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________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996
[ ] 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)
Delaware 25-0742820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 East John Carpenter Freeway
Irving, Texas 75062
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 972-868-0400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
--------------------------------- ------------------------
Capital Stock, par value New York Stock Exchange
$1.00 per share Pacific Stock Exchange
Rights to Purchase Capital Stock, New York Stock Exchange
par value $1.00 per share Pacific Stock Exchange
6.625% Notes due 2005 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 14(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 at least 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 ]
The registrant estimates that as of March 18, 1997 the aggregate market
value of the shares of its Capital Stock held by non-affiliates of the
registrant was more than $496,465,000.
As of March 18, 1997, there were 35,097,296 shares of Capital Stock of the
registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Quaker State's 1996 Annual Report to Stockholders are
incorporated by reference in Parts I and II of this annual report on Form 10-K.
Portions of the Proxy Statement for Quaker State's Annual Meeting of
Stockholders to be held on May 16, 1997 are incorporated by reference in Part
III of this annual report on Form 10-K.
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PART I
ITEM 1. BUSINESS.
Quaker State Corporation ("Quaker State" or the "Company") is a leading
producer and marketer of branded and private label motor oils and other
lubricants. The Company also operates fast lube centers in certain areas of
the United States and Canada, markets automobile engine and fuel treatments,
manufactures and sells automobile polishes, car wash products, automotive air
fresheners and vehicular safety lighting equipment and operates a materials
handling facility in Canada.
The Company's Lubricants and Lubricant Services segment, through Quaker
State's Q Lube, Inc. ("Q Lube") subsidiary, operates fast lube centers which
offer consumers quick and economical oil changes and related services for
passenger vehicles (primarily under the name "Q Lube") and markets and
distributes major national brand, private label and proprietary brand
lubricants and other automotive aftermarket products primarily in the United
States, Canada and Mexico. The lubricant stocks used in the Company's
lubricants are blended with additives and packaged at manufacturing facilities
operated by the Company in the United States. Approximately 20% of the base
oil stocks used by the Company are produced at its Congo refinery in West
Virginia. The Lubricants and Lubricant Services segment also provides
collection, transportation and recycling services for used oil, antifreeze and
filters in certain regions of the United States.
The Company's subsidiary Truck-Lite Co., Inc. ("Truck-Lite") manufactures
safety lighting equipment for trucks and automobiles, which is sold to original
equipment manufacturers and replacement parts distributors.
Following the appointment of Herbert M. Baum as Chairman and Chief
Executive Officer in June 1993, the Company has taken initiatives to increase
its share of the branded motor oil market. These efforts have included
introducing new products and repositioning the Company's current product line,
extending the Company's existing brands, acquiring new brands, creating niche
markets for the Company's products, offering incentive programs and marketing
allowances to customers and independent distributors, and emphasizing the
Quaker State name through a new logo, contemporary packaging and increased
advertising.
Quaker State's goal is to continue the growth of its Lubricant and
Lubricant Services businesses and to strengthen further its position as a
leading North American motor oil company by capitalizing on the Company's brand
name, expanding its Q Lube operations, emphasizing its distribution, customer
service and technological capabilities and providing comprehensive lubricant
products and services, including the recycling of used oils and related
materials.
In September 1994, the Company acquired the Specialty Oil Companies
("Specialty") and Westland Oil Company, Inc. ("Westland"), which together have
provided the Company with a substantial private label motor oil business, two
additional blending and packaging facilities and a network of approximately 25
sales and distribution locations. This acquisition expanded the Company's
product range and distribution capabilities.
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In 1996, the Company formed a new Consumer Products segment, which is
comprised of Slick 50, Inc. ("Slick 50"), Blue Coral, Inc. ("Blue Coral"), and
Medo Industries, Inc. and its affiliated companies (collectively, "Medo"). In
July 1995, the Company acquired Slick 50, a producer of automotive engine
treatments and related automotive chemicals. In June 1996, the Company
acquired Blue Coral, a manufacturer and marketer of automobile appearance
products, commercial and industrial cleaning products and, through its Blue
Coral Systems division, commercial car wash products. In October 1996, the
Company acquired Medo. Medo is engaged in the design, manufacture and
marketing of air fresheners primarily for use in automobiles. The Company
plans to continue to expand its Consumer Products segment by internal growth
and by acquiring new companies which capitalize on the Company's strong sales,
distribution and customer service capabilities in the automotive aftermarket.
Quaker State believes that acquisitions will be an important aspect of its
corporate strategy. However, there can be no assurance that the Company will
be successful in finding other suitable acquisition or expansion opportunities.
The Company, a Delaware corporation formed in 1931, has its principal
executive offices at 225 E. John Carpenter Freeway, Irving, Texas 75062. Its
telephone number is (972) 868-0400. For further information about Quaker
State's business segments, see Lubricants and Lubricant Services, Truck-Lite,
and Consumer Products, below.
LUBRICANTS AND LUBRICANT SERVICES
Quaker State manufactures, markets and sells lubricants (primarily motor
oils for automobiles and trucks) and fuels. The lubricants include
transmission fluids, gear lubricants and greases for automobiles and trucks, as
well as specialty lubricants designed for other types of vehicles, such as
sport utility vehicles, marine craft, motorcycles and snowmobiles. The
lubricants are sold under the Quaker State brand name and certain private label
and proprietary brand names. The fuels sold by Quaker State include gasoline,
fuel oils (diesel fuel and heating oils) and kerosene. Quaker State also
purchases and resells automotive consumer products. The administrative offices
for the Lubricants and Lubricant Services segment are located in Irving, Texas
and Salt Lake City, Utah.
Quaker State also provides collection, transportation and recycling
services for used oil, antifreeze and used oil filters in certain regions of
the United States.
Manufacturing. Motor oils are made by blending additives with lubricant
stocks refined from crude oil. Quaker State's motor oils are made from
lubricant stocks produced at its Congo refinery located at Newell, West
Virginia or from lubricant stocks purchased from other refiners. During 1996,
20% of the lubricant stocks used by Quaker State were produced at the Congo
refinery and 80% were purchased from various suppliers. In addition,
approximately 80% of the Company's additives during 1996 were purchased from
one supplier. The Company believes that alternative sources of supply for
lubricant stocks and additives are readily available.
The Congo refinery is specially designed to maximize the production of
lubricant stocks from Pennsylvania Grade crude oil. Crude oil is available
from a large number of suppliers. Gasoline, fuel oils and kerosene account for
approximately 40% of the output (by volume) of the Congo refinery. The Company
is evaluating the possibility of a sale of the Congo refinery.
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Quaker State blends lubricant stocks with chemicals and/or additives to
produce motor oils, finished lubricants and related products at five blending
and packaging plants owned and operated by Quaker State and its subsidiaries in
Vicksburg, Mississippi; Newell, West Virginia; Shreveport, Louisiana; San
Antonio, Texas; and Carson, California.
Quaker State sells the majority of its branded motor oils (by volume) in
packages ranging in size from four ounces to 55 gallons; however, it sells a
significant amount in bulk. Packaged motor oils are sold primarily in one
quart plastic bottles. In the United States, the plastic bottles are made by
others to Quaker State's specifications. Quaker State also makes certain
plastic containers itself and purchases its other containers from a number of
suppliers. Greases and some specialty lubricants sold by Quaker State are
privately labeled and made by others to the Company's specifications.
Raw materials used in the manufacturing process, other than crude oil and
containers, consist primarily of lubricant stocks produced by other refiners,
chemicals, fuels and additives, which are available from a number of sources.
Availability of Pennsylvania Grade crude oil depends primarily on the price
which purchasers, including Quaker State, are willing to pay, which in turn
depends on the prevailing market prices for all types of crude oil. The
available supply of Pennsylvania Grade crude oil has been declining for some
time and is expected to continue to decline.
Quaker State contracts with operators of tank truck fleets to gather crude
oil produced in eastern Ohio and western Pennsylvania and transport it to the
Congo refinery or to a crude oil terminal and storage complex owned and
operated by Quaker State at Magnolia, Ohio. From there, crude oil flows
through a pipeline to the Congo refinery. Other crude oil is gathered by
regulated pipeline companies and barged to the Congo refinery.
Domestic Sales. Quaker State sells motor oils and other lubricants to
retailers directly and through independent distributors. In addition, sales to
one customer by the Lubricants and Lubricant Services segment were material to
the segment.
Direct sales are made to national and regional chain stores, to fast lube
centers and to resellers and end users primarily in large metropolitan areas.
The resellers include wholesalers and retailers, and the end users include
industrial and commercial accounts and fleet customers.
As of December 31, 1996, there were 85 independent distributors selling
Quaker State products in all 50 states. Independent distributors resell to
service stations, retailers, automobile dealers, repair shops, fast lube
centers, automobile parts stores, retail food chains, fleet and commercial
customers and wholesale outlets.
Gasoline, fuel oils and kerosene are sold F.O.B. the Congo Refinery to
wholesalers located for the most part in Ohio, Pennsylvania and West Virginia.
Sales of automotive consumer products are made to the same entities to
which lubricant sales are made. The leading products sold by this segment,
other than lubricants, are oil, air and fuel filters.
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The Company also sells antifreeze, brake and power steering fluids, fuel
additives, spray lubricants and cleaners and automotive undercoatings.
Fast Lube Centers. Quaker State's Q Lube subsidiary is one of the largest
operators and franchisers of fast lube centers in the United States. Fast lube
centers are service outlets providing quick and inexpensive oil changes,
lubrication and related services and products for automobiles. Q Lube provides
oil changes and lubrication services to consumer vehicles and related products
and services such as air filters, breathers, PCVs, wipers, headlights, engine
treatments, coolant system drain and refill services, and automatic
transmission services. In January 1996, McQuik's Oilube, Inc., a former
subsidiary, was merged into Q Lube. Fast lube centers owned by Q Lube and its
franchisees are operated under the names Q Lube, McQuik's Oilube or Quaker
State Minit-Lube. Q Lube is expanding its service offerings in certain
locations to include coolant flushing, vacuuming, air-conditioning system
recharging and possibly other services.
Q Lube is one of Quaker State's largest outlets for Quaker State motor
oils. In 1991, Q Lube began to convert its company-operated fast lube centers
to the name Q Lube, featuring heightened Quaker State identification. Because
of the success of the conversions, Q Lube has been redesigning virtually all of
its company-operated centers to Q Lube identification and plans to complete the
conversion by the end of 1997. At the end of 1996, Q Lube owned 142 locations,
leased 290 locations, and licensed 55 franchisees to use the Q Lube name. Most
of the Q Lube locations are in 24 states primarily in the Western, Midwestern
and Southern United States.
Docks. A Quaker State subsidiary, Valley Camp Inc., operates a leased
bulk materials handling facility in Thunder Bay, Ontario.
Foreign and Export Sales. Quaker State's Canadian subsidiary, Quaker
State, Inc. ("QSI"), has been a marketer of Quaker State branded motor oils in
Canada for many years. Sales in Canada are made primarily through independent
distributors and fast lube centers under contract with QSI, but also directly
to customers. Quaker State believes that Quaker State motor oil is the largest
selling brand in Canada.
Quaker State sells branded motor oils in Japan through a Quaker State
subsidiary and in Mexico through a licensee. Quaker State believes that Quaker
State motor oil is one of the largest selling independent brands in Mexico.
Quaker State makes export sales of motor oils in 66 foreign countries
through independent distributors. The largest amount of export sales is made
in the Dominican Republic. During 1996, Quaker State also made a significant
part of its export sales to Guatemala, Ecuador, Poland, Sweden and Taiwan.
Small amounts of greases, gear lubricants and automotive consumer products
such as filters and chemicals are exported to certain foreign countries.
During the three years ended December 31, 1996, total revenues from
foreign operations, including export sales, were: 1996 - $77,368,000; 1995 -
$78,260,000; and 1994 - $68,661,000. The revenues for 1994 include Specialty
and Westland revenues from the time of acquisition. The largest component of
these revenues comes from Canada.
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During 1996, revenues from the Lubricant and Lubricant Services segment
comprised approximately 81% of the Company's total sales and operating revenues
from continuing operations. See, "Marketing by the Lubricants and Lubricant
Services and Consumer Products Segments" below for further information.
CONSUMER PRODUCTS
During 1996, the Company formed a new Consumer Products Segment, which is
comprised of Slick 50, Blue Coral and Medo.
Manufacturing. Slick 50 purchases motor oils, additives and chemicals and
contracts with an outside packager to blend these materials into finished
products in accordance with Slick 50's specifications. Blue Coral purchases
chemicals, waxes and cleaners from a variety of suppliers, and blends and
packages finished products in Cleveland, Ohio. Blue Coral owns its
manufacturing and headquarters facilities, and leases its distribution
facilities in Cleveland, Ohio. Slick 50 and Blue Coral have shared the Blue
Coral facilities in Cleveland, Ohio since the beginning of 1997.
Blue Coral Systems arranges for the bulk manufacturing of products which
it sells to commercial and industrial users from its leased headquarters
facility in Tucson, Arizona. Medo purchases paperboard, containers and
fragrances from a variety of suppliers, and manufactures and distributes
finished air fresheners at its leased Baltimore, Maryland facility. Raw
materials used in the Medo manufacturing process are generally available from
several suppliers. Medo leases its corporate headquarters in Tarrytown, New
York.
Domestic Sales. The Consumer Products segment accounted for 12% of the
Company's total consolidated revenues in 1996. In addition, sales to two
customers by the Consumer Products segment were material to that segment.
Foreign and Export Sales. Products are sold in approximately 75 foreign
countries, primarily through subsidiaries of Blue Coral and Slick 50,
independent distributors and a direct sales unit in Japan. Blue Coral sells
automotive appearance products into 30 foreign countries (excluding Canada,
Mexico, South America and the Caribbean), Slick 50 sells its engine treatment
and other products into 40 foreign countries, and Medo sells its products into
75 foreign countries. Slick 50 and Blue Coral operations lease their United
Kingdom headquarters facilities, and use third party contract manufacturers in
the United Kingdom to produce products such as appearance products, engine,
fuel and radiator additives. Blue Coral also leases warehouse space in the
United Kingdom and Singapore. Slick 50 leases office space in Monaco, which
serves as the primary headquarters of its international distribution outside
the United Kingdom, Canada, Mexico and South America. Slick 50's principal
foreign markets are the United Kingdom, Spain, France, Germany, Australia and
Asia. Blue Coral's major foreign markets are in countries in which it has
exclusive distributors, namely, France, Japan, Poland and Turkey. Medo
distributes all its branded products internationally through independent third
party distributors.
During the three years ended December 31, 1996, total revenues from
foreign operations, including export sales, were: 1996 - $12,543,000; 1995 -
$3,298,000; and 1994 - $0. The revenues from 1995 include Slick 50 revenues
from the date of acquisition and for 1996 include Blue Coral
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and Medo from the dates of acquisition. The largest component of these revenues
comes from the United Kingdom.
MARKETING BY THE LUBRICANTS AND LUBRICANT SERVICES AND CONSUMER PRODUCTS
SEGMENTS.
Quaker State's Lubricants and Lubricant Services and Consumer Products
segments aggressively market their products. In particular, these segments
rely heavily on media advertising to project the quality image of their
products and to maintain their respective competitive positions.
In addition to media advertising, total marketing costs include
sponsorship of automobile racing teams, participation in automotive trade shows
and distribution of promotional materials. Quaker State also provides
marketing allowances to its customers and has incentive programs for its direct
retail customers and independent distributors. All products are generally sold
through independent distributors to major national retailers, mass
merchandisers, and automotive chains. In addition, Medo sells products through
food and drugstore chains and Blue Coral Systems sells car appearance products
to commercial and industrial users such as car washes, primarily through its
sales staff.
The Lubricant and Lubricant Services segment has U.S. and foreign trademark
registrations or applications in effect covering the use of its trademarks and
service marks Quaker State(R), Q Lube(R), Lubriguard(TM), Itasca(R) and other
product names, logos and designs utilized in connection with the sale of its
products. The Consumer Products segment has U.S. and foreign trademark
registrations or applications in effect covering the use of its trademarks and
service marks Slick 50(R), Blue Coral(R), Black Magic(TM), Westley's(R),
Polyglycoat(R), Bleche-Wite(R), Medo(R), leaf design(R), Ultra Norsk(R), and
Ozium(R). Quaker State believes that these registrations and applications are
important to the success of its marketing efforts and have been effective in
preventing use of the trademarks by others. The trademark registrations expire
at various dates, but in each case may be renewed.
Medo uses a number of trademarks of third parties pursuant to license
agreements which expire on various dates. These agreements are material to
Medo's business and Medo generally negotiates extensions as the agreements
expire.
In 1996, sales by the Lubricants and Lubricant Services and Consumer
Products segments to Wal*Mart and its affiliated companies exceeded 10% of
Quaker State's consolidated revenues.
TRUCK-LITE
Quaker State's Truck-Lite subsidiary manufactures vehicular safety
lighting equipment, which is sold to original equipment manufacturers and
replacement parts distributors. Truck-Lite's product line consists of custom
designed safety and interior lights for passenger cars, light trucks and vans;
sealed and bulb replaceable stop, turn and indicator lights for heavy-duty
trucks; and sealed wiring harness systems for heavy-duty truck trailers. Truck
Lite's administrative offices are located in an owned facility in Falconer,
New York.
Most of Truck-Lite's products for passenger cars, light trucks and vans
are manufactured in Falconer, New York. Heavy-duty truck and truck trailer
products are manufactured at leased facilities in Coudersport, McElhattan and
Wellsboro, Pennsylvania.
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Truck-Lite owns several trademark registrations for its Truck-Lite(R) mark
and several patents on a number of its products.
Products for passenger cars, light trucks and vans are distributed from
the Falconer facility. Products for heavy-duty trucks and truck trailers are
distributed from leased facilities in McElhattan, Pennsylvania and Sacramento,
California. Truck-Lite also manufactures specially designed heavy-duty
lighting products for sale in Europe through a subsidiary formed for this
purpose. Products are generally distributed directly to original equipment
manufacturers and distributors. Sales to one customer by Truck-Lite were
material to the segment.
Truck-Lite accounted for 7% of the Company's total consolidated revenues
in 1996.
FINANCIAL INFORMATION BY BUSINESS SEGMENT
Financial information and certain information (identifiable assets, capital
expenditures and depreciation, depletion and amortization) for Quaker State's
operations by business segment (i.e., Lubricants and Lubricant Services,
Consumer Products and Truck-Lite) are set forth in the segment information which
appears on pages 20 and 21 of the Quaker State Annual Report for the period
ended December 31, 1996 ("1996 Annual Report") as well as under the heading
"Management's Discussion and Analysis" which appears on pages 18 through 20 of
the 1996 Annual Report. This financial information is incorporated in this item
by reference.
COMPETITION
Lubricants and Lubricant Services. The branded motor oil business is
highly competitive. The major competitors of Quaker State and their principal
brands of motor oil are Pennzoil Company (Pennzoil(R)), Ashland Oil, Inc.
(Valvoline(R)), Texaco, Inc. (Havoline(R)) and Burmah Castrol PLC (Castrol(R)).
The principal methods of competition in the branded motor oil business are
product quality, distribution capability, advertising and sales promotion.
Quaker State also competes with Pennzoil Company in the purchase of Pennsylvania
Grade crude oil. In the sale of private label lubricants, Quaker State competes
with Ashland, Inc. and a number of small blending and packaging companies. The
principal methods of competition are product quality and price. The fast lube
business is also highly competitive. The major competitors of Q Lube are Jiffy
Lube International, Inc. (a subsidiary of Pennzoil Company) and Ashland Oil,
Inc. through its Valvoline Instant Oil Change centers. In addition to competing
with other fast lube centers, Q Lube competes with local automobile dealers,
service stations and garages. The principal methods of competition are quality
of service, speed, location, warranty, price, convenience, reliability and sales
promotion. In the waste oil collection, transportation, management and
recycling business, Quaker State competes with Safety Kleen Corporation;
International Petroleum Corp.; First Recovery, Inc., a division of Ashland,
Inc.; and a number of regional waste oil haulers. The principal methods of
competition are price, location, quality, environmental indemnification and
reliability of service. In foreign countries, Quaker State competes with
foreign manufacturers (including some that are government-owned) and with its
major U.S. competitors. In Canada the primary methods of competition are price,
service, sales support programs, brand acceptance, and marketing programs.
Many of the competitors, particularly the major integrated oil companies, have
substantially greater finished motor oil capacities and financial resources
than Quaker State.
Consumer Products. The major competitors of Slick 50 and their principal
brands of engine additives and functional fluids are Ashland Oil, Inc.
(Valvoline TM8(TM) engine treatment), Howe Laboratories (Duralube(R) brand
engine treatment and fuel system cleaner), Turtle Wax (Lubricator
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2001(TM) engine treatment, and Sure Fire(TM) fuel treatment); Prestone Products
Corporation (Prestone(R) brand functional fluids); Nationwide Industries/Snap
Products (Snap(R) products); Octane Boost Corporation (104+ Octane Boost(R)
fuel system cleaner); Chevron Corporation (Pro-Gard(R) fuel system cleaner);
Pennzoil Products Company (Gumout(R) fuel system cleaner); and Castrol Limited
(fuel treatment). The car appearance products business is also highly
competitive. The major competitors of Blue Coral are Armor All Products
Corporation (Armor All(R) brand products), Turtle Wax, Inc. (Turtle Wax(R)
products), and First Brands (STP(R) Son of a Gun!(R) cleaners, Simoniz(R) waxes
and polishes). Blue Coral Systems, the industrial and commercial sales arm for
Blue Coral products, competes with the same companies as Blue Coral and with
Zep Manufacturing Company (Zep(R) brand products). The automotive air
freshener business is also highly competitive. The major competitor of Medo is
Car Freshner Corporation (Car-Freshner(R), Tree design(R)), and Medo competes
with many other smaller competitors, among them California Scents Corporation
(California Scents(R), Cool Jel(R), Spritzers(R) brands), and New Ideas
International, Inc. (New Ideas International(R), Filtermate(R), Scent Clip(R)).
