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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 1-5591
PENNZOIL-QUAKER STATE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 76-0200625
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $0.10 per share New York Stock Exchange
Pacific Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
Pacific Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Aggregate market value of the voting stock held by non-affiliates of the
registrant: $1.2 billion as of January 31, 1999.
Number of shares outstanding of each class of the registrant's classes of
common stock, as of the latest practicable date, January 31, 1999: Common Stock,
par value $0.10 per share -- 77,619,765.
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE PROXY STATEMENT TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A
UNDER THE SECURITIES EXCHANGE ACT OF 1934 IN CONNECTION WITH THE COMPANY'S 1999
ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III
HEREOF (TO THE EXTENT SET FORTH IN ITEMS 10, 11, 12 AND 13 OF PART III OF THIS
ANNUAL REPORT ON FORM 10-K).
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FORWARD-LOOKING STATEMENTS -- SAFE HARBOR PROVISIONS
This annual report on Form 10-K of Pennzoil-Quaker State Company for the
year ended December 31, 1998 contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. To the extent that
such statements are not recitations of historical fact, such statements
constitute forward-looking statements which, by definition, involve risks and
uncertainties. In particular, statements (i) under the captions (a) "Lubricants
and Consumer Products," (b) "Base Oil and Specialty Products" and (c) "Fast Lube
Operations" under "Item 1. Business and Item 2. Properties" and (ii) under the
captions (a) "Results of Operations," (b) "Disclosures About Market Risk," (c)
"Capital Resources and Liquidity" and (d) "Year 2000 Issues" under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" contain forward-looking statements. Where, in any forward-looking
statement, Pennzoil-Quaker State Company expresses an expectation or belief as
to future results or events, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but there can be no assurance
that the statement of expectation or belief will result or be achieved or
accomplished.
The following are factors that could cause actual results or events to
differ materially from those anticipated, and include but are not limited to
general economic, financial and business conditions; commodity prices for crude
oil; competition in the motor oil marketing business; base oil margins and
supply and demand in the base oil business; the success and costs of advertising
and promotional efforts; mechanical failure in refining operations;
unanticipated environmental liabilities; changes in and compliance with
governmental regulations; changes in tax laws; and the costs and effects of
legal proceedings.
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PART I
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES.
Pennzoil-Quaker State Company (the "Company" or "Pennzoil-Quaker State") is
a premier worldwide automotive aftermarket products and consumer car care
company. The Company is engaged primarily in the manufacturing and marketing of
lubricants, car care products, base oils and specialty industrial products and
in the franchising, ownership and operation of fast lube centers.
Pennzoil-Quaker State has strong brand-name recognition in key product
categories such as motor oil with Pennzoil(R), Quaker State(R) and Wolf's
Head(R), fast lube centers with Jiffy Lube(R) and car care products with Slick
50(R), Rain-X(R), Blue Coral(R), Black Magic(R), Westley's(R), Medo(R),
Axius(R), Gumout(R), Fix-A-Flat(R), The Outlaw(R), Snap(R), Classic(R) car wax
and others.
Pennzoil-Quaker State is the result of the consolidation and separation on
December 30, 1998 (the "Spin-off") of the lubricants and consumer products, base
oil and specialty products and Jiffy Lube fast lube operations of Pennzoil
Company and the acquisition by the Company of Quaker State Corporation ("Quaker
State") in a merger transaction immediately following the separation. Reference
is made to Note 2 and Note 5 of Notes to Consolidated Financial Statements for
additional information.
SEGMENT FINANCIAL INFORMATION
Effective December 31, 1998, Pennzoil-Quaker State adopted Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of
an Enterprise and Related Information." Prior period disclosures have been
restated to conform to the requirements of this statement.
Pennzoil-Quaker State's businesses are organized, managed and internally
reported as three segments. The segments, which are based on differences in
products and services, are (1) lubricants and consumer products, (2) base oils
and specialty products and (3) fast lube operations. These segments have
worldwide responsibility for virtually all of the Company's product lines.
Transactions between reportable segments are recorded at market. The
majority of intersegment sales are from the base oil and specialty products
segment to the lubricants and consumer products segment. The Company excludes
interest expense and income tax expense or benefit from segment profit or loss.
Reference is made to Note 14 of Notes to Consolidated Financial Statements for
additional segment financial information.
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1998 1997 1996
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(EXPRESSED IN THOUSANDS)
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NET SALES(1)
Lubricants and Consumer Products......................... $ 960,493 $ 966,195 $ 947,002
Base Oil and Specialty Products(2)....................... 717,358 916,759 1,007,326
Fast Lube Operations..................................... 322,704 316,068 290,219
Other.................................................... 248 264 163
Intersegment Sales....................................... (199,127) (217,138) (283,394)
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$1,801,676 $1,982,148 $1,961,316
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OPERATING INCOME (LOSS)(1)(3)
Lubricants and Consumer Products......................... $ 55,923 $ 76,460 $ 73,038
Base Oil and Specialty Products(4)....................... 16,003 19,375 (19,711)
Fast Lube Operations(5).................................. (4,054) 24,492 21,383
Impairment of Long-Lived Assets(6)....................... (29,613) -- --
Other.................................................... (8,099) 1,919 708
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30,160 122,246 75,418
Corporate Administrative Expense......................... 44,422 54,810 30,639
Interest Expense......................................... 69,943 61,780 55,071
Income Tax Provision (Benefit)........................... (38,338) 6,245 (1,103)
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Net Loss....................................... $ (45,867) $ (589) $ (9,189)
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IDENTIFIABLE ASSETS(1)
Lubricants and Consumer Products......................... $1,667,429 $ 371,057 $ 287,536
Base Oil and Specialty Products(7)....................... 700,546 757,042 620,853
Fast Lube Operations..................................... 527,387 348,764 339,293
Other.................................................... 249,632 82,760 122,817
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$3,144,994 $1,559,623 $1,370,499
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DEPRECIATION AND AMORTIZATION(1)
Lubricants and Consumer Products......................... $ 23,709 $ 17,885 $ 17,125
Base Oil and Specialty Products.......................... 28,169 25,153 14,938
Fast Lube Operations..................................... 24,507 21,439 19,840
Other.................................................... 825 13 15
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$ 77,210 $ 64,490 $ 51,918
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CAPITAL EXPENDITURES(1)(8)
Lubricants and Consumer Products......................... $ 23,739 $ 32,310 $ 23,090
Base Oil and Specialty Products(9)....................... 18,352 89,648 208,587
Fast Lube Operations..................................... 28,651 25,836 19,509
Other.................................................... 17,598 -- --
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$ 88,340 $ 147,794 $ 251,186
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(1) On December 30, 1998, the Company acquired Quaker State in a merger
transaction. Reference is made to Note 2 of Notes to Consolidated Financial
Statements for additional information. Net sales, operating income (loss),
depreciation and amortization and capital expenditures for 1998, 1997 and
1996 do not include Quaker State. The fair value of assets and liabilities
of Quaker State are included in the Company's consolidated balance sheet as
of December 31, 1998.
(2) In October 1997, the Company contributed most of its specialty industrial
products business to Penreco, a partnership with Conoco Inc. ("Conoco").
The partnership is accounted for under the equity method with the Company's
share of net earnings being reported as a component of other income.
(3) Total 1998 operating income includes one-time pretax charges of $10.6
million related to the acquisition of Quaker State on December 30, 1998.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations" and Note 2 of
Notes to Consolidated Financial Statements for additional information.
(4) Operating income includes Pennzoil-Quaker State's share of income (loss)
from the Company's Excel Paralubes, Penreco and Bareco partnerships of
$32.9 million, $4.4 million and $(16.7) million for the years ending
December 31, 1998, 1997 and 1996,
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respectively. Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Base Oil and Specialty
Products" for additional information.
(5) The decrease in operating income in 1998 compared to 1997 includes $14.8
million of nonrecurring charges as a result of one-time acquisition
expenses, legal settlements and other liabilities.
(6) In December 1998, the fast lube operations segment recorded a pretax charge
of $29.6 million to reflect the impairment of long-lived assets as required
under SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." These impairment charges have not
been included in depreciation and amortization expenses in the table above.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Fast Lube Operations and Note 3 of
Notes to Consolidated Financial Statements" for additional information.
(7) Identifiable assets includes $16.9 million, $32.5 million and ($18.9)
million in net investment in equity method investees at December 31, 1998,
1997 and 1996, respectively.
(8) Includes interest capitalized of $0.3 million, $7.4 million and $10.1
million in 1998, 1997 and 1996, respectively.
(9) Total 1997 and 1996 capital expenditures include $42.0 million and $147.3
million, respectively, relating to the upgrade of the Company's Shreveport
manufacturing facility.
Narrative descriptions of these business segments follow, with emphasis on
1998 developments. Unless otherwise indicated by the context, references to
Pennzoil-Quaker State include its subsidiaries.
LUBRICANTS AND CONSUMER PRODUCTS
The Company's lubricants and consumer products segment manufactures and
markets lubricants and other automotive aftermarket consumer products.
LUBRICANTS. The Company manufactures and markets Pennzoil(R), Quaker
State(R) and Wolf's Head(R) motor oil. The Company also manufactures and markets
transmission fluids, gear lubricants and greases, as well as specialty
lubricants designed for sport utility vehicles, heavy duty agricultural and
construction equipment, marine craft, motorcycles and snowmobiles. These other
lubricants are sold under the Pennzoil(R) and Quaker State(R) brand names and
certain private label and proprietary brand names. The Company also markets
automobile consumer products such as oil and air filters and antifreeze produced
by third parties and provides collection, transportation and recycling services
for used oil, antifreeze and used oil filters in certain regions of the United
States.
The primary markets for the Company's lubricants are mass merchandisers,
auto parts stores, lube centers and automobile dealerships. Secondary markets
include convenience stores, drug stores, grocery stores, tire stores and
independent automotive repair facilities. The Company markets its branded motor
oils in packages ranging in size from four ounces to 55 gallons and sells a
significant amount in bulk to the installed market. Packaged motor oil is
primarily sold in one quart plastic bottles.
Consumer marketing for the Company's lubricants focuses primarily on the
driving conditions experienced by vehicle owners and the technical benefits that
lubricants can provide under those conditions. Key components of the marketing
strategy include targeted media, motorsports participation, public relations and
consumer promotions. Targeted media includes national and local television,
radio and print advertising designed to reach specific populations of consumers
based upon their usage. Motorsports participation includes team sponsorships in
NASCAR(R), Indy Racing League(R), NHRA(R) and the sponsorship of the Pennzoil
World of Outlaws(R), a grass roots sprint car racing series. In addition,
several national and local racing events are sponsored by the Company.
In marketing its lubricants, the Company utilizes a brand management
structure. Under this approach, the Company centralizes all brand-related
activity under a single manager for each brand, allowing coordination of all
strategic and tactical decisions for advertising and promotions, product
packaging and positioning, formulation strategy and pricing. The brand manager
is responsible for developing the annual marketing plan that is designed to
enhance brand equity.
Motor oils and lubricants are produced by the Company by blending additives
and lubricant base oils in thirteen domestic blending and packaging plants.
These plants are located in Portland, Oregon; Vernon, California; Alameda,
California; Carson, California; Shreveport, Louisiana (where two are located);
Rouseville, Pennsylvania; Mundy's Corner, Pennsylvania; St. Louis, Missouri;
Marion, Illinois; Newell, West
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Virginia; Vicksburg, Mississippi; and San Antonio, Texas. The Newell, West
Virginia location is leased and the other locations are owned by the Company.
Base oils processed by the Company's blending and packaging plants are purchased
at prevailing market prices and supplied by the Company's manufacturing
facilities, Excel Paralubes (either directly or through exchanges) and other
outside suppliers. Substantially all additives are purchased from outside
suppliers. The Company believes that alternative sources of supply for base oils
and additives are readily available.
Lubricants are distributed domestically through 80 owned and operated
distribution facilities in 29 states. The Company's products are also
distributed through independent distributors and directly from third-party
suppliers.
The Company markets Pennzoil(R) and Quaker State(R) lubricants and car care
products in more than 80 countries outside of the United States through directly
and indirectly wholly and partly owned subsidiary companies, joint ventures,
licensees, distributors and jobbers. During 1998, the Company's largest national
markets outside the United States (by total lubricant sales volume) were Mexico,
Canada, Thailand, India and Indonesia. The Company's motor oil and other
lubricants are blended and packaged by wholly owned subsidiaries of the Company
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.
CONSUMER PRODUCTS. The Company manufactures and markets automotive
polishes, car wash products and automotive air fresheners, and markets
automobile engine and fuel treatments, automotive window shades, automotive
glass treatments, tire inflators and automotive accessories. These products are
marketed under national brand names such as Slick 50(R), Rain-X(R), Blue
Coral(R), Black Magic(R), Westley's(R), Medo(R), Axius(R), Gumout(R), Snap(R),
Fix-A-Flat(R), The Outlaw(R), Classic(R) car wax and other proprietary brand
names. The divisions of the Company included in the consumer product segment are
described below.
The Blue Coral/Slick 50 division markets Slick 50(R) automotive engine
treatments and related automotive chemical products and manufactures and markets
Blue Coral(R) automobile appearance products. Slick 50(R) branded products are
produced by third party contract manufacturers and distributed directly to
customers or shipped to company locations for distribution to customers. Blue
Coral purchases chemicals, waxes and cleaners from a variety of suppliers and
blends and packages finished products at its leased facility in Cleveland, Ohio.
The Blue Coral/Slick 50 division also markets Rain-X(R), the leading brand of
rain repellant for automobile windows, Black Magic(R) non-waterbased tire
protectant and dressing products and Westley's(R) car washes and cleaners. The
majority of the Rain-X(R), Black Magic(R) and Westley's(R) brand products are
manufactured and distributed by third party contract manufacturers.
The Medo division designs, manufactures and markets air fresheners
primarily for use in automobiles. Medo purchases paperboard, containers and
fragrance from a variety of suppliers, and manufactures and distributes finished
air fresheners from a leased Baltimore, Maryland facility.
The Axius division 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 Moorepark,
California facility.
The Company's automotive chemicals division manufactures and markets
Fix-A-Flat(R) tire inflators, Gumout(R) fuel additives and cleaners, The
Outlaw(R) fuel additives, Snap(R) fuel additives, cleaners and performance
fluids, Classic(R) car waxes and washes and other private and house brand
automotive chemicals. Fix-A-Flat(R) is the number one seller of tire inflators
in the United States, and Gumout(R) is the number one seller of carburetor spray
cleaners in the United States. Fix-A-Flat(R), Gumout(R), The Outlaw(R), and
Snap(R) products are manufactured through arrangements with third party contract
manufacturers. Classic(R) products are manufactured at a leased facility in
Winter Haven, Florida and by third party contract manufacturers.
The Company's consumer products are marketed primarily to the consumer
through mass merchandisers and auto parts stores, and secondarily through the
installed market (lube centers, service stations, automobile dealerships, etc.).
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Outside the United States, the Company's consumer products are manufactured
by third parties in the United Kingdom. Products are sold in 48 countries
through wholly and partly owned subsidiaries, licensees, sales agents and
distributors.
BASE OIL AND SPECIALTY PRODUCTS
BASE OIL. The Company owns and operates two base oil and specialty product
manufacturing facilities, one located in Rouseville, Pennsylvania and the other
located in Shreveport, Louisiana. The paraffinic base oil produced by these
manufacturing facilities is used in the blending of 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 and other naphthenic base oils for use in producing specialty
industrial products or for sale to industrial customers. In addition, the
Company markets gasoline and distillate products in eight states through
wholesale distributors to retail outlets under the Pennzoil(R) brand name or as
an unbranded product.
The Company and Conoco are equal partners in Excel Paralubes, 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 the Company. The Company purchases 50% of
base oil production volume of Excel Paralubes at contract rates based on
prevailing market prices.
SPECIALTY PRODUCTS. The Company and Conoco are partners in Penreco. The
Company 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.
The Company and Baker Petrolite Corporation, the specialty chemicals
division of Baker Hughes Incorporated, are equal 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. The
Company 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 the Company's Shreveport manufacturing facility and waxes
purchased from other suppliers, are marketed through the partnership under the
Be Square(R) and other brand names.
The Company is currently evaluating its manufacturing assets and
investments and their importance to the Company's strategic plan and future
direction. As a result of this evaluation, the Company may determine to dispose
of or discontinue the operations of some or all of its manufacturing assets and
investments. The Company cannot currently predict the timing or the financial
impact of any such dispositions or discontinuances, which could result in cash
or non-cash charges, depending on the manner and timing of any such dispositions
or discontinuances.
FAST LUBE OPERATIONS
The Company provides fast automotive preventive maintenance services in the
United States through Jiffy Lube(R) and Q Lube(R) service centers.
As of December 31, 1998, 1,588 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. Franchisees
operated 1,009 of these service centers and the other 579 service centers were
owned and operated by Jiffy Lube, including 31 franchised service centers and
134 company-operated service centers at Sears Auto Centers across the country.
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As of December 31, 1998, 619 Q Lube(R) service centers were open in 28
states, primarily in the western, midwestern and southern United States and in
Canada. Franchisees operated 123 of these service centers, 438 of these service
centers were owned and operated by Q Lube and the other 58 service centers were
operated by joint ventures between Q Lube and franchisees. Fast lube centers
owned by Q Lube and its franchisees are operated under the names Q Lube(R),
McQuik's Oilube(R) or Quaker State Minit-Lube(R). During the next two years, the
Company intends to rebrand all existing Q Lube(R) centers to Jiffy Lube(R)
service centers to achieve single system synergies.
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 service centers also provide
other authorized services and products at an additional cost. Pennzoil motor oil
is the featured motor oil in company-operated service centers and most
franchise-operated centers. Pennzoil supplied approximately 87% of the
lubricants to Jiffy Lube centers in 1998.
Jiffy Lube 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 the
Company and their principal brands of motor oil in the United States are Ashland
Inc. (Valvoline(R)), Texaco, Inc. (Havoline(R)), Burmah Castrol PLC
(Castrol(R)), and Mobil Oil Corporation (Mobil(R)). The Company also competes
with a number of independent blending and packaging companies. Outside of the
United States, the Company also competes with major fuels marketers and
state-owned petroleum companies. The principal methods of competition in the
motor oil business are breadth of product portfolio, product quality, price,
distribution capability, advertising and sales promotion. Some of the
competitors, particularly the major integrated oil companies, have greater
financial resources than the Company.
The car care consumer products 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 appearance products Armor All(R) and Turtle Wax(R).
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 base oil and specialty products business is highly competitive. The
major competitors are Witco Corporation, Petro-Canada and Lyondell Chemical
Company in the white oils business and several major integrated oil companies in
base oil (primarily Exxon and Equilon) and 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 highly competitive. Major competitors include
Ashland Inc. through its Valvoline Instant Oil Change(R) centers. A large number
of independent fast lube chains also compete with Jiffy Lube and Q Lube on a
regional or local basis. In addition to competing with other fast lube centers,
Jiffy Lube(R) and Q Lube(R) service centers compete 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.
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PATENTS AND TRADEMARKS
Most of the Company's brand name consumer products are protected by
registered trademarks. Pennzoil-Quaker State's brand names and trademarks are
extremely important to its business, and the Company pursues a course of
vigorous action against apparent infringements. The Company's numerous
trademarks have been registered in the United States and throughout the world
where the Company's products are sold. The Company's rights in these trademarks
endure for as long as they are used or registered.
The Company currently has 110 active patents related to lubricants,
synthetic lubricants, lubricant additives, hydrocarbon gel and automotive
chemicals. Although some products are covered by patents, the Company does not
believe that patents are material to its business.
RESEARCH AND DEVELOPMENT
Research and development activities are directed toward continued
improvement of 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 products
and provide extensive technical services to the manufacturing, packaging, sales
and marketing operations as well as to customers and consumers.
The Company spent approximately $12.1 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. The Company 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.
EMPLOYEES
As of December 31, 1998 the Company and its subsidiaries had approximately
13,200 employees, of whom approximately 9,300 were full-time employees and
approximately 3,900 were temporary and part-time employees. Approximately 4
percent of the Company's employees are represented by various labor unions.
Collective bargaining agreements are in force with most of the unions.
The Company is subject to various federal and state laws and regulations
governing employment practices and working conditions, including, but not
limited to, Title VII of the Civil Rights Act of 1964, as amended, the Civil
Rights Act of 1866, as amended, the Equal Pay Act of 1963, the Civil Rights Act
of 1991, the Americans with Disabilities Act of 1990, the Family and Medical
Leave Act of 1993, the Drug Free Workplace Act of 1989, the Age Discrimination
in Employment Act of 1967, as amended, the Rehabilitation Act of 1973, as
amended, the Vietnam Era Veterans' Readjustment Assistance Act of 1974, as
amended, the Occupational Safety and Health Act of 1970, the Fair Labor
Standards Act of 1938, as amended, the National Labor Relations Act of 1935, as
amended, and Executive Order 11246.
GOVERNMENTAL REGULATION
The Company'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 the Company 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.
The Company 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 Company. 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
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<PAGE> 10
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 Company 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 Company's refineries will likely be required to
be reformulated to a composition significantly different from the fuels
currently produced, which would involve the installation of additional refining
equipment. However, current estimates indicate that expenditures associated with
the installation of such equipment would not have a material effect on the
Company's results of operations.
The Company 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 estimates are possible. The Company 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.
The Company'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. The Company'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 1996 through December 1998, capital outlays of approximately
$10.6 million have been made by the Company with respect to environmental
protection. Capital expenditures for environmental control facilities are
currently expected to be approximately $0.6 million in 1999. Reference is made
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations for Pennzoil-Quaker State -- Capital Resources and
Liquidity -- Environmental" for additional information.
FAST LUBE OPERATIONS MATTERS. Jiffy Lube and Q Lube are subject to, and
devote 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 and Q
Lube seek to comply with applicable regulatory requirements. However, given the
scope of the fast lube business and the nature of franchise regulations,
compliance problems can be encountered from time to time.
ITEM 3. LEGAL PROCEEDINGS.
(a) LOUISIANA FEDERAL COURT EMPLOYMENT ACTION. In September 1997, a lawsuit
styled Kenneth Epperson, et al. v. 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 attorneys' fees and costs, various forms of
injunctive and equitable relief, $50.0 million in damages for back
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<PAGE> 11
pay, front pay and emotional distress, and a minimum of three times that amount
in punitive damages. The Company vigorously denies these allegations and will
oppose plaintiffs' efforts to have the case certified as a class action by the
court.
(b) DURA LUBE. In July 1997, Dura Lube Corporation and certain of its
affiliated companies filed suit in the United States District Court for the
District of Delaware. The complaint names Quaker State and its subsidiary, Slick
50, Inc., as defendants and asserts claims under the Sherman Act and the Clayton
Act, for tortious interference with business relations and for civil conspiracy.
Plaintiffs allege that defendants attempted and conspired to monopolize the
market for engine treatment by, among other things, entering into exclusive
dealing arrangements with major automotive parts retailers around the country.
Plaintiffs seek treble damages, punitive damages, attorneys' fees and costs as
well as injunctive relief. The Company is contesting this action vigorously.
(c) BLUE CORAL. In May 1997, a class action lawsuit was filed in the United
States District Court for the Northern District of Illinois on behalf of a class
of persons who purchased wax, polish or protectant products sold by a number of
defendants. The action names as defendants a number of car wax manufacturers,
including Blue Coral, Inc., a subsidiary of the Company, and certain of its
present and former officers. The complaint alleges that the defendants falsely
advertised and marketed such products and seeks treble damages, attorneys' fees
and costs for the class for alleged violations of the federal Racketeer
Influenced and Corrupt Organizations Act and compensatory damages for alleged
violations of the Ohio Consumer Sales Practices Act as well as for breach of
express warranty. On January 5, 1999, the court certified a nationwide class
consisting of all persons who purchased products marketed, produced or
distributed as "car wax" by the defendants. While no class period has been
specified by the court, the plaintiffs are seeking a class period dating back
four years prior to the filing of the action. On February 2, 1999, the
plaintiffs proposed a joint settlement fund equal to ten percent of each
defendant's 1997 gross revenue from the products. The Company is contesting this
action vigorously.
(d) OIL CHANGER. In July 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 Quaker State, certain
former executives of Quaker State and other individuals. The complaint alleges
that Quaker State and Oil Changer were "strategic partners" in an alleged
partnership to develop quick lubrication centers in Northern California. Oil
Changer alleges that Quaker State breached the alleged agreement by developing
quick lubrication centers with another entity. The complaint asserts claims for
fraud, breach of fiduciary duty and usurpation of partnership opportunity,
partnership accounting, breach of contract, conspiracy and violation of Section
17200 of the California Business Professions Code. Plaintiffs seek compensatory
damages of $50 million, punitive damages, restitution, attorneys' fees and costs
as well as injunctive relief.
In addition, in July 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 Quaker State and Pennzoil Company. 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 of the Company and Pennzoil Company'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 sought compensatory and treble damages,
restitution, attorneys' fees and costs as well as injunctive relief enjoining
the proposed acquisition of Quaker State by the Company. 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 acquisition of Quaker State by the Company, which was denied on
December 7, 1998. Plaintiffs are appealing the denial of the injunction. The
Company is contesting these actions vigorously.
(e) TEXAS FEDERAL COURT EMPLOYMENT ACTION SETTLED. The parties have reached
a settlement in the lawsuit styled Donna Alexander, et al. v. Pennzoil Company,
et al., pending in the United States District Court for the Southern District of
Texas, Houston Division. The suit was filed by eleven named plaintiffs and
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alleged wrongful and illegal discrimination by Pennzoil Company and subsidiaries
against African-American employees. The settlement was approved by the court on
March 8, 1999.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM S-K 401(b) EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Set forth below are the names and ages of the executive officers of
Pennzoil-Quaker State Company (at February 28, 1999). Positions, unless
otherwise specified, are with Pennzoil-Quaker State Company.
DAVID P. ALDERSON II (49)
Group Vice President, Chief Financial Officer and Treasurer
CLYDE W. BEAHM (61)
Executive Vice President -- Lubricants and
Consumer Products
LINDA F. CONDIT (51)
Vice President and Corporate Secretary
MICHAEL J. MARATEA (54)
Vice President and Controller
JAMES L. PATE (63)(1)
Chairman of the Board and Chief Executive Officer
JAMES J. POSTL (53)(1)
President and Chief Operating Officer
WILLIAM M. ROBB (54)
Group Vice President -- Base Oil and
Specialty Products
JAMES W. SHADDIX (52)
General Counsel
PAUL B. SIEGEL (53)
Vice President
- ---------------
(1) Director of Pennzoil-Quaker State Company and member of Executive Committee.
(b) Officers are appointed annually to serve for the ensuing year or until
their successors have been appointed. Officers listed above have held their
present offices for at least the past five years except for those named below,
who have had the business experience indicated during that period. Positions,
unless specified otherwise, are with Pennzoil-Quaker State Company.
DAVID P. ALDERSON II -- Group Vice President, Chief Financial Officer and
Treasurer since December 1998. Group Vice President -- Finance and Accounting of
Pennzoil Company from December 1995 to December 1998. Treasurer of Pennzoil
Company from August 1989 to June 1996. Group Vice President -- Finance of
Pennzoil Company from February 1992 to December 1995. Vice President of Pennzoil
Products Company from March 1998 to December 1998.
CLYDE W. BEAHM -- Executive Vice President -- Lubricants and Consumer
Products since December 1998. Group Vice President -- Products Marketing of
Pennzoil Company from January 1996 to December 1998. Group Vice
President -- Franchise Operations of Pennzoil Company prior thereto. Vice
President of Pennzoil Products Company from March 1998 to December 1998.
LINDA F. CONDIT -- Vice President and Corporate Secretary since December
1998. Vice President of Pennzoil Company from December 1995 to December 1998.
Corporate Secretary of Pennzoil Company from March 1990 to December 1998. Vice
President and Secretary of Pennzoil Products Company from March 1998 to December
1998.
MICHAEL J. MARATEA -- Vice President and Controller since December 1998.
Vice President of Pennzoil Company from February 1996 to December 1998 and
Controller of Pennzoil Company from May 1995 to December 1998. Vice
President -- Process Improvement of Pennzoil Exploration and Production Company
prior thereto. Controller of Pennzoil Products Company from March 1998 to
December 1998.
JAMES L. PATE -- Chairman of the Board and Chief Executive Officer since
December 1998. Chairman of the Board of Pennzoil Company since May 1994 and
Chief Executive Officer of Pennzoil Company from May 1990 to December 1998.
President of Pennzoil Company from March 1990 to December 1997. Chief Executive
Officer of Pennzoil Products Company from October 1998 to December 1998 and
President of Pennzoil Products Company from March 1998 to October 1998.
JAMES J. POSTL -- President and Chief Operating Officer since December
1998. President of Pennzoil Products Company from October 1998 to December 1998.
President of Nabisco Biscuit Company from
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<PAGE> 14
December 1995 to February 1998. President and Chief Executive Officer of Nabisco
International prior thereto.
WILLIAM M. ROBB -- Group Vice President -- Base Oil and Specialty Products
since December 1998. Group Vice President -- Products Manufacturing of Pennzoil
Company prior thereto. Vice President of Pennzoil Products Company from March
1998 to December 1998.
JAMES W. SHADDIX -- General Counsel since December 1998. General Counsel of
Pennzoil Company prior thereto. Vice President of Pennzoil Products Company from
March 1998 to December 1998.
PAUL B. SIEGEL -- Vice President since December 1998. Senior Vice
President -- Legal of Pennzoil Products Group from February 1995 to December
1998. Vice President -- Legal of Pennzoil Products Group prior thereto. Vice
President of Pennzoil Products Company from March 1998 to December 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The common stock of Pennzoil-Quaker State began trading "regular way" on
the New York Stock Exchange on December 31, 1998. The closing sales price for
the common stock of Pennzoil-Quaker State on December 31, 1998 was $14.75 as
reported on the New York Stock Exchange (consolidated transactions reporting
system), the principal market in which the common stock is traded. The common
stock is also listed for trading on the Pacific Exchange.
Pennzoil-Quaker State did not pay dividends in 1998.
As of December 31, 1998, Pennzoil-Quaker State had 15,054 record holders of
its common stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table contains selected financial data for the five years
indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -----------
(UNAUDITED)
(EXPRESSED IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues(1)................................... $1,850.1 $2,013.2 $1,968.0 $1,807.7 $1,748.3
Net loss(2)................................... $ (45.9) $ (0.6) $ (9.2) $ (53.2) $ (16.0)
Basic and diluted loss per share.............. $ (0.96) $ (0.01) $ (0.19) $ (1.11) $ (0.34)
Dividends per common share.................... -- -- -- -- --
Total assets(3)............................... $3,145.0 $1,559.6 $1,370.5 $1,278.7 $1,056.1
Total debt and capital lease
obligations(3)(4)........................... $1,105.6 $ 458.6 $ 458.5 $ 435.2 $ 140.0
Total shareholders' equity(3)................. $1,350.2 $ 256.4 $ 235.7 $ 224.8 $ 211.7
</TABLE>
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(1) The decrease in revenues for the year ended December 31, 1998 compared to
the year ended December 31, 1997 was primarily the result of the Company's
contribution of most of its specialty industrial products business to a
partnership with Conoco called Penreco in October 1997. Beginning in the
fourth quarter of 1997, the Company'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 -- Base Oil and
Speciality Products" for additional information.
(2) The 1998 net loss includes nonrecurring after-tax charges of $59.0 million
($91.9 million pretax). These charges include $10.6 million in pretax
expenses related to the December 30, 1998 acquisition of Quaker State, $29.6
million in pretax charges for the impairment of fast lube assets required
under SFAS No. 121, $25.0 million in pretax charges for the voluntary
withdrawal and reformulation of Fix-A-Flat(R) tire inflator products and
$26.7 million in pretax charges for litigation settlement expenses, net loss
on sales of assets and other matters. The 1997 net loss includes pretax
one-time charges of $22.0 million allocated to the Company by its former
parent company. 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 the Company'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
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<PAGE> 15
associated with international marketing restructuring charges and $8.2 million
associated with a general and administrative cost reduction program. The 1994
net loss includes a pretax charge of $32.5 million for cessation of crude oil
processing at the Company's Roosevelt manufacturing facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for additional information related to 1996 through 1998.
(3) On December 30, 1998 the Company acquired Quaker State. Reference is made to
Note 2 of Notes to Consolidated Financial Statements for additional
information.
(4) Includes current maturities of long-term debt and current portion of capital
lease obligations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to Segment Financial Information included in Item 1.
Business and Item 2. Properties and the Consolidated Financial Statements
beginning on page F-3 for additional information.
Pennzoil-Quaker State Company is the result of the consolidation and
separation on December 30, 1998 of the lubricants and consumer products, base
oil and specialty products and fast lube operations of Pennzoil Company and the
acquisition by the Company of Quaker State in a merger transaction immediately
following the separation.
Results of operations for Pennzoil-Quaker State do not include Quaker
State's results prior to the acquisition. In addition, operating results include
certain affiliated charges for interest and services provided by Pennzoil
Company to Pennzoil-Quaker State in 1998 and prior periods that will not be
incurred by Pennzoil-Quaker State in future periods. The fair value of assets
and liabilities of Quaker State are included in the Company's consolidated
balance sheet as of December 31, 1998.
RESULTS OF OPERATIONS
The Company had net sales of $1,801.7 million for the year ended December
31, 1998, a decrease of $180.5 million and $159.6 million from the comparable
periods in 1997 and 1996, respectively. The decrease was primarily due to the
contribution of most of the Company's 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 consolidated in the
financial statements of the Company. The Company's share of Penreco earnings are
now accounted for under the equity method of accounting and reported as a
component of other income, net. Net sales associated with the contributed
specialty industrial products operations were $121.2 million and $148.5 million
for the years ended 1997 and 1996, respectively.
Excluding the net sales associated with the contributed specialty
industrial products operations in 1997 and 1996, net sales revenue for 1998 was
$59.3 million below 1997 and $11.1 million below 1996. The decrease in 1998
compared to the same periods in 1997 and 1996 was primarily due to lower
lubricating product and fuels net sales prices. Lower market prices, primarily
the result of lower petroleum feedstock costs, more than offset increases in
product sales volumes.
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) in 1998 decreased 6.7% from 1997. Gross margin for
1997, adjusted to exclude the impact of specialty industrial products operations
contributed to Penreco, was up 10.9% over 1996.
A net loss of $45.9 million was recorded for 1998 compared to a net loss of
$.6 million and $9.2 million in 1997 and 1996, respectively. Results of
operations for 1998 include $10.6 million in pretax expenses related to the
December 30, 1998 acquisition of Quaker State, $29.6 million in pretax charges
for the impairment of fast lube assets required under SFAS No. 121, $25.0
million in pretax charges for the voluntary withdrawal and reformulation of
Fix-A-Flat(R) tire inflator products and $26.7 million in pretax charges for
litigation settlement expenses, net loss on sales of assets and other matters.
Depreciation expense increased $12.7 million for 1998 compared to 1997, and
$12.6 million for 1997 compared to 1996, primarily due to the Shreveport
manufacturing facility upgrade and the implementation of a new information
technology system in January 1998. Reference is made to Note 2, Note 3 and Note
12 of Notes to Consolidated Financial Information for additional information.
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<PAGE> 16
LUBRICANTS AND CONSUMER PRODUCTS. Net sales for the lubricants and consumer
products segment in 1998 were $960.5 million, essentially even with 1997
revenues. Operating income from this segment was $55.9 million for 1998 compared
to $76.5 million in 1997. Excluding nonrecurring charges of $39.2 million and
$3.5 million in 1998 and 1997, respectively, operating income was $95.1 million
in 1998, an increase of $15.1 million, or 18.9%, over 1997. Nonrecurring charges
in 1998 include $25.0 million for charges taken in association with the
voluntary withdrawal and reformulation of Fix-A-Flat(R) tire inflator products
and $14.2 million for impairments, write-offs and other charges. The
year-over-year increase in operating income was due to a full year's impact of
income from acquisitions made in late 1997, lower raw material costs and lower
expenses, partially offset by increased promotional spending from lubricants and
lower filter and automotive chemicals sales volumes.
Net sales for this segment in 1997 were $966.2 million, a $19.2 million
increase over 1996. Operating income for this segment in 1997 was $76.5 million
compared to $73.0 million in 1996. Excluding nonrecurring items of $3.5 million
and $2.5 million in 1997 and 1996, respectively, operating income in 1997 was
$80.0 million, a $4.5 million increase over 1996. The improvement was due
primarily to lower raw material costs and higher filter sales volume, partially
offset by lower domestic motor oil sales volumes and higher selling and
operating expenses.
BASE OIL AND SPECIALTY PRODUCTS. Net sales for the base oil and specialty
products segment decreased 21.8% for 1998 compared to the same period in 1997.
The decrease was primarily due to the Company's contribution of most of its
specialty industrial products business to the Penreco partnership. Excluding the
net sales associated with the contributed specialty industrial business, net
sales decreased 9.8% in 1998 compared to the same period in 1997 primarily due
to lower average sales prices for base oils, fuels and other refined petroleum
products. The decline in sales prices generally followed the market price
decrease of crude oil and other petroleum feedstocks. Partially offsetting this
decrease was an increase in fuels production volumes as a result of the
completion of the Shreveport manufacturing facility upgrade in April 1997.
Gross margin decreased $35.4 million in 1998 from the same period in 1997.
The decrease was primarily due to lower fuels margins, which were primarily
caused by lower fuels sales prices, which decreased faster than crude oil and
other feedstock prices.
Other income for this segment increased $24.2 million in 1998 compared to
the same period in 1997 primarily due to higher equity income in partnerships,
which was up $28.5 million in 1998 compared to the same period in 1997. Equity
income related to Excel Paralubes increased $20.0 million in 1998 over 1997,
primarily due to higher base oil volumes. In addition, equity income
attributable to the Penreco partnership increased $7.0 million in 1998 compared
to 1997.
Other income for 1998 includes income of $1.6 million related to the sale
of the Company's refinery in Roosevelt, Utah.
Selling, general and administrative expenses decreased $8.5 million in 1998
compared to the same period in 1997 due in part to the impact of the specialty
industrial products operations contributed to Penreco.
Operating income for the segment decreased $3.4 million in 1998 compared to
the same period in 1997.
Net sales for the year-ended 1997 decreased $90.6 million, or 9.0% from the
same period in 1996. The decrease was primarily due to the contribution of most
of the specialty industrial products business to the Penreco partnership in
October 1997. Excluding the net sales associated with the contributed specialty
industrial business, net sales decreased 7.4% in 1997 compared to the same
period in 1996 primarily due to lower average sales prices for base oils.
Partially offsetting this decrease was an increase in fuels production volumes
as a result of the completion of the Shreveport manufacturing facility upgrade
in April 1997.
Gross margin increased approximately $26.4 million in 1997 from the same
period in 1996. The increase was primarily due to higher fuels volumes resulting
from the completion of the Shreveport manufacturing facility upgrade in April
1997. The increase in fuels volumes was partially offset by the decrease in base
oil margins. Base oil margins in 1997 were depressed as the market absorbed new
capacity from Excel Paralubes,
14
<PAGE> 17
which began commercial production in late December 1996, and a Petro Canada
facility which also began production in 1996.
Other income for the base oil and specialty products segment increased
$25.8 million in 1997 from the same period in 1996. The increase was primarily
due to higher equity income in partnerships. Equity income related to Excel
Paralubes increased $21.5 million in 1997 over the same period in 1996 primarily
as a result of pre-operating expenses recorded during 1996. In addition, equity
income attributable to the Penreco partnership was $4.0 million in 1997.
Depreciation and amortization expense increased $10.2 million in 1997
compared to 1996 primarily as a result of completion of the Shreveport
manufacturing facility upgrade in April 1997 and implementation of a new
information technology system in December 1996.
Operating income for the base oil and specialty products segment was $19.4
million in 1997 compared to a loss of $19.7 million in 1996.
The Company is currently evaluating its manufacturing assets and
investments and their importance to the Company's strategic plan and future
direction. As a result of this evaluation, the Company may determine to dispose
of or discontinue the operations of some or all of its manufacturing assets and
investments. The Company cannot currently predict the timing or the financial
impact of any such dispositions or discontinuances, which could result in cash
or noncash charges, depending on the manner and timing of any such dispositions
or discontinuances.
FAST LUBE OPERATIONS. Net sales recorded by the fast lube operations
segment, operating through Jiffy Lube, increased 2.1% for 1998 compared to 1997.
The increase in net sales was due primarily to an increase in the number of
service centers. Net sales reported by the fast lube operations segment consist
of sales revenues from company-operated service centers and franchise fees,
royalty revenues, rental income and automotive product sales proceeds from
franchisee operated service centers. System-wide sales increased $52.6 million
to $817.6 million for 1998 compared to 1997 as a result of an increased number
of service centers open and an increase in the average ticket price. System-wide
average ticket prices increased to $36.71 in 1998 compared with $35.87 for the
same period in 1997, as customers continue to take advantage of additional
authorized services and products available at service centers. There were 1,588
service centers (including 579 company-operated service centers) open as of
December 31, 1998.
Net sales recorded by the fast lube operations segment were up $25.8
million in 1997 compared to 1996. This increase was due to an increase in the
number of company-operated service centers and an increase in franchise
royalties. The increase in the number of service centers was primarily due to
placing service centers in Sears Auto Centers and partially due to acquisitions.
In December 1998, the fast lube operations segment recorded a pretax charge
of $29.6 million to reflect the impairment of long-lived assets as required
under SFAS No. 121.
The fast lube operations segment reported an operating loss of $4.1 million
for the year ended December 31, 1998 compared to operating income of $24.5
million during 1997 and operating income of $21.4 million in 1996. Included in
1998 results are nonrecurring charges of $14.8 million for one-time acquisition
expenses, legal settlements and other liabilities. Adjusted to exclude these
nonrecurring charges, operating income totaled $10.7 million in 1998 compared to
$24.5 million in 1997. The year-over-year decline in earnings was due to
increased salaries and other operating costs within company-operated centers,
higher selling, general and administrative costs and higher depreciation
expense. The improvement in 1997 results compared to 1996 was due primarily to
higher company service center sales, lower operating expenses as a result of
fewer new service center openings and increased royalty income.
During 1998, Jiffy Lube acquired 22 centers along with related real estate
in exchange for cash of $8.6 million and liabilities and debt assumed of $3.5
million. Also, during 1998, 16 centers were sold for $6.5 million in cash.
During 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 1997, 24 centers were sold for
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<PAGE> 18
$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 1996, Jiffy Lube acquired 16 centers along with related real estate
in exchange for $4.7 million in cash and $2.8 million in liabilities and debt
assumed. Also during 1996, 36 centers were sold for $4.4 million in cash and
$0.6 million in forgiveness of debt.
OTHER. Other operating income in 1998 was a loss of $8.1 million, compared
to income of $1.9 million in 1997 and income of $0.7 million in 1996. The
decrease in 1998 compared to 1997 was primarily due to the writedown of fixed
assets at corporate headquarters.
CORPORATE ADMINISTRATIVE CHARGES
Pennzoil Company provided administrative services to the Company during
1998, 1997 and 1996 and charged the Company for all direct costs associated with
its operations. In addition, certain administrative costs incurred by Pennzoil
Company not directly charged to the Company were historically allocated through
a monthly charge based on a formula that considered the relative total assets,
sales and employees of its subsidiary companies. These charges totaled $44.4
million, $54.8 million and $30.6 million for the years ended December 31, 1998,
1997 and 1996, respectively. The increase in charges in 1998 and 1997 was
primarily due to one-time expenses incurred by Pennzoil Company. The Company's
share of these expenses were approximately $9.9 million and $22.0 million,
respectively.
DISCLOSURES ABOUT MARKET RISK
Pennzoil-Quaker State is exposed to market risk, including adverse changes
in interest rates and foreign currency exchange rates.
INTEREST. At December 31, 1998, the fair value of the Company's long-term
debt, including commercial paper and short-term variable rate credit agreements,
is projected to be $1.0 billion using 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. Such fair value exceeded the
long-term debt carrying value by $26.4 million. Reference is made to Note 9 of
Notes to Consolidated Financial Statements for additional information. A
hypothetical 10 percent adverse change in market interest rate relative to the
aforementioned securities would not have had a material effect on the Company's
results of operations for the fiscal year ending December 31, 1998.
HEDGING ACTIVITIES. Pennzoil-Quaker State enters into forward exchange
contracts and options to hedge the impact of foreign currency fluctuations on
certain monetary liabilities and commitments denominated in foreign currencies.
The purpose of entering into these hedges is to minimize the impact of foreign
currency fluctuations on the results of operations. The unrealized gains and
losses on these contracts are deferred and recognized in the results of
operations in the period in which the hedged transaction is consummated.
Unrealized gains at December 31, 1998 are not material.
Pennzoil-Quaker State also uses interest rate locks and swaps to reduce its
exposure to interest rate movements. In 1998, the Company entered into four
interest rate locks, based upon the 30-year Treasury rate to hedge future
issuances of long-term indebtedness. To accomplish its hedged position, the
Company entered into forward rate agreements in which it will pay or receive the
difference between (1) the 30-year Treasury rate at the time the forward was
entered into and (2) the 30-year Treasury rate at the time of maturity. Under
current accounting standards, these transactions qualify as a hedge of an
anticipated transaction. Any gains or losses from the interest rate hedges are
deferred during the interim period with the offset to a payable or receivable.
Upon maturity of the hedge contracts, any gain or loss will be treated as an
adjustment to the issue price of the debt instrument, effectively creating a
premium or discount that is amortized over the life of the borrowings. The
estimated value of the amount payable by the Company under its open interest
rate hedge was $8.3 million at December 31, 1998, which has been recorded as a
deferred charge in other assets.
16
<PAGE> 19
INTEREST CHARGES, NET
Interest charges, net, for the Company increased $8.2 million for the
twelve months ended December 31, 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
primarily due to increased borrowings by the fast lube operations segment from
Pennzoil Company and lower capitalized interest.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1998 1997 1996
------- ------- -------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Interest expense........................................ $13,826 $12,847 $12,208
Affiliated interest charges............................. 56,372 56,374 52,966
Less: interest capitalized.............................. (255) (7,441) (10,103)
------- ------- -------
$69,943 $61,780 $55,071
======= ======= =======
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW. The Company had cash and cash equivalents of $14.9 million, $9.1
million and $15.8 million at December 31, 1998, 1997 and 1996, respectively.
Cash flow generated from operating activities before changes in operating assets
and liabilities was $125.4 million, $149.6 million and $86.3 million for the
years ended December 31, 1998, 1997 and 1996, 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. The Company's cash flow from
operations for the year ended December 31, 1998 decreased by $281.0 million
compared to the same period in 1997. Reference is made to Note 3 of Notes to
Consolidated Financial Statements for additional information.
CAPITAL EXPENDITURES. Capital expenditures were $88.3 million in 1998,
$147.8 million in 1997 and $251.2 million in 1996. Capital expenditures in 1997
and 1996 included $42.0 million and $147.3 million, respectively, for the
upgrade of the Company's Shreveport manufacturing facility. Capital expenditures
in 1997 also included $17.0 million for the installation of facilities near the
Company's motor oil packaging facilities to store base oils manufactured by
Excel Paralubes and $12.8 million for the implementation of new information
technology software. Capital expenditures in 1996 included $8.6 million for
improvements at the Company's Rouseville manufacturing facility to enable
production of additional waxes in connection with the Company's Bareco joint
venture. The 1999 capital budget for the Company is estimated to be
approximately $117.3 million. The Company 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. The increase in current receivables at December 31,
1998 compared to December 31, 1997 is primarily due to the acquisition of Quaker
State, which resulted in a $152.0 million increase in current receivables.
Current receivables include trade accounts and notes receivable and are net of
allowances for doubtful accounts of $18.2 million and $7.7 million at December
31, 1998 and 1997, respectively. Long-term receivables consist of notes
receivable and are net of allowances for doubtful accounts of $0.9 million at
December 31, 1998 and 1997.
At December 31, 1998 and 1997, current receivables included notes
receivable of $16.6 million and $12.4 million, respectively. Other assets
included long-term notes receivable of $53.2 million and $41.4 million at
December 31, 1998 and 1997, 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 the Company, and most require payment
of principal and interest. Similar to other incentive programs, sales agreements
normally accompany the loans.
The Company's net accounts receivable sold under its receivables sales
facility totaled $115.0 million and $103.3 million at December 31, 1998 and
1997, respectively. The Company entered into a new one-year
17
<PAGE> 20
receivables sales facility in February 1999 that provides for ongoing sales of
up to $120.0 million of accounts receivable.
CREDIT FACILITIES. During 1999, the Company intends to refinance a portion
of its commercial paper borrowings with the issuance of longer term debt
securities. The Company expects to finance operations and planned capital needs
from operating cash flow, supplemented as required by additional borrowings
under its revolving credit facility, commercial paper programs or short-term
variable-rate credit arrangements.
The Company's primary revolving credit facility with a group of banks
provides for up to $1.0 billion of committed unsecured revolving credit
borrowings through November 16, 1999, with any outstanding borrowings on such
date being converted into a term credit facility terminating on November 16,
2000. There were no borrowings outstanding under this revolving credit facility
at December 31, 1998. The Company had borrowings under a Quaker State revolving
credit agreement of $370.0 million at December 31, 1998. In January 1999, the
Company repaid these borrowings with borrowings under its commercial paper
facility and terminated the Quaker State revolving credit facility. The average
interest rate applicable to the outstanding Quaker State revolving credit
borrowings was 5.8% during 1998.
The Company currently limits aggregate borrowings under its commercial
paper programs to $1.0 billion. Borrowings under commercial paper facilities
totaled $488.4 million at December 31, 1998. The average interest rate
applicable to outstanding commercial paper was 6.0% at year-end 1998.
