<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
- ------------------ OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
TRANSITION REPORT PURSUANT TO SECTION 13 OR
- ------------------ 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------- --------------------
Commission File Number 1-2677
QUAKER STATE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 25-0742820
(State or other jurisdiction of incorporation of organization) (IRS Employer Identification No.)
</TABLE>
225 East John Carpenter Freeway
Irving, Texas 75062
(Address of Principal Executive Offices)
(Zip Code)
(972)868-0400
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------------- ----------------
As of October 31, 1997, 35,170,796 shares of Capital Stock, par value
$1.00 per share, of the registrant were outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Quaker State Corporation and Subsidiaries
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
09/30/97 09/30/96 09/30/97 09/30/96
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA, UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Sales and operating revenues $ 303,356 $289,197 $ 916,983 $ 823,540
Other, net 1,132 1,751 4,551 5,943
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 304,488 290,948 921,534 829,483
COSTS AND EXPENSES
Cost of sales and operating costs 194,710 195,155 590,311 563,387
Selling, general and administrative 81,190 74,003 247,032 206,911
Depreciation and amortization 10,350 8,710 30,303 24,011
Interest 7,189 3,110 20,251 7,035
Unusual item 4,667 94 4,667 939
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 298,106 281,072 892,564 802,283
- -----------------------------------------------------------------------------------------------------------------------------
Pretax income 6,382 9,876 28,970 27,200
Provision for income taxes 2,550 4,050 11,800 10,925
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 3,832 5,826 17,170 16,275
Income from discontinued operations 1,477 928 3,848 3,358
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,309 $ 6,754 $ 21,018 $ 19,633
=============================================================================================================================
PER SHARE:
Income from continuing operations $ 0.11 $ 0.16 $ 0.49 $ 0.48
Income from discontinued operations 0.04 0.03 0.11 0.10
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.15 $ 0.19 $ 0.60 $ 0.58
=============================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 35,453 36,067 35,256 34,002
=============================================================================================================================
DIVIDENDS PAID PER SHARE $ 0.10 $ 0.10 $ 0.30 $ 0.30
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
1
<PAGE> 3
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Quaker State Corporation and Subsidiaries
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
9/30/97 9/30/96
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 22,609 $ 28,252
- ------------------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from disposal of property, equipment and refinery 36,764 2,914
Capital expenditures (45,087) (38,430)
Acquisition of businesses, net of cash acquired (71,561) (75,633)
Other, net (3,343) (7,920)
- ------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (83,227) (119,069)
- ------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid (10,492) (10,159)
Proceeds from debt 228,057 102,170
Payments on debt (171,465) (30,555)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 46,100 61,456
- ------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (14,518) (29,361)
Cash and cash equivalents at beginning of period 31,224 31,669
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,706 $ 2,308
============================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 4
CONDENSED CONSOLIDATED BALANCE SHEET
Quaker State Corporation and Subsidiaries
<TABLE>
<CAPTION>
9/30/97 12/31/96
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,706 $ 31,224
Accounts and notes receivable, net 190,206 161,246
Inventories 92,507 97,522
Other current assets 22,233 25,917
Net assets of discontinued operations 34,428 18,147
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 356,080 334,056
- ---------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net of accumulated
depreciation of $144,682 and $221,071 234,251 210,465
Goodwill, brands and other assets 531,372 467,418
Net assets of discontinued operations - 17,070
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,121,703 $ 1,029,009
===============================================================================================================
LIABILITIES
Current liabilities:
Accounts payable $ 75,624 $ 71,651
Accrued liabilities 80,700 82,825
Debt payable within one year 1,198 17,204
Debt to be refinanced - 142,000
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 157,522 313,680
- ---------------------------------------------------------------------------------------------------------------