The principal methods of competition for the Consumer Products segment are
price, quality, delivery, warranty terms, technical innovation, advertising and
sales promotion.
Slick 50's competitive factors internationally are price and product
performance. Blue Coral's primary competitors in the international arena are
its main United States competitors and Johansons and Holt. Blue Coral's
primary methods of competition internationally are price, product performance,
co-operative advertising support and services.
Truck-Lite. Truck-Lite operates generally in two markets, the heavy duty
truck and trailer market and the automotive passenger car market. Truck-Lite
competes with other independent manufacturers including Grote Industries, Inc.,
Peterson Manufacturing Co., Inc. and the Signal-Stat Division of Federal Mogul
Corporation, as well as with companies owned by truck and automobile
manufacturers. The principal methods of competition are brand awareness,
quality, performance, product availability, price and technical innovation.
RESEARCH AND DEVELOPMENT
Research and development activities in lubricants and lubricant services
are directed toward continued improvement of Quaker State motor oils, other
lubricants and engine additives and the development of new or improved
automotive consumer 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. The amounts
spent on research and development by Quaker State during the three years ended
December 31, 1996 were not material.
ENVIRONMENTAL REGULATIONS AND EXPENDITURES
Quaker State and certain of its subsidiaries as well as its competitors
are subject to federal, state and local air, water, land use and waste
management laws and regulations. In particular, these laws and regulations
affect all manufacturing operations, distribution locations, collection of used
oil and other automotive fluids and fast lube operations.
Capital expenditures for environmental control facilities during 1996 were
approximately $1.9 million and capital expenditures for pollution control
facilities during 1997 are expected to amount to approximately $10.0 million.
This forward looking statement is contingent upon competitive pricing
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and market availability of materials needed to complete the environmental and
pollution control facilities.
The capital expenditures for environmental control facilities in 1996 were
primarily made for upgrading and replacing underground storage tanks in Q
Lube's operations, upgrading bulk oil storage facilities at Company operated
facilities, and construction of two boiler stack extensions at the Congo
refinery. Anticipated expenditures in 1997 for environmental control
facilities include expenditures for wastewater treatment and air pollution
controls at the Congo refinery, continued upgrading and replacement of
underground storage tanks in the Q Lube operations and upgrading of bulk oil
storage facilities.
Quaker State and certain of its subsidiaries have received notices from
the United States Environmental Protection Agency (the "USEPA") and similar
state agencies that they may be responsible under federal and/or state
Superfund laws for response and clean-up costs (see Item 3 of this annual
report).
Quaker State expects that it will incur some expenditures related to
environmental indemnities for previously discontinued operations.
For further information with respect to environmental expenditures, see
the information under the heading "Management's Discussion and Analysis", and
Notes 1, 10 and 11 of the Notes to Consolidated Financial Statements, contained
in Quaker State's 1996 Annual Report.
EMPLOYEES
As of December 31, 1996, Quaker State and its subsidiaries had 6,002
employees, of whom 5,598 were full-time employees and 404 were temporary and
part-time employees.
Approximately 6.5% of the Company's full-time employees are represented by
various labor unions. Collective bargaining agreements are in effect with all
of the unions.
ITEM 2. PROPERTIES.
Information with respect to the location and general character of the
materially important principal properties of Quaker State and its subsidiaries,
identified by the business segments utilizing such properties, is included in
Item 1 of this annual report and is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS.
Congo Refinery Environmental Litigation. In December 1993, the United
States commenced a lawsuit against Quaker State in the United States District
Court for the Northern District of West Virginia (the "Court"). The Amended
Complaint alleged, among other things, that Quaker State had violated the
federal Resource Conservation and Recovery Act ("RCRA") and the federal Clean
Air Act at its Congo, West Virginia refinery. The Amended Complaint requested
injunctive relief and civil penalties not exceeding $25,000 for each day of
violation of RCRA and the Clean Air Act. Quaker State disclosed that a
tentative settlement was reached in this matter in its Quarterly Report on Form
10-Q for the quarter ended June 30, 1996. On November 12, 1996, a proposed
consent decree was lodged with the Court. On February 10, 1997 the consent
decree was entered by the Court and the
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lawsuit was dismissed. As part of the consent decree, Quaker State has agreed
to a $2.9 million civil penalty assessment, which will be satisfied by
supplemental environmental projects valued at approximately $1.2 million and a
payment of approximately $1.7 million. The Company has paid the cash portion
of the civil penalty and begun work towards compliance with the consent decree
at the Congo, West Virginia refinery.
Petrochem/Ekotek Superfund Site. In December 1988, Q Lube received a
notice from the USEPA pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act, as amended ("CERCLA"), identifying Q Lube as a
potentially responsible party ("PRP") for response and clean-up costs with
respect to a waste disposal site known as the Petrochem/Ekotek Superfund Site
in Salt Lake City, Utah. In August 1989, Q Lube and 34 other respondents
entered into a Consent Order under which they agreed to fund the costs to
clean-up the surface of the contaminated property. The respondents have
advanced $10,000,000 toward these costs, of which Q Lube's share to date has
amounted to approximately $600,000. A comprehensive remedial investigation and
feasibility study of this site has been completed, and the USEPA has issued its
record of decision ("ROD") containing the plan for further remediation. On
January 31, 1997, the PRP group of which Q Lube is a member received a special
notice letter offering the opportunity to negotiate a settlement with the USEPA
to perform remedial design/remedial action activities at the Ekotek Superfund
Site to implement the ROD.
For further information with respect to CERCLA matters, see the
information under the heading "Management's Discussion and Analysis," and Note
11 of the Notes to Consolidated Financial Statements, contained in the 1996
Annual Report.
Slick 50. The Federal Trade Commission filed an administrative proceeding
on July 16, 1996 seeking an order that Quaker State Slick 50, Inc. ("Slick 50"),
a subsidiary of the Company, and several Slick 50 subsidiaries cease and desist
from making certain product claims and refrain from making other product claims
without adequate substantiation. The respondents in the FTC proceeding and
Quaker State in some instances were later named as defendants in nine 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. The
representative plaintiffs in such actions, the date of filing and the court in
which each suit is pending are, respectively:
a) Torres, July 18, 1996, the District Court for Harris County, Texas;
b) Lombardi, July 19, 1996, U.S. District Court for the Eastern District
of New York;
c) Weiss, July 23, 1996, U.S. District Court for the Southern District of
New York;
d) Hargett, September 24, 1996, U.S. District Court for the Northern
District of Alabama;
e) Kerksieck, October 11, 1996, the Superior Court for San Francisco
County, California;
f) Davis, November 18, 1996, U.S. District Court for the Northern District
of Alabama;
g) Hammack, December 19, 1996, the Circuit Court of Franklin County,
Alabama;
h) Mayo, February 5, 1997, Circuit Court of Cook County, Illinois; and
i) Garza, March 14, 1997, District Court of Hidalgo County, Texas.
11
<PAGE> 12
The complaints allege claims in various combinations for fraud, deceit,
negligent misrepresentation, and violation of certain state consumer protection
laws and seek compensatory and punitive damages, imposition of a constructive
trust, restitution and injunctive relief, attorneys' fees, court costs and
interest on behalf of the purported classes. In another proceeding filed by
Henri Carnal on December 20, 1996 in the Superior Court for San Francisco
County, California, injunctive relief and restitution are sought for alleged
deceptive marketing practices pursuant to the California Business and
Professions Code. The Company is vigorously defending all of these lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
EXECUTIVE OFFICERS OF QUAKER STATE
The following table lists the names, period of service with the Company,
ages and positions held with Quaker State of all executive officers of Quaker
State as of March 18, 1997. There are no family relationships between any
executive officer or Director of Quaker State and any other Director or
executive officer of Quaker State. The executive officers serve at the
discretion of the Board of Directors and are elected annually by the Board of
Directors immediately after each Annual Meeting of Stockholders.
<TABLE>
With Company
Name Since Position
- ------------ ------------ ------------------------------------------
<S> <C> <C>
John D. Barr 1995 Director since October 1995; President and
Chief Operating Officer since July 1995; Senior
Vice President of Ashland, Inc. and President of
its subsidiary The Valvoline Company
(manufacturer of motor oils and lubricants) from
March 1987 to July 1995; age 49.
Herbert M. Baum 1993 Chairman and Chief Executive Officer since June
1993; President of Quaker State from September
1994 to July 1995; Executive Vice President of
Campbell Soup Company (manufacturer of food
products) from November 1989 to June 1993, and
President, Campbell North and South America from
January 1992 to June 1993; Director of Dial
Corporation, Meredith Corporation and Whitman
Corporation; age 60.
Charles F. Bechtel 1993 Vice President of Quaker State, and President,
Quaker State Lubricants since November 1996;
Senior Vice President, Sales, Lubricants and
Lubricant Services Division (formerly Motor Oil
Division) from October 1995 to October 1996;
Executive Vice President, Sales and Marketing,
Motor Oil Division from November 1994 to October
1995; Executive Vice President, Sales, Motor Oil
Division from November 1993 to November 1994;
President, Bechtel and Associates (sales
consulting firm), from October 1992 to November
1993; Executive Vice President, Sales of 21st
Century Foods, Inc. from
</TABLE>
12
<PAGE> 13
<TABLE>
<S> <C>
September 1992 to November 1993; and Executive
Vice President and Chief Operating Officer of Old
Fashioned Kitchens, Inc. from August 1991 to
September 1992; age 52.
Conrad A. Conrad 1974 Director since January 1988; Vice Chairman of
Quaker State since September 1994; Chief
Financial Officer of Quaker State since July
1995; Chief Administrative Officer of Quaker
State from September 1994 to July 1995; President
and Chief Operating Officer of Quaker State from
February 1990 to September 1994; age 51.
Paul E. Konney 1994 Senior Vice President, General Counsel and
Secretary since July 1996; Vice President and
General Counsel from September 1994 to July 1996
and Secretary since January 1995; private
practice of law from July 1993 to September 1994;
Senior Vice President-General Counsel and
Secretary of Tambrands Inc. from April 1989 to
July 1993; age 52.
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Quaker State capital stock is listed on the New York Stock Exchange and
the Pacific Stock Exchange and trades under the trading symbol KSF. The market
prices of Quaker State capital stock appear under the caption "Quaker State
(KSF) Market Prices by Quarter" on page 37 of the 1996 Annual Report. Dividend
information appears in Note 16 of the Notes to Consolidated Financial
Statements contained in the 1996 Annual Report. All such information is
incorporated in this annual report by reference. As of March 18, 1996, there
were 9,066 holders of record of Quaker State's capital stock.
RECENT SALES OF UNREGISTERED SECURITIES. Set forth below is information
regarding all securities of Quaker State sold by Quaker State within the past
three years which were not registered under the Securities Act of 1933, as
amended (the "Act"). All references in the chart to "Quaker State Shares" mean
Quaker State Capital Stock, par value $1.00 per share.
13
<PAGE> 14
<TABLE>
<CAPTION>
DATE OF NUMBER OF QUAKER
SALE STATE SHARES DESCRIPTION OF TRANSACTION INCLUDING PARTIES AND CONSIDERATION
- ------------ -------------------- --------------------------------------------------------------
<S> <C> <C>
9/30/94 4,000,000 Quaker State Shares were exchanged in connection with the
acquisition of shares of Westland from the Westland
shareholders. The total value of the Quaker State Shares
upon issuance was $57.8 million. The exemption from
registration relied upon was Section 4(2) of the Act.
7/11/95 1,260,403 Quaker State Shares and other Quaker State equity rights were
exchanged in connection with the acquisition of shares of
Slick 50 from the Slick 50, Inc. I stockholders. The total
value of the Quaker State Shares upon issuance was $19.5
million. The Quaker State equity rights had no ascertainable
value upon issuance. The exemption from registration relied
upon was Section 4(2) or Regulation D, Rule 506 under the
Act.* In accordance with such exemption, Quaker State
reasonably believed all of the Slick 50, Inc. I stockholders
were "accredited investors," as defined in Regulation D, Rule
501(a), of the Act or constituted, collectively, no more than
35 non-accredited investors.
6/30/96 2,956,328 Quaker State Shares were exchanged in connection with the
acquisition of shares of Blue Coral, Inc. from the Blue Coral
stockholders. The total value of the Quaker State Shares upon
issuance was $43.5 million. The exemption from registration
relied upon was Section 4(2) or Regulation D, Rule 506 under
the Act.* In accordance with such exemption, Quaker State
reasonably believed that all of the Blue Coral, Inc.
stockholders were "accredited investors," as defined in
Regulation D, Rule 501(a), of the Act.
12/10/96 354,374 Quaker State Shares were exchanged in connection with the
relinquishment of certain Quaker State equity rights held by
the former Slick 50, Inc. I stockholders. The total value of
the Quaker State Shares upon issuance was $6.0 million. The
exemption from registration relied upon was Section 3(a)(9)
of the Act.* In accordance with such exemption, the former
Slick 50, Inc. I stockholders were existing security holders
of Quaker State who exchanged securities of Quaker State for
Quaker State Shares and did not pay any additional
consideration for such Quaker State Shares. No commission or
other remuneration was paid or given directly or indirectly
for soliciting such exchange.
</TABLE>
* On December 23, 1996 a Form S-3 registration statement was declared
effective which registered 2,024,989 shares of restricted stock for resale
through April 22, 1997. These shares included all shares held by the former
Slick 50, Inc. I shareholders and shares held by certain former shareholders of
Blue Coral, Inc.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item 6 appears under the caption
"Five-Year Summary of Net Income and Comparative Statistical Data" on page 22
of the 1996 Annual Report and is incorporated in this annual report by
reference.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Discussion and Analysis of Financial Condition and Results of
Operations required by this Item 7 appears on pages 18 through 20 of the 1996
Annual Report and is incorporated in this annual report by reference.
From time to time, the Company may make statements which constitute or
contain "forward-looking" information as that term is defined in the Private
Securities Litigation Reform Act of 1995 or by the Securities and Exchange
Commission in its rules, regulations and releases. The Company cautions
investors that any such forward-looking statements made by the Company are not
guarantees of future performance and that actual results may differ materially
from those in the forward-looking statements. The following are some of the
factors that could cause actual results to differ materially from estimates
contained in the Company's forward-looking statements:
o The pattern of the Company's sales, including variations in
sales volume within periods and sales to significant customers, which
makes forward-looking statements about sales and earnings difficult
and may result in variance of actual results from those contained in
statements made at any time prior to any given period's close;
o The Company's ability to develop, produce and market new and
innovative products and services on which future operating results
depend. There are a number of risks inherent in these activities,
including technological changes, manufacturing facility
capacity, availability of raw materials and critical manufacturing
equipment, changing customer needs and competitive reactions;
o Vigorous competition within the Company's product markets,
including pricing and promotional, advertising or other activities in
order to preserve or gain market share in any segment, the timing of
which cannot be foreseen;
o Global or regional economic factors and potential changes in laws and
regulations affecting the Company's various businesses in over 75
countries around the world, including, changes in product mix,
currency exchange rate fluctuations, changes in monetary policy and
tariffs, and federal, state and international laws regulating the
environment, which could impact the Company's financial condition and
results of operation;
o The market price of the Company's Capital Stock or other securities,
which could be subject to fluctuation in response to quarterly
variations in operating results, changes in analysts' earnings
estimates, market conditions, press releases issued by the Company,
and general economic conditions and other factors external to the
Company, thereby affecting the availability of capital to the Company;
o The impact of unusual items resulting from ongoing evaluations
of business strategies, asset valuations and organizational
structures;
o The costs and effects associated with legal or administrative
proceedings and any required remedial action, anticipated or
unanticipated;
o Real estate prices and the Company's ability to negotiate effectively
based on competitive factors, which could cause the number of new Q
Lube facilities to differ from the number projected and could affect
expenses in other segments; and
o Significant competitive pricing pressures and intense competition for
qualified, skilled employees, which could affect profitability,
productivity and/or expenses.
15
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS.
The following financial statements and related report on the consolidated
financial statements of Quaker State and its subsidiaries for the years ended
December 31, 1996, 1995 and 1994 required by this Item 8 appear on the pages
indicated in the 1996 Annual Report and are incorporated in this annual report
by reference:
<TABLE>
PAGE(S) IN 1996
FINANCIAL STATEMENTS AND RELATED REPORT ANNUAL REPORT
---------------------------------------------------- -------------
<S> <C>
Consolidated Statement of Income for the
years ended December 31, 1996, 1995 and 1994 23
Consolidated Statement of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 24
Consolidated Balance Sheet as of December 31, 1996
and 1995 25
Consolidated Statement of Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 26
Notes to Consolidated Financial Statements 27
Financial Results by Quarter 35
Report of Independent Certified Public
Accountants, dated January 28, 1997 36
</TABLE>
The supplementary financial information required by this Item 8 appears in
Note 16 of the Notes to Consolidated Financial Statements contained in the 1996
Annual Report and is incorporated in this annual report by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10 THROUGH 13.
Information concerning the executive officers of Quaker State appears at
the end of Part I of this annual report. In accordance with the provisions of
General Instruction G to Form 10-K, the other information required by Item 10
(Directors and Executive Officers of the Registrant) and the information
required by Item 11 (Executive Compensation), Item 12 (Security Ownership of
Certain Beneficial Owners and Management) and Item 13 (Certain Relationships
and Related Transactions) is incorporated in this annual report by reference
from the definitive Proxy Statement to be filed by Quaker State pursuant to
Regulation 14A no later than April 30, 1996 (except for the information
required to be included in such Proxy Statement by paragraphs (i), (k) and (l)
of Item 402 of Regulation S-K).
16
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS:
The consolidated financial statements of Quaker State and its subsidiaries,
together with the report of Coopers & Lybrand L.L.P. dated January 28, 1997,
appearing on pages 23 through 35 and on page 36, respectively, of the 1996
Annual Report are incorporated in this annual report by reference (see Item 8
above).
(a)(2) FINANCIAL STATEMENT SCHEDULES:
The financial statement schedule and related report listed below are filed as
part of this annual report:
<TABLE>
PAGE IN THIS
FINANCIAL STATEMENT SCHEDULE AND RELATED REPORT ANNUAL REPORT
----------------------------------------------- -------------
<S> <C>
Report of Independent Certified Public
Accountants, dated January 28, 1997 S-1
Schedule II -- Valuation and Qualifying
Accounts for the years ended December 31,
1996, 1995 and 1994 S-2
</TABLE>
All other financial statement schedules are omitted because they either
are not applicable or are not material, or because the information required
therein is contained in the consolidated financial statements or notes thereto
set forth in the 1996 Annual Report.
(a)(3) EXHIBITS:
The exhibits listed below are filed as a part of this annual report:
<TABLE>
<CAPTION>
EXHIBIT
NO DOCUMENT
- ------- --------
<S> <C>
2(a) Asset Purchase Agreement by and among the Company, BC Acquisition
Corporation, Blue Coral, Inc. and the Blue Coral Stockholders dated
as of June 7, 1996, with list of omitted schedules and exhibits
(filed as Exhibit 2 to the Company's Current Report on Form 8-K
dated June 28, 1996 and incorporated herein by reference).
2(a)(i) Purchase Agreement dated December 12, 1996, among the Company, Blue
Coral, Inc., Sheldon Adelman, Joel Adelman and the Trust, with
exhibits (filed as Exhibit 99.3 to the Company's Current Report on
Form 8-K dated December 12, 1996 and incorporated herein by
reference).
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C>
2(b) Stock Purchase Agreement by and among the Company and the Medo
Shareholders, dated as of August 30, 1996, with list of omitted
schedules and exhibits (filed as Exhibit 2(a) to the Company's
Current Report on Form 8-K dated October 2, 1996 and incorporated
herein by reference).
2(b)(i) Amendment No. 1 to Stock Purchase Agreement dated as of October 2,
1996 (filed as Exhibit 2(b) to the Company's Current Report on Form
8-K dated October 2, 1996 and incorporated herein by reference).
3(i) Composite Certificate of Incorporation of the Company (filed as
Exhibit 3(i) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 and incorporated herein by reference).
3(ii) Bylaws of the Company, as amended to July 25, 1996 (filed as
Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by
reference).
4(a) Rights Agreement, dated as of September 28, 1995, between the
Company and Mellon Securities Trust Company, as Rights Agent (filed
as Exhibit 1 to the Company's Current Report on Form 8-K dated
October 20, 1995 and incorporated herein by reference).
4(b) Escrow Agreement among the Company and the former Slick 50, Inc.
Shareholders dated November 14, 1996 (filed herewith).
4(c) Escrow Agreement among the Company and the Blue Coral Stockholders,
dated as of June 28, 1996 (filed as Exhibit 4 to the Company's
Current Report on Form 8-K dated June 28, 1996 and incorporated
herein by reference).
4(c)(i) Purchase Agreement dated December 12, 1996, among the Company, Blue
Coral, Adelman, Joel Adelman and the Trust, with exhibits (filed as
Exhibit 99.3 to the Company's Current Report on Form 8-K dated
December 12, 1996 and incorporated herein by reference).
4(d) Form of Indenture between Quaker State and Chemical Bank, as
Trustee, related to $100,000,000 of 6.625% Notes due 2005 (filed as
Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by
reference).
