================================
Under current plans, 6,285,836 shares have been authorized for issuance.
Collectively, these plans include stock options, stock appreciation rights, cash
payment rights, restricted shares, performance shares and other share awards.
Under these plans, options have been granted to employees and non-employee
directors to purchase capital stock at a price no less than 100% of the fair
market value on the date of grant. Options granted may not be exercised for at
least six months from the date of grant and all options must be exercised within
ten years of the date granted.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996, and 1995: expected volatility of 26%,
risk-free interest rates of 6%, and expected lives of 3.5 years. A dividend
yield of 2.6%, 2.4%, and 2.4% was assumed for 1997, 1996, and 1995,
respectively. A summary of the status of the Company's stock option plans is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF YEAR 1,770,348 $14.52 1,988,950 $ 14.71 1,607,071 $ 14.65
Granted
Option price equal to market value 1,492,750 $14.57 223,500 $ 14.43 436,500 $ 14.22
Option price greater than
market value 90,000 $19.50 125,000 $ 16.81 50,000 $ 21.74
Exercised (66,400) $12.56 (179,551) $ 12.61 (64,201) $ 12.40
Canceled or expired (136,800) $16.99 (387,551) $ 17.20 (40,420) $ 19.07
- --------------------------------------------------------------------------------------------------------------------------
OUTSTANDING, END OF YEAR 3,149,898 $14.62 1,770,348 $ 14.52 1,988,950 $ 14.71
==========================================================================================================================
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options
granted during the year
Option price equal to market value $ 3.18 $3.22 $ 3.18
Option price greater than market value $ 2.82 $2.31 $ 1.79
Options exercisable at December 31 2,431,523 1,430,348 1,168,950
Shares available for option 2,236,962 134,833 420,604
Capital stock reserved 5,720,720 2,357,881 2,409,554
==========================================================================================================================
</TABLE>
14
<PAGE>
The following table summarizes information about the Company's stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contract Life Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.19-$14.00 1,068,198 6.53 $ 13.08 993,698 $ 13.07
$14.06-$14.50 1,124,250 8.96 $ 14.26 639,875 $ 14.26
$14.63-$23.81 957,450 7.18 $ 16.77 797,950 $ 16.92
- -----------------------------------------------------------------------------------------------------------
$10.19-$23.81 3,149,898 7.60 $ 14.62 2,431,523 $ 14.64
===========================================================================================================
</TABLE>
In 1997, 1996, and 1995, the Company issued 31,621, 45,000 and 72,845,
respectively, restricted shares with weighted-average fair values of $15.81,
$14.00 and $14.48 to certain key employees. Effective December 31, 1996, 96,477
performance restricted shares that had been issued in 1994 and 1995 were
canceled due to the non-achievement of certain three year performance goals
resulting in a credit to compensation expense of $1.2 million. The total impact
to compensation expense (benefit) for restricted stock awards was $309,000,
$(291,000), and $842,000 for 1997, 1996, and 1995, respectively.
14. EMPLOYEE BENEFIT PLANS:
The Company has noncontributory pension plans covering substantially all of its
corporate and Lubricants and Lubricant Services employees. Plans covering
substantially all of the salaried employees provide pension benefits that are
generally based on the employees' compensation and length of service. Plans
covering hourly employees provide benefits of stated amounts for each year of
service. The Company's funding policy is based on an actuarially determined cost
method allowable under statutory regulations.
Net pension cost for 1997, 1996, and 1995 is summarized below:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned during the period $ 2,401 $ 2,496 $ 2,886
Interest cost 10,207 9,668 9,629
Actual return on assets (13,025) (11,543) (22,791)
Net amortization and deferral (341) (858) 11,121
-------- -------- --------
Total pension (benefit) costs (a) $ (758) $ (237) $ 845
====================================================================================
</TABLE>
a. 1997 excludes $600,000 curtailment loss and $800,000 of special termination
benefits due to the sale of the West Virginia refinery and $1 million
curtailment gain due to the sale of Truck-Lite. 1995 excludes $1.8 million
and $800,000 curtailment gain and $3 million and $500,000 cost of special
termination benefits due to restructuring and sale of E&P.