Long-term debt 458,717 241,619
Other long-term liabilities 188,711 175,041
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 804,950 730,340
- ---------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock, $1.00 par value; authorized shares, 250,000,000 at 9/30/97 and
95,000,000 at 12/31/96; issued shares,
36,851,944 at 9/30/97 and 36,322,312 at 12/31/96 36,852 36,322
Additional capital 194,653 187,560
Retained earnings 114,012 103,480
Treasury Stock, at cost, 1,699,593 shares at 9/30/97
and 1,593,582 shares at 12/31/96 (26,924) (25,433)
Other, net (1,840) (3,260)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 316,753 298,669
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,121,703 $ 1,029,009
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 5
SEGMENT INFORMATION
Quaker State Corporation and Subsidiaries
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
09/30/97 09/30/96 09/30/97 09/30/96
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Lubricants and lubricant services $ 237,540 $ 245,310 $ 706,823 $ 733,078
Consumer products 68,405 44,590 217,675 92,764
Intersegment sales (2,589) (703) (7,515) (2,302)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES $ 303,356 $ 289,197 $ 916,983 $ 823,540
=====================================================================================================================
OPERATING PROFITS
Lubricants and lubricant services $ 11,293 $ 12,247 $ 32,563 $ 36,267
Unusual item (4,667) - (4,667) (250)
- ---------------------------------------------------------------------------------------------------------------------
Total Lubricants and lubricant services 6,626 12,247 27,896 36,017
Consumer products 11,036 4,751 35,921 11,770
- ---------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING PROFITS 17,662 16,998 63,817 47,787
- ---------------------------------------------------------------------------------------------------------------------
Interest expense (7,189) (3,110) (20,251) (7,035)
Corporate income 235 732 616 2,308
Corporate expenses (4,326) (4,650) (15,212) (15,171)
Unusual item - (94) - (689)
- ---------------------------------------------------------------------------------------------------------------------
PRETAX INCOME $ 6,382 $ 9,876 $ 28,970 $ 27,200
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quaker State Corporation and Subsidiaries (unaudited)
1. In the opinion of management of Quaker State Corporation (the company), the
accompanying financial statements include all adjustments which are
necessary for a fair statement of the results for such periods. All of
these adjustments are of a normal recurring nature. The December 31, 1996
condensed consolidated balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. These statements should be read in
conjunction with the financial statements included as part of the 1996
Annual Report on Form 10-K. Certain items in 1996 periods have been
reclassified to conform to the 1997 presentation.
2. The effective tax rates are higher than the 35% federal rate due to the
added impact of state and foreign taxes and nondeductible amortization.
3. On August 1, 1997, subsidiaries of the company acquired all of the assets
of Axius Holdings, L.P. (Axius) for approximately $51 million in cash.
Axius is a marketer of automotive window sun protection products and
automotive accessories. The acquisition has been accounted for under the
purchase method. The purchase price allocation to assets and liabilities is
preliminary. The acquisition has resulted in a preliminary excess of
purchase price over fair market value of net assets of approximately $37.5
million. The operating results of Axius from the date of acquisition are
included in the consumer products segment and in the accompanying condensed
consolidated financial statements for the three and nine months ended
September 30, 1997.
The following schedule is prepared on a pro forma basis as though Blue
Coral, Inc. (Blue Coral), Medo Industries, Inc. and its affiliated
companies and Axius had been acquired as of the beginning of 1996, after
including the impact of adjustments, such as amortization of goodwill,
brands and other intangible assets, interest expense and related tax
effects.
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<CAPTION>
For the nine months ended September 30
-------------------------------------------------------------------------------------------------------------
(in thousands except per share data) 1997 1996
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 947,429 $ 966,794
Income from continuing operations 18,912 19,805
Income per share from continuing operations .54 .57
-------------------------------------------------------------------------------------------------------------
</TABLE>
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been made prior to the period presented.
In addition, they are not intended to be a projection of future results.
