[BAKER BOTTS LETTERHEAD]
March 29, 2002
00D805.0321
Mr. Michael Pressman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Pennzoil-Quaker State Company
Registration Statement on Form S-4
File No. 333-84640
Mr. Pressman:
On behalf of Pennzoil-Quaker State Company (the "Company"), we transmit
herewith for electronic filing via the EDGAR System under the Securities Act of
1933, as amended (the "Securities Act"), Amendment No. 1 to the Registration
Statement on Form S-4 (the "Registration Statement") including exhibits,
relating to the offer by the Company to exchange (the "Exchange Offer") up to
$250,000,000 of registered 10% Senior Notes due 2008 for a like principal amount
of currently outstanding 10% Senior Notes due 2008 that were issued in a private
placement exempt from registration under the Securities Act.
Please telephone collect Mr. Darrell W. Taylor (713/229-1313) or the
undersigned (713/229-1923) of the firm Baker Botts L.L.P., counsel to the
Company, with any questions or comments you may have regarding the enclosed. In
addition, please send copies of all correspondence with the Company directly to
Mr. Darrell W. Taylor, Baker Botts L.L.P., One Shell Plaza, 910 Louisiana
Street, Houston, Texas 77002-4995.
BAKER BOTTS LLP
Securities and Exchange Commission 2 March 29, 2002
Very truly yours,
BAKER BOTTS L.L.P.
By: /s/ HELEN KIM
-----------------
Helen Kim
Enclosure
cc: Darrell W. Taylor
As filed with the Securities and Exchange Commission on March 29, 2002
Registration No. 333-84640
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 1 to
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
PENNZOIL-QUAKER STATE COMPANY
(AND ITS SUBSIDIARIES IDENTIFIED ON THE FOLLOWING PAGE)
(Exact name of Registrant as specified in its charter)
Delaware 5172 76-0200625
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification No.)
of incorporation or
organization)
Pennzoil Place, P.O. Box 2967
Houston, Texas 77252-2967
(713) 546-4000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Linda F. Condit
Vice President and Corporate Secretary
Pennzoil-Quaker State Company
Pennzoil Place, P.O. Box 2967
Houston, Texas 77252-2967
(713) 546-4000
(Name, Address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Darrell W. Taylor
Baker Botts L.L.P.
One Shell Plaza
Houston, Texas 77002-4995
(713) 229-1234
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable following the effectiveness of this registration
statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table of Additional Registrants
Primary
Exact Name of State or Other Standard I.R.S.
Registrant as Jurisdiction of Industrial Employer
Specified in its Incorporation Classification Identification
Charter* or Organization Code Number Number
---------------- --------------- -------------- --------------
Blue Coral, Inc. Delaware 5013 34-1263041
Jiffy Lube Delaware 7549 22-2806458
International, Inc.
Jiffy Lube International Maryland 7549 52-1462657
of Maryland, Inc.
Medo Industries, Inc. New York 5013 11-2291040
Pennzoil-Quaker State Delaware 5172 76-0573245
Canada Holding Company
Pennzoil-Quaker State Delaware 5172 76-0625809
International
Corporation
Q Lube, Inc. Delaware 7549 52-1422362
- --------
* Addresses and telephone numbers of principal executive offices are the same
as that of Pennzoil-Quaker State Company.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may change. We may not +
+sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated March 29, 2002
PRELIMINARY PROSPECTUS
PENNZOIL-QUAKER STATE COMPANY
$250,000,000
Offer to Issue
Registered
10% Senior Notes Due 2008
in Exchange for
All Outstanding
10% Senior Notes Due 2008
The new notes:
The exchange offer:
. will be freely
tradeable;
. are substantially . expires at 5:00 p.m., New York City time, on
identical to the old May 1, 2002, unless extended; and
notes;
. will accrue interest at
the same rate per annum . is not conditioned upon any minimum aggregate
as the old notes principal amount of old notes being tendered.
payable semi-annually
in arrears on each May In addition, you should note that:
1 and November 1,
beginning May 1, 2002; . all old notes that are validly tendered and not
validly withdrawn will be exchanged for an
equal principal amount of new notes that are
. will be unsecured and registered under the Securities Act of 1933;
will rank equally with
the old notes that are . tenders of old notes may be withdrawn any time
not exchanged and all before the expiration of the exchange offer;
other unsecured and and
unsubordinated
indebtedness but will . the exchange of new notes for old notes in the
effectively be junior exchange offer will not be a taxable event for
to all other secured U.S. federal income tax purposes.
indebtedness to the
extent of the value of
the assets securing
that indebtedness; and
You should consider carefully the risk factors beginning on page 15 of this
prospectus before participating in the exchange offer.
. will not be listed on
any securities exchange
or quoted on any
automated dealer
quotation system.
You should consider carefully the risk factors beginning on page 15 of this
prospectus before participating in the exchange offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the new notes or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2002
In making your investment decision, you should rely only on the information
contained in this prospectus. We have not authorized anyone to provide you with
any other information. If you receive any other information, you should not
rely on it.
We are offering the notes only in places where offers are permitted.
You should not assume that the information contained in this prospectus is
accurate as of any date other than the date on the front of this document.
----------------
TABLE OF CONTENTS
Page
----
Summary............................. 1
Risk Factors........................ 15
Use of Proceeds..................... 25
Capitalization...................... 26
Selected Historical Consolidated
Financial Information.............. 27
The Exchange Offer.................. 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 40
Business............................ 63
Management.......................... 75
Page
----
Description of Other Debt........... 78
Description of Notes................ 82
Book-Entry Settlement and
Clearance.......................... 131
Registration Rights Agreement....... 134
Certain United States Federal Income
Tax Consequences................... 137
Plan of Distribution................ 141
Legal Matters....................... 142
Independent Public Accountants...... 142
Where You Can Find More
Information........................ 143
Pennzoil-Quaker State Company is a Delaware corporation. Our principal
executive offices are located at Pennzoil Place, 700 Milam Street, Houston,
Texas 77002 and our telephone number at that address is (713) 546-4000. Our
website is located at www.pzlqs.com. The information on our website is not part
of this prospectus. Our common stock is publicly traded on the New York Stock
Exchange under the symbol "PZL."
In this prospectus, the terms "Pennzoil-Quaker State," "we," "us" and "our"
refer to Pennzoil-Quaker State Company and its subsidiaries, and "notes" refers
to both the new notes and the old notes.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of new notes. The letter of transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933, as amended, which we refer to as the Securities Act.
This prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of new notes received in
exchange for old notes where the old notes were acquired by the broker-dealer
as a result of market-making activities or other trading activities. We have
agreed that, for a period of 180 days after the expiration date, we will make
this prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution."
----------------
i
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended, which we refer to as the Exchange
Act, that are intended to be covered by the safe harbors created thereby. To
the extent that such statements are not recitations of historical fact, such
statements constitute forward-looking statements which, by definition, involve
risks and uncertainties. Where, in any forward-looking statement, we express an
expectation or belief as to future results or events, such expectation or
belief is expressed in good faith and believed to have a reasonable basis, but
there can be no assurance that the statement of expectation or belief will
result or be achieved or accomplished.
The following are some but not all of the factors that could cause actual
results or events to differ materially from those anticipated: general
economic, financial and business conditions; energy prices; competition in the
motor oil marketing business; base oil prices and supply and demand in the base
oil business; the success and costs of advertising and promotional efforts;
unanticipated environmental liabilities; changes in and compliance with
governmental regulations; changes in tax laws; the costs and effects of legal
proceedings; and other risks and uncertainties described under "Risk Factors"
or in other documents that we file with the Securities and Exchange Commission,
or SEC, and incorporate by reference into this prospectus.
----------------
INDUSTRY AND MARKET DATA
In this prospectus we rely on and refer to information and statistics
regarding us and our market share in the sectors in which we compete. We have
obtained this information and statistics from various third-party sources,
discussions with our customers, and our own internal estimates. We believe that
these sources and estimates are reliable, but have not independently verified
them and cannot guarantee their accuracy or completeness.
ii
SUMMARY
This summary highlights information about us and the offering. It does not
contain all information that is important to you. We encourage you to read this
entire prospectus carefully, including "Risk Factors" beginning on page 15 and
the consolidated financial statements and the notes to those statements
included in, and incorporated by reference into, this prospectus.