15
<PAGE>
The funded status of the plans at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Exceed Accumulated Benefits
(in thousands) Benefits Assets Benefits Exceed Assets
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Vested benefit obligation $129,456 $ 4,189 $125,171 $ 1,013
======== ======= ======== =======
Accumulated benefit obligation 136,775 5,547 130,601 1,087
======== ======= ======== =======
Projected benefit obligation 144,942 5,835 139,438 1,308
Plan assets at fair value, primarily
pooled separate accounts 156,456 -- 145,468 --
-------- ------- -------- -------
Projected benefit obligation less than
(in excess of) plan assets 11,514 (5,835) 6,030 (1,308)
Prior service cost not yet recognized
in net periodic pension cost 2,699 80 4,085 98
Unrecognized net loss 2,297 30 8,181 67
Unrecognized transition asset (6,280) 138 (7,987) 184
Minimum liability adjustment -- (248) -- (349)
-------- ------- -------- -------
Prepaid pension cost (liability)
recognized in the balance sheet $ 10,230 $(5,835) $ 10,309 $(1,308)
===============================================================================================================
</TABLE>
Significant assumptions used in determining net pension costs and related
pension obligations are:
December 31, 1997 1996 1995
- -------------------------------------------------------------------
Discount rate 7.0% 7.5% 7.0%
Rate of increase in compensation levels 4.0% 4.0% 4.0%
Expected long-term rate of return on assets 9.0% 9.0% 9.0%
===================================================================
The Company has certain defined contribution plans including a Thrift and Stock
Purchase Plan and an Employee Stock Ownership Plan. The cost of these plans was
$1.8 million, $1.2 million, and $1.2 million in 1997, 1996, and 1995,
respectively.
In addition to providing pension benefits, the Company provides health care and
life insurance benefits for active and retired employees of certain
subsidiaries. These plans are unfunded, and the Company retains the right to
modify or eliminate these benefits.
The components of periodic expense for postretirement benefits in 1997, 1996 and
1995 were as follows:
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Service costs of benefits earned $1,609 $1,660 $ 697
Interest cost on liability 6,928 7,201 7,565
Amortization of (gain) loss (387) 477 129
------ ------ ------
Net periodic postretirement benefit cost (a) $8,150 $9,338 $8,391
==============================================================================
a. 1997 excludes $800,000 of curtailment gain due to sale of West Virginia
refinery. 1995 excludes $600,000 and $800,000 cost of curtailment due to
restructuring and sale of E&P.
16
<PAGE>
The status of the plans at December 31, 1997 and 1996 follows:
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
Retirees $ 91,139 $ 90,526
Fully eligible active participants 3,165 3,848
Other active participants 8,562 7,500
-------- --------
Accumulated postretirement benefit obligation (APBO) 102,866 101,874
Unrecognized net gain 1,714 1,081
-------- --------
Accrued postretirement benefit costs $104,580 $102,955
=============================================================================
For measurement purposes, a 7% annual rate of increase in the per capita claims
cost was assumed for 1997, declining gradually to 5% by the year 2001 and
thereafter. The health care cost trend rate assumption has a significant effect
on the APBO and net periodic benefit costs. A 1% increase in the trend rate for
health care costs would have increased the APBO at December 31, 1997 by 12% and
1997 service and interest costs by 14%.