4. Inventories consist of:
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<CAPTION>
-------------------------------------------------------------------------------------------------------------
(in thousands) 9/30/97 12/31/96
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Crude oil, lubricants and related materials $ 64,123 $ 76,462
Consumer products 28,384 21,060
-------------------------------------------------------------------------------------------------------------
Total $ 92,507 $ 97,522
-------------------------------------------------------------------------------------------------------------
</TABLE>
The reserve to reduce the carrying value of inventories from current
costs to LIFO basis amounted to $11.6 million at September 30, 1997 and
$18.3 million at December 31, 1996.
5
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. In July 1996, the Federal Trade Commission (FTC) filed an administrative
proceeding seeking an order that the company's Slick 50 subsidiary cease
and desist from making certain product claims concerning Slick 50 engine
treatment and refrain from making other product claims without adequate
substantiation. In August 1997 Slick 50 and the FTC entered into a
tentative settlement of the administrative proceeding. The settlement, if
approved, would include restrictions on the future advertising of Slick 50
products and an agreement by the FTC not to seek consumer redress provided
Slick 50 makes available by January 1999 at least $10,000,000 in consumer
redress in the form of coupons, refunds or free products for former
purchasers of Slick 50 products. The proposed consent decree would be
without any admission of wrongdoing by Slick 50. The company does not
anticipate a significant impact on its results of operations or
liquidity as a result of the restriction that would be imposed on future
advertising of Slick 50 products by the FTC consent decree.
In May 1997, a purported class action lawsuit was filed in the United
States District Court for the Northern District of Illinois. The action
names as defendants a number of car wax manufacturers including Blue Coral,
a subsidiary of the company, and certain of its present and former
officers. The complaint alleges that the defendants falsely advertised and
marketed wax, polish or protectant products and seeks treble damages,
attorneys' fees and costs for the class for alleged violations of the
federal RICO statute and compensatory damages for the alleged violations of
the Ohio Consumer Sales Practices Act as well as for common law breach of
express warranty.
Also in May 1997, Hot Wax, Inc. filed a suit in the United States District
Court for the Northern District of Illinois. Plaintiff purports to be a
Wisconsin corporation that manufactures a wax product called "Hot Wax"
designed for use in automated car washes. The complaint names Blue Coral
and others as defendants. The case is purportedly brought under the federal
trademark statute, the Lanham Act, and the complaint alleges that Blue
Coral falsely represented certain products it marketed, advertised and sold
to consumers and retailers. Plaintiff seeks an injunction against Blue
Coral and also seeks to recover money damages, attorneys' fees and costs.
Blue Coral was dismissed without prejudice on July 29, 1997. The suit was
refiled against Blue Coral separately, in October 1997.
In July 1997, Dura Lube Corporation and certain of its affiliates filed a
suit in the United States District Court for the District of Delaware. The
complaint names the company and its Slick 50 subsidiary as defendants and
asserts claims under the Sherman Act and the Clayton Act and for tortious
interference with business relations and civil conspiracy. Plaintiff
alleges that the company has attempted and conspired to monopolize the
market for engine treatment. Plaintiff seeks treble damages, punitive
damages, attorneys' fees and costs as well as injunctive relief.
Also in July 1997, Conte Bros. Automotive, Inc. and Hi/Tor Automotive,
individually and on behalf of all others similarly situated who offered for
sale or sold engine additives or treatments which compete with Slick 50(R)
engine treatments filed a suit in the United States District Court for the
District of New Jersey. The complaint names the company's Slick 50
subsidiary and its subsidiaries as defendants. The complaint alleges that
the defendants falsely and misleadingly advertised and marketed Slick 50(R)
engine treatments in violation of the New Jersey Consumer Fraud Act and the
federal Lanham Act and seeks monetary relief, restitution, damages, lost
revenues, and injunctive relief.
6
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The company has received notices from the EPA and others that it is a
"potentially responsible party" relative to certain waste disposal sites
identified by the EPA and may be required to share in the cost of cleanup.