4(e) Amended and restated $140 million Credit Agreement, dated April 17,
1996 and amended and restated September 27, 1996, between Quaker
State and Morgan Guaranty Trust Company of New York, as agent, with
a list of omitted schedules and exhibits (filed as Exhibit 4(b) to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference).
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
4(f) $165 million Credit Agreement between Quaker State and Texas
Commerce Bank National Association, as Agent, dated as of September
30, 1996, with a list of omitted schedules and exhibits (filed as
Exhibit 4(c) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by
reference).
10(a) 1986 Stock Option Plan, as amended through April 30, 1987 (filed as
Exhibit 10(b) to Form 10-K for the fiscal year ended December 31,
1987 and incorporated herein by reference).*
10(a)(i) Resolution, adopted on February 27, 1992 by the Board of Directors
of Quaker State, amending Section 5(D) of the 1986 Stock Option
Plan (filed as Exhibit 10(c) to Form 10-K for the fiscal year ended
December 31, 1991 and incorporated herein by reference).*
10(a)(ii) Third Amendment to the 1986 Stock Option Plan, dated October 24,
1996 (filed as Exhibit 10(c) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996 and incorporated
herein by reference).
10(b) 1994 Non-Employee Directors' Stock Option Plan (filed as Exhibit
10(d) to Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference).*
10(b)(i) First Amendment to the 1994 Non-Employee Director's Stock Option
Plan, dated October 24, 1996 (filed as Exhibit 10(d) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference).*
10(c) 1994 Stock Incentive Plan (filed as Exhibit 10(e) to Form 10-K for
the fiscal year ended December 31, 1994 and incorporated herein by
reference).*
10(c)(i) First Amendment to the 1994 Stock Incentive Plan, dated October 24,
1996 (filed as Exhibit 10(b) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996 and incorporated
herein by reference).*
10(d) 1996 Directors' Fee Plan, as amended and restated October 24, 1996
to be effective January 1, 1997 (filed as Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference).*
10(e) Forms of Split Dollar Life Insurance Agreement and related
Collateral Assignment Agreement (filed as Exhibit 10(c) to Form
10-K for the fiscal year ended December 31, 1987 and incorporated
herein by reference).*
10(e)(i) First Amendment to Split Dollar Life Insurance Agreement (filed as
Exhibit 10(g) to Form 10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).*
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C>
10(f) Annual Incentive Bonus Plan, as amended and restated effective
January 1, 1995 (filed as Exhibit 10(a) to Form 10-K for the fiscal
year ended December 31, 1994 and incorporated herein by
reference).*
10(g) Quaker State Amended and Restated Severance Plan, effective
September 30, 1988 (filed as Exhibit 28.1 to Form 8-K filed on
October 17, 1988 and incorporated herein by reference).*
10(h) Articles X and XI of the Quaker State Salaried Pension Plan, as
Amended and Restated effective July 1, 1989 for Quaker State and
certain of its subsidiaries (filed as Exhibit 28(b) to Form 10-K
for the fiscal year ended December 31, 1991 and incorporated herein
by reference).*
10(i) Articles X and XI of the Quaker State Hourly Pension Plan, as
Amended and Restated effective July 1, 1989 for Quaker State and
certain of its subsidiaries (filed as Exhibit 28(e) to Form 10-K
for the fiscal year ended December 31, 1991 and incorporated herein
by reference).*
10(j) Quaker State Supplemental Excess Retirement Plan (filed as Exhibit
10(k) to Form 10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference).*
10(k) Employment Agreement, dated as of August 1, 1994, between Quaker
State Corporation and Herbert M. Baum (filed as Exhibit 10(a) to
Form 10-Q for the fiscal quarter ended September 30, 1994 and
incorporated herein by reference).*
10(k)(i) Amendment to Employment Agreement with Herbert M. Baum dated May
10, 1996 (filed as Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference).*
10(k)(ii) Second Amendment to Employment Agreement with Herbert M. Baum dated
March 20, 1997 (filed herewith).*
10(l) Employment Agreement, dated as of September 30, 1994, between
Quaker State Corporation and L. David Myatt (filed as Exhibit 10(b)
to Form 10-Q for the quarter ended September 30, 1994 and
incorporated herein by reference).*
10(m) Letter, dated as of June 5, 1995, between Quaker State and John D.
Barr (filed as Exhibit 10(m) to the 1995 Form 10-K and incorporated
herein by reference).*
10(n) Letter Agreement, dated February 28, 1996, between Quaker State and
John D. Barr (filed as Exhibit 10(n) to the Form 10-K for the
fiscal year ended December 31, 1995 and incorporated herein by
reference).*
10(o) Letter Agreement, dated March 4, 1996, between Quaker State and
Charles F. Bechtel (filed as Exhibit 10(o) to the Form 10-K for the
fiscal year ended December 31, 1995 and incorporated herein by
reference).*
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
10(p) Employment contract dated June 28, 1996 between Sheldon G. Adelman
and Quaker State Corporation (filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
and incorporated herein by reference).*
10(p)(i) Purchase Agreement dated December 12, 1996, among the Company, Blue
Coral, Adelman, Joel Adelman and the Trust, with exhibits (filed as
Exhibit 99.3 to the Company's Current Report on Form 8-K dated
December 12, 1996 and incorporated herein by reference).
10(q) Form of Indemnification and Insurance Agreement entered into
between Quaker State and each of its directors (filed as Exhibit
10(g) to Form 10-K for the fiscal year ended December 31, 1987 and
incorporated herein by reference).
10(r) Form of letter agreement entered into between Quaker State and each
of its non-employee directors regarding the retirement benefits
provided by Quaker State to its non-employee directors (filed as
Exhibit 10(n) to Form 10-K for the fiscal year ended December 31,
1993 and incorporated herein by reference).
10(s) Outside Directors' Group Life Plan (filed as Exhibit 10(d) to Form
10-K for the fiscal year ended December 31, 1986 and incorporated
herein by reference).
10(t) Form of Employment Continuation Agreement entered into between
Quaker State and certain of its executive officers (filed as
Exhibit 10(p) to the Form 10-K for the fiscal year ended December
31, 1996 and incorporated herein by reference).*
11 Statement re Computation of Per Share Earnings (filed herewith).
13 Those portions of the 1996 Annual Report which are expressly
incorporated in this annual report by reference (filed herewith).
21 List of subsidiaries of Quaker State Corporation (filed herewith).
23 Consent of Coopers & Lybrand L.L.P. (filed herewith).
24 Powers of Attorney (filed as part of Signature Page).
27 Financial Data Schedule (filed herewith).
</TABLE>
- --------
* Management contract or compensatory plan, contract or
arrangement required to be filed by Item 601(b)(10)(iii) of
Regulation S-K.
Quaker State agrees to furnish to the Commission upon request copies of
all instruments not listed above which define the rights of holders of
long-term debt of Quaker State and its subsidiaries.
Copies of the above exhibits are available at a cost of $.20 per page to
any stockholder upon written request to the Secretary, Quaker State
Corporation, 225 E. John Carpenter Freeway, Irving, Texas 75062.
21
<PAGE> 22
(b) REPORTS ON FORM 8-K:
A current report on Form 8-K was filed by the Company on October 10, 1996 and
amended on December 17, 1996. Quaker State reported under Item 2 the
completion of the acquisition of Medo Industries, Inc., and its affiliated
companies ("Medo"). The initial report included financial statements for Medo.
The pro forma financial information related to the acquisition of Medo was
included in the amendment filed on December 17, 1996.
A current report on Form 8-K was filed on November 12, 1996. The Company
reported under Item 5 an updated description of the Company's Capital Stock,
$1.00 par value per share, containing the information required by Item 202 of
Regulation S-K.
A current report on Form 8-K was filed on November 15, 1996. The Company
reported under Item 5 updated information concerning the proposed resolution
of the Congo litigation which was previously reported in the report on Form
10-K for the year 1995 and in the report on Form 10-Q for the quarter ended
June 30, 1996.
A current report on Form 8-K was filed on December 20, 1996. Under Item 5, the
Company reported information related to expected 1996 earnings per share, the
reorganization of the Company's operations into strategic business units,
several officer changes and the completion of a transaction with the former
Blue Coral shareholders.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Quaker State has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUAKER STATE CORPORATION
By: /s/ Herbert M. Baum
--------------------------------------
Herbert M. Baum, Chairman of the Board
and Chief Executive Officer
Date: March 25, 1997
POWER OF ATTORNEY
We, the undersigned officers and directors of Quaker State Corporation,
hereby severally constitute Conrad A. Conrad and Paul E. Konney and each of
them singly, our true and lawful attorneys with full power to them, and each of
them singly, to sign for us and in our names in the capacities indicated below
the report on Form 10-K filed herewith and any and all amendments to said
report, and generally to do all such things in our name and behalf in our
capacities as officers and directors to enable Quaker State Corporation to
comply with the provisions of the Securities Exchange Act of 1934, as amended,
and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to said report and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report and Power of Attorney have been signed by the following persons in the
capacities and on the date indicated.
Name Title Date
- ------------------------------------ -------------------------------- -------
/s/ Herbert M. Baum Chairman of the Board, Chief 3/25/97
- ------------------------------------
(Herbert M. Baum) Executive Officer and Director
(Principal Executive Officer)
/s/ Conrad A. Conrad Vice Chairman, Chief Financial 3/25/97
- ------------------------------------
(Conrad A. Conrad) Officer and Director (Principal
Financial Officer)
/s/ Keith S. Krzeminski Controller (Principal Accounting 3/25/97
- ------------------------------------ Officer)
(Keith S. Krzeminski)
23
<PAGE> 24
/s/ John D. Barr Director 3/25/97
- ------------------------------------
(John D. Barr)
/s/ Leonard M. Carroll Director 3/25/97
- ------------------------------------
(Leonard M. Carroll)
/s/ Laurel Cutler Director 3/25/97
- ------------------------------------
(Laurel Cutler)
/s/ C. Frederick Fetterolf Director 3/25/97
- ------------------------------------
(C. Frederick Fetterolf)
/s/ Thomas A. Gardner Director 3/25/97
- ------------------------------------
(Thomas A. Gardner)
/s/ F. William Grube Director 3/25/97
- ------------------------------------
(F. William Grube)
/s/ Forrest R. Haselton Director 3/25/97
- ------------------------------------
(Forrest R. Haselton)
/s/ L. David Myatt Director 3/25/97
- ------------------------------------
(L. David Myatt)
/s/ Raymond A. Ross, Jr. Director 3/25/97
- ------------------------------------
(Raymond A. Ross, Jr.)
/s/ Lorne R. Waxlax Director 3/25/97
- ------------------------------------
(Lorne R. Waxlax)
24
<PAGE> 25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
Quaker State Corporation:
Our report on the consolidated financial statements of Quaker State
Corporation and Subsidiaries has been incorporated by reference in this Form
10-K from page 36 of the 1996 Annual Report to Stockholders of Quaker State
Corporation. In connection with our audits of such financial statements, we
have also audited the related financial statement schedule listed in the index
on page 17 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Dallas, Texas
January 28, 1997
S-1
<PAGE> 26
QUAKER STATE CORPORATION AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------------- ---------------- ----------------- ------------- -------------
Additions
Balance at charged to Balance at
Beginning costs and End of
Description of Period expenses Deductions Period
- ------------------------------------------- ---------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND NOTES RECEIVABLE:
1996....................................... $ 3,507 $ 2,389(A) $1,724(B) $ 4,172(C)
1995....................................... 2,185 2,970(A) 1,648(B) 3,507(C)
1994....................................... 1,679 1,188(A) 682(B) 2,185
AMORTIZATION OF INTANGIBLE ASSETS:
1996....................................... $14,764 $12,159(D) $ 238 $26,685
1995....................................... 9,442 5,883 561 14,764
1994....................................... 10,300 2,650 3,508(E) 9,442
DEFERRED TAX ASSET VALUATION ALLOWANCE:
1996....................................... $ 460 - $ 138 $ 322
1995....................................... 539 - 79 460
1994....................................... 1,101 - 562 539
</TABLE>
(A) Includes $1.6 million, $1.5 million and $380,000 of additions due to
business acquisitions in 1996, 1995 and 1994, respectively.
(B) Accounts and notes receivable written off during the year.
(C) Includes $12,000 related to the discontinued exploration and production
business.
(D) Includes $402,000 related to business acquisitions.
(E) Includes $3.5 million of amortization related to the discontinued insurance
business.
S-2
<PAGE> 27
EXHIBIT INDEX
TO 1996 FORM 10-K
QUAKER STATE CORPORATION
<TABLE>
EXHIBIT
NO DOCUMENT
- ------- --------
<S> <C>
2(a) Asset Purchase Agreement by and among the Company, BC Acquisition
Corporation, Blue Coral, Inc. and the Blue Coral Stockholders dated
as of June 7, 1996, with list of omitted schedules and exhibits
(filed as Exhibit 2 to the Company's Current Report on Form 8-K
dated June 28, 1996 and incorporated herein by reference).
2(a)(i) Purchase Agreement dated December 12, 1996, among the Company, Blue
Coral, Inc., Sheldon Adelman, Joel Adelman and the Trust, with
exhibits (filed as Exhibit 99.3 to the Company's Current Report on
Form 8-K dated December 12, 1996 and incorporated herein by
reference).
2(b) Stock Purchase Agreement by and among the Company, and the Medo
Shareholders, dated as of August 30, 1996, with list of omitted
schedules and exhibits (filed as Exhibit 2(a) to the Company's
Current Report on Form 8-K dated October 2, 1996 and incorporated
herein by reference).
2(b)(i) Amendment No. 1 to Stock Purchase Agreement dated as of October 2,
1996 (filed as Exhibit 2(b) to the Company's Current Report on Form
8-K dated October 2, 1996 and incorporated herein by reference).
3(i) Composite Certificate of Incorporation of the Company (filed as
Exhibit 3(i) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995 and incorporated herein by reference).
3(ii) Bylaws of the Company, as amended to July 25, 1996 (filed as
Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by
reference).
4(a) Rights Agreement, dated as of September 28, 1995, between the
Company and Mellon Securities Trust Company, as Rights Agent (filed
as Exhibit 1 to the Company's Current Report on Form 8-K dated
October 20, 1995 and incorporated herein by reference).
4(b) Escrow Agreement among the Company and the former Slick 50, Inc.
Shareholders dated November 14, 1996 (filed herewith).
4(c) Escrow Agreement among the Company and the Blue Coral
Stockholders, dated
</TABLE>
<PAGE> 28
<TABLE>
<S> <C>
as of June 28, 1996 (filed as Exhibit 4 to the Company's Current
Report on Form 8-K dated June 28, 1996 and incorporated herein by
reference).
4(c)(i) Purchase Agreement dated December 12, 1996, among the Company, Blue
Coral, Adelman, Joel Adelman and the Trust, with exhibits (filed as
Exhibit 99.3 to the Company's Current Report on Form 8-K dated
December 12, 1996 and incorporated herein by reference).
4(d) Form of Indenture between Quaker State and Chemical Bank, as
Trustee, related to $100,000,000 of 6.625% Notes due 2005 (filed as
Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by
reference).
4(e) Amended and restated $140 million Credit Agreement, dated April 17,
1996 and amended and restated September 27, 1996, between Quaker
State and Morgan Guaranty Trust Company of New York, as agent, with
a list of omitted schedules and exhibits (filed as Exhibit 4(b) to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference).
4(f) $165 million Credit Agreement between Quaker State and Texas
Commerce Bank National Association, as Agent, dated as of September
30, 1996, with a list of omitted schedules and exhibits (filed as
Exhibit 4(c) to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by
reference).
10(a) 1986 Stock Option Plan, as amended through April 30, 1987 (filed as
Exhibit 10(b) to Form 10-K for the fiscal year ended December 31,
1987 and incorporated herein by reference).*
10(a)(i) Resolution, adopted on February 27, 1992 by the Board of Directors
of Quaker State, amending Section 5(D) of the 1986 Stock Option
Plan (filed as Exhibit 10(c) to Form 10-K for the fiscal year ended
December 31, 1991 and incorporated herein by reference).*
10(a)(ii) Third Amendment to the 1986 Stock Option Plan, dated October 24,
1996 (filed as Exhibit 10(c) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996 and incorporated
herein by reference).*
</TABLE>
<PAGE> 29
<TABLE>
<S> <C>
10(b) 1994 Non-Employee Directors' Stock Option Plan (filed as Exhibit
10(d) to Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference).*
10(b)(i) First Amendment to the 1994 Non-Employee Director's Stock Option
Plan, dated October 24, 1996 (filed as Exhibit 10(d) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference).*
10(c) 1994 Stock Incentive Plan (filed as Exhibit 10(e) to Form 10-K for
the fiscal year ended December 31, 1994 and incorporated herein by
reference).*
10(c)(i) First Amendment to the 1994 Stock Incentive Plan, dated October 24,
1996 (filed as Exhibit 10(b) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996 and incorporated
herein by reference).*
10(d) 1996 Directors' Fee Plan, as amended and restated October 24, 1996
to be effective January 1, 1997 (filed as Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and incorporated herein by reference).*
10(e) Forms of Split Dollar Life Insurance Agreement and related
Collateral Assignment Agreement (filed as Exhibit 10(c) to Form
10-K for the fiscal year ended December 31, 1987 and incorporated
herein by reference).*
10(e)(i) First Amendment to Split Dollar Life Insurance Agreement (filed as
Exhibit 10(g) to Form 10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).*
10(f) Annual Incentive Bonus Plan, as amended and restated effective
January 1, 1995 (filed as Exhibit 10(a) to Form 10-K for the fiscal
year ended December 31, 1994 and incorporated herein by
reference).*
10(g) Quaker State Amended and Restated Severance Plan, effective
September 30, 1988 (filed as Exhibit 28.1 to Form 8-K filed on
October 17, 1988 and incorporated herein by reference).*
10(h) Articles X and XI of the Quaker State Salaried Pension Plan, as
Amended and Restated effective July 1, 1989 for Quaker State and
certain of its subsidiaries (filed as Exhibit 28(b) to Form 10-K
for the fiscal year ended December 31, 1991 and incorporated herein
by reference).*
10(i) Articles X and XI of the Quaker State Hourly Pension Plan, as
Amended and Restated effective July 1, 1989 for Quaker State and
certain of its subsidiaries (filed as Exhibit 28(e) to Form 10-K
for the fiscal year ended December 31, 1991 and incorporated herein
by reference).*
</TABLE>
<PAGE> 30
<TABLE>
<S> <C>
10(j) Quaker State Supplemental Excess Retirement Plan (filed as Exhibit
10(k) to Form 10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference).*
10(k) Employment Agreement, dated as of August 1, 1994, between Quaker
State Corporation and Herbert M. Baum (filed as Exhibit 10(a) to
Form 10-Q for the fiscal quarter ended September 30, 1994 and
incorporated herein by reference).*
10(k)(i) Amendment to Employment Agreement with Herbert M. Baum dated May
10, 1996 (filed as Exhibit 10(a) to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996 and
incorporated herein by reference).*
10(k)(ii) Second Amendment to Employment Agreement with Herbert M. Baum dated
March 20, 1997 (filed herewith).*
10(l) Employment Agreement, dated as of September 30, 1994, between
Quaker State Corporation and L. David Myatt (filed as Exhibit 10(b)
to Form 10-Q for the quarter ended September 30, 1994 and
incorporated herein by reference).*
10(m) Letter, dated as of June 5, 1995, between Quaker State and John D.
Barr (filed as Exhibit 10(m) to the 1995 Form 10-K and incorporated
herein by reference).*
10(n) Letter Agreement, dated February 28, 1996, between Quaker State and
John D. Barr (filed as Exhibit 10(n) to the Form 10-K for the
fiscal year ended December 31, 1995 and incorporated herein by
reference).*
10(o) Letter Agreement, dated March 4, 1996, between Quaker State and
Charles F. Bechtel (filed as Exhibit 10(o) to the Form 10-K for the
fiscal year ended December 31, 1995 and incorporated herein by
reference).*
10(p) Employment contract dated June 28, 1996 between Sheldon G. Adelman
and Quaker State Corporation (filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
and incorporated herein by reference).*
10(p)(i) Purchase Agreement dated December 12, 1996, among the Company, Blue
Coral, Adelman, Joel Adelman and the Trust, with exhibits (filed as
Exhibit 99.3 to the Company's Current Report on Form 8-K dated
December 12, 1996 and incorporated herein by reference). *
10(q) Form of Indemnification and Insurance Agreement entered into
between Quaker State and each of its directors (filed as Exhibit
10(g) to Form 10-K for the fiscal year ended December 31, 1987 and
incorporated herein by reference).
</TABLE>
<PAGE> 31
<TABLE>
<S> <C>
10(r) Form of letter agreement entered into between Quaker State and each
of its non-employee directors regarding the retirement benefits
provided by Quaker State to its non-employee directors (filed as
Exhibit 10(n) to Form 10-K for the fiscal year ended December 31,
1993 and incorporated herein by reference).
10(s) Outside Directors' Group Life Plan (filed as Exhibit 10(d) to Form
10-K for the fiscal year ended December 31, 1986 and incorporated
herein by reference).
10(t) Form of Employment Continuation Agreement entered into between
Quaker State and certain of its executive officers (filed as
Exhibit 10(p) to the Form 10-K for the fiscal year ended December
31, 1996 and incorporated herein by reference).*
11 Statement re Computation of Per Share Earnings (filed herewith).
13 Those portions of the 1996 Annual Report which are expressly
incorporated in this annual report by reference (filed herewith).
21 List of subsidiaries of Quaker State Corporation (filed herewith).
23 Consent of Coopers & Lybrand L.L.P. (filed herewith).
24 Powers of Attorney (filed as part of Signature Page).
27 Financial Data Schedule (filed herewith).
- --------
* Management contract or compensatory plan, contract or arrangement
required to be filed by Item 601(b)(10)(iii) of Regulation S-K.