Significant assumptions used in determining postretirement benefit expenses and
accumulated postretirement benefit obligations are:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.0% 7.5% 7.0%
Rate of increase in compensation levels 4.0% 4.0% 4.0%
=================================================================================================
15. SUPPLEMENTAL CASH FLOW INFORMATION:
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $ 26,536 $ 11,645 $ 6,911
Income taxes 12,401 11,961 30,562
==================================================================================================
Noncash investing and financing activities:
Capital stock issued for acquisitions (Note 2) $ 23,509 $ 49,458 $ 19,536
Debt issued for acquisition (Note 2) 10,312 -- --
Notes received in sale of assets 9,305 -- --
Capital stock issued under incentive plans (Note 13) 753 344 1,055
==================================================================================================
Details of acquisitions (Note 2):
Fair value of assets acquired $158,501 $305,915 $ 79,486
Liabilities assumed (14,894) (21,560) (26,289)
Debt issued (10,312) -- --
Stock issued (23,509) (49,458) (19,536)
-------- -------- --------
Cash paid 109,786 234,897 33,661
Less: cash acquired (894) (791) (2,653)
======== ======== ========
Net cash paid for acquisitions $108,892 $234,106 $ 31,008
=================================================================================================
</TABLE>
16. SEGMENT INFORMATION:
The Company's operations are organized into two segments. The Lubricants and
Lubricant Services segment produces and markets lubricants and provides fast
service automobile oil changes through the Company's Q Lube subsidiary. The
Company's Consumer Products segment consists of operations from its recent
acquisitions (see Note 2) of Slick 50, Blue Coral, Medo, Axius and Rain-X. The
Consumer Products segment manufactures and markets automotive aftermarket
products, including automotive chemicals, car appearance and air freshener
products. Intersegment sales are at market. Corporate assets consist principally
of deferred tax assets, cash and cash equivalents and assets not identifiable
with the operations of a segment.
17
<PAGE>
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (a)
Lubricants and lubricant services $ 914,682 $ 972,390 $906,158
Consumer products 287,594 143,929 39,962
Intersegment sales (8,305) (2,815) (862)
---------- ---------- --------
$1,193,971 $1,113,504 $945,258
======================================================================================
Operating Profits
Lubricants and lubricant services $ 33,703 $ 46,061 $ 39,868
Restructuring, systems integration and
other special charges (Note 3) (26,980) (17,871) (17,800)
---------- ---------- --------
Total lubricants and lubricant services 6,723 28,190 22,068
---------- ---------- --------
Consumer products 44,658 14,383 2,880
Restructuring, systems integration and
other special charges (Note 3) (13,833) (239) --
---------- ---------- --------
Total consumer products 30,825 14,144 2,880
---------- ---------- --------
Total operating profits 37,548 42,334 24,948
Corporate income 912 3,013 5,523
Gain on sale of joint venture interests 3,517 -- --
Interest expense (26,913) (12,609) (7,178)
Corporate expenses (18,855) (18,790) (19,816)
Restructuring, systems integration and
other special charges (Note 3) (7,598) 3,603 (9,200)
---------- ---------- --------
Total corporate expenses (26,453) (15,187) (29,016)
---------- ---------- --------
Income (loss) from continuing operations
before income taxes $ (11,389) $ 17,551 $ (5,723)
======================================================================================
Identifiable Assets
Lubricants and lubricant services $ 575,554 $ 505,236 $448,674
Consumer products 482,896 375,892 78,794
Discontinued operations 1,851 36,798 35,543
---------- ---------- --------
1,060,301 917,926 563,011
Corporate 109,414 111,083 144,640
---------- ---------- --------
$1,169,715 $1,029,009 $707,651
======================================================================================
</TABLE>
a. In 1997, 1996, and 1995, sales to one customer and its affiliated companies
totaled 19%, 19%, and 18%, respectively, of consolidated revenues.