The company has accrued for all matters which are probable and can be
reasonably estimated.
Contingent liabilities of an indeterminate amount exist in connection with
suits and claims arising in the ordinary course of business.
In the opinion of management, all matters discussed above are adequately
accrued for or covered by insurance, or, if not so provided for, are
without merit or the disposition is not anticipated to have a material
effect on the company's financial position; however, one or more of these
matters could have a material effect on future quarterly or annual results
of operations or cash flow when resolved.
6. In June 1997, the company replaced its $140 million and $165 million lines
of credit with a $400 million Credit Agreement. The Credit Agreement
provides for loans from time to time not in excess of $400 million
outstanding at any time, and provides for various interest rate elections
by the company. The Credit Agreement expires June 2002.
7. In July 1997, the company completed the sale of its Newell, West Virginia
refinery and associated inventory for total proceeds of approximately $39
million. Included in the sale were the company's oil gathering and pipeline
facilities in Ohio and Pennsylvania. The company retained responsibility
for certain environmental matters relating to the refinery. A one-time
charge of $4.7 million was recognized as a result of environmental issues
and certain contractual obligations associated with the sale.
8. On November 3, 1997, the company announced it had entered into a memorandum
of understanding to acquire the Rain-X(R) brand of automotive glass
coatings and glass treatments, and other related assets. The acquisition is
expected to be completed in November 1997.
Also on November 3, 1997, the company completed the sale of Truck-Lite for
$82 million in cash, subject to final adjustments. Accordingly, Truck-Lite
is presented as a discontinued operation as of September 30, 1997 and for
the three and nine months ended September 30, 1997. The December 31, 1996
balance sheet presented has been reclassified to conform to the
presentation of Truck-Lite as a discontinued operation.
The sale will result in a gain.
9. In February 1997, the Financial Accounting Standards Board issued Standard
No. 128, "Earnings Per Share," which will require the company to calculate
and disclose earnings per share using the guidance set forth in the
Standard. The new Standard is effective for financial statements issued
after December 15, 1997. The company does not expect the adoption of the
new standard to have a material impact on earnings per share.
In June 1997, the Financial Accounting Standards Board issued Standards No.
130 and No. 131, "Reporting Comprehensive Income" and "Disclosures
about Segments of an Enterprise and Related Information" Standard No.
130 will require the company to disclose comprehensive income and its
components in its financial statements using the guidance set forth in
the Standard. Standard No. 131 will require the company to report
certain information about operating segments in its financial statements
using the guidance set forth in the Standard. The new Standards are
effective for fiscal years beginning after December 15, 1997. The company
is evaluating the impact the Standards will have on its financial statement
presentation.
7
<PAGE> 9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The condensed consolidated financial statements, segment information and related
notes for Quaker State Corporation (the company) included in this Form 10-Q,
should be read as an integral part of this analysis.
In July 1997, the company completed the sale of its Newell, West Virginia
refinery and associated inventory for total proceeds of approximately $39
million. Included in the sale were the company's oil gathering and pipeline
facilities in Ohio and Pennsylvania. The company retained responsibility for
certain environmental matters relating to the refinery. The company plans to
continue to operate the blending and packaging facility adjacent to the
refinery. As a result of the sale, the company recorded a one-time charge of
$4.7 million ($2.8 million after-tax) relating primarily to environmental
reserves and certain contractual obligations associated with the refinery sale.
On August 1, 1997, subsidiaries of the company acquired all of the assets of
Axius Holdings, L.P. (Axius) for approximately $51 million in cash. Axius is a
marketer of automotive window sun protection products and automotive
accessories. The acquisition has been accounted for under the purchase method.
The purchase price allocation to assets and liabilities is preliminary. The
acquisition has resulted in a preliminary excess of purchase price over fair
market value of net assets of approximately $37.5 million. The operating results
of Axius from the acquisition date are included in the consumer products
segment.