The Company had one short-term variable-rate credit arrangement with a bank
at year-end 1998 and intends to enter into several more. The Company currently
limits its aggregate borrowings under these types of credit arrangements to
$300.0 million. There were no outstanding borrowings at December 31, 1998. None
of the banks under these credit arrangements has any obligation to continue to
extend credit after the maturities of outstanding borrowings or to extend the
maturities of any borrowings.
In December 1998, in connection with its separation from Pennzoil Company,
the Company repaid $430.0 million of intercompany indebtedness and accounts
payable to Pennzoil Company. Intercompany indebtedness of $412.4 million to
Pennzoil Company was not repaid and was treated as a capital contribution to the
Company in connection with the separation.
The Company has a long-term credit facility with a Canadian bank that
provides for borrowings of up to C$27.0 million through October 25, 1999.
Outstanding borrowings under the credit facility totaled US$9.6 million and
US$12.2 million at December 31, 1998 and 1997, respectively. The average
interest rates applicable to amounts outstanding under the credit facility were
5.0% and 3.4% during 1998 and 1997, respectively.
Reference is made to Note 9 of Notes to Consolidated Financial Statements
for additional information regarding the Company's indebtedness and credit
facilities.
CLASSIFICATION OF BORROWINGS UNDER CREDIT FACILITIES. As of December 31,
1998, borrowings under Pennzoil-Quaker State's commercial paper programs and the
Company's Canadian credit facility totaling $498.0 have been classified as
long-term debt. Such debt classification is based upon the availability of
committed long-term credit facilities to refinance such short-term facilities
and the Company's intent to maintain such commitments in excess of one year.
ENVIRONMENTAL. The Company 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. The
Company 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
the Company's combined financial statements. The Company 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.
18
<PAGE> 21
Certain of the Company'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 the
Company'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, 1998 and 1997, the Company's
consolidated balance sheet included accrued liabilities for environmental
remediation of $27.2 million and $11.6 million, respectively. Of these reserves,
$4.2 million and $2.4 million are reflected on the consolidated balance sheet as
current liabilities as of December 31, 1998 and 1997, respectively, and $23.0
million and $9.2 million are reflected as other liabilities as of December 31,
1998 and 1997, respectively. The Company 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 the Company subsidiaries are PRPs, the Company'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) the Company'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-Quaker State's monetary exposure is not expected to be material beyond
the amounts reserved.
YEAR 2000 ISSUES
The Company has conducted a review of its key computer systems and has
identified a number of systems that were affected by the year 2000 issue. The
Company has completed conversion of these non-compliant financial, operating,
human resource and payroll systems to a new information technology system in
1998. In addition, the Company is currently upgrading electronic commerce
systems to compliant versions. Conversion of operating and financial software as
well as desktop hardware and software used in international locations for the
Company to compliant versions began in the second quarter of 1998, with
completion expected in the second quarter of 1999. Upgrades and standardization
of network, infrastructure, desktop and communications systems to make these
assets compliant are in progress. This effort is scheduled for completion in the
first quarter of 1999 following the release of compliant updates from the
vendors. The only system replacements that have been accelerated to remedy
non-compliance are the Company voicemail systems and the international desktop
hardware, software, financial and operational systems. No major information
technology projects have been deferred due to year 2000 compliance matters.
Contingency planning will be started for the information technology systems in
the first quarter of 1999, and will include backup, standby and storage service
solutions to reduce the impact of critical service providers.
The Company 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 Company 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 during the first
quarter of 1999. These systems will first undergo a pilot test at the Company's
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. In order to prevent safety and environmental problems due to
non-compliant embedded-chip systems, operation of these systems would be reduced
or discontinued. Contingency planning is also underway to provide alternatives
in the event these systems are partially or completely inoperable.
The Company is contacting key suppliers, banks, customers and other
unaffiliated companies that have business relationships with the Company to
assess their year 2000 compliance programs. The Company could be adversely
affected by the failure of these unaffiliated companies to adequately address
the year 2000 issue. This assessment includes activities such as face-to-face
meetings, reviews of year 2000 readiness and cooperative testing. Contingency
planning will be included in this assessment to identify arrangements to
19
<PAGE> 22
mitigate the impact of disruptions from outside sources. In addition, the
Company has implemented internal procedures to respond cooperatively to
inquiries from regulatory agencies and other businesses about its year 2000
program.
As with most companies, the Company anticipates more issues arising from
international business partners, especially in the banking, utility, shipping
and governmental segments. The Company is currently reviewing all banking
relationships in international locations. In addition, the Company 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, the
Company's 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 position or results
of operations of the Company for several reasons. Most of the remediation is
being accomplished with upgrades to existing software that are under maintenance
contracts. The implementation of the major information technology 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 Company resources. Costs for
all year 2000 activities are estimated to be less than $7.0 million.
On December 30, 1998, the Company acquired Quaker State. During 1998,
Quaker State continued to make progress in addressing the issue of computer
systems and embedded computer chips that may be unable to accommodate the year
2000. As of the acquisition date, Quaker State had completed reviews of computer
systems and embedded technologies at all locations other than its blending and
packaging facilities. It is expected that the assessment at the blending and
packaging facilities will be completed by the end of the first quarter of 1999.
In addition, certain aspects of Quaker State's year 2000 program included not
upgrading or replacing certain systems as they were deemed to be redundant as a
result of the acquisition by the Company. These systems are currently being
evaluated and replaced.
The Company has a June 30, 1999 target readiness date for all major phases
of its year 2000 preparations. The Company'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.
Forward-looking statements contained under this "Year 2000 Issues" subpart
should be read in conjunction with the Company's disclosures under the heading:
"Forward-Looking Statements - Safe Harbor Provisions."
OTHER MATTERS. The Company does not currently consider the impact of
inflation to be significant in the businesses in which the Company operates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by Item 305 of Regulation S-K is included under
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Pennzoil-Quaker State, together
with the report thereon of Arthur Andersen LLP dated March 11, 1999 and the
supplementary financial data specified by Item 302 of Regulation S-K, are set
forth on pages F-1 through F-32 hereof. (See Item 14 for Index.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
20
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the captions "Nominees," "Directors with
Terms Expiring in 2000 and 2001" and "Compliance with Section 16(a) of the
Exchange Act" set forth within the section entitled "Election of Directors" in
the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.
See also Item S-K 401(b) appearing in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the captions "Director Remuneration" set
forth within the section entitled "Election of Directors" and under the captions
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A under the Securities Exchange Act of 1934 is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Security Ownership of
Directors and Officers" set forth within the section entitled "Election of
Directors" and under the caption "Security Ownership of Certain Shareholders"
set forth within the section entitled "Additional Information" in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the captions "Director Remuneration" and
"Certain Transactions" set forth within the section entitled "Election of
Directors" and under the caption "Security Ownership of Certain Shareholders"
set forth within the section entitled "Additional Information" and under the
caption "Compensation Committee Interlocks and Insider Participation" in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)(1) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-1
Consolidated Statement of Operations........................ F-3
Consolidated Balance Sheet.................................. F-4
Consolidated Statement of Shareholders' Equity.............. F-6
Consolidated Statement of Cash Flows........................ F-7
Consolidated Statement of Comprehensive Income.............. F-8
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
The supplementary financial data specified by Item 302 of Regulation S-K
are included in "Supplemental Financial and Statistical
Information -- Unaudited" beginning on page F-32.
21
<PAGE> 24
(a)(2) FINANCIAL STATEMENT SCHEDULES.
Schedules of the Company and its subsidiaries are omitted because of the
absence of the conditions under which they are required or because the required
information is included in the financial statements or notes thereto.
(a)(3) EXHIBITS.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
*3.2 -- Restated Certificate of Incorporation of the Company
(filed as exhibit 4.2 to the Current Report on Form 8-K
of the Company filed on December 29, 1998 (File No.
001-14501) and incorporated herein by reference).
*3.4 -- By-Laws of the Company (filed as Exhibit 4.2 to the
Registration Statement on Form S-8 of the Company
(Registration No. 333-72835) and incorporated herein by
reference).
*3.5 -- Form of Common Stock Certificate of the Company (filed as
Exhibit 3.5 to the Registration Statement on Form S-4 of
the Company (Registration No. 333-61541) and incorporated
herein by reference).
*3.6 -- Rights Agreement dated as of December 18, 1998 between
the Company and The Chase Manhattan Bank (filed as
Exhibit 1 to the Current Report on Form 8-K of the
Company filed on December 18, 1998 (File No. 001-14501)
and incorporated herein by reference).
10.1 -- Credit Agreement dated as of November 17, 1998 among
Pennzoil Products Company and the lenders named therein
+*10.2 -- Pennzoil-Quaker State Company 1998 Incentive Plan (filed
as Exhibit 4.3 to the Registration Statement of the
Company on Form S-8 (Registration No. 333-69837) and
incorporated herein by reference).
+*10.3 -- Form of Indemnification Agreement between Pennzoil-Quaker
State Company and directors and executive officers of the
Company (filed as Exhibit 10.7 to the Registration
Statement of the Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+10.4 -- Pennzoil-Quaker State Company Deferred Compensation Plan
+10.5 -- Pennzoil-Quaker State Company Medical Expenses
Reimbursement Plan
+10.6 -- Pennzoil-Quaker State Company Supplemental Disability
Plan
+10.7 -- Pennzoil-Quaker State Company Salary Continuation Plan
+10.8 -- Pennzoil-Quaker State Company Supplemental Life Insurance
Plan
+10.9 -- Pennzoil-Quaker State Company Executive Severance Plan
+10.10 -- Form of Pennzoil-Quaker State Company Supplemental
Medical and Retirement Benefits Agreement
+10.11 -- Employment Agreement between the Company and James J.
Postl
12.1 -- Computation of Ratio of Earnings to Fixed Charges for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994.
21.1 -- Subsidiaries of Pennzoil-Quaker State Company
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
24.1 -- Powers of Attorney
27.1 -- Financial Data Schedule.
99.1 -- Financial Statements of Excel Paralubes.
</TABLE>
- ---------------
* Incorporated by reference as indicated.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K.
Pennzoil-Quaker State filed the following Current Reports on Form 8-K with
the Securities and Exchange Commission during the quarter ended December 31,
1998:
<TABLE>
<CAPTION>
DATE OF REPORT ITEMS REPORTED
-------------- --------------
<S> <C>
December 14, 1998.................................. Adoption of a shareholder rights plan.
December 29, 1998.................................. Change of the Company's name to Pennzoil-Quaker
State Company.
</TABLE>
23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENNZOIL-QUAKER STATE COMPANY
By: /s/ JAMES L. PATE
------------------------------------
(James L. Pate, Chairman of the
Board and
Chief Executive Officer)
Date: March 15, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES L. PATE Principal Executive Officer March 15, 1999
- ----------------------------------------------------- and Director
(James L. Pate, Chairman of the Board and
Chief Executive Officer)
/s/ DAVID P. ALDERSON II Principal Financial and March 15, 1999
- ----------------------------------------------------- Accounting Officer
(David P. Alderson II, Group Vice President,
Chief Financial Officer and Treasurer
HOWARD H. BAKER, JR.*
W. L. LYONS BROWN, JR.*
ERNEST H. COCKRELL*
ALFONSO FANJUL*
C. FREDERICK FETTEROLF*
FORREST R. HASELTON* A majority of the Directors March 15, 1999
BERDON LAWRENCE* of the Registrant
L. DAVID MYATT*
JAMES J. POSTL*
GERALD B. SMITH*
LORNE R. WAXLAX*
*By: /s/ DAVID P. ALDERSON II
------------------------------------------------
(David P. Alderson II, Attorney-In-Fact)
</TABLE>
24
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennzoil-Quaker State Company:
We have audited the accompanying consolidated balance sheet of
Pennzoil-Quaker State Company (a Delaware corporation) and subsidiaries, as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, cash flows and comprehensive income for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Excel Paralubes (a
50%-owned equity investee of Pennzoil-Quaker State Company), the investment in
which is reflected in the accompanying financial statements using the equity
method of accounting. The equity in Excel Paralubes net income represents 17
percent of Pennzoil-Quaker State Company's net loss for the year ended December
31, 1998. The summarized financial data for Excel Paralubes contained in Note 5
are derived from the financial statements of Excel Paralubes. We also did not
audit the financial statements of Quaker State Corporation as of and for the
years ended December 31, 1997 and 1996. The summarized financial data for Quaker
State Corporation contained in Note 5 are derived from the financial statements
of Quaker State Corporation. The financial statements of Excel Paralubes and
Quaker State Corporation were audited by other auditors whose reports have been
furnished to us and our opinion, insofar as it relates to the amounts and
disclosures included for Excel Paralubes and Quaker State Corporation for the
indicated periods described above, is based solely on the reports 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 and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Pennzoil-Quaker State Company and
subsidiaries as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 11, 1999
F-1
<PAGE> 28
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE> 29
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1998 1997 1996
---------- ---------- ----------
(EXPRESSED IN THOUSANDS EXCEPT FOR
PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Net sales.............................................. $1,801,676 $1,982,148 $1,961,316
Other income, net...................................... 48,462 31,012 6,697
---------- ---------- ----------
1,850,138 2,013,160 1,968,013
COSTS AND EXPENSES
Cost of sales.......................................... 1,279,220 1,182,742 1,202,909
Purchases from affiliate............................... 115,703 336,413 342,046
Selling, general and administrative.................... 339,799 350,123 315,022
Depreciation and amortization.......................... 77,210 64,490 51,918
Acquisition related expenses (Note 2).................. 10,645 -- --
Impairment of long-lived assets (Note 3)............... 29,613 -- --
Taxes, other than income............................... 12,210 11,956 11,339
Interest charges....................................... 13,826 12,847 12,208
Affiliated interest.................................... 56,372 56,374 52,966
Interest capitalized................................... (255) (7,441) (10,103)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX.......................... (84,205) 5,656 (10,292)
Income tax provision (benefit)........................... (38,338) 6,245 (1,103)
---------- ---------- ----------
NET LOSS................................................. $ (45,867) $ (589) $ (9,189)
========== ========== ==========
BASIC AND DILUTED LOSS PER SHARE......................... $ (0.96) $ (0.01) $ (0.19)
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 30
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS (NOTE 2)
Cash and cash equivalents................................. $ 14,899 $ 9,132
Receivables............................................... 291,997 143,303
Inventories
Crude oil.............................................. 6,911 14,245
Motor oil and refined products......................... 299,601 184,028
Materials and supplies, at average cost................... 12,422 11,814
Deferred income taxes..................................... 47,413 --
Other current assets...................................... 63,328 36,838
---------- ----------
TOTAL CURRENT ASSETS.............................. 736,571 399,360
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Lubricants and consumer products.......................... 336,946 238,958
Fast lube operations...................................... 399,447 228,048
Base oil and specialty products........................... 937,039 943,972
Other..................................................... 47,562 297
---------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT............... 1,720,994 1,411,275
Less accumulated depreciation and amortization............ 688,918 621,098
---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT................. 1,032,076 790,177
---------- ----------
DEFERRED INCOME TAXES....................................... 36,614 --
OTHER ASSETS
Goodwill.................................................. 1,104,353 158,489
Other..................................................... 235,380 211,597
---------- ----------
TOTAL OTHER ASSETS................................ 1,339,733 370,086
---------- ----------
TOTAL ASSETS................................................ $3,144,994 $1,559,623
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 31
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
----------- -----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES (NOTE 2)
Current maturities of long-term debt...................... $ 1,283 $ 2,363
Accounts payable.......................................... 245,721 120,577
Payable to affiliate...................................... -- 544,390
Payroll accrued........................................... 18,734 17,825
Other current liabilities................................. 147,609 46,161
---------- ----------
TOTAL CURRENT LIABILITIES......................... 413,347 731,316
---------- ----------
LONG-TERM DEBT, less current maturities
Long-term debt payable to affiliate....................... -- 336,172
Long-term debt............................................ 1,026,054 49,798
---------- ----------
TOTAL LONG-TERM DEBT, less current maturities..... 1,026,054 385,970
---------- ----------
DEFERRED INCOME TAXES....................................... -- 1,179
CAPITAL LEASE OBLIGATIONS................................... 74,464 67,136
OTHER LIABILITIES........................................... 280,922 117,642
---------- ----------
TOTAL LIABILITIES................................. 1,794,787 1,303,243
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY
Common stock, par value $0.10 per share -- authorized
100,000,000 shares, issued and outstanding shares of
77,619,765 at December 31, 1998 and 47,846,502 at
December 31, 1997...................................... 7,762 4,785
Additional capital........................................ 1,532,531 395,233
Accumulated deficit....................................... (180,216) (134,349)
Net unrealized holding loss on investments in
securities............................................. (843) (1,768)
Cumulative foreign currency translation adjustment........ (9,027) (7,521)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 1,350,207 256,380
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $3,144,994 $1,559,623
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 32
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
1998 1997 1996
------------------- ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ---------- ------ --------- ------ ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK, $0.10 par --
Authorized 100,000,000 shares
Balance January 1....................... 47,847 $ 4,785 47,847 $ 4,785 47,847 $ 4,785
Acquisition of Quaker State
Corporation........................ 29,773 2,977 -- -- -- --
------ ---------- ------ --------- ------ ---------
Balance December 31..................... 77,620 7,762 47,847 4,785 47,847 4,785
------ ---------- ------ --------- ------ ---------
ADDITIONAL CAPITAL
Balance January 1....................... 395,233 366,653 345,422
Capital contribution from
affiliate.......................... 412,448 28,580 21,231
Acquisition of Quaker State
Corporation........................ 724,850 -- --
---------- --------- ---------
Balance December 31..................... 1,532,531 395,233 366,653
---------- --------- ---------
ACCUMULATED DEFICIT
Balance January 1....................... (134,349) (133,760) (124,389)
Net loss............................. (45,867) (589) (9,189)
Dividends on common stock............ -- -- (182)
---------- --------- ---------
Balance December 31..................... (180,216) (134,349) (133,760)
---------- --------- ---------
NET UNREALIZED HOLDING LOSS ON INVESTMENTS
IN SECURITIES
Balance January 1....................... (1,768) -- --
Change in unrealized holding loss.... 925 (1,768) --
---------- --------- ---------
Balance December 31..................... (843) (1,768) --
---------- --------- ---------
CUMULATIVE FOREIGN CURRENCY TRANSLATION
ADJUSTMENT
Balance January 1....................... (7,521) (1,937) (1,023)
Change in translation adjustment..... (1,506) (5,584) (914)
---------- --------- ---------
Balance December 31..................... (9,027) (7,521) (1,937)
------ ---------- ------ --------- ------ ---------
TOTAL SHAREHOLDERS' EQUITY................ 77,620 $1,350,207 47,847 $ 256,380 47,847 $ 235,741
====== ========== ====== ========= ====== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 33
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1998 1997 1996
--------- --------- ---------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................ $ (45,867) $ (589) $ (9,189)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 77,210 64,490 51,918
Impairment of long-lived assets...................... 29,613 -- --
Deferred income taxes (benefit)...................... (38,814) 36,029 28,628
Gain on sales of assets.............................. (4,357) (3,072) (10,904)
Distributions from equity investees in excess of
earnings........................................... 27,834 23,774 --
Non-cash accruals.................................... 53,830 25,366 17,248
Other non-cash items................................. 25,969 3,555 8,558
Change in operating assets and liabilities (Note
3)................................................. (221,605) 35,227 111,949
--------- --------- ---------
Net cash provided by (used in) operating
activities.................................... (96,187) 184,780 198,208
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................... (88,340) (147,794) (251,186)
Acquisition of Snap Automotive Products assets.......... -- (41,000) --
Proceeds from sales of assets........................... 26,539 14,350 13,457
Other investing activities.............................. 14,634 (28,222) (3,043)
--------- --------- ---------
Net cash used in investing activities........... (47,167) (202,666) (240,772)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper borrowings............................. 488,409 -- 1,673
Debt repayments......................................... (8,405) (10,457) (17,304)
Proceeds from issuances of debt......................... 13,457 8,500 43,679
Proceeds from note payable to affiliate................. 25,622 13,178 19,845
Payment of intercompany indebtedness to affiliate....... (369,962) -- --
--------- --------- ---------
Net cash provided by financing activities....... 149,121 11,221 47,893
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 5,767 (6,665) 5,329
CASH AND CASH EQUIVALENTS, beginning of period............ 9,132 15,797 10,468
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.................. $ 14,899 $ 9,132 $ 15,797
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 34
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
NET LOSS.................................................... $(45,867) $ (589) $ (9,189)
Change in:
Foreign currency translation adjustment................... (1,506) (5,584) (914)
Unrealized loss on investment in securities............... 925 (1,768) --
-------- -------- --------
(581) (7,352) (914)
-------- -------- --------
COMPREHENSIVE LOSS.......................................... $(46,448) $ (7,941) $(10,103)
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE> 35
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SPIN-OFF FROM PENNZOIL COMPANY AND PRINCIPLES OF CONSOLIDATION --
Spin-off from Pennzoil Company --
On December 30, 1998, Pennzoil Company distributed (the "Spin-off") to its
stockholders 47.8 million shares of common stock of its wholly owned subsidiary
Pennzoil-Quaker State Company ("Pennzoil-Quaker State" or the "Company")
representing all of the shares of the Company owned by Pennzoil Company. As a
result of the distribution, Pennzoil Company, now renamed PennzEnergy Company
("PennzEnergy"), and Pennzoil-Quaker State are no longer affiliated entities.
Principles of Consolidation --
Pennzoil-Quaker State is engaged primarily in the manufacturing and
marketing of lubricants, car care products, base oils and specialty industrial
products and in the franchising, ownership and operation of fast lube centers.
The accompanying consolidated financial statements include all majority-owned
subsidiaries of the Company, including Jiffy Lube International, Inc. ("Jiffy
Lube"), Pennzoil Sales Company, certain assets and liabilities of Pennzoil
Company's captive insurance company (that is now a subsidiary of the Company)
and certain assets and liabilities previously reported in Pennzoil Company's
corporate segment. These financial statements reflect the historical costs and
results of operations of Pennzoil-Quaker State. All significant intercompany
accounts and transactions within Pennzoil-Quaker State have been eliminated.
Pennzoil-Quaker State follows the equity method of accounting for investments in
20% to 50% owned entities.
(2) ACQUISITIONS --
Acquisition of Quaker State --
On December 30, 1998, the Company acquired Quaker State Corporation
("Quaker State") in a merger transaction, and Quaker State became a wholly owned
subsidiary of the Company. As a result of the acquisition, stockholders of
Quaker State received .8204 of a share of common stock of the Company in
exchange for each share of Quaker State capital stock previously owned. The
total purchase price, including acquisition-related costs and expenses, was
$812.1 million.
Pennzoil-Quaker State has accounted for the acquisition using the purchase
method of accounting. The purchase price, which was calculated based on the
market capitalization of Quaker State, was allocated to the assets and
liabilities acquired based upon the estimated fair value of those assets and
liabilities as of the acquisition date. The excess of the aggregate purchase
price over estimated fair value of the net assets acquired has been reflected as
goodwill in the consolidated financial statements and is being amortized on a
straight-line basis over 40 years. The purchase price was allocated as follows
(in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired............................... $659,071
Goodwill and intangible assets.............................. 943,398
Fair value of liabilities assumed........................... (874,642)
--------
Net purchase price.......................................... 727,827
Quaker State acquisition-related costs and expenses......... 80,557
Pennzoil-Quaker State acquisition-related costs and
expenses.................................................. 3,720
--------
Total purchase price........................................ $812,104
========
</TABLE>
The consolidated financial statements reflect the preliminary allocation of
purchase price. A final allocation of the purchase price will be made by the end
of 1999. Pennzoil-Quaker State does not anticipate material changes in the
allocation of the purchase price.
Pennzoil-Quaker State recognized certain liabilities assumed in connection
with the acquisition of Quaker State totaling $27.9 million and adjusted the
purchase cost accordingly. The preliminary allocation of
F-9
<PAGE> 36
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the purchase price to liabilities assumed included (a) $16.6 million in
severance costs for certain Quaker State employees, (b) $9.0 million in closing
costs of Quaker State's Q Lube company-operated fast lube service centers and
(c) $2.3 million in relocation costs of certain Quaker State employees.
Pennzoil-Quaker State also incurred $10.6 million in 1998 expenses related
to the acquisition of Quaker State. These charges were the result of
management's changes in strategic plans, restructurings and reorganizations
related to the acquisition and were primarily due to the estimated costs of
closing Jiffy Lube company-operated fast lube service centers and the resolution
of certain conflicts between Jiffy Lube and Q Lube franchise-operated service
centers.
The Company expects to incur additional acquisition-related costs and
expenses in future periods and will adjust the preliminary purchase price
allocation or charge these amounts to income, as appropriate, depending on their
nature. These future costs and expenses relate to additional facility closings,
conflict resolution between franchise-operated service centers, employee
severance, systems integration and conversion costs of Q Lube franchise-operated
service centers. These costs and expenses are not accruable until a plan is
formulated and approved and amounts are paid or certain obligations are
contractually committed. The restructurings and reorganizations related to the
Quaker State acquisition are expected to be completed by the end of 1999.
Acquisition-related expenses incurred by Quaker State prior to the
acquisition of $80.6 million were recognized in Quaker State's 1998 results of
operations and are not included in Pennzoil-Quaker State's results of operations
for 1998.
The following unaudited pro forma information has been prepared as if the
acquisition of Quaker State occurred on January 1, 1997 after including
amortization of goodwill, brands and other intangible assets, interest expense
and related income tax effects. The unaudited pro forma information does not
reflect adjustments for any estimated general and administrative expense
savings, operational efficiencies and one-time costs related to the acquisition
of Quaker State. The unaudited pro forma information is not necessarily
indicative of results that would have actually occurred had the acquisition of
Quaker State been consummated on January 1, 1997 or future results of
operations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
(EXPRESSED IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $3,021,565 $3,217,020
Net loss(1)................................................. (33,191) (1,729)
Basic and diluted loss per share............................ (0.43) (0.02)
</TABLE>
- ---------------
(1) The 1998 net loss includes certain nonrecurring after-tax charges of $82.5
million ($124.5 million pretax) related to the acquisition of Quaker State,
impairment of long-lived assets, restructuring and other matters.
Acquisition of Assets of Snap Automotive Products --
In November 1997, the Company acquired the marketing and distribution
assets of Snap Automotive Products, Inc. for $41.0 million in cash. 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-Quaker State's consolidated statement of operations.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
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
F-10
<PAGE> 37
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Receivables --
Current receivables include trade accounts and notes receivable and are net
of allowances for doubtful accounts of $18.2 million and $7.7 million at the end
of 1998 and 1997, respectively. Long-term receivables consist of notes
receivable and are net of allowances for doubtful accounts of $0.9 million at
the end of 1998 and 1997.
At December 31, 1998 and 1997, current receivables included notes
receivable of $16.6 million and $12.4 million, respectively. Other assets
included long-term notes receivable of $53.2 million and $41.4 million at
December 31, 1998 and 1997, respectively.
The Company's net accounts receivable sold under its receivables sales
facility totaled $115.0 million and $103.3 million as of December 31, 1998 and
1997, respectively. The Company entered into a new one-year receivables sales
facility in February 1999 that provides for ongoing sales of up to $120.0
million of accounts receivable.
The Company maintains a lube center receivable purchase and sale agreement,
which provides for the sale of certain notes receivables up to $150.0 million.
The agreement terminates on March 13, 2001 or on the date on which the aggregate
purchase price reaches $150.0 million. The Company's notes receivable sold under
the agreement totaled $97.3 million and $70.8 million as of December 31, 1998
and 1997, 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 $187.5 million and $146.4 million at December 31, 1998
and 1997, respectively. The current cost of LIFO inventories was approximately
$187.5 million and $170.7 million at December 31, 1998 and 1997, 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 estimated useful lives. Pennzoil-Quaker State
capitalizes the interest cost associated with major construction projects based
on the effective interest rate on aggregate borrowings.
Impairment of Long-Lived Assets --
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" requires that long-lived assets be reviewed for impairment whenever there is
evidence that the carrying amount of such assets may not be recoverable. This
consists of comparing the carrying amount of the asset with its expected future
undiscounted cash flows without interest costs. If the asset carrying amount is
less than such cash flow estimate, it is written down to its fair value.
Estimates of expected future cash flows are to represent management's best
estimate based on reasonable and supportable assumptions. Any impairment
recognized in accordance with SFAS No. 121 is permanent and may not be restored.
Due principally to the incurrence of operating losses at certain Jiffy Lube
company-operated stores, an impairment totaling $29.6 million was recorded with
respect to such stores during 1998. No long-lived asset impairments were
required during 1997 or 1996.
F-11
<PAGE> 38
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1998, 1997 and 1996 was $14.1 million, $13.1 million and
$10.6 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 current and long-term liabilities in the
accompanying consolidated balance sheet were $15.2 million and $10.0 million at
December 31, 1998 and 1997, 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.
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 12 for a discussion of
amounts recorded for these liabilities.
Cash Flow Information --
For purposes of the consolidated 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
1998, 1997 or 1996.
Changes in operating assets and liabilities consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Receivables................................................. $ (31,277) $(30,432) $118,567
Inventories................................................. (21,077) (34,121) (13,115)
Other assets................................................ (21,855) (30,011) 8,040
Payable to Pennzoil Company(1).............................. (60,000) 153,535 56,131
Other current liabilities................................... (43,824) (1,751) (20,918)
Other operating assets and liabilities...................... (43,572) (21,993) (36,756)
--------- -------- --------
Decrease (increase) in operating assets and liabilities..... $(221,605) $ 35,227 $111,949
========= ======== ========
Cash paid during the period for:
Interest (net of amounts capitalized)..................... $ 13,256 $ 4,954 $ 1,708
</TABLE>
- ---------------
(1) Historically, changes in operating cash flows pertaining to intercompany
balances were a function of the timing of intercompany settlements, level of
investment activity and operating performance of the user of such funds.
F-12
<PAGE> 39
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings Per Share --
Pennzoil-Quaker State computes earnings per share in accordance with SFAS
No. 128, "Earnings Per Share." Under the provisions of SFAS No. 128, basic
earnings per share are computed based on the weighted average shares of common
stock outstanding, while diluted earnings per share also reflects the impact of
potentially dilutive securities such as outstanding options. Computations for
basic and diluted loss per share for the years ended 1998, 1997 and 1996 consist
of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
--------- -------- --------
(EXPRESSED IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net loss.................................................... $(45,867) $ (589) $(9,189)
Basic and diluted weighted average shares(1)................ 48,009 47,847 47,847
Basic and diluted loss per share............................ (0.96) (0.01) (0.19)
</TABLE>
- ---------------
(1) At December 31, 1998, options to purchase 3,409,474 shares of common stock
and awards of 137,636 were outstanding, but were not included in the
computation of diluted per share income because the impact of these options
and awards was antidilutive.
International Operations --
Pennzoil-Quaker State's income (loss) before income tax includes losses of
$0.3 million, $9.3 million and $8.9 million from international operations in
1998, 1997 and 1996, respectively.
Foreign Currency Translation --
For subsidiaries whose functional currency is deemed to be other than the
U.S. dollar, asset and liability accounts are translated at year-end exchange
rates and revenue and expenses are translated at average exchange rates
prevailing during the year. Translation adjustments are included as a separate
component of shareholders' 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-Quaker State adopted SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components. SFAS No. 130 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 years ended December 31, 1998 and 1997, unrealized holding
gains (losses) on marketable securities includes income tax (benefit) of $0.5
million and ($1.0) million, respectively. There were no unrealized holding gains
or losses on investments in securities in 1996. There has been no recorded tax
benefit associated with foreign currency translation losses through December 31,
1998.
Recent Accounting Pronouncements --
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
Under the new standard, companies are required to report information about
operating segments in consolidated financial statements. Operating segments are
determined based on the method by which management organizes its business for
making operating decisions and assessing performance. Pennzoil-Quaker State,
which has three reportable segments, adopted the provisions of SFAS No. 131 and
has included segment financial information in Note 14.
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
F-13
<PAGE> 40
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Internal Use." SOP No. 98-1 is effective for fiscal years beginning after
December 15, 1998 and earlier adoption is permitted. The adoption of SOP No.
98-1 is not expected to have a material impact on Pennzoil-Quaker State's
financial position or 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-Quaker State 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." SFAS No. 133 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-Quaker State's financial position or results
of operations.
(4) TRANSACTIONS WITH PENNZOIL COMPANY --
Purchases from Affiliate --
Purchases from affiliate include purchases of crude oil from Pennzoil
Company at market prices of $115.7 million, $336.4 million and $342.0 million in
1998, 1997 and 1996, respectively.
Allocated General and Administrative Expenses and Other Items --
PennzEnergy and Pennzoil-Quaker State have an arrangement to share certain
services for a period of up to one year after the date of the Spin-off. Any or
all of the services being provided may be discontinued with at least 30 days
prior written notice of the discontinuation. Shared services include legal,
environmental, human resources, finance, treasury, accounting, information
technology, corporate communications, corporate secretary, executive and
government relations. Fees are paid based upon actual costs of providing these
services.
Prior to the Spin-off, Pennzoil Company charged Pennzoil-Quaker State for
all direct costs associated with its operations. In addition, certain indirect
administrative costs incurred by Pennzoil Company that were not directly charged
to Pennzoil-Quaker State were historically allocated through a monthly charge
based on a formula that considered the relative total assets, sales and
employees of its subsidiary companies. These charges totaled $76.0 million,
$63.8 million and $42.0 million for the years ended December 31, 1998, 1997 and
1996, respectively.
Receivable from Affiliate --
At December 31, 1998, receivables included amounts due from PennzEnergy of
$11.8 million for borrowings by PennzEnergy after the Spin-off. The full amount
was repaid in 1999.
F-14
<PAGE> 41
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) SUMMARIZED FINANCIAL DATA --
Quaker State Corporation --
Summarized balance sheet and operations information for Quaker State as of
December 31, 1998 and 1997 and for the three years in the period ended December
31, 1998 follow:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
------------ ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $ 316,057 $317,748
Noncurrent assets........................................... 1,286,412 851,967
Current liabilities......................................... 236,513 212,370
Noncurrent liabilities...................................... 638,129 625,444
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1998 1997 1996
---------- ---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Revenues........................................... $1,171,427 $1,203,860 $1,121,178
Operating income................................... 85,047 78,361 60,444
Income (loss) from continuing operations........... (74,848) (7,389) 9,651
Net income (loss).................................. (74,848) 23,088 13,723
</TABLE>
At December 31, 1998, Quaker State had total debt of $472.7 million,
consisting of $99.6 million of 6.625% Notes due 2005, $370.0 million of variable
rate borrowings under a revolving credit facility and $3.1 million in various
notes due in installments through 2005. On January 4, 1999, variable rate
borrowings under the revolving credit facility were repaid by Pennzoil-Quaker
State.
Excel Paralubes --
The Company and Conoco Inc. ("Conoco") are equal partners in Excel
Paralubes, which operates a state-of-the-art base oil hydro-cracker located at
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 operates the plant with support
positions staffed by both companies. Commercial production commenced at the
facility in December 1996.
Pennzoil-Quaker State's net investment in Excel Paralubes, carried as a
credit balance of $51.8 million and $37.4 million at December 31, 1998 and 1997,
respectively, is netted against other equity investments and included in other
assets on the consolidated balance sheet. Pennzoil-Quaker State's 1998, 1997 and
1996 equity in Excel Paralubes' pretax income (loss) of $14.7 million, $(2.8)
million and $(24.3) million, respectively, is included in other income on the
consolidated statement of operations.
Summarized balance sheet and operations information for Excel Paralubes (on
a 100% basis) as of December 31, 1998 and 1997 and for the three years in the
period ended December 31, 1998 follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1998 1997
---------- -----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $ 53,273 56,446
Noncurrent assets........................................... 442,763 457,556
Current liabilities......................................... 80,912 81,617
Noncurrent liabilities...................................... 518,765 507,164
Partners' deficit........................................... (103,641) (74,779)
</TABLE>
F-15
<PAGE> 42
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................... $279,329 $264,388 $ 14,528
Operating earnings (loss).............................. 67,180 32,023 (35,769)
Net income (loss)...................................... 29,488 (5,677) (48,713)
</TABLE>
At December 31, 1998, Excel Paralubes had total debt of $559.2 million,
consisting of $240.0 million of 7.125% senior bonds due 2011, $250.0 million of
7.43% senior bonds due 2015, and $69.2 million of variable rate borrowings under
commercial paper facilities with banks. Borrowings under commercial paper
facilities are due in 1999 and are classified as short-term. Recourse for the
partners under the bonds is limited to the revenues and assets of Excel
Paralubes. Certain restrictive covenants may limit the ability of Excel
Paralubes to incur debt, make distributions to the partners, make investments or
create liens. Conoco and Pennzoil-Quaker State maintain an agreement with Excel
Paralubes to provide support to Excel Paralubes up to an aggregate amount of $60
million during the existence of a liquidity cash flow deficit.
(6) BENEFIT PLANS --
Pensions and Other Postretirement Benefits --
Substantially all Pennzoil-Quaker State employees are covered by
non-contributory defined benefit pension plans which provide benefits based on
the participants' years of service and compensation or stated amounts for each
year of service. 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.
In addition, Pennzoil-Quaker State sponsors unfunded defined benefit
postretirement plans that cover substantially all of its employees. The plans
provide medical and life insurance benefits and are, depending on the type of
plan, either contributory or non-contributory. The accounting for the health
care plans anticipates future cost-sharing changes that are consistent with
Pennzoil-Quaker State's expressed intent to increase, where possible,
contributions from future retirees to a minimum of 30% of the total annual cost.
Furthermore, future contributions for both current and future retirees have been
limited, where possible, to 200% of the average 1992 benefit cost.
Prior to the Spin-off, Pennzoil-Quaker State employees participated in
Pennzoil Company's defined benefit pension and postretirement plans. On December
30, 1998, obligations under the Pennzoil Company plans relating to
Pennzoil-Quaker State's employees and retirees were assumed by Pennzoil-Quaker
State plans. Assets that were formerly held by Pennzoil Company's pension trusts
will be divided between the trusts for Pennzoil Company and Pennzoil-Quaker
State. The pension benefit obligation and plan assets transferred to
Pennzoil-Quaker State from Pennzoil Company as of December 31, 1998 were $175.8
million and $225.6 million, respectively.
Also on December 31, 1998, Pennzoil-Quaker State established postretirement
benefit plans for its employees and retirees separate from Pennzoil Company. The
accumulated postretirement benefit obligation transferred to Pennzoil-Quaker
State from Pennzoil Company as of December 31, 1998 was $37.3 million.
As a result of the acquisition of Quaker State, Pennzoil-Quaker State
assumed the obligations and assets of the pension and postretirement benefit
plans for Quaker State employees. The pension benefit obligation and plan assets
assumed by Pennzoil-Quaker State as of December 31, 1998 are $157.8 million and
$172.6 million, respectively. The accumulated postretirement benefit obligation
assumed by Pennzoil-Quaker State from Quaker State as of December 31, 1998 was
$86.9 million.
F-16
<PAGE> 43
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the Pennzoil-Quaker State plans' benefit
obligations, plan assets, reconciliation of funded status, amounts recognized in
the consolidated balance sheets, components of net periodic benefit cost, and
the actuarial assumptions used in determining the recognized obligations:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
AS OF DECEMBER 31 AS OF DECEMBER 31
------------------- --------------------
1998 1997 1998 1997
-------- -------- --------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year.......... $159,060 $136,011 $ 39,406 $ 41,935
Service cost.................................. 7,143 5,934 579 761
Interest cost................................. 11,891 10,499 2,607 2,734
Plan amendments............................... 2,342 11,701 -- --
Acquisitions.................................. 157,815 -- 86,902 --
Special termination benefits.................. -- (933) -- --
Benefits paid................................. (7,377) (5,980) (3,266) (2,769)
Actuarial (gain) or loss...................... 2,748 1,828 (2,073) (3,255)
-------- -------- --------- --------
Benefit obligation at end of year................ $333,622 $159,060 $ 124,155 $ 39,406
======== ======== ========= ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year... $186,169 $148,692 $ -- $ --
Actual return on plan assets.................. 46,274 44,220 -- --
Acquisitions.................................. 172,600 -- -- --
Employer contributions........................ 515 170 3,266 2,769
Benefits paid................................. (7,377) (5,980) (3,266) (2,769)
Settlement payments........................... -- (933) -- --
-------- -------- --------- --------
Fair value of plan assets at end of year......... $398,181 $186,169 $ -- $ --
======== ======== ========= ========
RECONCILIATION OF FUNDED STATUS:
Over (under) funded status.................... $ 64,559 $ 27,109 $(124,155) $(39,406)
Unrecognized actuarial gain................... (79,899) (59,399) (2,690) (604)
Unrecognized transition asset................. (696) (908) -- --
Unrecognized prior service cost............... 23,686 23,920 -- --
-------- -------- --------- --------
Net amount over (under) funded at year-end....... $ 7,650 $ (9,278) $(126,845) $(40,010)
======== ======== ========= ========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEET CONSIST OF:
Prepaid benefit cost.......................... $ 38,420 $ 11,563 $ -- $ --
Accrued benefit liability..................... (34,060) (24,233) (126,845) (40,010)
Intangible asset.............................. 3,131 3,370 -- --
Accumulated other comprehensive income........ 159 22 -- --
-------- -------- --------- --------
Net asset (liability) recognized at year-end..... $ 7,650 $ (9,278) $(126,845) $(40,010)
======== ======== ========= ========
Other comprehensive income attributable to
change in additional minimum liability
recognition................................. 137 (45)
</TABLE>
The benefit obligation for the defined benefit pension plans with benefit
obligations in excess of plan assets was $15.9 million and $114.7 million, as of
December 31, 1998 and December 31, 1997, respectively. The fair value of plan
assets related to these underfunded plans was $105.8 million as of December 31,
1997. No plan assets related to the underfunded plans existed for the plans at
December 31, 1998. A majority of the underfunded plans in 1997 became funded in
1998.
The projected benefit obligation and accumulated benefit obligation for the
defined benefit pension plans with accumulated benefit obligations in excess of
plan assets were $15.9 million and $13.6 million, respectively, as of December
31, 1998, and $8.2 million and $6.3 million, respectively, as of December 31,
1997. The fair value of plan assets was $0.3 million as of December 31, 1997. No
plan assets related to the
F-17
<PAGE> 44
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
underfunded plans existed for these plans at December 31, 1998. A majority of
the underfunded plans in 1997 became funded in 1998.
Net periodic benefit cost included the following components:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- ------ ------ ------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost........................ $ 7,142 $ 5,934 $ 5,888 $ 579 $ 760 $ 848
Interest cost....................... 11,891 10,499 9,439 2,607 2,734 2,975
Expected return on plan assets...... (19,810) (16,406) (12,586) -- -- --
Amortization of prior service
cost.............................. 2,570 2,197 1,711 -- -- --
Amortization of transition asset.... (212) (212) (212) -- -- --
Recognized actuarial gain........... (3,252) (2,682) (407) -- -- --
-------- -------- -------- ------ ------ ------
Net periodic benefit cost.............. $ (1,671) $ (670) $ 3,833 $3,186 $3,494 $3,823
======== ======== ======== ====== ====== ======
Additional (gain) or loss recognized due
to:
Curtailment......................... -- -- (903)
Settlement.......................... -- -- 465
</TABLE>
Weighted-average assumptions were:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
AS OF DECEMBER 31 AS OF DECEMBER 31
----------------------- --------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rates................................ 7.00% 7.25% 7.50% 7.00% 7.25% 7.50%
Expected long-term rate of return on plan
assets...................................... 10.50% 10.50% 10.50% -- -- --
Rate of compensation increase................. 4.20% 4.60% 4.60% -- -- --
</TABLE>
For measurement purposes, a 7% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998; the rate was assumed
to decrease gradually to 5% through the year 2002 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plan. A one percentage-point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
ONE-PERCENTAGE ONE-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Effect on total of service and interest cost components for
1998...................................................... $ 105 $ (112)
Effect on year-end 1998 postretirement benefit obligation... 11,031 (9,722)
</TABLE>
Contribution Plans --
Prior to the Spin-off, employees of Pennzoil-Quaker State who had completed
one year of service were also covered by a defined contribution plan of Pennzoil
Company. Employee contributions of not less than 1% to not more than 6% of each
covered employee's compensation were matched between 50% and 100% by Pennzoil
Company. Pennzoil-Quaker State assumed responsibility for the defined
contribution plans related to Pennzoil-Quaker State employees. Pennzoil-Quaker
State was charged $6.2 million, $6.5 million and $6.3 million for such
contributions in 1998, 1997 and 1996, respectively.
F-18
<PAGE> 45
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) CAPITAL STOCK AND STOCK OPTIONS --
Common Stock --
Pennzoil-Quaker State's Restated Certificate of Incorporation authorizes
the issuance of up to 100,000,000 shares of common stock. At December 31, 1998,
77,619,765 shares were issued and outstanding.
Preferred Stock --
Pennzoil-Quaker State's Restated Certificate of Incorporation authorizes
the issuance of up to 10,000,000 shares of preferred stock. None of these shares
were issued or outstanding at December 31, 1998. On December 14, 1998, the Board
of Directors of Pennzoil-Quaker State declared a dividend of one right to
purchase preferred stock ("Right") for each outstanding share of the
Pennzoil-Quaker State common stock, to stockholders of record at the close of
business on December 18, 1998. Each Right entitles the registered holder to
purchase from Pennzoil-Quaker State a unit consisting of one one-hundredth of a
share of Series A Junior Participating Preferred Stock at a purchase price of
$90 per share upon the occurrence of certain specified events.
Stock Option Plans --
In connection with the Spin-off on December 30, 1998, Pennzoil-Quaker State
issued 3,397,474 stock options, on a one-for-one basis, to the holders of
Pennzoil Company stock options outstanding on that date. The exercise prices
were based upon the original exercise prices of the Pennzoil Company options
allocated in proportion to the market value of common stock of Pennzoil-Quaker
State relative to the market value of common stock of PennzEnergy immediately
following the Spin-off. Also on December 30, 1998, Pennzoil-Quaker State issued
12,000 stock options to former holders of Quaker State stock options who elected
not to redeem their options for cash in connection with the Quaker State
acquisition. The exercise price was based on the original exercise prices of the
Quaker State options adjusted for antidilution. Options issued on December 30,
1998 have a maximum term of ten years and are exercisable under the terms of the
respective option agreements. At December 31, 1998, expiration dates for the
outstanding options ranged from October 1999 to October 2008 and the average
exercise price per share was $26.54. Payment of the exercise price may be made
in cash or in shares of Pennzoil-Quaker State common stock previously owned by
the optionee, valued at the then-current market value.
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-Quaker State's employee participation in the stock based plans. Prior
to the Spin-off, Pennzoil-Quaker State employees participated in Pennzoil
Company's stock-based compensation plans. The Company was charged $0.8 million,
$1.2 million and $0.6 million in 1998, 1997 and 1996, respectively, for costs
attributable to its employees' participation in those plans.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-------------------------------------------
NUMBER OF
OPTIONS WEIGHTED WEIGHTED
OUTSTANDING AVERAGE AVERAGE
AND EXERCISABLE CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES AT DEC. 31, 1998 LIFE IN YEARS PRICE
------------------------ ---------------- ------------- --------
<S> <C> <C> <C>
$ 5.63-$15.00............................................ 12,000 8.4 $ 6.33
$15.01-$23.00............................................ 1,002,546 6.8 $20.36
$23.01-$30.00............................................ 1,290,478 6.4 $25.76
$30.01-$39.29............................................ 1,104,450 6.7 $33.26
---------
$ 5.63-$39.29............................................ 3,409,474 $26.54
</TABLE>
F-19
<PAGE> 46
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 30, 1998, holders of 137,636 units of Pennzoil Company common
stock granted to participating employees under Pennzoil Company's conditional
stock award programs were granted, on a one-for-one basis, units of
Pennzoil-Quaker State common stock. Awards under the programs are made in the
form of units which entitle the recipient to receive, at the end of a specific
period, subject to certain conditions of continued employment, a number of
shares of Pennzoil-Quaker State common stock equal to the number of units
granted. At December 31, 1998, units covering 137,636 shares of Pennzoil-Quaker
State common stock were outstanding.
(8) INCOME TAXES --
Accounting for Income Taxes --
Pennzoil-Quaker State 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.
Prior to the Spin-off, Pennzoil-Quaker State was included in Pennzoil
Company's consolidated income tax returns. Each subsidiary of Pennzoil Company
with taxable income was charged an amount equal to its taxable income multiplied
by the highest rate imposed on corporations, less allowable credits. If the
subsidiary had a taxable loss, it received 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 accrued deferred income taxes on temporary differences between the
book and tax basis of its assets and liabilities.