</TABLE>
<PAGE> 1
EXHIBIT 4(b)
ESCROW AGREEMENT
AGREEMENT, dated as of November 14, 1996, among QUAKER STATE CORPORATION,
a Delaware corporation (the "Parent"), the individuals listed on the signature
pages hereto (collectively, the "Applicable Slick 50 Stockholders"), and United
States Trust Company of New York, as Escrow Agent (the "Escrow Agent").
W I T N E S S E T H
WHEREAS, the Applicable Slick 50 Stockholders and the Parent entered into
an Agreement and Plan of Merger, dated as of May 26, 1995, as amended on June
17, 1995 (as so amended, the "Merger Agreement");
WHEREAS, the parties have entered into an Amendment No. 2 to the Merger
Agreement (the "Amendment") which provides that, among other things, the Parent
shall be indemnified by the Applicable Slick 50 Stockholders for legal fees and
defense costs incurred by Parent in the defense of certain litigation;
WHEREAS, to facilitate such indemnification, the Amendment provides for
the deposit into escrow of a portion of certain Parent Common Stock otherwise
payable to the Applicable Slick 50 Stockholders pursuant to the Amendment; and
WHEREAS, the Parent and the Applicable Slick 50 Stockholders desire to
secure the services of the Escrow Agent, and the Escrow Agent is willing to
provide such services, pursuant to the terms and conditions of this Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION I
DEFINITIONS
1.1 Capitalized terms used herein and not otherwise defined shall have
the meanings assigned to them in the Merger Agreement or the Amendment.
SECTION II
APPOINTMENT OF ESCROW AGENT; RESIGNATION AND SUCCESSOR
2.1 Appointment of Escrow Agent. The Escrow Agent is hereby appointed,
and accepts its appointment and designation as, Escrow Agent pursuant to the
terms and conditions of this Agreement.
2.2 Resignation of Escrow Agent; Appointment of Successor. The Escrow
Agent acting at any time hereunder may resign at any time by giving at least
thirty (30) days' prior written notice of resignation to the Parent and the
Slick 50 Stockholders' Representative (as defined in Section 6.1), such
resignation to be effective on the date specified in such notice. Upon receipt
of such notice, the Parent and the Slick 50 Stockholders' Representative shall,
unless they otherwise agree, appoint a bank or trust company with a combined
capital and surplus of at least $25 million as successor Escrow Agent, by a
written instrument delivered to such Escrow Agent, the Parent and the Slick 50
Stockholders' Representative, whereupon such successor Escrow Agent shall
succeed to all the rights and obligations of the retiring Escrow Agent as of the
effective date of resignation as if originally named herein. Upon such
assignment of this Escrow Agreement, the retiring Escrow Agent shall duly
transfer and deliver the Escrow Deposit at the time held by the retiring Escrow
Agent, provided that, if no successor Escrow Agent shall have been appointed on
the effective date of resignation of the resigning Escrow Agent hereunder, the
resigning Escrow Agent may pay the Escrow Deposit into a court of competent
jurisdiction.
<PAGE> 2
SECTION III
ESCROW ARRANGEMENTS
3.1 Liability Secured by the Escrow Deposit. This Escrow Agreement has
been executed and delivered, and the Escrow Account is hereby established, to
facilitate any indemnification which may be owed to the Parent, the Company and
their respective affiliates, subsidiaries, officers, directors, employees and
agents (collectively, the "Indemnitees") pursuant to the Amendment.
3.2 Delivery of the Escrowed Shares; etc. (a) On the Additional
Purchase Price Closing Date, the Parent shall deliver to the Escrow Agent a
certificate, bearing the legend indicated in the attached Exhibit 1 and
registered in the name "United States Trust Company of New York, as Escrow Agent
under Escrow Agreement, dated November 14, 1996, by and among Quaker State
Corporation and the Applicable Slick 50 Stockholders (as defined therein)", for
the applicable number of shares of Parent Common Stock determined in accordance
with Section 3 of the Amendment (such shares, together with any additional
shares of Parent Capital Stock distributed pursuant to any stock split, stock
dividend, reclassification of shares or other transaction to which such shares
may be subject, the "Escrowed Shares"; the Escrowed Shares and any other
securities, cash or other property distributed in respect of the Escrowed Shares
(whether by way of liquidation, merger, exchange, spin-off or otherwise), any
investments or securities permitted by this Agreement and any interest received
thereon shall constitute the "Escrow Deposit") . The parties agree that all such
interest and all other income earned on the Escrow Deposit shall be interest and
income of the Applicable Slick 50 Stockholders and shall be reported by the
Applicable Slick 50 Stockholders for federal, state and local tax purposes pro
rata in accordance with the pro rata ownership of the Applicable Slick 50
Stockholders reflected on the Ownership Certificate (as hereinafter defined).
(b) On the Additional Purchase Price Closing Date, the Slick 50
Stockholders Representative shall deliver to the Escrow Agent a written
certificate setting forth the respective ownership interests to the Escrowed
Shares (as the same may be amended from time to time in accordance with the next
sentence, the "Ownership Certificate"). The Ownership Certificate may be
amended from time to time by written certificate executed by the Slick 50
Stockholders' Representative and delivered to the Escrow Agent.
(c) The Escrow Agent shall hold the Escrow Deposit in an Escrow Account
(the "Escrow Account") for the benefit of the Applicable Slick 50 Stockholders
and the Indemnitees. The Escrow Deposit shall be held as a trust fund with the
identification number and shall not be subject to any lien or
attachment of any creditor or any party thereto, and shall be used solely for
the purposes and subject to the conditions set forth in this Agreement and the
Amendment.
3.3 Investment of the Escrow Deposit. Except for the release of the
Escrow Deposit pursuant to Section IV hereof, the Escrow Agent shall not sell or
transfer any of the Escrowed Shares. Notwithstanding the foregoing, the Escrow
Agent is hereby authorized and directed to invest any cash contained in the
Escrow Deposit in the following obligations (collectively, the "Permitted
Investments"):
(a) obligations of, or fully guaranteed as to timely payment of principal
and interest by, the United States of America;
(b) such money market funds as are agreed to from time to time by the
Parent and the Slick 50 Stockholders' Representative; and
(c) certificates of deposit with any bank or trust company organized
under the laws of the United States of America or any agency or instrumentality
thereof or under the laws of any state thereof which has a combined capital and
surplus of at least $100,000,000.
Subject to the foregoing limitations, the Escrow Agent shall invest any
such cash in accordance with written instructions delivered to it by the Slick
50 Stockholders' Representative from time to time. Except as
<PAGE> 3
provided above, the Escrow Agent shall have no power or duty to invest the
Escrow Deposit or to make substitutions therefor or to sell, transfer or
otherwise dispose of investments acquired hereunder.
3.4 Right to Vote the Escrowed Shares. The Slick 50 Stockholders'
Representative, on behalf of the Applicable Slick 50 Stockholders, shall have
the right to direct the Escrow Agent in a writing signed by the Slick 50
Stockholders' Representative to exercise the voting rights pertaining to all or
a portion of the Escrowed Shares that remain in the Escrow Account. The Escrow
Agent shall comply with any such directions. In the absence of such directions,
the Escrow Agent shall vote all of the Escrowed Shares in accordance with the
recommendations of management of the Parent.
<PAGE> 4
SECTION IV
RELEASE OF THE ESCROW DEPOSIT
4.1 Distribution of Cash Dividends and Income. Any cash dividends
ordinarily declared and paid by the Parent on a quarterly basis with respect to
the Escrowed Shares and deposited pursuant hereto ("Cash Dividends") and all
interest earned on any portion of the Escrow Deposit shall be distributed by
the Escrow Agent to (or as directed by) the Slick 50 Stockholders'
Representative, on behalf of the Applicable Slick 50 Stockholders, promptly
after receipt thereof by the Escrow Agent.
4.2 Distributions for Indemnification. (a) At any time prior to January
15, 1998, (the "Escrow Date"), the Parent may deliver to the Escrow Agent a
certificate (a "Notice of Claim") (i) stating that the Parent is of the opinion
that it may be entitled to indemnification pursuant to paragraph 6 of the
Amendment (an "Indemnified Obligation"), (ii) stating the aggregate amount
(the "Claim Amount") of such Indemnified Obligation, and (iii) specifying in
reasonable detail the nature of such Indemnified Obligation. Upon delivery of
any such Notice of Claim, the Escrow Agent shall, within five (5) days of
receipt thereof, deliver a written notice together with a copy of such Notice
of Claim to the Slick 50 Stockholders' Representative.
(b) If the Slick 50 Stockholders' Representative shall object on behalf
of the Applicable Slick 50 Stockholders to the Indemnification Obligation or the
Claim Amount specified in such Notice of Claim, the Slick 50 Stockholders'
Representative shall, within twenty (20) business days after delivery of the
written notice containing a copy of any such Notice of Claim, deliver to the
Escrow Agent a certificate (a "Reply Certificate") (x) specifying each such
objection, and (y) specifying in reasonable detail the nature and basis for such
objection. Within five (5) business days after delivery to the Escrow Agent of
a Reply Certificate, the Escrow Agent shall deliver a copy of such Reply
Certificate to the Parent. The Parent and the Slick 50 Stockholders'
Representative shall negotiate in good faith for a period of forty-five (45)
days after delivery of such Reply Certificate to the Parent to reach a written
resolution of any objections raised in a Reply Certificate.
(c) If no Reply Certificate is delivered with respect to any Notice of
Claim, then the Slick 50 Stockholders' Representative shall be deemed to have
delivered a Payment Authorization (as defined below) acknowledging the Parent's
right to receive the Claim Amount specified in such Notice of Claim with
respect to the applicable Indemnification Obligation and the Escrow Agent shall
transfer to the Parent a portion of the Escrow Deposit in an amount equal to
such Claim Amount, all in accordance with the procedures set forth in Section
4.2(e).
(d) If the Escrow Agent receives a Reply Certificate in a timely manner
with respect to any Notice of Claim, the Claim Amount referred to in such Notice
of Claim shall be held by the Escrow Agent and shall not be released to the
Parent except upon the Parent's delivery to the Escrow Agent of either (i)
written instructions signed by each of an authorized officer of the Parent and
the Slick 50 Stockholders' Representative directing the Escrow Agent to release
the Claim Amount (or any other amount mutually agreed upon by such parties) or
(ii) a final, non-appealable order, judgment or decree of a court or other body
having jurisdiction over the matters relating to the Indemnification Obligation
referred to in such Notice of Claim demonstrating that the Parent is entitled to
indemnification for such Claim Amount from the Applicable Slick 50 Stockholders
pursuant to the Amendment (either of (i) or (ii), a "Payment Authorization"), at
which date the portion of the amount due to such Parent determined pursuant to
(i) or (ii) above shall promptly be paid to the Parent in accordance with the
procedures set forth herein.
(e) As soon as practicable following receipt by the Escrow Agent of a
Payment Authorization, the Escrow Agent shall pay from the Escrow Deposit to
the Parent, on behalf of the Indemnitee, the amount expressly set forth in such
Payment Authorization. In making such payment, the Escrow Agent shall utilize
the Escrow Deposit as directed in writing by the Slick 50 Stockholders'
Representative on or prior to the date that the Escrow Agent receives a Payment
Authorization, or if not so directed on such date, then as follows, in the
following order of priority, to the extent required to make such payment:
<PAGE> 5
First, the Escrow Agent shall utilize any cash then held in the
Escrow Deposit;
Second, to the extent of any insufficiency, the Escrow Agent shall
transfer, deliver and assign to the Parent, on behalf of the Indemnitee,
such number of Escrowed Shares (rounded up or down to the nearest whole
share) held in the Escrow Account as shall have a value equal to the
amount required to make or complete such payment, it being understood and
agreed that such Escrowed Shares shall be valued for such purpose based
upon the Average Trading Price for the thirty (30) most recent trading
days on the New York Stock Exchange prior to the date of delivery (the
"Adjusted Average Trading Price"); and
Third, to the extent of any insufficiency, the Escrow Agent shall
sell securities or investments, other than the Escrowed Shares, then held
in the Escrow Deposit for cash and utilize such cash to make up such
insufficiency.
In the event the Escrow Deposit shall be insufficient to pay the amount
expressly set forth in such Payment Authorization, the Escrow Agent shall pay
the entire amount of the Escrow Deposit to the Parent in accordance with this
Section 4.2(e).
(f) To the extent that any payment pursuant to Section 4.2(e)
hereof shall be made in cash, the Escrow Agent shall pay all such amount to the
Parent, on behalf of the Indemnitee, by wire transfer to the bank account or
accounts designated by the Parent to the Escrow Agent in writing not less than
one (1) Business Day prior to the date of such payment.
4.3 Release upon the Escrow Date. (a) On the Escrow Date, the Escrow
Agent shall distribute the Escrow Deposit to the Slick 50 Stockholders'
Representative and terminate the Escrow Account, unless the Escrow Agent shall
have received a Notice of Claim from the Parent prior to the Escrow Date with
respect to an indemnification claim (an "Unresolved Claim") for which the Escrow
Agent has not received a subsequent Payment Authorization or written
notification, signed by the Parent and the Slick 50 Stockholders'
Representative, informing the Escrow Agent of the termination or other
resolution of such claim or claims (each, a "Claim Termination Notice"). If on
the Escrow Date there shall exist any Unresolved Claim, then (i) the Escrow
Agent shall retain the Escrow Deposit in the Escrow Account in an amount
sufficient for the payment of all Claim Amounts with respect to all such
Unresolved Claims, and (ii) the Escrow Agent shall release to the Slick 50
Stockholders' Representative the portion of the Escrow Deposit in the Escrow
Account not otherwise retained in accordance with clause (i). For all purposes
of this Section 4.3(a), the Escrowed Shares shall be deemed to have a per share
value equal to the Adjusted Average Trading Price.
(b) Upon the resolution of any Unresolved Claim, the Escrow Agent
shall (A) release any portion of the Escrow Deposit retained in respect of such
Unresolved Claim (x) to the Parent in accordance with any Payment Authorization
received by the Escrow Agent in respect of such Unresolved Claim or (y) to the
Slick 50 Stockholders' Representative in accordance with any Claim Termination
Notice received by the Escrow Agent in respect of such Unresolved Claim and, if
no other Unresolved Claims remain outstanding, (B) release the remainder of the
Escrow Deposit to the Slick 50 Stockholders' Representative. For purposes of
this Section 4.3(b), the Escrowed Shares shall have a per share value equal to
the Adjusted Average Trading Price.
(c) Any distribution to the Slick 50 Stockholders' Representative
pursuant to this Section 4.3 shall be made by the Escrow Agent, in accordance
with the written instructions of the Slick 50 Stockholders' Representative
(including, without limitation, any instructions as to the liquidation of the
Escrow Account and/or the transfer of the Escrowed Shares to the transfer agent
of the Parent). The Escrow Agent shall sign such stock powers or other
documents of transfer as are necessary to transfer any remaining Escrowed Shares
included within the Escrow Deposit in accordance with such instructions (the
"Released Shares").
<PAGE> 6
SECTION V
ESCROW AGENT
5.1 Fees. For its services hereunder, the Escrow Agent shall receive
Five Thousand Dollars ($5,000) upon its receipt of the Escrow Deposit at the
Additional Purchase Price Closing and Five Thousand Dollars ($5,000) for each
calendar year (or a prorated portion of $5,000 for any fraction thereof) until
it has delivered all of the Escrow Deposit pursuant to Section 4. The fees
referred to in the foregoing sentence shall be paid by the Parent.
5.2 Responsibilities of Escrow Agent. The Escrow Agent's acceptance of
its duties under this Agreement is subject to the following terms and
conditions, which the parties hereto agree shall govern and control with respect
to its rights, duties, liabilities and immunities:
(a) Except as to its due execution and delivery of the Agreement,
it makes no representation and has no responsibility as to the validity of this
Agreement or of any other instrument referred to herein, or as to the
correctness of any statement contained herein, and it shall not be required to
inquire as to the performance of any obligation under the Amendment;
(b) The Escrow Agent shall be protected in acting upon any written
notice, request, waiver, consent, receipt or other paper or document, not only
as to its due execution and the validity and effectiveness of its provisions,
but also as to the truth of any information therein contained, which it in good
faith believes to be genuine and what it purports to be;
(c) The Escrow Agent shall not be liable for any error of judgment,
or for any act done or step taken or omitted by it in good faith, or for any
mistake of fact or law, or for anything which it may do or refrain from doing in
connection therewith, except its own gross negligence or misconduct;
(d) The Escrow Agent may consult with competent and responsible
legal counsel selected by it, and it shall not be liable for any action taken or
omitted by it in good faith in accordance with the advice of such counsel;
(e) The Parent shall reimburse the Escrow Agent for all expenses
incurred by it in connection with its duties hereunder (other than taxes imposed
in respect of the receipt of fees by the Escrow Agent pursuant to Section 5.1).
The Parent and the Applicable Slick 50 Stockholders agree to jointly and
severally indemnify and hold the Escrow Agent and its directors, employees,
officers, agents, successors and assigns (collectively, the "Indemnified
Parties") harmless from and against any and all losses, claims, damages,
liabilities and expenses (collectively, "Damages"), including, without
limitation, reasonable costs of investigation and counsel fees and expenses
which may be imposed on the Escrow Agent or incurred by it in connection with
its acceptance of this appointment as the Escrow Agent hereunder or the
performance of its duties hereunder. As between the Parent and the Applicable
Slick 50 Stockholders, the party or parties legally liable for any Damages
suffered by the Escrow Agent and for which another party or parties has provided
indemnity, shall reimburse the party or parties providing indemnity the amount
paid immediately upon written demand. Such indemnity includes, without
limitation, Damages incurred in connection with any litigation (whether at the
trial or appellate levels) arising from this Escrow Agreement or involving the
subject matter hereof. The indemnification provisions contained in this
paragraph are in addition to any other rights any of the Indemnified Parties may
have by law or otherwise and shall survive the termination of this Agreement or
the resignation or removal of the Escrow Agent. Notwithstanding any provision
to the contrary in this Escrow Agreement, the Parent and the Applicable Slick 50
Stockholders shall have no liability to the Indemnified Parties with respect to
any Damages that result, directly or indirectly, from the gross negligence or
misconduct of the Escrow Agent;
(f) The Escrow Agent shall have no duties or responsibilities
except those expressly set forth herein, and it shall not be bound by any
modification of this Agreement unless in writing and signed by all parties
hereto or their respective successors in interest;
<PAGE> 7
(g) The Escrow Agent shall have no responsibility in respect of
the validity or sufficiency of this Escrow Agreement or of the terms hereof.
The recitals of facts in this Escrow Agreement shall be taken as the statements
of the Parent and the Applicable Slick 50 Stockholders, and the Escrow Agent
assumes no responsibility for the correctness of the same. The Escrow Agent
shall be under no obligation or duty to perform any act which would involve it
in an expense or liability or to institute or defend any suit in respect of this
Escrow Agreement or to advance any of its own monies unless properly
indemnified;
(h) The Escrow Agent shall be protected in acting upon any notice,
resolution, request, consent, order, certificate, report, opinion, bond or
other paper or document reasonably believed by it to be genuine and to have
been signed and presented by the proper party or parties. Whenever the Escrow
Agent shall deem it necessary or desirable that a matter be proved or
established prior to taking or suffering any action under this Escrow
Agreement, such matter may be deemed conclusively proved and established by a
certificate signed by the Parent and the Slick 50 Stockholders' Representative
(on behalf of the Applicable Slick 50 Stockholders), and such certificate shall
be full warranty for any action taken or suffered in good faith under the
provisions of this Escrow Agreement; and
(i) The Escrowed Agent does not have any interest in the Escrow
Deposit but is serving as escrow agent only and having only possession thereof.
This Section 5.2(i) shall survive notwithstanding any termination of this
Agreement or the resignation of the Escrow Agent.
SECTION VI
MISCELLANEOUS
6.1 Slick 50 Stockholders' Representative. (a) Each Applicable Slick 50
Stockholder hereby irrevocably appoints to act on his behalf, in considering
and certifying the amount of any indemnification hereunder, in communicating
with the Applicable Slick 50 Stockholders, in appointing a successor Escrow
Agent, in considering and acting with respect to any amendment or termination
of this Agreement, and generally in performing all acts expressly required or
permitted to be performed by the Slick 50 Stockholders' Representative pursuant
hereto, Gold Eagle Company to serve as the "Slick 50 Stockholders'
Representative." If Gold Eagle Company should resign or otherwise become
unable to serve as the Slick 50 Stockholders' Representative, the Applicable
Slick 50 Stockholders shall be obligated, within twenty (20) days following any
such event, to elect, by plurality vote, another Slick 50 Stockholders'
Representative hereunder.
(b) The Parent and the Escrow Agent shall have the right to deal
exclusively with the Slick 50 Stockholders' Representative with respect to all
matters under this Agreement and neither the Parent nor the Escrow Agent shall
have any liability to any Applicable Slick 50 Stockholder for any acts or
omissions of the Slick 50 Stockholders' Representative, or any acts or
omissions taken or not taken by the Parent or the Escrow Agent at the direction
of the Slick 50 Stockholders' Representative, including, but not limited to (i)
any acts or omissions relating to the voting of any Escrowed Shares or (ii) the
transferring or the failure to transfer any Released Shares, Cash Dividends,
interest, or other shares or amounts released from the Escrow Account. Upon
any distribution from the Escrow Account to the Slick 50 Stockholders'
Representative (or to one or more of the Applicable Slick 50 Stockholders upon
written instruction of the Slick 50 Stockholders' Representative) in accordance
with this Agreement, the Escrow Agent and the Parent shall be deemed to have
fully satisfied any and all obligations to each Applicable Slick 50 Stockholder
under this Agreement and the Amendment with respect to the amount of such
distribution.