On November 3, 1997, the company completed the sale of Truck-Lite for $82
million in cash, subject to final adjustments. Accordingly, Truck-Lite is
presented as a discontinued operation as of September 30, 1997 and for the three
and nine months ended September 30, 1997. The December 31, 1996 balance sheet
presented has been reclassified to conform to the presentation of Truck-Lite as
a discontinued operation. The sale will result in a gain. Proceeds from the
sale will be used to reduce debt and/or fund future acquisitions.
On November 3, 1997, the company announced it had entered into a memorandum of
understanding to acquire the Rain-X (R) brand of automotive glass coatings and
glass treatments, and other related assets. The acquisition is expected to be
completed in November 1997.
The company reported net income of $5.3 million or $.15 per share for the
quarter ended September 30, 1997, compared to net income of $6.8 million or $.19
per share for the quarter ended September 30, 1996. Net income for the quarter
ended September 30, 1997 includes income of $3.8 million or $.11 per share from
continuing operations and $1.5 million or $.04 per share from the discontinued
operations of Truck-Lite. Included in income from continuing operations is the
one-time charge of $4.7 million ($2.8 million after-tax) relating to exiting the
refining business. Sales and operating revenues were $303.4 million for the
quarter ended September 30, 1997 and $289.2 million for the quarter ended
September 30, 1996. This increase is due to the inclusion of Medo Industries,
Inc. and its affiliated companies (Medo), which were acquired in October 1996.
The increase was offset by lower revenues in the lubricants and lubricant
services segment due to exiting the refining business. Excluding the one-time
refinery exit charge, operating profit from continuing operations for the
quarter ended September 30, 1997 increased 31% to $22.3 million from $17 million
for the quarter ended September 30, 1996. This increase is primarily due to the
improved operating profit in the consumer products segment.
8
<PAGE> 10
Management's Discussion and Analysis of Results of Operations and Financial
Condition, continued
Lubricants and lubricant services operating profit before the one-time refinery
exit charge was $11.3 million for the quarter ended September 30, 1997,
compared to $12.2 million for the quarter ended September 30, 1996. This
decrease is primarily due to exiting the refining business where positive
margins were experienced in the third quarter of 1996, partially off set by
product cost savings in the current quarter. Revenues for the quarter ended
September 30, 1997 were $237.5 million, down 3% from $245.3 million for the
quarter ended September 30, 1996. This decline is primarily due to a decrease
in nonbranded motor oil volume and exiting the refining business partially
offset by a 12% increase in branded motor oil volume, a 14% increase in car
counts and a 3% increase in average ticket prices at the company's Q Lube
operations.
Consumer products operating profit was $11 million for the quarter ended
September 30, 1997, compared to $4.8 million for the quarter ended September 30,
1996. This increase is primarily due to the inclusion of Medo. Revenues for the
quarter ended September 30, 1997 were $68.4 million, compared to $44.6 million
for the quarter ended September 30, 1996. This increase is due to the inclusion
of Medo and Axius.
For the quarter ended September 30, 1997, corporate income was $235,000 compared
to $732,000 for the quarter ended September 30, 1996. The decrease is due to
royalties and interest received in 1996 on the long-term receivable settled in
December 1996. Interest expense increased for the quarter ended September 30,
1997 as a result of utilizing debt in recent acquisitions. Corporate expenses
decreased to $4.3 million from $4.7 million for the quarter ended September 30,
1996.
The effective tax rate for the quarter ended September 30, 1997 of 40% for
continuing operations is higher than the 35% federal rate due to the added
impact of state and foreign taxes and nondeductible amortization.