PENNZOIL-QUAKER STATE COMPANY
The Exchange Offer and New Credit Facility
In November 2001, we issued and sold $250 million aggregate principal amount
of 10% senior notes due 2008, or old notes. In connection with that sale, we
entered into a registration rights agreement with the initial purchasers of the
old notes in which we agreed to deliver this prospectus to you and to complete
an exchange offer for the old notes. Pursuant to the registration rights
agreement, we are offering to issue $250 million aggregate principal amount of
our new 10% senior notes due 2008, or new notes, in exchange for a like
aggregate principal amount of our old notes. We refer to this offer to issue
new notes in exchange for old notes in accordance with the terms set forth in
this prospectus and the accompanying letter of transmittal as the exchange
offer. You are entitled to exchange your old notes for new notes. We urge you
to read the discussions under the headings "Summary of the Exchange Offer" and
"Summary of Terms of the New Notes" in this summary for further information
regarding the exchange offer and the new notes.
In November 2001, we entered into a new $348 million senior secured
revolving credit facility. Under this new revolving credit facility, $325
million is available on a revolving basis until November 2, 2004 and $23
million is available on a revolving basis until November 2, 2002. Our
obligations under the new revolving credit facility are guaranteed by each of
our domestic material subsidiaries. The new revolving credit facility and
related guarantees are secured by a perfected first priority security interest
in all of our domestic inventories, certain of our domestic receivables, all of
our domestic intellectual property, all of the capital stock of each of our
direct and indirect domestic material subsidiaries and 66 2/3% of the capital
stock of our direct foreign material subsidiaries, with certain exceptions. We
urge you to read the discussions under the heading "Description of Other Debt"
for further information regarding the new revolving credit facility.
The proceeds from the old notes and borrowings under the credit agreement
were used to repay all of our outstanding borrowings under our previous credit
agreement and to pay for fees and expenses related to the sale of the old notes
and our entering into the credit agreement.
Recent Developments
On March 25, 2002, we entered into a definitive agreement with Shell Oil
Company, a wholly owned member of the Royal Dutch / Shell Group, under which
Shell Oil Company will acquire Pennzoil-Quaker State Company through a cash
merger at a price of $22.00 per share. Completion of the transaction is subject
to approval by our stockholders and customary reviews by regulatory agencies in
the United States and other relevant jurisdictions. It is expected that the
transaction will be completed in the second half of 2002. The completion of the
transaction will trigger a "change of control" event as defined in the
indenture between us and the trustee. Please read the discussion under
"Description of Notes--Change of Control" beginning on page 85 for further
information.
1
Company Overview
We are a leading automotive consumer products and services company in the
United States and we market our products worldwide in approximately 90
countries. We manufacture, market and distribute branded lubricants and car
care products through traditional retailing channels targeting the do-it-
yourself consumer. In addition, we target the do-it-for-me consumer through
automotive service centers such as car dealerships, repair shops and fast oil
change centers, including our Jiffy Lube(R) fast oil change centers. Our
Pennzoil(R) and Quaker State(R) brands hold the #1 and #2 positions,
respectively, in the domestic passenger car motor oil market, and our Jiffy
Lube(R) brand occupies the #1 position in the fast oil change market. For the
year ended December 31, 2001, we generated $2.3 billion of revenues and $200.4
million of EBITDA.
Our current product, service and brand portfolio includes the following:
Estimated
% of Total Selected Product or U.S. Market
Operating Segment Revenues (1) Service Categories Position (2) Representative Brands
----------------- ------------ ------------------- ------------ ---------------------
Lubricants.............. 55.0% Passenger car motor Pennzoil(R) and Quaker
oil..................... 1 State(R)
Consumer Products....... 15.2% Sun shades.............. 1 Axius(R)
Organizers.............. 1 Axius(R)
Steering wheel covers... 1 Axius(R)
Air fresheners.......... 1 Medo(R)
Glass treatments........ 1 Rain-X(R)
Tire sealants........... 1 Fix-A-Flat(R)
Tire and wheel care Black Magic(R) and
products................ 2 Westley's(R)
Seat covers............. 1 Sagaz(R)
Fuel additives.......... 2 Gumout(R) and Snap(R)
Appearance products..... 3 Blue Coral(R)
Engine treatments....... 1 Slick 50(R)
Jiffy Lube.............. 15.1% Fast oil change......... 1 Jiffy Lube(R)
International........... 10.5% Lubricants and consumer
products ............... NA Pennzoil(R) and Quaker
State(R) motor oil and
Pennzoil(R) automotive
consumer products
Other................... 4.2% Supply chain
investments, corporate
and other............... NA NA
- --------
(1) For the year ended December 31, 2001, net of intercompany eliminations.
(2) Based on management's estimates and data from NPD Group Inc., Information
Resources Inc. and major customers.
Pennzoil-Quaker State Company is the result of the spin-off of the
lubricants, consumer products and fast oil change operations of Pennzoil
Company and our acquisition of Quaker State Corporation in December 1998.
Competitive Strengths
Leading U.S. Market Positions. We are a leading manufacturer and marketer of
automotive consumer products and provider of automotive services in the United
States. Our flagship lubricant brands, Pennzoil(R) and Quaker State(R), are the
#1 and #2 selling passenger car motor oils in the United States, with a
combined market share of approximately 36% for the year ended December 31,
2001. Pennzoil(R) completed its 15th consecutive year as the nation's #1
selling motor oil. Quaker State(R) has been the nation's #2 selling motor oil
in fourteen of the last fifteen years. Our Jiffy Lube business, with 2,157
service centers nationwide at December 31, 2001, is the nation's largest
operator and franchiser of fast oil change locations and, together with
approximately 790 independently owned Pennzoil "10-Minute Oil Change"(R)
centers at December 31, 2001, accounts for approximately half of all domestic
chain-operated
2
fast oil change locations. In January 2002, Entrepreneur Magazine reported that
Jiffy Lube(R) was the #1 U.S. automotive franchise and the #20 franchise among
all U.S. franchises. We are also a market leader in a broad range of automotive
consumer car care products, holding the #1 market position in eight of the
eleven categories in which we compete.
Broad Product, Service and Brand Portfolio. We focus on products and
services which enhance the comfort and safety of our consumers and the
appearance and performance of their automobiles. We offer our customers an
extensive selection of products and services, including some of the most
recognized brands in the U.S. automotive industry. In October 2000, Pennzoil(R)
and Quaker State(R) were ranked as the #1 and #3 automotive brands in 2000 by
DSN Retailing Today. In June 2001, Jiffy Lube(R) was designated as the #1
automotive aftercare "SuperBrand" by Brand Week. We devote significant
resources to building our already strong brands through advertising, marketing
and the development of complementary products and services. Our strong brand
portfolio, enhanced through innovation, enables us to position many of our
products and services at the premium end of the market. Furthermore, our broad
product offerings have enabled us to build a large, loyal customer base, who
see us as a single-source supplier.
Cash Flow Driven by Strong Core Passenger Car Motor Oil Business. For the
year ended December 31, 2001, over half of our revenues were derived from our
lubricants segment, primarily from the sale of motor oil to the U.S. passenger
car market. In 2001, the domestic passenger car motor oil market was estimated
to be $3.5 billion. During the last five years, the Pennzoil(R) and Quaker
State(R) brands have supplied more than one-third of the total U.S. demand for
passenger car motor oils. Our Excel Paralubes partnership provides a low-cost,
secure source of feedstock for our lubricants business, while Jiffy Lube serves
as a distribution platform for the sale of our motor oil to the fast growing
do-it-for-me market. Our significant scale, premium brands and partial vertical
integration provide strong fundamentals for generating significant cash flow.
Multi-Channel Presence. Our broad portfolio of high quality products,
premium brands and leading market positions support our strong presence in
virtually all of the major domestic distribution channels for automotive
consumer products. Our wide product portfolio makes us an attractive supplier
to mass merchandisers as well as specialty retailers. Furthermore, we
distribute a significant portion of our lubricant products through the do-it-
for-me channel, including Jiffy Lube, in which we have a proprietary interest.