6.2 Amendment and Termination. This Agreement may be amended or
terminated by the written agreement of the parties hereto, or shall terminate
automatically at such time as all securities and funds from the Escrow Deposit
have been paid or distributed in accordance with the terms of this Agreement
and the Escrow Agent has received all fees as described in Section 5.1 hereto.
Notwithstanding the foregoing, all provisions concerning the indemnification of
the Escrow Agent shall survive any termination of this Agreement.
<PAGE> 8
6.3 Notices. All notices, requests, demands, letters, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if (a) delivered
personally, (b) mailed, certified or registered mail with postage prepaid, (g)
sent by next-day or overnight mail or delivery or (d) sent by fax, as follows:
To the Slick 50 Stockholders' Representative:
Gold Eagle Company
4400 South Kildare
Chicago, IL 60602
Attention: Robert F. Hirsch
Phone:
Fax:
To the Parent:
Quaker State Corporation
225 East John Carpenter Freeway
Irving, TX 75062
Attention: Secretary
Phone: 214-868-0400
Fax: 214-868-0440
To the Escrow Agent:
United States Trust Company of New York
114 W. 47th Street
New York, NY 10036
Attn: Corporate Trust Division
or to such other Person or address as any party shall specify by notice in
writing to the party entitled to notice. All such notices, requests, demands,
letters, waivers and other communications shall be deemed to have been received
(w) if by personal delivery on the day after such delivery, (x) if by certified
or registered mail, on the fifth (5th) Business Day after the mailing thereof,
(y) if by next-day or overnight mail or delivery, on the day delivered or (z)
if by fax, on the next day following the day on which such fax was sent,
provided that a copy is also sent by certified or registered mail.
6.4 Governing Law. This Agreement shall be construed, performed and
enforced in accordance with the laws of the State of Texas.
6.5 Miscellaneous. This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and assigns. The headings in this
Agreement are for convenience of reference only and shall not define or limit
the provisions hereof. This Agreement may be executed in several counterparts,
each of which is an original but all of which together shall constitute one
instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above set forth.
QUAKER STATE CORPORATION
By: /s/ Conrad A. Conrad
----------------------------------
<PAGE> 9
QUAKER STATE - SLICK 50, INC.
By: /s/ Conrad A. Conrad
---------------------------------
/s/ Kirby Atwell
------------------------------------
Kirby Attwell
/s/ A. Benton Cocanougher
------------------------------------
A. Benton Cocanougher
/s/ David A. Dillingham
------------------------------------
David A. Dillingham
/s/ Ronald D. Fash
------------------------------------
Ronald D. Fash
GOLD EAGLE COMPANY
By: /s/ Richard A. Levy
---------------------------------
Its: Exec. V.P. Finance
---------------------------------
/s/ David M. Goldstein
------------------------------------
David M. Goldstein
/s/ Richard A. Jaenicke
------------------------------------
Richard A. Jaenicke
/s/ William M. Jeter
------------------------------------
William M. Jeter III
/s/ Margaret Lea Jeter, Trustee
------------------------------------
Margaret Lea Jeter
/s/ Lonnie L. McKinney
------------------------------------
Lonnie L. McKinney
/s/ Herschel G. Maltz by Ron Fash,
------------------------------------
Agent and Attorney in Fact
------------------------------------
Herschel G. Maltz
/s/ Suzanne J. Menefee
------------------------------------
Executrix of the Estate of
W. O. Menefee
/s/ Carol L. Padlick
------------------------------------
Carol L. Padlick
/s/ Robert E. Vail, Jr.
------------------------------------
Rob Vail
/s/ Jack Thomas
------------------------------------
Jack Thomas
<PAGE> 10
/s/ Barry J. Sobral
------------------------------------
Barry Sobral
/s/ Bill Cornelson
------------------------------------
Bill Cornelson
/s/ Allen Harness
------------------------------------
Allen Harness
/s/ J. Hill Ryer
------------------------------------
Hill Ryer
/s/ Ken Owens
------------------------------------
Ken Owens
/s/ Terry Sanford
------------------------------------
Terry Sanford
/s/ Brad McLane
------------------------------------
Brad McLane
/s/ Gary Garrett
------------------------------------
Gary Garrett
/s/ Mark Carroll
------------------------------------
Mark Carroll
/s/ William Beichner
------------------------------------
Bill Beichner
/s/ John Harvey
------------------------------------
John Harvey
/s/ Harvey Wolff
------------------------------------
Harvey Wolf
/s/ Mike Charley
------------------------------------
Mike Charley
/s/ Linda King
------------------------------------
Linda King
/s/ Sherri Razo
------------------------------------
Sherri Razo
/s/ Dennis Scott
------------------------------------
Dennis Scott
/s/ Bob Marler
------------------------------------
Bob Marler
/s/ Tom Floyd
------------------------------------
Tom Floyd
<PAGE> 11
/s/ Hal Shaub
------------------------------------
Hal Shaub
/s/ Darrell W. O'Neal
------------------------------------
Darrell O'Neal
/s/ Edward Griffith
------------------------------------
Ed Griffith
/s/ Patricia E. Bartlowe
------------------------------------
Pat Barlowe
/s/ Susan Phillips
------------------------------------
Susan Phillips
/s/ W. Jeffrey Howard
------------------------------------
Jeff Howard
U. S. TRUST COMPANY OF NEW YORK
/s/ Margaret Ciesmelewski
------------------------------------
<PAGE> 1
EXHIBIT 10(k)(ii)
SECOND AMENDMENT
TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement ("Second Amendment") is made
and entered into effective as of January 1, 1997, by and between Quaker State
Corporation (hereinafter called the "Corporation"), a Delaware corporation, and
Herbert M. Baum, an individual currently residing in Dallas, Texas (hereinafter
called the "Executive").
WHEREAS, the Executive is employed by the Corporation as its Chairman and
Chief Executive Officer under an Employment Agreement dated as of August 1,
1994, which was previously amended by an Amendment to Employment Agreement
dated as of May 10, 1996 (which agreement, as amended, is referred to herein as
the "Employment Agreement"); and
WHEREAS, the parties desire by this Second Amendment to modify the terms
of the Employment Agreement in certain respects as hereinafter set forth;
NOW, THEREFORE, the Corporation and the Executive covenant and agree as
follows, intending to be legally bound:
1. Paragraph 3(a) of the Employment Agreement ("Base Salary") is hereby
amended by adding the following provisions at the end of the first
sentence thereof:
For services performed by the Executive for the Corporation
pursuant to this Agreement during calendar years 1997 and
1998 while the Executive holds the position of Chief
Executive Officer of the Corporation, the Corporation shall
pay the Executive a base salary at the rates of at least
$700,000 for calendar year 1997 and at least $750,000 for
calendar year 1998, payable each year in substantially equal
installments in accordance with the Corporation's regular
payroll practices.
2. Paragraph 4 of the Employment Agreement ("Annual Bonuses") is hereby
amended by adding the following provisions at the end of the fourth
sentence thereof:
For calendar years 1997 and 1998, the Executive shall be
eligible under the Corporation's cash bonus and incentive
plan for executive officers to receive a cash bonus based on
the Corporation's achievement of certain operating and/or
financial goals established at the beginning of each such
year by the Organization and Compensation Committee of the
Board. Such bonus shall equal sixty percent (60%) of the
Executive's base salary as in effect during such year
(prorated for a partial year of employment), payable upon
the Corporation's obtaining or exceeding the targeted
performance goals.
3. Paragraph 5 of the Employment Agreement ("Other Benefits") is hereby
amended by restating subparagraph 5(b) thereof in its entirety to provide
as follows:
(b) Additional Restricted Share Award. As of August 1, 1994,
the Corporation shall award to the Executive pursuant to
the Corporation's 1994 Stock Incentive Plan (the "1994
Plan") 60,000 restricted shares of Capital Stock. Such
60,000 restricted shares (the "Basic Restricted Stock
Award") shall be subject to transferability and
forfeiture restrictions which shall expire with respect
to 20,000 such shares on each of July 31, 1995, July 31,
1996 and July 31,
<PAGE> 2
1997. In addition, as of August 1, 1994, the
Corporation shall award to the Executive
pursuant to the 1994 Plan 100,000 restricted
shares of Capital Stock (the "Performance
Restricted Stock Award"), and as of January 30,
1996, the Corporation shall award to the
Executive pursuant to the 1994 Plan 25,000
restricted shares of Capital Stock (the "Second
Performance Restricted Stock Award"). Such
125,000 restricted shares shall be subject to
transferability and forfeiture restrictions
which shall expire as to the number of shares
set forth below if, prior to the applicable
dates provided below, the average closing price
of the Capital Stock for any ten (10)
consecutive trading days equals or exceeds the
following levels:
<TABLE>
<CAPTION>
Average Closing Price No. of Shares Vesting Date
--------------------- --------------------- ----
<S> <C> <C>
$18.00 per share 25,000 January 30, 2001
$20.00 per share 33,333 August 1, 1999
$25.00 per share 33,333 August 1, 2000
$30.00 per share 33,334 August 1, 2001
</TABLE>
The foregoing target prices shall be appropriately
adjusted, as determined in the discretion of the
Organization and Compensation Committee of the Board, to
reflect any material stock split, stock dividend,
recapitalization or similar transaction with respect to
the Capital Stock. All transfer and forfeiture
restrictions with respect to the shares of Capital Stock
under the Basic Restricted Stock Award, the Performance
Restricted Stock Award and the Second Performance
Restricted Stock Award shall lapse in their entirety in
the event that (i) the Executive is discharged without
Cause (as hereinafter defined in Paragraph 7(d)(ii)),
(ii) the Executive resigns with Good Reason (as
hereinafter defined in Paragraph 7(d)(v)) or (iii) a
Section 8 Event (as defined in Section 8 of the 1994
Plan) occurs. The Basic Restricted Stock Award, the
Performance Restricted Stock Award and the Second
Performance Restricted Stock Award shall also be subject
to the other terms and conditions set forth in the
applicable award agreement.
Promptly after execution of this Second Amendment, the Executive and the
Corporation shall execute a mutually acceptable amendment to the 1994
Performance Restricted Share Award Agreement dated August 1, 1994 to
confirm the above modifications.
4. Paragraph 5 of the Employment Agreement ("Other Benefits") is hereby
further amended by adding a new subparagraph 5(g) to provide as follows:
(g) Stock Option Awards. The Corporation shall, subject
to stockholder approval of an amendment to the 1994 Plan
to increase the number of shares of the Corporation's
Capital Stock available for issuance thereunder, grant
to the Executive under the 1994 Plan:
(i) as of January 2, 1997, non-statutory stock options
in respect of 100,000 shares of the Corporation's
Capital at an exercise price equal to the fair
market value of the
<PAGE> 3
Corporation's Stock on January 2, 1997,
with a term of ten years from the date of
grant; and
(ii) as of January 2, 1998, non-statutory stock options
in respect of 100,000 shares of the Corporation's
Capital Stock at an exercise price equal to the
fair market value of the Corporation's capital
stock on January 2, 1998, with a term of ten years
from the date of grant.
Both of the above stock option grants shall be
subject to the terms of the 1994 Plan and shall
be evidenced by written stock option agreements
between the Corporation and the Executive in
form and substance reasonably satisfactory to
the Corporation and the Executive.
5. Paragraph 7 of the Employment Agreement ("Termination") is hereby amended
by adding the following provisions immediately after subparagraph
7(d)(vi):
(vii) "Person" shall have the meaning provided
for such term in Section 3(a)(9) of the Exchange Act,
as supplemented by Section 13(d)(3) of the Exchange
Act; provided, however, that Person shall not include
(A) the Corporation or any subsidiary of the
Corporation or (B) any employee benefit plan sponsored
by the Corporation or any subsidiary of the
Corporation.
(viii) "Potential Change in Control" shall mean the
occurrence of any of the following events:
(a) a Person commences a tender offer (with adequate
financing) for securities representing at least 20% of
the Voting Power of the Corporation's securities;
(b) the Corporation enters into an agreement, the
consummation of which would constitute a Change in
Control;
(c) proxies for the election of a majority of the directors
of the Corporation are solicited by anyone other than
the Corporation; or
(d) any other event occurs which is deemed to be a Potential
Change in Control by the Board.
(ix) "Potential Change in Control Period"
shall mean the period commencing on the date that a
Potential Change in Control has occurred and ending
upon:
(a) the date any tender offer described in Paragraph
7(d)(viii)(A) above is abandoned;
(b) the acquisition of twenty percent (20%) of the Voting
Power of the Corporation's outstanding securities by any
Person if such acquisition does not constitute a
Potential Change in Control as defined in Paragraph
7(d)(viii);
(c) the date when any Person described in Paragraph
7(d)(viii), (x) shall own less than twenty percent (20%)
of the voting power of the Corporation's outstanding
securities, (y) shall have abandoned the
<PAGE> 4
tender or exchange offer, or (z) shall not have elected
a member of the Board as the case may be; or
(d) the date a Change in Control occurs.
(x) "Voting Power." A specified percentage
of "Voting Power" of a company shall mean such number
of the Voting Securities as shall enable the holders
thereof to cast such percentage of all the votes which
could be cast in an annual election of directors
(without consideration of the rights of any class of
stock other than the capital stock of the company to
elect directors by a separate class vote); and Voting
Securities shall mean all securities of a company
entitling the holders thereof to vote in an annual
election of directors (without consideration of the
rights of any class of stock other than the common
stock of the company to elect directors by a separate
class vote).
6. Paragraph 8 of the Employment Agreement ("Obligations of the Corporation
Upon Termination") is hereby amended by restating subparagraph 8(b)(iv) in
its entirety to provide as follows:
(iv) in the case of the resignation or
retirement of the Executive (but not his disability or
discharge without cause):
(A) during any period in which the Executive's spouse is
provided medical benefit coverage under the medical
benefit plan of Executive's prior employer at the
Executive's expense, the Corporation shall reimburse the
Executive for such expense upon proper accounting;
(B) in the event the Executive and/or the Executive's spouse
should no longer be entitled to coverage under the
medical benefit plan of Executive's prior employer, the
Corporation shall provide at its expense comparable
coverage for the Executive and his spouse for the
duration of their lives under the Corporation's medical
benefit plan or by such other method as may be selected
by the Corporation; and
(C) in the event the Executive should be required to pay for
his own coverage under his prior employer's medical
benefit plan, the Corporation shall reimburse the
Executive for such expense upon proper accounting.
7. Paragraph 8 of the Agreement ("Obligations of the Corporation Upon
Termination") is hereby further amended by restating subparagraph 8(c)
thereof in its entirety to provide as follows:
(c) Termination after Change in Control. In the event that
the Executive is discharged without Cause or resigns
with Good Reason at any time within two years following
the date that a Change in Control occurs, then, in
addition to any other amounts due to be paid to the
Executive under the foregoing provisions of this
Paragraph 8, the Executive shall be entitled to receive
from the Corporation for a period of three (3) years
from the Date of Termination (the "Supplemental
Period"): (i) the Executive's annual base salary for the
calendar year in which the Date of Termination occurs;
(ii) an annual bonus equal to the Executive's target
bonus for the calendar year in which the Date of
Termination occurs; and (iii) within 30 days of the Date
of Termination a cash amount (the "Incremental
<PAGE> 5
Retirement Benefit") equal to the present value,
calculated using a discount rate equal to the then
applicable Federal rate as determined under Section
1274(d) of the Internal Revenue Code, of the additional
retirement benefits (including, without limitation, any
pension, retiree life or retiree medical benefits) that
would have been payable or available to the Executive
under any employee benefit plan qualified under Section
401(a) of the Internal Revenue Code and under any
supplemental retirement plan based on (x) the age and
service the Executive would have attained or completed
had the Executive continued in the Corporation's employ
through the Supplemental Period and (y) where
compensation is a relevant factor, his pensionable
compensation at the Date of Termination.
Notwithstanding the foregoing or any other provision of
this Agreement to the contrary, if tax counsel to the
Corporation determines that any portion of any payment
under this Agreement, or under any other agreement with
or plan of the Corporation (in the aggregate "Total
Payments"), would constitute an "excess parachute
payment," then the payments to be made to the Executive
under this Agreement shall be reduced such that the
value of the aggregate Total Payments that the Executive
is entitled to receive shall be one dollar ($1) less
than the maximum amount which the Executive may receive
without becoming subject to the tax imposed by Section
4999 of the Internal Revenue Code, or which the
Corporation may pay without loss of deduction under
Section 280G(a) of the Internal Revenue Code; provided,
however, that the foregoing limitation on Total Payments
shall not apply in the event that such tax counsel
determines that the benefits to the Executive under this
Agreement on an after-tax basis (i.e., after federal,
state and local income and excise taxes) if such
limitation is not applied would exceed the after-tax
benefits to the Executive if such limitation is applied.
In the event of a termination pursuant to this Paragraph
8(c), the Executive (and, to the extent applicable, his
dependents) shall be entitled after the Date of
Termination, until the earlier of the end of the
Supplemental Period or the date the Executive becomes
eligible for comparable benefits under a similar plan,
policy or program of a subsequent employer, to continue
to participate in all of the Corporation's employee and
executive welfare, pension and fringe benefit plans (the
"Benefit Plans"). To the extent any such benefits
cannot be provided under the terms of the applicable
plan, policy or program, the Corporation shall provide a
comparable benefit under another plan or from the
Corporation's general assets. The Executive's
participation in the Benefit Plans shall be on the same
terms and conditions that would have applied had the
Executive continued to be employed by the Corporation
through the Supplemental Period.
8. Paragraph 8 of the Employment Agreement is hereby further amended by
adding new subparagraphs 8(d) and 8(e) thereto, to provide as follows:
(d) Termination of Employment Following a Potential Change
in Control. Notwithstanding Section 8(c), if the
Executive's employment is terminated by the Corporation
without Cause during a Potential Change in Control
Period, the Executive shall be deemed,
<PAGE> 6
solely for the purpose of determining his rights under
this Agreement, to have been terminated by the
Corporation without Cause immediately after a Change in
Control.
(e) Funding of Payments. In the event a Potential Change in
Control occurs, the Corporation shall, in accordance
with the terms of the Quaker State Corporation Benefits
Protection Trust Agreement dated July 25, 1996 (the
"Trust Agreement"), deposit into the trust established
pursuant to the Trust Agreement an amount sufficient to
fund the present value of the Severance/Retirement
Benefit as of the date of funding.
9. All capitalized terms used herein but not otherwise defined herein shall
have the meanings assigned to them in the Employment Agreement.
10. Except as specifically modified by this Amendment, all terms and
conditions of the Employment Agreement shall remain in full force and
effect, unmodified.
IN WITNESS WHEREOF, the parties have executed this Second Amendment as of
the day and year first above set forth.
QUAKER STATE CORPORATION
By: /s/ CONRAD A. CONRAD
---------------------------
Its: Vice Chairman and
Chief Financial Officer
EXECUTIVE
/s/ HERBERT M. BAUM
------------------------------
Herbert M. Baum
<PAGE> 1
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Quaker State Corporation and Subsidiaries
(in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- -------------------
<S> <C> <C> <C>
1. Net income $ 13,723 $ 12,100 $ 18,766
==================== ==================== ===================
2. Average number of shares of capital stock outstanding 34,352 32,119 28,368
3. Shares issuable upon exercise of dilutive stock options
outstanding during the year, based on average market
prices 113 107 911
4. Shares issuable upon exercise of dilutive stock options
outstanding during the year, based on higher of
average or year-end prices 158 121 96
5. Average number of capital and capital equivalent
shares outstanding (2 + 3) 34,465 32,226 28,459
==================== ==================== ===================
6. Average number of capital shares outstanding,
assuming a full dilution (2 + 4) 34,510 32,240 28,464
==================== ==================== ===================
7. Net income per capital and equivalent share
(1 divided by 5) $ 0.40 $ 0.38 $ 0.66
==================== ==================== ===================
8. Net income per capital share, assuming full dilution
(1 divided by 6) $ 0.40 $ 0.38 $ 0.66
==================== ==================== ===================
</TABLE>
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The consolidated financial statements and related notes (pages 23 to 35) and
the segment information included on pages 20 and 21 should be read as an
integral part of this review.
In June 1996, the company acquired all the stock of Blue Coral, Inc.
(Blue Coral) for $43.5 million in cash, the issuance of 2,956,328 shares of
capital stock with a market value of $43.5 million, and the payment of $27.9
million to satisfy certain Blue Coral indebtedness. In October 1996, the
company acquired all the stock of Medo Industries, Inc. and its affiliated
companies (Medo) for $142.3 million in cash and the payment of $17.7 million to
satisfy certain Medo indebtedness. These acquisitions are expected to add over
$175 million in annual revenues. In connection with the above acquisitions the
company formed a new Consumer Products segment, combining the operating results
of Blue Coral, Medo and Slick 50, Inc. (Slick 50), which was acquired in 1995.
Slick 50's results, which were previously reported in the Lubricants and
Lubricant Services segment, have been reclassified to the Consumer Products
segment.
As of January 1, 1996, the company began reporting the results of its
fast lube subsidiary, Q Lube, as a component of its core lubricants and
lubricant services businesses. Prior to that, Q Lube had been reported as a
separate segment. Prior periods have been reclassified to conform to current
presentation.