The company reported net income of $21 million or $.60 per share for the nine
months ended September 30, 1997, compared to net income of $19.6 million or $.58
per share for the nine months ended September 30, 1996. Net income for the nine
months ended September 30, 1997 includes income of $17.2 million or $.49 from
continuing operations and $3.8 million or $.11 per share from the discontinued
operations of Truck-Lite. Included in income from continuing operations is the
one-time charge of $4.7 million ($2.8 million after-tax) relating to exiting the
refining business. Sales and operating revenues were $917 million for the nine
months ended September 30, 1997 and $823.5 million for the nine months ended
September 30, 1996. This increase is primarily due to the inclusion of Blue
Coral and Medo, which were acquired in 1996. The increases were offset by lower
revenues in the lubricants and lubricant services segment due to soft retail
market conditions and exiting the refining business. Excluding unusual items
operating profit for the nine months ended September 30, 1997 increased 43% to
$68.5 million from $48 million for the nine months ended September 30, 1996.
This increase is primarily due to the inclusion of Blue Coral and Medo offset by
poor refining margins.
Lubricants and lubricant services operating profit before unusual items was
$32.6 million for the nine months ended September 30, 1997, compared to $36.3
million for the nine months ended September 30, 1996. This decrease is primarily
due to poor refining margins. Revenues for the nine months ended September 30,
1997 were $706.8 million, down 4% from $733.1 million for the nine months ended
September 30, 1996. This decline reflects a decrease in nonbranded motor oil
volume and the exit of the refining business, partially offset by a 4% increase
in branded motor oil volume, a 7% increase in car counts and a 2% increase in
average ticket prices at the company's Q Lube operations.
9
<PAGE> 11
Management's Discussion and Analysis of Results of Operations and Financial
Condition, continued
Consumer products operating profit was $35.9 million for the nine months ended
September 30, 1997, compared to $11.8 million for the nine months ended
September 30, 1996. Revenues for the nine months ended September 30, 1997 were
$217.7 million, compared to $92.8 million for the nine months ended September
30, 1996. These increases are primarily due to the inclusion of Blue Coral and
Medo in 1997.
For the nine months ended September 30, 1997, corporate income was $616,000
compared to $2.3 million for the nine months ended September 30, 1996. The
decrease is due to royalties and interest received on the long-term receivable
settled in December 1996. Interest expense increased for the nine months ended
September 30, 1997 as a result of utilizing debt in recent acquisitions.
Corporate expenses were unchanged at $15.2 million for the nine months ended
September 30, 1997 compared to the same period in 1996.
The effective tax rate for the nine months ended September 30, 1997 of 41% for
continuing operations is higher than the 35% federal rate due to the added
impact of state and foreign taxes and nondeductible amortization.
Cash and cash equivalents decreased by $14.5 million from December 31, 1996. The
decrease was comprised of $22.6 million cash provided by operations, $83.2
million cash used in investing activities and $46.1 million cash provided by
financing activities. Cash provided by operations was negatively impacted by
working capital requirements.
Cash used in investing activities of $83.2 million was primarily due to $45.1
million in capital expenditures and $71.6 million used in acquisitions. These
uses were partially offset by proceeds of $36.8 million from disposal of
property, equipment and the refinery and associated inventories. Cash provided
by financing activities of $46.1 million was primarily due to working capital
needs and investing activities.
In June 1997, the company replaced its $140 million and $165 million lines of
credit with a $400 million Credit Agreement. The Credit Agreement provides for
loans from time to time not in excess of $400 million outstanding at any time,
and provides for various interest rate elections by the company. The Credit
Agreement expires June 2002.
On September 25, 1997 the Board of Directors of the company authorized a
quarterly dividend of $.10 per share, payable to shareholders of record as of
November 15, 1997.
In February 1997, the Financial Accounting Standards Board issued Standard No.
128, "Earnings Per Share," which will require the company to calculate and
disclose earnings per share using the guidance set forth in the Standard. The
new Standard is effective for financial statements issued after December 15,
1997. The company does not expect the adoption of the new standard to have a
material impact on earnings per share.