Our multi-channel presence provides us valuable marketing intelligence and
affords us a better opportunity to successfully introduce new products and
implement marketing promotions. We also work in partnership with our customers
to provide value-added services such as logistics, category management and
merchandising solutions, which we believe strengthens our relationships with
those customers and provides a solid foundation for growth. For example, in
1999, we received a Vendor of the Year award from O'Reilly Auto Parts and a
Vendor of the Year award from Canadian Tire for our Blue Coral(R) products. In
2000, we received a Vendor of the Year award from Wal*Mart for our Axius(R)
products, and we received a Vendor of the Year award from Advance Auto Parts
and the "Extra Miler Vendor Award" from Autozone for our Blue Coral(R)
products. In 2001, we received a Supplier of the Year award from Sam's Club.
Experienced Management Team with Consumer Products Expertise. We have
assembled a management team of seasoned consumer product veterans. Our senior
operating professionals have substantial prior experience with such leading
consumer products companies as Nabisco, PepsiCo, Anheuser-Busch and Procter &
Gamble. On average, members of our operating team have over 20 years of
relevant consumer products experience, which, combined with our
3
automotive sector expertise, gives us valuable insight and skill in the
execution of our business strategy.
Business Strategy
Our objective is to be the consumers' first choice for automotive products
and services that enhance the car and the driving experience. We expect to
achieve this objective by using the following strategies:
Execute Focused Brand Management. We intend to increase market share by
continuing to invest in our key brands. Our marketing plan has been designed to
create a strong consumer awareness and "pull," while our strong distribution
platform creates a strong "push" for our products. Our marketing plan positions
us to grow our product base successfully through product extensions and to
improve our results of operations by enhancing our product mix. Many of our
brands and products can be extended into complementary uses for the consumer.
For example, we recently introduced Rain-X(R) wiper blades and Rain-X(R) Ice-
X(TM) de-icer to complement our existing Rain-X(R) glass treatment. We expect
that the strong awareness that our brands enjoy in their markets will also
enable us to expand our consumer base. We seek to increase household
penetration as well as the frequency of use of our products and services,
particularly among selected demographic groups, including women and Hispanics.
Finally, using existing distribution channels, we seek to sell a broader array
of our recognized premium brand names by further penetrating these markets.
Together, we expect these efforts to expand the size of our product portfolio
while strengthening the positions of our brands and products.
Develop New Products and Services. New automotive consumer products and
services are essential components of our strategy. During the past two years,
we have introduced a variety of new products, including Black Magic(R) Total
Shine(TM), Rain-X(R) Ice-X(TM) de-icer, Pennzoil(R) Synthetic motor oil with
Pennzane(R), Black Magic(R) Tire Tint(TM), Rain-X(R) wiper blades, Quaker
State(R) High Mileage Engine(TM) motor oil and Pennzoil(R) Total Care
appearance product. In 2001, we received the NorTech "Innovation Award" for
Black Magic(R) Total Shine(TM) and received the Popular Mechanics product
innovation award for Pennzoil(R) Total Care. We estimate that these and other
new products and services introduced during the past two years generated more
than 6% of our revenues for the period January to September 2001. Our ongoing
goal is to derive at least 10% of our annual revenues from products or services
introduced during the immediately preceding two years. To accomplish this goal,
we have established an infrastructure, including a funded research and
development center and new product development process, that we expect will
allow us to more effectively generate new and innovative products. We also
believe that we will be able to leverage our relationships with major customers
to continue to obtain desirable shelf space and product placement for our new
products. In addition to new product development, we intend to expand the range
of high-margin ancillary services that we offer at our Jiffy Lube(R) service
centers, such as AutoX-ray(TM) computer diagnostics, engine oil analysis and
Carfax(TM) automotive history reporting. We believe that our development of
innovative new products and services will provide us significant growth.
Expand Car Care Products Internationally. According to J.D. Power, there are
more than 400 million passenger vehicles outside of the United States, which is
more than twice the number domestically, and we believe the international
market for automotive consumer products is relatively fragmented. To take
advantage of opportunities in this market, we have recently restructured and
consolidated our international operations to leverage our premium brands, our
leading domestic market positions and our strong existing relationships with
retail mass
4
merchandisers such as Wal*Mart. We believe that the international packaged
consumer products category, including motor oil distributed through traditional
retail channels, represents a strong growth opportunity given the relatively
low penetration of automotive consumer products in significant markets such as
Japan, the United Kingdom, Germany, France and Spain. We expect our expansion
efforts to provide increased net sales from our international operations, which
were $251.1 million for the year ended December 31, 2001.
Enhance Customer Relationships. We believe that our customer relations are
critical to the success of our business. Our customers rely on our ability to
deliver innovative products and service solutions on time and to execute
effective merchandising strategies. For larger retail customers, we plan to
offer value-added services, such as category management, in-store merchandising
programs and vendor managed inventory services similar to those we currently
provide to Wal*Mart. For more of our smaller customers, we plan to offer order
tracking, direct marketing support and a web-based ordering system, among other
services. For example, in 2000 we introduced PQSOpenRoad.com, an on-line
business-to-business ordering system targeting small retail and wholesale
customers and auto service centers.
Continue Cost Savings and Strengthen Operations. We have achieved
significant cost savings by focusing on merger synergies, general and
administrative cost savings initiatives and improved supply-chain management.
Since our acquisition of Quaker State at the end of 1998 through the end of
2000, we realized $120 million in cost savings through these initiatives. We
have realized additional cost savings in 2001. In 2001, we reduced selling,
general, and administrative costs (exclusive of non-recurring charges and
advertising) by $52.1 million compared to the same period in 2000. We expect to
further refine our cost structure and enhance our operating efficiency by
continuing to streamline our national distribution network, making additional
improvements in our information systems, seeking improved and more efficient
supply chain strategies and further cutting our general and administrative
costs.
Selectively Acquire Complementary Businesses. We intend to continue to
evaluate opportunities to acquire businesses with complementary products or
services, strong brands, significant market position, international
distribution capability or potential cost synergies.
5
Summary of the Exchange Offer
You should read the discussion under the headings "Summary of Terms of the
New Notes" beginning on page 10 and "Description of Notes" beginning on page 82
for further information regarding the new notes.
We summarize the terms of the exchange offer below. You should read the
discussion under the heading "The Exchange Offer" beginning on page 29 for
further information regarding the exchange offer and resale of the new notes.
Notes Offered............... $250,000,000 aggregate principal amount of 10%
senior notes due 2008. The terms of the new notes
and old notes are identical in all material
respects, except for transfer restrictions and
registration rights relating to the old notes.
The Exchange Offer.......... We are offering the new notes to you in exchange
for a like principal amount of old notes. Old
notes may be exchanged only in integral multiples
of $1,000. We are issuing the new notes pursuant
to the Registration Rights Agreement. See
"Registration Rights Agreement."
Expiration Date.............
The exchange offer will expire at 5:00 p.m., New
York City time, on May 1, 2002, or at a later
date and time to which we extend it.
Conditions to the Exchange
Offer......................
We will not be required to accept old notes for
exchange if the exchange offer would violate
applicable law or if any legal action has been
instituted or threatened that would impair our
ability to proceed with the exchange offer. The
exchange offer is not conditioned on any minimum
aggregate principal amount of old notes being
tendered. Please read the section "The Exchange
Offer--Conditions to the Exchange Offer"
beginning on page 32 for more information
regarding the conditions to the exchange offer.
Procedures for Tendering
Old Notes..................
If you wish to participate in the exchange offer,
you must complete, sign and date the letter of
transmittal and mail or deliver the letter of
transmittal, together with your old notes, to the
exchange agent. If your old notes are held
through The Depository Trust Company, or DTC, you
may effect delivery of the old notes by book-
entry transfer.
In the alternative, if your old notes are held
through DTC and you wish to participate in the
exchange offer, you may do so through the
automated tender offer program of DTC. If you
tender under this program, you will agree
6
to be bound by the letter of transmittal that we
are providing with this prospectus as though you
had signed the letter of transmittal.
By signing or agreeing to be bound by the letter
of transmittal, you will represent to us, among
other things, that:
. you are not our "affiliate," as defined in
Rule 144 of the Securities Act or a broker-
dealer tendering old notes acquired directly
from us for your own account;
. if you are not a broker-dealer or are a
broker-dealer but will not receive new notes
for your own account, you are not engaged in
and do not intend to participate in a
distribution of the new notes;
. you have no arrangement or understanding with
any person to participate in the distribution
of the new notes or the old notes;
. any new notes you receive will be acquired in
the ordinary course of your business; and
. if you are a broker-dealer that will receive
new notes for your own account in exchange
for old notes, those old notes were acquired
as a result of market-making activities or
other trading activities, and you will
deliver a prospectus, as required by law, in
connection with any resale of those new
notes.