Federal, State and Foreign --
Federal, state and foreign income tax expense (benefit) consists of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Current
United States...................................... $ -- $(30,044) $(30,010)
Foreign............................................ 700 239 317
State.............................................. (224) 20 (37)
Deferred
United States...................................... (37,104) 32,470 27,863
Foreign............................................ -- (442) (874)
State.............................................. (1,710) 4,002 1,638
-------- -------- --------
$(38,338) $ 6,245 $ (1,103)
======== ======== ========
</TABLE>
F-20
<PAGE> 47
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pennzoil-Quaker State's net deferred tax liability (asset) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1998 1997
----------- -----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Deferred tax liability...................................... $ 194,457 $ 145,641
Deferred tax asset.......................................... (302,327) (166,745)
Valuation allowance......................................... 23,843 22,283
--------- ---------
Net deferred tax liability (asset)................ $ (84,027) $ 1,179
========= =========
</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
-------------------------
1998 1997
----------- -----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Inventory................................................... $(10,310) $ --
Product liability........................................... (8,750) --
Property, plant and equipment............................... 154,563 103,262
Investments in foreign subsidiaries......................... (7,373) (17,256)
Benefit related accruals.................................... (86,322) (15,283)
Environmental cleanup....................................... (11,088) (4,874)
Alternative minimum tax credit carryforward................. (35,229) (32,595)
Net operating loss carryforwards............................ (52,530) (29,973)
Other, net.................................................. (49,255) (24,385)
Valuation allowance......................................... 22,267 22,283
-------- --------
Net deferred tax liability (asset)................ $(84,027) $ 1,179
======== ========
</TABLE>
The principal items accounting for the difference in income taxes on income
computed at the federal statutory rate and income taxes as recorded are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1998 1997 1996
-------- ------- --------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate...... $(29,472) $ 1,980 $ (3,602)
Increases (reductions) resulting from:
State income taxes, net............................. (1,257) 2,592 1,000
Taxes on foreign income less than statutory rate.... 456 (149) (532)
Nondeductible goodwill.............................. 1,040 1,173 1,173
Spin-off from Pennzoil(1)........................... (9,721) -- --
Other, net.......................................... 616 649 858
-------- ------- --------
Income tax provision (benefit)........................ $(38,338) $ 6,245 $ (1,103)
======== ======= ========
</TABLE>
- ---------------
(1) Pennzoil-Quaker State's income tax expense was decreased by approximately
$9.7 million due to the Spin-off from Pennzoil Company. This decrease was
primarily caused by (1) reallocation of net operating losses between
Pennzoil-Quaker State and Pennzoil Company pursuant to Internal Revenue
Service regulations ($4.2 million) and (2) reallocation of income and
expense pursuant to a tax separation agreement ($5.5 million).
In connection with the Spin-off, Pennzoil-Quaker State entered into a tax
separation agreement with PennzEnergy which provides, among other things, that
(1) Pennzoil-Quaker State will be responsible for and
F-21
<PAGE> 48
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indemnify PennzEnergy against all taxes that are attributable to certain
inventory adjustments, (2) PennzEnergy will be responsible for and indemnify
Pennzoil-Quaker State against any other consolidated federal or state income tax
liability for periods ended on or before the date of the Spin-off, (3) any other
taxes will be borne by the party on whom such taxes are imposed by law and (4)
Pennzoil-Quaker State will make a payment to PennzEnergy equal to the greater of
(a) 38% of the aggregate regular taxable income or (b) 24% of the alternative
minimum taxable income for the year ended December 31, 1998. The agreement also
establishes procedures for the conduct and settlement of certain tax audits and
related proceedings. Pennzoil-Quaker State and Quaker State will file separate
tax returns for the 1998 tax year. Pennzoil-Quaker State will file a
consolidated tax return beginning in 1999.
As of December 31, 1998, Pennzoil-Quaker State had a United States net
operating loss carryforward of approximately $60.2 million, which is available
to reduce future federal income taxes payable. Additionally, for the purposes of
determining alternative minimum tax, an approximate $46.6 million net operating
loss is available to offset future alternative minimum taxable income. If not
used, these carryovers will expire in 2018. In addition, Pennzoil-Quaker State
has a separate return limitation loss of $4.5 million and an approximate $3.1
million net operating loss which is available to offset 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 the subsidiary, or its successor,
generating the loss. If not used, these carryovers will expire in the years 2000
to 2006. In addition, Pennzoil-Quaker State has approximately $35.2 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-Quaker State also had state net operating loss carryforwards, the
tax effect of which was approximately $31.5 million as of December 31, 1998. A
valuation allowance of approximately $22.1 million has been established to
offset the portion of this deferred tax asset related to state tax loss
carryforwards expected to expire before their utilization.
(9) DEBT --
Debt outstanding was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1998 1997
------------ ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
Amounts due Pennzoil Company under revolving credit
arrangements.............................................. $ -- $566,168
6.625% Notes due 2005, net of discount...................... 99,578 --
Pollution control bonds, net of discount.................... 50,544 33,050
International debt facilities............................... 11,033 12,466
Other debt.................................................. 7,773 6,645
Quaker State variable-rate revolving credit agreements...... 370,000 --
Commercial paper............................................ 488,409 --
---------- --------
Total debt........................................ 1,027,337 618,329
Less amounts classified as current maturities............... (1,283) (232,359)
---------- --------
Total long-term debt.............................. $1,026,054 $385,970
========== ========
</TABLE>
The Company's primary revolving credit facility with a group of banks
provides for up to $1.0 billion of committed unsecured revolving credit
borrowings through November 16, 1999, with any outstanding borrowings on such
date being converted into a term credit facility terminating on November 16,
2000. There were no borrowings outstanding under this revolving credit facility
at December 31, 1998. The Company had borrowings under a Quaker State revolving
credit agreement of $370.0 million at December 31, 1998. In
F-22
<PAGE> 49
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 1999, the Company repaid these borrowings with borrowings under its
commercial paper facility and terminated the Quaker State revolving credit
facility. The average interest rate applicable to the outstanding Quaker State
revolving credit borrowings was 5.8% during 1998.
The Company currently limits aggregate borrowings under its commercial
paper programs to $1.0 billion. Borrowings under commercial paper facilities
totaled $488.4 million at December 31, 1998. The average interest rate
applicable to outstanding commercial paper was 6.0% at year-end 1998.
The Company had one short-term variable-rate credit arrangement with a bank
at year-end 1998 and intends to enter into several more. The Company currently
limits its aggregate borrowings under these types of credit arrangements to
$300.0 million. There were no outstanding borrowings at December 31, 1998. None
of the banks under these credit arrangements has any obligation to continue to
extend credit after the maturities of outstanding borrowings or to extend the
maturities of any borrowings.
Prior to Spin-off, the Company had revolving credit arrangements with
Pennzoil Company that provided for borrowings of up to $590.0 million through
December 31, 1998 and $340.0 million through December 31, 2004. Amounts borrowed
under the credit arrangements bore interest at variable and fixed rates.
In December 1998, in connection with its separation from Pennzoil Company,
the Company repaid $430.0 million in intercompany indebtedness and certain
accounts payable to Pennzoil Company. Intercompany indebtedness of $412.4
million to Pennzoil Company was not repaid and was treated as a capital
contribution to the Company in connection with the separation. This amount was
reclassified from payable to affiliate to shareholders' equity. At December 31,
1997, there was $230.0 million outstanding classified as payable to affiliate
and $336.2 million outstanding classified as long-term debt payable to
affiliate. Interest associated with the affiliated debt was $56.4 million for
the years ended December 31, 1998 and 1997 and $53.0 million for the year ended
December 31, 1996. The average interest rates applicable to amounts outstanding
under these credit arrangements during 1998 was 9.8%.
In December 1997, Pennzoil Company made a capital contribution of $28.6
million to the Company. This amount was reclassified from payable to affiliate
to shareholders' equity.
The Company has a total of $50.5 million, net of discount, in pollution
control bonds issued by three authorities. Issuances by the Industrial
Development Board of the Parish of Caddo, Inc. include $24.6 million issued
December 23, 1996, $8.5 million issued December 19, 1997 and $11.8 million net
of discount, issued December 22, 1998. The three issuances are scheduled for
retirement on December 1, 2026, December 1, 2027 and December 1, 2028,
respectively. Proceeds from the bonds were used to help fund an upgrade to the
Company's Shreveport refinery. The interest rates for the bonds issued in 1996
and 1997 are currently reset weekly and interest is paid monthly. The interest
rate is fixed at 5.6% for the bonds issued in 1998 and interest is paid
semi-annually. Both the Venango Industrial Development Authority pollution
control bonds of $3.4 million and the Butler County Industrial Development
Authority pollution control bonds of $2.3 million were issued on December 21,
1982 and are scheduled for retirement on December 1, 2012. The interest rate on
both bond issuances is currently reset weekly and interest is paid monthly.
Proceeds from the issuances were used to help fund pollution control facilities
related to the Company's refinery and specialty processing facilities in
Pennsylvania, respectively.
As part of the Quaker State acquisition, Pennzoil-Quaker State assumed
$100.0 million of 6.625% notes due 2005 and other debt of $3.1 million due in
various installments through 2005.
The Company's long-term credit facility with a Canadian bank provides for
borrowings of up to C$27.0 million through October 25, 1999. Outstanding
borrowings under the credit facility totaled US$9.6 million and US$12.2 million
at December 31, 1998 and 1997, respectively. The average interest rate
applicable to amounts outstanding under the credit facility were 5.0% and 3.4%
during 1998 and 1997, respectively.
F-23
<PAGE> 50
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, borrowings under Pennzoil-Quaker State's
commercial paper programs and the Company's Canadian credit facility totaling
$498.0 have been classified as long-term debt. Such debt classification is based
upon the availability of committed long-term credit facilities to refinance such
short-term facilities and the Company's intent to maintain such commitments in
excess of one year.
At December 31, 1998, aggregated maturities of long-term debt for the years
ending December 31, 1999 through 2003 were $1.3 million, $869.0 million, $0.8
million, $0.7 million and $0.5 million, respectively.
(10) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK --
Financial Instruments With Off-Balance-Sheet Risk --
Pennzoil-Quaker State 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-Quaker State's consolidated balance sheet.
Other financial guarantees include debt and lease obligation guarantees
with expiration dates of up to 15 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.
Following are the amounts related to Pennzoil-Quaker State's financial
guarantees and contractual commitments to extend financial guarantees, credit
and other assistance as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
CONTRACT OR
NOTIONAL AMOUNTS
DECEMBER 31
-----------------
1998 1997
------- -------
(EXPRESSED IN
THOUSANDS)
<S> <C> <C>
Financial guarantees relating to Excel Paralubes............ $17,710 $16,790
Other financial guarantees.................................. 20,892 27,902
Commitments to extend financial guarantees:
Guarantees of letters of credit........................... 21,537 28,535
Other guarantees.......................................... 8,930 9,557
------- -------
Total............................................. $69,069 $82,784
======= =======
</TABLE>
Pennzoil-Quaker State'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.
F-24
<PAGE> 51
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Derivatives --
In order to lock in future interest rates covering pending debenture
issuances of $100 million, Pennzoil-Quaker State entered into four interest rate
locks, based upon the 30-year Treasury rate. To accomplish its hedged position,
Pennzoil-Quaker State entered into forward rate agreements in which it will pay
or receive the difference between (1) the 30-year Treasury rate at the time the
forward was entered into and (2) the 30-year Treasury rate at the time of
maturity. Under current accounting standards, these transactions qualify as a
hedge of an anticipated transaction. Any gains or losses from the interest rate
hedges are deferred during the interim period with the offset to a payable or
receivable. Upon maturity of the hedge contracts, any gain or loss will be
treated as an adjustment to the issue price of the debt instrument, effectively
creating a premium or discount that is amortized over the life of the
borrowings. The estimated value of the amount payable by Pennzoil-Quaker State
under its open interest rate hedge was $8.3 million at December 31, 1998, which
has been recorded as a deferred charge in other assets.
Concentrations of Credit Risk --
Pennzoil-Quaker State extends credit to various companies in the lubricants
and consumer products, base oil and specialty products and fast lube operations
segments 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-Quaker State's overall credit risk. However,
management believes that Pennzoil-Quaker State's receivables are well
diversified, thereby reducing potential credit risk to Pennzoil-Quaker State,
and that allowances for doubtful accounts are adequate to absorb estimated
losses as of December 31, 1998. Pennzoil-Quaker State'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."
As of December 31, 1998, receivables related to group concentration in the
lubricants and consumer products, base oil and specialty products and fast lube
operations segments were $274.0 million, $37.4 million and $40.1 million,
respectively, compared with $143.9 million, $16.1 million and $31.5 million,
respectively, at December 31, 1997.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS --
Balance Sheet Financial Instruments --
The carrying amounts of Pennzoil-Quaker State'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.
The following table summarizes the carrying amounts and estimated fair
values of Pennzoil-Quaker State's other balance sheet financial instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- -------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C>
Notes receivable................................ $ 69,848 $ 70,212 $ 52,610 $ 51,314
Debt............................................ 1,027,337 1,000,970 52,161 52,332
Amounts due to affiliate under revolving credit
agreements.................................... -- -- 566,168 644,884
</TABLE>
F-25
<PAGE> 52
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 $13.2 million and $16.7 million
as of December 31, 1998 and 1997, respectively. The estimated fair value of
certain financial guarantees written and commitments to extend financial
guarantees is based on the estimated cost to Pennzoil-Quaker State to obtain
third party letters of credit to relieve Pennzoil-Quaker State 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.
(12) COMMITMENTS AND CONTINGENCIES --
Environmental Matters --
The operations of the Company 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.
The Company 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 Company. 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 Company 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 Company's refineries will likely be required to
be reformulated to a composition significantly different from the fuels
currently produced which would involve the installation of additional refining
equipment. However, current estimates indicate that expenditures associated with
the installation of such equipment would not have a material effect on the
Company's results of operations.
Pennzoil-Quaker State 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
F-26
<PAGE> 53
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reasonable estimates are possible. Such accruals primarily include estimated
costs associated with remediation. Pennzoil-Quaker State 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-Quaker State's combined financial statements. Pennzoil-Quaker State
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.
The Company'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. The Company'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.
Certain of Pennzoil-Quaker State'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-Quaker State'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, 1998
and 1997, Pennzoil-Quaker State's consolidated balance sheet included accrued
liabilities for environmental remediation of $27.2 million and $11.6 million,
respectively. Of these reserves, $4.2 million and $2.4 million are reflected on
the consolidated balance sheet as current liabilities as of December 31, 1998
and 1997, respectively, and $23.0 million and $9.2 million are reflected as
other liabilities as of December 31, 1998 and 1997, respectively.
Pennzoil-Quaker State 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-Quaker State subsidiaries are PRPs,
Pennzoil-Quaker State'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-Quaker State'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-Quaker State's monetary exposure is
not expected to be material beyond the amounts reserved.
From January 1995 through December 1998, capital outlays of approximately
$14.1 million have been made by the Company with respect to environmental
protection. Capital expenditures for environmental control facilities are
currently expected to be approximately $0.6 million in 1999.
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
F-27
<PAGE> 54
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum of three times that amount in punitive damages. The Company vigorously
denies these allegations and will oppose plaintiffs' efforts to have the case
certified as a class action by the court.
Dura Lube --
In July 1997, Dura Lube Corporation and certain of its affiliated companies
filed suit in the United States District Court for the District of Delaware. The
complaint names Quaker State and its subsidiary, Slick 50, Inc., as defendants
and asserts claims under the Sherman Act and the Clayton Act, for tortious
interference with business relations and for civil conspiracy. Plaintiffs allege
that the defendants attempted and conspired to monopolize the market for engine
treatment by, among other things, entering into exclusive dealing arrangements
with major automotive parts retailers around the country. Plaintiffs seek treble
damages, punitive damages, attorneys' fees and costs as well as injunctive
relief. The Company is contesting this action vigorously.
Blue Coral --
In May 1997, a class action lawsuit was filed in the United States District
Court for the Northern District of Illinois on behalf of a class of persons who
purchased wax, polish or protectant products sold by a number of defendants. The
action names as defendants a number of car wax manufacturers including the Blue
Coral, Inc., a subsidiary of the Company and certain of its present and former
officers. The complaint alleges that the defendants falsely advertised and
marketed such products and seeks treble damages, attorneys' fees and costs for
the class for alleged violations of the federal Racketeer Influenced and Corrupt
Organizations Act and compensatory damages for alleged violations of the Ohio
Consumer Sales Practices Act as well as for breach of express warranty. On
January 5, 1999, the court certified a nationwide class consisting of all
persons who purchased products marketed, produced or distributed as "car wax" by
the defendants. While no class period has been specified by the court, the
plaintiffs are seeking a class period dating back four years prior to the filing
of the action. On February 2, 1999, the plaintiffs proposed a joint settlement
fund equal to ten percent of each defendant's 1997 gross revenue from the
products. The Company is contesting this action vigorously.
Oil Changer --
In July 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 Quaker State, certain former executives of
Quaker State and other individuals. The complaint alleges that Quaker State and
Oil Changer were "strategic partners" in an alleged partnership to develop quick
lubrication centers in Northern California. Oil Changer alleges that Quaker
State breached the alleged agreement by developing quick lubrication centers
with another entity. The complaint asserts claims for fraud, breach of fiduciary
duty and usurpation of partnership opportunity, partnership accounting, breach
of contract, conspiracy and violation of Section 17200 of the California
Business Professions Code. Plaintiffs seek compensatory damages of $50 million,
punitive damages, restitution, attorneys' fees and costs as well as injunctive
relief.
In addition, in July 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. 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 of the Company and Pennzoil Company'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 sought compensatory and treble damages,
restitution, attorneys' fees and costs as well as injunctive relief enjoining
the proposed acquisition of Quaker State by the Company. 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
F-28
<PAGE> 55
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
October 8, 1998, Plaintiffs filed a notice of motion for a preliminary
injunction to enjoin the proposed merger, which was denied on December 7, 1998.
Plaintiffs are appealing the denial of the injunction. The Company is contesting
these actions vigorously.
Texas Federal Court Employment Action Settled --
The parties have reached a settlement in the lawsuit styled Donna
Alexander, et al. v. Pennzoil Company, et. al., pending in the United States
District Court for the Southern District of Texas, Houston Division. The suit
was filed by eleven named plaintiffs and alleged wrongful and illegal
discrimination by Pennzoil Company and subsidiaries against African-American
employees. The settlement was approved by the court on March 8, 1999.
Voluntary Withdrawal and Reformulation of Fix-A-Flat(R)
In February 1999, the Company announced a voluntary withdrawal and
reformulation of its Fix-A-Flat(R) tire inflator products. The Company's action
was in response to reported uses of the product in a manner inconsistent with
safe automotive tire repair procedures and contrary to explicit warnings on
Fix-A-Flat(R) product labels. In rare instances, an explosion may occur if a
tire repaired with the Fix-A-Flat(R) tire inflator product is subjected to
extreme heat by welding on, or applying a flame to, the wheel rim with the tire
still on the rim. Reformulated Fix-A-Flat(R) products are being distributed by
the Company. Accrued 1998 charges associated with the product withdrawal and
reformulation totaled $25.0 million. The Company is currently a defendant in one
lawsuit alleging injuries as a result of Fix-A-Flat(R) products. After
consideration of its accrued reserve, the Company believes that this matter will
not have a material adverse effect on the Company's financial condition or
results of operations.
Other --
Pennzoil-Quaker State and its subsidiaries are 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 all claims, lawsuits
and other proceedings 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-Quaker State's financial condition or
results of operations.
(13) LEASES --
As Lessee --
Pennzoil-Quaker State leases various assets and office space with lease
periods of one to 20 years. Additionally, Pennzoil-Quaker State 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-Quaker State. 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.
F-29
<PAGE> 56
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total operating lease rental expenses for Pennzoil-Quaker State were $61.9
million, $55.1 million and $55.2 million for 1998, 1997 and 1996, respectively.
Interest expense related to Pennzoil-Quaker State's capital lease obligations
was $8.3 million during 1998 and $8.6 million in 1997 and 1996.
Future minimum commitments under noncancellable leasing arrangements as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
AMOUNTS PAYABLE
AS LESSEE
------------------------
CAPITAL OPERATING
LEASES LEASES
--------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
YEAR ENDING DECEMBER 31:
1999........................................................ $ 13,232 $ 81,209
2000........................................................ 13,441 72,713
2001........................................................ 13,517 63,056
2002........................................................ 13,450 56,048
2003........................................................ 13,451 51,277
Thereafter.................................................. 65,529 302,029
-------- --------
Net minimum future lease payments........................... $132,620 $626,332
========
Less interest............................................... 55,193
--------
Present value of net minimum lease payments at December 31,
1998...................................................... $ 77,427
========
</TABLE>
Assets recorded under capital lease obligations of $74.5 million and $12.9
million at December 31, 1998 are classified as property, plant and equipment and
other assets, respectively, in the accompanying consolidated balance sheet.
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 consolidated balance sheet.
As Lessor --
Pennzoil-Quaker State 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 consolidated balance sheet.
F-30
<PAGE> 57
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payment receivables under noncancellable leasing
arrangements as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
AMOUNTS RECEIVABLE
AS LESSOR
-------------------------
DIRECT
FINANCING OPERATING
LEASES LEASES
---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C>
YEAR ENDING DECEMBER 31:
1999........................................................ $ 4,694 $ 18,624
2000........................................................ 4,762 17,539
2001........................................................ 4,794 16,264
2002........................................................ 4,817 15,267
2003........................................................ 4,786 14,136
Thereafter.................................................. 24,740 121,671
------- --------
Net minimum future lease payments........................... $48,593 $203,501
========
Less unearned income........................................ 20,811
-------
Net investment in direct financing leases at December 31,
1998...................................................... $27,782
=======
</TABLE>
(14) SEGMENT FINANCIAL INFORMATION --
Information with respect to revenues, operating income and other data by
operating segment is presented in Item 1. Business and Item 2. Properties of
this Annual Report on Form 10-K. The tabular presentation below sets forth
certain financial information regarding Pennzoil-Quaker State's net sales by
classes of similar products and services and net sales and identifiable assets
by geographic area for the years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
NET SALES BY CLASSES OF SIMILAR PRODUCTS OR
SERVICES:
Lubricants............................................... $ 818,166 $ 840,383 $ 833,598
Consumer Products........................................ 56,310 31,284 26,589
Base Oils................................................ 263,421 258,061 420,931
Specialty Products(1).................................... 65,336 210,602 191,933
Fast Lube Operations..................................... 322,704 316,068 290,219
All Other Products....................................... 474,866 542,888 481,440
Intersegment Sales(2).................................... (199,127) (217,138) (283,394)
---------- ---------- ----------
Total.......................................... $1,801,676 $1,982,148 $1,961,316
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(EXPRESSED IN THOUSANDS)
<S> <C> <C> <C>
GEOGRAPHIC AREAS:
Net Sales
Domestic............................................... $1,695,453 $1,875,264 $1,853,073
Foreign................................................ 106,223 106,884 108,243
Identifiable Assets
Domestic............................................... $2,948,320 $1,422,777 $1,237,727
Foreign................................................ 196,674 136,846 132,772
</TABLE>
- ---------------
(1) In October 1997, the Company contributed most of its specialty industrial
products business to Penreco, a partnership with Conoco. The partnership is
accounted for under the equity method with the Company's share of net
earnings being reported as a component of other income.
(2) Intersegment sales are priced at market. The majority of intersegment sales
are from the base oil and specialty products segment to the lubricants and
consumer products segments.
F-31
<PAGE> 58
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION -- UNAUDITED
QUARTERLY RESULTS --
<TABLE>
<CAPTION>
BASIC AND
NET DILUTED
OPERATING INCOME EARNINGS (LOSS)
REVENUES INCOME (LOSS)(1) (LOSS) PER SHARE
---------- ---------------- -------- ---------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
First Quarter........................... $ 502,707 $ 20,811 $ 336 $ 0.01
Second Quarter.......................... 526,608 31,308 1,315 0.03
Third Quarter........................... 515,656 39,333 5,199 0.11
Fourth Quarter.......................... 468,189 30,794 (7,439) (0.16)
---------- -------- -------- -------
$2,013,160 $122,246 $ (589) $ (0.01)
========== ======== ======== =======
1998
First Quarter........................... $ 443,442 $ 28,748 $ 599 $ 0.01
Second Quarter.......................... 498,969 38,460 6,050 0.13
Third Quarter........................... 474,852 31,843 636 0.01
Fourth Quarter.......................... 432,875 (68,891) (53,152) (1.11)
---------- -------- -------- -------
$1,850,138 $ 30,160 $(45,867) $ (0.96)
========== ======== ======== =======
</TABLE>
- ---------------
(1) Operating income is defined as net revenues less costs and operating
expenses.
F-32
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
*3.2 -- Restated Certificate of Incorporation of the Company
(filed as exhibit 4.2 to the Current Report on Form 8-K
of the Company filed on December 29, 1998 (File No.
001-14501) and incorporated herein by reference).
*3.4 -- By-Laws of the Company (filed as Exhibit 4.2 to the
Registration Statement on Form S-8 of the Company
(Registration No. 333-72835) and incorporated herein by
reference).
*3.5 -- Form of Common Stock Certificate of the Company (filed as
Exhibit 3.5 to the Registration Statement on Form S-4 of
the Company (Registration No. 333-61541) and incorporated
herein by reference).
*3.6 -- Rights Agreement dated as of December 18, 1998 between
the Company and The Chase Manhattan Bank (filed as
Exhibit 1 to the Current Report on Form 8-K of the
Company filed on December 18, 1998 (File No. 001-14501)
and incorporated herein by reference).
10.1 -- Credit Agreement dated as of November 17, 1998 among
Pennzoil Products Company and the lenders named therein
+*10.2 -- Pennzoil-Quaker State Company 1998 Incentive Plan (filed
as Exhibit 4.3 to the Registration Statement of the
Company on Form S-8 (Registration No. 333-69837) and
incorporated herein by reference).
+*10.3 -- Form of Indemnification Agreement between Pennzoil-Quaker
State Company and directors and executive officers of the
Company (filed as Exhibit 10.7 to the Registration
Statement of the Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+10.4 -- Pennzoil-Quaker State Company Deferred Compensation Plan
+10.5 -- Pennzoil-Quaker State Company Medical Expenses
Reimbursement Plan
+10.6 -- Pennzoil-Quaker State Company Supplemental Disability
Plan
+10.7 -- Pennzoil-Quaker State Company Salary Continuation Plan
+10.8 -- Pennzoil-Quaker State Company Supplemental Life Insurance
Plan
+10.9 -- Pennzoil-Quaker State Company Executive Severance Plan
+10.10 -- Form of Pennzoil-Quaker State Company Supplemental
Medical and Retirement Benefits Agreement
+10.11 -- Employment Agreement between the Company and James J.
Postl
12.1 -- Computation of Ratio of Earnings to Fixed Charges for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994.
21.1 -- Subsidiaries of Pennzoil-Quaker State Company
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
24.1 -- Powers of Attorney
27.1 -- Financial Data Schedule.
99.1 -- Financial Statements of Excel Paralubes.
</TABLE>
- ---------------
* Incorporated by reference as indicated.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
<PAGE> 1
EXHIBIT 10.1
===============================================================================
[CHASE LOGO]
CREDIT AGREEMENT
dated as of
November 17, 1998
among
PENNZOIL PRODUCTS COMPANY
as Borrower
The Lenders Party Hereto
and
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
as Administrative Agent
CITIBANK, N.A.
and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
as Syndication Agents
NATIONSBANK, N.A.
as Documentation Agent
and
The Managing Agents and Co-Agents
Set Forth On Schedule 2.01 Hereto
---------------------------
CHASE SECURITIES INC.,
as Arranger
$1,000,000,000 Revolving Credit, Term and Competitive Bid Facility
===============================================================================
<PAGE> 2
1
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
Definitions..............................................................................................1
SECTION 1.01. Defined Terms.............................................................................1
SECTION 1.02. Classification of Loans and Borrowings...................................................13
SECTION 1.03. Terms Generally..........................................................................13
SECTION 1.04. Accounting Terms; GAAP...................................................................14
ARTICLE II
The Credits.............................................................................................14
SECTION 2.01. Commitments..............................................................................14
SECTION 2.02. Loans and Borrowings.....................................................................14
SECTION 2.03. Requests for Revolving Borrowings........................................................15
SECTION 2.04. Competitive Bid Procedure................................................................16
SECTION 2.05. Letters of Credit........................................................................18
SECTION 2.06. Funding of Borrowings....................................................................21
SECTION 2.07. Interest Elections.......................................................................22
SECTION 2.08. Termination and Reduction of Commitments.................................................23
SECTION 2.09. Repayment of Loans; Evidence of Debt.....................................................24
SECTION 2.10. Prepayment of Loans......................................................................25
SECTION 2.11. Fees.....................................................................................26
SECTION 2.12. Interest.................................................................................27
SECTION 2.13. Alternate Rate of Interest...............................................................28
SECTION 2.14. Increased Costs..........................................................................28
SECTION 2.15. Break Funding Payments...................................................................29
SECTION 2.16. Taxes....................................................................................30
SECTION 2.17. Payments Generally; Pro Rata Treatment; Sharing of Set-offs..............................31
SECTION 2.18. Mitigation Obligations...................................................................33
SECTION 2.19. Limitation of Compensation if Applicable Lending Office is Changed.......................33
ARTICLE III
Representations and Warranties..........................................................................33
SECTION 3.01. Organization; Powers.....................................................................33
SECTION 3.02. Authorization; Enforceability............................................................34
SECTION 3.03. Governmental Approvals; No Conflicts.....................................................34
SECTION 3.04. No Material Adverse Change...............................................................34
SECTION 3.05. Litigation and Environmental Matters.....................................................34
SECTION 3.06. Compliance with Laws and Agreements......................................................34
SECTION 3.07. Investment and Holding Company Status....................................................35
</TABLE>
<PAGE> 3
2
<TABLE>
<CAPTION>
<S> <C>
SECTION 3.08. Taxes....................................................................................35
SECTION 3.09. ERISA....................................................................................35
SECTION 3.10. Financial Information....................................................................35
SECTION 3.11. Year 2000................................................................................36
SECTION 3.12. Credit Utilization.......................................................................36
ARTICLE IV
Conditions..............................................................................................36
SECTION 4.01. Effective Date...........................................................................36
SECTION 4.02. Each Credit Event........................................................................37
ARTICLE V
Affirmative Covenants...................................................................................38
SECTION 5.01. Financial Statements and Other Information...............................................38
SECTION 5.02. Notices of Material Events...............................................................38
SECTION 5.03. Existence; Conduct of Business...........................................................39
SECTION 5.04. Payment of Obligations...................................................................39
SECTION 5.05. Maintenance of Properties; Insurance.....................................................39
SECTION 5.06. Books and Records; Inspection Rights.....................................................40
SECTION 5.07. Compliance with Laws.....................................................................40
SECTION 5.08. Use of Proceeds and Letters of Credit....................................................40
SECTION 5.09. Covenant Cross-Default...................................................................40
ARTICLE VI
Negative Covenants......................................................................................41
SECTION 6.01. Liens....................................................................................41
SECTION 6.02. Fundamental Changes......................................................................42
SECTION 6.03. Investments, Loans, Advances, Guarantees and Acquisitions................................43
ARTICLE VII
Events of Default.......................................................................................43
ARTICLE VIII
The Administrative Agent................................................................................45
ARTICLE IX
Miscellaneous...........................................................................................47
SECTION 9.01. Notices..................................................................................47
SECTION 9.02. Waivers; Amendments......................................................................48
SECTION 9.03. Expenses; Indemnity; Damage Waiver.......................................................48
</TABLE>
<PAGE> 4
3
<TABLE>
<CAPTION>
<S> <C>
SECTION 9.04. Successors and Assigns...................................................................50
SECTION 9.05. Survival.................................................................................52
SECTION 9.06. Counterparts; Integration; Effectiveness.................................................52
SECTION 9.07. Severability.............................................................................52
SECTION 9.08. Right of Setoff..........................................................................53
SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process...............................53
SECTION 9.10. WAIVER OF JURY TRIAL.....................................................................53
SECTION 9.11. Headings.................................................................................54
SECTION 9.12. Confidentiality..........................................................................54
SECTION 9.13. Interest Rate Limitation.................................................................54
</TABLE>
SCHEDULES:
Schedule 2.01 -- Commitments
EXHIBITS:
Exhibit A -- Form of Assignment and Acceptance
Exhibit B -- Form of Opinion of Borrower's Counsel
<PAGE> 5
1
CREDIT AGREEMENT dated as of November 17, 1998, among PENNZOIL PRODUCTS
COMPANY (to be renamed Pennzoil - Quaker State Company), a Delaware corporation,
the LENDERS party hereto (the "Lenders"), and CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, as Administrative Agent (the "Administrative Agent").
The parties hereto agree as follows:
ARTICLE I
Definitions
SECTION 1.01. Defined Terms. As used in this Agreement, the
following terms have the meanings specified below:
"ABR", when used in reference to any Loan or Borrowing, refers
to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Alternate Base Rate.
"Adjusted LIBO Rate" means, with respect to any Eurodollar
Borrowing of Committed Loans for any Interest Period, an interest rate per annum
(rounded upwards, if necessary, to the next 1/100 of 1%) equal to (a) the LIBO
Rate for such Interest Period multiplied by (b) the Statutory Reserve Adjustment
Factor.
"Administrative Agent" means Chase Bank of Texas, National
Association, in its capacity as administrative agent for the Lenders hereunder.
"Administrative Questionnaire" means an Administrative
Questionnaire in a form supplied by the Administrative Agent.
"Affiliate" means, with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, Controls
or is Controlled by or is under common Control with the Person specified.
"Agreement " means this Credit Agreement, as the same may,
from time to time be amended or supplemented.
"Alternate Base Rate" means, for any day, a rate per annum
equal to the greater of (a) the Prime Rate in effect on such day, and (b) the
Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in
the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds
Effective Rate shall be effective from and including the effective date of such
change in the Prime Rate or the Federal Funds Effective Rate, respectively.
"Applicable Percentage" means, with respect to any Lender, the
percentage of the total Commitments represented by such Lender's Commitment. If
the Commitments have terminated or expired, the Applicable Percentage for any
Lender shall be the percentage of the total Committed Credit
<PAGE> 6
2
Exposure of all Lenders represented by such Lender's Committed Credit Exposure,
in each case as of the date of determination.
"Applicable Rate" means, for any day, with respect to (a) the
facility fees payable hereunder, a rate per annum equal to 0.1%, (b) any
Eurodollar Revolving Loan, the applicable rate per annum set forth below under
the caption "Eurodollar Spread" based upon the Utilization Factor as of such
date, and (c) any Eurodollar Term Loan, the applicable rate per annum set forth
below under the caption "Eurodollar Spread" based upon the Utilization Factor in
effect immediately prior to conversion of the Revolving Loans to Term Loans
pursuant to Section 2.02(e):
<TABLE>
<CAPTION>
====================================================
Eurodollar
Utilization Factor: Spread
----------------------------------------------------
<S> <C> <C>
less than 0.5 0.325%
----------------------------------------------------
equal to or greater 0.4%
than 0.5
====================================================
</TABLE>
The term "Utilization Factor" means, for any day, the quotient of (i) the
aggregate amount of the Lenders' Revolving Credit Exposure on such day divided
by (ii) the aggregate amount of the Lenders' Commitments on such day
"Assignment and Acceptance" means an assignment and acceptance
entered into by a Lender and an assignee (with the consent of any party whose
consent is required by Section 9.04), and accepted by the Administrative Agent,
in the form of Exhibit A or any other form approved by the Administrative Agent.
"Availability Period"means the period from and including the
Effective Date to but excluding the earlier of the Revolving Loan Maturity Date
and the date of termination of the Commitments.
"Board" means the Board of Governors of the Federal Reserve
System of the United States of America.
"Borrower" means Pennzoil Products Company, a Delaware
corporation, which shall be renamed Pennzoil - Quaker State Company.
"Borrowing" means (a) Committed Loans of the same Type, made,
converted or continued on the same date and, in the case of Eurodollar Loans, as
to which a single Interest Period is in effect, or (b) a Competitive Loan or
group of Competitive Loans of the same Type made on the same date and as to
which a single Interest Period is in effect.
<PAGE> 7
3
"Borrowing Request" means a request by the Borrower for a
Revolving Borrowing in accordance with Section 2.03.
"Business Day" means any day that is not a Saturday, Sunday or
other day on which commercial banks in New York City or Houston, Texas are
authorized or required by law to remain closed; provided that, when used in
connection with a Eurodollar Loan, the term "Business Day" shall also exclude
any day on which banks are not open for dealings in dollar deposits in the
London interbank market.
"Capital Lease Obligations" of any Person means the
obligations of such Person to pay rent or other amounts under any lease of (or
other arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP,
and the amount of such obligations shall be the capitalized amount thereof
determined in accordance with GAAP.
"Change in Law" means (a) the adoption of any law, rule or
regulation after the date of this Agreement, (b) any change in any law, rule or
regulation or in the interpretation or application thereof by any Governmental
Authority after the date of this Agreement or (c) compliance by any Lender or
the Issuing Bank (or, for purposes of Section 2.14(b), by any lending office of
such Lender or by such Lender's or the Issuing Bank's holding company, if any)
with any request, guideline or directive (whether or not having the force of
law) of any Governmental Authority made or issued after the date of this
Agreement; excluding, in any event, Changes in Law resulting in any increase in
Excluded Taxes.
"Charges" has the meaning assigned to such term in Section
9.13.
"Class", when used in reference to any Loan or Borrowing,
refers to whether such Loan, or the Loans comprising such Borrowing, are
Committed Loans or Competitive Loans.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Committed Credit Exposure" means, with respect to any Lender
at any time, the sum of the outstanding principal amount of such Lender's
Committed Loans and its LC Exposure at such time.
"Committed Loan" means a Revolving Loan or a Term Loan.
"Commitment" means, with respect to each Lender, the
commitment of such Lender to make Revolving Loans, to acquire participations in
Letters of Credit hereunder and to convert the Revolving Loans outstanding on
the Revolving Loan Maturity Date to Term Loans, expressed as an amount
representing the maximum aggregate amount of such Lender's Revolving Credit
Exposure hereunder, as such commitment may be (a) reduced from time to time
pursuant to Section 2.08, (b) reduced or increased from time to time pursuant to
assignments by or to such Lender pursuant to Section 9.04, and (c) limited
pursuant to Section 2.20 prior to termination of the Quaker State Credit
Facility and the merger of Quaker State Corporation and a Wholly Owned
Subsidiary of the Borrower. The initial amount of each Lender's Commitment is
set forth on Schedule 2.01, or in the Assignment and
<PAGE> 8
4
Acceptance pursuant to which such Lender shall have assumed its Commitment, as
applicable. The initial aggregate amount of the Lenders' Commitments is
$1,000,000,000.
"Competitive Bid" means an offer by a Lender to make a
Competitive Loan in accordance with Section 2.04.
"Competitive Bid Rate" means, with respect to any Competitive
Bid, the Margin or the Fixed Rate, as applicable, offered by the Lender making
such Competitive Bid.
"Competitive Bid Request" means a request by the Borrower for
Competitive Bids in accordance with Section 2.04.
"Competitive Loan" means a Loan made pursuant to Section 2.04.
"Consolidated Net Tangible Assets" means the total amount of
assets, including all cash received from asset sales during the 12 months prior
to the date of determination to the extent that such cash has not been
reinvested, of the Borrower and its Subsidiaries on a consolidated basis (less
applicable reserves and other properly deductible items) after deducting
therefrom (a) all current liabilities (excluding any which are, by their terms,
extendable or renewable at the option of the obligor thereon to a time more than
12 months after the time as of which the amount thereof is being computed) and
(b) all goodwill, trade names, trademarks, patents, unamortized debt premium or
discount and expense and other like intangible assets, determined in accordance
with GAAP.
"Control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
Person, whether through the ability to exercise voting power, by contract or
otherwise. "Controlling" and "Controlled" have meanings correlative thereto.
"Debt Securities Offering" means either a public offering of
debt securities registered pursuant to the Securities Act, or a private
placement of debt securities (other than commercial paper) exempted from
registration under the Securities Act and issued pursuant to Rule 144A
promulgated by the Securities and Exchange Commission.
"Default" means any event or condition which constitutes an
Event of Default or which upon notice, lapse of time or both would, unless cured
or waived, become an Event of Default.
"De Minimis Subsidiary" means any Subsidiary of the Borrower
whose percentage of Consolidated Net Tangible Assets represented by such
Subsidiary's portion of Consolidated Net Tangible Assets (before intercompany
eliminations) is less than 1% as of the end of the most recently-completed
fiscal quarter.
"dollars" or "$" refers to lawful money of the United States
of America.
"Duff & Phelps" means Duff & Phelps Credit Rating Company.
<PAGE> 9
5
"Early Termination Date" means the fourth Business Day after
the first to occur of the initial Borrowing and the initial issuance of
commercial paper supported by the availability of Loan proceeds.
"Effective Date" means the date on which the conditions
specified in Section 4.01 are satisfied (or waived in accordance with Section
9.02).
"Environmental Laws" means all laws, rules, regulations,
codes, ordinances, orders, decrees, judgments, injunctions, notices or binding
agreements issued, promulgated or entered into by any Governmental Authority,
relating in any way to the environment, preservation or reclamation of natural
resources, the management, release or threatened release of any Hazardous
Material or to health and safety matters.
"Environmental Liability" means any liability, contingent or
otherwise (including any liability for damages, costs of environmental
remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary
directly or indirectly resulting from or based upon (a) violation of any
Environmental Law, (b) the generation, use, handling, transportation, storage,
treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous
Materials, (d) the release or threatened release of any Hazardous Materials into
the environment or (e) any contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the
foregoing.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that, together with the Borrower, is treated as a single employer
under Section 414(b) or (c) of the Code or, solely for purposes of Section 302
of ERISA and Section 412 of the Code, is treated as a single employer under
Section 414 of the Code.
"ERISA Event" means (a) any "reportable event", as defined in
Section 4043 of ERISA or the regulations issued thereunder with respect to a
Plan (other than an event for which the 30-day notice period is waived); (b) the
existence with respect to any Plan of an "accumulated funding deficiency" (as
defined in Section 412 of the Code or Section 302 of ERISA), whether or not
waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d)
of ERISA of an application for a waiver of the minimum funding standard with
respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA
Affiliates of any liability under Title IV of ERISA with respect to the
termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate
from the PBGC or a plan administrator of any notice relating to an intention to
terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f)
the incurrence by the Borrower or any of its ERISA Affiliates of any liability
with respect to the withdrawal or partial withdrawal from any Plan or
Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of
any notice, or the receipt by any Multiemployer Plan from the Borrower or any
ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability
or a determination that a Multiemployer Plan is, or is expected to be, insolvent
or in reorganization, within the meaning of Title IV of ERISA.
<PAGE> 10
6
"Eurodollar", when used in reference to any Loan or Borrowing,
refers to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Adjusted LIBO Rate (or, in the
case of a Competitive Loan, the LIBO Rate).
"Event of Default" has the meaning assigned to such term in
Article VII.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended
"Excluded Taxes" means, with respect to the Administrative
Agent, any Lender, the Issuing Bank or any other recipient of any payment to be
made by or on account of any obligation of the Borrower hereunder, (a) income or
franchise taxes (including penalties and interest payable in respect thereof)
imposed on (or measured by) its net income by the United States of America, or
by the jurisdiction under the laws of which such recipient is organized or in
which its principal office is located or, in the case of any Lender, in which
its applicable lending office is located, (b) any branch profits taxes imposed
by the United States of America or any similar tax imposed by any other
jurisdiction in which the Borrower is located and (c) in the case of a Foreign
Lender (other than an assignee pursuant to a request by the Borrower under
Section 2.08(e)), any withholding tax that is imposed on amounts payable to such
Foreign Lender at the time such Foreign Lender becomes a party to this Agreement
(or designates a new lending office) or is attributable to such Foreign Lender's
failure to comply with Section 2.16(e), except to the extent that such Foreign
Lender (or its assignor, if any) was entitled, at the time of designation of a
new lending office (or assignment), to receive additional amounts from the
Borrower with respect to such withholding tax pursuant to Section 2.16(a).
"Federal Funds Effective Rate" means, for any day, the
weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day that is a Business Day, the average
(rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for
such day for such transactions received by the Administrative Agent from three
Federal funds brokers of recognized standing selected by it.
"Final Maturity Date" means November 16, 2000.
"Financial Officer" means the chief financial officer,
treasurer, any assistant treasurer or controller of the Borrower.
"Fixed Rate" means, with respect to any Competitive Loan
(other than a Eurodollar Competitive Loan), the fixed rate of interest per annum
specified by the Lender making such Competitive Loan in its related Competitive
Bid.
"Fixed Rate Loan" means a Competitive Loan bearing interest at
a Fixed Rate.
"Foreign Lender" means any Lender that is organized under the
laws of a jurisdiction other than that in which the Borrower is located. For
purposes of this definition, the United States of America, each State thereof
and the District of Columbia shall be deemed to constitute a single
jurisdiction.
<PAGE> 11
7
"GAAP" means generally accepted accounting principles in the
United States of America.
"Governmental Authority" means the government of the United
States of America, any other nation or any political subdivision thereof,
whether state or local, and any agency, authority, instrumentality, regulatory
body, court, central bank or other entity exercising executive, legislative,
judicial, taxing, regulatory or administrative powers or functions of or
pertaining to government.
"Guarantee" of or by any Person (the "guarantor") means any
obligation, contingent or otherwise, of the guarantor guaranteeing or having the
economic effect of guaranteeing any Indebtedness or other obligation of any
other Person (the "primary obligor") in any manner, whether directly or
indirectly, and including any obligation of the guarantor, direct or indirect,
(a) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation or to purchase (or to advance or
supply funds for the purchase of) any security for the payment thereof, (b) to
purchase or lease property, securities or services for the purpose of assuring
the owner of such Indebtedness or other obligation of the payment thereof, (c)
to maintain working capital, equity capital or any other financial statement
condition or liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness or other obligation or (d) as an account party
in respect of any letter of credit or letter of guaranty issued to support such
Indebtedness or obligation; provided, that the term Guarantee shall not include
endorsements for collection or deposit in the ordinary course of business.
"Hazardous Materials" means all explosive or radioactive
substances or wastes and all hazardous or toxic substances, wastes or other
pollutants, including petroleum or petroleum distillates, asbestos or asbestos
containing materials, polychlorinated biphenyls, radon gas, infectious or
medical wastes and all other substances or wastes of any nature regulated
pursuant to any Environmental Law.
"Indebtedness" of any Person means, without duplication, (a)
all obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such Person
upon which interest charges are customarily paid, (d) all obligations of such
Person under conditional sale or other title retention agreements relating to
property acquired by such Person, (e) all obligations of such Person in respect
of the deferred purchase price of property or services (excluding current
accounts payable incurred in the ordinary course of business), (f) all
Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on
property owned or acquired by such Person, whether or not the Indebtedness
secured thereby has been assumed, (g) all Guarantees by such Person of
Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i)
all obligations, contingent or otherwise, of such Person as an account party in
respect of letters of credit and letters of guaranty and (j) all obligations,
contingent or otherwise, of such Person in respect of bankers' acceptances. The
Indebtedness of any Person shall include the Indebtedness of any other entity
(including any partnership in which such Person is a general partner) to the
extent such Person is liable therefor as a result of such Person's ownership
interest in or other relationship with such entity, except to the extent the
terms of such Indebtedness provide that such Person is not liable therefor.
"Indemnified Taxes" means Taxes other than Excluded Taxes.
<PAGE> 12
8
"Index Debt" means senior, unsecured, long-term indebtedness
for borrowed money of the Borrower that is not guaranteed by any other Person or
subject to any other credit enhancement.
"Information Memorandum" means the Confidential Information
Memorandum dated August 1998 relating to the Borrower and the Transactions.
"Interest Election Request" means a request by the Borrower to
convert or continue a Committed Borrowing in accordance with Section 2.08.
"Interest Payment Date" means (a) with respect to any ABR
Loan, the last day of each March, June, September and December, (b) with respect
to any Eurodollar Loan, the last day of the Interest Period applicable to the
Borrowing of which such Loan is a part and, in the case of a Eurodollar
Borrowing with an Interest Period of more than three months' duration, each day
prior to the last day of such Interest Period that occurs at intervals of three
months' duration after the first day of such Interest Period, and (c) with
respect to any Fixed Rate Loan, the last day of the Interest Period applicable
to the Borrowing of which such Loan is a part and, in the case of a Fixed Rate
Borrowing with an Interest Period of more than 90 days' duration (unless
otherwise specified in the applicable Competitive Bid Request), each day prior
to the last day of such Interest Period that occurs at intervals of 90 days'
duration after the first day of such Interest Period, and any other dates that
are specified in the applicable Competitive Bid Request as Interest Payment
Dates with respect to such Borrowing.
"Interest Period" means (a) with respect to any Eurodollar
Borrowing, the period commencing on the date of such Borrowing and ending on the
numerically corresponding day in the calendar month that is one, two, three or
six months (or, with the consent of each Lender, nine or twelve months)
thereafter, as the Borrower may elect, (b) with respect to any Fixed Rate
Borrowing, the period (which shall not be less than 1 day or more than 360 days)
commencing on the date of such Borrowing and ending on the date specified in the
applicable Competitive Bid Request; provided, that (i) if any Interest Period
would end on a day other than a Business Day, such Interest Period shall be
extended to the next succeeding Business Day unless, in the case of a Eurodollar
Borrowing only, such next succeeding Business Day would fall in the next
calendar month, in which case such Interest Period shall end on the next
preceding Business Day and (ii) any Interest Period pertaining to a Eurodollar
Borrowing that commences on the last Business Day of a calendar month (or on a
day for which there is no numerically corresponding day in the last calendar
month of such Interest Period) shall end on the last Business Day of the last
calendar month of such Interest Period. For purposes hereof, the date of a
Borrowing initially shall be the date on which such Borrowing is made and, in
the case of a Committed Borrowing, thereafter shall be the effective date of the
most recent conversion or continuation of such Borrowing.
"Issuing Bank" means either Chase Bank of Texas, National
Association or The Chase Manhattan Bank, in its capacity as the issuer of
Letters of Credit hereunder, and its successors in such capacity as provided in
Section 2.05(i).
"LC Disbursement" means a payment made by the Issuing Bank
pursuant to a Letter of Credit.
<PAGE> 13
9
"LC Exposure" means, at any time, the sum of (a) the aggregate
undrawn amount of all outstanding Letters of Credit at such time plus (b) the
aggregate amount of all LC Disbursements that have not yet been reimbursed by or
on behalf of the Borrower at such time. The LC Exposure of any Lender at any
time shall be its Applicable Percentage of the total LC Exposure at such time.
"Lenders" means the Persons listed on Schedule 2.01 and any
other Person that shall have become a party hereto pursuant to an Assignment and
Acceptance, other than any such Person that ceases to be a party hereto pursuant
to an Assignment and Acceptance.
"Letter of Credit" means any letter of credit issued pursuant
to this Agreement.