In June 1997, the Financial Accounting Standards Board issued
Standards No. 130 and No. 131, "Reporting Comprehensive Income" and
"Disclosures about Segments of an Enterprise and Related Information."
Standard No. 130 will require the company to disclose comprehensive income
and its components in its financial statements using the guidance set forth
in the Standard. Standard No. 131 will require the company to report certain
information about operating segments in its financial statements using the
guidance set forth in the Standard. The new Standards are effective for fiscal
years beginning after December 15, 1997. The company is evaluating the
impact the Standards will have on its financial statement presentation.
10
<PAGE> 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The company reported in its report on Form 10-K for the year ending December 31,
1996, that its subsidiary Quaker State-Slick 50 (Slick 50) and several Slick 50
subsidiaries and the company in some instances were named as defendants in ten
lawsuits filed on behalf of purported classes of purchasers of Slick 50(R)
engine treatment alleging that false, misleading, deceptive and /or
unsubstantiated advertising claims were made for Slick 50(R) engine treatment.
On August 29, 1997, the U.S. District Court for the Northern District of Alabama
dismissed, without prejudice, the case captioned Davis, et. al. v. Quaker State
Corporation, et. al. On September 28, 1997, the U.S. District Court for the
Eastern District of New York entered an order remanding to the Supreme Court of
New York the case captioned Lombardi et. al. v. Quaker State-Slick 50, Inc.
et. al. On October 2, 1997, the District Court for Harris County, Texas
entered an order transferring venue in the case captioned Torres, et. al.
vs. Quaker State-Slick 50, Inc. et. al., to the 68th Judicial District
Court of Dallas County, Texas. On September 15, 1997, the U.S. District Court
for the Northern District of Alabama dismissed, without prejudice, the case
captioned Hargett, et. al. vs. Quaker State Corporation, et. al.
On July 31, 1997, an action was filed in the United States District Court for
the District of New Jersey by Conte Bros. Automotive, Inc. and Hi/Tor
Automotive, individually and on behalf of all others similarly situated who
offered for sale or sold engine additives or treatments which compete with Slick
50(R) engine treatments. The action names as defendants Slick 50, its successor
and several of its subsidiaries and affiliates. The complaint alleges that the
defendants falsely and misleadingly advertised and marketed Slick 50(R) engine
treatments in violation of state consumer protection statutes and the federal
Lanham Act and seeks monetary relief, restitution, damages, lost revenues, and
injunctive relief. The company intends to contest the action vigorously. There
can be no assurance, however, that the plaintiffs will not be awarded injunctive
relief and/or money damages, some or all of which may be payable by the company.
The company reported in its Form 10-Q for the period ended June 30, 1997 Hot
Wax, Inc. filed a suit in the United States District Court for the Northern
District of Illinois against a number of car wax manufactures including the
company's subsidiary Blue Coral, Inc. (Blue Coral). This suit was refiled
separately on October 1, 1997 against Blue Coral following dismissal of Blue
Coral from the earlier action. Plaintiff purports to be a Wisconsin corporation
that manufactures a wax product called "Hot Wax" designed for use in automated
car washes. The company intends to contest the action vigorously. There can be
no assurance, however, that the plaintiffs will not be awarded injunctive relief
and/or money damages, some or all of which may be payable by the company.
11
<PAGE> 13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of net income per share for the quarters and nine
month periods ended September 30, 1997 and 1996, filed
herewith.
12 Computation of ratio of earnings to fixed charges for the nine
month period ended September 30, 1997, filed herewith.
27 Financial Data Schedule, filed herewith.
(b) A current report on Form 8-K was filed by the Company on August 7, 1997
disclosing under Item 5 that a tentative settlement had been reached in
the administrative proceeding brought by the Federal Trade Commission
against Quaker State-Slick 50, Inc. (Slick 50), a subsidiary of the
Company, and several Slick 50 subsidiaries.