Procedures for Beneficial
Owners.....................
If you beneficially own old notes registered in
the name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to
tender your old notes in the exchange offer, you
should promptly contact the registered holder and
instruct it to tender the old notes on your
behalf.
If you wish to tender your old notes on your own
behalf, you must either arrange to have your old
notes registered in your name or obtain a
properly completed bond power from the registered
holder before completing and executing the letter
of transmittal and delivering your old notes. The
transfer of registered ownership may take
considerable time.
Guaranteed Delivery
Procedures.................
If you wish to tender your old notes and cannot
comply with the requirement to deliver the letter
of transmittal and notes or use the applicable
procedures under the automated tender offer
program of DTC before the expiration date, you
must tender your old notes according to the
guaranteed delivery procedures described in "The
Exchange Offer--Guaranteed Delivery Procedures"
on page 36.
7
Withdrawal Rights........... Tenders may be withdrawn at any time before 5:00
p.m., New York City time, on May 1, 2002.
U.S. Federal Income Tax
Considerations............. The exchange of new notes for old notes in the
exchange offer will not be a taxable event for
U.S. federal income tax purposes. Please read
"Certain United States Federal Income Tax
Consequences" beginning on page 137.
Use of Proceeds............. There will be no proceeds from the issuance of
the new notes.
Resale of New Notes......... Based on SEC staff interpretations in no action
letters, we believe that each new note issued
under the exchange offer may be offered for
resale, resold and otherwise transferred by you,
the holder of that new note, without compliance
with the registration and prospectus delivery
provisions of the Securities Act if:
. you are not our "affiliate" within the
meaning of Rule 144 under the Securities Act;
. the new note is acquired in the ordinary
course of your business; and
. you do not intend to participate in the
distribution of new notes.
If you tender old notes in the exchange offer
with the intention of participating in any manner
in a distribution of the new notes:
. you cannot rely on these interpretations by
the SEC staff; and
. you must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction.
Failure to comply with the registration and
prospectus delivery requirements by a holder
subject to these requirements could result in
that holder incurring liability for which it is
not indemnified by us. Please read "The Exchange
Offer" on page 29 for more information.
Plan of Distribution........ All broker-dealers who receive new notes in the
exchange offer have a prospectus delivery
obligation.
Based on SEC no-action letters, broker-dealers
who acquired the old notes as a result of market-
making or other trading activities may use this
exchange offer prospectus, as supplemented or
amended, in connection with the resale of the new
notes.
8
Broker-dealers who acquired the old notes from us
may not rely on SEC staff interpretations in no-
action letters. Broker-dealers who acquired the
old notes from us must comply with the
registration and prospectus delivery requirements
of the Securities Act including being named as
selling noteholders in order to resell the old
notes or the new notes.
The Exchange Agent
We have appointed JPMorgan Chase Bank (formerly known as The Chase Manhattan
Bank) as exchange agent for the exchange offer. You should direct questions and
requests for assistance, requests for additional copies of this prospectus or
of the letter of transmittal and requests for the notice of guaranteed delivery
to the exchange agent addressed as follows:
For Delivery by Mail, Overnight Delivery or by Hand:
JPMorgan Chase Bank
(formerly known as The Chase Manhattan Bank)
2001 Bryan Street, 9th Floor
Dallas, Texas 75201
By Facsimile Transmission (for eligible institutions only):
(214) 468-6494
To Confirm Receipt:
214-468-6464
9
Summary of Terms of the New Notes
The new notes will be freely tradeable and otherwise substantially identical
to the old notes. The new notes will not have registration rights. The new
notes will evidence the same debt as the old notes, and the old notes and the
new notes will be governed by the same indenture.
Issuer...................... Pennzoil-Quaker State Company.
Maturity Date............... November 1, 2008.
Interest Payment Dates...... May 1 and November 1 of each year, commencing on
May 1, 2002.
Optional Redemption......... The new notes will be redeemable at our option,
in whole or in part, at any time on or after
November 1, 2005 at the redemption prices set
forth in this prospectus, together with accrued
and unpaid interest, if any, to the date of
redemption.
At any time prior to November 1, 2004, we may
redeem up to 35% of the original principal amount
of the new notes with the proceeds of one or more
equity offerings of our common or preferred stock
at a redemption price of 110% of the principal
amount of the new notes, together with accrued
and unpaid interest, if any, to the date of
redemption.
Ranking..................... The new notes will:
. be unsecured;
. be effectively junior to our secured debt;
. rank equally with all of our existing and
future unsecured unsubordinated debt; and
. be senior to any future subordinated debt.
As of December 31, 2001, we had approximately
$1,197.9 million of total indebtedness, including
capital lease obligations, approximately $931.8
million of which was secured debt.
Guarantees.................. The new notes will be guaranteed by our existing
and future subsidiaries that guarantee our new
revolving credit facility. The guarantees will be
unsecured senior indebtedness of our subsidiary
guarantors and will have the same ranking with
respect to indebtedness of our subsidiary
guarantors as the new notes will have with
respect to our indebtedness.
Our non-guarantor subsidiaries represented
approximately 19% of our revenues, approximately
16% of our operating income and approximately 22%
of our
10
EBITDA for the year ended December 31, 2000, and
approximately 13% of our revenues, approximately
22% of our operating income and approximately 26%
of our EBITDA for the year ended December 31,
2001.
Covenants................... We will issue the new notes under an indenture
with JPMorgan Chase Bank (formerly known as The
Chase Manhattan Bank), as trustee. The indenture,
among other things, limits our ability and the
ability of our restricted subsidiaries to:
. borrow money;
. incur liens;
. increase dividends on our stock, redeem stock
or redeem subordinated debt;
. make investments;
. sell assets or sell capital stock of
restricted subsidiaries;
. enter into sale and leaseback transactions;
. guarantee indebtedness;
. merge or consolidate; and
. enter into affiliate transactions.
If the new notes are assigned an investment grade
rating from Standard & Poor's (at least BBB-) and
Moody's Investors Service, Inc. (at least Baa3),
our obligation to comply with some of these
covenants will "fall-away," even if the new notes
are subsequently downgraded. The "fall away,"
however, will not affect our obligation to comply
with the covenants relating to liens, sale and
leaseback transactions, and mergers and
consolidations.
Mandatory Offers to Upon the occurrence of a change of control, you
Purchase................... will have the right to require us to purchase all
or a portion of your new notes at a price equal
to 101% of their principal amount, together with
accrued and unpaid interest, if any, to the date
of purchase.
In connection with certain asset dispositions, we
may be required to use the proceeds from those
asset dispositions to make an offer to purchase
the new notes at 100% of their principal amount,
together with accrued and unpaid interest, if
any, to the date of purchase if such proceeds are
not otherwise used within 360 days to purchase
senior secured indebtedness, to repay
indebtedness under our new revolving credit
facility (with a corresponding reduction in
commitment) or to invest in assets related to our
business.
11
Form of New Notes........... The new notes will be represented by one or more
permanent global securities deposited with DTC.
You will not receive certificates for your new
notes unless one of the events described under
the heading "Book-Entry Settlement and
Clearance--Certificated Notes" on page 133
occurs. Instead, beneficial ownership interests
in the new notes will be shown on, and transfers
of beneficial ownership will be effected only
through, book-entry records maintained by DTC.
RISK FACTORS
Before deciding to participate in the exchange offer, you should carefully
consider, along with the other information set forth in this prospectus, the
specific factors set forth under "Risk Factors" beginning on page 15.
12
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
Set forth below are certain of our consolidated financial and operating
data. The statement of operations data for the years ended December 31, 1999,
2000, and 2001 and the balance sheet data as of the end of such periods have
been derived from our consolidated financial statements which have been audited
by Arthur Andersen LLP, independent public accountants.