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
Capital Expenditures
Lubricants and lubricant services $63,040 $53,519 $39,363
Consumer products 5,529 2,100 --
Discontinued operations 2,616 4,504 5,767
------- ------- -------
$71,185 $60,123 $45,130
============================================================================
Depreciation, Depletion and Amortization
Lubricants and lubricant services $27,531 $27,668 $27,940
Consumer products 13,735 8,113 2,520
Discontinued operations 2,819 2,797 7,870
------- ------- -------
$44,085 $38,578 $38,330
============================================================================
18
<PAGE>
17. QUARTERLY RESULTS (UNAUDITED):
<TABLE>
<CAPTION>
Quarters Ended 1997
---------------------------------------------------------------
(in thousands,
except per share data) March 31, June 30, September 30, December 31, Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $294,353 $319,274 $303,356 $276,988 $1,193,971
Gross profit (a)(b)(c) 102,594 115,432 103,355 62,862 384,243
Income (loss) from continuing operations 5,771 7,567 3,832 (24,559) (7,389)
Income from discontinued operations 1,094 1,277 1,477 26,629 30,477
Net income $ 6,865 $ 8,844 $ 5,309 $ 2,070 $ 23,088
==========================================================================================================
Per share:
Income (loss) from continuing operations $ .17 $ .21 $ .11 $ (.69) $ (.21)
Income from discontinued operations .03 .04 .04 .75 .87
Net income .20 .25 .15 .06 .66
Dividends $ .10 $ .10 $ .10 $ .10 $ .40
==========================================================================================================
</TABLE>
a. Gross profit equals total sales and operating revenues less cost of sales and
operating costs (excluding depreciation and amortization) and restructuring,
systems integration and other special charges.
b. Gross profit for the fourth quarter of 1997 was impacted positively by the
effect of LIFO liquidations of $3.1 million.
c. Gross profit for the third and fourth quarters was impacted negatively by the
effect of special charges of $5.3 million, and $43.1 million, respectively.
<TABLE>
<CAPTION>
Quarters Ended 1996
---------------------------------------------------------------
(in thousands,
except per share data) March 31, June 30, September 30, December 31, Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $255,251 $279,092 $289,197 $289,964 $1,113,504
Gross profit (a)(b)(c) 84,586 80,681 93,948 79,870 339,085
Income (loss) from continuing operations 4,479 5,945 5,826 (6,599) 9,651
Income from discontinued operations 1,227 1,228 928 689 4,072
Net income (loss) $ 5,706 $ 7,173 $ 6,754 $ (5,910) $ 13,723
==========================================================================================================
Per share:
Income (loss) from continuing operations $ .13 $ .18 $ .16 $ (.18) $ .28
Income from discontinued operations .04 .04 .03 .02 .12
Net income (loss) .17 .22 .19 (.16) .40
Dividends $ .10 $ .10 $ .10 $ .10 $ .40
==========================================================================================================
</TABLE>
a. Gross profit equals total sales and operating revenues less cost of sales
and operating costs (excluding depreciation and amortization) and
restructuring, systems integration and other special charges.
b. Gross profit for the second, third and fourth quarters of 1996 was impacted
positively by the effect of LIFO liquidations of $300,000, $200,000 and
$600,000, respectively.
c. Gross profit for the first, second, third and fourth quarters was impacted
negatively by the effect of special charges of $470,000, $340,000 $90,000
and $13.6 million, respectively.