CONSOLIDATED REVIEW OF OPERATIONS
Net income for 1996 was $13.7 million, or $.40 per share compared to $12.1
million, or $.38 per share in 1995. Net income in 1996 included $9.3 million,
net of taxes, or $.27 per share related to unusual items consisting of the
write-down of certain assets and restructuring charges of $12.4 million, net of
taxes, or $.36 per share, and a gain on the settlement of a long-term
receivable of $3.1 million, net of taxes, or $.09 per share (see Note 3 to the
Consolidated Financial Statements). Net income in 1996 was negatively impacted
by the dilutive effect of the June 1996 acquisition of Blue Coral, due to the
seasonal nature of Blue Coral's business and a shortfall in second-season
sales, partially offset by the positive impact of Medo. Net income for 1995
included $16.5 million, net of taxes, or $.51 per share, related to unusual
items consisting of restructuring charges of $13.8 million, or $.43 per share,
and the settlement of a class-action lawsuit for $2.7 million, or $.08 per
share (see Note 3 to the Consolidated Financial Statements). Additionally, 1995
included $14.5 million, or $.45 per share, related to a gain on sale and income
from discontinued operations (see Note 5 to the Consolidated Financial
Statements) and $4.1 million, or $.13 per share, for an extraordinary item
related to early extinguishment of debt (see Note 9 to the Consolidated
Financial Statements). Net income of $18.8 million, or $.66 per share in 1994
included $9.3 million or $.33 per share, related to discontinued operations.
Income from continuing operations in 1996 was $13.7 million, or $.40
per share, compared to $1.8 million, or $.06 per share in 1995. Included in
income from continuing operations in 1996 is $14.5 million related to the
unusual items, the operating results of Slick 50 for a full year and the
operating results of Blue Coral and Medo for six and three months,
respectively. Operating profit before unusual items for the Lubricants and
Lubricant Services segment was up 16% over 1995 primarily due to increased
sales volume in both the retail and installed markets. Operating profit at
Truck-Lite was down 32% as the company continued its withdrawal from the
automotive lighting business. Income from continuing operations in 1995 was
$1.8 million, or $.06 per share, compared to $9.5 million, or $.33 per share in
1994. Included in income from continuing operations in 1995 is $27 million,
related to unusual items and the operating results of Slick 50 for six months.
Operating profit before unusual items in the Lubricants and Lubricant Services
segment was up 67%, due to increased sales volume over 1994. Operating profit
at Truck-Lite was down 16%, due to a decrease in automotive lighting volume.
Sales and operating revenues in 1996 were up 16% to $1.2 billion
compared to $1 billion in 1995. Recent acquisitions and increased sales volumes
at each of the company's major businesses contributed to the increase in
revenues in 1996. Sales and operating revenues in 1995 were up 41% over $732.6
million in 1994 as a result of increased sales volumes and the Specialty Oil
Company (Specialty) and Westland Oil Company (Westland) acquisitions.
LUBRICANTS AND LUBRICANT SERVICES
Operating profit before unusual items for 1996 was $46.1 million compared to
$39.9 million in 1995. The increase in operating profit was favorably impacted
by a 7% and 16% increase in branded and private label motor oil volumes, and a
3% increase in car counts and average ticket prices at the company's Q Lube
operations, offset by reduced LIFO
18
<PAGE> 2
profits of $1.1 million. Operating profit before unusual items in 1995 was up
67% over $23.9 million in 1994. The increase was due to improved branded motor
oil and refinery margins, increased car counts and average ticket prices and
LIFO profits of $2.2 million.
Operating revenues were up 7% to $972.4 million in 1996 compared to
$906.2 million in 1995. The increase in revenues was due to the improved volume
of branded and private label motor oil and increased car counts and average
ticket prices. Operating revenues for 1995 were up 43% compared to 1994
operating revenues of $633 million primarily due to the Specialty and Westland
acquisitions in 1994.
CONSUMER PRODUCTS
Operating profit before unusual items for 1996 was $14.4 million compared to
$2.9 million in 1995. The increase is due to the acquisition of Medo, and the
full-year results accompanied by improved volume at Slick 50, partially offset
by seasonal operating losses at Blue Coral. The Consumer Products segment
recorded revenues of $143.9 million in 1996 compared to $40 million in 1995 due
to the inclusion of Blue Coral, Medo and Slick 50.
TRUCK-LITE
Operating profit decreased to $6.7 million in 1996 compared to $9.8 million in
1995. This decline is attributed to lower sales volume and a change in product
mix as Truck-Lite continued its withdrawal from the automotive lighting
business to focus on the more profitable original equipment and aftermarket
truck lighting business. Operating profit was down 16% in 1995 compared to
$11.8 million in 1994 as a result of the softening automotive market and
initiation of Truck-Lite's transition out of the automotive lighting business.
Operating revenues were down 4% to $86.7 million in 1996 from $90.3
million in 1995 due to lower sales volume and changes in product mix. Operating
revenues for 1995 were down 9% from $99.6 million in 1994, due to the softening
of the automotive market.
CORPORATE
Corporate income excluding unusual items was down 45% to $3 million in 1996
from $5.5 million in 1995, due to reduced cash on hand and reduced royalty
income received from the acquirer of the coal operations. Corporate expenses
were down 5% to $18.8 million in 1996 compared to $19.8 million in 1995.
Interest expense increased 75% to $12.6 million in 1996 from $7.2 million in
1995 as a result of utilizing debt in recent acquisitions. In 1996, the company
settled a long-term receivable from the acquirer of the coal operations
resulting in an unusual gain of $5 million.
Corporate income was up 71% in 1995 from $3.2 million in 1994. The
increase resulted primarily from additional royalty income received from the
acquirer of the coal operations. Corporate expenses excluding restructuring
charges increased 6% in 1995 from $18.7 million in 1994. Interest expense
increased 59% in 1995 from $4.5 million in 1994 as a result of an increase in
average debt outstanding in 1995.
LIQUIDITY AND FINANCIAL CONDITION
Cash flow from operations was up $38.9 million primarily due to reduced cash
used for the company's 1995 relocation and restructuring, and favorable working
capital changes compared to 1995.
The company expects to have $50 million of capital expenditures in
1997 compared to $60.1 million in 1996. The 1997 expenditures will relate
primarily to adding Q Lube stores, through construction or acquisition,
converting various fast lube locations to the Q Lube format and various plant
and equipment expenditures, including environmental capital expenditures.
Capital expenditures could be impacted by the general business economy and
environmental laws.
The company anticipates expanding its Q Lube operations from 469
company-owned and franchised stores at December 31, 1996, to 1,000
company-owned and franchised stores by the end of the year 2000, subject to
locating and acquiring appropriate sites. Additionally, the company intends to
expand its consumer products business through continued product development and
acquisitions. This growth will be financed by cash from operations and
financing activities.
As a result of the company's Blue Coral and Medo acquisitions, total
debt was up $275.8 million to $401.6 million at December 31, 1996, compared to
$125.8 million at December 31, 1995. A portion of the debt is interim financing
which the company plans to refinance in 1997, through a capital stock offering
or permanent financing.
In December 1996, the company purchased 1,550,934 shares of its
capital stock for $24.8 million (see Note 11 to the Consolidated Financial
Statements).
The company's working capital was $20.4 million at December 31, 1996,
with a current ratio of 1.1 to 1, compared to $132.1 million and 1.9 to 1 at
December 31, 1995.
19
<PAGE> 3
This decrease is due to the inclusion in current liabilities of $142 million of
debt which the company plans to refinance in 1997. Excluding the debt to be
refinanced the current ratio for 1996 is 1.9 to 1.
ADDITIONAL FINANCIAL INFORMATION
The net deferred tax assets at December 31, 1996 of $55.8 million will be
either realized through the carryback provisions of the tax law or recovered in
the future through existing levels of taxable income from continuing
operations.
Federal, state, and local environmental laws continue to have an
impact on the company's operations. Compliance with such laws has been
accomplished without a material effect on the company's financial position and
results of operations.
In December 1993, the United States commenced a lawsuit against the
company alleging that the company violated the federal Resource Conservation
and Recovery Act and the federal Clean Air Act at its Congo refinery. In 1996,
a $2.9 million settlement was reached that requires the company to pay $1.7
million in cash penalties and complete supplemental environmental projects
valued at $1.2 million. The cash penalties are provided for in the company's
current environmental reserves. Additionally, the company has agreed to make
other capital improvements at this facility.
The company has been named as a party or a potentially responsible
party in a number of government and private actions based on environmental laws
and regulations. The company anticipates some liability for long-term
remediation or reclamation at formerly owned facilities including three
refineries and various coal operations.
In 1996, the Federal Trade Commission (FTC) filed an administrative
proceeding seeking an order that Slick 50 cease from making certain product
claims and refrain from making other product claims without adequate
substantiation. In addition, Slick 50 was named as a defendant in a number of
class actions alleging false, misleading, deceptive and/or unsubstantiated
advertising claims relating to Slick 50(R) engine treatment. These actions seek
damages on behalf of the purported classes. The company is vigorously defending
the FTC proceeding and the lawsuits.
While it is impossible at this time to determine with certainty the
ultimate outcome of all environmental and legal matters involving the company,
the company has accrued for all items which are probable and can be reasonably
estimated, and does not expect any material adverse effect on its financial
position. However, it is possible that one or more of these matters may be
decided against the company and could have a material impact on results of
operations or cash flow in that period.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain matters discussed herein are forward-looking statements that involve
risks and uncertainties, including, but not limited to, economic conditions,
product demand, competitive products and pricing, availability of raw
materials, changes in inventory due to shifts in market demand, environmental
and trade regulations, litigation and other risks indicated in filings with the
Securities and Exchange Commission. Such factors could cause actual results to
differ significantly from estimates.
SEGMENT INFORMATION
The company's operations are organized into three segments. The Lubricants and
Lubricant Services segment produces and markets branded and private label
lubricants and provides fast service automobile oil changes through the
company's Q Lube subsidiary. The Consumer Products segment manufactures and
markets automotive aftermarket products, including automotive chemicals, car
appearance and air freshener products. The company's third segment, Truck-Lite,
manufactures and sells automotive and heavy-duty truck lighting.
Intersegment sales are at market. Corporate assets consist principally
of deferred tax assets, cash and cash equivalents and assets not identifiable
with the operations of a segment.
In July 1996, the company formed a new Consumer Products segment,
combining the operating results of Blue Coral, Medo and Slick 50. Slick 50's
results, which were previously reported in the Lubricants and Lubricant
Services segment, have been reclassified to the Consumer Products segment. As
of January 1, 1996, the company began reporting the results of its fast lube
subsidiary, Q Lube, as a component of its core Lubricants and Lubricant
Services segment. Prior to that, Q Lube had been reported as a separate
segment. As of December 31, 1996, the company began reporting the results of
its bulk handling facility, Docks, as a component of its Lubricants and
Lubricant Services segment. Prior periods have been reclassified to conform to
current presentation.
20
<PAGE> 4
SEGMENT INFORMATION (continued)
Quaker State Corporation and Subsidiaries
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (a)
Lubricants and lubricant services ........................ $ 972,390 $ 906,158 $ 632,996
Consumer products ........................................ 143,929 39,962 --
Truck-Lite ............................................... 86,725 90,312 99,638
Intersegment sales ....................................... (2,815) (862) --
----------- ----------- -----------
$ 1,200,229 $ 1,035,570 $ 732,634
======================================================================================================
OPERATING PROFITS
Lubricants and lubricant services ........................ $ 46,061 $ 39,868 $ 23,880
Unusual items (b) ..................................... (17,871) (17,800) --
----------- ----------- -----------
Total lubricants and lubricant services .................. 28,190 22,068 23,880
----------- ----------- -----------
Consumer products ........................................ 14,383 2,880 --
Unusual items (b) ..................................... (239) -- --
----------- ----------- -----------
Total consumer products .................................. 14,144 2,880 --
----------- ----------- -----------
Truck-Lite ............................................... 6,703 9,823 11,756
----------- ----------- -----------
Total operating profits .................................. 49,037 34,771 35,636
Corporate income ......................................... 3,013 5,523 3,235
Interest expense ......................................... (12,640) (7,228) (4,534)
Corporate expenses ....................................... (18,790) (19,816) (18,669)
Unusual items (b) ..................................... 3,603 (9,200) --
----------- ----------- -----------
Total corporate expenses ................................. (15,187) (29,016) (18,669)
----------- ----------- -----------
Income from continuing operations before income taxes .... $ 24,223 $ 4,050 $ 15,668
======================================================================================================
IDENTIFIABLE ASSETS
Lubricants and lubricant services ........................ $ 505,236 $ 448,674 $ 426,108
Consumer products ........................................ 375,892 78,794 --
Truck-Lite ............................................... 41,586 40,636 37,497
Discontinued operations .................................. 3,039 4,279 49,449
----------- ----------- -----------
925,753 572,383 513,054
Corporate ................................................ 111,083 144,640 116,964
----------- ----------- -----------
$ 1,036,836 $ 717,023 $ 630,018
======================================================================================================
CAPITAL EXPENDITURES
Lubricants and lubricant services ........................ $ 53,519 $ 39,363 $ 24,848
Consumer products ........................................ 2,100 -- --
Truck-Lite ............................................... 4,504 5,039 2,978
Discontinued operations .................................. -- 728 8,618
----------- ----------- -----------
$ 60,123 $ 45,130 $ 36,444
======================================================================================================
DEPRECIATION, DEPLETION AND AMORTIZATION
Lubricants and lubricant services ........................ $ 27,659 $ 27,940 $ 19,419
Consumer products ........................................ 8,113 2,520 --
Truck-Lite ............................................... 2,806 2,459 2,426
Discontinued operations .................................. -- 5,411 10,414
----------- ----------- -----------
$ 38,578 $ 38,330 $ 32,259
======================================================================================================
</TABLE>
a. In 1996 and 1995, sales to one customer and its affiliated companies
exceeded 10% of consolidated revenues.
b. In 1996, unusual items primarily relate to asset write-downs,
restructuring charges and a gain on the settlement of a long-term
receivable. In 1995, unusual items primarily relate to restructuring
charges and the settlement of a class-action lawsuit.
21
<PAGE> 5
FIVE-YEAR SUMMARY OF NET INCOME AND COMPARATIVE STATISTICAL DATA
Quaker State Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(in thousands except per share and statistical data) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Sales and operating revenues ......................... $ 1,200,229 $ 1,035,570 $ 732,634 $ 607,085 $ 592,650
Other, net ........................................... 7,470 9,894 6,923 5,595 4,063
------------ ------------ ------------ ------------ ------------
1,207,699 1,045,464 739,557 612,680 596,713
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales and operating costs .................... 821,530 718,996 503,539 421,894 408,830
Selling, general and administrative .................. 296,221 255,271 193,390 156,359 158,920
Depreciation and amortization ........................ 38,578 32,919 21,845 19,181 20,077
Interest ............................................. 12,640 7,228 5,115 5,721 4,785
Unusual items (a) .................................... 14,507 27,000 -- -- 3,200
------------ ------------ ------------ ------------ ------------
1,183,476 1,041,414 723,889 603,155 595,812
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM ............... 24,223 4,050 15,668 9,525 901
PROVISION FOR INCOME TAXES ........................... 10,500 2,300 6,167 2,534 245
------------ ------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM ................................ 13,723 1,750 9,501 6,991 656
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (b) ....... -- 14,489 9,265 6,711 (31,904)
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES ........... 13,723 16,239 18,766 13,702 (31,248)
EXTRAORDINARY ITEM (c) ............................... -- (4,139) -- -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (d) .......... -- -- -- -- (62,600)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) .................................... $ 13,723 $ 12,100 $ 18,766 $ 13,702 $ (93,848)
===================================================================================================================================
PER SHARE:
Income from continuing operations
before extraordinary item and cumulative
effect of accounting changes ...................... $ .40 $ .06 $ .33 $ .25 $ .02
Income (loss) from discontinued operations ........... -- .45 .33 .25 (1.17)
Extraordinary item ................................... -- (.13) -- -- --
Cumulative effect of accounting changes .............. -- -- -- -- (2.30)
------------ ------------ ------------ ------------ ------------
Net income (loss) .................................... $ .40 $ .38 $ .66 $ .50 $ (3.45)
==================================================================================================================================
Dividends:
Cash per share .................................... $ .40 $ .40 $ .40 $ .60 $ .80
Amount ............................................ 13,762 12,867 11,358 16,310 21,720
Capital expenditures ................................. 60,123 45,130 36,444 29,760 25,706
As of December 31:
Working capital (e) .................................. 20,376 132,073 101,439 35,403 74,911
Total assets ......................................... 1,036,836 717,023 630,018 783,677 792,820
Total debt ........................................... 401,608 125,762 73,249 51,450 79,183
Stockholders' equity ................................. 298,669 272,155 251,850 188,750 191,194
Book value per share ................................. 8.60 8.29 8.00 6.93 7.04
===================================================================================================================================
Number of stockholders of record ..................... 9,193 9,776 11,792 12,147 12,606
Weighted average capital and equivalent
shares outstanding ................................ 34,465,000 32,226,000 28,459,000 27,234,000 27,184,000
===================================================================================================================================
</TABLE>
a. In 1996, the company recorded $19.5 million related primarily to asset
write-downs and restructuring charges and a $5 million gain upon the settlement
of a long-term receivable (see Note 3 to Consolidated Financial Statements).
The company recorded $22.6 million of restructuring charges and $4.4 million
for the settlement of a class-action lawsuit in 1995 (see Note 3 to
Consolidated Financial Statements). The Company recorded a charge in 1992 for
assets to be replaced by future conversion of Minit-Lube stores to the Q Lube
format.
b. The company sold its exploration and production business in 1995,
and its insurance business in 1994 and discontinued its coal business in 1992.
These businesses have been reported as discontinued operations (see Note 5 to
Consolidated Financial Statements).
c. Premium on early extinguishment of $50 million, 8.73% Senior Notes (see Note
9 to Consolidated Financial Statements).
d. Cumulative effect of implementing Statement of Financial Accounting Standard
No. 106, "Employers' Accounting For Postretirement Benefits Other Than
Pensions" and Standard No. 109, "Accounting For Income Taxes" in 1992.
e. Working Capital at December 31, 1996, has been reduced by $142 million of
debt which the company plans to refinance in 1997.