This information should be read in conjunction with our consolidated
financial statements and related notes thereto and the report of our
independent public accountants included in our consolidated financial
statements incorporated by reference into this prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
Year Ended
December 31,
----------------------------------
Restated
----------------------
1999 2000 2001
---------- ---------- ----------
(dollars in thousands)
Statement of Operations Data:
REVENUES
Net sales................................. $2,310,056 $2,381,220 $2,276,154
Other income, net(1)...................... 17,229 46,151 38,570
---------- ---------- ----------
Total Revenues......................... 2,327,285 2,427,371 2,314,724
COSTS AND EXPENSES
Cost of sales(2).......................... 1,544,032 1,618,501 1,606,329
Selling, general and administrative(3).... 503,787 538,593 489,221
Depreciation and amortization(4).......... 100,462 96,070 110,343
Acquisition related expenses(5)........... 75,077 34,400 --
Charges related to asset disposals(6)..... 13,910 9,952 --
Taxes other than income................... 12,897 14,081 18,788
Interest charges.......................... 80,588 94,895 92,079
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX........................ (3,468) 20,879 (2,036)
Income tax provision...................... 7,790 16,595 8,505
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS.. (11,258) 4,284 (10,541)
DISCONTINUED OPERATIONS:
Loss from operations, net of tax......... (300,459) (51,665) --
Estimated loss on disposal, net of tax... -- (40,431) (22,467)
---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM............ (311,717) (87,812) (33,008)
Extraordinary item, net of tax............ -- -- (937)
---------- ---------- ----------
NET LOSS.................................. $ (311,717) $ (87,812) $ (33,945)
========== ========== ==========
Year Ended
December 31,
----------------------------------
Restated
----------------------
1999(1) 2000 2001
---------- ---------- ----------
(dollars in thousands)
Other Financial Data:
EBITDA(7)................................. $ 177,582 $ 211,844 $ 200,386
Capital expenditures...................... 70,604 78,491 51,866
Ratio of earnings to fixed charges(8)..... -- 1.18x --
As of December 31,
--------------------------------
Restated
---------------------
1999 2000 2001
---------- ---------- ----------
(dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents..................... $ 20,155 $ 38,263 $ 86,412
Working capital............................... 281,010 275,175 169,082
Total assets.................................. 2,738,287 2,801,067 2,696,317
Total debt and capital lease obligations...... 1,110,046 1,275,773 1,197,915
Total shareholders' equity.................... 961,431 820,979 764,551
13
- --------
(1) Includes pretax charges in 2001 of: (a) $2.8 million associated with the
2001 cost reduction plan and (b) $4.7 million as a result of the currency
devaluation in Argentina.
(2) Includes pretax charges of: (a) $4.0 million in 1999 associated with a
sales tax audit in the Jiffy Lube segment, $1.0 million for a contract
settlement and $0.4 million for a loss on sale of assets and (b) $25.3
million in 2001 associated with the 2001 cost reduction plan and $3.4
million related to the impairment of Jiffy Lube's total investments in
CarClub.com and Q-lube Marine.
(3) Includes pretax charges of: (a) $1.4 million in 1999 of restructuring
charges; (b) $29.0 million in 2000 associated with the 2000 cost
reduction plan and $0.2 million for other matters; and (c) $39.5 million
in 2001 associated with the 2001 cost reduction plan, $16.0 million to
reflect an increase in the allowance for doubtful accounts resulting from
the Chapter 11 bankruptcy filing of K-Mart, $1.2 million to reflect an
increase in the allowance for doubtful accounts resulting from the impact
of economic uncertainty on certain customers in Argentina and $0.3
million for other matters.
(4) Includes pretax charges of $9.3 million in 2001 associated with the 2001
cost reduction plan.
(5) Includes Quaker State acquisition- and integration-related charges of
$75.1 million in 1999 and $34.4 million in 2000. There were no such
charges in 2001.
(6) Includes pretax charges of: (a) $13.9 million in 1999 associated with the
closure of the Rouseville, Pennsylvania blending and packaging plant and
(b) $10.0 million in 2000 related to the sales of our Carson, California
and San Antonio, Texas blending and packaging plants.
(7) EBITDA is income from continuing operations plus interest charges (net of
interest income), income taxes and depreciation and amortization. EBITDA
is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to
either net income as an indicator of our operating performance or cash
flows as an indicator of our profitability or liquidity. EBITDA has been
calculated for the periods presented as follows:
Year Ended
December 31,
--------------------
Restated
-------------
1999 2000 2001
------ ----- ------
(dollars in
millions)
Income (loss) from continuing operations................. $(11.3) $ 4.3 $(10.5)
Plus:
Interest charges........................................ 80.6 94.9 92.1
Income tax provision.................................... 7.8 16.6 8.5
Depreciation and amortization........................... 100.5 96.1 110.3
------ ----- ------
EBITDA................................................. 177.6 211.9 200.4
--------
(8) The ratio of earnings to fixed charges has been computed by dividing (a)
earnings before income taxes, plus fixed charges (excluding capitalized
interest), amortization of capitalized interest and undistributed equity
earnings (losses) of joint venture by (b) fixed charges, which consist of
interest charges (including capitalized interest) plus the portion of
rental expense that includes an interest factor. No ratio is shown for
1999 and 2001 because earnings were insufficient to cover fixed charges
by $2.0 million in 1999 and $1.2 million in 2001.
14
RISK FACTORS
You should carefully consider the risks below before deciding to participate
in the exchange offer.
Risks relating to the exchange offer
If you fail to exchange your old notes, the existing transfer restrictions
will remain in effect and the market value of your old notes may be adversely
affected because of a smaller float and reduced liquidity.
If you do not exchange your old notes for new notes under the exchange
offer, then you will continue to be subject to the existing transfer
restrictions on the old notes. Old notes not tendered will remain outstanding
and continue to accrue interest but will not retain any rights under the
registration rights agreement. In general, the old notes may not be offered or
sold unless they are registered or exempt from registration under the
Securities Act and applicable state securities laws. Except as required by the
registration rights agreement, we do not intend to register resales of the old
notes.
The tender of old notes under the exchange offer will reduce the principal
amount of the old notes. This may have an adverse effect upon, and increase the
volatility of, the market price of any old notes that you continue to hold due
to a reduction in liquidity.
Risks relating to our business
Sudden or sharp raw materials price increases that cannot be passed on to
customers may adversely affect our profit margins.
The raw materials for motor oil and lubricants consist primarily of base oil
and additives. Our profitability is sensitive to changes in the costs of these
commodity-like raw materials caused by changes in supply or other market
conditions, over which we have little or no control. When there are sudden or
sharp increases in the cost of base oil or additives, we may not be able to
pass on these increases in whole or in part to our customers through retail or
wholesale lubricant price increases, or we may be significantly delayed in our
ability to do so. Recently, we experienced delays of approximately two months
from the date we announced lubricant price increases to the time we began to
generate revenues from such price increases. In addition, any rapid or
unexpected increase in the price of crude oil directly or indirectly resulting
from war, armed hostilities, terrorist acts or other incidents could cause a
sudden or sharp increase in the cost of base oil. We cannot assure you that we
will be able to pass on to our customers any future increased base oil or
additive costs in the form of price increases for our lubricants. Any inability
to pass on these costs as price increases to our customers will reduce the
profit margin in our lubricants segment. Because our lubricants segment has
historically generated over half of our operating income, our profitability on
a company-wide basis would be adversely affected.
A downturn in the economy may delay or reduce consumer purchases of our
products, which could adversely affect our revenues.
Many factors affect the level of consumer spending in the automotive
lubricants and consumer products industries, including, among others, general
business conditions, interest rates, gasoline prices, the availability of
consumer credit and consumer confidence in future economic conditions. Consumer
purchases of lubricants, automotive engine treatments and fuel additives and
automotive appearance products generally are reduced during recessionary
periods when disposable income is lower. Moreover, consumer purchases of
discretionary items, such as our Axius(R) and Medo(R) consumer products, could
decline even more rapidly for many consumers during recessionary periods. A
downturn in the economies in which we sell our products could adversely affect
our revenues.
15
A reduction in the number of miles driven by automobile owners or an
extension in the interval between regular oil changes will adversely affect
the demand for our lubricants products and our Jiffy Lube oil change
services.
A reduction in the frequency of oil changes could adversely affect the
revenues of our lubricants and Jiffy Lube segments. When the retail cost of
gasoline increases, the number of miles driven by automobile owners typically
decreases, which results in fewer oil changes. In addition, some automotive
manufacturers are increasing the recommended mileage interval between oil
changes for newer cars, which could lead to changes in consumer maintenance
patterns. A change in consumer maintenance patterns could result in oil changes
becoming less frequent.