19
<PAGE>
QUAKER STATE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Income
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
(in thousands except per share data, unaudited) 9/30/98 9/30/97 9/30/98 9/30/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Sales and operating revenues $296,509 $303,356 $907,917 $916,983
Other, net 3,531 1,132 6,111 4,551
-------- -------- -------- --------
300,040 304,488 914,028 921,534
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of sales and operating costs 183,340 194,710 551,836 590,311
Selling, general and administrative 83,038 80,566 263,369 246,408
Depreciation and amortization 12,612 10,350 35,392 30,303
Interest 7,385 7,189 21,899 20,251
Systems integration, merger,
restructuring and other special charges 10,929 5,291 32,603 5,291
-------- -------- -------- --------
297,304 298,106 905,099 892,564
-------- -------- -------- --------
Income from continuing operations before
income taxes 2,736 6,382 8,929 28,970
Provision for income taxes 1,750 2,550 4,550 11,800
-------- -------- -------- --------
Income from continuing operations 986 3,832 4,379 17,170
Income from discontinued operations -- 1,477 -- 3,848
-------- -------- -------- --------
NET INCOME $ 986 $ 5,309 $ 4,379 $ 21,018
======== ======== ======== ========
PER SHARE (BASIC AND DILUTED)
Income from continuing operations $.03 $ .11 $.12 $ .49
Income from discontinued operations -- .04 -- .11
-------- -------- -------- --------
NET INCOME $.03 $ .15 $.12 $ .60
======== ======== ======== ========
Weighted average shares outstanding - Basic 36,430 35,140 36,384 35,042
Weighted average shares outstanding - Diluted 36,675 35,453 36,829 35,256
======== ======== ======== ========
Dividends paid per share $.10 $ .10 $.30 $ .30
======== ======== ======== ========
COMPREHENSIVE INCOME
Net income $ 986 $ 5,309 $ 4,379 $ 21,018
Foreign currency translation adjustment,
net of tax 56 188 (287) 271
-------- -------- -------- --------
Comprehensive income $ 1,042 $ 5,497 $ 4,092 $ 21,289
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE>
QUAKER STATE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
(in thousands, unaudited) 1998 1997
--------- ----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 6,498 $ 22,609
-------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures (28,494) (45,087)
Proceeds from disposal of property and equipment and refinery 6,132 36,764
Acquisition of businesses, net of cash acquired (9,395) (71,561)
Taxes paid on sale of discontinued operations (12,250) --
Other, net 1,300 (3,343)
-------- ---------
Net cash used in investing activities (42,707) (83,227)
-------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid (10,914) (10,492)
Proceeds from debt 49,745 228,057
Payments on debt (7,239) (171,465)
Other, net 1,717 --
-------- ---------
Net cash provided by financing activities 33,309 46,100
-------- ---------
Net decrease in cash and cash equivalents (2,900) (14,518)
Total cash and cash equivalents at beginning of period 20,205 31,224
-------- ---------
TOTAL CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,305 $ 16,706
======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE>
QUAKER STATE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands, except share data) 1998 1997
-------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,305 $ 20,205
Accounts and notes receivable, less allowance of $4,947 and
$4,696 in 1998 and 1997 197,636 186,654
Inventories 98,012 90,821
Other current assets 21,722 20,068
---------- ----------
Total current assets 334,675 317,748
---------- ----------
Property, plant and equipment, at cost 258,279 247,073
Goodwill, brands and other assets 598,906 604,894
---------- ----------
TOTAL ASSETS $1,191,860 $1,169,715
========== ==========
LIABILITIES
Current liabilities:
Accounts payable $ 69,095 $ 70,805
Accrued liabilities 121,675 130,088
Debt payable within one year 4,350 11,477
---------- ----------
Total current liabilities 195,120 212,370
---------- ----------
Long-term debt 478,528 429,198
Other long-term liabilities 189,541 196,246
---------- ----------
Total liabilities 863,189 837,814
---------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Capital stock $1.00 par value; authorized shares, 250,000,000;
issued shares, 38,224,651 and 37,977,144 in 1998 and 1997 38,225 37,977
Additional capital 214,332 210,734
Retained earnings 105,916 112,451
Cumulative foreign currency translation adjustment (154) 133
Treasury stock, at cost, 1,772,264 and 1,699,593 in 1998 and 1997 (28,152) (26,924)
Unearned compensation (1,496) (2,470)
---------- ----------
Total stockholders' equity 328,671 331,901
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,191,860 $1,169,715
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