"LIBO Rate" means, with respect to any Eurodollar Borrowing
for any Interest Period, the rate appearing on Page 3750 of the Telerate Service
(or on any successor or substitute page of such Service, or any successor to or
substitute for such Service, providing rate quotations comparable to those
currently provided on such page of such Service, as determined by the
Administrative Agent from time to time for purposes of providing quotations of
interest rates applicable to dollar deposits in the London interbank market) at
approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period, as the rate for dollar deposits with a
maturity comparable to such Interest Period. In the event that such rate is not
available at such time for any reason, then the "LIBO Rate" with respect to such
Eurodollar Borrowing for such Interest Period shall be the rate at which dollar
deposits of $5,000,000 and for a maturity comparable to such Interest Period are
offered by the principal London office of the Administrative Agent in
immediately available funds in the London interbank market at approximately
11:00 a.m., London time, two Business Days prior to the commencement of such
Interest Period.
"Lien" means, with respect to any asset, (a) any mortgage,
deed of trust, lien, pledge, hypothecation, encumbrance, charge or security
interest in, on or of such asset and (b) the interest of a vendor or a lessor
under any conditional sale agreement, capital lease or title retention agreement
(or any financing lease having substantially the same economic effect as any of
the foregoing) relating to such asset.
"Loans" means the loans made by the Lenders to the Borrower
pursuant to this Agreement.
"Margin" means, with respect to any Competitive Loan bearing
interest at a rate based on the LIBO Rate, the marginal rate of interest, if
any, to be added to or subtracted from the LIBO Rate to determine the rate of
interest applicable to such Loan, as specified by the Lender making such Loan in
its related Competitive Bid.
"Material Adverse Effect" means a material adverse effect on
(a) the business, assets, operations or condition, financial or otherwise, of
the Borrower and the Subsidiaries taken as a whole, (b) the ability of the
Borrower to perform any of its obligations under this Agreement or (c) the
rights of or benefits available to the Lenders under this Agreement.
"Material Indebtedness" means Indebtedness of any one or more
of the Borrower and its Subsidiaries in an aggregate principal amount exceeding
$50,000,000 of the type described in (i)
<PAGE> 14
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clauses (a) and (b) of the definition of Indebtedness and (ii) clause (g) of the
definition of Indebtedness (to the extent that clause (g) relates to
Indebtedness described in clauses (a) or (b) of such definition), but excluding
the Loans and Letters of Credit.
"Material Subsidiary" means each of (a) any Subsidiary of the
Borrower whose percentage of the Consolidated Net Tangible Assets represented by
such Subsidiary's portion of such Consolidated Net Tangible Assets (after
intercompany eliminations) exceeds 10% as of the end of the most
recently-completed fiscal quarter, and (b) any other Subsidiary which at the
time shall have been designated by the Borrower as a Material Subsidiary in an
officers' certificate delivered to the Administrative Agent for such purpose. As
of the Closing Date, the only Subsidiary of the Borrower that qualifies as a
Material Subsidiary under clause (a) above is Jiffy Lube International, Inc., a
Delaware corporation. As of the date of the merger of Quaker State Corporation
and a Wholly Owned Subsidiary of the Borrower, Quaker State Corporation will
also qualify as a Material Subsidiary under clause (a) above. On or about
January 1, 1999, the Borrower intends to cause Quaker State Corporation to
distribute all or substantially all of its assets to the Borrower and, after
such distribution has been consummated, it is anticipated that Quaker State
Corporation will no longer qualify as a Material Subsidiary.
"Maximum Rate" has the meaning assigned to such term in
Section 9.13.
"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Plan" means a multiemployer plan as defined in
Section 4001(a)(3) of ERISA.
"Other Taxes" means any and all present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies arising from any payment made hereunder or from the execution, delivery
or enforcement of, or otherwise with respect to, this Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation referred
to and defined in ERISA and any successor entity performing similar functions.
"PennzEnergy Credit Facility" means that certain Credit
Agreement dated as of November 17, 1998, among Pennzoil Company, the lenders
parties thereto, Chase Bank of Texas, National Association, as Administrative
Agent and the other agents and co-agents referenced therein.
"PennzEnergy Effective Date" has the meaning assigned to the
term "Effective Date" in the PennzEnergy Credit Facility.
"Permitted Investments" means:
(a) direct obligations of, or obligations on which the
principal of and interest are unconditionally guaranteed by, the United
States of America (or by any agency thereof to the extent such
obligations are backed by the full faith and credit of the United
States of America), in each case maturing within one year from the date
of acquisition thereof;
<PAGE> 15
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(b) investments in commercial paper maturing within 270 days
from the date of acquisition thereof and having, at such date of
acquisition, the highest credit rating obtainable from S&P, from
Moody's or from Duff & Phelps;
(c) investments in certificates of deposit, banker's
acceptances and time deposits maturing within 180 days from the date of
acquisition thereof issued or guaranteed by or placed with, and money
market deposit accounts issued or offered by, any domestic office of
any commercial bank organized under the laws of the United States of
America or any State thereof which has a combined capital and surplus
and undivided profits of not less than $1,000,000,000; and
(d) fully collateralized repurchase agreements with a term of
not more than 30 days for securities described in clause (a) above and
entered into with a financial institution satisfying the criteria
described in clause (c) above.
"Person" means any natural person, corporation, limited
liability company, trust, joint venture, association, company, partnership,
Governmental Authority or other entity.
"Plan" means any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section
412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or
any ERISA Affiliate is (or, if such plan were terminated, would under Section
4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.
"Prime Rate" means the rate of interest per annum publicly
announced from time to time by Chase Bank of Texas, National Association as its
prime rate in effect at its principal office in Houston, Texas; each change in
the Prime Rate shall be effective from and including the date such change is
publicly announced as being effective.
"Prior Credit Facility" means that certain Amended and
Restated Revolving Credit Agreement dated as of August 20, 1993 by and among
Pennzoil Company, the banking institutions party thereto and Chase Bank of
Texas, National Association (f/k/a Texas Commerce Bank National Association), as
Administrative Agent, as amended from time to time.
"Prior Credit Facility Termination" shall have occurred at
such time as the Prior Credit Facility has been terminated, all Indebtedness
owing thereunder has been repaid in full, and all "Commitments" thereunder (as
defined therein) have been irrevocably terminated.
"Quaker State Credit Facility" means that certain Credit
Agreement dated as of June 12, 1997, among Quaker State Corporation, the banks
parties thereto and Morgan Guaranty Trust Company of New York, as Agent, as
amended from time to time.
"Quaker State Credit Facility Termination" shall have occurred
at such time as the Quaker State Credit Facility has been terminated, all
Indebtedness owing thereunder has been repaid in full, and all "Commitments"
thereunder (as defined therein) have been irrevocably terminated.
<PAGE> 16
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"Quaker State Cross Defaults" means the cross default
provisions contained in Section 501(4) of the Indenture dated October 23, 1995
between Quaker State Corporation and Chemical Bank, as Trustee, relating to
$100,000,000 6 5/8% Notes due 2005 and Sections 6.01(e), (f), (i) and (j) of the
Quaker State Credit Facility.
"Register" has the meaning set forth in Section 9.04.
"Related Parties" means, with respect to any specified Person,
such Person's Affiliates and the respective directors, officers, employees,
agents and advisors of such Person and such Person's Affiliates.
"Required Lenders" means, at any time, Lenders having
Committed Credit Exposures and unused Commitments representing 66-2/3% or more
of the sum of the total Committed Credit Exposures and unused Commitments at
such time; provided that, for purposes of declaring the Loans to be due and
payable pursuant to Article VII, and for all purposes after the Loans become due
and payable pursuant to Article VII or the Commitments expire or terminate, the
outstanding Competitive Loans of the Lenders shall be added to their respective
Committed Credit Exposures and to the total Committed Credit Exposures in
determining the Required Lenders.
"Revolving Credit Exposure" means, with respect to any Lender
at any time, the sum of the outstanding principal amount of such Lender's
Revolving Loans and its LC Exposure at such time.
"Revolving Loan" means a Loan made pursuant to Section 2.03.
"Revolving Loan Maturity Date" means November 16, 1999.
"S&P" means Standard & Poor's Ratings Group, a division of The
McGraw Hill Companies, Inc.
"Securities Act" means the Securities Act of 1933, as amended
"Statutory Reserve Adjustment Factor" means a fraction
(expressed as a decimal), the numerator of which is the number one and the
denominator of which is the number one minus the aggregate of the maximum
reserve percentages (including any marginal, special, emergency or supplemental
reserves) expressed as a decimal established by the Board to which the
Administrative Agent is subject with respect to the Adjusted LIBO Rate, for
eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in
Regulation D of the Board). Such reserve percentages shall include those imposed
pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute
eurocurrency funding and to be subject to such reserve requirements without
benefit of or credit for proration, exemptions or offsets that may be available
from time to time to any Lender under such Regulation D or any comparable
regulation. The Statutory Reserve Adjustment Factor shall be adjusted
automatically on and as of the effective date of any change in any reserve
percentage.
"subsidiary" means, with respect to any Person (the "parent")
at any date, any corporation, limited liability company, partnership,
association or other entity the accounts of which would be consolidated with
those of the parent in the parent's consolidated financial statements if such
<PAGE> 17
13
financial statements were prepared in accordance with GAAP as of such date, as
well as any other corporation, limited liability company, partnership,
association or other entity (a) of which securities or other ownership interests
representing more than 50% of the equity or more than 50% of the ordinary voting
power or, in the case of a partnership, more than 50% of the general partnership
interests are, as of such date, owned, controlled or held, or (b) that is, as of
such date, otherwise Controlled, by the parent or one or more subsidiaries of
the parent or by the parent and one or more subsidiaries of the parent.
"Subsidiary" means any subsidiary of the Borrower.
"Taxes" means any and all present or future taxes, levies,
imposts, duties, deductions, charges or withholdings imposed by any Governmental
Authority.
"Term Loan" means a Revolving Loan that is converted to a term
Loan with a maturity of not greater than one year pursuant to Section 2.02(e).
"Transactions" means the execution, delivery and performance
by the Borrower of this Agreement, the borrowing of Loans, the use of the
proceeds thereof and the issuance of Letters of Credit hereunder.
"Type", when used in reference to any Loan or Borrowing,
refers to whether the rate of interest on such Loan, or on the Loans comprising
such Borrowing, is determined by reference to the Adjusted LIBO Rate, the
Alternate Base Rate or, in the case of a Competitive Loan or Borrowing, the LIBO
Rate or a Fixed Rate.
"Wholly Owned Subsidiary" means a corporation all the
outstanding voting stock (other than any directors' qualifying shares) of which
is owned, directly or indirectly, by the Borrower or by one or more other Wholly
Owned Subsidiaries, or by the Borrower and one or more other Wholly Owned
Subsidiaries. For the purposes of this definition, "voting stock" means stock
which ordinarily has voting power for the election of directors, whether at all
times or only so long as no senior class of stock has such voting power by
reason of any contingency.
"Withdrawal Liability" means liability to a Multiemployer Plan
as a result of a complete or partial withdrawal from such Multiemployer Plan, as
such terms are defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. Classification of Loans and Borrowings. For
purposes of this Agreement, Loans may be classified and referred to by Class
(e.g., a "Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or by Class
and Type (e.g., a "Eurodollar Revolving Loan"). Borrowings also may be
classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type
(e.g., a "Eurodollar Borrowing") or by Class and Type (e.g., a "Eurodollar
Revolving Borrowing").
SECTION 1.03. Terms Generally. The definitions of terms herein
shall apply equally to the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
The word "will" shall be construed to have the same meaning and effect as the
word "shall". Unless the context requires
<PAGE> 18
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otherwise (a) any definition of or reference to any agreement, instrument or
other document herein shall be construed as referring to such agreement,
instrument or other document as from time to time amended, supplemented or
otherwise modified (subject to any restrictions on such amendments, supplements
or modifications set forth herein), (b) any reference herein to any Person shall
be construed to include such Person's successors and assigns, (c) the words
"herein", "hereof" and "hereunder", and words of similar import, shall be
construed to refer to this Agreement in its entirety and not to any particular
provision hereof, (d) all references herein to Articles, Sections, Exhibits and
Schedules shall be construed to refer to Articles and Sections of, and Exhibits
and Schedules to, this Agreement and (e) the words "asset" and "property" shall
be construed to have the same meaning and effect and to refer to any and all
tangible and intangible assets and properties, including cash, securities,
accounts and contract rights.
SECTION 1.04. Accounting Terms; GAAP. Except as otherwise
expressly provided herein, all terms of an accounting or financial nature shall
be construed in accordance with GAAP, as in effect from time to time; provided
that, if the Borrower notifies the Administrative Agent that the Borrower
requests an amendment to any provision hereof to eliminate the effect of any
change occurring after the date hereof in GAAP or in the application thereof on
the operation of such provision (or if the Administrative Agent notifies the
Borrower that the Required Lenders request an amendment to any provision hereof
for such purpose), regardless of whether any such notice is given before or
after such change in GAAP or in the application thereof, then such provision
shall be interpreted on the basis of GAAP as in effect and applied immediately
before such change shall have become effective until such notice shall have been
withdrawn or such provision amended in accordance herewith.
ARTICLE II
The Credits
SECTION 2.01. Commitments. Subject to the terms and conditions
set forth herein, each Lender agrees to (i) make Revolving Loans to the Borrower
from time to time during the Availability Period in an aggregate principal
amount that will not result in (a) such Lender's Revolving Credit Exposure
exceeding such Lender's Commitment or (b) the sum of the total Revolving Credit
Exposures plus the aggregate principal amount of outstanding Competitive Loans
exceeding the total Commitments; and (ii) at the election of the Borrower, to
convert the principal amount of any Revolving Loans remaining outstanding on the
Revolving Loan Maturity Date to a Term Loan. Within the foregoing limits and
subject to the terms and conditions set forth herein, the Borrower may borrow,
prepay and reborrow Revolving Loans.
SECTION 2.02. Loans and Borrowings. (a) Each Committed Loan
shall be made as part of a Borrowing consisting of Committed Loans made by the
Lenders ratably in accordance with their respective Commitments. Each
Competitive Loan shall be made in accordance with the procedures set forth in
Section 2.04. The failure of any Lender to make any Loan required to be made by
it shall not relieve any other Lender of its obligations hereunder; provided
that the Commitments and Competitive Bids of the Lenders are several and no
Lender shall be responsible for any other Lender's failure to make Loans as
required.
<PAGE> 19
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(b) Subject to Section 2.13, (i) each Committed Borrowing
shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may
request in accordance herewith, and (ii) each Competitive Borrowing shall be
comprised entirely of Eurodollar Loans or Fixed Rate Loans as the Borrower may
request in accordance herewith. Each Lender at its option may make any
Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such
Lender to make such Loan; provided that any exercise of such option shall not
affect the obligation of the Borrower to repay such Loan in accordance with the
terms of this Agreement.
(c) At the commencement of each Interest Period for any
Eurodollar Committed Borrowing, such Borrowing shall be in an aggregate amount
that is an integral multiple of $1,000,000 and not less than $10,000,000;
provided that a Eurodollar Committed Borrowing may be in an aggregate amount
that is less than $10,000,000, but greater than $5,000,000, and that is equal to
the entire unused balance of the total Commitments. At the time that each ABR
Committed Borrowing is made, such Borrowing shall be in an aggregate amount that
is an integral multiple of $1,000,000 and not less than $5,000,000; provided
that an ABR Committed Borrowing may be in an aggregate amount that is equal to
the entire unused balance of the total Commitments or that is required to
finance the reimbursement of an LC Disbursement as contemplated by Section
2.05(e). Each Competitive Borrowing shall be in an aggregate amount that is an
integral multiple of $1,000,000 and not less than $15,000,000. Borrowings of
more than one Type and Class may be outstanding at the same time; provided that
there shall not at any time be more than a total of ten Eurodollar Committed
Borrowings outstanding.
(d) Notwithstanding any other provision of this Agreement, (i)
the Borrower shall not be entitled to request, or to elect to convert (except
for a conversion to a Term Loan pursuant to Section 2.02(e))or continue, any
Borrowing containing Revolving Loans if the Interest Period requested with
respect thereto would end after the Revolving Loan Maturity Date and (ii) the
Borrower shall not be entitled to request, or to elect to convert or continue,
any Borrowing containing Term Loans if the Interest Period requested with
respect thereto would end after the Final Maturity Date.
(e) At the option of the Borrower, upon written notice
delivered to the Administrative Agent no later than 10 Business Days prior to
the Revolving Loan Maturity Date, so long as no Default has occurred and is
continuing, the aggregate principal amount of any Revolving Loans remaining
outstanding at the close of the Administrative Agent's business on the Revolving
Loan Maturity Date shall automatically convert to Term Loans with a maturity of
no greater than one year. Any portion of each Lender's Commitment not utilized
on or before the Revolving Loan Maturity Date shall be permanently canceled. Any
Term Loans that are prepaid may not be reborrowed.
SECTION 2.03. Requests for Revolving Borrowings. To request a
Revolving Borrowing, the Borrower shall notify the Administrative Agent of such
request by telephone (a) in the case of a Eurodollar Borrowing, not later than
11:00 a.m., Houston, Texas time, three Business Days before the date of the
proposed Borrowing, or (b) in the case of an ABR Borrowing, not later than 11:00
a.m., Houston, Texas time, on the date of the proposed Borrowing; provided that
any such notice of an ABR Revolving Borrowing to finance the reimbursement of an
LC Disbursement as contemplated by Section 2.05(e) may be given not later than
10:00 a.m., Houston, Texas time, on the date of the proposed Borrowing. Each
such telephonic Borrowing Request shall be irrevocable and shall be confirmed
promptly by hand delivery or telecopy to the Administrative Agent of a written
Borrowing Request in
<PAGE> 20
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a form approved by the Administrative Agent and signed by the Borrower. Each
such telephonic and written Borrowing Request shall specify the following
information in compliance with Section 2.02:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business
Day;
(iii) whether such Borrowing is to be an ABR Borrowing or a
Eurodollar Borrowing;
(iv) in the case of a Eurodollar Borrowing, the initial
Interest Period to be applicable thereto, which shall be a period contemplated
by the definition of the term "Interest Period"; and
(v) the location and number of the Borrower's account to which
funds are to be disbursed, which shall comply with the requirements of Section
2.06.
If no election as to the Type of Revolving Borrowing is specified, then the
requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period
is specified with respect to any requested Eurodollar Revolving Borrowing, then
the Borrower shall be deemed to have selected an Interest Period of one month's
duration. Promptly following receipt of a Borrowing Request in accordance with
this Section, the Administrative Agent shall advise each Lender of the details
thereof and of the amount of such Lender's Loan to be made as part of the
requested Borrowing.
SECTION 2.04. Competitive Bid Procedure. (a) Subject to the
terms and conditions set forth herein, from time to time during the Availability
Period the Borrower may request Competitive Bids and may (but shall not have any
obligation to) accept Competitive Bids and borrow Competitive Loans; provided
that the sum of the total Committed Credit Exposures plus the aggregate
principal amount of outstanding Competitive Loans at any time shall not exceed
the total Commitments. To request Competitive Bids, the Borrower shall notify
the Administrative Agent of such request by telephone, in the case of a
Eurodollar Borrowing, not later than 11:00 a.m., Houston, Texas time, four
Business Days before the date of the proposed Borrowing and, in the case of a
Fixed Rate Borrowing, not later than 10:00 a.m., Houston, Texas time, one
Business Day before the date of the proposed Borrowing. Each such telephonic
Competitive Bid Request shall be confirmed promptly by hand delivery or telecopy
to the Administrative Agent of a written Competitive Bid Request in a form
approved by the Administrative Agent and signed by the Borrower. Each such
telephonic and written Competitive Bid Request shall specify the following
information in compliance with Section 2.02:
(i) the aggregate amount of the requested Borrowing;
(ii) the date of such Borrowing, which shall be a Business
Day;
(iii) whether such Borrowing is to be a Eurodollar Borrowing
or a Fixed Rate Borrowing;
(iv) the Interest Period to be applicable to such Borrowing,
which shall be a period contemplated by the definition of the term "Interest
Period"; and
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(v) the location and number of the Borrower's account to which
funds are to be disbursed, which shall comply with the requirements of Section
2.07.
Promptly following receipt of a Competitive Bid Request in accordance with this
Section, the Administrative Agent shall notify the Lenders of the details
thereof by telecopy, inviting the Lenders to submit Competitive Bids.
(b) Each Lender may (but shall not have any obligation to)
make one or more Competitive Bids to the Borrower in response to a Competitive
Bid Request. Each Competitive Bid by a Lender must be in a form approved by the
Administrative Agent and must be received by the Administrative Agent by
telecopy, in the case of a Eurodollar Competitive Borrowing, not later than 9:30
a.m., Houston, Texas time, three Business Days before the proposed date of such
Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than
9:30 a.m., Houston, Texas time, on the proposed date of such Competitive
Borrowing. Competitive Bids that do not conform substantially to the form
approved by the Administrative Agent may be rejected by the Administrative
Agent, and the Administrative Agent shall notify the applicable Lender as
promptly as practicable. Each Competitive Bid shall specify (i) the principal
amount (which shall be a minimum of $15,000,000 and an integral multiple of
$1,000,000 and which may equal the entire principal amount of the Competitive
Borrowing requested by the Borrower) of the Competitive Loan or Loans that the
Lender is willing to make, (ii) the Competitive Bid Rate or Rates at which the
Lender is prepared to make such Loan or Loans (expressed as a percentage rate
per annum in the form of a decimal to no more than four decimal places) and
(iii) the Interest Period applicable to each such Loan and the last day thereof.
(c) The Administrative Agent shall promptly notify the
Borrower by telecopy of the Competitive Bid Rate and the principal amount
specified in each Competitive Bid and the identity of the Lender that shall have
made such Competitive Bid.
(d) Subject only to the provisions of this paragraph, the
Borrower may accept or reject any Competitive Bid. The Borrower shall notify the
Administrative Agent by telephone, confirmed by telecopy in a form approved by
the Administrative Agent, whether and to what extent it has decided to accept or
reject each Competitive Bid, in the case of a Eurodollar Competitive Borrowing,
not later than 10:30 a.m., Houston, Texas time, three Business Days before the
date of the proposed Competitive Borrowing, and in the case of a Fixed Rate
Borrowing, not later than 10:30 a.m., Houston, Texas time, on the proposed date
of the Competitive Borrowing; provided that (i) the failure of the Borrower to
give such notice by such required time shall be deemed to be a rejection of each
Competitive Bid, (ii) the Borrower shall not accept a Competitive Bid made at a
particular Competitive Bid Rate if the Borrower rejects a Competitive Bid made
at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive
Bids accepted by the Borrower shall not exceed the aggregate amount of the
requested Competitive Borrowing specified in the related Competitive Bid
Request, (iv) to the extent necessary to comply with clause (iii) above, the
Borrower may accept Competitive Bids at the same Competitive Bid Rate in part,
which acceptance, in the case of multiple Competitive Bids at such Competitive
Bid Rate, shall be made pro rata in accordance with the amount of each such
Competitive Bid, and (v) except pursuant to clause (iv) above, no Competitive
Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in
a minimum principal amount of $15,000,000 and an integral multiple of
$1,000,000; provided further that if a Competitive Loan must be in an amount
less than $15,000,000 because of the provisions of clause (iv) above, such
Competitive Loan may be for a minimum of
<PAGE> 22
18
$1,000,000 or any integral multiple thereof, and in calculating the pro rata
allocation of acceptances of portions of multiple Competitive Bids at a
particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be
rounded to integral multiples of $1,000,000 in a manner determined by the
Borrower. A notice given by the Borrower pursuant to this paragraph shall be
irrevocable.
(e) The Administrative Agent shall promptly notify each
bidding Lender by telecopy whether or not its Competitive Bid has been accepted
(and, if so, the amount and Competitive Bid Rate so accepted), and each
successful bidder will thereupon become bound, subject to the terms and
conditions hereof, to make the Competitive Loan in respect of which its
Competitive Bid has been accepted.
(f) If the Administrative Agent shall elect to submit a
Competitive Bid in its capacity as a Lender, it shall submit such Competitive
Bid directly to the Borrower at least one quarter of an hour earlier than the
time by which the other Lenders are required to submit their Competitive Bids to
the Administrative Agent pursuant to paragraph (b) of this Section.
SECTION 2.05. Letters of Credit. (a) General. Subject to the
terms and conditions set forth herein, the Borrower may request the issuance of
Letters of Credit for its own account, in a form reasonably acceptable to the
Administrative Agent and the Issuing Bank, at any time and from time to time
during the Availability Period. In the event of any inconsistency between the
terms and conditions of this Agreement and the terms and conditions of any form
of letter of credit application or other agreement submitted by the Borrower to,
or entered into by the Borrower with, the Issuing Bank relating to any Letter of
Credit, the terms and conditions of this Agreement shall control.
(b) Notice of Issuance, Amendment, Renewal, Extension; Certain
Conditions. To request the issuance of a Letter of Credit (or the amendment,
renewal or extension of an outstanding Letter of Credit), the Borrower shall
hand deliver or telecopy (or transmit by electronic communication, if
arrangements for doing so have been approved by the Issuing Bank) to the Issuing
Bank and the Administrative Agent (reasonably in advance of the requested date
of issuance, amendment, renewal or extension) a notice requesting the issuance
of a Letter of Credit, or identifying the Letter of Credit to be amended,
renewed or extended, and specifying the date of issuance, amendment, renewal or
extension (which shall be a Business Day), the date on which such Letter of
Credit is to expire (which shall comply with paragraph (c) of this Section), the
amount of such Letter of Credit, the name and address of the beneficiary thereof
and such other information as shall be necessary to prepare, amend, renew or
extend such Letter of Credit. If requested by the Issuing Bank, the Borrower
also shall submit a letter of credit application on the Issuing Bank's standard
form in connection with any request for a Letter of Credit. A Letter of Credit
shall be issued, amended, renewed or extended only if (and upon issuance,
amendment, renewal or extension of each Letter of Credit the Borrower shall be
deemed to represent and warrant that), after giving effect to such issuance,
amendment, renewal or extension (i) the LC Exposure shall not exceed
$100,000,000 and (ii) the sum of the total Revolving Credit Exposures plus the
aggregate principal amount of outstanding Competitive Loans shall not exceed the
total Commitments.
(c) Expiration Date. Each Letter of Credit shall expire at or
prior to the close of business on the date that is five Business Days prior to
the Revolving Loan Maturity Date.
<PAGE> 23
19
(d) Participations. By the issuance of a Letter of Credit (or
an amendment to a Letter of Credit increasing the amount thereof) and without
any further action on the part of the Issuing Bank or the Lenders, the Issuing
Bank hereby grants to each Lender, and each Lender hereby acquires from the
Issuing Bank, a participation in such Letter of Credit equal to such Lender's
Applicable Percentage of the aggregate amount available to be drawn under such
Letter of Credit. In consideration and in furtherance of the foregoing, each
Lender hereby absolutely and unconditionally agrees to pay to the Administrative
Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage
of each LC Disbursement made by the Issuing Bank and not reimbursed by the
Borrower on the date due as provided in paragraph (e) of this Section, or of any
reimbursement payment required to be refunded to the Borrower for any reason.
Each Lender acknowledges and agrees that its obligation to acquire
participations pursuant to this paragraph in respect of Letters of Credit is
absolute and unconditional and shall not be affected by any circumstance
whatsoever, including any amendment, renewal or extension of any Letter of
Credit or the occurrence and continuance of a Default or reduction or
termination of the Commitments, and that each such payment shall be made without
any offset, abatement, withholding or reduction whatsoever.
(e) Reimbursement. If the Issuing Bank shall make any LC
Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such
LC Disbursement by paying to the Administrative Agent an amount equal to such LC
Disbursement not later than 12:00 noon, Houston, Texas time, on the date that
such LC Disbursement is made, if the Borrower shall have received notice of such
LC Disbursement prior to 10:00 a.m., Houston, Texas time, on such date, or, if
such notice has not been received by the Borrower prior to such time on such
date, then not later than 12:00 noon, Houston, Texas time, on (i) the Business
Day that the Borrower receives such notice, if such notice is received prior to
10:00 a.m., Houston, Texas time, on the day of receipt, or (ii) the Business Day
immediately following the day that the Borrower receives such notice, if such
notice is not received prior to such time on the day of receipt; provided that
the Borrower may, subject to the conditions to borrowing set forth herein,
request in accordance with Section 2.03 that such payment be financed with an
ABR Revolving Borrowing in an equivalent amount and, to the extent so financed,
the Borrower's obligation to make such payment shall be discharged and replaced
by the resulting ABR Revolving Borrowing. If the Borrower fails to make such
payment when due, the Administrative Agent shall notify each Lender of the
applicable LC Disbursement, the payment then due from the Borrower in respect
thereof and such Lender's Applicable Percentage thereof. Promptly following
receipt of such notice, each Lender shall pay to the Administrative Agent its
Applicable Percentage of the payment then due from the Borrower, in the same
manner as provided in Section 2.06 with respect to Loans made by such Lender
(and Section 2.06 shall apply, mutatis mutandis, to the payment obligations of
the Lenders), and the Administrative Agent shall promptly pay to the Issuing
Bank the amounts so received by it from the Lenders. Promptly following receipt
by the Administrative Agent of any payment from the Borrower pursuant to this
paragraph, the Administrative Agent shall distribute such payment to the Issuing
Bank or, to the extent that Lenders have made payments pursuant to this
paragraph to reimburse the Issuing Bank, then to such Lenders and the Issuing
Bank as their interests may appear. Any payment made by a Lender pursuant to
this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than
the funding of ABR Revolving Loans as contemplated above) shall not constitute a
Loan and shall not relieve the Borrower of its obligation to reimburse such LC
Disbursement.
(f) Obligations Absolute. The Borrower's obligation to
reimburse LC Disbursements as provided in paragraph (e) of this Section shall be
absolute, unconditional and irrevocable, and shall
<PAGE> 24
20
be performed strictly in accordance with the terms of this Agreement under any
and all circumstances whatsoever and irrespective of (i) any lack of validity or
enforceability of any Letter of Credit or this Agreement, or any term or
provision therein, (ii) any draft or other document presented under a Letter of
Credit proving to be forged, fraudulent or invalid in any respect or any
statement therein being untrue or inaccurate in any respect, (iii) payment by
the Issuing Bank under a Letter of Credit against presentation of a draft or
other document that does not comply with the terms of such Letter of Credit, or
(iv) any other event or circumstance whatsoever, whether or not similar to any
of the foregoing, that might, but for the provisions of this Section, constitute
a legal or equitable discharge of, or provide a right of setoff against, the
Borrower's obligations hereunder. Neither the Administrative Agent, the Lenders
nor the Issuing Bank, nor any of their Related Parties, shall have any liability
or responsibility by reason of or in connection with the issuance or transfer of
any Letter of Credit or any payment or failure to make any payment thereunder
(irrespective of any of the circumstances referred to in the preceding
sentence), or any error, omission, interruption, loss or delay in transmission
or delivery of any draft, notice or other communication under or relating to any
Letter of Credit (including any document required to make a drawing thereunder),
any error in interpretation of technical terms or any consequence arising from
causes beyond the control of the Issuing Bank; provided that the foregoing shall
not be construed to excuse the Issuing Bank from liability to the Borrower to
the extent of any direct damages (as opposed to consequential damages, claims in
respect of which are hereby waived by the Borrower to the extent permitted by
applicable law) suffered by the Borrower that are caused by the Issuing Bank's
failure to exercise care when determining whether drafts and other documents
presented under a Letter of Credit comply with the terms thereof. The parties
hereto expressly agree that, in the absence of gross negligence or wilful
misconduct on the part of the Issuing Bank (as finally determined by a court of
competent jurisdiction), the Issuing Bank shall be deemed to have exercised care
in each such determination. In furtherance of the foregoing and without limiting
the generality thereof, the parties agree that, with respect to documents
presented which appear on their face to be in substantial compliance with the
terms of a Letter of Credit, the Issuing Bank may, in its sole discretion,
either accept and make payment upon such documents without responsibility for
further investigation, regardless of any notice or information to the contrary,
or refuse to accept and make payment upon such documents if such documents are
not in strict compliance with the terms of such Letter of Credit.
(g) Disbursement Procedures. The Issuing Bank shall, promptly
following its receipt thereof, examine all documents purporting to represent a
demand for payment under a Letter of Credit. The Issuing Bank shall promptly
notify the Administrative Agent and the Borrower by telephone (confirmed by
telecopy) of such demand for payment and whether the Issuing Bank has made or
will make an LC Disbursement thereunder; provided that any failure to give or
delay in giving such notice shall not relieve the Borrower of its obligation to
reimburse the Issuing Bank and the Lenders with respect to any such LC
Disbursement.
(h) Interim Interest. If the Issuing Bank shall make any LC
Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in
full on the date such LC Disbursement is made, the unpaid amount thereof shall
bear interest, for each day from and including the date such LC Disbursement is
made to but excluding the date that the Borrower reimburses such LC
Disbursement, at the rate per annum then applicable to ABR Committed Loans;
provided that, if the Borrower fails to reimburse such LC Disbursement when due
pursuant to paragraph (e) of this Section, then Section 2.12(d) shall apply.
Interest accrued pursuant to this paragraph shall be for the account of the
Issuing Bank, except that interest accrued on and after the date of payment by
any Lender pursuant
<PAGE> 25
21
to paragraph (e) of this Section to reimburse the Issuing Bank shall be for the
account of such Lender to the extent of such payment.
(i) Replacement of the Issuing Bank. The Issuing Bank may be
replaced at any time by written agreement among the Borrower, the Administrative
Agent, the replaced Issuing Bank and the successor Issuing Bank. The
Administrative Agent shall notify the Lenders of any such replacement of the
Issuing Bank. At the time any such replacement shall become effective, the
Borrower shall pay all unpaid fees accrued for the account of the replaced
Issuing Bank pursuant to Section 2.11(b). From and after the effective date of
any such replacement, (i) the successor Issuing Bank shall have all the rights
and obligations of the Issuing Bank under this Agreement with respect to Letters
of Credit to be issued thereafter and (ii) references herein to the term
"Issuing Bank" shall be deemed to refer to such successor or to any previous
Issuing Bank, or to such successor and all previous Issuing Banks, as the
context shall require. After the replacement of an Issuing Bank hereunder, the
replaced Issuing Bank shall remain a party hereto and shall continue to have all
the rights and obligations of an Issuing Bank under this Agreement with respect
to Letters of Credit issued by it prior to such replacement, but shall not be
required to issue additional Letters of Credit.
(j) Cash Collateralization. If any Event of Default shall
occur and be continuing, on the Business Day that the Borrower receives notice
from the Administrative Agent or the Required Lenders (or, if the maturity of
the Loans has been accelerated, Lenders with LC Exposure representing at least
51% of the total LC Exposure) demanding the deposit of cash collateral pursuant
to this paragraph, the Borrower shall deposit in an account with the
Administrative Agent, in the name of the Administrative Agent and for the
benefit of the Lenders, an amount in cash equal to the LC Exposure as of such
date plus any accrued and unpaid interest thereon; provided that the obligation
to deposit such cash collateral shall become effective immediately, and such
deposit shall become immediately due and payable, without demand or other notice
of any kind, upon the occurrence of any Event of Default with respect to the
Borrower described in clause (h) or (i) of Article VII. Such deposit shall be
held by the Administrative Agent as collateral for the payment and performance
of the obligations of the Borrower under this Agreement. The Administrative
Agent shall have exclusive dominion and control, including the exclusive right
of withdrawal, over such account. Other than any interest earned on the
investment of such deposits, which investments shall be Permitted Investments
and shall be made at the Borrower's risk and expense, such deposits shall not
bear interest. Interest or profits, if any, on such investments shall accumulate
in such account. Moneys in such account shall be applied by the Administrative
Agent to reimburse the Issuing Bank for LC Disbursements for which it has not
been reimbursed and, to the extent not so applied, shall be held for the
satisfaction of the reimbursement obligations of the Borrower for the LC
Exposure at such time or, if the maturity of the Loans has been accelerated (but
subject to the consent of Lenders with LC Exposure representing at least 51% of
the total LC Exposure), be applied to satisfy other obligations of the Borrower
under this Agreement. If the Borrower is required to provide an amount of cash
collateral hereunder as a result of the occurrence of an Event of Default, such
amount (to the extent not applied as aforesaid) shall be returned to the
Borrower within three Business Days after all Events of Default have been cured
or waived.
SECTION 2.06. Funding of Borrowings. (a) Each Lender shall
make each Loan to be made by it hereunder on the proposed date thereof by wire
transfer of immediately available funds by 12:00 noon, Houston, Texas time, to
the account of the Administrative Agent most recently designated by it for such
purpose by notice to the Lenders. The Administrative Agent will make such Loans
<PAGE> 26
22
available to the Borrower by promptly crediting the amounts so received, in like
funds, to an account of the Borrower maintained with the Administrative Agent in
Houston, Texas and designated by the Borrower in the applicable Borrowing
Request or Competitive Bid Request; provided that ABR Revolving Loans made to
finance the reimbursement of an LC Disbursement as provided in Section 2.05(e)
shall be remitted by the Administrative Agent to the Issuing Bank.
(b) Unless the Administrative Agent shall have received notice
from a Lender prior to the proposed date of any Borrowing that such Lender will
not make available to the Administrative Agent such Lender's share of such
Borrowing, the Administrative Agent may assume that such Lender has made such
share available on such date in accordance with paragraph (a) of this Section
and may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. In such event, if a Lender has not in fact made its share
of the applicable Borrowing available to the Administrative Agent, then the
applicable Lender and the Borrower severally agree to pay to the Administrative
Agent forthwith on demand such corresponding amount with interest thereon, for
each day from and including the date such amount is made available to the
Borrower to but excluding the date of payment to the Administrative Agent, at
(i) in the case of such Lender, the greater of the Federal Funds Effective Rate
and a rate determined by the Administrative Agent in accordance with banking
industry rules on interbank compensation or (ii) in the case of the Borrower,
the interest rate applicable to ABR Loans. If such Lender pays such amount to
the Administrative Agent, then such amount shall constitute such Lender's Loan
included in such Borrowing.
SECTION 2.07. Interest Elections. (a) Each Revolving Borrowing
initially shall be of the Type specified in the applicable Borrowing Request
and, in the case of a Eurodollar Committed Borrowing, shall have an initial
Interest Period as specified in such Borrowing Request. Thereafter, the Borrower
may elect to convert such Borrowing to a different Type or to continue such
Borrowing and, in the case of a Eurodollar Committed Borrowing, may elect
Interest Periods therefor, all as provided in this Section. The Borrower may
elect different options with respect to different portions of the affected
Borrowing, in which case each such portion shall be allocated ratably among the
Lenders holding the Loans comprising such Borrowing, and the Loans comprising
each such portion shall be considered a separate Borrowing. This Section shall
not apply to Competitive Borrowings which may not be converted or continued.
(b) To make an election pursuant to this Section, the Borrower
shall notify the Administrative Agent of such election by telephone by the time
that a Borrowing Request would be required under Section 2.03 if the Borrower
were requesting a Revolving Borrowing of the Type resulting from such election
to be made on the effective date of such election. Each such telephonic Interest
Election Request shall be irrevocable and shall be confirmed promptly by hand
delivery or telecopy to the Administrative Agent of a written Interest Election
Request in a form approved by the Administrative Agent and signed by the
Borrower.
(c) Each telephonic and written Interest Election Request
shall specify the following information in compliance with Section 2.02:
(i) the Borrowing to which such Interest Election Request
applies and, if different options are being elected with respect to different
portions thereof, the portions thereof to be allocated
<PAGE> 27
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to each resulting Borrowing (in which case the information to be specified
pursuant to clauses (iii) and (iv) below shall be specified for each resulting
Borrowing);
(ii) the effective date of the election made pursuant to such
Interest Election Request, which shall be a Business Day;
(iii) whether the resulting Borrowing is to be an ABR
Borrowing or a Eurodollar Borrowing; and
(iv) if the resulting Borrowing is a Eurodollar Borrowing, the
Interest Period to be applicable thereto after giving effect to such election,
which shall be a period contemplated by the definition of the term "Interest
Period".
If any such Interest Election Request requests a Eurodollar Borrowing but does
not specify an Interest Period, then the Borrower shall be deemed to have
selected an Interest Period of one month's duration.
(d) Promptly following receipt of an Interest Election
Request, the Administrative Agent shall advise each Lender of the details
thereof and of such Lender's portion of each resulting Borrowing.
(e) If the Borrower fails to deliver a timely Interest
Election Request with respect to a Eurodollar Committed Borrowing prior to the
end of the Interest Period applicable thereto, then, unless such Borrowing is
repaid as provided herein, at the end of such Interest Period such Borrowing
shall be converted to an ABR Borrowing. Notwithstanding any contrary provision
hereof, if an Event of Default has occurred and is continuing and the
Administrative Agent, at the request of the Required Lenders, so notifies the
Borrower, then, so long as an Event of Default is continuing (i) no outstanding
Committed Borrowing may be converted to or continued as a Eurodollar Borrowing
and (ii) unless repaid, each Eurodollar Committed Borrowing shall be converted
to an ABR Borrowing at the end of the Interest Period applicable thereto.
SECTION 2.08. Termination and Reduction of Commitments. (a)
Unless previously terminated, the Commitments shall terminate on the Revolving
Loan Maturity Date as provided in Section 2.02(e).
(b) The Borrower may at any time terminate, or from time to
time reduce, the Commitments; provided that (i) each reduction of the
Commitments shall be in an amount that is an integral multiple of $10,000,000
and (ii) the Borrower shall not terminate or reduce the Commitments if, after
giving effect to any concurrent prepayment of the Loans in accordance with
Section 2.10, the sum of the Revolving Credit Exposures plus the aggregate
principal amount of outstanding Competitive Loans would exceed the total
Commitments.
(c) The Borrower shall notify the Administrative Agent of any
election to terminate or reduce the Commitments under paragraph (b) of this
Section at least three Business Days prior to the effective date of such
termination or reduction, specifying such election and the effective date
thereof. Promptly following receipt of any notice, the Administrative Agent
shall advise the Lenders of the contents thereof. Each notice delivered by the
Borrower pursuant to this Section shall be irrevocable; provided that a notice
of termination of the Commitments delivered by the Borrower may state that such
<PAGE> 28
24
notice is conditioned upon the effectiveness of other credit facilities, in
which case such notice may be revoked by the Borrower (by notice to the
Administrative Agent on or prior to the specified effective date) if such
condition is not satisfied. Any termination or reduction of the Commitments
shall be permanent. Each reduction of the Commitments shall be made ratably
among the Lenders in accordance with their respective Commitments.
(d) (i) The Commitments shall automatically be reduced, if at
any time, or from time to time, the Borrower issues debt through a Debt
Securities Offering; provided that (A) each reduction of the Commitments shall
be in an amount that is equal to the net proceeds that are received by the
Borrower from the sale of such debt, (B) the aggregate of all reductions
required under this Section 2.08(d)(i) shall not exceed $300,000,000, (C) each
reduction of the Commitments required hereunder shall be made ratably among the
Lenders in accordance with their respective Commitments and shall be permanent,
and (D) the Borrower shall provide notice to the Administrative Agent of any
reduction of Commitments required under this Section 2.08(d)(i) in accordance
with Section 2.08(c) above.
(ii) Unless the merger of Quaker State Corporation and a
Wholly Owned Subsidiary of the Borrower, occurs on or prior to the Early
Termination Date, the Commitments shall automatically terminate in full at 5:00
p.m. (Houston, Texas time) on the Early Termination Date.
(iii) Unless both the Quaker State Credit Facility Termination
and the Prior Credit Facility Termination shall have occurred on or prior to the
Early Termination Date, the Commitments shall automatically terminate in full at
5:00 p.m. (Houston, Texas time) on the Early Termination Date.
(e) The Borrower may, at its sole expense and effort, upon
notice to any Lender and the Administrative Agent, require such Lender to assign
and delegate, without recourse (in accordance with and subject to the
restrictions contained in Section 9.04), all its interests, rights and
obligations under this Agreement (other than any outstanding Competitive Loans
held by it) to an assignee that shall assume such obligations (which assignee
may be another Lender, if a Lender accepts such assignment); provided that (i)
for all assignees that are not at the time of such assignment a Lender, the
Borrower shall have received the prior written consent of the Administrative
Agent (and, if a Commitment is being assigned, the Issuing Bank), which consent
shall not unreasonably be withheld and (ii) such assigning Lender shall have
received payment of an amount equal to the outstanding principal of its Loans
(other than Competitive Loans) and participations in LC Disbursements, accrued
interest thereon, accrued fees and all other amounts payable to it hereunder,
from the assignee (to the extent of such outstanding principal and accrued
interest and fees) or the Borrower (in the case of all other amounts).
SECTION 2.09. Repayment of Loans; Evidence of Debt. (a) The
Borrower hereby unconditionally promises to pay (i) to the Administrative Agent
for the account of each Lender the then unpaid principal amount of each
Revolving Loan on the Revolving Loan Maturity Date, unless the same are
converted to Term Loans, (ii) to the Administrative Agent for the account of
each Lender the then unpaid principal amount of each Competitive Loan on the
last day of the Interest Period applicable to such Loan, and (iii) to the
Administrative Agent for the account of each Lender the then unpaid principal
amount of each Term Loan on the Final Maturity Date.
<PAGE> 29
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(b) Each Lender shall maintain in accordance with its usual
practice an account or accounts evidencing the indebtedness of the Borrower to
such Lender resulting from each Loan made by such Lender, including the amounts
of principal and interest payable and paid to such Lender from time to time
hereunder.
(c) The Administrative Agent shall maintain accounts in which
it shall record (i) the amount of each Loan made hereunder, the Class and Type
thereof and the Interest Period applicable thereto, (ii) the amount of any
principal or interest due and payable or to become due and payable from the
Borrower to each Lender hereunder and (iii) the amount of any sum received by
the Administrative Agent hereunder for the account of the Lenders and each
Lender's share thereof.
(d) The entries made in the accounts maintained pursuant to
paragraph (b) or (c) of this Section shall be prima facie evidence of the
existence and amounts of the obligations recorded therein; provided that the
failure of any Lender or the Administrative Agent to maintain such accounts or
any error therein shall not in any manner affect the obligation of the Borrower
to repay the Loans in accordance with the terms of this Agreement.
(e) Any Lender may request that Loans made by it be evidenced
by a promissory note. In such event, the Borrower shall prepare, execute and
deliver to such Lender a promissory note payable to the order of such Lender
(or, if requested by such Lender, to such Lender and its registered assigns) and
in a form approved by the Administrative Agent. Thereafter, the Loans evidenced
by such promissory note and interest thereon shall at all times (including after
assignment pursuant to Section 9.04) be represented by one or more promissory
notes in such form payable to the order of the payee named therein (or, if such
promissory note is a registered note, to such payee and its registered assigns).
SECTION 2.10. Prepayment of Loans. (a) The Borrower shall have
the right at any time and from time to time to prepay any Borrowing in whole or
in part, subject to prior notice in accordance with paragraph (b) of this
Section; provided that the Borrower shall not have the right to prepay any
Competitive Loan without the prior consent of the Lender thereof.
(b) The Borrower shall notify the Administrative Agent by
telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of
prepayment of a Eurodollar Committed Borrowing, not later than 11:00 a.m.,
Houston, Texas time, three Business Days before the date of prepayment, or (ii)
in the case of prepayment of an ABR Committed Borrowing, not later than 11:00
a.m., Houston, Texas time, one Business Day before the date of prepayment. Each
such notice shall be irrevocable and shall specify the prepayment date and the
principal amount of each Borrowing or portion thereof to be prepaid; provided
that, if a notice of prepayment is given in connection with a conditional notice
of termination of the Commitments as contemplated by Section 2.08, then such
notice of prepayment may be revoked if such notice of termination is revoked in
accordance with Section 2.08. Promptly following receipt of any such notice
relating to a Committed Borrowing, the Administrative Agent shall advise the
Lenders of the contents thereof. Each partial prepayment of any Committed
Borrowing shall be in an amount that would be permitted in the case of an
advance of a Committed Borrowing of the same Type as provided in Section 2.02.
Each prepayment of a Committed Borrowing shall be applied ratably to the Loans
included in the prepaid Borrowing. Prepayments shall be accompanied by accrued
interest to the extent required by Section 2.12.
<PAGE> 30
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(c) If at any time the sum of the Revolving Credit Exposures
plus the aggregate principal amount of outstanding Competitive Loans is in
excess of the total Commitments, the Borrower shall immediately pay to the
Administrative Agent, for the account of the Banks, the amount of such excess to
be applied as a prepayment of the Revolving Loans and LC Disbursements
outstanding. Any such prepayment shall be payable in full on the date on which
the applicable reduction or termination of the Commitments pursuant to Section
2.08(d) becomes effective.
(d) If at any time after the Revolving Loan Maturity Date, the
Borrower or its Subsidiaries receives net proceeds from any issuance or sale of
debt through a Debt Securities Offering, then to the extent the outstanding
principal balance of the Term Loans at such time exceeds $700,000,000, 100% of
such net proceeds shall be applied on the date received to the Term Loans to the
extent necessary to reduce the outstanding principal balance thereof to
$700,000,000.
SECTION 2.11. Fees. (a) The Borrower agrees to pay to the
Administrative Agent for the account of each Lender a facility fee, which shall
accrue at the Applicable Rate on the daily amount of the Commitment of such
Lender (whether used or unused) during the period from and including the date of
this Agreement to but excluding the date on which such Commitment terminates;
provided that, if such Lender continues to have any Committed Credit Exposure
after its Commitment terminates, then such facility fee shall continue to accrue
on the daily amount of such Lender's Committed Credit Exposure from and
including the date on which its Commitment terminates to but excluding the date
on which such Lender ceases to have any Committed Credit Exposure. Accrued
facility fees shall be payable in arrears on the last day of March, June,
September and December of each year and on the date on which the Commitments
terminate, commencing on the first such date to occur after the date hereof;
provided that any facility fees accruing after the date on which the Committed
Loans have matured, whether by acceleration or otherwise, shall be payable on
demand. All facility fees shall be computed on the basis of a year of 360 days
and shall be payable for the actual number of days elapsed (including the first
day but excluding the last day).