If we fail to continue to maintain and develop our brand names, our future
revenues could be adversely affected.
We believe that maintaining and developing our brand names, including
Pennzoil(R), Quaker State(R) and Jiffy Lube(R), are critical to our success and
that the importance of brand recognition may increase as competitors offer
products similar to our products. We incur substantial marketing expenditures
to create and maintain brand loyalty as well as increase awareness of our
brands. If our brand-building strategy is unsuccessful, these expenses may
never be recovered, and we may be unable to increase our future revenues or
implement our business strategy.
An inability to respond to changes in consumer demands in a timely manner
could adversely affect our revenues, and a failure to make continuous and
successful new product introductions could result in declines in financial
performance.
Our success in general, and in our consumer products segment in particular,
depends on our ability to identify, originate and define automotive consumer
product trends as well as to anticipate, gauge and react to changing consumer
demands in a timely manner. Our automotive consumer products must appeal to a
broad range of consumers whose preferences cannot be predicted with certainty
and are subject to rapid change. We cannot assure you that we will be able to
continue to develop appealing automotive products or meet changing consumer
demands in the future. If we misjudge the market for our products, we may be
faced with significant excess inventories for some automotive products and
missed opportunities for other products.
In categories in which we compete, there are frequent introductions of new
products and line extensions. If we were not able to identify emerging consumer
and technological trends and to maintain and improve the competitiveness of our
products, we would lose our market position and there will be an adverse effect
on our financial performance. We cannot be sure that we will successfully
achieve those goals. Continued product development and marketing efforts have
all the risks inherent in the development of new products and line extensions,
including development delays, the failure of new products and line extensions
to achieve anticipated levels of market acceptance and the cost of failed
product introductions.
Competition in the markets in which we compete is intense and our competitors
may develop products more popular with consumers.
We face intense competition in the product lines and markets in which we
compete. Our lubricants and consumer products compete with other brands within
their product category and with private label products sold by retailers. We
compete with numerous manufacturers, importers and distributors of competing
products for the limited space available for the display
16
of these products to the consumer. Moreover, the general availability of
contract manufacturing allows new entrants easy access to the consumer products
markets in which we compete, which may increase the number of our competitors
and adversely affect our competitive position and our business. Many of our
competitors' financial, distribution, marketing and other resources are
substantially greater than those that we possess.
The fast oil change business is highly competitive, particularly with
respect to price and service. In any given location, Jiffy Lube(R) service
centers may encounter competition from national, regional and local companies,
many of which have greater financial resources than that of Jiffy Lube.
We depend on a few customers for a large percentage of our sales.
Some customers are material to our business and operations. Our five largest
customers represented approximately 29% of net sales for the year ended
December 31, 2001. Wal*Mart is the largest customer of our lubricants segment
(23% of its net sales for the year ended December 31, 2001) and our consumer
products segment (32% of its net sales for the year ended December 31, 2001).
We do not have long-term purchase agreements or other contractual assurance as
to future sales to any major customer. A loss of Wal*Mart or another material
customer would adversely affect our revenues and our profitability. In
addition, continued consolidation within the retail industry has resulted in an
increasingly concentrated retail base. To the extent such consolidation
continues to occur, our net sales and profitability may be increasingly
sensitive to a deterioration in the financial condition of, or other adverse
developments involving our relationship with, one or more customers. As a
result of consolidation in the retail industry generally, and the leading
market positions of mass merchandisers such as Wal*Mart, our customers are able
to exert increasing pressure on us with respect to pricing, product quality and
new product introductions. In addition, some customers may outsource various
management and marketing functions, which could result in additional
distribution costs to us.
Operations outside the United States expose us to uncertain conditions in
overseas markets.
We believe that our sales outside of the United States, which were 9% of net
sales for the year ended December 31, 2001, are likely to increase as a
percentage of our total sales. As a result, we will increasingly face the risks
created by having foreign operations, including:
. economic or political instability in our overseas markets; and
. fluctuations in foreign currency exchange rates that may make our
products more expensive in our foreign markets or negatively impact our
sales or earnings.
These risks could have a significant impact on our ability to sell our
products on a timely and competitive basis in foreign markets and may have a
material adverse effect on our results of operations or financial position. We
may seek to limit foreign currency exchange risks through the use of foreign
currency borrowings and foreign currency forward contracts when practical, but
cannot be sure that this strategy, if implemented, will be successful. In
addition, our operations outside the United States are subject to the risk of
new and different legal and regulatory requirements in local jurisdictions,
potential difficulties in staffing and managing local operations, credit risk
of local customers and distributors, and potentially adverse tax consequences.
In addition, our ability to identify, originate and define automotive consumer
product trends, as well as gauge and react to changing consumer demands, may be
more difficult in foreign markets.
17
Our Jiffy Lube business is partly dependent on the ability of our franchisees
to deliver high quality services.
Our Jiffy Lube franchisees are independent contractors and are not our
employees. We provide training and support to our franchisees, but the quality
of franchised store operations may be diminished by any number of factors
beyond our control. Consequently, not all our franchisees may successfully
operate stores in a manner consistent with our standards and requirements or
hire and train qualified managers and other store personnel. If they do not,
our image and reputation may suffer, and system-wide sales and profitability
could decline.
Our Jiffy Lube business is dependent on our franchisees to open new stores on
schedule and build them on suitable sites.
The growth of our Jiffy Lube segment is partially dependent upon our
franchisees' ability to develop new franchised stores. Our existing and
potential future franchisees may not have access to the financial resources
that they need to open the stores required by their development schedules, or
be able to find suitable sites on which to develop new stores. They may not be
able to negotiate acceptable lease or purchase terms for the sites, obtain the
necessary permits and approvals or meet construction schedules. Any of these
problems could slow our growth, impair our strategy and reduce our franchise
revenues and profitability.
We are subject to franchise laws and regulations that govern our status as a
franchisor and regulate some aspects of our franchisee relationships. Our
ability to develop new franchised stores and to enforce contractual rights
against franchisees may be adversely affected by these laws and regulations,
which could cause our franchise revenues to decline and adversely affect our
growth strategy.
Jiffy Lube, as a franchisor, is subject to both regulation by the Federal
Trade Commission and state laws regulating the offer and sale of franchises.
Our failure to obtain or maintain approvals to sell franchises would cause us
to lose franchise revenues. If we are unable to sell new franchises, our Jiffy
Lube growth strategy will be significantly harmed. In addition, state laws that
regulate substantive aspects of our relationships with franchisees may limit
our ability to terminate or otherwise resolve conflicts with our franchisees.
Because we plan to grow the Jiffy Lube business through franchising, any
impairment of our ability to develop new franchised stores will negatively
affect us and our Jiffy Lube growth strategy more than if we planned to develop
additional company-owned stores.
Environmental compliance costs and liabilities could have a material adverse
effect on our financial condition.
Our operations and properties are subject to increasingly stringent laws and
regulations relating to environmental protection, including laws and
regulations governing air emissions, water discharges, waste management and
workplace safety. Such laws and regulations can impose fines and criminal
sanctions for violations and require the installation of costly pollution
control equipment or operational changes to limit pollution emissions and
decrease the likelihood of accidental hazardous substance releases. We incur,
and expect to continue to incur, significant capital and operating costs to
comply with environmental laws and regulations.
We use and generate hazardous substances and wastes in some of our
manufacturing operations. In addition, some of our current and former
properties are or have been used for industrial purposes. Accordingly, we could
become subject to potentially material liabilities relating to the
investigation and cleanup of contaminated properties, and to claims alleging
personal injury or property damage as the result of exposures to, or releases
of, hazardous
18
substances. In addition, stricter interpretation of existing laws and
regulations, new laws and regulations, the discovery of previously unknown
contamination or the imposition of new or increased requirements could require
us to incur costs or become the basis of new or increased liabilities that
could reduce our earnings and our cash available for operations.
We have recently discontinued some of our operations and announced a cost
reduction plan, which could result in charges that reduce the availability of
cash for our operations, including payments on the notes.
As a result of our decision in 2000 to withdraw from the refining business
and our subsequent disposal of our refineries and related assets, we have
recorded charges related to asset impairments and liabilities incurred,
including environmental, contract buyouts, severance and other costs. At
December 31, 2001, the remaining accrual for these charges was $46.8 million.