22
<PAGE>
QUAKER STATE CORPORATION AND SUBSIDIARIES
Segment Information
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
(in thousands, unaudited) 9/30/98 9/30/97 9/30/98 9/30/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Lubricants and lubricant services $228,192 $237,540 $661,867 $706,823
Consumer products 70,415 68,405 252,762 217,675
Intersegment sales (2,098) (2,589) (6,712) (7,515)
-------- -------- -------- --------
Total operating revenues $296,509 $303,356 $907,917 $916,983
======== ======== ======== ========
OPERATING PROFITS
Lubricants and lubricant services $ 18,529 $ 11,292 $ 44,417 $ 32,563
Systems integration, merger,
restructuring and other special charges (3,321) (4,930) (9,761) (4,930)
-------- -------- -------- --------
Total lubricants and lubricant services 15,208 6,362 34,656 27,633
-------- -------- -------- --------
Consumer products 5,701 11,036 32,043 35,921
Systems integration, merger,
restructuring and other special charges (1,397) (147) (7,837) (147)
-------- -------- -------- --------
Total consumer products 4,304 10,889 24,206 35,774
-------- -------- -------- --------
Total operating profits 19,512 17,251 58,862 63,407
Interest expense (7,385) (7,189) (21,899) (20,251)
Corporate other income 142 235 406 616
Corporate expense (3,322) (3,701) (13,435) (14,588)
Systems integration, merger,
restructuring and other special charges (6,211) (214) (15,005) (214)
-------- -------- -------- --------
Total corporate expenses (9,533) (3,915) (28,440) (14,802)
-------- -------- -------- --------
Income from continuing operations before
income taxes $ 2,736 $ 6,382 $ 8,929 $ 28,970
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quaker State Corporation and Subsidiaries (unaudited)
1. In the opinion of management of Quaker State Corporation (the "Company"),
the accompanying financial statements include all adjustments which are
necessary for a fair statement of the results for such periods. All of
these adjustments are of a normal recurring nature. The December 31, 1997
condensed consolidated balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. These statements should be read in
conjunction with the financial statements included in the 1997 Annual
Report on Form 10-K.
2. Special charges of $32.6 million for the nine months ended September 30,
1998 are comprised of $14.5 million of systems integration costs, $15
million of merger costs (see Note 8) and $3.1 million of restructuring and
other special charges.
3. The effective tax rates are higher than the 35% federal statutory rate due
to the impact of state and foreign taxes and nondeductible amortization.
4. The difference between basic and diluted weighted average shares of capital
stock outstanding for the quarter and nine months ended September 30, 1998
and 1997 is due to dilutive stock options of 245,000 and 313,000, and
445,000 and 214,000, respectively.
5. The following schedule is prepared on a pro forma basis as though Rain-X
Corporation ("Rain-X") and the assets of Auto-Shade, L.L.C. and Auto-Shade
(Overseas) L.L.C. ("Axius") had been acquired as of January 1, 1997 and
Truck-Lite Co. Inc. ("Truck-Lite") was sold as of January 1, 1997, after
including the impact of adjustments, such as amortization of goodwill,
brands and other intangible assets, interest expense and related tax
effects.
<TABLE>
For the nine months ended September 30, 1997 (in thousands except per share data)
- ---------------------------------------------------------------------------------
<S> <C>
Revenues $964,364
Income from continuing operations 19,024
Income per share from continuing operations .53
--------
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the period presented.
In addition, they are not intended to be a projection of future results.
6. Inventories are stated at the lower of cost or market. Cost is determined
on the last-in, first-out ("LIFO") basis for manufactured products. For other
inventories, such as purchased finished lubricating oils and purchased
automotive aftermarket products, cost is determined on the first-in, first-
out ("FIFO") basis. The reserve to reduce the carrying value of inventories
from FIFO basis to LIFO basis amounted to $3.6 million at September 30, 1998
and $7.5 million at December 31, 1997. Inventories consist of:
<TABLE>
<CAPTION>
September 30, December 31,
(in thousands) 1998 1997
- --------------------------------- ------------- ------------
<S> <C> <C>
Lubricants and related materials $59,985 $59,242
Consumer products 38,027 31,579
------- -------
Total $98,012 $90,821
======= =======
</TABLE>
Certain inventory quantities were reduced resulting in liquidation of LIFO
inventory which increased net income by $1.6 million or $.04 per share for
the nine months ended September 30, 1998.