(b) The Borrower agrees to pay (i) to the Administrative Agent
for the account of each Lender a participation fee with respect to its
participations in Letters of Credit, which shall accrue at the same Applicable
Rate as interest on Eurodollar Committed Loans on the average daily amount of
such Lender's LC Exposure (excluding any portion thereof attributable to
unreimbursed LC Disbursements) during the period from and including the
Effective Date to but excluding the later of the date on which such Lender's
Commitment terminates and the date on which such Lender ceases to have any LC
Exposure, and (ii) to the Issuing Bank a fronting fee, which shall accrue at the
rate of 0.125% per annum on the average daily amount of the LC Exposure
(excluding any portion thereof attributable to unreimbursed LC Disbursements)
during the period from and including the Effective Date to but excluding the
later of the date of termination of the Commitments and the date on which there
ceases to be any LC Exposure, as well as the Issuing Bank's standard fees with
respect to the issuance, amendment, renewal or extension of any Letter of Credit
or processing of drawings thereunder. Participation fees and fronting fees
accrued through and including the last day of March, June, September and
December of each year shall be payable on such day, commencing on the first such
date to occur after the Effective Date; provided that all such fees shall be
payable on the date on which the Commitments terminate and any such fees
accruing after the date on which the Commitments terminate shall be payable on
demand. Any other fees payable to the Issuing Bank pursuant to this paragraph
shall be payable within 10 days after demand. All participation fees and
fronting fees shall be computed on
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27
the basis of a year of 360 days and shall be payable for the actual number of
days elapsed (including the first day but excluding the last day).
(c) The Borrower agrees to pay to the Administrative Agent,
for its own account, fees payable in the amounts and at the times separately
agreed upon between the Borrower and the Administrative Agent.
(d) All fees payable hereunder shall be paid on the dates due,
in immediately available funds, to the Administrative Agent (or to the Issuing
Bank, in the case of fees payable to it) for distribution, in the case of
facility fees and participation fees, to the Lenders. Fees paid shall not be
refundable under any circumstances.
SECTION 2.12. Interest. (a) The Loans comprising each ABR
Borrowing shall bear interest at the Alternate Base Rate.
(b) The Loans comprising each Eurodollar Borrowing shall bear
interest (i) in the case of a Eurodollar Committed Loan, at the Adjusted LIBO
Rate for the Interest Period in effect for such Borrowing plus the Applicable
Rate, or (ii) in the case of a Eurodollar Competitive Loan, at the LIBO Rate for
the Interest Period in effect for such Borrowing plus (or minus, as applicable)
the Margin applicable to such Loan.
(c) Each Fixed Rate Loan shall bear interest at the Fixed Rate
applicable to such Loan.
(d) Notwithstanding the foregoing, if any principal of or
interest on any Loan or any fee or other amount payable by the Borrower
hereunder is not paid when due, whether at stated maturity, upon acceleration or
otherwise, such overdue amount shall bear interest, after as well as before
judgment, at a rate per annum equal to (i) in the case of overdue principal of
any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the
preceding paragraphs of this Section or (ii) in the case of any other amount, 2%
plus the rate applicable to ABR Loans as provided in paragraph (a) of this
Section.
(e) Accrued interest on each Loan shall be payable in arrears
on each Interest Payment Date for such Loan and, in the case of Revolving Loans,
upon termination of the Commitments; provided that (i) interest accrued pursuant
to paragraph (d) of this Section shall be payable on demand, (ii) in the event
of any repayment or prepayment of any Loan (other than a prepayment of an ABR
Committed Loan prior to the end of the Availability Period), accrued interest on
the principal amount repaid or prepaid shall be payable on the date of such
repayment or prepayment and (iii) in the event of any conversion of any
Eurodollar Committed Loan prior to the end of the current Interest Period
therefor, accrued interest on such Loan shall be payable on the effective date
of such conversion.
(f) All interest hereunder shall be computed on the basis of a
year of 360 days, except that interest computed by reference to the Alternate
Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall
be computed on the basis of a year of 365 days (or 366 days in a leap year), and
in each case shall be payable for the actual number of days elapsed (including
the first day but excluding the last day). The applicable Alternate Base Rate,
Adjusted LIBO Rate or LIBO Rate
<PAGE> 32
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shall be determined by the Administrative Agent, and such determination shall be
conclusive absent manifest error.
SECTION 2.13. Alternate Rate of Interest. If prior to the
commencement of any Interest Period for a Eurodollar Borrowing:
(a) the Administrative Agent determines (which determination
shall be conclusive absent manifest error) that adequate and reasonable
means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO
Rate, as applicable, for such Interest Period; or
(b) the Administrative Agent is advised by the Required
Lenders (or, in the case of a Eurodollar Competitive Loan, the Lender
that is required to make such Loan) that the Adjusted LIBO Rate or the
LIBO Rate, as applicable, for such Interest Period will not adequately
and fairly reflect the cost to such Lenders (or Lender) of making or
maintaining their Loans (or its Loan) included in such Borrowing for
such Interest Period;
then the Administrative Agent shall give notice thereof to the Borrower and the
Lenders by telephone or telecopy as promptly as practicable thereafter and,
until the Administrative Agent notifies the Borrower and the Lenders that the
circumstances giving rise to such notice no longer exist, (i) any Interest
Election Request that requests the conversion of any Committed Borrowing to, or
continuation of any Committed Borrowing as, a Eurodollar Borrowing shall be
ineffective, (ii) if any Borrowing Request requests a Eurodollar Revolving
Borrowing, such Borrowing shall be made as an ABR Borrowing and (iii) any
request by the Borrower for a Eurodollar Competitive Borrowing shall be
ineffective; provided that (A) if the circumstances giving rise to such notice
do not affect all the Lenders, then requests by the Borrower for Eurodollar
Competitive Borrowings may be made to Lenders that are not affected thereby and
(B) if the circumstances giving rise to such notice affect only one Type of
Borrowings, then the other Type of Borrowings shall be permitted.
SECTION 2.14. Increased Costs. (a) If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special
deposit or similar requirement against assets of, deposits with or for
the account of, or credit extended by, any Lender (except any such
reserve requirement reflected in the Adjusted LIBO Rate) or the Issuing
Bank; or
(ii) impose on any Lender or the Issuing Bank or the London
interbank market any other condition affecting this Agreement or
Eurodollar Loans or Fixed Rate Loans made by such Lender or any Letter
of Credit or participation therein;
and the result of any of the foregoing shall be to increase the cost to such
Lender of making or maintaining any Eurodollar Loan or Fixed Rate Loan (or of
maintaining its obligation to make any such Loan) or to increase the cost to
such Lender or the Issuing Bank of participating in, issuing or maintaining any
Letter of Credit or to reduce the amount of any sum received or receivable by
such Lender or the Issuing Bank hereunder (whether of principal, interest or
otherwise), then the Borrower will pay to such Lender or the Issuing Bank, as
the case may be, such additional amount or amounts as
<PAGE> 33
29
will compensate such Lender or the Issuing Bank, as the case may be, for such
additional costs incurred or reduction suffered.
(b) If any Lender or the Issuing Bank determines that any
Change in Law regarding capital requirements has or would have the effect of
reducing the rate of return on such Lender's or the Issuing Bank's capital or on
the capital of such Lender's or the Issuing Bank's holding company, if any, as a
consequence of this Agreement or the Loans made by, or participations in Letters
of Credit held by, such Lender, or the Letters of Credit issued by the Issuing
Bank, to a level below that which such Lender or the Issuing Bank or such
Lender's or the Issuing Bank's holding company could have achieved but for such
Change in Law (taking into consideration such Lender's or the Issuing Bank's
policies and the policies of such Lender's or the Issuing Bank's holding company
with respect to capital adequacy), then from time to time the Borrower will pay
to such Lender or the Issuing Bank, as the case may be, such additional amount
or amounts as will compensate such Lender or the Issuing Bank or such Lender's
or the Issuing Bank's holding company for any such reduction suffered.
(c) A certificate of a Lender or the Issuing Bank setting
forth the amount or amounts necessary to compensate such Lender or the Issuing
Bank or its holding company, as the case may be, as specified in paragraph (a)
or (b) of this Section and setting forth in reasonable detail the calculation
thereof shall be delivered to the Borrower and shall be conclusive absent
manifest error. The Borrower shall pay such Lender or the Issuing Bank, as the
case may be, the amount shown as due on any such certificate within 30 days
after receipt thereof.
(d) Failure or delay on the part of any Lender or the Issuing
Bank to demand compensation pursuant to this Section shall not constitute a
waiver of such Lender's or the Issuing Bank's right to demand such compensation;
provided that the Borrower shall not be required to compensate a Lender or the
Issuing Bank pursuant to this Section for any increased costs or reductions
incurred more than 90 days prior to the date that such Lender or the Issuing
Bank, as the case may be, notifies the Borrower of the Change in Law giving rise
to such increased costs or reductions and of such Lender's or the Issuing Bank's
intention to claim compensation therefor; provided further that, if the Change
in Law giving rise to such increased costs or reductions is retroactive, then
the 90-day period referred to above shall be extended to include the period of
retroactive effect thereof.
(e) Notwithstanding the foregoing provisions of this Section,
a Lender shall not be entitled to compensation pursuant to this Section in
respect of any Competitive Loan if the Change in Law that would otherwise
entitle it to such compensation shall have been publicly announced prior to
submission of the Competitive Bid pursuant to which such Loan was made.
SECTION 2.15. Break Funding Payments. In the event of (a) the
payment of any principal of any Eurodollar Loan or Fixed Rate Loan other than on
the last day of an Interest Period applicable thereto (including as a result of
an Event of Default), (b) the conversion of any Eurodollar Loan other than on
the last day of the Interest Period applicable thereto, (c) the Borrower's
failure to borrow, convert, continue or prepay any Revolving Loan on the date
specified in any notice delivered pursuant hereto (regardless of whether such
notice may be revoked under Section 2.10(b) and is revoked in accordance
therewith), (d) the Borrower's failure to borrow any Competitive Loan after
accepting the Competitive Bid to make such Loan, or (e) the assignment of any
Eurodollar Loan or Fixed Rate Loan other than on the last day of the Interest
Period applicable thereto as a result of a request by the
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Borrower pursuant to Section 2.08(e), then, in any such event, the Borrower
shall compensate each Lender for the loss, cost and expense attributable to such
event. In the case of a Eurodollar Loan, such loss, cost or expense to any
Lender shall be deemed to include an amount determined by such Lender to be the
excess, if any, of (i) the amount of interest which would have accrued on the
principal amount of such Loan had such event not occurred, at the Adjusted LIBO
Rate that would have been applicable to such Loan, for the period from the date
of such event to the last day of the then current Interest Period therefor (or,
in the case of a failure to borrow, convert or continue, for the period that
would have been the Interest Period for such Loan), over (ii) the amount of
interest which would accrue on such principal amount for such period at the
interest rate which such Lender would bid were it to bid, at the commencement of
such period, for dollar deposits of a comparable amount and period from other
banks in the eurodollar market. A certificate of any Lender setting forth any
amount or amounts that such Lender is entitled to receive pursuant to this
Section and setting forth in reasonable detail the calculation thereof shall be
delivered to the Borrower and shall be conclusive absent manifest error. The
Borrower shall pay such Lender the amount shown as due on any such certificate
within 30 days after receipt thereof.
SECTION 2.16. Taxes. (a) Any and all payments by or on account
of any obligation of the Borrower hereunder shall be made free and clear of and
without deduction for any Indemnified Taxes or Other Taxes; provided that if the
Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from
such payments, then (i) the sum payable shall be increased as necessary so that
after making all required deductions (including deductions applicable to
additional sums payable under this Section) the Administrative Agent, Lender or
Issuing Bank (as the case may be) receives an amount equal to the sum it would
have received had no such deductions been made, (ii) the Borrower shall make
such deductions and (iii) the Borrower shall pay the full amount deducted to the
relevant Governmental Authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any Other Taxes
(including, without limitation, any Other Tax which Borrower is required to pay
pursuant to Section 2.16(a)(iii)) to the relevant Governmental Authority in
accordance with applicable law.
(c) The Borrower shall indemnify the Administrative Agent,
each Lender and the Issuing Bank, within 20 days after written demand therefor,
for the full amount of any Indemnified Taxes or Other Taxes paid by the
Administrative Agent, such Lender or the Issuing Bank, as the case may be, on or
with respect to any payment by or on account of any obligation of the Borrower
hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or
attributable to amounts payable under this Section) and any penalties, interest
and reasonable and documented expenses arising therefrom or with respect
thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or
legally imposed or asserted by the relevant Governmental Authority. A
certificate as to the amount of such payment or liability delivered to the
Borrower by a Lender or the Issuing Bank, or by the Administrative Agent on its
own behalf or on behalf of a Lender or the Issuing Bank, shall be conclusive
absent manifest error. To the extent that the Administrative Agent, any Lender,
or the Issuing Bank is reimbursed by a Governmental Authority and such
reimbursement is clearly identified as specifically relating to any Indemnified
Tax or Other Tax that was incorrectly or illegally asserted in connection with
this Agreement, such Person shall return to the Borrower the amount of such
reimbursement, together with any interest that may have been paid by the
Governmental Authority with respect thereto, to the extent the Borrower has
actually paid such Person with respect thereto.
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(d) As soon as practicable after any payment of Indemnified
Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower
shall deliver to the Administrative Agent the original or a certified copy of a
receipt issued by such Governmental Authority evidencing such payment, a copy of
the return reporting such payment or other evidence of such payment reasonably
satisfactory to the Administrative Agent.
(e) Each of the Administrative Agent, Lenders, and the Issuing
Bank represents that it is either (i) a corporation organized under the laws of
the United States of America or any state thereof or (ii) it is entitled to
complete exemption from United States withholding tax imposed on or with respect
to any payments, including fees, to be made to it pursuant to this Agreement (A)
under an applicable provision of a tax convention to which the United States of
America is a party or (B) because it is acting through a branch, agency or
office in the United States of America and any payment to be received by it
hereunder is effectively connected with a trade or business in the United States
of America. Each of the Administrative Agent, Lenders, and the Issuing Bank that
is not a corporation organized under the laws of the United States of America or
any state thereof either represents that it has previously furnished to the
Borrower (with a copy to the Administrative Agent) or agrees to provide to the
Borrower (with a copy to the Administrative Agent) on the date of this
Agreement, or on the date which it becomes a party to this Agreement, two
accurate and complete original signed copies of either (1) Internal Revenue
Service Form 4224 (or successor form) certifying that all payments to be made to
it hereunder will be effectively connected to a United States trade or business,
(2) Internal Revenue Service Form 1001 (or successor form) certifying that it is
entitled to the benefit of a tax convention to which the United States of
America is a party which completely exempts from United States withholding tax
all payments to be made to it hereunder, or (3) such properly completed and
executed documentation prescribed by applicable law or reasonably requested by
the Borrower as will permit such payments to be made without withholding; and
each of the Administrative Agent, Lenders and Issuing Bank further agrees to
provide to Borrower, at the time or times prescribed by applicable law, such
properly completed and executed documentation prescribed by applicable law or
reasonably requested by the Borrower as will permit such payments to be made
without withholding. If any of the Administrative Agent, Lenders, or Issuing
Bank determines that it is unable to submit any form or certificate that it is
obligated to submit pursuant to this Section 2.16(e), or that is required to
withdraw or cancel any such form or certificate previously submitted, it shall
promptly notify the Borrower (with copy to the Administrative Agent) of such
fact. In the event that such person fails to deliver any forms required under
this Section 2.16(e) upon its initially becoming a party hereunder, the
Borrower's obligation to pay additional amounts shall be reduced to the amount
that it would have been obligated to pay had such forms been provided.
(f) Any Lender claiming any additional amounts payable
pursuant to this Section 2.16 shall use its reasonable efforts to change the
jurisdiction of its lending office so as to avoid the imposition of any
Indemnified Taxes or Other Taxes or to otherwise eliminate the amount of any
such additional amounts which may thereafter accrue.
SECTION 2.17. Payments Generally; Pro Rata Treatment; Sharing
of Set-offs. (a) The Borrower shall make each payment required to be made by it
hereunder (whether of principal, interest, fees or reimbursement of LC
Disbursements, or of amounts payable under Sections 2.14, 2.15 or 2.16, or
otherwise) prior to 12:00 noon, Houston, Texas time, on the date when due, in
immediately available funds, without set-off or counterclaim. Any amounts
received after such time on any date may, in the
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32
discretion of the Administrative Agent, be deemed to have been received on the
next succeeding Business Day for purposes of calculating interest thereon. All
such payments shall be made to the Administrative Agent at its offices at 600
Travis Street, Houston, Texas, except payments to be made directly to the
Issuing Bank as expressly provided herein and except that payments pursuant to
Sections 2.14, 2.15, 2.16 and 9.03 shall be made directly to the Persons
entitled thereto. The Administrative Agent shall distribute any such payments
received by it for the account of any other Person to the appropriate recipient
promptly following receipt thereof. If any payment hereunder shall be due on a
day that is not a Business Day, the date for payment shall be extended to the
next succeeding Business Day, and, in the case of any payment accruing interest,
interest thereon shall be payable for the period of such extension. All payments
hereunder shall be made in dollars.
(b) If at any time insufficient funds are received by and
available to the Administrative Agent to pay fully all amounts of principal,
unreimbursed LC Disbursements, interest and fees then due hereunder, such funds
shall be applied (i) first, towards payment of interest and fees then due
hereunder, ratably among the parties entitled thereto in accordance with the
amounts of interest and fees then due to such parties, and (ii) second, towards
payment of principal and unreimbursed LC Disbursements then due hereunder,
ratably among the parties entitled thereto in accordance with the amounts of
principal and unreimbursed LC Disbursements then due to such parties.
(c) If any Lender shall, by exercising any right of set-off or
counterclaim or otherwise, obtain payment in respect of any principal of or
interest on any of its Committed Loans or participations in LC Disbursements
resulting in such Lender receiving payment of a greater proportion of the
aggregate amount of its Committed Loans and participations in LC Disbursements
and accrued interest thereon than the proportion received by any other Lender,
then the Lender receiving such greater proportion shall purchase (for cash at
face value) participations in the Committed Loans and participations in LC
Disbursements of other Lenders to the extent necessary so that the benefit of
all such payments shall be shared by the Lenders ratably in accordance with the
aggregate amount of principal of and accrued interest on their respective
Committed Loans and participations in LC Disbursements; provided that (i) if any
such participations are purchased and all or any portion of the payment giving
rise thereto is recovered, such participations shall be rescinded and the
purchase price restored to the extent of such recovery, without interest, and
(ii) the provisions of this paragraph shall not be construed to apply to any
payment made by the Borrower pursuant to and in accordance with the express
terms of this Agreement or any payment obtained by a Lender as consideration for
the assignment of or sale of a participation in any of its Loans or
participations in LC Disbursements to any assignee or participant, other than to
the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions
of this paragraph shall apply). The Borrower consents to the foregoing and
agrees, to the extent it may effectively do so under applicable law, that any
Lender acquiring a participation pursuant to the foregoing arrangements may
exercise against the Borrower rights of set-off and counterclaim with respect to
such participation as fully as if such Lender were a direct creditor of the
Borrower in the amount of such participation.
(d) Unless the Administrative Agent shall have received notice
from the Borrower prior to the date on which any payment is due to the
Administrative Agent for the account of the Lenders or the Issuing Bank
hereunder that the Borrower will not make such payment, the Administrative Agent
may assume that the Borrower has made such payment on such date in accordance
herewith and may, in reliance upon such assumption, distribute to the Lenders or
the Issuing Bank, as the case may be, the amount due. In such event, if the
Borrower has not in fact made such payment, then each of the Lenders
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or the Issuing Bank, as the case may be, severally agrees to repay to the
Administrative Agent forthwith on demand the amount so distributed to such
Lender or Issuing Bank with interest thereon, for each day from and including
the date such amount is distributed to it to but excluding the date of payment
to the Administrative Agent, at the greater of the Federal Funds Effective Rate
and a rate determined by the Administrative Agent in accordance with banking
industry rules on interbank compensation.
(e) If any Lender shall fail to make any payment required to
be made by it pursuant to Sections 2.05(d) or (e), 2.06(b) or 2.17(d), then the
Administrative Agent may, in its discretion (notwithstanding any contrary
provision hereof), apply any amounts thereafter received by the Administrative
Agent for the account of such Lender to satisfy such Lender's obligations under
such Sections until all such unsatisfied obligations are fully paid.
SECTION 2.18. Mitigation Obligations. Each Lender will notify
the Borrower of any event occurring after the date of this Agreement which will
entitle such Lender to compensation pursuant to Sections 2.14, 2.15 and 2.16 as
promptly as practicable after it obtains knowledge thereof and determines to
request such compensation, provided that such Lender shall not be liable for the
failure to provide such notice. If any Lender requests compensation under
Section 2.14, or if the Borrower is required to pay any additional amount to any
Lender or any Governmental Authority for the account of any Lender pursuant to
Section 2.16, then such Lender shall use reasonable efforts to avoid or minimize
the amounts payable, including, without limitation, the designation of a
different lending office for funding or booking its Loans hereunder or to assign
its rights and obligations hereunder to another of its offices, branches or
affiliates, if, in the judgment of such Lender, such designation or assignment
(i) would eliminate or reduce amounts payable pursuant to Section 2.14 or 2.16,
as the case may be, in the future and (ii) would not subject such Lender to any
unreimbursed cost or expense and would not otherwise be disadvantageous to such
Lender. The Borrower hereby agrees to pay all reasonable and documented costs
and expenses incurred by any Lender in connection with any such designation or
assignment.
SECTION 2.19. Limitation of Compensation if Applicable Lending
Office is Changed. Notwithstanding anything herein to the contrary, in the event
that any Lender designates a different lending office other than as set forth on
the signature pages hereof, the Borrower shall not be liable to pay or
compensate such Lender under any provision of Sections 2.14 or 2.16 in an amount
in excess of that for which the Borrower would have been liable had such
designation not been made unless such designation was made (1), so long as no
Default has occurred and is continuing, with the Borrower's prior written
consent or (2) by reason of such Lender's having been required by Section 2.18
to designate a new lending office.
ARTICLE III
Representations and Warranties
The Borrower represents and warrants to the Lenders that:
SECTION 3.01. Organization; Powers. Each of the Borrower and
its Material Subsidiaries is duly organized, validly existing and in good
standing under the laws of the jurisdiction
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of its organization, has all requisite corporate power and authority to carry on
its business as now conducted and, except where the failure to do so,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect, is qualified to do business in, and is in good
standing in, every jurisdiction where such qualification is required.
SECTION 3.02. Authorization; Enforceability. The Transactions
are within the Borrower's corporate powers and have been duly authorized by all
necessary corporate and, if required, stockholder action. This Agreement has
been duly executed and delivered by the Borrower and constitutes a legal, valid
and binding obligation of the Borrower, enforceable in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
or other laws affecting creditors' rights generally and subject to general
principles of equity, regardless of whether considered in a proceeding in equity
or at law.
SECTION 3.03. Governmental Approvals; No Conflicts. The
Transactions (a) do not require the Borrower or any Material Subsidiary to
obtain any consent or approval of, registration or filing with, or any other
action by, any Governmental Authority, except such as have been obtained or made
and are in full force and effect and except as identified in Sections 2.08(d)
(ii) and (iii), (b) will not violate any applicable law or regulation or the
charter, by-laws or other organizational documents of the Borrower or any of its
Material Subsidiaries or any order of any Governmental Authority, (c) will not
violate or result in a default under any indenture, material agreement or other
instrument binding upon the Borrower or any of its Material Subsidiaries or its
assets, or give rise to a right thereunder to require any payment to be made by
the Borrower or any of its Material Subsidiaries, and (d) will not result in the
creation or imposition of any Lien on any asset of the Borrower or any of its
Subsidiaries.
SECTION 3.04. No Material Adverse Change. At the Effective
Date, there has been no material adverse change in the financial condition,
operations or business of the Borrower and its Material Subsidiaries, taken as a
whole, since June 30, 1998, including with regard thereto the selected pro forma
financial information dated as of and for the six months ended June 30, 1998,
set forth in the Quaker State Corporation/Pennzoil Products Company Proxy
Statement/Prospectus dated August 17, 1998.
SECTION 3.05. Litigation and Environmental Matters. (a) At the
Effective Date, there are no actions, suits or proceedings by or before any
arbitrator or Governmental Authority pending against or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or any of its
Subsidiaries that could reasonably be expected, individually or in the
aggregate, to result in a Material Adverse Effect.
(b) Except for any matters that, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect, neither the Borrower nor any of its Subsidiaries (i) has failed to
comply with any Environmental Law or to obtain, maintain or comply with any
permit, license or other approval required under any Environmental Law, (ii) has
become subject to any Environmental Liability, (iii) has received notice of any
claim with respect to any Environmental Liability or (iv) knows of any basis for
any Environmental Liability.
SECTION 3.06. Compliance with Laws and Agreements. Each of the
Borrower and its Subsidiaries is in compliance with all laws, regulations and
orders of any Governmental Authority
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35
applicable to it or its property and all indentures, agreements and other
instruments binding upon it or its property, except where the failure to do so,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect. No Default has occurred and is continuing.
SECTION 3.07. Investment and Holding Company Status. Neither
the Borrower nor any of its Subsidiaries is (a) an "investment company" as
defined in, or subject to regulation under, the Investment Company Act of 1940
or (b) a "holding company" as defined in, or subject to regulation under, the
Public Utility Holding Company Act of 1935.
SECTION 3.08. Taxes. Each of the Borrower and its Subsidiaries
has timely filed or caused to be filed all Tax returns and reports required to
have been filed and has paid or caused to be paid all Taxes required to have
been paid by it, except (a) Taxes that are being contested in good faith by
appropriate proceedings and for which the Borrower or such Subsidiary, as
applicable, has set aside on its books adequate reserves or (b) to the extent
that the failure to do so could not reasonably be expected to result in a
Material Adverse Effect.
SECTION 3.09. ERISA. No ERISA Event has occurred or is
reasonably expected to occur that, when taken together with all other such ERISA
Events for which liability is reasonably expected to occur, could reasonably be
expected to result in a Material Adverse Effect. The present value of all
accumulated benefit obligations under each Plan (based on the assumptions used
for purposes of Statement of Financial Accounting Standards No. 87) did not, as
of the date of the most recent financial statements reflecting such amounts,
exceed by more than $50,000,000 the fair market value of the assets of such
Plan, and the present value of all accumulated benefit obligations of all
underfunded Plans (based on the assumptions used for purposes of Statement of
Financial Accounting Standards No. 87) did not, as of the date of the most
recent financial statements reflecting such amounts, exceed by more than
$50,000,000 the fair market value of the assets of all such underfunded Plans.
SECTION 3.10. Financial Information. The Borrower has
disclosed to the Lenders all agreements, instruments and corporate or other
restrictions to which it or any of its Material Subsidiaries is subject, and all
other matters known to it (other than industry-wide risks normally associated
with the types of business conducted by the Borrower and its Subsidiaries) that,
individually or in the aggregate, could reasonably be expected to result in a
Material Adverse Effect. Neither the Information Memorandum nor any of the other
reports, financial statements, certificates or other written information
furnished by or on behalf of the Borrower to the Administrative Agent or any
Lender in connection with the negotiation of this Agreement or delivered
hereunder (as modified or supplemented by other information so furnished) when
considered as a whole contains any material misstatement of fact or omits to
state any material fact (other than industry wide risks normally associated with
the types of business conducted by the Borrower and its Subsidiaries) necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading as of the date made or deemed made; provided
that, with respect to projected financial information, the Borrower represents
only that such information was prepared in good faith based upon assumptions
believed to be reasonable at the time, it being recognized by the Lenders that
such projections as they relate to future events are not to be viewed as fact
and that actual results during the period or periods covered by such projections
may differ from the projected results set forth therein by a material amount.
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36
SECTION 3.11. Year 2000. Any reprogramming required to permit
the proper functioning, in and following the year 2000, of (a) the Borrower's,
or any Material Subsidiary's, computer systems and (b) equipment containing
embedded microchips (including systems and equipment supplied by others or with
which Borrower's, or any Material Subsidiary's, systems interface) and the
testing of all such systems and equipment, as so reprogrammed, will be completed
by October 1, 1999. The cost to the Borrower and its Material Subsidiaries of
such reprogramming and testing and of the reasonably foreseeable consequences of
year 2000 to the Borrower (including, without limitation, reprogramming errors
and the failure of others' systems or equipment) will not result in a Default or
a Material Adverse Effect.
SECTION 3.12. Credit Utilization. At any time prior to the
occurrence of both the Quaker State Credit Facility Termination and the merger
of Quaker State Corporation and a Wholly Owned Subsidiary of the Borrower, the
"aggregate utilization" under this Agreement and the Prior Credit Facility or
the PennzEnergy Credit Facility, as applicable, does not exceed $1,000,000,000.
For purposes of this Section 3.12, "aggregate utilization" means the amount
equal at any time to the sum of (a) with respect to this Agreement, the
aggregate amount at such time of commercial paper supported by the availability
of Loan proceeds under this Agreement, the Committed Credit Exposure and the
outstanding principal amount of all Competitive Loans, plus (b)(i) if prior to
the occurrence of both the PennzEnergy Effective Date and the Prior Credit
Facility Termination, the aggregate amount at such time of commercial paper
supported by the availability of loan proceeds under the Prior Credit Facility,
plus the principal amount of loans outstanding under the Prior Credit Facility,
plus the face amount of letters of credit issued under the Prior Credit Facility
or (ii) if after the occurrence of both the PennzEnergy Effective Date and the
Prior Credit Facility Termination, the aggregate amount at such time of
commercial paper supported by the availability of loan proceeds under the
PennzEnergy Credit Facility, plus the principal amount of loans outstanding
under the PennzEnergy Credit Facility, plus the face amount of letters of credit
issued under the PennzEnergy Credit Facility.
ARTICLE IV
Conditions
SECTION 4.01. Effective Date. The obligations of the Lenders
to make the initial Loans and of the Issuing Bank to issue the initial Letters
of Credit hereunder shall not become effective until the date on which each of
the following conditions is satisfied (or waived in accordance with Section
9.02):
(a) The Administrative Agent (or its counsel) shall have
received from each party hereto either (i) a counterpart of this Agreement
signed on behalf of such party or (ii) written evidence satisfactory to the
Administrative Agent (which may include telecopy transmission of a signed
signature page of this Agreement) that such party has signed a counterpart of
this Agreement.
(b) The Administrative Agent shall have received a favorable
written opinion (addressed to the Administrative Agent and the Lenders and dated
the Effective Date) of Baker & Botts L.L.P.,
<PAGE> 41
37
counsel for the Borrower, in the form of Exhibit B. The Borrower hereby requests
such counsel to deliver such opinion.
(c) The Administrative Agent shall have received such
documents and certificates as the Administrative Agent or its counsel may
reasonably request on or before the Effective Date relating to the organization,
existence and good standing of the Borrower, the authorization of the
Transactions and any other legal matters relating to the Borrower, this
Agreement or the Transactions, all in form and substance reasonably satisfactory
to the Administrative Agent and its counsel.
(d) The Administrative Agent shall have received a
certificate, dated the Effective Date and signed by the President, a Vice
President or a Financial Officer of the Borrower, confirming compliance with the
conditions set forth in paragraphs (a) and (b) of Section 4.02.
(e) The Administrative Agent shall have received all fees and
other amounts due and payable by the Borrower on or prior to the Effective Date,
including, to the extent invoiced at least 3 days prior to the Effective Date,
reimbursement or payment of all reasonable and documented out-of-pocket expenses
required to be reimbursed or paid by the Borrower hereunder.
The Administrative Agent shall notify the Borrower and the Lenders of the
Effective Date, and such notice shall be conclusive and binding. Notwithstanding
the foregoing, the obligations of the Lenders to make Loans and of the Issuing
Bank to issue Letters of Credit hereunder shall not become effective unless each
of the foregoing conditions is satisfied (or waived pursuant to Section 9.02).
SECTION 4.02. Each Credit Event. The obligation of each Lender
to make a Loan on the occasion of any Borrowing (which is not a conversion or a
continuation of a Loan as provided in Section 2.07), and of the Issuing Bank to
issue, amend, renew or extend any Letter of Credit which increases the LC
Exposure, is subject to the satisfaction of the following conditions (unless
waived in accordance with Section 9.02):
(a) The representations and warranties of the Borrower set
forth in Article III of this Agreement (except those that by their terms are
limited to a specified date which shall be true and correct as of such specified
date) shall be true and correct on and as of the date of such Borrowing or the
date of issuance, amendment, renewal or extension of such Letter of Credit, as
applicable.
(b) At the time of and immediately after giving effect to such
Borrowing or the issuance, amendment, renewal or extension of such Letter of
Credit, as applicable, no Default shall have occurred and be continuing.
Each such Borrowing and each such issuance, amendment, renewal or extension of a
Letter of Credit shall be deemed to constitute a representation and warranty by
the Borrower on the date thereof as to the matters specified in paragraphs (a)
and (b) of this Section.
<PAGE> 42
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ARTICLE V
Affirmative Covenants
Until the Commitments have expired or been terminated and the
principal of and interest on each Loan and all fees payable hereunder shall have
been paid in full and all Letters of Credit shall have expired, terminated or
are fully cash collateralized and all LC Disbursements shall have been
reimbursed, the Borrower covenants and agrees with the Lenders that:
SECTION 5.01. Financial Statements and Other Information. The
Borrower will furnish to the Administrative Agent and with a copy for each
Lender:
(a) within five Business Days after filing the Annual Report
on Form 10-K of the Borrower for the fiscal year then ended with the Securities
and Exchange Commission, but in no event later than 120 days after the end of
such fiscal year, the financial statements for such fiscal year as contained in
such Annual Report on Form 10-K, and, as soon as it shall become available, the
annual report to shareholders of the Borrower for the fiscal year then ended;
(b) within five Business Days after filing the Quarterly
Report on Form 10-Q of the Borrower for the fiscal quarter of the Borrower then
ended with the Securities and Exchange Commission, but in no event later than 60
days after the end of such fiscal quarter, copies of the financial statements
for such fiscal quarter as contained in such Quarterly Report on Form 10-Q, and,
as soon as it shall become available, the quarterly report to shareholders of
the Borrower for the fiscal quarter then ended;
(c) concurrently with any delivery of financial statements
under clause (a) or (b) above, a certificate of a Financial Officer of the
Borrower certifying as to whether a Default has occurred and, if a Default has
occurred, specifying the details thereof and any action taken or proposed to be
taken with respect thereto;
(d) promptly after the same become publicly available, copies
of all periodic and other reports, proxy statements and other materials filed by
the Borrower or any Subsidiary with the Securities and Exchange Commission, or
any Governmental Authority succeeding to any or all of the functions of said
Commission, under the Exchange Act; and
(e) promptly following any request therefor, such other
information regarding the operations, business affairs and financial condition
of the Borrower or any Material Subsidiary, or compliance with the terms of this
Agreement, as the Administrative Agent or any Lender may reasonably request.
SECTION 5.02. Notices of Material Events. Upon any Financial
Officer obtaining knowledge thereof, the Borrower will furnish to the
Administrative Agent and each Lender prompt written notice of the following:
(a) the occurrence of any Default;
<PAGE> 43
39
(b) the filing or commencement of any action, suit or
proceeding by or before any arbitrator or Governmental Authority against or
affecting the Borrower or any Affiliate thereof that, if adversely determined,
could reasonably be expected to result in a Material Adverse Effect;
(c) the occurrence of any ERISA Event that, alone or together
with any other ERISA Events that have occurred, result in, or could reasonably
be expected to result in, a Material Adverse Effect;
(d) any other development that results in, or could reasonably
be expected to result in, a Material Adverse Effect; and
(e) the initial issuance of commercial paper supported by the
availability of Loan proceeds.
Each notice delivered under this Section shall be accompanied by a statement of
a Financial Officer or other executive officer of the Borrower setting forth the
details of the event or development requiring such notice and any action taken
or proposed to be taken with respect thereto.
SECTION 5.03. Existence; Conduct of Business. The Borrower
will, and will cause each of its Material Subsidiaries to, do or cause to be
done all things necessary to preserve, renew and keep in full force and effect
its legal existence and the rights, licenses, permits, privileges and franchises
used or useful in the conduct of its business, except where the failure to
preserve, renew and keep in full force and effect such rights, licenses,
permits, privileges and franchises could not reasonably be expected to result in
a Material Adverse Effect; provided that the foregoing shall not prohibit any
merger, consolidation, liquidation or dissolution permitted under Section 6.02.
SECTION 5.04. Payment of Obligations. The Borrower will, and
will cause each of its Material Subsidiaries to, pay its obligations, including
Tax liabilities, that, if not paid, could result in a Material Adverse Effect
before the same shall become delinquent or in default, except where (a) the
validity or amount thereof is being contested in good faith by appropriate
proceedings, and for which the Borrower or such Material Subsidiary has set
aside on its books adequate reserves with respect thereto in accordance with
GAAP or (b) the failure to make payment pending such contest could not
reasonably be expected to result in a Material Adverse Effect.
SECTION 5.05. Maintenance of Properties; Insurance. The
Borrower will, and will cause each of its Material Subsidiaries to, (a) keep and
maintain all property used or useful in the conduct of its business in good
working order and condition, ordinary wear and tear excepted; provided that the
foregoing shall not prohibit any sale, lease, transfer, merger, consolidation,
liquidation, or dissolution permitted under Section 6.02; and provided further,
that nothing in this Section 5.05 shall prevent the Borrower or any Subsidiary
from discontinuing the operation or maintenance of any property if such
discontinuance is, in the reasonable judgment of the Borrower, desirable in the
conduct of its business or the business of any Subsidiary, and (b) maintain,
with financially sound and reputable insurance companies, insurance in such
amounts and against such risks as are customarily maintained by companies
engaged in the same or similar businesses operating in the same or similar
locations.
<PAGE> 44
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SECTION 5.06. Books and Records; Inspection Rights. The
Borrower will, and will cause each of its Material Subsidiaries to, keep proper
books of record and account in which full, true and correct entries are made of
all dealings and transactions in relation to its business and activities as
required by GAAP. The Borrower will, and will cause each of its Subsidiaries to,
permit any representatives designated by the Administrative Agent or any Lender,
upon reasonable prior notice, to visit and inspect its properties, to examine
and make extracts from its books and records, and to discuss its affairs,
finances and condition with its officers, directors and its independent
accountants, all at such reasonable times and as often as reasonably requested
provided however, that with respect to discussions with the Borrower's
independent accountants, the Borrower shall be given the opportunity to have a
representative present during such discussions; provided, further,
notwithstanding the provisions of Section 9.03 the Administrative Agent or the
Lender making such inspection and visitation hereby releases the Borrower, its
Affiliates, and their officers, directors, employees, and agents against any
claim for injury to the Administrative Agent or such Lender (or the
representatives thereof) during such inspection and visitation; provided,
further, that neither the Borrower nor any of its Subsidiaries shall be required
to disclose to the Administrative Agent, any Lender or any agents or
representatives thereof any information which is the subject of attorney-client
privilege or attorney's work-product privilege properly asserted by the
applicable Person to prevent the loss of such privilege in connection with such
information. The Borrower shall pay or reimburse the reasonable and documented
expenses of the inspections and visitations made by the Administrative Agent and
any Lender pursuant to this Section 5.06, except that such expenses shall not be
the responsibility of the Borrower more than once per calendar year, unless a
Default has occurred and is continuing at the time of the inspection and
visitation, in which case the Borrower shall pay or reimburse such expenses.
SECTION 5.07. Compliance with Laws. The Borrower will, and
will cause each of its Material Subsidiaries to, comply with all laws, rules,
regulations and orders of any Governmental Authority (including, without
limitation, Environmental Laws) applicable to it or its property, except where
the failure to do so, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect on the Borrower and its Material
Subsidiaries, taken as a whole.
SECTION 5.08. Use of Proceeds and Letters of Credit. The
proceeds of the Loans will be used only for working capital and general
corporate purposes. No part of the proceeds of any Loan will be used, whether
directly or indirectly, for any purpose that entails a violation of any of the
Regulations of the Board, including Regulations U and X. Letters of Credit will
be issued only to support the general corporate requirements of the Borrower and
its Subsidiaries.
SECTION 5.09. Covenant Cross-Default. In connection with the
incurrence by the Borrower or any Material Subsidiary of any obligation for
borrowed money on terms that provide that an event of default shall exist with
respect to such obligation if the Borrower or such Material Subsidiary, as
applicable, defaults in the performance of any agreement, term or condition
(other than the payment of principal or interest) in any other agreement or
instrument (a "Covenant Cross-Default") under or by which any other obligation
of the Borrower or any Material Subsidiary for borrowed money is created or
evidenced or secured, the Borrower shall execute an instrument in form
satisfactory to the Administrative Agent, to be delivered prior to such
incurrence, agreeing that such Covenant Cross-Default shall also constitute an
Event of Default under this Agreement; provided, however, that this Section 5.09
shall not apply to any obligation of a Material Subsidiary for borrowed money in
an amount
<PAGE> 45
41
less than $50,000,000; and provided further that the Quaker State Cross Defaults
shall not constitute Covenant Cross-Defaults for purposes of this Section 5.09.
ARTICLE VI
Negative Covenants
Until the Commitments have expired or terminated and the
principal of and interest on each Loan and all fees payable hereunder have been
paid in full and all Letters of Credit have expired, terminated or are fully
cash collateralized and all LC Disbursements shall have been reimbursed, the
Borrower covenants and agrees with the Lenders that:
SECTION 6.01. Liens. The Borrower will not, and will not
permit any Material Subsidiary to pledge, mortgage, hypothecate or grant a
security interest in, or permit any Lien upon, any property or assets owned by
the Borrower or any Material Subsidiary to secure any Indebtedness, without
making effective provision whereby the outstanding Loans shall (so long as such
other Indebtedness shall be so secured) be equally and ratably secured with any
and all such other Indebtedness and any other indebtedness similarly entitled to
be equally and ratably secured; provided, however, that this restriction shall
not apply to nor prevent the creation or existence of:
(a) any Lien upon any property or assets (together with
receivables and intangibles related to such property or assets and the cash
proceeds thereof) created at the time of the acquisition or construction of such
property or assets by the Borrower or any Material Subsidiary or within one year
after such time to secure all or a portion of the purchase price or construction
costs (or Indebtedness incurred to finance such purchase price or construction
costs) for such property or assets;
(b) any Lien upon any property or assets (together with
receivables and intangibles related to such property or assets and the cash
proceeds thereof) existing thereon at the time of the acquisition thereof by the
Borrower or any Material Subsidiary (whether or not the obligations secured
thereby are assumed by the Borrower or any Subsidiary);
(c) any Lien upon any property or assets (together with
receivables and intangibles related to such property or assets and the cash
proceeds thereof), whenever acquired, of any Person that becomes a Material
Subsidiary after the date hereof, provided that (i) the instrument creating such
Lien shall be in effect prior to the time such Person becomes a Material
Subsidiary and (ii) such Lien shall only apply to properties or assets (together
with receivables and intangibles related to such property or assets and the cash
proceeds thereof) owned by such Person at the time it becomes a Material
Subsidiary or thereafter acquired by it from sources other than the Borrower or
another Material Subsidiary;
(d) any extension, renewal or refunding of any Lien permitted
by Subsection (a), (b) or (c) above on substantially the same property or assets
theretofore subject thereto;
(e) any Lien in favor of the Borrower and any Lien created or
assumed by a Subsidiary in favor of another Subsidiary;
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(f) any Lien created or assumed by the Borrower or a Material
Subsidiary in connection with the issuance of debt securities the interest on
which is excludable from gross income of the holder of such security pursuant to
the Internal Revenue Code of 1986, as amended, for the purpose of financing, in
whole or in part, the acquisition or construction of property or assets to be
used by the Borrower or a Subsidiary;
(g) any Lien securing any Indebtedness in an amount which,
together with all other Indebtedness secured by a Lien that is not otherwise
permitted by the provisions of this Section 6.01 does not at the time of the
incurrence of the Indebtedness so secured exceed 5% of Consolidated Net Tangible
Assets of the Borrower and its Material Subsidiaries as at the end of the most
recent quarter; or
(h) any Lien existing in connection with any sale,
securitization or monetization of receivables or other rights to receive payment
of the Borrower and any of its Subsidiaries, so long as such sale,
securitization or monetization is treated as a sale pursuant to the Statement on
Financial Accounting Standards No. 125.
In case the Borrower or any Material Subsidiary shall propose to
pledge, mortgage, hypothecate or grant a security interest in any property or
assets owned by the Borrower or any Material Subsidiary to secure any
Indebtedness, other than as permitted by subdivisions (a) to (h), inclusive, of
this Section 6.01, the Borrower will prior thereto give written notice thereof
to the Administrative Agent, and the Borrower will, or will cause such Material
Subsidiary to, prior to or simultaneously with such pledge, mortgage,
hypothecation or grant of security interest, by executed instrument in form
satisfactory to the Administrative Agent, effectively secure (for so long as
such other Indebtedness shall be so secured) all the Loans equally and ratably
with such Indebtedness and with any other indebtedness similarly entitled to be
equally and ratably secured. Such instrument shall contain provisions concerning
the possession, control, release and substitution of mortgaged and pledged
property and Loans and other appropriate matters as the Borrower and the
Administrative Agent shall deem advisable or appropriate or as the
Administrative Agent shall deem necessary in connection with such pledge,
mortgage, hypothecation or grant of security interest.
For the purpose of this Section 6.01 the term "Lien" shall include the
interest of the lessor under a lease with a term of three years or more that
should be, in accordance with GAAP, recorded as a capital lease and incurred
after the Effective Date, and any such lease of property or assets not acquired
from the Borrower or any Material Subsidiary in contemplation of such lease
shall be treated as though the lessee had purchased such property or assets from
the lessor.
SECTION 6.02. Fundamental Changes. (a) The Borrower will not,
and will not permit any Material Subsidiary to, merge into or consolidate with
any other Person, or permit any other Person to merge into or consolidate with
it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a
series of transactions) all or substantially all of its assets, or all or
substantially all of the stock of any of its Material Subsidiaries (in each
case, whether now owned or hereafter acquired), or liquidate or dissolve, except
that, if at the time thereof and immediately after giving effect thereto no
Default shall have occurred and be continuing (i) any Person may merge into the
Borrower in a transaction in which the Borrower is the surviving corporation or
the surviving Person is a domestic entity and expressly assumes the obligations
of the Borrower under this Agreement, (ii) any Person may merge into any
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43
Subsidiary in a transaction in which the surviving entity is a Subsidiary, (iii)
any Subsidiary may sell, transfer, lease or otherwise dispose of its assets to
the Borrower or to another Subsidiary and (iv) any Subsidiary may liquidate or
dissolve if the Borrower determines in good faith that such liquidation or
dissolution is in the best interests of the Borrower and is not materially
disadvantageous to the Lenders; provided that any such merger involving a Person
that is not a Wholly Owned Subsidiary immediately prior to such merger shall not
be permitted unless also permitted by Section 6.03.
(b) The Borrower will not, and will not permit any of its
Subsidiaries to, engage to any material extent in any business that would change
the character of the business of the Borrower and its Subsidiaries, taken as a
whole, from that in existence on the Merger Date.
SECTION 6.03. Investments, Loans, Advances, Guarantees and
Acquisitions. The Borrower will not, and will not permit any of its Material
Subsidiaries to, purchase, hold or acquire (including pursuant to any merger
with any Person that was not a Wholly Owned Subsidiary prior to such merger) any
capital stock, evidences of indebtedness or other securities (including any
option, warrant or other right to acquire any of the foregoing) of, make or
permit to exist any loans or advances to, Guarantee any obligations of, or make
or permit to exist any investment or any other interest in, any other Person, or
purchase or otherwise acquire (in one transaction or a series of transactions)
any assets of any other Person constituting a business unit, if any such loan
advance, Guarantee, acquisition or investment would change the character of the
business of the Borrower and its Subsidiaries, taken as a whole, from that in
existence on the Effective Date; provided, that after the occurrence of the
merger of Quaker State Corporation and a Wholly Owned Subsidiary of the
Borrower, thereafter from that in existence on the date of such merger..