Of this amount, we expect $17.8 million to be paid in 2002, $8.0 million to be
paid in 2003 and $21.0 million to be paid thereafter.
In June 2001, we announced our 2001 cost reduction plan. We have incurred
$46.3 million in after-tax charges ($77.1 million pretax) through December 31,
2001 in implementing the plan. At December 31, 2001, the remaining accrual for
severance expense under the 2000 general and administrative cost reduction plan
was $2.3 million, all of which we expect to pay in 2002. At December 31, 2001,
the remaining accrual for severance expense under the 2001 cost reduction plan
was $19.9 million. Of this amount, we expect $17.1 million to be paid in 2002
and $2.8 million to be paid in 2003.
Any further or future cash charges in continuing or discontinued operations
would reduce the availability of cash to be used for payments on the notes.
Failure to protect our intellectual property could reduce our
competitiveness.
We rely on trademark, trade secret, patent and copyright law to protect our
intellectual property, including our brand names. We cannot be sure that these
intellectual property rights can be successfully asserted in the future or will
not be invalidated, circumvented or challenged. In addition, laws of some of
the foreign countries in which our products are or may be sold do not protect
our intellectual property rights to the same extent as the laws of the United
States. Our failure to protect our proprietary information, and any successful
intellectual property challenges or infringement proceedings against us, could
make us less competitive and could have a material adverse effect on our
business, operating results and financial condition.
We depend on key personnel.
We are dependent on the continuing services of our key management personnel,
including James J. Postl, our Chief Executive Officer. The loss of the services
of Mr. Postl or other key personnel could have a material adverse affect on our
business.
19
Risks relating to the new notes and our indebtedness
The risks described below that apply to the new notes also apply to any old
notes not tendered for new notes in the exchange offer.
We have a significant amount of debt, which could adversely affect our
ability to operate our business.
We have a significant amount of debt. As of December 31, 2001, we had
approximately $1,197.9 million of total indebtedness, including capital lease
obligations, approximately $931.8 million of which was secured debt. We also
had a cash balance of $86.4 million intended to fund a significant portion of
the repayment of principal of our $104.5 million of 9.40% notes that mature in
December 2002. For more information on these obligations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In addition, as of December 31, 2001, we had $348.0 million available for
borrowings and letters of credit under our new revolving credit facility,
subject to customary conditions. Subject to the restrictions in our new
revolving credit facility and the indenture for the new notes, we may incur
additional indebtedness from time to time. The level of our indebtedness could
have important consequences, including:
. limiting cash flow available for general corporate purposes, including
capital expenditures and acquisitions, because a substantial portion of
our cash flow from operations must be dedicated to servicing our debt;
. limiting our ability to obtain additional debt financing on
satisfactory terms in the future for working capital, capital
expenditures, research and development efforts, acquisitions and other
general corporate obligations;
. limiting our flexibility in planning for, or reacting to, competitive
and other changes in our industry and economic conditions generally;
. creating a higher level of debt than some of our competitors, which may
put us at a competitive disadvantage;
. exposing us to risks inherent in interest rate fluctuations because
some of our borrowings will be at variable rates of interest, which
could result in higher interest expense in the event of increases in
interest rates; and
. increasing our vulnerability to general economic downturns and adverse
competitive and industry conditions, which could place us at a
competitive disadvantage compared to our competitors that are less
leveraged.
Our ability to make payments on and to refinance our indebtedness, including
the new notes, and our ability to fund working capital and planned capital
expenditures, will depend on our ability to generate cash in the future. We
cannot assure you:
. that our business will generate sufficient cash flow from operations
for these purposes;
. that future borrowings will be available under our current or future
revolving credit facilities in an amount sufficient to enable us to pay
our indebtedness on or before maturity; or
. that we will be able to sell assets or refinance any of our
indebtedness on commercially reasonable terms, if at all.
20
We cannot assure you that our business will generate sufficient cash flow,
or that we will be able to obtain funding, sufficient to satisfy our debt
service obligations. In addition, factors beyond our control may affect our
ability to make these payments and refinancings. These factors include those
discussed elsewhere in these risk factors and those listed in the "Forward-
Looking Statements" section of this prospectus.
Restrictive covenants in our indenture and new revolving credit facility may
adversely affect us.
The indenture governing the new notes will contain various covenants that
limit our ability to engage in specified types of transactions. These
covenants limit our ability to:
. incur additional debt or issue redeemable preferred stock or subsidiary
preferred stock;
. incur liens;
. increase dividends on our common stock;
. redeem or repurchase capital stock or subordinated debt;
. engage in transactions with affiliates, except on an arm's-length
basis;
. engage in sale and leaseback transactions;
. engage in businesses unrelated to our current businesses;
. make some types of investments or sell assets; and
. consolidate or merge with or into, or sell substantially all of our
assets to, another person.
In addition, our new revolving credit facility contains restrictive
covenants and also requires us to maintain specified financial ratios and
satisfy other financial condition tests. See "Description of Other Debt--New
Revolving Credit Facility." Our ability to meet those financial ratios and
tests can be affected by events beyond our control, and we cannot assure you
that we will meet those tests. A breach of any of these covenants could result
in a default under our new revolving credit facility and/or the new notes. In
addition, a default under some of our other debt agreements could also result
in a default under our new revolving credit facility and/or the new notes.
Upon the occurrence of an event of default under our new revolving credit
facility, the lenders could elect to declare all amounts outstanding under our
new revolving credit facility to be immediately due and payable and terminate
all commitments to extend further credit. If we were unable to repay those
amounts, the lenders under the new revolving credit facility could proceed
against the collateral granted to them to secure that indebtedness. We pledged
a significant portion of our assets as security under our new revolving credit
facility. If the lenders under our new revolving credit facility accelerate
the repayment of borrowings, we cannot assure you that we will have sufficient
assets to repay our new revolving credit facility and our other indebtedness,
including the new notes. A default under our new revolving credit agreement
and/or the indenture could cause a default under some of our other debt
agreements.
Although the new notes are referred to as "senior notes," and the subsidiary
guarantees are senior obligations of our subsidiaries, each will be
effectively subordinated to our secured debt and any secured liabilities of
our guaranteeing subsidiaries.
The new notes will not be secured by any of our assets. As a result, the
new notes will effectively rank junior to our secured indebtedness or the
secured indebtedness of our guaranteeing subsidiaries to the extent of the
assets securing such indebtedness, including all indebtedness under our $348
million new revolving credit facility and our 9.40% notes due 2002, 6.625%
notes due 2005, 6.75% notes due 2009, 7.375% debentures due 2029, and some of
our international debt. As of December 31, 2001, we had approximately $931.8
million of
21
secured debt and $348 million available for borrowing under our new revolving
credit facility, excluding letters of credit. In addition, the indenture
governing the new notes will, subject to specified limitations, permit us to
incur additional secured indebtedness and your new notes will be effectively
junior to any such additional secured indebtedness we may incur. In the event
of our bankruptcy, liquidation, reorganization or other winding up, our assets
that secure our secured indebtedness will be available to pay obligations on
the new notes only after all such secured indebtedness has been repaid in full
from such assets. Likewise, if payment under our secured indebtedness,
including the senior revolving credit facility or any of our series of secured
notes, were accelerated, then only those lenders and holders of those notes
would be entitled to exercise the remedies available to a secured lender under
applicable law, and those lenders and holders of those notes will have a claim
on our assets before a holder of these new notes. Holders of these new notes
will participate in our remaining assets ratably with all holders of our
unsecured indebtedness that is deemed to be of the same class as the new notes,
and potentially with all of our other general creditors. We advise you that
there may not be sufficient assets remaining to pay amounts due on any or all
the notes then outstanding. The guarantees of the new notes will have a similar
ranking with respect to secured and unsecured senior indebtedness of the
subsidiaries as the new notes do with respect to our secured and unsecured
senior indebtedness, as well as with respect to any unsecured obligations
expressly subordinated in right of payment to the guarantees.
The new notes will be structurally junior to all indebtedness of our
subsidiaries that are not guarantors of the new notes.