22
<PAGE> 6
CONSOLIDATED STATEMENT OF INCOME
Quaker State Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(in thousands, except per share data) 1996 1995 1994
=============================================================================================================
<S> <C> <C> <C>
REVENUES
Sales and operating revenues .................................... $ 1,200,229 $ 1,035,570 $ 732,634
Other, net ...................................................... 7,470 9,894 6,923
----------- ----------- -----------
1,207,699 1,045,464 739,557
----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales and operating costs ............................... 821,530 718,996 503,539
Selling, general and administrative ............................. 296,221 255,271 193,390
Depreciation and amortization ................................... 38,578 32,919 21,845
Interest ........................................................ 12,640 7,228 5,115
Unusual items (Note 3) .......................................... 14,507 27,000 --
----------- ----------- -----------
1,183,476 1,041,414 723,889
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ....................................... 24,223 4,050 15,668
PROVISION FOR (BENEFIT FROM) INCOME TAXES (NOTE 4)
Current ...................................................... 27,500 11,200 9,550
Deferred ..................................................... (17,000) (8,900) (3,383)
----------- ----------- -----------
10,500 2,300 6,167
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ..... 13,723 1,750 9,501
DISCONTINUED OPERATIONS (NOTE 5)
Discontinued operations, net of taxes ........................ -- 1,794 8,888
Income on disposition, net of taxes .......................... -- 12,695 377
----------- ----------- -----------
-- 14,489 9,265
=============================================================================================================
INCOME BEFORE EXTRAORDINARY ITEM ................................ 13,723 16,239 18,766
EXTRAORDINARY ITEM, NET OF TAXES (NOTE 9) ....................... -- (4,139) --
NET INCOME ...................................................... $ 13,723 $ 12,100 $ 18,766
PER SHARE:
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM ..... $ .40 $ .06 $ .33
INCOME FROM DISCONTINUED OPERATIONS ............................. -- .45 .33
EXTRAORDINARY ITEM .............................................. -- (.13) --
----------- ----------- -----------
NET INCOME PER SHARE ............................................ $ .40 $ .38 $ .66
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE> 7
CONSOLIDATED STATEMENT OF CASH FLOWS
Quaker State Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................................... $ 13,723 $ 12,100 $ 18,766
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization .......................................... 38,578 38,330 32,259
Unusual items - noncurrent ........................................................ 17,712 7,864 --
Gain on settlement of long-term receivable ........................................ (5,053) -- --
Gain on disposition of discontinued operations (Note 5) ........................... -- (12,695) (377)
Extraordinary loss on extinguishment of debt ...................................... -- 4,139 --
Deferred income taxes and investment tax credit ................................... (10,547) (17,937) 2,669
Increase (decrease) from changes in:
Receivables .................................................................... (5,397) (22,078) (1,154)
Inventories .................................................................... (16,523) (1,120) (3,719)
Other current assets ........................................................... 6,955 (7,548) 5,018
Accounts payable ............................................................... 12,197 (7,039) (7,920)
Accrued liabilities ............................................................ (1,415) 4,999 (11,509)
Other .......................................................................... (6,446) 5,913 3,529
--------- --------- ---------
Net cash provided by operating activities ......................................... 43,784 4,928 37,562
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................................................. (60,123) (45,130) (36,444)
Proceeds from disposal of property and equipment ..................................... 2,953 4,910 4,556
Proceeds from settlement of long-term receivable, net of taxes ....................... 15,380 -- --
Acquisition of businesses, net of cash acquired (Note 2) ............................. (234,106) (31,008) (28,366)
Proceeds from sale of discontinued operations, net of discontinued
operations cash and taxes (Note 5) ................................................ -- 47,213 78,529
Discontinued insurance operations investing activities, net .......................... -- -- (12,732)
Other, net ........................................................................... (8,046) (5,685) --
--------- --------- ---------
Net cash provided by (used in) investing activities ............................... (283,942) (29,700) 5,543
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ....................................................................... (13,762) (12,867) (11,358)
Purchase of treasury stock ........................................................... (25,313) -- --
Proceeds from debt ................................................................... 282,774 99,375 418
Payments on debt ..................................................................... (6,990) (60,882) (17,988)
Other ................................................................................ 2,187 -- --
--------- --------- ---------
Net cash provided by (used in) financing activities ............................... 238,896 25,626 (28,928)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................................. (1,262) 854 14,177
Total cash and cash equivalents at beginning of year ................................. 30,659 29,805 15,628
--------- --------- ---------
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR ....................................... $ 29,397 $ 30,659 $ 29,805
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE> 8
CONSOLIDATED BALANCE SHEET
Quaker State Corporation and Subsidiaries
<TABLE>
<CAPTION>
DECEMBER 31
(in thousands except share data) 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 29,397 $ 30,659
Accounts and notes receivable, less allowance of $4,160 and $3,495 in 1996 and 1995 ..... 171,346 129,267
Inventories (Note 6) .................................................................... 113,970 80,284
Other current assets .................................................................... 26,518 36,796
----------- -----------
Total current assets ................................................................. 341,231 277,006
----------- -----------
Property, plant and equipment, at cost (Note 7) ......................................... 227,876 203,259
Goodwill, brands and other assets (Note 8) .............................................. 467,729 236,758
----------- -----------
TOTAL ASSETS ...................................................................... $ 1,036,836 $ 717,023
======================================================================================================================
LIABILITIES
Current liabilities:
Accounts payable ........................................................................ $ 73,959 $ 53,465
Accrued liabilities ..................................................................... 87,559 84,225
Debt payable within one year ............................................................ 17,337 7,243
Debt to be refinanced (Note 9) .......................................................... 142,000 --
----------- -----------
Total current liabilities ............................................................ 320,855 144,933
----------- -----------
Long-term debt (Note 9) ................................................................. 242,271 118,519
Other long-term liabilities (Note 10) ................................................... 175,041 181,416
----------- -----------
Total liabilities .................................................................... 738,167 444,868
----------- -----------
Commitments and contingencies (Note 11)
STOCKHOLDERS' EQUITY
Capital stock $1.00 par value; authorized shares, 95,000,000;
issued shares, 36,322,312 and 32,824,157 in 1996 and 1995 ........................... 36,322 32,824
Additional capital ...................................................................... 187,560 139,068
Retained earnings ....................................................................... 103,480 103,519
Cumulative foreign currency translation adjustment ...................................... 411 (111)
Treasury stock, at cost, 1,593,582 and 8,447 shares in 1996 and 1995 .................... (25,433) (120)
Unearned compensation ................................................................... (3,671) (3,025)
----------- -----------
Total stockholders' equity ........................................................... 298,669 272,155
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................ $ 1,036,836 $ 717,023
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE> 9
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Quaker State Corporation and Subsidiaries
<TABLE>
<CAPTION>
Foreign
Currency Unearned
Capital Additional Retained Translation Treasury Compen-
(in thousands except shares and per share) Stock Capital Earnings Adjustment Stock sation Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 ................ $27,251 $ 63,044 $ 98,877 $ 75 $ (497) $ 188,750
Net income ................................ -- -- 18,766 -- -- 18,766
Cash dividends ($.40 per share) ........... -- -- (11,358) -- -- (11,358)
265,687 shares of capital stock issued
under incentive plans .................. 266 3,337 -- -- (2,411) 1,192
Net changes in unrealized gains and
losses on marketable securities ........ -- -- (1,999) -- -- (1,999)
Change in foreign currency translation .... -- -- -- (784) -- (784)
4,000,000 shares issued for acquisition ... 4,000 53,750 -- -- -- 57,750
Purchase of 33,498 shares ................. -- -- -- -- $ (467) -- (467)
------- -------- --------- ---- -------- ---------
BALANCE, DECEMBER 31, 1994 ................ 31,517 120,131 104,286 (709) (467) (2,908) 251,850
------- -------- --------- ---- -------- ---------
Net income ................................ -- -- 12,100 -- -- -- 12,100
Cash dividends ($.40 per share) ........... -- -- (12,867) -- -- -- (12,867)
103,030 shares of capital stock
issued under incentive plans .......... 47 661 -- -- 789 (117) 1,380
Change in foreign currency translation .... -- -- 598 -- -- 598
1,260,403 shares issued for acquisition ... 1,260 18,276 -- -- -- -- 19,536
Purchase of 30,529 shares ................. -- -- -- -- (442) -- (442)
------- -------- --------- ---- -------- ---------
BALANCE, DECEMBER 31, 1995 ................ 32,824 139,068 103,519 (111) (120) (3,025) 272,155
------- -------- --------- ---- -------- ---------
Net income ................................ -- -- 13,723 -- -- -- 13,723
Cash dividends ($.40 per share) ........... -- -- (13,762) -- -- -- (13,762)
187,453 shares of capital stock issued
under incentive plans .................. 187 2,345 -- -- -- (646) 1,886
Change in foreign currency translation .... -- -- -- 522 -- -- 522
3,310,700 shares issued for acquisitions .. 3,311 46,147 -- -- -- -- 49,458
Purchase of 1,585,135 shares .............. -- -- -- -- (25,313) -- (25,313)
------- -------- --------- ---- -------- ---------
BALANCE, DECEMBER 31, 1996 ................ $36,322 $ 187,560 $ 103,480 $411 $(25,433) $(3,671) $ 298,669
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quaker State Corporation and Subsidiaries
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Quaker State Corporation and Subsidiaries (the company) is principally a
producer of motor oil and lubricants, and a manufacturer and marketer of
consumer products and services in the automotive aftermarket. Branded and
private label products are sold to distributors and national and regional
retailers.
a. Basis of presentation: The consolidated financial statements
include the accounts of Quaker State Corporation and all of its subsidiaries
more than 50% owned. The preparation of the consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities and reported amounts of revenues and expenses. Actual results could
differ from those estimates.
b. Cash equivalents: The company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
c. Inventories: Inventories are stated at the lower of cost or market.
Cost is determined on the last-in, first-out (LIFO) basis for crude oil and
manufactured products. For other inventories, such as purchased finished
lubricating oils and purchased automotive aftermarket products, cost is
determined on the first-in, first-out (FIFO) basis.
d. Depreciation, amortization and valuation of intangibles:
Depreciation is recorded on a straight-line basis. Goodwill, brands and other
intangible assets are amortized on a straight line basis over periods not
exceeding 40 years. When factors indicate an intangible asset may not be
recoverable, the company uses an estimate of the related undiscounted future
cash flows compared to the carrying value of the intangible asset to determine
if an impairment exists.
e. Environmental expenditures: Costs in connection with compliance and
monitoring of compliance with existing environmental regulations as they relate
to ongoing operations are expensed or capitalized as appropriate. Costs
associated with remediation efforts resulting from prior activities are
recorded no later than at the completion of an environmental site assessment. A
liability is recorded earlier if it is probable that a liability exists and a
cost can be reasonably estimated. All cleanup estimates are based on current
technology.
f. Advertising Costs: Advertising costs are expensed as incurred.
Advertising costs were $123.3 million, $92.7 million and $77.8 million in 1996,
1995, and 1994, respectively.
g. Income taxes and investment credit: The company uses the liability
method of accounting for income taxes. The company accounts for investment
credit on the deferral method which recognizes the investment credit as a
reduction of the provision for income taxes over the life of the related
assets.
h. Earnings per share: Earnings per share is based on the weighted
average number of shares of capital stock outstanding and capital stock
equivalents.
i. Foreign currency translation: For all foreign operations, the
functional currency is the local currency. The assets and liabilities of the
company's foreign operations are translated into U.S. dollars using current
exchange rates. Income statement items are translated at average exchange rates
prevailing during the period. Exchange gains or losses are not material.
2. ACQUISITIONS:
In June 1996, the company acquired all the stock of Blue Coral, Inc. (Blue
Coral) for $43.5 million in cash, the issuance of 2,956,328 shares of capital
stock with a market value of $43.5 million, and the payment of $27.9 million to
satisfy certain Blue Coral indebtedness. In October 1996, the company sold one
of the Blue Coral businesses for $7.2 million in cash. The acquisition resulted
in $82.2 million of goodwill, brands and other intangible assets.
In October 1996, the company acquired all the stock of Medo
Industries, Inc. and its affiliated companies (Medo) for $142.3 million in cash
and the payment of $17.7 million to satisfy certain Medo indebtedness. The
acquisition resulted in $145.9 million of goodwill, brands and other intangible
assets.
In 1995, the company acquired all the stock of Slick 50, Inc. (Slick
50) for $22.6 million in cash, the issuance of 1,260,403 shares of capital
stock with a market value of $19.5 million, and the payment of $11 million to
satisfy certain Slick 50 indebtedness. In December 1996, under performance
consideration terms of the Merger Agreement, additional consideration of
354,374 shares of capital stock with a market value of $6 million was paid to
the former Slick 50 stockholders. The total goodwill, brands and other
intangible assets resulting from the Slick 50 acquisition was $72.3 million.
27
<PAGE> 11
In 1994, the company acquired all the stock of the Specialty Oil
Companies (Specialty) and Westland Oil Company, Inc. (Westland) for $19.5
million in cash and 4,000,000 shares of capital stock with a market value of
$57.8 million. The company also purchased certain related equipment for
approximately $1.5 million and assumed approximately $40 million of debt of the
acquired companies of which $22 million was satisfied by the company at the
time of closing. The agreements provide for the company to indemnify the prior
owners for certain loan obligations, taxes and other liabilities. The
acquisition resulted in $80.6 million of goodwill, brands and other intangible
assets. In 1996, the company purchased certain real property used in these
operations for $9 million. This property was leased prior to its purchase (see
Note 11).
The following summary is prepared on a pro forma basis as though Blue
Coral, Medo and Slick 50 had been acquired as of January 1, 1995 after
including the impact of adjustments, such as amortization of goodwill, brands
and other intangible assets, interest expense and related tax effects.
<TABLE>
<CAPTION>
(unaudited, in thousands except
per share amounts) 1996 1995
- ------------------------------------------------------
<S> <C> <C>
Revenues ..................... $1,308,202 $1,216,165
Income from continuing
operations ................ 16,848 4
Income per share from
continuing operations ..... .49 --
========================================================
</TABLE>
The pro forma results are not necessarily indicative of what would
have occurred if the acquisitions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combining
the operations.
3. UNUSUAL ITEMS:
In 1996, the company recorded pretax charges of $19.5 million ($12.4 million
after tax) primarily related to the write-down of certain assets to net
realizable value and restructuring costs. Additionally, the company recognized
a pretax gain of $5 million ($3.1 million after tax) in connection with the
settlement of a long-term receivable.
In 1995, the company recognized pretax costs and expenses associated
with the restructuring and relocation of the Motor Oil division and corporate
headquarters of $22.6 million ($13.8 million after tax) and settled a class
action lawsuit for $4.4 million ($2.7 million after tax).
4. INCOME TAXES:
Income before income taxes from continuing operations consists of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Domestic ....................... $21,128 $ 4,028 $12,914
Foreign ........................ 3,095 22 2,754
-------- ------- -------
Total .......................... $24,223 $ 4,050 $15,668
==============================================================
</TABLE>
The components of the provision for income taxes from continuing
operations are as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal ................... $ 23,100 $ 8,900 $ 7,170
State ..................... 3,000 1,600 680
Foreign ................... 1,400 700 1,700
Deferred:
Federal ................... (14,800) (6,900) (2,827)
State ..................... (1,900) (1,200) 44
Foreign ................... (100) (600) (200)
Tax credits amortized ..... (200) (200) (400)
-------- -------- --------
Total ........................ $ 10,500 $ 2,300 $ 6,167
=================================================================
</TABLE>
A reconciliation from the federal statutory tax rate to the effective
tax rate for continuing operations follows:
<TABLE>
<CAPTION>
(% of pretax income) 1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate ............ 35.0 35.0 35.0
Add (deduct) the tax effect of:
Goodwill amortization .............. 3.3 17.2 1.8
Investment credit .................. (.7) (3.8) (2.4)
Other tax credits .................. (2.6) (10.4) (1.2)
State and foreign income taxes ..... 4.0 8.0 4.7
Other, net ......................... 4.3 10.8 1.4
---- ---- ----
Effective tax rate .................... 43.3 56.8 39.3
===================================================================
</TABLE>
28
<PAGE> 12
The deferred tax assets and liabilities as of December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Employee benefits ................ $ 57,966 $ 58,774
Environmental reserves ........... 7,789 8,293
Other ............................ 26,746 23,804
-------- --------
Gross deferred tax assets ........... 92,501 90,871
Valuation allowance ................. (322) (460)
-------- --------
Total deferred tax assets ........... 92,179 90,411
-------- --------
Deferred tax liabilities:
Depreciation and amortization .... 25,656 30,645
Other ............................ 10,708 12,167
-------- --------
Total deferred tax liabilities ...... 36,364 42,812
-------- --------
Net deferred tax assets ............. $ 55,815 $ 47,599
============================================================
</TABLE>
5. DISCONTINUED OPERATIONS:
In 1995, the company sold the assets of its Natural Gas Exploration and
Production division (E&P) for $67.7 million. The sale resulted in a gain on
disposition of $12 million, net of taxes of $7.5 million. In 1994, the company
sold its wholly owned subsidiary, Heritage Insurance Group, Inc. (Heritage),
for $82 million. Net of taxes of $2.7 million, the gain on the sale was
$377,000 in 1994 and $650,000 in 1995.
Condensed income statements relating to the E&P operations for the
seven months ended July 31, 1995 and the year ended December 31, 1994 and the
insurance operations for the eight months ended August 31, 1994 are presented
below:
<TABLE>
<CAPTION>
E&P Heritage
---------------------------
(in thousands) 1995 1994 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Revenues ....................... $14,641 $29,751 $87,566
Costs and expenses ............. 12,617 24,364 82,392
------- ------- -------
Income before income
taxes ....................... 2,024 5,387 5,174
Provision for income taxes ..... 230 883 790
------- ------- -------
Net income ..................... $ 1,794 $ 4,504 $ 4,384
==============================================================
</TABLE>
6. INVENTORIES:
Inventories consist of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- -------------------------------------------------------
<S> <C> <C>
Crude oil, lubricants
and related materials.......... $ 76,462 $60,202
Consumer products................. 21,060 5,355
Vehicular lighting products....... 16,448 14,727
-------- -------
Total............................. $113,970 $80,284
======================================================
</TABLE>
The reserve to reduce the carrying value of inventories from current
costs to the LIFO basis amounted to $21 million in 1996 and $18.9 million in
1995.
At December 31, 1996 and 1995, $55.7 million and $32.1 million,
respectively, of inventories were valued on the LIFO basis. Certain inventory
quantities were reduced resulting in liquidations of LIFO inventory which
increased net income by $650,000 or $.02 per share in 1996 and $1.3 million or
$.04 per share in 1995.
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------------------
<S> <C> <C>
Lubricants and lubricant services .. $415,902 $375,453
Consumer products .................. 15,634 2,606
Truck-Lite ......................... 40,395 36,051
-------- --------
Subtotal ........................... 471,931 414,110
Less: accumulated depreciation ..... 244,055 210,851
-------- --------
Total .............................. $227,876 $203,259
=========================================================
</TABLE>
Depreciation expense was $26.8 million, $27.4 million and $20.9 million in
1996, 1995 and 1994, respectively.
29
<PAGE> 13
8. GOODWILL, BRANDS AND OTHER ASSETS:
Goodwill, brands and other assets consist of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- -------------------------------------------------------
<S> <C> <C>
Goodwill, net of accumulated
amortization of $11,051
and $5,806 .................... $251,375 $ 88,567
Brands, net of accumulated
amortization of $2,885
and $1,000 .................... 113,715 49,000
Other intangible assets, net of
accumulated amortization
of $12,749 and $7,958 ......... 21,510 18,823
Net deferred tax assets .......... 49,056 35,549
Notes and royalties receivable ... 20,283 35,927
Prepaid pension cost ............. 9,001 8,768
Other ............................ 2,789 124
-------- --------
Total ............................ $467,729 $236,758
=======================================================
</TABLE>
9. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS:
Long-term debt consists of:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ----------------------------------------------------------
<S> <C> <C>
6.625% Notes due 2005, net
of discount ..................... $ 99,458 $ 99,396
Variable rate revolving credit
agreements ...................... 292,000 9,540
Other, 2% to 10.50% due in
various installments to 2010 .... 10,150 16,826
-------- --------
Subtotal ........................ 401,608 125,762
Less: Payments due within
one year .................... 17,337 7,243
Debt to be refinanced
in 1997 ..................... 142,000 --
-------- --------
Total .............................. $242,271 $118,519
==========================================================
</TABLE>
As of December 31, 1996, the company had available $320 million of
committed revolving credit agreements. The credit agreements provide for
various borrowing rate options and expire from 1997 to 2001. The
weighted-average interest rate on borrowings on these credit agreements as of
December 31, 1996 was 6.12%. The credit agreements contain various covenants
pertaining to financial ratios and interest coverage.
The company expects to refinance a portion of its debt in 1997 through
a capital stock offering or permanent financing.
In 1995, the company issued $100 million of 6.625% Notes due 2005. A
portion of the proceeds of these notes was used to retire $50 million of 8.73%
Senior Notes due 2002. In connection with the early retirement of the notes,
the company paid a premium of $6.5 million and wrote off $300,000 of
unamortized debt issuance costs. These transactions resulted in the
extraordinary charge of $4.1 million, net of tax benefits of $2.7 million.
The aggregate long-term debt maturing in the next five years is as
follows: 1997-$159.3 million; 1998-$823,000; 1999-$657,000; 2000-$225,000;
2001-$140.2 million.
The fair value of debt at December 31, 1996 was $399.5 million and for
other financial instruments the fair value does not materially differ from the
value reflected in the financial statements. The fair value of the instruments
was based upon quoted market prices of the same or similar instruments or on a
discounted basis using the rates available to the company for instruments of
similar maturity.
10. OTHER LONG-TERM LIABILITIES:
Other long-term liabilities consist of :
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Postretirement benefits ............ $ 97,955 $ 94,784
Environmental reserves ............. 13,203 18,399
Other .............................. 17,635 15,328
Discontinued coal liabilities:
Employee benefits ............... 43,137 46,791
Other ........................... 3,111 6,114
-------- --------
Total .............................. $175,041 $181,416
==========================================================
</TABLE>
11. COMMITMENTS, CONTINGENCIES AND RELATED PARTIES:
The company has operating leases in effect for equipment and facilities with
initial terms ranging from 2 to 20 years, with renewal options generally being
available. Future minimum annual rentals, net of estimated sublease rentals
under operating leases of $7.3 million, during each of the next five years are:
1997-$18.5 million; 1998-$17.7 million; 1999-$14.9 million; 2000-$13.6 million;
2001-$11.5 million and thereafter $56.4 million.
30
<PAGE> 14
Rental expenses amounted to $22.4 million, $18.3 million and $15.5
million for 1996, 1995 and 1994, respectively, net of sublease rentals of $3.4
million, $3.3 million and $3.8 million for 1996, 1995 and 1994, respectively.
The company leases certain real property from a company that is owned,
in part, by a director of the company. The company paid $465,000, $1.5 million
and $376,000 in 1996, 1995 and 1994, respectively, for rental of the property.
In 1994, the company entered into license and construction agreements
with Interline Resources Corporation (Interline), that provide for the
exclusive use of Interline's used oil rerefining technology in North America
and for the construction of facilities. In 1996, the company terminated the
construction agreement and agreed to terminate the license agreement upon the
sale of the existing rerefining unit to Interline.
In 1996, the company entered into a long-term lube base stock supply
agreement with a major oil company. This agreement requires the company to
purchase a certain volume of lube base stock based on a price formula.
The company regularly purchases lubricant base stocks from a company,
the president of which is a director of the company. The company purchased $3.3
million, $1.6 million and $393,000 in 1996, 1995 and 1994, respectively, at
prices comparable to other purchases.
In 1996, the company retained an advertising firm, the vice chairman
of which is a director of the company. The company paid $1.2 million in 1996
for advertising services, at prices comparable to other similar services.
In December 1996, the company paid $24.8 million for 1,550,934 shares
of its capital stock to a former owner of Blue Coral, who was a director of the
company, and to an affiliated trust.
In 1993, the United States commenced a lawsuit against the company
alleging that the company violated the federal Resource Conservation and
Recovery Act and the federal Clean Air Act at the Congo refinery. In 1996, a
$2.9 million settlement was reached that requires the company to pay $1.7
million in cash penalties and complete supplemental environmental projects
valued at $1.2 million. The cash penalties are provided for in the company's
current environmental reserves. Additionally, the company has agreed to make
other capital improvements at this facility.
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 that it 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.
In 1996, the Federal Trade Commission (FTC) filed an administrative
proceeding seeking an order that Slick 50 cease from making certain product
claims and refrain from making other product claims without adequate
substantiation. In addition, class action suits were filed against Slick 50
alleging false, misleading, deceptive and/or unsubstantiated claims relating to
Slick 50(R) engine treatment. These actions seek damages on behalf of the
purported classes. The company is vigorously defending the FTC proceeding and
the lawsuits.
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.