12
<PAGE> 14
QUAKER STATE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER STATE CORPORATION
(Registrant)
Date 11/12/97 By /s/ Herbert M. Baum
-------------------- ------------------------------
Herbert M. Baum
Chairman of the Board and
Chief Executive Officer
Date 11/12/97 By /s/ Conrad A. Conrad
-------------------- ------------------------------
Conrad A. Conrad
Vice Chairman and
Chief Financial Officer
13
<PAGE> 15
QUAKER STATE CORPORATION
EXHIBIT LIST
The following Exhibits are required to be filed with this quarterly
report on Form 10-Q.
Exhibit No. and Document
11 Computation of net income per share for the quarters and nine
month periods ended September 30, 1997 and 1996, filed
herewith.
12 Computation of ratio of earnings to fixed charges for the nine
month period ended September 30, 1997, filed herewith.
27 Financial Data Schedule, filed herewith.
<PAGE> 1
COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11
Quaker State Corporation and Subsidiaries
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
9/30/97 9/30/96 9/30/97 9/30/96
- -------------------------------------------------------------------------------------------------------------------------
(in thousands except per share data, unaudited)
<S> <C> <C> <C> <C> <C>
1. Net income $ 5,309 $ 6,754 $ 21,018 $ 19,633
=========================================================================================================================
2. Average number of shares of capital
stock outstanding 35,140 35,842 35,042 33,848
3. Shares issuable upon exercise of dilutive stock
options outstanding during the period, based on
average market prices 313 225 214 154
4. Shares issuable upon exercise of dilutive stock
options outstanding during the period, based on
higher of average or period-end market prices 517 353 327 346
5. Average number of capital and capital equivalent
shares outstanding (2 + 3) 35,453 36,067 35,256 34,002
6. Average number of capital shares outstanding,
assuming full dilution (2 + 4) 35,657 36,195 35,369 34,194
7. Net income per capital and capital equivalent share
(1 divided by 5) $ 0.15 $ 0.19 $ 0.60 $ 0.58
=========================================================================================================================
8. Net income per capital share assuming full dilution
(1 divided by 6) $ 0.15 $ 0.19 $ 0.59 $ 0.57
=========================================================================================================================
</TABLE>
<PAGE> 1
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12
Quaker State Corporation and Subsidiaries
For the Nine Months Ended September 30, 1997
(in thousands)
<TABLE>
<S> <C>
Interest expense $ 20,251
Interest factor of rental expense (1) 6,879
------------
Total fixed charges $ 27,130
============
Income from continuing operations
before income taxes $ 17,170
Fixed charges 27,130
------------
Total earnings $ 44,300
============
Ratio of earnings to fixed charges 1.6
============
</TABLE>
(1) Interest factor of rental expense computed based on: (a) average interest
factor from a sample of leases for operations representing in excess of
50% of rentals from continuing operations, and (b) one-third factor of
rentals for other operations.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 16,706
<SECURITIES> 0
<RECEIVABLES> 194,831
<ALLOWANCES> 4,625
<INVENTORY> 92,507
<CURRENT-ASSETS> 356,080
<PP&E> 378,933
<DEPRECIATION> (144,682)
<TOTAL-ASSETS> 1,121,703
<CURRENT-LIABILITIES> 157,522
<BONDS> 0
0
0
<COMMON> 36,852
<OTHER-SE> 279,901
<TOTAL-LIABILITY-AND-EQUITY> 1,121,703
<SALES> 916,983
<TOTAL-REVENUES> 921,534
<CGS> 431,927
<TOTAL-COSTS> 590,311
<OTHER-EXPENSES> 280,459
<LOSS-PROVISION> 1,543
<INTEREST-EXPENSE> 20,251
<INCOME-PRETAX> 28,970
<INCOME-TAX> 11,800
<INCOME-CONTINUING> 17,170
<DISCONTINUED> 3,848
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,018
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.59
</TABLE>