ARTICLE VII
Events of Default
If any of the following events ("Events of Default") shall
occur:
(a) the Borrower shall fail to pay any principal of any Loan
or any reimbursement obligation in respect of any LC Disbursement when and as
the same shall become due and payable, whether at the due date thereof or at a
date fixed for prepayment thereof or otherwise;
(b) the Borrower shall fail to pay any interest on any Loan
when and as the same shall become due and payable, and such failure shall
continue unremedied for a period of five Business Days or the Borrower shall
fail to pay any fee or any other amount (other than an amount referred to in
clause (a) of this Article) payable under this Agreement, when and as the same
shall become due and payable, and such failure shall continue unremedied for a
period of fifteen Business Days;
(c) any representation or warranty made or deemed made by or
on behalf of the Borrower or any Subsidiary in this Agreement shall prove to
have been incorrect in any material respect when made or deemed made;
<PAGE> 48
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(d) the Borrower shall fail to observe or perform any
covenant, condition or agreement contained in Section 5.02, 5.03 (with respect
to the Borrower's existence) or 5.08 or in Article VI;
(e) the Borrower shall fail to observe or perform any
covenant, condition or agreement contained in this Agreement (other than those
specified in clause (a), (b) or (d) of this Article), and such failure shall
continue unremedied for a period of 30 days after notice thereof from the
Administrative Agent to the Borrower (which notice will be given at the request
of any Lender);
(f) the Borrower or any Subsidiary shall fail to make any
payment (whether of principal or interest and regardless of amount) in respect
of any Material Indebtedness, when and as the same shall become due and payable
after giving effect to any period of grace with respect thereto;
(g) any event or condition occurs that results in any Material
Indebtedness becoming due prior to its scheduled maturity or that results in any
Material Indebtedness being required to be prepaid, repurchased, redeemed or
defeased prior to its scheduled maturity; provided that this clause (g) shall
not apply to secured Indebtedness that becomes due as a result of the voluntary
sale or transfer of the property or assets securing such Indebtedness;
(h) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed seeking (i) liquidation, reorganization or
other relief in respect of the Borrower or any Subsidiary that is not a De
Minimis Subsidiary or its debts, or of a substantial part of its assets, under
any Federal, state or foreign bankruptcy, insolvency, receivership or similar
law now or hereafter in effect or (ii) the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for the Borrower or any
Subsidiary that is not a De Minimis Subsidiary or for a substantial part of its
assets, and, in any such case, such proceeding or petition shall continue
undismissed for 60 days or an order or decree approving or ordering any of the
foregoing shall be entered;
(i) the Borrower or any Subsidiary that is not a De Minimis
Subsidiary shall (i) voluntarily commence any proceeding or file any petition
seeking liquidation, reorganization or other relief under any Federal, state or
foreign bankruptcy, insolvency, receivership or similar law now or hereafter in
effect, (ii) consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or petition described in clause (h) of this
Article, (iii) apply for or consent to the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for the Borrower or any
Subsidiary that is not a De Minimis Subsidiary or for a substantial part of its
assets, (iv) file an answer admitting the material allegations of a petition
filed against it in any such proceeding, (v) make a general assignment for the
benefit of creditors or (vi) take any action for the purpose of effecting any of
the foregoing;
(j) the Borrower or any Subsidiary that is not a De Minimis
Subsidiary shall become unable, admit in writing its inability or fail generally
to pay its debts as they become due;
(k) one or more judgments for the payment of money in an
aggregate amount in excess of $50,000,000 in excess of insurance in respect
thereof shall be rendered against the Borrower, any Subsidiary that is not a De
Minimis Subsidiary or any combination thereof and the same shall remain
undischarged for a period of 45 consecutive days during which execution shall
not be effectively stayed,
<PAGE> 49
45
or any action shall be legally taken by a judgment creditor to attach or levy
upon any assets of the Borrower or any Subsidiary that is not a De Minimis
Subsidiary to enforce any such judgment; or
(l) an ERISA Event shall have occurred that when taken
together with all other ERISA Events that have occurred, could reasonably be
expected to result in a Material Adverse Effect;
then, and in every such event (other than an event with respect to the Borrower
described in clause (h) or (i) of this Article), and at any time thereafter
during the continuance of such event, the Administrative Agent may, and at the
request of the Required Lenders shall, by notice to the Borrower, take either or
both of the following actions, at the same or different times: (i) terminate the
Commitments, and thereupon the Commitments shall terminate immediately, and (ii)
declare the Loans then outstanding to be due and payable in whole (or in part,
in which case any principal not so declared to be due and payable may thereafter
be declared to be due and payable), and thereupon the principal of the Loans so
declared to be due and payable, together with accrued interest thereon and all
fees and other obligations of the Borrower accrued hereunder, shall become due
and payable immediately, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Borrower; and in case of any
event with respect to the Borrower described in clause (h) or (i) of this
Article, the Commitments shall automatically terminate and the principal of the
Loans then outstanding, together with accrued interest thereon and all fees and
other obligations of the Borrower accrued hereunder, shall automatically become
due and payable, without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by the Borrower.
ARTICLE VIII
The Administrative Agent
Each of the Lenders and the Issuing Bank hereby irrevocably
appoints the Administrative Agent as its agent and authorizes the Administrative
Agent to take such actions on its behalf and to exercise such powers as are
delegated to the Administrative Agent by the terms hereof, together with such
actions and powers as are reasonably incidental thereto.
The bank serving as the Administrative Agent hereunder shall
have the same rights and powers in its capacity as a Lender as any other Lender
and may exercise the same as though it were not the Administrative Agent, and
such bank and its Affiliates may accept deposits from, lend money to and
generally engage in any kind of business with the Borrower or any Subsidiary or
other Affiliate thereof as if it were not the Administrative Agent hereunder.
The Administrative Agent shall not have any duties or
obligations except those expressly set forth herein. Without limiting the
generality of the foregoing, (a) the Administrative Agent shall not be subject
to any fiduciary or other implied duties, regardless of whether a Default has
occurred and is continuing, (b) the Administrative Agent shall not have any duty
to take any discretionary action or exercise any discretionary powers, except
discretionary rights and powers expressly contemplated hereby that the
Administrative Agent is required to exercise in writing by the Required Lenders
(or such other number or percentage of the Lenders as shall be necessary under
the circumstances as provided in Section 9.02), and (c) except as expressly set
forth herein, the Administrative Agent shall not have
<PAGE> 50
46
any duty to disclose, and shall not be liable for the failure to disclose, any
information relating to the Borrower or any of its Subsidiaries that is
communicated to or obtained by the bank serving as Administrative Agent or any
of its Affiliates in any capacity. The Administrative Agent shall not be liable
to the Lenders for any action taken or not taken by it with the consent or at
the request of the Required Lenders (or such other number or percentage of the
Lenders as shall be necessary under the circumstances as provided in Section
9.02) or in the absence of its own gross negligence or wilful misconduct. The
Administrative Agent shall be deemed not to have knowledge of any Default unless
and until written notice thereof is given to the Administrative Agent by the
Borrower or a Lender, and the Administrative Agent shall not be responsible for
or have any duty to ascertain or inquire into (i) any statement, warranty or
representation made in or in connection with this Agreement, (ii) the contents
of any certificate, report or other document delivered hereunder or in
connection herewith, (iii) the performance or observance of any of the
covenants, agreements or other terms or conditions set forth herein, (iv) the
validity, enforceability, effectiveness or genuineness of this Agreement or any
other agreement, instrument or document, or (v) the satisfaction of any
condition set forth in Article IV or elsewhere herein, other than to confirm
receipt of items expressly required to be delivered to the Administrative Agent.
The Administrative Agent shall be entitled to rely upon, and
shall not incur any liability for relying upon, any notice, request,
certificate, consent, statement, instrument, document or other writing believed
by it to be genuine and to have been signed or sent by the proper Person. The
Administrative Agent also may rely upon any statement made to it orally or by
telephone and believed by it to be made by the proper Person, and shall not
incur any liability for relying thereon. The Administrative Agent may consult
with legal counsel (who may be counsel for the Borrower), independent
accountants and other experts selected by it, and shall not be liable to the
Lenders for any action taken or not taken by it in accordance with the advice of
any such counsel, accountants or experts.
The Administrative Agent may perform any and all its duties
and exercise its rights and powers by or through any one or more sub-agents
appointed by the Administrative Agent. The Administrative Agent and any such
sub-agent may perform any and all its duties and exercise its rights and powers
through their respective Related Parties. The exculpatory provisions of the
preceding paragraphs shall apply to any such sub-agent and to the Related
Parties of the Administrative Agent and any such sub-agent, and shall apply to
their respective activities in connection with the syndication of the credit
facilities provided for herein as well as activities as Administrative Agent.
Subject to the appointment and acceptance of a successor
Administrative Agent as provided in this paragraph, the Administrative Agent may
resign at any time by notifying the Lenders, the Issuing Bank and the Borrower.
Upon any such resignation, the Required Lenders shall have the right, to appoint
a successor and, if there is no Default or Event of Default, the Borrower shall
have the right to consent, in writing, prior to the appointment of a successor,
provided that such consent shall not be unreasonably withheld. If no successor
shall have been so appointed by the Required Lenders and shall have accepted
such appointment within 30 days after the retiring Administrative Agent gives
notice of its resignation, then the retiring Administrative Agent may, on behalf
of the Lenders and the Issuing Bank, appoint a successor Administrative Agent
which shall be a commercial bank engaged or licensed to conduct banking business
under the laws of the United States or a state thereof with an office in New
York, New York, or an Affiliate of any such bank that maintains an office in the
United States and will administer this Agreement from such office. Upon the
acceptance of its appointment as Administrative
<PAGE> 51
47
Agent hereunder by a successor, such successor shall succeed to and become
vested with all the rights, powers, privileges and duties of the retiring
Administrative Agent, and the retiring Administrative Agent shall be discharged
from its duties and obligations hereunder. The fees payable by the Borrower to a
successor Administrative Agent shall be the same as those payable to its
predecessor unless otherwise agreed between the Borrower and such successor.
After the Administrative Agent's resignation hereunder, the provisions of this
Article and Section 9.03 shall continue in effect for the benefit of such
retiring Administrative Agent, its sub-agents and their respective Related
Parties in respect of any actions taken or omitted to be taken by any of them
while it was acting as Administrative Agent.
Each Lender acknowledges that it has, independently and
without reliance upon the Administrative Agent or any other Lender and based on
such documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent or any other Lender and based on such documents and
information as it shall from time to time deem appropriate, continue to make its
own decisions in taking or not taking action under or based upon this Agreement,
any related agreement or any document furnished hereunder or thereunder. Each
Lender acknowledges that Vinson & Elkins L.L.P. is acting in the Transactions as
special counsel to the Administrative Agent only. Each Lender will consult with
its own legal counsel to the extent that is deems necessary in connection with
the Transactions.
None of the Documentation Agent, the Syndication Agent or any Co-Agent
shall have any duties or responsibilities hereunder in its capacity as such.
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices. Except in the case of notices and other
communications expressly permitted to be given by telephone, all notices and
other communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:
(a) if to the Borrower, to it at 700 Milam, Houston,
Texas 77002, Attention: Assistant Treasurer (Telecopy
No. (713) 546-6040);
(b) if to the Administrative Agent, to it at Chase Bank
of Texas, National Association, c/o Chase Securities
Inc., 600 Travis Street, 20th Floor, Houston, Texas
77002 Attention: Peter Licalzi, (Telecopy No. (713)
216-4117);
(c) if to the Issuing Bank, to it at Chase Bank of Texas,
National Association, 712 Main Street, Mezzanine
South, Houston, Texas 77002, Attention: Mary Ellen
Coffey (Telecopy No. (713) 216-4499); and
(d) if to any other Lender, to it at its address (or
telecopy number) set forth in its Administrative
Questionnaire.
<PAGE> 52
48
Any party hereto may change its address or telecopy number for notices and other
communications hereunder by notice to the other parties hereto. All notices and
other communications given to any party hereto in accordance with the provisions
of this Agreement shall be deemed to have been given on the date of receipt.
SECTION 9.02. Waivers; Amendments. (a) No failure or delay by
the Administrative Agent, the Issuing Bank or any Lender in exercising any right
or power hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. The rights
and remedies of the Administrative Agent, the Issuing Bank and the Lenders
hereunder are cumulative and are not exclusive of any rights or remedies that
they would otherwise have. No waiver of any provision of this Agreement or
consent to any departure by the Borrower therefrom shall in any event be
effective unless the same shall be permitted by paragraph (b) of this Section,
and then such waiver or consent shall be effective only in the specific instance
and for the purpose for which given. Without limiting the generality of the
foregoing, the making of a Loan or issuance of a Letter of Credit shall not be
construed as a waiver of any Default, regardless of whether the Administrative
Agent, any Lender or the Issuing Bank may have had notice or knowledge of such
Default at the time.
(b) Neither this Agreement nor any provision hereof may be
waived, amended or modified except pursuant to an agreement or agreements in
writing entered into by the Borrower and the Required Lenders or by the Borrower
and the Administrative Agent with the consent of the Required Lenders; provided
that no such agreement shall (i) increase the Commitment of any Lender without
the written consent of such Lender, (ii) reduce the principal amount of any Loan
or LC Disbursement or reduce the rate of interest thereon, or reduce any fees
payable hereunder, without the written consent of each Lender affected thereby,
(iii) postpone the scheduled date of payment of the principal amount of any Loan
or LC Disbursement, or any interest thereon, or any fees payable hereunder, or
reduce the amount of, waive or excuse any such payment, or postpone the
scheduled date of expiration of any Commitment, without the written consent of
each Lender affected thereby, (iv) change Section 2.17(b) or (c) in a manner
that would alter the pro rata sharing of payments required thereby, without the
written consent of each Lender, or (v) change any of the provisions of this
Section or the definition of "Required Lenders" or any other provision hereof
specifying the number or percentage of Lenders required to waive, amend or
modify any rights hereunder or make any determination or grant any consent
hereunder, without the written consent of each Lender; provided further that no
such agreement shall amend, modify or otherwise affect the rights or duties of
the Administrative Agent or the Issuing Bank hereunder without the prior written
consent of the Administrative Agent or the Issuing Bank, as the case may be.
SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The
Borrower shall pay (i) all reasonable and documented out-of-pocket expenses
incurred by the Administrative Agent and its Affiliates, including the
reasonable and documented fees, charges and disbursements of counsel for the
Administrative Agent, in connection with the syndication of the credit
facilities provided for herein, the preparation and administration of this
Agreement or any amendments, modifications or waivers of the provisions hereof
(whether or not the transactions contemplated hereby or thereby shall be
consummated), (ii) all reasonable and documented out-of-pocket expenses incurred
by the Issuing Bank in connection with the issuance, amendment, renewal or
extension of any Letter of Credit or any demand
<PAGE> 53
49
for payment thereunder and (iii) all out-of-pocket expenses incurred by the
Administrative Agent, the Issuing Bank or any Lender, including the reasonable
and documented fees, charges and disbursements of any counsel for the
Administrative Agent, the Issuing Bank or any Lender, in connection with the
enforcement or protection of its rights in connection with this Agreement,
including its rights under this Section, or in connection with the Loans made or
Letters of Credit issued hereunder, including all such out-of-pocket expenses
incurred during any workout, restructuring or negotiations in respect of such
Loans or Letters of Credit.
(b) The Borrower shall indemnify the Administrative Agent, the
Issuing Bank and each Lender, and each Related Party of any of the foregoing
Persons (each such Person being called an "Indemnitee") against, and hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses, including the reasonable and documented fees, charges and
disbursements of any counsel for any Indemnitee, incurred by or asserted against
any Indemnitee arising out of, in connection with, or as a result of (i) the
execution or delivery of this Agreement or any agreement or instrument
contemplated hereby, the performance by the parties hereto of their respective
obligations hereunder or the consummation of the Transactions or any other
transactions contemplated hereby, (ii) any Loan or Letter of Credit or the use
of the proceeds therefrom (including any refusal by the Issuing Bank to honor a
demand for payment under a Letter of Credit if the documents presented in
connection with such demand do not strictly comply with the terms of such Letter
of Credit), (iii) any actual or alleged presence or release of Hazardous
Materials on or from any property owned or operated by the Borrower or any of
its Subsidiaries, or any Environmental Liability related in any way to the
Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim,
litigation, investigation or proceeding relating to any of the foregoing,
whether based on contract, tort or any other theory and regardless of whether
any Indemnitee is a party thereto; provided that such indemnity shall not, as to
any Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or wilful misconduct of any Indemnitee or arise between Indemnitees.
(c) To the extent that the Borrower fails to pay any amount
required to be paid by it to the Administrative Agent or the Issuing Bank under
paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the
Administrative Agent or the Issuing Bank, as the case may be, such Lender's
Applicable Percentage (determined as of the time that the applicable
unreimbursed expense or indemnity payment is sought) of such unpaid amount;
provided that the unreimbursed expense or indemnified loss, claim, damage,
liability or related expense, as the case may be, was incurred by or asserted
against the Administrative Agent or the Issuing Bank in its capacity as such.
(d) To the extent permitted by applicable law, the Borrower
shall not assert, and hereby waives, any claim against any Indemnitee, on any
theory of liability, for special, indirect, consequential or punitive damages
(as opposed to direct or actual damages) arising out of, in connection with, or
as a result of, this Agreement or any agreement or instrument contemplated
hereby, the Transactions, any Loan or Letter of Credit or the use of the
proceeds thereof.
(e) All amounts due under this Section shall be payable
promptly after written demand therefor.
<PAGE> 54
50
(f) Each Indemnitee shall give prompt notice to the Borrower
of any claim for indemnification under this Section 9.03 by such Indemnitee and
shall consult with the Borrower in the conduct of such Indemnitee's legal
defense of such claim; provided, however, that an Indemnitee's failure to give
such prompt notice to the Borrower or to seek such consultation with the
Borrower shall not constitute a defense to any claim for indemnification by such
Indemnitee unless, and only to the extent that, such failure materially
prejudices the Borrower.
SECTION 9.04. Successors and Assigns. (a) The provisions of
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns permitted hereby (including
any Affiliate of the Issuing Bank that issues any Letter of Credit), except that
the Borrower may not assign or otherwise transfer any of its rights or
obligations hereunder without the prior written consent of each Lender (and any
attempted assignment or transfer by the Borrower without such consent shall be
null and void). Nothing in this Agreement, expressed or implied, shall be
construed to confer upon any Person (other than the parties hereto, their
respective successors and assigns permitted hereby (including any Affiliate of
the Issuing Bank that issues any Letter of Credit) and, to the extent expressly
contemplated hereby, the Related Parties of each of the Administrative Agent,
the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim
under or by reason of this Agreement.
(b) Any Lender may assign to one or more assignees all or a
portion of its rights and obligations under this Agreement (including all or a
portion of its Commitment and the Loans at the time owing to it); provided that
(i) except in the case of an assignment to a Lender or an Affiliate of a Lender,
each of the Borrower and the Administrative Agent (and, in the case of an
assignment of all or a portion of a Commitment or any Lender's obligations in
respect of its LC Exposure, the Issuing Bank) must give their prior written
consent to such assignment (which consent shall not be unreasonably withheld),
(ii) except in the case of an assignment to a Lender or an Affiliate of a Lender
or an assignment of the entire remaining amount of the assigning Lender's
Commitment, the amount of the Commitment of the assigning Lender subject to each
such assignment (determined as of the date the Assignment and Acceptance with
respect to such assignment is delivered to the Administrative Agent) shall not
be less than $5,000,000 unless each of the Borrower and the Administrative Agent
otherwise consent, (iii) each partial assignment shall be made as an assignment
of a proportionate part of all the assigning Lender's rights and obligations
under this Agreement, except that this clause (iii) shall not apply to rights in
respect of outstanding Competitive Loans, (iv) the parties to each assignment
shall execute and deliver to the Administrative Agent an Assignment and
Acceptance, together with a processing and recordation fee of $3,500, and (v)
the assignee, if it shall not be a Lender, shall deliver to the Administrative
Agent an Administrative Questionnaire; and provided further that any consent of
the Borrower otherwise required under this paragraph shall not be required if an
Event of Default under clause (h) or (i) of Article VII has occurred and is
continuing. Subject to acceptance and recording thereof pursuant to paragraph
(d) of this Section, from and after the effective date specified in each
Assignment and Acceptance the assignee thereunder shall be a party hereto and,
to the extent of the interest assigned by such Assignment and Acceptance, have
the rights and obligations of a Lender under this Agreement, and the assigning
Lender thereunder shall, to the extent of the interest assigned by such
Assignment and Acceptance, be released from its obligations under this Agreement
(and, in the case of an Assignment and Acceptance covering all of the assigning
Lender's rights and obligations under this Agreement, such Lender shall cease to
be a party hereto but shall continue to be entitled to the benefits of Sections
2.14, 2.15, 2.16 and 9.03). Any assignment or transfer by a Lender of rights or
obligations
<PAGE> 55
51
under this Agreement that does not comply with this paragraph shall be treated
for purposes of this Agreement as a sale by such Lender of a participation in
such rights and obligations in accordance with paragraph (e) of this Section.
(c) The Administrative Agent, acting for this purpose as an
agent of the Borrower, shall maintain at one of its offices in The City of New
York a copy of each Assignment and Acceptance delivered to it and a register for
the recordation of the names and addresses of the Lenders, and the Commitment
of, and principal amount of the Loans and LC Disbursements owing to, each Lender
pursuant to the terms hereof from time to time (the "Register"). The entries in
the Register shall be conclusive, and the Borrower, the Administrative Agent,
the Issuing Bank and the Lenders may treat each Person whose name is recorded in
the Register pursuant to the terms hereof as a Lender hereunder for all purposes
of this Agreement, notwithstanding notice to the contrary. The Register shall be
available for inspection by the Borrower, the Issuing Bank and any Lender, at
any reasonable time and from time to time upon reasonable prior notice.
(d) Upon its receipt of a duly completed Assignment and
Acceptance executed by an assigning Lender and an assignee, the assignee's
completed Administrative Questionnaire (unless the assignee shall already be a
Lender hereunder), the processing and recordation fee referred to in paragraph
(b) of this Section and any written consent to such assignment required by
paragraph (b) of this Section, the Administrative Agent shall accept such
Assignment and Acceptance and record the information contained therein in the
Register. No assignment shall be effective for purposes of this Agreement unless
it has been recorded in the Register as provided in this paragraph.
(e) Any Lender may, without the consent of the Borrower, the
Administrative Agent or the Issuing Bank, sell participations to one or more
banks or other entities (a "Participant") in all or a portion of such Lender's
rights and obligations under this Agreement (including all or a portion of its
Commitment and the Loans owing to it); provided that (i) such Lender's
obligations under this Agreement shall remain unchanged, (ii) such Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations and (iii) the Borrower, the Administrative Agent, the Issuing
Bank and the other Lenders shall continue to deal solely and directly with such
Lender in connection with such Lender's rights and obligations under this
Agreement. Any agreement or instrument pursuant to which a Lender sells such a
participation shall provide that such Lender shall retain the sole right to
enforce this Agreement and to approve any amendment, modification or waiver of
any provision of this Agreement; provided that such agreement or instrument may
provide that such Lender will not, without the consent of the Participant, agree
to any amendment, modification or waiver described in the first proviso to
Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this
Section, the Borrower agrees that each Participant shall be entitled to the
benefits of Sections 2.14, 2.15 and 2.16 to the same extent as if it were a
Lender and had acquired its interest by assignment pursuant to paragraph (b) of
this Section. To the extent permitted by law, each Participant also shall be
entitled to the benefits of Section 9.08 as though it were a Lender, provided
such Participant agrees to be subject to Section 2.17(c) as though it were a
Lender. Each Lender that sell participations pursuant to this Section 9.04(e)
shall deliver a notice of such participation setting forth the purchaser thereof
to the Borrower, provided that such Lender shall not be liable for the failure
to provide such notice.
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52
(f) A Participant shall not be entitled to receive any greater
payment under Section 2.14 or 2.16 than the applicable Lender would have been
entitled to receive with respect to the participation sold to such Participant.
A Participant that would be a Foreign Lender if it were a Lender shall not be
entitled to the benefits of Section 2.16 unless the Borrower is notified of the
participation sold to such Participant and such Participant agrees, for the
benefit of the Borrower, to comply with Section 2.16(e) as though it were a
Lender.
(g) Any Lender may at any time pledge or assign a security
interest in all or any portion of its rights under this Agreement to secure
obligations of such Lender, including any pledge or assignment to secure
obligations to a Federal Reserve Bank, and this Section shall not apply to any
such pledge or assignment of a security interest; provided that no such pledge
or assignment of a security interest shall release a Lender from any of its
obligations hereunder or substitute any such pledgee or assignee for such Lender
as a party hereto.
SECTION 9.05. Survival. All covenants, agreements,
representations and warranties made by the Borrower herein and in the
certificates or other instruments delivered in connection with or pursuant to
this Agreement shall be considered to have been relied upon by the other parties
hereto and shall survive the execution and delivery of this Agreement and the
making of any Loans and issuance of any Letters of Credit, regardless of any
investigation made by any such other party or on its behalf and notwithstanding
that the Administrative Agent, the Issuing Bank or any Lender may have had
notice or knowledge of any Default or incorrect representation or warranty at
the time any credit is extended hereunder, and shall continue in full force and
effect as long as the principal of or any accrued interest on any Loan or any
fee or any other amount payable under this Agreement is outstanding and unpaid
or any Letter of Credit is outstanding and so long as the Commitments have not
expired or terminated. The provisions of Sections 2.14, 2.15, 2.16, and 9.03 and
Article VIII shall survive and remain in full force and effect regardless of the
consummation of the transactions contemplated hereby, the repayment of the
Loans, the expiration or termination of the Letters of Credit and the
Commitments or the termination of this Agreement or any provision hereof.
SECTION 9.06. Counterparts; Integration; Effectiveness. This
Agreement may be executed in counterparts (and by different parties hereto on
different counterparts), each of which shall constitute an original, but all of
which when taken together shall constitute a single contract. This Agreement and
any separate letter agreements with respect to fees payable to the
Administrative Agent constitute the entire contract among the parties relating
to the subject matter hereof and supersede any and all previous agreements and
understandings, oral or written, relating to the subject matter hereof. Except
as provided in Section 4.01, this Agreement shall become effective when it shall
have been executed by the Administrative Agent and when the Administrative Agent
shall have received counterparts hereof which, when taken together, bear the
signatures of each of the other parties hereto, and thereafter shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Delivery of an executed counterpart of a signature page
of this Agreement by telecopy shall be effective as delivery of a manually
executed counterpart of this Agreement.
SECTION 9.07. Severability. Any provision of this Agreement
held to be invalid, illegal or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such invalidity, illegality
or unenforceability without affecting the validity, legality and enforceability
<PAGE> 57
53
of the remaining provisions hereof; and the invalidity of a particular provision
in a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.
SECTION 9.08. Right of Setoff. If an Event of Default shall
have occurred and be continuing, each Lender and each of its Affiliates is
hereby authorized at any time and from time to time, to the fullest extent
permitted by law, to set off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other obligations at
any time owing by such Lender or Affiliate to or for the credit or the account
of the Borrower against any of and all the obligations of the Borrower now or
hereafter existing under this Agreement held by such Lender, irrespective of
whether or not such Lender shall have made any demand under this Agreement and
although such obligations may be unmatured. The rights of each Lender under this
Section are in addition to other rights and remedies (including other rights of
setoff) which such Lender may have.
SECTION 9.09. Governing Law; Jurisdiction; Consent to Service
of Process. (a) This Agreement shall be construed in accordance with and
governed by the law of the State of New York.
(b) The Borrower hereby irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction of the
Supreme Court of the State of New York sitting in New York County and of the
United States District Court of the Southern District of New York, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement, or for recognition or enforcement of any judgment,
and each of the parties hereto hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in such New York State or, to the extent permitted by law, in such
Federal court. Each of the parties hereto agrees that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Agreement shall affect any right that the Administrative Agent,
the Issuing Bank or any Lender may otherwise have to bring any action or
proceeding relating to this Agreement against the Borrower or its properties in
the courts of any jurisdiction.
(c) The Borrower hereby irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement in any court
referred to in paragraph (b) of this Section. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
(d) Each party to this Agreement irrevocably consents to
service of process in the manner provided for notices in Section 9.01. Nothing
in this Agreement will affect the right of any party to this Agreement to serve
process in any other manner permitted by law.
SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER
BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES
THAT NO REPRESENTATIVE,
<PAGE> 58
54
AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE
BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION.
SECTION 9.11. Headings. Article and Section headings and the
Table of Contents used herein are for convenience of reference only, are not
part of this Agreement and shall not affect the construction of, or be taken
into consideration in interpreting, this Agreement.
SECTION 9.12. Confidentiality. Each of the Administrative
Agent, the Issuing Bank and the Lenders agrees to maintain (and use reasonable
efforts to cause its respective agents and representatives to maintain) the
confidentiality of the Information (as defined below), except that Information
may be disclosed (a) to its and its Affiliates' directors, officers, employees
and agents, including accountants, legal counsel and other advisors (it being
understood that the Persons to whom such disclosure is made will be informed of
the confidential nature of such Information and instructed to keep such
Information confidential), (b) to the extent requested by any regulatory
authority, (c) to the extent required by applicable laws or regulations or by
any subpoena or similar legal process, (d) to any other party to this Agreement,
(e) in connection with the exercise of any remedies hereunder or any suit,
action or proceeding relating to this Agreement or the enforcement of rights
hereunder, (f) subject to an agreement containing provisions substantially the
same as those of this Section, to any assignee of or Participant in, or any
prospective assignee of or Participant in, any of its rights or obligations
under this Agreement, (g) with the consent of the Borrower or (h) to the extent
such Information (i) becomes publicly available other than as a result of a
breach of this Section or (ii) becomes available to the Administrative Agent,
the Issuing Bank or any Lender on a nonconfidential basis from a source other
than the Borrower. For the purposes of this Section, "Information" means all
information received from the Borrower relating to the Borrower, its
Subsidiaries, its Affiliates or their respective businesses, other than any such
information that is available to the Administrative Agent, the Issuing Bank or
any Lender on a nonconfidential basis prior to disclosure by the Borrower. Any
Person required to maintain the confidentiality of Information as provided in
this Section shall be considered to have complied with its obligation to do so
if such Person has exercised the same degree of care to maintain the
confidentiality of such Information as such Person would accord to its own
confidential information. The provisions of this Section 9.12 shall remain
operative and in full force and effect for a period of three years following the
expiration and termination of this Agreement.
SECTION 9.13. Interest Rate Limitation. Notwithstanding
anything herein to the contrary, if at any time the interest rate applicable to
any Loan, together with all fees, charges and other amounts which are treated as
interest on such Loan under applicable law (collectively the "Charges"), shall
exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for,
charged, taken, received or reserved by the Lender holding such Loan in
accordance with applicable law, the rate of interest payable in respect of such
Loan hereunder, together with all Charges payable in respect thereof, shall be
limited to the Maximum Rate and, to the extent lawful, the interest and Charges
that would have been payable in respect of such Loan but were not payable as a
result of the operation of this Section shall be cumulated and the interest and
Charges payable to such Lender in respect of other Loans or periods shall be
increased (but not above the Maximum Rate therefor) until such cumulated amount,
<PAGE> 59
55
together with interest thereon at the Federal Funds Effective Rate to the date
of repayment, shall have been received by such Lender.
<PAGE> 60
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
PENNZOIL PRODUCTS COMPANY,
as Borrower
By
------------------------------------------
Name:
Title:
CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION,
individually and as Administrative Agent,
By
------------------------------------------
Name:
Title:
[Signature Page-1]
<PAGE> 61
CITIBANK, N.A.
individually and as Syndication Agent
By
------------------------------------------
Name:
Title:
[Signature Page-2]
<PAGE> 62
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK,
individually and as Syndication Agent
By
------------------------------------------
Name:
Title:
[Signature Page-3]
<PAGE> 63
NATIONSBANK, N.A.,
individually and as Documentation Agent
By
------------------------------------------
Name:
Title:
[Signature Page-4]
<PAGE> 64
DEUTSCHE BANK AG
NEW YORK BRANCH AND/OR
CAYMAN ISLANDS BRANCH
By
------------------------------------------
Name:
Title:
By
------------------------------------------
Name:
Title:
[Signature Page-5]
<PAGE> 65
DRESDNER BANK AG, NEW YORK AND
GRAND CAYMAN BRANCHES
By
------------------------------------------
Name:
Title:
By
------------------------------------------
Name:
Title:
[Signature Page-6]
<PAGE> 66
ROYAL BANK OF CANADA
By
------------------------------------------
Name:
Title:
[Signature Page-7]
<PAGE> 67
THE BANK OF NOVA SCOTIA
By
------------------------------------------
Name:
Title:
[Signature Page-8]
<PAGE> 68
THE FIRST NATIONAL BANK OF CHICAGO
By
------------------------------------------
Name:
Title:
[Signature Page-9]
<PAGE> 69
MELLON BANK, N.A.
By
------------------------------------------
Name:
Title:
[Signature Page-10]
<PAGE> 70
UBS AG, STAMFORD BRANCH
By
------------------------------------------
Name:
Title:
[Signature Page-11]
<PAGE> 71
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By
------------------------------------------
Name:
Title:
[Signature Page-12]
<PAGE> 72
BANQUE NATIONALE DE PARIS,
HOUSTON AGENCY
By
------------------------------------------
Name:
Title:
[Signature Page-13]
<PAGE> 73
THE BANK OF NEW YORK
By
------------------------------------------
Name:
Title:
[Signature Page-14]
<PAGE> 74
THE BANK OF TOKYO-MITSUBISHI, LTD.
By
------------------------------------------
Name:
Title:
[Signature Page-15]
<PAGE> 75
WESTDEUTSCHE LANDESBANK GIROZENTRALE,
NEW YORK BRANCH
By
------------------------------------------
Name:
Title:
By
------------------------------------------
Name:
Title:
[Signature Page-16]
<PAGE> 76
SUNTRUST BANK, ATLANTA
By
------------------------------------------
Name:
Title:
By
------------------------------------------
Name:
Title:
[Signature Page-17]
<PAGE> 1
EXHIBIT 10.4
PENNZOIL-QUAKER STATE COMPANY
DEFERRED COMPENSATION PLAN
I. PURPOSES OF PLAN AND DEFINITIONS.
1.1 Purposes. This Deferred Compensation Plan (the "Plan") of
Pennzoil-Quaker State Company (the "Company") for selected senior executives is
intended to provide greater incentives to attain and maintain the highest
standards of performance, to retain executives of outstanding competence and
ability, and to reward such executives for outstanding performance.
1.2 Definitions.
(a) "Company" means Pennzoil-Quaker State Company or any
successor.
(b) "Subsidiary" means any corporation in which the Company
owns, directly or indirectly, stock possessing 50% or more of the total
combined voting power of all classes of stock or any affiliated company
which is controlled by the Company by reason of a management contract
and stock ownership.
(c) "Board" means the Board of Directors of the Company.
(d) "Closing Date" means the date of Closing described in the
Agreement and Plan of Merger, dated as of April 14, 1998, among
Pennzoil Company, Pennzoil Products Company, Downstream Merger Company
and Quaker State Corporation ("Merger Agreement").
(e) "Employee" means any employee of the Company or any
Subsidiary (whether or not he is also a director thereof), who is
compensated for employment with the Company or any Subsidiary by a
regular salary.
(f) "Participant" means an Employee who is selected by the
Board to participate in the Plan and enters into a Deferred
Compensation Agreement with the Company. The term Participant also
means any individual who (1) had entered into an agreement under the
PennzEnergy Company Deferred Compensation Plan (formerly, the Pennzoil
Company Deferred Compensation Plan) prior to the "Distribution Date,"
and (2) is either (i) a "Downstream Employee" not actively at work,
(ii) a "Downstream Former Employee," or (iii) a former employee of
Pennzoil Company who is assigned to the Company under the Merger
Agreement, as terms in quotes are defined in the Merger Agreement.
-1-
<PAGE> 2
II. ADMINISTRATION OF THE PLAN - BOARD.
2.1 Interpretations. The Board shall have full power and authority to
interpret, construe and administer this Plan and the Deferred Compensation
Agreements entered into pursuant to this Plan.
2.2 Board Determinations Conclusive. All determinations by the Board as
to which eligible Employees shall be offered Deferred Compensation Agreements
under the Plan and as to the provisions of such Deferred Compensation
Agreements, shall be final, binding and conclusive upon all persons.
III. ELIGIBILITY OF EMPLOYEES.
3.1 Eligibility Requirements. The Board may from time to time establish
such eligibility requirements for participation in the Plan as it may deem
appropriate.
3.2 Deferred Compensation Agreement. Each Eligible Employee chosen by
the Board to participate in the Plan shall be offered a Deferred Compensation
Agreement setting forth the specific provisions which the Board has determined
to be appropriate for such Employee. No Employee shall have any rights
whatsoever under the Plan other than the rights and benefits granted to him
under his Deferred Compensation Agreement with the Company.
IV. DEFERRED COMPENSATION BENEFITS.
4.1 Supplemental Retirement Benefits. Each Deferred Compensation
Agreement entered into under this Plan shall provide for supplemental retirement
benefits for the Employee in such amounts and subject to such service
requirements and other conditions as the Board shall determine to be appropriate
and shall set forth therein.
4.2 Supplemental Death Benefits. Each Deferred Compensation Agreement
may provide for supplemental death benefits payable to the surviving spouse of
the Employee in such amounts and subject to such conditions as the Board shall
determine to be appropriate and shall set forth therein.
4.3 Medical Expenses Reimbursement. Each Deferred Compensation
Agreement may, in the discretion of the Board, authorize the reimbursement of
medical expenses incurred by the Employee during his lifetime in the same manner
and to the same extent as if coverage under the Pennzoil-Quaker State Company
Medical Expenses Reimbursement Plan as of Closing Date had continued in full
force and effect. In addition, a Deferred Compensation Agreement may, in the
discretion of the Board, authorize the reimbursement of medical expenses
incurred by the Employee's spouse and dependents if the Employee dies after
having commenced his benefits under
-2-
<PAGE> 3
a Deferred Compensation Agreement, such medical expenses of such spouse and
dependents to be reimbursed in the same manner and to the same extent as if
coverage under the Pennzoil-Quaker State Company Medical Expenses Reimbursement
Plan as of Closing Date had continued in full force and effect. Any
reimbursement of medical expenses pursuant to this Section 4.3 shall be made
only if the medical expense, or portion thereof sought to be reimbursed, is not
otherwise reimbursable or paid by another plan or program of the Company or by
U.S. Social Security, Medicare, Medicaid or any analogous state or federal
program, assuming in all cases that any person eligible for such otherwise
reimbursable expense had properly applied for reimbursement from such federal or
state program.
4.4 Offsets Against Benefits. All Benefits provided under this Plan
shall supplement other benefits payable to the Participant and Spouse and shall
be offset by any benefits received from a retirement or other plan or any
individual contractual agreement of the Company or any other former employer.
4.5 Withholding of Taxes. The Company shall deduct from the amount of
any benefits payable under a Deferred Compensation Agreement entered into under
this Plan any taxes required to be withheld by the Federal or any state or local
government.
V. RIGHTS OF PARTICIPANTS.
5.1 Limitation of Rights. Nothing in this Plan shall be construed to:
(a) Give any Employee of the Company or a Subsidiary any right
to participate in this Plan;
(b) Limit in any way the right of the Company or any
Subsidiary to terminate a Participant's employment with the Company or
any Subsidiary at any time;
(c) Give a Participant or any spouse of a deceased Participant
any interest in any fund or in any specific asset or assets of the
Company or any Subsidiary; or
(d) Be evidence of any agreement or understanding, express or
implied, that the Company or any Subsidiary will employ a Participant
in any particular position or at any particular rate of remuneration.
5.2 Nonalienation of Benefits. No right or benefit under this Plan
shall be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance or charge, and any attempt to anticipate, alienate, sell, assign,
pledge, encumber or charge the same will be void. No right or benefit hereunder
shall in any manner be liable for or subject to any debts, contracts,
liabilities or torts of the person entitled to such benefits.
-3-
<PAGE> 4
5.3 Prerequisites to Benefits. No Participant, or any person claiming
through a Participant, shall have any right or interest in the Plan, or any
benefits hereunder unless and until all the terms, conditions and provisions of
the Plan which affect such Participant or such other person shall have been
complied with as specified herein.
VI. MISCELLANEOUS.
6.1 Amendment or Termination of the Plan. The Board may amend or
terminate this Plan at any time. Any such amendment or termination shall not,
however, affect the rights of any Participant to the benefits provided under an
executed Deferred Compensation Agreement.
6.2 Applicable Laws. This Plan shall be construed, administered and
governed in all respects under the laws of the State of Texas.
PENNZOIL-QUAKER STATE COMPANY
-4-
<PAGE> 1
EXHIBIT 10.5
PENNZOIL-QUAKER STATE COMPANY
MEDICAL EXPENSES REIMBURSEMENT PLAN
I. PURPOSES OF PLAN, DEFINITIONS AND DURATION.
1.1 Purposes. This Medical Expenses Reimbursement Plan (the
"Plan") of Pennzoil- Quaker State Company (the "Company") for selected
executives is intended to attract and retain executives of outstanding
competence and ability by providing financial protection against medical
expenses of such executives, their spouses and dependents.
1.2 Definitions.
(a) "Company" means Pennzoil-Quaker State Company or any
successor.
(b) "Subsidiary" means any corporation in which the Company
owns, directly or indirectly, stock possessing 50% or more of the
total combined voting power of all classes of stock or any affiliated
company which is controlled by the Company by reason of a management
contract and stock ownership.
(c) "Board" means the Board of Directors of the Company.
(d) "Closing Date" means the date of Closing as described in
the Agreement and Plan of Merger, dated as of April 14, 1998, among
Pennzoil Company, Pennzoil Products Company, Downstream Merger Company
and Quaker State Corporation ("Merger Agreement").
(e) "Employee" means any person, including an officer of the
Company or any Subsidiary (whether or not he is also a director
thereof), who, at the time such person is designated a Participant
hereunder, is employed by the Company or any Subsidiary on a full-time
basis, who is compensated for such employment by a regular salary and
who, in the opinion of the Committee, is one of the officers or other
key executives of the Company or any Subsidiary in a position to
contribute materially to the continued growth and development and to
the future financial success of the Company.
(f) "Participant" means an Employee who has been designated
by the Committee to participate in the Plan.
(g) "Medical Expenses" means amounts paid for the diagnosis,
cure, mitigation, treatment, or prevention of disease, and for other
"medical care" as such term is defined in Section 213(e)(1) of the
Internal Revenue Code of 1986, as amended.
-1-
<PAGE> 2
(h) "Dependent" means any person who is a "dependent" of a
Participant within the meaning of the term "dependent" as defined in
Section 152 of the Internal Revenue Code 1986, as amended.
(i) "Spouse" means the person to whom a Participant is then
married and not legally separated under a decree of divorce or
separate maintenance.
1.3 Term. The effective date of the Plan is the Closing Date. The Plan
shall continue until terminated by the Board as herein provided.
II. ADMINISTRATION OF THE PLAN - COMMITTEE.
2.1 Appointment of Committee. The Plan shall be administered by the
Compensation Committee or such other committee of the Board as may be
designated by the Board from time to time (the "Committee").
2.2 Committee Powers. The Committee shall be deemed to have and to be
exercising all of the powers of the Board in the performance of any of the
powers and duties delegated to it under the Plan, including, but without
limiting the generality of the foregoing, the selection of Participants. The
Committee may from time to time establish rules for the administration of the
Plan which are not inconsistent with the provisions and purposes of the Plan.
2.3 Committee Action. A majority of the members of the Committee shall
constitutes a quorum for the transaction of business. All action taken by the
Committee at a meeting shall be by the vote of a majority of those present at
such meeting, but any action may be taken by the Committee without a meeting
upon written consent signed by all of the members of the Committee. Members of
the Committee may participate in a meeting by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other.
2.4 Committee Determinations Conclusive. The determination of the
Committee as to any disputed question of construction or interpretation arising
under the Plan shall be final, binding, and conclusive upon all persons.
III. COVERAGE OF THE PLAN.
3.1 Persons Covered. Each person who is designated as a Participant
and the Spouse and Dependents of each such Participant shall be eligible for
benefits under this Plan from and after the Effective Date or such later date
as may be designated as the commencement date of his coverage under this Plan.
-2-
<PAGE> 3
3.2 Termination of Coverage. Coverage under this Plan of any
Participant, his Spouse and Dependents shall terminate upon the death,
resignation or other termination of such Participant's employment with the
Company.
IV. BENEFITS.
4.1 Reimbursable Medical Expenses. The Company shall reimburse each
Participant for Medical Expenses incurred by such Participant, his Spouse or
any of his Dependents during the time such Participant was covered under this
Plan or under the PennzEnergy Medical Expenses Reimbursement Plan (formerly,
the Pennzoil Company Medical Expenses Reimbursement Plan) to the extent that
such Medical Expenses are or were not otherwise paid or reimbursed by group
hospitalization or other medical benefits insurance or plan or program provided
by the Company or it's former parent, PennzEnergy Company (formerly Pennzoil
Company). Notwithstanding the foregoing, Medical Expenses incurred prior to the
Closing Date will only be reimbursed to the extent required under the Merger
Agreement.
4.2 Payment Procedure. Each Participant entitled to payments for
Reimbursable Medical Expenses under this Plan shall request such payments in
writing in such form as may be prescribed by the Committee and shall support
such request with such invoices and other documents as may be required by the
Committee. Upon receipt of satisfactory proof of payment of Reimbursable
Medical Expenses of a Participant, his Spouse or a Dependent, the Company shall
reimburse such Participant therefor as soon as practicable.
V. RIGHTS OF PARTICIPANTS.
5.1 Limitation of Rights. Nothing in this Plan shall be construed to:
(a) Give any Employee of the Company or a Subsidiary any
right to participate in this Plan; or
(b) Limit in any way the right of the Company or any
Subsidiary to terminate a Participant's employment with the Company or
any Subsidiary at any time; or
(c) Give a Participant any interest in any fund or in any
specific asset or assets of the Company or any Subsidiary; or
(d) Be evidence of any agreement or understanding, express or
implied, that the Company or any Subsidiary will employ a Participant
in any particular position or at any particular rate of remuneration.
5.2 Nonalienation of Benefits. No right or benefit under this Plan
shall be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance or charge of any nature, and any
-3-
<PAGE> 4
attempt to anticipate, alienate, sell, assign, pledge, encumber or charge the
same will be void. No night or benefit hereunder shall in any manner be liable
for or subject to any debts, contracts, liabilities or torts of the person
entitled to such benefits.
VI. MISCELLANEOUS.
6.1 Amendment or Termination of the Plan. The Board may amend or
terminate this Plan at any time. Any such amendment or termination shall not,
however, affect any right to claim reimbursement of Medical Expenses incurred
prior thereto.
6.2 Reliance upon Information. The Board and the Committee shall not
be liable for any decision or action taken in good faith in connection with the
administration of this Plan. Without limiting the generality of the foregoing,
any such decision or action taken by the Board or the Committee in reliance
upon any information supplied to them by an officer of the Company, the
Company's legal counsel or by the Company's independent accountants in
connection with the administration of this Plan shall be deemed to have been
taken in good faith.
6.3 Applicable Laws. This Plan shall be construed, administered and
governed in all respects under the laws of the State of Texas.
PENNZOIL-QUAKER STATE COMPANY
-4-
<PAGE> 1
EXHIBIT 10.6
PENNZOIL-QUAKER STATE COMPANY
SUPPLEMENTAL DISABILITY PLAN
I. PURPOSE OF PLAN, DEFINITIONS AND DURATION.
1.1 Purposes. This Supplemental Disability Plan (the "Plan") of
Pennzoil-Quaker State Company (the "Company") for selected executives is
intended to attract and retain executives of outstanding competence and ability
by providing financial security to them in the event of their disability during
employment.
1.2 Definitions.
(a) "Company" means Pennzoil-Quaker State Company or any
successor.
(b) "Subsidiary" means any corporation in which the Company
owns, directly or indirectly, stock possessing 50% or more of the total
combined voting power of all classes of stock or any affiliated company
which is controlled by the Company by reason of a management contract
and stock ownership.
(c) "Board" means the Board of Directors of the Company.
(d) "Closing Date" means the date of Closing as described in
the Agreement and Plan of Merger, dated as of April 14, 1998, among
Pennzoil Company, Pennzoil Products Company, Downstream Merger Company
and Quaker State Corporation ("Merger Agreement").
(e) "Employee" means any person, including an officer of the
Company or any Subsidiary (whether or not he is also a director
thereof), who, at the time such person is designated a Participant
hereunder, is employed by the Company or any Subsidiary on a full-time
basis, who is compensated for such employment by a regular salary and
who, in the opinion of the Committee, is one of the officers or other
key executives of the Company or any Subsidiary in a position to
contribute materially to the continued growth and development and to
the future financial success of the Company.
(f) "Participant" means an Employee who has been designated by
the Committee to participate in the Plan. The term Participant also
means any individual who (1) immediately prior to the "Distribution
Date," was receiving a benefit under the PennzEnergy Company
Supplemental Disability Plan (formerly, the Pennzoil Company
Supplemental Disability Plan), and (2) is either (i) a "Downstream
Employee" not actively at work, (ii) a "Downstream Former Employee," as
terms in quotes are defined in the Merger Agreement,
-1-
<PAGE> 2
or (iii) a former employee of Pennzoil Company who is assigned to the
Company under the Merger Agreement.
(g) "Retirement Plan" means the Pennzoil-Quaker State Company
Salaried Employees Retirement Plan.
(h) "Normal Retirement Date" means the normal retirement date
under the Retirement Plan.
1.3 Term. The effective date of the Plan is the Closing Date. The Plan
shall continue until terminated by the Board as herein provided.
II. ADMINISTRATION OF THE PLAN - COMMITTEE.
2.1 Appointment of Committee. The Plan shall be administered by the
Compensation Committee or such other committee of the Board as may be designated
by the Board from time to time ("the Committee").
2.2 Committee Powers. The Committee shall be deemed to have and to be
exercising all of the powers of the Board in the performance of any of the
powers and duties delegated to it under the Plan, including, but without
limiting the generality of the foregoing, the selection of Participants. The
Committee may from time to time establish rules for the administration of the
Plan which are not inconsistent with the provision and purposes of the Plan.
2.3 Committee Action. A majority of the members of the Committee shall
constitute a quorum for the transaction of business. All action taken by the
Committee at a meeting shall be by the vote of a majority of those present at
such meeting, but any action may be taken by the Committee without a meeting
upon written consent signed by all of the members of the Committee. Members of
the Committee may participate in a meeting by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other.
2.4 Committee Determinations Conclusive. The determination of the
Committee as to any disputed question of construction or interpretation arising
under the Plan shall be final, binding, and conclusive upon all persons.
III. ELIGIBILITY.
3.1 Eligibility Requirements. The Committee may from time to time
establish eligibility requirements for Employees to participate in the Plan.
-2-
<PAGE> 3
3.2 Designation of Participants. From time to time during the
continuation of the Plan, the Committee may designate one or more eligible
Employees to participate in the Plan and shall advise each such Employee of his
selection.