12. STOCK OPTIONS:
The company has various stock option, incentive and award plans. The company
applies APB Opinion 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for stock options issued under the plans. Had compensation
cost for the company's plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" the company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(in thousands, except per share amount) 1996 1995
- ----------------------------------------------------------------
<S> <C> <C>
Net income ........................... $ 13,225 $ 11,544
Earnings per share ................... .38 .36
================================================================
</TABLE>
31
<PAGE> 15
Under current plans, 2,785,836 shares have been authorized for
issuance. Collectively, these plans include stock options, stock appreciation
rights (SARs), cash payment rights, restricted shares, performance shares and
other share awards. Under these plans, options have been granted to employees
and non-employee directors to purchase capital stock at a price no less than
100% of the fair market value on the date of grant. Options granted may not be
exercised for at least six months from the date of grant and all options must
be exercised within ten years of the date granted.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996, 1995 and 1994: dividend
yield of 2.4%, expected volatility of 26%, risk-free interest rates of 6% and
expected lives of 3.5 years. A summary of the status of the company's stock
option plans is presented below:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
OUTSTANDING, DECEMBER 31, 1993 ............................................ 1,343,904 $ 14.86
Granted
Option Price equal to
Market Value ........................................................ 309,000 $ 13.58
Option Price greater than
Market Value ........................................................ 125,000 $ 16.00
Exercised ................................................................. (90,000) $ 11.80
Canceled or expired ....................................................... (80,833) $ 17.86
--------- -------
OUTSTANDING, DECEMBER 31, 1994 ............................................ 1,607,071 $ 14.65
Granted
Option Price equal to
Market Value ........................................................ 436,500 $ 14.22
Option Price greater than
Market Value ........................................................ 50,000 $ 21.74
Exercised ................................................................. (64,201) $ 12.40
Canceled or expired ....................................................... (40,420) $ 19.07
--------- -------
OUTSTANDING, DECEMBER 31, 1995 ............................................ 1,988,950 $ 14.71
Granted
Option Price equal to
Market Value ........................................................ 223,500 $ 14.43
Option Price greater than
Market Value ........................................................ 125,000 $ 16.81
Exercised ................................................................. (179,551) $ 12.61
Canceled or expired ....................................................... (387,551) $ 17.20
--------- -------
OUTSTANDING, DECEMBER 31, 1996 ............................................ 1,770,348 $ 14.52
========================================================================================================
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------
Weighted-average fair value of options granted during the year
Option Price equal to Market Value ............................ $ 3.22 $ 3.18 $ 3.26
Option Price greater than Market Value ........................ $ 2.31 $ 1.79 $ 2.75
Options exercisable at December 31 ............................... 1,430,348 1,168,950 958,571
Shares available for option ...................................... 134,833 420,604 905,449
Capital stock reserved ........................................... 2,357,881 2,409,554 2,512,520
========================================================================================================
</TABLE>
32
<PAGE> 16
The following table summarizes information about the company's stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$10.19 - $13.31 ......... 592,598 6.5 $ 12.48 556,098 $ 12.52
$13.38 - $14.69 ......... 643,000 8.2 $ 13.89 446,000 $ 13.86
$14.75 - $25.69 ......... 534,750 6.3 $ 17.54 428,250 $ 17.88
--------- --- ------- --------- ---------
$10.19 - $25.69 ......... 1,770,348 7.0 $ 14.52 1,430,348 $ 14.54
======================================================================================================
</TABLE>
In 1996, 1995, and 1994, the company issued 45,000, 72,845 and 225,800
restricted shares, respectively, with weighted-average fair values of $14.00,
$14.48 and $13.76 to certain key employees. Effective December 31, 1996, 96,477
performance restricted shares that had been issued in 1994 and 1995 were
canceled due to the non-achievement of certain three-year performance goals
resulting in a credit to compensation expense of $1.2 million. The total impact
to compensation expense (benefit) for restricted stock awards was $(291,000),
$842,000 and $485,000 for 1996, 1995, and 1994, respectively.
13. EMPLOYEE BENEFIT PLANS:
The company has noncontributory pension plans covering substantially all of its
employees. Plans covering salaried employees provide pension benefits that are
generally based on the employees' compensation and length of service. Plans
covering hourly employees provide benefits of stated amounts for each year of
service. The company's funding policy is based on an actuarially determined
cost method allowable under statutory regulations.
Net pension cost for 1996, 1995, and 1994 is summarized below:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- -----------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits
earned during
the period ............... $ 3,510 $ 4,033 $ 3,675
Interest Cost ............... 9,668 9,629 9,015
Actual return on assets ..... (11,543) (22,791) (1,025)
Net amortization and
deferral ................. (858) 11,121 (11,188)
------- -------- --------
Total pension cost(a) ....... $ 777 $ 1,992 $ 477
=================================================================
</TABLE>
a. Excludes $1.8 million and $800,000 curtailment gain and $3 million and
$500,000 cost of special termination benefits due to restructuring and sale of
E&P in 1995.
The funded status of the plans is reconciled to prepaid pension cost
at December 31, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Plan assets at fair value, primarily investments in pooled separate accounts ... $ 145,468 $ 142,683
Accumulated benefit obligation, including vested benefits of:
1996-$126.2 million; 1995-$128.8 million .................................... 131,688 134,930
Effect of future salary increases .............................................. 9,058 8,183
--------- ---------
Projected benefit obligation ................................................... 140,746 143,113
--------- ---------
Plan assets in excess of (less than) projected benefit obligation .............. 4,722 (430)
Unrecognized net loss .......................................................... 12,082 18,439
Unrecognized transition asset .................................................. (7,803) (9,241)
--------- ---------
Prepaid pension cost ........................................................... $ 9,001 $ 8,768
=========================================================================================================
</TABLE>
33
<PAGE> 17
Significant assumptions used in determining net pension costs and
related pension obligations are:
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
- -------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 7% 8%
Rate of increase in compensation
levels 4% 4% 4.5%
Expected long-term rate of return
on assets 9% 9% 9%
=======================================================
</TABLE>
The company has certain defined contribution plans including a Thrift
and Stock Purchase Plan and an Employee Stock Ownership Plan. The cost of these
plans was $1.4 million, $1.4 million and $2.5 million in 1996, 1995 and 1994,
respectively.
In addition to providing pension benefits, the company provides health
care and life insurance benefits for active and retired employees of certain
subsidiaries. These plans are unfunded, and the company retains the right to
modify or eliminate these benefits.
The components of periodic expense for postretirement benefits in
1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Service costs of benefits
earned ............................ $ 1,660 $ 697 $ 805
Interest cost on liability ........... 7,201 7,565 6,812
Amortization of (gain) or loss ....... 477 129 (115)
------- ------- -------
Net periodic postretirement
benefit cost(a) ................... $ 9,338 $ 8,391 $ 7,502
====================================================================
</TABLE>
a. Excludes $600,000 and $800,000 cost of curtailment due to restructuring and
sale of E&P in 1995.
The accumulated postretirement benefit obligation (APBO) at December
31, 1996 and 1995 is summarized below:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- -------------------------------------------------------------------
<S> <C> <C>
Retirees ................................. $ 90,526 $ 98,035
Fully eligible active participants ....... 3,848 7,784
Other active participants ................ 7,500 7,914
--------- ---------
APBO ..................................... 101,874 113,733
Unrecognized net gain or (loss) .......... 1,081 (13,949)
Less: current portion .................... (5,000) (5,000)
--------- ---------
Long-term portion ........................ $ 97,955 $ 94,784
===================================================================
</TABLE>
For measurement purposes, a 7% annual rate of increase in the per
capita claims cost was assumed for 1997, declining gradually to 5% by the year
2002 and thereafter.
Significant assumptions used in determining postretirement benefit
expenses and accumulated postretirement benefit obligations are:
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate ........................... 7.5% 7% 8%
Rate of increase in compensation
levels ............................... 4% 4% 4.5%
============================================================================
</TABLE>
The health care cost trend rate assumption has a significant effect on
the APBO and net periodic benefit costs. A 1% increase in the trend rate for
health care costs would have increased the APBO at December 31, 1996 by 12% and
1996 service and interest costs by 12%.
14. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest, net of amounts capitalized .................... $ 11,645 $ 6,911 $ 5,101
Income taxes ............................................ 11,961 30,562 9,174
==================================================================================================
Noncash investing and financing activities:
Capital stock issued for acquisitions (Note 2) .......... $ 49,458 $ 19,536 $ 57,750
Capital stock issued under incentive plans (Note 12) .... 344 1,055 3,109
==================================================================================================
Details of Acquisitions (Note 2):
Fair value of assets acquired ........................... $ 305,915 $ 79,486 $ 171,219
Liabilities assumed ..................................... (21,560) (26,289) (82,748)
Stock issued ............................................ (49,458) (19,536) (57,750)
--------- --------- ---------
Cash paid ............................................... 234,897 33,661 30,721
Less: cash acquired ..................................... (791) (2,653) (2,355)
--------- --------- ---------
Net cash paid for acquisitions .......................... $ 234,106 $ 31,008 $ 28,366
==================================================================================================
</TABLE>
34
<PAGE> 18
15. SEGMENT INFORMATION:
Information on the company's operations in different segments is contained on
pages 20 and 21 of this report.
16. QUARTERLY RESULTS (UNAUDITED):
<TABLE>
<CAPTION>
QUARTERS ENDED 1996
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) March 31, June 30, September 30, December 31, Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues ......................................... $ 278,781 $ 301,829 $ 309,985 $ 309,634 $1,200,229
Gross profit (a)(b)(c) ........................... 91,194 87,194 99,940 85,864 364,192
Income (loss) from continuing operations ......... 5,706 7,173 6,754 (5,910) 13,723
Net income (loss) ................................ $ 5,706 $ 7,173 $ 6,754 $ (5,910) $ 13,723
======================================================================================================================
Per Share:
Income (loss) from continuing operations ......... $ .17 $ .22 $ .19 $ (.16) $ .40
Net income (loss) ................................ .17 .22 .19 (.16) .40
Dividends ........................................ .10 .10 .10 .10 .40
======================================================================================================================
</TABLE>
a. Gross profit equals total sales and operating revenues less cost of sales
and operating costs (excluding depreciation and amortization) and unusual
items.
b. Gross profit for the second, third and fourth quarters of 1996 was
impacted positively by the effect of LIFO liquidations of $300,000, $200,000
and $600,000, respectively.
c. Gross profit for the first, second, third and fourth quarters was impacted
negatively by the effect of unusual items of $470,000, $340,000, $90,000 and
$13.6 million, respectively.
<TABLE>
<CAPTION>
QUARTERS ENDED 1995
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) March 31, June 30, September 30, December 31, Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues ......................................... $ 239,533 $ 257,698 $ 277,109 $ 261,230 $ 1,035,570
Gross profit(a)(b)(c) ............................ 68,454 59,010 86,474 75,636 289,574
Income (loss) from continuing operations ......... 4,221 (4,528) 4,073 (2,016) 1,750
Income from discontinued operations .............. 1,375 1,303 11,255 556 14,489
Extraordinary item ............................... -- -- -- (4,139) (4,139)
Net income (loss) ................................ $ 5,596 $ (3,225) $ 15,328 $ (5,599) $ 12,100
==========================================================================================================================
Per Share:
Income (loss) from continuing operations ......... $ .13 $ (.14) $ .13 $ (.06) $ .06
Income from discontinued operations .............. .05 .04 .34 .02 .45
Extraordinary item ............................... -- -- -- (.13) (.13)
Net income (loss) ................................ .18 (.10) .47 (.17) .38
Dividends ........................................ .10 .10 .10 .10 .40
==========================================================================================================================
</TABLE>
a. Gross profit equals total sales and operating revenues less cost of sales
and operating costs (excluding depreciation and amortization) and unusual
items.
b. Gross profit for the second and fourth quarter of 1995 was impacted
positively by the effect of LIFO liquidations of $1.5 million and $700,000,
respectively.
c. Gross profit for the second, third and fourth quarter of 1995 was impacted
negatively by the effect of unusual items of $15.8 million, $1.2 million and
$10 million, respectively.
35
<PAGE> 19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS
QUAKER STATE CORPORATION:
We have audited the accompanying consolidated balance sheets of Quaker State
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, cash flows and stockholders' equity for each
of the three years in the period ended December 31, 1996. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Quaker
State Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Dallas, Texas
January 28, 1997
===============================================================================
MANAGEMENT REPORT
TO THE STOCKHOLDERS
QUAKER STATE CORPORATION:
The consolidated financial statements of Quaker State Corporation (the company)
and other financial information appearing in this report have been prepared by
management of the company, which is responsible for their integrity and
objectivity. The statements were prepared in conformity with generally accepted
accounting principles, and where appropriate, reflect estimates based upon the
judgment of management.
The company's system of internal accounting control is designed to
provide reasonable assurance that transactions are recorded and reported
appropriately and that the assets of the company are safeguarded. This system
of internal control includes both administrative and accounting controls.
Management's commitment to internal controls is demonstrated through written
policies and procedures (including a statement of ethical values and a code of
business conduct), an effective internal audit function and a qualified
financial staff.
The Audit Committee of the Board of Directors, consisting of three
outside directors, is directly responsible for assuring that management
fulfills its financial reporting responsibility and for monitoring the internal
audit function. The Audit Committee meets regularly, and when appropriate
separately with the internal auditors, the independent auditors and management.
Both the internal auditors and the independent auditors have unrestricted
access to the Audit Committee.
/s/ HERBERT M. BAUM /s/ CONRAD A. CONRAD
Herbert M. Baum Conrad A. Conrad
Chairman and Chief Executive Officer Vice Chairman and Chief Financial Officer
36
<PAGE> 20
QUAKER STATE (KSF) MARKET PRICES BY QUARTER
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------
<S> <C> <C> <C>
First Quarter
High ................. 14 5/8 15 1/8 14 3/8
Low .................. 12 3/4 13 3/8 12 5/8
Close ................ 14 13 3/4 13
------ ------ ------
Second Quarter
High ................. 16 1/8 15 1/8 16 1/8
Low .................. 13 7/8 13 1/2 12 3/4
Close ................ 15 15 14
------ ------ ------
Third Quarter
High ................. 17 1/2 16 1/2 15 3/8
Low .................. 14 14 5/8 13 1/2
Close ................ 17 1/4 14 5/8 14 1/2
------ ------ ------
Fourth Quarter
High ................. 18 1/4 14 3/4 14 1/2
Low .................. 14 12 1/8 13
Close ................ 14 12 3/4 14
=====================================================
</TABLE>
37
<PAGE> 1
EXHIBIT 21
QUAKER STATE CORPORATION
Subsidiaries
All of the following subsidiaries are 100% owned by Quaker State
Corporation unless otherwise indicated:
<TABLE>
<CAPTION>
Jurisdiction of
Name of Subsidiary Incorporation
- --------------------------------------------------------------- ---------------
<S> <C>
Blue Coral, Inc. Delaware
Blue Coral International Ltd. (18) United Kingdom
Fort William Coal Dock Company, Ltd. Ontario
Green Shield, Inc. Delaware
Lubricants, Inc. Arkansas
Myatt-Brooks, Inc. (1) Arkansas
QS/Brooks Distribution Company (2) Tennessee
Medo Industries, Inc. New York
Medo Manufacturing Corporation Maryland
Medo Industries de Mexico, S.A. de C.V. Mexico
QS Holding Company Delaware
Quaker Oil Corporation Texas
Quaker State, Inc. Canada
Quaker State Investment Corporation Delaware
Freedom Freightways, Inc. (3) Missouri
Genesis Petroleum, Inc. (3) Utah
Genesis Petroleum - Salt Lake L.L.C. (17) Utah
Q Lube, Inc. (3) Delaware
Quaker State Minit-Lube Canada, Inc. (4) Ontario
Q Lube Ontario, Inc. (5) Ontario
Lubeco Management, Inc. (4) Delaware
The Valley Camp Coal Company (3) Delaware
Donaldson Mine Company (6) West Virginia
Kelley's Creek and Northwestern Railroad Company (6) West Virginia
Valley Camp Investment Company (6) Delaware
Elm Grove Coal Company (7) West Virginia
Valley Camp Coal Sales Company (7) Ohio
The Helen Mining Company (7) Pennsylvania
Kanawha and Hocking Coal and Coke Company (7) West Virginia
Shrewsbury Coal Company (7) West Virginia
Valley Camp of Utah, Inc. (7) Utah
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Jurisdiction of
Name of Subsidiary Incorporation
- --------------------------------------------------------------- ---------------
<S> <C>
Truck-Lite Co., Inc. (3) New York
T-L Automotive Industries, Inc. (8) Delaware
Truck-Lite International, Inc. (8) Delaware
Valley Camp, Inc. (3) Canada
Quaker State Japan Co., Ltd. Japan
Quaker State Oil Refining Corporation, B.V. Holland
Quaker State - Slick 50, Inc. Delaware
Petrolon UK Ltd. (9) United Kingdom
Sutherwell Ltd. (14) United Kingdom
Petrolon British Isles Ltd. (15) United Kingdom
Petrolon Deutschland GMBH (10) Germany
Petrolon Australia Pty. Ltd. (11) Australia
Petrolon International Management Monaco
SAM (10)
Petrolon International Limited (10) Isle of Man
Petrolon Overseas Ltd. (12) United Kingdom
Petrolon Europe Ltd. (13) Isle of Man
Slick 50 Management, Inc. (10) Delaware
Slick 50 Products Corporation (16) Delaware
Slick 50 Corporation (16) Delaware
Specialty Oil Company, Inc. Delaware
Westland Oil Company, Inc. Louisiana
</TABLE>
- --------------------------------------------------------------------------------
(1) 50% owned by Lubricants, Inc. and 50% owned by Specialty Oil Company, Inc.
(2) 50% owned by Myatt-Brooks, Inc.
(3) 100% owned by Quaker State Investment Corporation
(4) 100% owned by Q Lube, Inc.
(5) 50% owned by Quaker State Minit-Lube Canada, Inc.
(6) 100% owned by The Valley Camp Coal Company
(7) 100% owned by Valley Camp Investment Company
(8) 100% owned by Truck-Lite Co., Inc.
(9) 5% owned by Quaker State - Slick 50, Inc.;
95% owned by Petrolon Europe Ltd.
(10) 100% owned by Quaker State - Slick 50, Inc.
(11) 5% owned by Quaker State - Slick 50, Inc.;
95% owned by Petrolon Europe, Ltd.
(12) 100% owned by Petrolon International Ltd.
(13) 90% owned by Petrolon International Ltd.;
10% owned by third party.
(14) 100% owned by Petrolon UK Ltd.
(15) 100% owned by Sutherwell Ltd.
(16) 100% owned by Slick 50 Management, Inc.
(17) 74% owned by Genesis Petroleum, Inc.
(18) 100% owned by Blue Coral, Inc.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference of our reports, dated January
28, 1997, on our audits of the consolidated financial statements and financial
statement schedule of Quaker State Corporation and Subsidiaries as of December
31, 1996 and 1995, and for the three years in the period ended December 31,
1996, which reports are incorporated by reference or included in this annual
report on Form 10-K, in the following documents:
1. Registration Statements No. 33-20416 and 333-06291 on Form S-8 for the
Quaker State Corporation Thrift and Stock Purchase Plan, filed under the
Securities Act of 1993, as amended, and the Prospectus used in connection
with such Registrant Statement;
2. Registration Statement No. 33-7163 on Form S-8 for the 1986
Stock Option Plan of Quaker State Corporation, filed under the Securities
Act of 1933, as amended, and the Prospectus used in connection with such
Registration Statements;
3. Registration Statement No. 33-65862 on Form S-8 for the Baum Employment
Agreement, filed under the Securities Act of 1933, as amended;
4. Registration Statement No. 33-53605 on Form S-8 for the 1994 Non-Employee
Directors' Stock Option Plan, filed under the Securities Act of 1933, as
amended, and the Prospectus used in connection with such Registration
Statement;
5. Registration Statements No. 33-53617 and 333-16237 on Form S-8 for the
1994 Stock Incentive Plan, filed under the Securities Act of 1933, as
amended, and the Prospectus used in connection with such Registration
Statement;
6. Registration Statement No. 333-05929 on Form S-8 for the 1996 Directors'
Fee Plan, filed under the Securities Act of 1933, as amended, and the
Prospectus used in connection with such Registration Statement; and
7. Registration Statement No. 333-13893 on Form S-3 for the registration of
2,024,989 shares of Capital Stock, filed under the Securities Act of 1933,
as amended, and the Prospectus used in connection with such Registration
Statement.
We also Consent to the references to our firm under the caption "Experts" in
the Prospectuses used in connection with Registration Statements No. 33-20416,
333-06291, 33-7163, 33-65862, 33-53605, 33-53617, 333-05929, and
333-13893 solely as it relates to the current financial statements being
incorporated by reference.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 29,397
<SECURITIES> 0
<RECEIVABLES> 175,506
<ALLOWANCES> 4,160
<INVENTORY> 113,970
<CURRENT-ASSETS> 341,231
<PP&E> 471,931
<DEPRECIATION> 244,055
<TOTAL-ASSETS> 1,036,836
<CURRENT-LIABILITIES> 320,855
<BONDS> 0
0
0
<COMMON> 36,322
<OTHER-SE> 262,347
<TOTAL-LIABILITY-AND-EQUITY> 1,036,836
<SALES> 1,200,229
<TOTAL-REVENUES> 1,207,699
<CGS> 645,851
<TOTAL-COSTS> 821,530
<OTHER-EXPENSES> 333,740
<LOSS-PROVISION> 1,059
<INTEREST-EXPENSE> 12,640
<INCOME-PRETAX> 24,223
<INCOME-TAX> 10,500
<INCOME-CONTINUING> 13,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,723
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