24
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. On July 28, 1998, Oil Changer, Inc. ("Oil Changer") and several corporations
affiliated with Oil Changer filed a suit in the Superior Court of the State
of California, Alameda County, against the Company, certain executives of the
Company and other individuals. The complaint alleges that the Company and Oil
Changer were "strategic partners" in an alleged partnership to develop quick
lubrication centers in Northern California. Oil Changer alleges that the
Company breached the alleged agreement by developing quick lubrication
centers with another entity. The complaint asserts claims for fraud, breach
of fiduciary duty and usurpation of partnership opportunity, partnership
accounting, breach of contract, conspiracy and violation of Section 17200 of
the California Business Professions Code. Plaintiffs seek compensatory
damages of $50 million, punitive damages, restitution, attorneys' fees and
costs as well as injunctive relief. The Company has filed an answer denying
liability and a cross-complaint alleging breach by Oil Changer of a loan
agreement with the Company and seeking damages and judicial foreclosure of
the collateral held by the Company.
In addition, on July 28, 1998, Oil Changer and several corporations
affiliated with Oil Changer filed a complaint in the United States District
Court for the Northern District of California against the Company and
Pennzoil Company ("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
proposed merger of the Company and Pennzoil's downstream business 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
proposed merger. On September 4, 1998, the Company filed a motion to
dismiss this complaint, which was granted in part resulting in a dismissal
of the claims under the California Business Professions Code and certain
Sherman Act and Clayton Act claims. On October 8, 1998, Plaintiffs filed a
notice of motion for a preliminary injunction to enjoin the proposed
merger, to which the Company and Pennzoil filed a joint opposition.
The Company has received notices from the EPA and others that it is a
"potentially responsible party" relative to certain waste disposal sites
identified by the EPA and may be required to share in the cost of cleanup.
The Company has accrued for all matters, which are probable and can be
reasonably estimated.
Contingent liabilities of an indeterminate amount exist in connection with
suits and claims arising in the ordinary course of business.
In the opinion of management, all matters discussed above are adequately
accrued for or covered by insurance, or, if not so provided for, are
without merit or the disposition is not anticipated to have a material
effect on the Company's financial position; however, one or more of these
matters could have a material effect on future quarterly or annual results
of operations or cash flow when resolved.
8. On April 14, 1998, the Company, Pennzoil and certain Pennzoil subsidiaries
entered into an Agreement and Plan of Merger (the "Merger Agreement"). The
Merger Agreement and related agreements provide for the separation of
Pennzoil's motor oil, refined products and franchise operations from its
exploration and production operations and for the combination of the motor
oil, refined products and franchise operations with the Company. Closing
under the Merger Agreement is conditioned on, among other things, approval by
the Company's stockholders, expiration or termination of waiting periods
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act"),
and receipt of a favorable tax ruling from the Internal Revenue Service. The
waiting period under the HSR Act expired on May 27, 1998. The Company's
stockholders approved the merger at the Special Meeting of Stockholders held
on September 18, 1998.
25
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Merger Agreement, if consummated, would result in a Change of Control
(as defined in the Company's $400 million Credit Agreement). Under the
terms of the Credit Agreement, the Company would be required to notify each
Bank (as defined in the Credit Agreement) that a Change of Control has
occurred within ten days of such occurrence, and each Bank may terminate
its Commitment (as defined in the Credit Agreement) and declare the Note
(as defined in the Credit Agreement) immediately due and payable with three
Domestic Business Days (as defined in the Credit Agreement) notice given
not later than ninety days after such Change of Control.
26