IV. SUPPLEMENTAL DISABILITY PAYMENTS.
4.1 Monthly Disability Benefit. A Participant who has been found by the
Committee, upon the advice of physicians of its selection, to have a total and
permanent disability shall be entitled to receive a monthly supplemental
disability benefit, commencing on the first day of the month following the
Committee's determination of such disability and continuing until the
Participant attains his Normal Retirement Date or dies, in an amount equal to
the excess of 60% of the Participant's monthly salary at the time of his
disability, over the total of the monthly amounts payable to the Participant
during each applicable month under the Retirement Plan, the U.S. Social Security
Act, and the Short-Term Disability Plan and Long-Term Disability Plan of the
Company, and under any retirement or disability plan or program of a former
employer.
4.2 Withholding of Taxes. The Company shall deduct from the amount of
all benefits paid to disabled Participants under the Plan any taxes required to
be withheld by the Federal or any state or local government.
V. RIGHTS OF PARTICIPANTS.
5.1 Limitation of Rights. Nothing in this Plan shall be construed to:
(a) Give any Employee of the Company or a Subsidiary any right
to participate in this Plan; or
(b) Limit in any way the right of the Company or any
Subsidiary to terminate a Participant's employment with the Company or
any Subsidiary at any time; or
(c) Give a Participant any interest in any fund or in any
specific asset or assets of the Company or any Subsidiary; or
(d) Be evidence of any agreement or understanding, express or
implied, that the Company or any Subsidiary will employ a Participant
in any particular position or at any particular rate of remuneration.
5.2 Nonalienation of Benefits. No right or benefit under this Plan
shall be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance or charge of any nature, and any attempt to anticipate, alienate,
sell, assign, pledge, encumber or charge the same will be void. No right or
benefit hereunder shall in any manner be liable for or subject to any debts,
contracts, liabilities or torts of the person entitled to such benefits.
-3-
<PAGE> 4
5.3 Prerequisites to Benefits. No Participant shall have any right or
interest in the Plan, or any benefits hereunder, unless and until all the terms,
conditions and provisions of the Plan which affect such Participant shall have
been complied with as specified herein.
VI. MISCELLANEOUS.
6.1 Amendment or Termination of the Plan. The Board may amend or
terminate this Plan at any time. Any such amendment or termination shall not,
however, affect the rights of any Participant who has commenced receiving
benefits hereunder.
6.2 Reliance upon Information. The Board and the Committee shall not be
liable for any decision or action taken in good faith in connection with the
administration of this Plan. Without limiting the generality of the foregoing,
any such decision or action taken by the Board or the Committee in reliance upon
any information supplied to them by an officer of the Company, the Company's
legal counsel or by the Company's independent accountants in connection with the
administration of this Plan shall be deemed to have been taken in good faith.
6.3 Applicable Laws. This Plan shall be construed, administered and
governed in all respects under the laws of the State of Texas.
PENNZOIL-QUAKER STATE COMPANY
-4-
<PAGE> 1
EXHIBIT 10.7
PENNZOIL-QUAKER STATE COMPANY
SALARY CONTINUATION PLAN
I. PURPOSES OF PLAN, DEFINITIONS AND DURATION.
1.1 Purposes. This Salary Continuation Plan (the "Plan") of
Pennzoil-Quaker State Company (the "Company") for selected executives is
intended to reward executives of outstanding competence and ability for past
services by providing benefits to their surviving spouses and dependents in the
event of an executive's death during employment.
1.2 Definitions.
(a) "Company" means Pennzoil -Quaker State Company or any
successor.
(b) "Subsidiary" means any corporation in which the Company
owns, directly or indirectly, stock possessing 50% or more of the
total combined voting power of all classes of stock or any affiliated
company which is controlled by the Company by reason of a management
contract and stock ownership.
(c) "Board" means the Board of Directors of the Company.
(d) "Closing Date" means the date of Closing described in the
Agreement and Plan of Merger, dated as of April 14, 1998, among
Pennzoil Company, Pennzoil Products Company, Downstream Merger Company
and Quaker State Corporation ("Merger Agreement").
(e) "Employee" means any person, including an officer of the
Company or any Subsidiary (whether or not he is also a director
thereof), who, at the time such person is designated a Participant
hereunder, is employed by the Company or any Subsidiary on a full-time
basis, who is compensated for such employment by a regular salary and
who, in the opinion of the Committee, is one of the key executives of
the Company or any Subsidiary.
(f) "Participant" means an Employee who has been designated
by the Committee to participate in the Plan.
(g) "Spouse" means (1) the surviving spouse of a Participant
who has been married to the Participant for more than one year at the
time of his death and (2) a surviving spouse assigned to receive
benefits under this Plan by the Merger Agreement pursuant to Section
4.4 of this Plan.
(h) "Retirement Plan" means the Pennzoil-Quaker State Company
Salaried Employees Retirement Plan.
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(i) "Normal Retirement Date" means the normal retirement date
under the Retirement Plan.
1.3 Term. The effective date of the Plan is the Closing Date. The Plan
shall continue until terminated by the Board as herein provided.
II. ADMINISTRATION OF THE PLAN - COMMITTEE.
2.1 Appointment of Committee. The Plan shall be administered by the
Compensation Committee or such other committee of the Board as may be
designated by the Board from time to time (the "Committee").
2.2 Committee Powers. The Committee shall be deemed to have and to be
exercising all of the powers of the Board in the performance of any of the
powers and duties delegated to it under the Plan, including, but without
limiting the generality of the foregoing, the selection of Participants. The
Committee may from time to time establish rules for the administration of the
Plan which are not inconsistent with the provisions and purposes of the Plan.
2.3 Committee Action. A majority of the members of the Committee shall
constitute a quorum for the transaction of business. All action taken by the
Committee at a meeting shall be by the vote of a majority of those present at
such meeting, but any action may be taken by the Committee without a meeting
upon written consent signed by all of the members of the Committee. Members of
the Committee may participate in a meeting by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other.
2.4 Committee Determinations Conclusive. The determination of the
Committee as to any disputed question of construction or interpretation arising
under the Plan shall be final, binding, and conclusive upon all persons.
III. ELIGIBILITY OF EMPLOYEES.
3.1 Eligibility Requirements. The Committee may from time to time
establish eligibility requirements for Employees to participate in the Plan.
3.2 Designation of Participants. From time to time during the
continuation of the Plan, the Committee may designate one or more eligible
Employees to participate in the Plan and shall advise each such Employee of his
selection. If a Participant's employment is terminated for any reason his
participation in this Plan shall be terminated.
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IV. SALARY CONTINUATION PAYMENTS.
4.1 Salary Continuation Payable to Spouse. In the event of the death
of a Participant while in the employment of the Company or any Subsidiary, the
Committee shall cause the Company to pay to the Participant's Spouse a Monthly
Salary Continuation Benefit for the remainder of his or her life in an amount
determined under paragraph 4.2 hereof.
4.2 Amount of Monthly Salary Continuation Benefit. The Spouse of a
deceased Participant shall be entitled to receive a Monthly Salary Continuation
Benefit, commencing on the first day of the month following the deceased
Participant's death and continuing for the life of the Spouse, determined under
whichever of the following provisions is then applicable:
(a) Monthly benefits payable before the Normal Retirement
Date of the deceased Participant. The Monthly Salary Continuation
Benefit payable to a Spouse for a month preceding the deceased
Participant's Normal Retirement Date shall be in an amount equal to
55% of the Participant's monthly salary on the date of his death less
amounts received by the Spouse as a Spouse's benefit under the
Retirement Plan and/or under any individual contractual agreement with
the Company, and less any amounts received by her under the U.S.
Social Security Act and less any amounts from any retirement or other
plan or individual contractual agreement of a former employer.
(b) After the deceased Participant's Normal Retirement Date.
The Monthly Salary Continuation Benefit payable to the Spouse of a
deceased Participant on and after his Normal Retirement Date shall
thereafter be changed to an amount equal to the monthly Spouse's
benefit which would have been payable under the Retirement Plan if the
deceased Participant had continued his employment as an Employee of
the Company or any Subsidiary until his Normal Retirement Date, at the
same monthly salary as in effect on the date of his death, and had
died on the day preceding his Normal Retirement Date, less any
Spouse's benefits received by the Spouse from the Retirement Plan
and/or under any individual contractual agreement between the Company
and the Participant, and less any amounts received by her under the
U.S. Social Security Act, and less any amounts from any retirement or
other plan or individual contractual agreement of a former employer.
4.3 Medical Expenses Reimbursement. During the period that an
Employee's Spouse is receiving benefits under Section 4.2 of this Plan, medical
expenses incurred by such Spouse and the eligible dependents of the deceased
Employee and his Spouse shall be reimbursed in the same manner and to the same
extent as if coverage under the Pennzoil-Quaker State Company Medical Expenses
Reimbursement Plan as in effect on the Closing Date had continued in full force
and effect. Any reimbursement of medical expenses pursuant to this Section 4.3
shall be made only if the medical expense, or portion thereof sought to be
reimbursed, is not otherwise reimbursable or paid by another plan or program of
the Company or by U.S. Social Security, Medicare, Medicaid or any
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analogous state or federal program, assuming in all cases that any person
eligible for such otherwise reimbursable expense had properly applied for
reimbursement from such federal or state program.
4.4 Salary Continuation Payments in Respect of Former Employees of
PennzEnergy Company (formerly Pennzoil Company). Benefits payable under the
PennzEnergy Company Salary Continuation Plan (formerly, the Pennzoil Company
Salary Continuation Plan) which were in pay status as of the "Distribution
Date," as defined in the Merger Agreement, will continue under this Plan in
lieu of any further payments under the PennzEnergy Company Salary Continuation
Plan after the Closing Date with respect to the spouse of any former employee
(which person shall be a Spouse under this Plan) who (i) was employed by a
member of the "Downstream Group" as of his date of death, (ii) would have been
classified as a "Downstream Former Employee," or (iii) who is assigned to the
Company under the Merger Agreement, as terms in quotes are defined in the
Merger Agreement.
4.5 Withholding of Taxes. The Company shall deduct from the amount of
all benefits paid to Spouses under the Plan any taxes required to be withheld
by the Federal or any state or local government.
V. RIGHTS OF PARTICIPANTS AND SPOUSES.
5.1 Limitation of Rights. Nothing in this Plan shall be construed to:
(a) Give any Employee of the Company or a Subsidiary any
right to participant in this Plan; or
(b) Limit in any way the right of the Company or any
Subsidiary to terminate a Participant's employment with the Company or
any Subsidiary at any time; or
(c) Give a Participant or any Spouse of a deceased
Participant any interest in any fund or in any specific asset or
assets of the Company or any Subsidiary; or
(d) Be evidence of any agreement or understanding, express or
implied, that the Company or any Subsidiary will employ a Participant
in any particular position or at any particular rate of remuneration.
5.2 Nonalienation of Benefits. No benefit when granted under this Plan
shall be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance or charge of any nature, and any attempt to anticipate, alienate,
sell, assign, pledge, encumber or charge the same will be void. No such benefit
hereunder shall in any manner be liable for or subject to any debts, contracts,
liabilities or torts of the person entitled to such benefits.
5.3 Prerequisites to Benefits. No Spouse shall have any right or
interest in the Plan, or any benefits hereunder, unless and until all the
terms, conditions and provisions of the Plan which affect such Spouse or the
deceased Participant shall have been complied with as specified herein.
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VI. MISCELLANEOUS.
6.1 Amendment or Termination of the Plan. The Board may amend or
terminate this Plan at any time. Any such amendment or termination shall not,
however, affect the rights of the Spouse of any deceased Participant to the
benefits provided hereunder.
6.2 Reliance upon Information. The Board and the Committee shall not
be liable for any decision or action taken in good faith in connection with the
administration of this Plan. Without limiting the generality of the foregoing,
any such decision or action taken by the Board or the Committee in reliance
upon any information supplied to them by an officer of the Company, the
Company's legal counselor or by the Company's independent accountants in
connection with the administration of this Plan shall be deemed to have been
taken in good faith.
6.3 Applicable Laws. This Plan shall be construed, administered and
governed in all respects under the laws of the State of Texas.
PENNZOIL-QUAKER STATE COMPANY
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EXHIBIT 10.8
PENNZOIL-QUAKER STATE COMPANY
SUPPLEMENTAL LIFE INSURANCE PLAN
I. PURPOSES OF PLAN, DEFINITIONS AND DURATION.
1.1 Purposes. This Supplemental Life Insurance Plan (the "Plan") of
Pennzoil-Quaker State Company (the "Company") for selected executives is
intended to attract and retain executives of outstanding competence and ability
by providing financial security to them and their surviving spouse or other
beneficiaries.
1.2 Definitions.
(a) "Company" means Pennzoil-Quaker State Company or any
successor.
(b) "Subsidiary" means any corporation in which the Company
owns, directly or indirectly, stock possessing 50% or more of the total
combined voting power of all classes of stock or any affiliated company
which is controlled by the Company by reason of a management contract
and stock ownership.
(c) "Board" means the Board of Directors of the Company.
(d) "Closing Date" means the date of Closing described in
Agreement and Plan of Merger, dated as of April 14, 1998, among
Pennzoil Company, Pennzoil Products Company, Downstream Merger Company
and Quaker State Corporation ("Merger Agreement").
(e) "Employee" means any person, including an officer of the
Company or any Subsidiary (whether or not he is also a director
thereof), who, at the time such person is designated a Participant
hereunder, is employed by the Company or any Subsidiary on a full-time
basis, who is compensated for such employment by a regular salary and
who, in the opinion of the Committee, is one of the officers or other
key executives of the Company or any Subsidiary in a position to
contribute materially to the continued growth and development and to
the future financial success of the Company.
(f) "Participant" means an Employee who has been designated by
the Committee to participate in the Plan. [THE TERM PARTICIPANT ALSO
MEANS ANY INDIVIDUAL WHO, IMMEDIATELY PRIOR TO THE "DISTRIBUTION DATE,"
AS DEFINED IN THE MERGER AGREEMENT, WAS A PARTICIPANT IN THE
PENNZENERGY COMPANY SUPPLEMENTAL LIFE INSURANCE PLAN
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(FORMERLY, THE PENNZOIL COMPANY SUPPLEMENTAL LIFE INSURANCE PLAN) AND
WOULD HAVE BECOME AN EMPLOYEE BUT FOR THE FACT THAT SUCH INDIVIDUAL HAD
A "TOTAL AND PERMANENT DISABILITY," AS DEFINED IN THE PENNZENERGY
COMPANY SUPPLEMENTAL DISABILITY PLAN (FORMERLY, THE PENNZOIL COMPANY
SUPPLEMENTAL DISABILITY PLAN.]
(g) "Retirement Plan" means the Pennzoil-Quaker State Company
Salaried Employees Retirement Plan.
(h) "Normal Retirement Date" means the normal retirement date
under the Retirement Plan.
1.3 Term. The effective date of the Plan is the Closing Date. The Plan
shall continue until terminated by the Board as herein provided.
II. ADMINISTRATION OF THE PLAN - COMMITTEE.
2.1 Appointment of Committee. The Plan shall be administered by the
Compensation Committee or such other committee of the Board as may be designated
by the Board from time to time (the "Committee").
2.2 Committee Powers. The Committee shall be deemed to have and to be
exercising all of the powers of the Board in the performance of any of the
powers and duties delegated to it under the Plan, including, but without
limiting the generality of the foregoing, the selection of Participants. The
Committee may from time to time establish rules for the administration of the
Plan which are not inconsistent with the provisions and purposes of the Plan.
2.3 Committee Action. A majority of the members of the Committee shall
constitute a quorum for the transaction of business. All action taken by the
Committee at a meeting shall be by the vote of a majority of those present at
such meeting, but any action may be taken by the Committee without a meeting
upon written consent signed by all of the members of the Committee. Members of
the Committee may participate in a meeting by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other.
2.4 Committee Determinations Conclusive. The determination of the
Committee as to any disputed question of construction or interpretation arising
under the Plan shall be final, binding, and conclusive upon all persons.
III. ELIGIBILITY.
3.1 Eligibility Requirements. The Committee may from time to time
establish eligibility requirements for Employees to participate in the Plan.
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3.2 Designation of Participants. From time to time during the
continuation of the Plan, the Committee may designate one or more eligible
Employees to participate in the Plan and shall advise each such Employee of his
selection.
IV. SUPPLEMENTAL LIFE INSURANCE PAYMENTS.
4.1 Amount of Coverage. The Company will pay the premiums on
supplemental life insurance coverage on the life of each Participant in an
amount equal to two times the annual salary as in effect from time to time, and
adjusted automatically to coincide with increases in annual salary of the
Participant less the maximum amount of coverage available to the Employee under
the Company's group life insurance plan. This coverage will be continued until
the earlier of the Participant's Normal Retirement Date or termination of
employment of the Participant.
4.2 Rights of Participants in Supplemental Life Insurance. Each
Participant shall have the right to designate the Beneficiary or Beneficiaries
under each of the life insurance policies on his life issued pursuant to the
terms of this Plan and may assign any and all rights he or she may have in the
Plan. Upon the retirement or other termination of employment of a Participant,
the coverage provided under this Plan shall automatically be terminated and the
Participant shall have no right to continued coverage under this Plan and shall
have no right to any insurance policies issued pursuant to this Plan unless
otherwise required by law; provided, however, that the Company may, in its
discretion, continue paying premiums on all or a portion of any insurance
coverage provided pursuant to this Plan notwithstanding that the Participant's
employment has terminated and may in its discretion convey to the Participant,
or if the Participant has assigned the policy to such Participant's assignee,
all rights of ownership in any policies issued under this Plan on such
Participant's life to the Participant.
4.3 Withholding of Taxes. The Company shall deduct from the amount of
all benefits paid to Beneficiaries under the Plan any taxes required to be
withheld by the Federal or any state or local government.
V. RIGHTS OF PARTICIPANTS.
5.1 Limitation of Rights. Nothing in this Plan shall be construed to:
(a) Give any Employee of the Company or a Subsidiary any right
to participate in this Plan; or
(b) Limit in any way the right of the Company or any
Subsidiary to terminate a Participant's employment with the Company or
any Subsidiary at any time; or
(c) Give a Participant or any Beneficiary of a deceased
Participant any interest in any fund or in any specific asset or assets
of the Company or any Subsidiary; or
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(d) Be evidence of any agreement or understanding, express or
implied, that the Company or any Subsidiary will employ a Participant
in any particular position or at any particular rate of remuneration.
5.2 Assignment of Rights in the Plan. A Participant may assign any and
all rights he or she may have in the Plan.
5.3 Prerequisites to Benefits. No Beneficiary shall have any right or
interest in the Plan, or any benefits hereunder, unless and until all the terms,
conditions and provisions of the Plan which affect such Beneficiary or the
deceased Participant shall have been complied with as specified herein.
VI. MISCELLANEOUS.
6.1 Amendment or Termination of the Plan. The Board may amend or
terminate this Plan at any time. Any such amendment or termination shall not,
however, affect the rights of the Beneficiary of any deceased Participant to the
benefits provided hereunder.
6.2 Reliance upon Information. The Board and the Committee shall not be
liable for any decision or action taken in good faith in connection with the
administration of this Plan. Without limiting the generality of the foregoing,
any such decision or action taken by the Board or the Committee in reliance upon
any information supplied to them by an officer of the Company, the Company's
legal counsel or by the Company's independent accountants in connection with the
administration of this Plan shall be deemed to have been taken in good faith.
6.3 Applicable Laws. This Plan shall be construed, administered and
governed in all respects under the laws of the State of Texas.
PENNZOIL-QUAKER STATE COMPANY
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EXHIBIT 10.9
PENNZOIL-QUAKER STATE COMPANY
EXECUTIVE SEVERANCE PLAN
I. PURPOSES OF PLAN AND DEFINITIONS
1.1 Purposes. This Pennzoil-Quaker State Company Executive Severance
Plan (the "Plan") for selected senior management employees is intended to
provide greater incentives to attain and maintain the high standards of
performance, to retain executives of outstanding competence and ability, to
reward such executives for outstanding performance and to provide protection for
loss of salary in the event of certain changes in control of the Company (as
defined herein).
1.2 Definitions.
(a) "Company" means Pennzoil-Quaker State Company or any
successor.
(b) "Subsidiary" means any corporation in which the Company
owns, directly or indirectly, stock possessing 50% or more of the total
combined voting power of all classes of stock or any affiliated company
which is controlled by the Company by reason of a management contract
and stock ownership.
(c) "Board" means the Board of Directors of the Company.
(d) "Compensation Committee" means the Compensation Committee
of the Board.
(e) "Employee" means any employee of the Company or any
Subsidiary (whether or not he is also a director thereof), who is
compensated for employment of the Company or any Subsidiary by a
regular salary and who is considered by the Compensation Committee to
be a senior management employee.
(f) "Participant" means an Employee who has been selected by
the Compensation Committee to participate in the Plan.
II. ADMINISTRATION OF THE PLAN - COMPENSATION COMMITTEE
2.1 Interpretations. The Compensation Committee shall have full power
and authority to interpret, construe and administer this Plan.
2.2 Compensation Committee Determinations Conclusive. All
determinations by the Compensation Committee as to which Employees shall be
offered the opportunity to participate herein shall be final, binding and
conclusive upon all persons. The interpretation adopted by the
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Compensation Committee with respect to any provision of the Plan and the effect
thereof shall be final, binding and conclusive upon all persons.
III. ELIGIBILITY OF EMPLOYEES
3.1 Eligibility Requirements. The Compensation Committee shall in its
sole discretion from time to time designate those Employees who are to
participate herein. The initial Participants are set forth in Exhibit "A"
attached hereto.
3.2 Notification of Participation. Each Employee who is denominated a
Participant herein by the Compensation Committee shall be provided an agreement
in writing specifying that the Employee is a Participant in this Plan together
with a copy of the Plan.
3.3 Termination of Participation. An Employee's status as a Participant
shall terminate at such time as may be determined by the Compensation Committee;
provided, however, that in the case of an Employee who is a Participant
immediately prior to the Effective Date of a change in control of the Company
(as defined herein) and who is designated by the Board or the Compensation
Committee as described in Section 4.1 hereof as likely to be adversely impacted
by such change in control of the Company, such Participant's coverage by this
Plan may not be terminated without the consent of the Participant within two
years of the Effective Date of such change in control of the Company.
IV. EXECUTIVE SEVERANCE BENEFITS
4.1 Cash Severance Payment. A Participant shall be entitled to the
severance benefits described herein upon termination following a change in
control of the Company only if the Board, in acting to determine that a change
in control has or might occur or the Compensation Committee acting thereafter,
designates the Participant, by name or by descriptive employment category, as
likely to be adversely affected by the particular change in control it being
intended that the Board or the Compensation Committee may determine that certain
Participants herein will not be entitled to severance benefits upon a
termination of employment following a change in control of the Company but only
if such determination is made coincident with or prior to the date the Board
acts under Section 4.2 with respect to such change in control of the Company.
Specifically, it is intended that an employee will not be considered to have a
termination of employment if the employee is separated from service with the
Company, but continues to be employed by and in connection with any part of the
Company's business that is spun-off to the Company's shareholders which spin-off
occurs at a time when the Company's stock is widely held and no individual or
group of shareholders (within the meaning of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended) owns (within the meaning of Section
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) twenty
percent or more of the Company's stock. In the event of the termination of a
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designated Participant's employment with the Company and any Subsidiary within
two years following a change in control of the Company (as herein defined) for
any reason other than cause (as herein defined), the Company shall pay to such a
Participant who has been designated by the Board or Compensation Committee
pursuant to this Section 4.1 as likely to be adversely affected by such change
in control forthwith an amount in cash equal to the present value (as herein
defined) of the product of (a) three times the sum of (i) the participant's
annual salary (at a rate equal to the higher of the rate of salary in effect on
the date immediately prior to the Effective Date of the change in control of the
Company or the annual rate of salary in effect on the date of termination of
employment) and (ii) the greater of (x) the Participant's highest annual
incentive bonus earned during the 12 months preceding termination of employment
or (y) the average annual incentive bonus earned by the Participant during the
three year period preceding the Effective Date of the change in control of the
Company multiplied by (b) a fraction (not to exceed one) the numerator of which
is the number of days between the date of the Participant's termination of
employment and the date the Participant will attain age 65 and the denominator
of which is 1095.
4.2 Change in Control. For purposes of this Plan, a change in control
of the Company shall conclusively be deemed to have occurred (a) if the Board
determines by resolution that a change in control which has the reasonable
likelihood of depriving key employees of benefits they otherwise would have
earned, by depriving key employees of the opportunity to fulfill applicable
service and age prerequisites to benefits or otherwise, has occurred, or (b)
upon the occurrence of an event specified for such purposes as a change in
control which has the reasonable likelihood of depriving key employees of
benefits they otherwise would have earned, by depriving key employees of the
opportunity to fulfill applicable service and age prerequisites to benefits or
otherwise, by resolution of the Board adopted not more than 60 days prior to the
occurrence of such event.
4.3 Effective Date of a Change in Control. The Effective Date of a
change in control of the Company shall be (a), in the case of such a change in
control determined as specified in Section 4.2(a), the date (not more than 30
days prior to the date on which the Board makes the determination) the Board
determines as the date on which such change in control has occurred, or (b), in
the case of such a change in control determined as specified in Section 4.2(b),
the date of occurrence of the event specified by the Board as constituting such
change in control.
4.4 Termination for Cause. For purposes of this Plan, a termination of
employment for cause shall be considered to have occurred only as specifically
described in this Section 4.4 and shall include termination of employment only
if termination of the Participant's employment is as a result of an act or acts
of dishonesty on the part of the Participant constituting a felony and resulting
or intended to result directly or indirectly in gain or personal enrichment at
the expense of the Company.
4.5 Executive Medical Continuation. Any Participant entitled to
benefits under this Plan shall be entitled to receive for the 12 months
following termination of employment continued
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coverage under the Company's Medical Expenses Reimbursement Plan at a rate no
less favorable than that in effect on the Effective Date of the change in
control of the Company.
V. RIGHTS OF PARTICIPANTS
5.1 Limitation of Rights. Nothing in this Plan shall be construed to:
(a) Give any Employee of the Company or a Subsidiary any right
to participate in this Plan;
(b) Limit in any way the right of the Company or any
Subsidiary to terminate a Participant's employment with the Company or
any Subsidiary at any time;
(c) Give a Participant or any spouse of a deceased Participant
any interest in any fund or any specific asset or assets of the Company
or any Subsidiary; or
(d) Be evidence of any agreement or understanding, express or
implied, that the Company or any Subsidiary will employ a participant
in any particular position or at any particular rate of remuneration.
5.2 Non-alienation of Benefits. No right or benefit under this Plan
shall be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance or charge, and any attempt to anticipate, alienate, sell, assign,
pledge, encumber or charge the same will be void. No right or benefit hereunder
shall in any manner be liable for or subject to any debts, contracts,
liabilities or torts of the person entitled to such benefits.
5.3 Prerequisites to Benefits. No Participant, or any person claiming
through a Participant shall have any right or interest in the Plan, or any
benefits hereunder unless and until all of the terms, conditions and provisions
of the Plan which affect such Participant or such other person shall have been
complied with as specified herein.
VI. MISCELLANEOUS
6.1 Amendment or Termination of the Plan. The Board may amend or
terminate this Plan at any time; provided, however, that the terms of the Plan
as in effect upon a change in control of the Company may not be changed in a
manner which would adversely affect the rights of any Employee who, as of the
date immediately prior to the date the Board acts under Section 4.2 of the Plan
with respect to determination of the Effective Date of a change in control of
the Company, is a Participant in the Plan and who has been designated by the
Board or the Compensation Committee as likely to be adversely affected by the
change in control.
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6.2 Applicable Laws. This Plan shall be construed, administered and
governed in all respects under the laws of the State of Texas.
PENNZOIL-QUAKER STATE COMPANY
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PENNZOIL-QUAKER STATE COMPANY
EXECUTIVE SEVERANCE PLAN
PARTICIPATION CERTIFICATE
This Participation Certificate given this ____ day of _____________,
_____, by Pennzoil-Quaker State Company, a Delaware corporation ("Company"), to
________________________ ("Employee") with terms herein having the meaning
assigned to such terms in the Pennzoil-Quaker State Company Executive Severance
Plan (the "Plan") unless
otherwise stated.
1. The Compensation Committee hereby designates Employee as a
Participant in the Plan effective as of _______________, ____.
2. Upon Employee's termination of employment following a
change in control of the Company under the circumstances and subject to
the terms and conditions described Article IV of the Plan, Employee
will be entitled to the benefits specified in Section 4.1. of the Plan.
3. Employee's status as a Participant in the Plan may be
terminated by action of the Compensation Committee but only after
formal notice in writing to the Employee; provided, however, that
Employee's status as a Participant may not be terminated after the date
the Board acts under Section 4.2 of the Plan with respect to a change
in control of the Company if the Board or Compensation Committee has
designated the Participant, pursuant to Section 4.1 of the Plan, as
likely to be adversely affected by the change in control of the Company
except after the expiration of two years from such change in control of
the Company.
Compensation Committee
By:
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<PAGE> 1
EXHIBIT 10.10
AGREEMENT
THIS AGREEMENT by and between Pennzoil-Quaker State Company, a Delaware
corporation (hereinafter called the "Company"), and _________________________
(hereinafter called "Employee") dated as of the __th day of ______, 1998, and to
be effective as of the Distribution Date as defined in the Agreement and Plan of
Merger, dated as of April 14, 1998, among Pennzoil Company, Pennzoil Products
Company, Downstream Merger Company and Quaker State Corporation ("Merger
Agreement");
W I T N E S S E T H:
WHEREAS, Employee has previously entered into an agreement with
Pennzoil Company, the former parent of the Company, which agreement (the "Prior
Agreement") provides certain medical and retirement benefits as additional
compensation for past and future services rendered and to be rendered by
Employee (a copy of which is attached hereto); and
WHEREAS, pursuant to the Merger Agreement, the Company will assume
certain employee benefit obligations of Pennzoil Company in connection with the
merger, and
WHEREAS, the Company desires to enter into an arrangement with the
Employee to provide certain medical and retirement benefits as additional
compensation for past and future services rendered and to be rendered by
Employee to the Company; and
WHEREAS, Employee desires to enter into an arrangement with the Company
to provide certain medical and retirement benefits as additional compensation
for past and future services rendered and to be rendered by Employee to the
Company;
NOW, THEREFORE, in consideration of the premises and the agreements
hereinafter contained, the parties hereto agree as follows:
<PAGE> 2
1. Status of Agreement: This Agreement supersedes the Prior Agreement
between Employee and Pennzoil Company and Employee waives the benefits and
contracts under the Prior Agreement in exchange for this Agreement. The
liability, if any, for benefits earned under the Prior Agreement is assumed by
the Company pursuant to the Merger Agreement, and such benefits are included
under this Agreement. No benefits will be paid to Employee (or Employee's spouse
or dependents) by Pennzoil Company under the Prior Agreement.
2. Change in Control: For purposes of this Agreement, a Change in
Control of the Company shall conclusively be deemed to have occurred (i) if the
Board of Directors of the Company determines by resolution that a change in
control which has the reasonable likelihood of depriving key employees of
benefits they otherwise would have earned, by depriving key employees of the
opportunity to fulfill applicable service and age prerequisites to benefits or
otherwise has occurred, or (ii) upon the occurrence of an event specified for
such purposes as a change in control which has the reasonable likelihood of
depriving key employees of benefits they otherwise would have earned, by
depriving key employees of the opportunity to fulfill applicable service and age
prerequisites to benefits or otherwise, by resolution of the Board of Directors
adopted not more than 60 days prior to the occurrence of such event. The
Effective Date of a Change in Control shall be (x) in the case of such a Change
in Control described as specified in clause (i) of the preceding sentence, the
date (not more than 30 days prior to the date on which the Board of Directors
makes the determination) the Board of Directors determines as the date on which
the Change in Control has occurred, or (y) in the case of such a Change in
Control determined as specified in clause (ii) of the preceding sentence, the
date of occurrence of the event specified by the Board of Directors as
constituting such Change in Control.
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<PAGE> 3
3. Disability: For purposes of this Agreement, "Disability" shall have
the meaning set forth in the Company's Supplemental Long Term Disability Plan.
4. Termination of Employment:
(a) By the Company for Due Cause. If Employee is terminated by the
Company for Due Cause, he shall be entitled to no benefits under this
Agreement. The term "Due Cause" as used herein, shall mean (x) Employee has
committed a willful serious act, such as embezzlement, against the Company
intending to enrich himself at the expense of the Company or has been
convicted of a felony involving moral turpitude or (y) Employee, in
carrying out his duties hereunder, has been guilty of (i) willful, gross
neglect or (ii) willful, gross misconduct resulting in either case in
material harm to the Company; provided, in any event, Employee shall be
given written notice by a majority of the Board of Directors of the Company
that it intends to terminate Employee's employment for Due Cause under this
Paragraph 4(a), which notice shall specify the act, or acts, on the basis
of which the majority of the Board of Directors of the Company intends so
to terminate Employee's employment, and Employee shall then be given the
opportunity, within fifteen days of his receipt of such notice, to have a
meeting with the Board of Directors of the Company to discuss such act, or
acts. If the basis of such written notice is an act, or acts, other than an
act, or acts, described in clause (i), above, the employee shall be given
seven days after such meeting within which to cease, or correct, the
performance (or nonperformance) giving rise to such written notice, and
upon failure of Employee within such seven days to cease, or correct, such
performance (or nonperformance), Employee's employment by the Company shall
automatically be terminated hereunder for Due Cause.
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<PAGE> 4
(b) By Death or Disability. In the event of the Death of Employee or
Disability while employed by the Company, Employee shall be entitled to
receive supplemental retirement benefits provided in Paragraph 5 and the
additional medical benefits provided in Paragraph 6.
(c) Voluntarily By Employee. If Employee terminates his employment
voluntarily and without Good Reason and prior to the Effective Date of a
Change in Control, he shall be entitled to no benefits under this
Agreement.
(d) By Company Other Than For Due Cause. If Employee's employment with
the Company is terminated by the Company for any reason other than as
provided in Paragraph 4(a) hereof, the Company shall provide to Employee
supplemental retirement benefits provided in Paragraph 5 and the additional
medical benefits provided in Paragraph 6.
(e) By Employee For Good Reason. If the Company: (i) demotes the
Employee to a lesser position than he occupies as of the date of the
Agreement; (ii) causes a material change in the nature or scope of the
authorities, powers, functions, duties, or responsibilities attached to
Employee's position as provided in clause (i); (iii) decreases Employee's
salary below the level provided as of the date of this Agreement or if
greater the level provided at any subsequent date; or (iv) materially
reduces Employee's benefits under any employee benefit plan, program, or
arrangement of the Company (other than a change that affects all employees
similarly situated) from the level in effect upon the date of this
Agreement, then, such action (or inaction) by the Company, unless consented
to in writing by Employee, shall constitute a termination of Employee's
employment by the Company pursuant to Paragraph 4(d).
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<PAGE> 5
(f) Following Change In Control of the Company. If Employee's
employment is terminated following the Effective Date of a Change in
Control of the Company for reasons other than Death, Disability or Due
Cause, such termination shall be treated as a termination of employment by
Company pursuant to Paragraph 4(d).
(g) Effect on Agreement. Termination of employment shall not
constitute termination of this Agreement.
5. Retirement Benefits: The employee shall be entitled to supplemental
retirement benefits, payable at such time or times as benefits are received
under the Company's tax qualified defined benefit plan, determined as the excess
of (i) the benefit to which he would have been entitled if his active service
with the Company under the Company's tax qualified defined benefit plan and
excess benefit arrangement between Employee and the Company, as in effect on the
date hereof but taking into account any benefit improvements hereafter, had
continued until age 55, assuming that (x) his salary in effect on the date of
termination of employment but, if a Change in Control has occurred, not less
than his salary in effect immediately prior to a Change in Control, or if
higher, that in effect at any later date, plus in any case a 5% increase in such
salary for each 12 months following termination of employment, has continued
uninterrupted until age 55 and (y) that he received in each calendar year,
including the calendar year of termination, a bonus equal to the greater of (A)
his highest annual incentive bonus earned during the 12 months preceding
termination of employment or (B) the highest annual incentive bonus earned by
the Employee in the three-year period preceding a Change in Control over (ii)
the benefit he actually receives from such tax
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qualified defined benefit plan and the excess benefit arrangement between
Employee and the Company.
6. Medical Benefits: The Company shall provide to Employee additional
medical benefits and medical benefits coverages following termination of
employment on terms and conditions and at benefit levels (including any required
employer contributions) no less favorable than those applicable to Employee as
of the date hereof for the period prior to his attainment of age 55 and
thereafter no less favorable than those provided as of the date hereof to
retired executives of the Company with more than 20 years of service
(disregarding any benefits provided a retired Company employee under a Deferred
Compensation Agreement). This medical benefit coverage shall include spouse and
dependent coverage both during and after the life of Employee.
7. No Offsets: The benefits provided under Paragraphs 5 and 6 hereunder
shall not be subject to an offset or reduction by reason of any benefits or
payments made by or under any other Company plan, program, practice or
arrangement or a plan, program, practice or arrangement maintained by any other
employer or otherwise, except for actual medical benefits, denominated as such,
provided by the Company.
8. Prohibition Against Assignment: The right of Employee to benefits
under this Agreement shall not be assigned, transferred, pledged or encumbered
in any way and any attempt at assignment, transfer, pledge, encumbrance or other
disposition of such benefits shall be null and void and without effect.
9. Binding Effect: This Agreement shall be binding upon and enure to
the benefit of the Company, its successors and assigns, and Employee, his heirs,
executors, administrators and legal representatives.
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10. Governing Law: This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
11. Severability: The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
12. Amendment or Termination: This Agreement may be amended only by
mutual consent of the parties hereto evidenced in writing.
IN WITNESS WHEREOF, the parties have executed this Agreement (in
multiple copies). PENNZOIL-QUAKER STATE COMPANY
- ------------------------------------ By
----------------------------------
James L. Pate
Chairman of the Board
Chief Executive Officer
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<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of the 12th day of October, 1998, by and between
Pennzoil Products Company, a Delaware corporation (hereinafter called the
"Company"), and James J. Postl (hereinafter called "Employee");
W I T N E S S E T H:
WHEREAS, the Company desires to induce Employee to enter into an
employment arrangement with the Company in order that the Company have the
benefit of Employee's services from and after the date hereof and has agreed to
provide compensation and benefits to Employee in consideration of Employee's
agreement to become employed by the Company; and
WHEREAS, Employee desires to enter into an employment arrangement with
the Company and to perform services for the Company for the compensation and
benefits described herein;
WHEREAS, it is anticipated that the Company will shortly become a
publicly traded company, independent of its present parent, Pennzoil Company
("Pennzoil"), through a spinoff from Pennzoil followed immediately by a merger
of the Company with Quaker State Company in which the Company is the survivor
and shall be named Pennzoil-Quaker State Company (such events hereinafter the
"Transaction");
WHEREAS, the Company wishes to engage Employee now regardless of
whether the Transaction occurs;
NOW, THEREFORE, in consideration of the premises and the agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment; Employment Term. The Company hereby agrees to employ
Employee and Employee agrees to become an employee of the Company effective as
of the date
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<PAGE> 2
hereof. Employee shall initially be the President of the Company with such
duties and responsibilities as may be assigned to Employee from time to time by
the Chairman of the Board of Directors and Chief Executive Officer of Pennzoil.
Upon the closing of the Transaction, Employee shall be the President and Chief
Operating Officer of Pennzoil-Quaker State Company with such duties and
responsibilities as are usually incident to the offices of President and Chief
Operating Officer and such other duties and responsibilities as may be assigned
to Employee from time to time by the Chairman of the Board of Directors and
Chief Executive Officer of Pennzoil- Quaker State Company and Employee shall be
a member of the Board of Directors of Pennzoil- Quaker State Company. The term
of employment under this Agreement shall commence upon the date hereof and shall
expire on the day after the third anniversary following the closing date of the
Transaction or, if the Transaction does not occur, on the close of business on
January 31, 2002, unless, in either case, employment is sooner terminated under
Paragraph 18 ("Employment Term"). The employment of Employee shall be subject to
the other terms and conditions of this Agreement. Employee agrees to devote his
full time, attention and energies to, and use his best efforts, ability and
fidelity in the performance of, the duties attaching to such employment;
provided, however, that it shall not be a violation of this Agreement for
Employee to serve on boards of directors of such proprietary or not for profit
organizations as are approved by the Company's Chief Executive Officer. Employee
shall perform his duties at the principal executive offices of Pennzoil or,
after the closing date of the Transaction, at the principal executive offices of
Pennzoil-Quaker State Company, wherever such offices shall be situated, subject
to reasonable travel in the course of carrying out his responsibilities under
this Agreement.
2. Salary Compensation. Effective as of the date hereof and during the
Employment Term the Company hereby agrees to pay as current salary compensation
to Employee
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<PAGE> 3
$500,000 on an annualized basis but payable in biweekly installments of
$19,230.77 each. The salary amounts described in the next preceding sentence
shall be reviewed annually by the Compensation Committee of the Company's Board
of Directors with a view to consideration of appropriate merit increases but may
not be decreased during the Employment Term.
3. Stock Option Grants. Effective as of the closing date of the
Transaction, the Company shall grant to Employee nonqualified stock options to
purchase shares of Common Stock of Pennzoil-Quaker State Company, par value
$_____ per share ("Common Stock"), with an aggregate grant value of $3,700,000
based on a grant price ("Grant Price") equal to the average for each of the five
trading days following the date of the Transaction of the mean between the
highest and the lowest sale prices per share of Common Stock on the New York
Stock Exchange (Composite Tape) (such mean being the "NYSE Price") on each such
day ("Initial Stock Option"). The actual number of shares subject to the Initial
Stock Option shall be determined by dividing 3,700,000 by the Grant Price. The
terms and conditions of such Initial Stock Option shall be substantially similar
to those applicable to options previously granted under Pennzoil's stock option
plans to key executive employees of Pennzoil and shall include (i) a term of ten
years, (ii) incremental vesting and exercisability of options at the rate of 33
1/3% of the shares subject to the option per year on the first, second and third
anniversaries of the Transaction closing date so that cumulatively after the end
of the third anniversary of the closing date of the Transaction, 100% of the
options shall be exercisable, (iii) provision for exercisability of all options
in the event of death, retirement or disability, (iv) acceleration of all
options in the event of a change in control of the Company and (v) other terms
no less favorable to Employee than those reflected in this Agreement or in the
form of option agreement attached hereto as Exhibit A. The Initial Stock Option
shall be subject to a stock option agreement entered into between the
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<PAGE> 4
parties hereto on terms consistent with the foregoing; provided that the option
shall be effective as of the closing date of the Transaction in accordance with
the terms and conditions contained herein, irrespective of whether a stock
option agreement has been executed by the parties. Employee shall be granted
additional stock options in an amount and with a frequency consistent with the
Company's stock option grant policy under the Company's applicable long-term
incentive plans with respect to similarly situated Company employees. Employee's
1999 stock option grant shall cover a number of shares of Common Stock that is
at least equal to the number determined by dividing 1,017,500 by the NYSE Price
of the Common Stock for the day preceding the date of grant.
4. Conditional Stock Awards. Employee shall participate in the
Company's grants of Common Stock Units in an amount and with a frequency
consistent with the Company's grant policy under the Company's applicable
long-term incentive plans with respect to similarly situated Company employees.
Employee's 1999 Common Stock Unit grant shall be for that number which is at
least equal to the number determined by dividing 185,000 by the NYSE Price of
the Common Stock for the day preceding the date of grant.
5. Executive Severance Plan. Pennzoil agrees to cover Employee under
Pennzoil's Executive Severance Plan as of the date hereof and to continue
Employee as a participant in said plan, subject to Pennzoil's right to terminate
or amend the plan as applicable to its key executives participating therein.
6. Excess Benefits Agreements. Pennzoil shall enter into with Employee
an Excess Benefits Agreement as of the date hereof substantially in the form
attached hereto as Exhibit B.
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<PAGE> 5
7. Benefits Acceleration Agreement. Pennzoil shall enter into with
Employee a Benefits Acceleration Agreement as of the date hereof substantially
in the form attached hereto as Exhibit C.
8. Retirement Plan. Employee shall participate in Pennzoil's retirement
plan for salaried employees on the same terms and conditions as are applicable
to other Pennzoil salaried employees.
9. Savings Plan. Employee shall participate in Pennzoil's Savings and
Investment Plan on the same terms and conditions as are applicable to other
Pennzoil salaried employees.
10. Other Benefits. Except as is specifically provided herein to the
contrary, Employee shall be entitled to participate as of the date hereof in all
other benefit plans, programs or practices generally applicable to salaried
employees and to those special benefit programs, plans and practices applicable
to executives, such as, and not by way of limitation, Pennzoil's Supplemental
Life Insurance Plan, Pennzoil's Supplemental Disability Plan, Pennzoil's Medical
Expenses Reimbursement Plan, Tax Protection Agreement, director and officers
indemnity agreement and Pennzoil's Salary Continuation Plan. If the Company
maintains a policy covering errors and omissions of officers, the Company shall
cause employee's errors and omissions to be covered under such policy during and
after termination of employment on the same terms and conditions as applied
generally to all other officers and former officers.
11. Special Lump Sum Payment. The Company shall pay Employee a special
lump sum cash payment of $296,775 promptly following the execution of this
Agreement by the Company and Employee.
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<PAGE> 6
12. Temporary Lodging and Commuting Expense Reimbursements. The
Company and Employee agree to endeavor in good faith to negotiate mutually
agreeable terms for the Company's reimbursement of Employee's temporary lodging
and commuting expenses.
13. Perquisites. Effective as of the date hereof, the Company shall
afford to Employee perquisites consistent with the level of compensation and
responsibility of Employee, such perquisites to be continued uninterrupted
except to the extent that the Board of Directors determines that prospective
adjustment to perquisite policy is appropriate for similarly situated employees.
14. Annual Paid Vacation. Employee shall be entitled to four weeks of
paid vacation annually.
15. Annual and Long Term Performance Incentive Plan. Effective as of
January 1, 1999, the Company shall afford to Employee participation in both an
annual performance incentive program ("Annual Plan") and a long term incentive
program ("LTIP") with terms and conditions substantially in accordance with
those described on Exhibit D attached hereto. Employee's target annual bonus
under the Annual Plan shall be 65% of then current salary. Employee's target
LTIP payments shall be, for each LTIP cycle, 74% of annualized salary (as in
effect at the time of payout, if any, under the LTIP).
16. Change in Control. For purposes of this Agreement, a change in
control of Pennzoil shall conclusively be deemed to have occurred (i) if the
Board of Directors of Pennzoil determines by resolution that a change in control
which has the reasonable likelihood of depriving key employees of benefits they
otherwise would have earned, by depriving key employees of the opportunity to
fulfill applicable service and age prerequisites to benefits or otherwise has
occurred, or (ii) upon the occurrence of an event specified for such purposes as
a change in
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<PAGE> 7
control which has the reasonable likelihood of depriving key employees of
benefits they otherwise would have earned, by depriving key employees of the
opportunity to fulfill applicable service and age prerequisites to benefits or
otherwise, by resolution of the Board of Directors of Pennzoil adopted not more
than 60 days prior to the occurrence of such event. The Effective Date of a
change in control shall be (x) in the case of such a change in control described
as specified in clause (i) of the preceding sentence, the date (not more than 30
days prior to the date on which the Board of Directors of Pennzoil makes the
determination) the Board of Directors of Pennzoil determines as the date on
which the change in control has occurred, or (y) in the case of such a change in
control determined as specified in clause (ii) of the preceding sentence, the
date of occurrence of the event specified by the Board of Directors of Pennzoil
as constituting such change in control. The Transaction shall not constitute a
change in control of Pennzoil or the Company.
17. Disability. In the event Employee suffers a Disability and
qualified for benefits under the Company's Supplemental Disability Plan during
the Employment Term, salary payments under Paragraph 2 shall be discontinued;
provided, however, Employee shall be entitled to the Disability and other
benefits provided by the Company and consistent with Paragraph 10 of this
Agreement. For purposes of this Agreement, "Disability" shall have the meaning
set forth in Pennzoil's Supplemental Disability Plan.
18. Termination of Employment.
(a) By the Company for Due Cause.
I. Nothing herein shall prevent the Company from terminating
Employee for Due Cause in which event the Employment Term shall
end and Employee shall continue to receive salary and benefit
coverages
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<PAGE> 8
provided for in this Agreement only through the period ending with
the date of such termination as provided in this Paragraph 18(a).
Any other rights and benefits Employee may have under other
employee benefit plans and programs of the Company, generally,
shall be determined in accordance with the terms of such plans and
programs. The term "Due Cause" as used herein, shall mean (x)
Employee has committed a willful serious act, such as
embezzlement, against the Company intending to enrich himself at
the expense of the Company or has been convicted of a felony
involving moral turpitude or (y) Employee, in carrying out his
duties hereunder, has been guilty of (i) willful, gross neglect or
(ii) willful, gross misconduct resulting in either case in
material harm to the Company.
II. Notwithstanding the foregoing, no termination of Employee's
employment by the Company shall be treated as for Due Cause or be
effective until and unless all of the steps described in
subparagraphs (i) through (iii) below have been complied with:
(i) Notice of intention to terminate for Due Cause has been
given by the Company within 120 days after the Board of Directors
of the Company learns of the act, failure or event (or latest in a
series of acts, failures or events) constituting "Cause";
(ii) The Board of Directors of the Company has voted (at a
meeting of the Board duly called and held as to which termination
of Employee is an agenda item) to terminate Employee for Due Cause
after Employee has been given notice of the particular acts or
circumstances
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<PAGE> 9
which are the basis for the termination for Due Cause and has been
afforded at least 20 days notice of the meeting and an opportunity
to present his position in writing; and
(iii) The Board of Directors of the Company has given a Notice
of Termination to Employee within 20 days of such Board meeting.
The Company may suspend Employee with pay at any time during the period
commencing with the giving of notice to Employee under clause (i) above
until final Notice of Termination is given under clause (iii) above.
Upon the giving of notice as provided in clause (iii) above, no further
payments shall be due Employee.
(b) By Death or Disability.
I. In the event of the death of Employee during the Employment
Term, the policies and plans of the Company applicable to Employee
shall govern all payments to be made to Employee's estate or
beneficiaries and no further payments shall be made to Employee
pursuant to Paragraph 2 of this Agreement, this Agreement shall
terminate and all amounts accrued for the benefit of Employee on
that date shall be paid to Employee's estate or beneficiaries. Any
death benefit under life insurance or other benefit programs
covering Employee shall be determined and paid in accordance with
the provisions of such policies and programs and the Initial Stock
Option shall be vested, or if not theretofore granted, shall be
granted as provided herein, and in either case remain outstanding
and exercisable for one year after death.
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<PAGE> 10
II. If Employee's employment is terminated by reason of
Disability, the policies and plans of the Company applicable to
Employee shall govern all payments to be made to Employee and the
Initial Stock Option shall be vested or if not theretofore
granted, shall be granted as provided herein and in either case
remain outstanding and exercisable until the earlier to occur of
death or one year after termination of employment.
(c) Voluntarily By Employee. Employee may terminate his employment
and the Employment Term under this Agreement other than for Good Reason
by providing 30 days notice to Company in which event Employee shall be
entitled only to those benefits as are specifically provided under the
terms of a particular benefit plan or program and salary payments under
Paragraph 2 shall immediately cease.
(d) By Company Other Than For Due Cause. If Employee's employment
under this Agreement is terminated by the Company for any reason other
than as provided in Paragraph 18(a) hereof and other than after a
change in control of the Company (as defined in Paragraph 16), the
Company shall (i) pay to Employee in a lump sum amount twice the amount
of current annualized salary compensation being paid to Employee under
Paragraph 2, (ii) permit Employee's and Employee's dependents continued
participation in Company medical plans previously available to Employee
for a period of two years following such termination and (iii) cause
the Initial Stock Option granted pursuant to Paragraph 3 to be fully
vested and immediately exercisable for a period of 730 days following
such termination of employment. Any other stock options will continue
to vest and
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<PAGE> 11
become exercisable determined as if Employee had remained employed for
two years following his actual termination of employment. Conditional
Stock Awards shall be prorated by multiplying each such award by a
fraction, the numerator of which is the number of complete calendar
months elapsing between January 1 of the initial year of the award and
the date that is two years from termination of employment and the
denominator of which is 60, but such prorated awards shall be paid out
only at the end of the original award period. Any LTIP award shall be
prorated in the same manner as Conditional Stock Awards (but using a
denominator of 36) and paid out as soon as is practicable after the end
of the three-year performance period. In addition, Employee's interests
in the Excess Benefits Agreements described in Paragraph 6 and the
qualified plans described in Paragraphs 8 and 9 hereof shall be fully
vested and nonforfeitable as of such termination and all service
requirements for early retirement shall be treated as satisfied and the
Company shall pay in a cash lump sum to Employee upon such termination
an amount equal to the benefits under such qualified plans otherwise
forfeitable which cannot be paid pursuant to those plans.
(e) By Employee For Good Reason. Anything herein to the contrary
notwithstanding, if the Company (i) demotes Employee to a lesser
position than provided in Paragraph 1 or, if the Transaction does not
occur, Paragraph 27; (ii) causes a material change in the nature or
scope of the authorities, powers, functions, duties, or
responsibilities attached to Employee's position as provided in
Paragraph 1 or, if the Transaction does not occur, Paragraph 27; (iii)
decreases Employee's salary below the level provided for by the terms
of Paragraph 2 (taking
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into account increases made from time to time in accordance with such
Paragraph 2); (iv) materially reduces Employee's benefits under any
executive compensation or employee benefit plan, program, or
arrangement of the Company (other than a change made prior to a change
in control that affects all of the Company's senior executive officers
alike) from the level in effect upon Employee's commencement of
participation on or after the date hereof; (v) fails to elect or
maintain Employee as a member of the Company's board of directors if
required to do so under Paragraph 1; (vi) fails to locate Employee's
office at the Company's principal executive office; (vii) fails to
obtain the assumption in writing of the obligation to perform this
Agreement by any successor to all or substantially all of the assets of
the Company within 60 days after a merger, consolidation, sale, or
similar transaction unless such assumption occurs by operation of law;
or (viii) commits any other material breach of this contract, then,
such action (or inaction) by the Company, unless consented to in
writing by Employee, shall give Employee the right to treat such action
as a termination of Employee's employment by the Company without Due
Cause and to receive the compensation and benefits provided pursuant to
Paragraph 18(d) above. Notwithstanding the preceding sentence, within
60 days of learning of the action (or inaction) described herein as the
basis for a constructive termination of employment, Employee shall
(unless he gives written consent thereto) advise the Company in
writing, that the action (or inaction) constitutes a basis for
termination of his employment pursuant to this Paragraph 18(e) in which
event the Company shall have 60 days in which to correct such action or
inaction and if the Company does so correct such action (or
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inaction) Employee shall not be entitled to terminate his employment
under this Paragraph 18(e) as a result of such action (or inaction). If
the Company fails to correct such action or inaction within such 60-day
period, Employee may terminate his employment for Good Reason within 30
days of the expiration of such period.
(f) Following Change In Control of the Company. If Employee's
employment is terminated within two years following a change in control
of the Company by the Employee for Good Reason or by the Company for
reasons other than death, Disability or Due Cause, such termination
shall be treated as a termination of employment by Company without Due
Cause and thereupon Employee shall receive the cash and benefits
described in Paragraph 18(d), plus any greater benefits provided under
the Executive Severance Plan, without any duplication of benefits.
(g) Expiration of Employment Term. Except as provided in Paragraph
18(f), in the event this Agreement expires by its terms at the end of
the initial Employment Term and the Company has not, at least six
months prior to such date, given Employee written notice of its
intention not to continue Employee's employment, either at will or
pursuant to other mutually agreeable terms, the Company shall pay
Employee a lump sum cash amount equal to the sum of (i) one times
Employee's annualized salary compensation paid to Employee pursuant to
Paragraph 2, plus (ii) (A) one twelfth of such annualized salary
compensation times (B) a number equal to six minus the number of months
of notice actually provided to Employee prior to the expiration of the
Employment Term.
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(h) Company Benefits Upon Termination. Employee shall also be
entitled in all events upon termination to receive the benefits to
which he is entitled, if any, under the Company's plans and programs
referenced herein or otherwise in effect from time to time.
(i) Effect on Agreement. Termination of employment or the
Employment Term as used herein shall not constitute a termination of
this Agreement and the provisions hereof shall survive until the
respective rights of the Company and Employee have been discharged.
19. Noncompetition Agreement. The Company and Employee agree to
endeavor in good faith to negotiate a form of noncompetition agreement with a
one year term mutually agreeable to the Company and Employee, which Employee
shall execute in favor of the Company if Employee's employment is terminated
pursuant to Paragraph 18(d) or Paragraph 18(e).
20. Prohibition Against Assignment. The right of Employee to benefits
under this Agreement shall not be assigned, transferred, pledged or encumbered
in any way and any attempt at assignment, transfer, pledge, encumbrance or other
disposition of such benefits shall be null and void and without effect.
21. Binding Effect. This Agreement shall be binding upon and enure to
the benefit of the Company, its successors and assigns, and Employee, his heirs,
executors, administrators and legal representatives.
22. Entire Agreement. This Agreement and the attached exhibits and
agreements referenced herein constitute the entire understanding between the
parties hereto with respect to the subject matter hereof, and may be modified
only by a writing executed by the
-14-
<PAGE> 15
parties hereto. The waiver by either party to this Agreement of a breach of any
provision thereof by the other party shall not operate or be construed as a
waiver of any subsequent breach of such party.
23. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
24. Resolution of Disputes.
(a) All controversies and claims arising under or in connection
with this Agreement or relating to the interpretation, breach or
enforcement thereof or of the agreements referenced herein, and all
other disputes between the parties, shall at the election of Employee
or the Company, be resolved by expedited, binding arbitration, to be
held in Houston, Texas in accordance with the rules and procedures of
the American Arbitration Association governing employment disputes. Any
award made by such arbitrator(s) shall be final, binding and conclusive
on the parties for all purposes, and judgment upon the award rendered
by the arbitrator(s) may be entered in any court having jurisdiction
thereof.
(b) Any and all reasonable legal fees and expenses incurred by
Employee in seeking to enforce any rights to benefits provided by this
Agreement or the agreements referenced herein shall be promptly paid by
the Company if Employee is successful in whole or in part in obtaining
or enforcing said rights to benefits pursuant to arbitration.
25. Severability. The invalidity or enforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
-15-
<PAGE> 16
26. Amendment. This Agreement may be amended only by mutual consent of
the parties hereto evidenced in writing.
27. Termination of the Transaction. In the event the Transaction is
terminated prior to its closing, Employee shall continue as the President of the
Company with duties and responsibilities customarily incident to such position
and as otherwise assigned by the Chairman of the Board of Directors and Chief
Executive Officer of Pennzoil and Employee shall report directly to the Chief
Executive Officer of Pennzoil. With respect to the Initial Stock Option grant in
Paragraph 3, Employee shall receive in no event later than March 1, 1999, or,
the date of a change in control, if earlier than March 1, 1999, stock options to
purchase Pennzoil common stock with an aggregate grant value of $3,700,000 based
on a grant price equal to the average of the mean between the highest and the
lowest sale prices per share of Pennzoil common stock on the NYSE for each of
the five trading days following the date the Board of Directors of Pennzoil
determines the Transaction has terminated. Such options shall have the same
terms and conditions as provided in Paragraph 3 with respect to the Initial
Stock Option, except that such options shall vest and become exercisable
incrementally at the rate of 33 1/3% of the shares subject to option per year on
the first, second, and third anniversaries of January 31, 1999.
28. Company References. Except as otherwise specifically provided
herein, following the date of the Transaction, all references to the Company
shall refer to Pennzoil-Quaker State Company and all obligations imposed on the
Company shall be the sole obligation of Pennzoil-Quaker State Company.
29. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if given to Employee, sent by
certified or registered mail to Employee's residence (if such notice is
addressed to Employee), with a copy to Willkie Farr &
-16-
<PAGE> 17
Gallagher, 787 Seventh Avenue, New York, New York, 10019-6099, Attention:
Stephen T. Lindo, Esq., or if given to the Company, sent to the principal
executive offices of the Company.
30. Representation.
(a) Employee hereby represents and warrants to the Company that
Employee is not aware of any presently existing fact, circumstance or
event (including, without limitation, any contractual or other legal
constraint) which would preclude or restrict him from entering into
this Agreement or providing to the Company the services contemplated by
this Agreement, or which would give rise to any breach of any term or
provision hereof.
(b) The Company hereby represents and warrants to Employee that (i)
it has received all authorizations necessary for the execution of this
Agreement on the terms and conditions set forth herein and for the
grant of the Initial Stock Option as set forth in Paragraph 3 hereof,
and that it has taken all actions necessary to make such grants, (ii)
there are no regulatory approvals that are necessary for the execution
and performance of this Agreement by the Company, and (iii) its
entering this Agreement and the performance of its obligations under
this Agreement will not violate any agreement between the Company and
any other person, firm or organization or any law or governmental
regulation.
-17-
<PAGE> 18
IN WITNESS WHEREOF, the parties have executed this Agreement (in
multiple copies) as of the day and year first above written.
PENNZOIL PRODUCTS COMPANY
/s/ JAMES J. POSTL By /s/ JAMES L. PATE
- ------------------------------ --------------------------------------
James J. Postl James L. Pate
Chairman of the Board and Chief
Executive Officer
<PAGE> 1
EXHIBIT 12
PENNZOIL-QUAKER STATE COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- ------- ------- --------
(DOLLAR AMOUNTS EXPRESSED IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income from continuing operations before
income from equity investees.............. $(15,031) $(46,772) $ 4,980 $(4,948) $(78,755)
Distribution of income from equity
investees................................. -- -- -- 4,359 32,888
Amortization of capitalized interest........ 482 337 575 1,292 1,904
Income tax provision........................ (1,462) (24,043) (1,103) 6,245 (38,338)
Interest charges............................ 46,627 79,632 73,468 80,167 90,552
Income before income tax provision and
interest charges.......................... $ 30,616 $ 9,154 $77,920 $87,115 $ 8,251
======== ======== ======= ======= ========
Fixed charges............................... $ 47,750 $ 82,677 $83,571 $87,608 $ 90,807
======== ======== ======= ======= ========
Amount by which fixed charges exceed
earnings.................................. $ 17,134 $ 73,523 $ 5,651 $ 493 $ 82,556
======== ======== ======= ======= ========
DETAIL OF INTEREST AND FIXED CHARGES
Interest charges per Consolidated Statement
of Income which includes amortization of
debt discount, expense and premium........ $ 31,091 $ 63,861 $65,174 $69,221 $ 70,198
Add: portion of rental expense
representative of interest factor(1)...... 16,659 18,816 18,397 18,387 20,609
-------- -------- ------- ------- --------
Total fixed charges............... $ 47,750 $ 82,677 $83,571 $87,608 $ 90,807
Less: interest capitalized per Consolidated
Statement of Income....................... 1,123 3,045 10,103 7,441 255
-------- -------- ------- ------- --------
Total interest charges............ $ 46,627 $ 79,632 $73,468 $80,167 $ 90,552
======== ======== ======= ======= ========
</TABLE>
- -------------------------
(1) Interest factor based on management's estimates and approximates one-third
of rental expense.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF PENNZOIL-QUAKER STATE COMPANY
(AS OF DECEMBER 31, 1998)
<TABLE>
<CAPTION>
PZL PARENT
--- ------
<S> <C> <C>
Atlas Processing Company (Delaware)......................... 100%
Excel Paralubes (Texas General Partnership)............... 50%
Pennzoil Wax Partner Company (Nevada)..................... 100%
Bareco Asia Pacific Pte. Ltd. (Singapore).............. 50%
Bareco Products (South Carolina General Partnership)... 50%
Bareco International Sales Corporation (Virgin
Islands)............................................ 100%
Penreco (Texas General Partnership)....................... 50%
Jiffy Lube International, Inc. (Nevada)..................... 100%
American Oil Change Corporation (Delaware)................ 100%
Heritage Merchandising Co., Inc., (Virginia).............. 100%
Jiffy Lube International of Maryland, Inc. (Maryland)..... 100%
Pennzoil Deutschland GmbH Mineralolvertrieb (Germany)....... 100%
Pennzoil Products Australia Company (Nevada)................ 100%
Pennzoil Products Benelux Company (Nevada).................. 100%
Pennzoil Products Company de Mexico (Nevada)................ 100%
Pennzoil Products International Company (Mauritius)......... 100%
Pennzoil India Limited (India)............................ 96.4%
Pennzoil Products International Holding Company
(Delaware)................................................ 100%
Pennzoil Products Canada Company (Nova Scotia)............ 100%
Pennzoil Products Mediterraneo, S.L. (Spain)................ 100%
Pennzoil-Quaker State Asia Pacific Company (Nevada)......... 100%
Pennzoil Receivables Company (Delaware)..................... 100%
PZ Shareowner Services Company (Delaware)................... 100%
Quaker State Corporation (Delaware)......................... 100%
Lube Acquisition Corporation (Delaware)................... 100%
QSHK Corporation (Delaware)............................... 100%
Quaker State, Inc. (Canada)............................... 100%
Quaker State Investment Corporation (Delaware)............ 100%
Blue Coral, Inc. (Delaware)............................ 100%
Blue Coral-Slick 50, Inc. (Delaware)................. 100%
Petrolon International Limited (Isle of Man)......... 99.9%
Petrolon Europe Limited (Isle of Man)............. 99.4%
Quaker State France S.A. (France)................. 100%
Pennzoil-Quaker State Limited (United Kingdom).... 100%
Medo Industries, Inc. (New York)....................... 100%
Q Lube, Inc. (Delaware)................................ 100%
The Valley Camp Coal Company (Delaware)................ 100%
Donaldson Mine Company (West Virginia)............... 100%
Kelley's Creek and Northwestern Railroad Company
(West Virginia)..................................... 100%
Elm Grove Coal Company (West Virginia)............... 100%
The Helen Mining Company (Pennsylvania).............. 100%
Kanawha and Hocking Coal and Coke Company (West
Virginia)........................................... 100%
Shrewsbury Coal Company (West Virginia).............. 100%
Valley Camp of Utah, Inc. (Utah)..................... 100%
Valley Camp, Inc. (Canada)............................. 100%
Rain-X Corporation (Arizona).............................. 100%
Specialty Oil Company, Inc. (Delaware).................... 100%
Specialty Environmental Services of Texas, Inc.
(Texas)............................................... 50%
Savannah Company Limited (Bermuda).......................... 100%
UMW Pennzoil Distributors SDN. BHD. (Malaysia).............. 50%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated March 11, 1999 included in this Form 10-K, into
Pennzoil-Quaker State Company's previously filed Registration Statements on Form
S-8 Nos. 333-69833, 333-69835, 333-69839, 333-69837, and 333-72835 and on Form
S-3 No. 333-65909.
ARTHUR ANDERSEN LLP
Houston, Texas
March 15, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference of our report dated
March 2, 1999 on Excel Paralubes included in this Form 10-K into Pennzoil-Quaker
State Company's previously filed Registration Statements on Form S-8 Nos.
333-69833, 333-69835, 333-69839, 333-69837, and 333-72835 and on Form S-3 No.
333-65909.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 12, 1999
<PAGE> 1
PENNZOIL-QUAKER STATE COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL-QUAKER STATE COMPANY, a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), an Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as prescribed by the Commission pursuant to the Act and the rules and
regulations of the Commission promulgated thereunder, with such amendments,
supplements or appendices thereto as may be necessary or appropriate, together
with any and all exhibits and other documents having relation to said Annual
Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON II, JAMES L. PATE and JAMES J. POSTL and each of them severally, his
true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead, in his capacity as a director or officer, or both,
as the case may be, of the Company, said Annual Report and any and all
amendments, supplements or appendices thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith and to file the same
or cause the same to be filed with the Commission. Each of said attorneys shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities, every act whatsoever necessary or
desirable to be done to the premises, as fully and to all intents and purposes
as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
10th day of March, 1999.
/s/ HOWARD H. BAKER, JR.
-----------------------------
Howard H. Baker, Jr.
<PAGE> 2
PENNZOIL-QUAKER STATE COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL-QUAKER STATE COMPANY, a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), an Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as prescribed by the Commission pursuant to the Act and the rules and
regulations of the Commission promulgated thereunder, with such amendments,
supplements or appendices thereto as may be necessary or appropriate, together
with any and all exhibits and other documents having relation to said Annual
Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON II, JAMES L. PATE and JAMES J. POSTL and each of them severally, his
true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead, in his capacity as a director or officer, or both,
as the case may be, of the Company, said Annual Report and any and all
amendments, supplements or appendices thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith and to file the same
or cause the same to be filed with the Commission. Each of said attorneys shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities, every act whatsoever necessary or
desirable to be done to the premises, as fully and to all intents and purposes
as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
10th day of March, 1999.
/s/ W.L. LYONS BROWN, JR.
-----------------------------
W.L. Lyons Brown, Jr.
<PAGE> 3
PENNZOIL-QUAKER STATE COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL-QUAKER STATE COMPANY, a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), an Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as prescribed by the Commission pursuant to the Act and the rules and
regulations of the Commission promulgated thereunder, with such amendments,
supplements or appendices thereto as may be necessary or appropriate, together
with any and all exhibits and other documents having relation to said Annual
Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON II, JAMES L. PATE and JAMES J. POSTL and each of them severally, his
true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead, in his capacity as a director or officer, or both,
as the case may be, of the Company, said Annual Report and any and all
amendments, supplements or appendices thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith and to file the same
or cause the same to be filed with the Commission. Each of said attorneys shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities, every act whatsoever necessary or
desirable to be done to the premises, as fully and to all intents and purposes
as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
10th day of March, 1999.
/s/ ERNEST H. COCKRELL
-----------------------------
Ernest H. Cockrell
<PAGE> 4
PENNZOIL-QUAKER STATE COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL-QUAKER STATE COMPANY, a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), an Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as prescribed by the Commission pursuant to the Act and the rules and
regulations of the Commission promulgated thereunder, with such amendments,
supplements or appendices thereto as may be necessary or appropriate, together
with any and all exhibits and other documents having relation to said Annual
Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON II, JAMES L. PATE and JAMES J. POSTL and each of them severally, his
true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead, in his capacity as a director or officer, or both,
as the case may be, of the Company, said Annual Report and any and all
amendments, supplements or appendices thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith and to file the same
or cause the same to be filed with the Commission. Each of said attorneys shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities, every act whatsoever necessary or
desirable to be done to the premises, as fully and to all intents and purposes
as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
10th day of March, 1999.
/s/ ALFONSO FANJUL
-----------------------------
Alfonso Fanjul
<PAGE> 5
PENNZOIL-QUAKER STATE COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL-QUAKER STATE COMPANY, a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), an Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as prescribed by the Commission pursuant to the Act and the rules and
regulations of the Commission promulgated thereunder, with such amendments,
supplements or appendices thereto as may be necessary or appropriate, together
with any and all exhibits and other documents having relation to said Annual
Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON II, JAMES L. PATE and JAMES J. POSTL and each of them severally, his
true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead, in his capacity as a director or officer, or both,
as the case may be, of the Company, said Annual Report and any and all
amendments, supplements or appendices thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith and to file the same
or cause the same to be filed with the Commission. Each of said attorneys shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities, every act whatsoever necessary or
desirable to be done to the premises, as fully and to all intents and purposes
as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
10th day of March, 1999.
/s/ C. FREDERICK FETTEROLF
-----------------------------
C. Frederick Fetterolf
<PAGE> 6
PENNZOIL-QUAKER STATE COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL-QUAKER STATE COMPANY, a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), an Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as prescribed by the Commission pursuant to the Act and the rules and
regulations of the Commission promulgated thereunder, with such amendments,
supplements or appendices thereto as may be necessary or appropriate, together
with any and all exhibits and other documents having relation to said Annual
Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON II, JAMES L. PATE and JAMES J. POSTL and each of them severally, his
true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead, in his capacity as a director or officer, or both,
as the case may be, of the Company, said Annual Report and any and all
amendments, supplements or appendices thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith and to file the same
or cause the same to be filed with the Commission. Each of said attorneys shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities, every act whatsoever necessary or
desirable to be done to the premises, as fully and to all intents and purposes
as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
10th day of March, 1999.
/s/ FORREST R. HASELTON
-----------------------------
Forrest R. Haselton
<PAGE> 7
PENNZOIL-QUAKER STATE COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL-QUAKER STATE COMPANY, a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), an Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as prescribed by the Commission pursuant to the Act and the rules and
regulations of the Commission promulgated thereunder, with such amendments,
supplements or appendices thereto as may be necessary or appropriate, together
with any and all exhibits and other documents having relation to said Annual
Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON II, JAMES L. PATE and JAMES J. POSTL and each of them severally, his
true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead, in his capacity as a director or officer, or both,
as the case may be, of the Company, said Annual Report and any and all
amendments, supplements or appendices thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith and to file the same
or cause the same to be filed with the Commission. Each of said attorneys shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities, every act whatsoever necessary or
desirable to be done to the premises, as fully and to all intents and purposes
as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
10th day of March, 1999.
/s/ BERDON LAWRENCE
-----------------------------
Berdon Lawrence
<PAGE> 8
PENNZOIL-QUAKER STATE COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL-QUAKER STATE COMPANY, a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), an Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as prescribed by the Commission pursuant to the Act and the rules and
regulations of the Commission promulgated thereunder, with such amendments,
supplements or appendices thereto as may be necessary or appropriate, together
with any and all exhibits and other documents having relation to said Annual
Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON II, JAMES L. PATE and JAMES J. POSTL and each of them severally, his
true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead, in his capacity as a director or officer, or both,
as the case may be, of the Company, said Annual Report and any and all
amendments, supplements or appendices thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith and to file the same
or cause the same to be filed with the Commission. Each of said attorneys shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities, every act whatsoever necessary or
desirable to be done to the premises, as fully and to all intents and purposes
as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
10th day of March, 1999.
/s/ L. DAVID MYATT
-----------------------------
L. David Myatt
<PAGE> 9
PENNZOIL-QUAKER STATE COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL-QUAKER STATE COMPANY, a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), an Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as prescribed by the Commission pursuant to the Act and the rules and
regulations of the Commission promulgated thereunder, with such amendments,
supplements or appendices thereto as may be necessary or appropriate, together
with any and all exhibits and other documents having relation to said Annual
Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON II, JAMES L. PATE and JAMES J. POSTL and each of them severally, his
true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead, in his capacity as a director or officer, or both,
as the case may be, of the Company, said Annual Report and any and all
amendments, supplements or appendices thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith and to file the same
or cause the same to be filed with the Commission. Each of said attorneys shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities, every act whatsoever necessary or
desirable to be done to the premises, as fully and to all intents and purposes
as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
10th day of March, 1999.
/s/ JAMES J. POSTL
-----------------------------
James J. Postl
<PAGE> 10
PENNZOIL-QUAKER STATE COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL-QUAKER STATE COMPANY, a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), an Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as prescribed by the Commission pursuant to the Act and the rules and
regulations of the Commission promulgated thereunder, with such amendments,
supplements or appendices thereto as may be necessary or appropriate, together
with any and all exhibits and other documents having relation to said Annual
Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON II, JAMES L. PATE and JAMES J. POSTL and each of them severally, his
true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead, in his capacity as a director or officer, or both,
as the case may be, of the Company, said Annual Report and any and all
amendments, supplements or appendices thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith and to file the same
or cause the same to be filed with the Commission. Each of said attorneys shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities, every act whatsoever necessary or
desirable to be done to the premises, as fully and to all intents and purposes
as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
10th day of March, 1999.
/s/ GERALD B. SMITH
-----------------------------
Gerald B. Smith
<PAGE> 11
PENNZOIL-QUAKER STATE COMPANY
POWER OF ATTORNEY
WHEREAS, PENNZOIL-QUAKER STATE COMPANY, a Delaware corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), an Annual Report on Form 10-K for the fiscal year ended December 31,
1998, as prescribed by the Commission pursuant to the Act and the rules and
regulations of the Commission promulgated thereunder, with such amendments,
supplements or appendices thereto as may be necessary or appropriate, together
with any and all exhibits and other documents having relation to said Annual
Report;
NOW, THEREFORE, the undersigned in his capacity as a director or officer,
or both, as the case may be, of the Company, does hereby appoint DAVID P.
ALDERSON II, JAMES L. PATE and JAMES J. POSTL and each of them severally, his
true and lawful attorney or attorneys with power to act with or without the
others, and with full power of substitution and resubstitution, to execute in
his name, place and stead, in his capacity as a director or officer, or both,
as the case may be, of the Company, said Annual Report and any and all
amendments, supplements or appendices thereto as said attorneys or any of them
shall deem necessary or incidental in connection therewith and to file the same
or cause the same to be filed with the Commission. Each of said attorneys shall
have full power and authority to do and perform in the name and on behalf of
the undersigned in any and all capacities, every act whatsoever necessary or
desirable to be done to the premises, as fully and to all intents and purposes
as the undersigned might or could do in person, the undersigned hereby
ratifying and approving the acts of said attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this instrument on this
10th day of March, 1999.
/s/ LORNE R. WAXLAX
-----------------------------
Lorne R. Waxlax
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,899
<SECURITIES> 0
<RECEIVABLES> 310,197
<ALLOWANCES> 18,200
<INVENTORY> 306,512
<CURRENT-ASSETS> 736,571
<PP&E> 1,720,994
<DEPRECIATION> 688,918
<TOTAL-ASSETS> 3,144,994
<CURRENT-LIABILITIES> 413,347
<BONDS> 1,100,518
0
0
<COMMON> 7,762
<OTHER-SE> 1,342,445
<TOTAL-LIABILITY-AND-EQUITY> 3,144,994
<SALES> 1,801,676
<TOTAL-REVENUES> 1,850,138
<CGS> 1,394,923
<TOTAL-COSTS> 1,394,923
<OTHER-EXPENSES> 89,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,943
<INCOME-PRETAX> (84,205)
<INCOME-TAX> (38,338)
<INCOME-CONTINUING> (45,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,867)
<EPS-PRIMARY> (0.96)<F1>
<EPS-DILUTED> (0.96)
<FN>
<F1>Reflects basic earnings per share.
</FN>
</TABLE>
<PAGE> 1
EXCEL PARALUBES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Excel Paralubes
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of partners' deficit and of cash flows
present fairly, in all material respects, the financial position of Excel
Paralubes (the Partnership) at December 31, 1998 and 1997 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Notes 7 and 10 to the consolidated financial statements,
the Partnership has significant transactions with its partners.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 2, 1999
1
<PAGE> 3
EXCEL PARALUBES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 587,935 $ 46,520
Accounts receivable -- related parties.................... 39,704,186 41,716,048
Inventory................................................. 12,176,257 13,897,549
Other current assets...................................... 804,666 785,742
------------- ------------
Total current assets.............................. 53,273,044 56,445,859
Property, plant and equipment, net.......................... 406,348,515 418,910,084
Intangible assets and deferred charges, net................. 36,414,904 38,646,321
------------- ------------
$ 496,036,463 $514,002,264
============= ============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities -- related
party.................................................. $ 5,766,179 $ 22,871,297
Short-term notes payable.................................. 69,200,000 52,800,000
Interest payable.......................................... 5,945,833 5,945,833
------------- ------------
Total current liabilities......................... 80,912,012 81,617,130
Long-term debt.............................................. 490,000,000 490,000,000
Long-term liabilities....................................... 28,765,025 17,163,828
Commitments and contingencies (Note 9)
Partners' deficit........................................... (103,640,574) (74,778,694)
------------- ------------
$ 496,036,463 $514,002,264
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
EXCEL PARALUBES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales -- related parties..................... $269,663,968 $254,726,101 $ 12,492,524
Processing fees -- related party................. 9,665,420 9,662,000 2,035,166
Other............................................ 354,370 433,563 97,897
------------ ------------ ------------
Total revenues........................... 279,683,758 264,821,664 14,625,587
------------ ------------ ------------
Costs and expenses:
Cost of goods sold -- related party.............. 145,882,471 164,487,535 10,181,471
Operating expense................................ 47,712,610 48,549,398 30,394,209
General and administrative expense............... 1,064,681 1,057,665 665,197
Project construction expenses.................... 368,532 5,876,000
Depreciation and amortization.................... 17,281,029 17,738,395 3,165,247
Interest expense................................. 38,046,184 38,133,795 13,041,253
Taxes other than income.......................... 208,663 163,284 15,000
------------ ------------ ------------
Total costs and expenses................. 250,195,638 270,498,604 63,338,377
------------ ------------ ------------
Net income (loss).................................. $ 29,488,120 $ (5,676,940) $(48,712,790)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
EXCEL PARALUBES
CONSOLIDATED STATEMENT OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
ATLAS
CONOCO, INC. PROCESSING CO. TOTAL
------------ -------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1995...................... $ (9,994,482) $ (9,994,482) $ (19,988,964)
Net operating loss for the year ended December
31, 1996...................................... (24,356,395) (24,356,395) (48,712,790)
------------ ------------ -------------
Balance, December 31, 1996...................... (34,350,877) (34,350,877) (68,701,754)
Contributions................................... 12,500,000 12,500,000 25,000,000
Distributions................................... (12,700,000) (12,700,000) (25,400,000)
Net operating loss for the year ended December
31, 1997...................................... (2,838,470) (2,838,470) (5,676,940)
------------ ------------ -------------
Balance, December 31, 1997...................... (37,389,347) (37,389,347) (74,778,694)
Distributions................................... (29,175,000) (29,175,000) (58,350,000)
Net operating income for the year ended December
31, 1998...................................... 14,744,060 14,744,060 29,488,120
------------ ------------ -------------
Balance, December 31, 1998...................... $(51,820,287) $(51,820,287) $(103,640,574)
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
EXCEL PARALUBES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net operating income (loss)................... $ 29,488,120 $ (5,676,940) $ (48,712,790)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 17,281,029 17,738,395 3,523,482
(Increase) decrease in accounts
receivable............................... 2,011,862 (21,565,500) (20,150,548)
(Increase) decrease in inventory........... 1,721,292 (3,544,858) (10,352,691)
Increase in other current assets........... (18,924) (49,193) (730,788)
Decrease in accounts payable and accrued
liabilities.............................. (17,105,118) (12,023,980) (15,056,882)
Increase in interest payable............... 190,000 2,917,986
Increase in long-term liabilities.......... 11,601,197 11,913,828
Other, net................................. 56,955 (48,069)
------------ ------------ -------------
Net cash provided by (used in)
operating activities................ 45,036,413 (13,066,317) (88,562,231)
------------ ------------ -------------
Cash flows from investing activities:
Additions to property, plant and equipment.... (2,557,498) (10,602,742) (158,072,969)
Acquisition of license agreements............. (8,260,140) (12,000,000)
Proceeds from sale of asset................... 12,500 1,286,759
------------ ------------ -------------
Net cash used in investing
activities.......................... (2,544,998) (17,576,123) (170,072,969)
------------ ------------ -------------
Cash flows from financing activities:
Cash distributions to partners................ (58,350,000) (25,400,000)
Cash contributions from partners.............. 25,000,000
Net proceeds from issuance of commercial
paper...................................... 16,400,000 31,000,000 19,800,000
Proceeds from issuance of bonds............... 240,000,000
Debt issue costs.............................. (2,851,869)
------------ ------------ -------------
Net cash provided by (used in)
financing activities................ (41,950,000) 30,600,000 256,948,131
------------ ------------ -------------
Net increase (decrease) in cash................. 541,415 (42,440) (1,687,069)
Cash balance at beginning of year............... 46,520 88,960 1,776,029
------------ ------------ -------------
Cash balance at end of year..................... $ 587,935 $ 46,520 $ 88,960
============ ============ =============
Supplementary cash flow information:
Cash paid for interest........................ $ 38,096,674 $ 37,943,795 $ 23,677,351
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Excel Paralubes (Excel or the Partnership), a general partnership, was
formed pursuant to the laws of the state of Texas on August 2, 1994 and was
created for the purpose of constructing and operating a $500 million lube oil
hydrocracker facility. Excel is a partnership which is equally owned by Conoco
Inc. (Conoco) and Atlas Processing Company (Atlas Processing), a 100%-owned
subsidiary of Pennzoil-Quaker State Company (Pennzoil). Excel Paralubes Funding
Corporation (Excel Funding), a Delaware corporation, was formed to execute and
administer the financing arrangements of the Partnership and is a wholly-owned
subsidiary of Excel.
Excel was in the development stage as defined in Statement of Financial
Accounting Standards No. 7 until early 1997. Although Excel produced and sold
some base oil and co-products in late 1996, full commercial operations did not
commence until the first quarter of 1997. As more fully described in Notes 7 and
10, Excel and its partners have entered into several long-term purchase and
supply contracts, processing agreements and partner guarantees.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates
The accompanying financial statements have been prepared on the accrual
basis in accordance with generally accepted accounting principles. Preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
Basis of Consolidation
The consolidated financial statements include the accounts of Excel and its
wholly-owned subsidiary. All intercompany accounts and transactions have been
eliminated.
Cash and Cash Equivalents
Cash consists of cash on deposit at financial institutions and cash
equivalents in the form of time deposits with original maturities of three
months or less. There were time deposits of $387,000 and $0 at December 31, 1998
and 1997, respectively.
Inventories
Inventories consist principally of feedstocks. All inventories are valued
at lower of cost or market, cost being determined by the last-in, first-out
(LIFO) method. The total LIFO reserves required at December 31, 1998 and 1997
were $5,591,252 and $3,242,306, respectively.
Property, Plant and Equipment
Property, plant and equipment is carried at cost and consists primarily of
roads, parking lots, buildings, furniture and refining equipment in service at
year end. Property, plant and equipment is being depreciated on a straight-line
basis principally over 28 years, the life of the assets.
Catalyst Reclamation and Turnaround Costs
Catalyst reclamation and turnaround costs are accrued as long-term
liabilities over the period between reclamations and turnarounds based on
estimates of the scope and the future costs for these activities.
6
<PAGE> 8
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets and Deferred Charges
Intangible assets and deferred charges consist of license fees, deferred
bond termination fees and debt issue costs. License fees are being amortized on
a straight-line basis principally over the life of the license agreement.
Deferred bond termination fees and debt issue costs are being amortized over the
life of the bonds using a method which approximates the interest method.
Intangible assets are reassessed annually to determine whether any potential
impairment exists.
Revenue Recognition
Revenues from the sale of base oil and co-products are recognized in the
period of delivery.
Operating Costs
Operating costs are expensed as incurred and consist primarily of labor,
utilities, maintenance, turnaround accruals, catalyst replacement, pilot plant,
environmental remediation, land rental and other miscellaneous costs associated
with operating the hydrocracker facility.
Research and Development Expenditures
Research and development expenditures are recorded in operating expenses
and primarily represent pilot plant costs surrounding the preoperating
activities of the hydrocracker facility. For the years ended December 31, 1998,
1997 and 1996, Excel recorded $1,029,216, $763,943 and $2,295,000, respectively,
for research and development expenditures.
Income Taxes
Excel is treated as a tax partnership under the provisions of Subchapter K
of the Internal Revenue Code. Accordingly, the accompanying financial statements
do not reflect a provision for income taxes since Excel's results of operations
and related credits and deductions will be passed through to and taken into
account by its partners in computing their respective tax liabilities. No income
taxes have been recorded for Excel's wholly-owned subsidiary as it has had no
taxable income or temporary differences since its inception.
Environmental Liabilities and Expenditures
Accruals for environmental matters are recorded in operating expenses when
it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated.
Concentration of Risk
All of Excel's trade receivables are from Conoco and Atlas Processing.
Although collection of these receivables could be influenced by economic factors
affecting the petroleum industry, the risk of significant loss is considered
remote.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to current year classifications.
7
<PAGE> 9
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 and 1997 is summarized
below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Plant and equipment...................................... $413,618,376 $412,348,450
Buildings................................................ 6,673,213 7,180,879
Improvements............................................. 17,241,508 12,419,040
Office furniture and equipment........................... 1,700,343 1,271,330
Construction in progress................................. 732,508 4,200,353
------------ ------------
439,965,948 437,420,052
Less -- accumulated depreciation......................... 33,617,433 18,509,968
------------ ------------
$406,348,515 $418,910,084
============ ============
</TABLE>
Depreciation expense was $15,049,612 for the year ended December 31, 1998,
$15,439,073 for the year ended December 31, 1997 and $2,807,143 for the year
ended December 31, 1996.
4. INTANGIBLE ASSETS AND DEFERRED CHARGES
Intangible assets and deferred charges at December 31, 1998 and 1997 are
summarized below:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
License fees............................................... $27,650,202 $27,650,202
Deferred bond termination fees (Note 6).................... 6,756,133 6,756,133
Debt issue costs........................................... 7,339,309 7,339,309
----------- -----------
41,745,644 41,745,644
Less -- accumulated amortization........................... 5,330,740 3,099,323
----------- -----------
$36,414,904 $38,646,321
=========== ===========
</TABLE>
Amortization cost associated with intangible assets and deferred charges
was $2,231,417, $2,299,322 and $77,901 in 1998, 1997 and 1996, respectively.
5. DEBT
On November 5, 1996, Excel Funding issued $240 million of 7.125% senior
bonds. These bonds are due in 2011 with interest payable on May 1 and November 1
each year. The first interest payment was paid on May 1, 1997 and the first
principal payments of $1,828,800 are due on May 1 and November 1, 2001. Proceeds
were applied to repay outstanding short-term borrowings of $202 million and to
finance operations through December 1996.
On November 6, 1995, Excel Funding issued $250 million of 7.43% senior
bonds. These bonds are due in 2015 with interest payable on May 1 and November 1
each year. The first interest payment was paid on May 1, 1996 and the first
principal payment is due on May 1, 2011. Proceeds were applied to repay
outstanding short-term borrowings of $201 million and to finance operations
through December 1995.
Recourse under the bonds is limited to the revenues and assets of Excel.
Certain restrictive covenants may limit the ability of Excel to incur debt, make
distributions to the partners, make investments or create liens.
On May 22, 1995, Excel entered into a variable rate $300 million line of
credit with a syndicate of banks which was reduced to $145 million during 1997.
The line of credit was extended through May 1999. At
8
<PAGE> 10
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998 and 1997, the line of credit remained unused. This credit
facility is intended for support of commercial notes. Through the credit
facility, the commercial notes can be converted to term loans with the related
bank syndicate at the Company's discretion for a period not to exceed one year.
On June 21, 1995, Excel began issuing commercial paper as short-term financing
for the construction of the lube oil hydrocracker. Additional commercial paper
was sold during 1998 and 1997 in order to finance operations. The
weighted-average interest rate on the $69.2 million and $52.8 million of
commercial paper outstanding at December 31, 1998 and 1997, respectively, was
6.5%.
Interest costs incurred in 1998, 1997 and 1996 totaled $38,046,185,
$38,133,795, and $26,519,620 respectively. Interest costs incurred during the
period required to bring assets to the condition and location for their intended
use are capitalized as part of acquisition costs. In 1998 and 1997, there were
no interest costs capitalized and, in 1996, capitalized interest costs totaled
$13,901,399. In 1998 and 1997, there were no debt issue costs capitalized. In
1996, debt issue costs capitalized were $2,851,869, which are being amortized
over the life of the bonds.
6. DERIVATIVES AND OTHER HEDGING INSTRUMENTS
Excel Funding entered into certain forward treasury contracts as part of
its program to hedge the interest rate risk related to the 1995 senior bond
offering. These contracts were primarily forward contracts with a syndicate of
investment banks to sell 30-year treasury bonds at 7.625%. On October 30, 1995,
Excel Funding locked in the lower rate of 7.43% on the issuance of $250 million
of senior bonds and, hence, terminated the contracts for a fee of approximately
$6.7 million. Excel Funding capitalized the termination fee as a deferred asset
and is amortizing the balance over the life of the bonds as an adjustment to
interest expense. Deferred bond termination fees amortized during 1998, 1997 and
1996 were $378,769, $378,767 and $358,232, respectively.
7. RELATED PARTY TRANSACTIONS
One of Excel's partners, Conoco, has been designated as the operator of the
partnership and, in that capacity, provides substantially all technical and
administrative assistance and services in connection with Excel's operations.
Charges for these services were approximately $9,400,000, $8,400,000 and
$11,200,000 during 1998, 1997 and 1996, respectively, and are included in
administrative expenses. Included in such charges are the costs of the
operators' salaries and wages, which include related benefits such as pensions
and other postretirement benefits, allocable to Excel. Excel has no employees.
Excel and Conoco have joint ownership of certain processing units
constructed at or adjacent to Conoco's Lake Charles Refinery. Variable costs
associated with certain of these units are allocated on the basis of usage.
Fixed costs are allocated based on the ownership percentage of the applicable
units.
As operator, Conoco is responsible for processing and paying Excel's
invoices. Disbursements made by the partner on Excel's behalf are reimbursed
semimonthly by Excel. Such amounts due to this partner totaled $3,326,797 at
December 31, 1998 and $2,937,658 at December 31, 1997. Accrued liabilities which
primarily represent capital expenditures incurred, but not yet invoiced, totaled
$0 at December 31, 1998 and $19,933,639 at December 31, 1997.
On May 12, 1995, Excel entered into a long-term sale and purchase agreement
whereby Conoco and Atlas Processing have agreed to purchase from Excel all base
oil production (within certain specifications) and at least the amount taken by
the other party, up to a maximum of 50% each of Excel's expected output, at a
market-based price (less an annual rebate which is subordinate in right of
payment to the senior debt of Excel). If either Conoco or Atlas Processing fails
to purchase its required amount of Excel's output, that party is obligated to
pay to Excel the amount that Excel would have earned had the party made such
purchases.
9
<PAGE> 11
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Base oil sales made to the partners, net of rebates, were $198,884,886 for 1998,
$166,093,946 for 1997 and $3,307,954 for 1996.
Excel and Conoco entered into a long-term sale and purchase agreement dated
May 12, 1995 which requires Conoco to purchase all co-products (within certain
specifications) produced by Excel, with the exception of sulfur, at market-based
prices as specified in the agreement. Co-product sales made to Conoco were
$70,779,082 during 1998, $87,499,331 during 1997 and $9,069,668 during 1996.
On May 12, 1995, Excel and Conoco entered into a long-term feedstock sale
and purchase agreement whereby Excel agrees to purchase from Conoco all of the
required volume of vacuum gas oil (VGO) and hydrogen needed by the hydrocracker
facility. These feedstocks must meet certain quality specifications and are
purchased at a market-based price as specified in the agreement. Feedstocks
purchased by Excel under the agreement were $143,959,735 during 1998,
$168,032,393 during 1997 and $20,534,162 during 1996.
Excel and Conoco entered into long-term processing agreements dated May 12,
1995 which require Conoco to pay processing fees for the use of the vacuum unit
and hydrogen supply facilities. The fee for the vacuum unit is equal to $1.50
for each barrel of VGO produced from the unit, not to exceed $6,740,000 in any
one year. Fees for the hydrogen supply facilities are $23,000 per day for each
day the facilities are utilized, not to exceed $4,202,000 in any one year.
Processing fees received for these facilities were $9,665,420 during 1998,
$9,662,000 during 1997 and $2,035,166 during 1996.
Both partners of Excel advanced substantial amounts to Excel to facilitate
the construction process. Until short-term financing was obtained in June 1995,
the partners had contributed $110,500,000 ($55,250,000 by each partner). These
amounts were repaid from the proceeds of the credit agreement, dated May 22,
1995, among Chemical Bank, as Syndication Agent; The Chase Manhattan Bank, as
Administrative Agent; and Excel and Excel Funding.
In accordance with a long-term agreement between Excel and Conoco dated
October 24, 1994, Excel agreed to pay Conoco a fixed monthly fee of $58,850 for
use of Conoco's wastewater facility. The fee was increased in May 1998 to
$73,875 per month. This adjusted fee will continue through December 31, 2024 and
amounted to $826,400 in 1998, $706,200 in 1997 and $529,650 in 1996.
Excel leases the project site land from Conoco. The lease expires on
December 31, 2024; at which time, the lease will automatically be extended for
successive renewal terms of five years each unless either the lessee or lessor
elects to terminate the lease. The following details the future lease payments
required of Excel for the five succeeding years:
<TABLE>
<S> <C>
1999 $ 2,481,600
2000........................................................ 2,481,600
2001........................................................ 2,481,600
2002........................................................ 2,481,600
2003........................................................ 2,481,600
Thereafter.................................................. 52,113,600
-----------
$64,521,600
===========
</TABLE>
Rental expense under operating leases was $2,481,600 for 1998, 1997 and
1996.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1998 and 1997, Excel had outstanding long-term debt with a
carrying value of $490 million. Based on borrowing rates currently available,
the carrying amount of this debt approximates fair value. The reported amounts
of financial instruments such as cash equivalents, accounts receivable and
short-term notes payable approximate fair value because of their short
maturities.
10
<PAGE> 12
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Excel does not maintain general liability (including sudden and accidental
pollution) insurance coverage. However, Excel's respective partners maintain
general insurance policies and/or are self-insured.
On July 31, 1995, a Petition for Class Action was filed in the 14th
Judicial District Court, Parish of Calcasieu, State of Louisiana, against Conoco
and a contractor that excavated soil from the project site, by persons upon
whose property such soil was placed, alleging that the soil contained harmful
and dangerous materials, including asbestos and/or lead. The plaintiffs seek
unspecified damages, including punitive or exemplary, compensatory and clean-up
damages and attorneys' fees. Conoco intends to vigorously defend the litigation.
Conoco is voluntarily removing and replacing contaminated soils from affected
properties. Based on the agreements that Excel has with Conoco, management of
Excel determined that Excel was potentially obligated to Conoco for a portion of
the amounts paid by Conoco in connection with this litigation and related
remediation. As such, management agreed to reimburse Conoco for a portion of the
costs. Excel paid $136,015, $368,532 and $1.3 million in 1998, 1997 and 1996,
respectively. Excel has accrued $900,000 and $712,140 as of December 31, 1998
and 1997, respectively, for anticipated remediation and litigation costs for
this matter. Management does not believe that the litigation or future
remediation expenses will have a material adverse effect on Excel's financial
condition or results of operations.
10. GUARANTEES
Conoco and Atlas Processing have entered into a Partner Loan Agreement with
Excel and the First National Bank of Chicago, as agent on behalf of holders of
certain debt of Excel, pursuant to which Conoco and Atlas Processing agreed to
provide liquidity support to Excel up to an aggregate amount of $60 million
outstanding at any time during the existence of a liquidity cash flow deficit.
Pennzoil has guaranteed all of Atlas Processing's obligations and E. I.
duPont de Nemours and Company (DuPont) has guaranteed all of Conoco's
obligations under all Excel offtake and operating agreements as described in
Note 7.
In October 1998, DuPont completed the initial divestiture of a portion of
its ownership interest in Conoco and has announced its intention to divest its
remaining ownership interest. If DuPont's ownership interest in Conoco falls
below 50%, the DuPont guarantee of Conoco's obligations to Excel may be
terminated if (i) the ratings of the Excel senior bonds, after giving effect to
DuPont's divestiture, are affirmed to be at least the lower of (a) A3/A- or (b)
the ratings in effect just prior to divestiture; (ii) all of Excel's senior
bonds are paid in full or (iii) 66 2/3% of the senior bond holders agree to a
change in the terms of the guarantee.
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