You will not have any claim as a creditor against our subsidiaries that are
not guarantors of the new notes, and indebtedness and other liabilities,
including trade payables, whether secured or unsecured, of those subsidiaries
will effectively be senior to your claims against those subsidiaries. Our non-
guarantor subsidiaries represented approximately 19% of our revenues,
approximately 16% of our operating income and approximately 22% of our EBITDA
for the year ended December 31, 2000, and approximately 13% of our revenues,
approximately 22% of our operating income and approximately 26% of our EBITDA
for the year ended December 31, 2001. As of December 31, 2001, these
subsidiaries had approximately $265 million of outstanding liabilities,
including trade payables, but excluding intercompany obligations. In addition,
the indenture, subject to certain limitations, permits these subsidiaries to
incur additional indebtedness and does not contain any limitation on the amount
of other liabilities, such as trade payables, that may be incurred by these
subsidiaries.
We may incur additional indebtedness ranking equal to the new notes.
If we incur any additional indebtedness that ranks equally with the new
notes, including trade payables, the holders of that debt will be entitled to
share ratably with you in any proceeds distributed in connection with any
insolvency, liquidation, reorganization, dissolution or other winding-up of us.
This may have the effect of reducing the amount of proceeds paid to you.
If we attain investment grade status, we will no longer be subject to most of
the covenants in our indenture governing the new notes.
If at any time the new notes receive an "investment grade" rating from
Standard & Poor's and Moody's, subject to certain additional conditions, we
will no longer be subject to most of the covenants set forth in the indenture.
If most of the covenants have ceased to apply to us as a result of achieving
such ratings, such covenants will not be restored, even if the new notes were
later rated below investment grade by either or both of the rating agencies.
22
A subsidiary guarantee could be voided or subordinated because of federal
bankruptcy law or comparable foreign and state law provisions.
Our obligations under the new notes are guaranteed by some of our
subsidiaries. Under the federal bankruptcy law and comparable provisions of
foreign and state fraudulent transfer laws, one or more of the subsidiary
guarantees could be voided, or claims in respect of a subsidiary guarantee
could be subordinated to all other debts of that guarantor if, among other
things, the guarantor at the time it incurred the indebtedness evidenced by
its guarantee received less than reasonably equivalent value or fair
consideration for the incurrence of such guarantee; and
. was insolvent or rendered insolvent by reason of such incurrence; or
. was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
. intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor or to a fund for the
benefit of the creditors of the guarantor.
The measure of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine
whether a fraudulent transfer has occurred. Generally, however, a guarantor
would be considered insolvent if:
. the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets; or
. the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
. it could not pay its debts as they become due.
We cannot be sure as to the standards that a court would use to determine
whether or not the guarantors were solvent at the relevant time, or,
regardless of the standard that the court uses, that the issuance of the
guarantee of the new notes would not be voided or the guarantee of the new
notes would not be subordinated to that guarantor's other debt.
If the guarantees were legally challenged, any guarantee could also be
subject to the claim that, since the guarantee was incurred for our benefit,
and only indirectly for the benefit of the guarantor, the obligations of the
applicable guarantor were incurred for less than fair consideration.
A court could thus void the obligations under the guarantee or subordinate
the guarantee to the applicable guarantor's other debt or take other action
detrimental to holders of the new notes.
We may be unable to purchase the new notes upon a change of control.
Upon the occurrence of specified change of control events, as described in
"Description of Notes," you may require us to repurchase all of your new notes
at 101% of their principal amount, plus accrued and unpaid interest, if any,
to the date of purchase. Any purchase of new notes would be funded by
available cash or cash generated from other sources. The new revolving credit
facility also provides that a change of control will be a default that will
permit the lenders to accelerate the maturity of all borrowings thereunder.
Any of our future debt
23
agreements may contain similar provisions. Accordingly, we may not be able to
satisfy our obligations to purchase your new notes unless we are able to
refinance or obtain waivers under the new revolving credit facility and other
indebtedness with similar provisions. In addition, even if we were able to
refinance that indebtedness, the refinancing may not be on terms favorable to
us. We cannot assure you that we will have the financial resources to
repurchase your new notes, particularly if that change of control event
triggers a similar repurchase requirement for, or results in the acceleration
of, other indebtedness.
You cannot be sure that an active trading market will develop for these new
notes.
We have been informed by the initial purchasers of the old notes that they
intend to make a market in the new notes if the exchange offer is completed.
However, the initial purchasers may cease their market-making at any time. In
addition, the liquidity of the trading market in the new notes, and the market
price quoted for the new notes, may be adversely affected by changes in the
overall market for such type of security and by changes in our financial
performance or prospects or in the prospects for companies in our industry
generally. In addition, such market-making activities will be subject to limits
imposed by the Securities Act and the Exchange Act, and may be limited for the
new notes during the exchange offer and the pendency of any shelf registration
statement. As a result, you cannot be sure that an active trading market will
develop for the new notes. Historically, the market for non-investment grade
debt has been subject to disruptions that have caused volatility in prices. It
is possible that the market for the new notes will be subject to disruptions.
Any such disruptions may have a negative effect on you as a holder of the new
notes, regardless of our prospects and financial performance.
24
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
registration rights agreement that we entered into in connection with the
private offering of the old notes. We will not receive any cash proceeds from
the issuance of the new notes. In consideration for issuing the new notes as
contemplated by this prospectus, we will receive in exchange old notes in like
principal amount. The form and terms of the new notes are identical in all
material respects to the form and terms of the old notes, except as otherwise
described herein under "Description of Notes." The old notes surrendered in
exchange for the new notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the new notes will not result in any change in our
capitalization.
We received net proceeds from the sale of the old notes of approximately
$237 million after deducting fees and expenses, including fees and expenses
related to the new revolving credit facility. We used the net proceeds from the
sale of the old notes to repay all of our outstanding borrowings under our old
revolving credit facility, which totaled $215 million at November 2, 2001. The
average interest rate applicable to these borrowings was 5.7% during 2001.
Concurrently with the completion of the sale of the old notes, we replaced our
old revolving credit facility with the new revolving credit facility. For
information about our new revolving credit facility, see "Description of Other
Debt--New Revolving Credit Facility."
25
CAPITALIZATION
The following table sets forth information as of December 31, 2001 with
respect to our consolidated capitalization after giving effect to the sale of
the old notes, the application of the net proceeds from the sale of the old
notes and the execution of our new $348 million secured revolving credit
facility.
You should read the information below in conjunction with "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes
included in, and incorporated by reference into, this prospectus.
December 31, 2001
-----------------
(dollars in
millions)
Cash and cash equivalents .................................... $ 86.4
========
Debt (including current portion)
New revolving credit facility (1)........................... $ --
International debt facilities (2)........................... 24.2
10.0% notes due 2008, net of discount....................... 248.5
9.40% senior notes 2002 (3)................................. 108.3
6.625% senior notes 2005.................................... 99.8
6.75% senior notes 2009..................................... 199.2
Pollution control bonds 2012-2028........................... 50.6
7.375% debentures due 2029.................................. 398.2
Capital lease obligations................................... 61.6
Other debt.................................................. 7.5
--------
Total debt and capital lease obligations.................... 1,197.9
Shareholders' equity.......................................... 764.6
--------
Total book capitalization..................................... $1,962.5
========
- --------
(1) As of December 31, 2001, we had $348 million available to be drawn under
our new revolving credit facility, including up to $175 million for letters
of credit. As of December 31, 2001, we had approximately $113 million of
outstanding letters of credit.
(2) Consists of borrowings under credit facilities and credit lines for
operations in the United Kingdom ($6.7 million), Canada ($7.5 million),
Spain ($4.6 million), India ($3.0 million), Peru ($1.8 million), Bolivia
($0.3 million) and other ($0.3 million).
(3) Includes $3.8 million that would have been due to us from a counterparty to
an interest rate swap. As a result of a ratings downgrade by Moody's and
Standard & Poor's, the coupon on our 8.65% senior notes increased 0.75% to
9.40%. Because our senior unsecured debt has been rated below investment
grade by Moody's and Standard & Poor's, each holder of a 9.40% note has the
option, at any time, to require us to purchase the note at 100% of the
principal amount thereof plus accrued and unpaid interest. We maintain
adequate cash balances and/or revolving credit facility capacity for this
purpose.
26
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
Set forth below are certain consolidated financial and operating data of
Pennzoil-Quaker State Company. The statement of operations data for the five
years ended December 31, 2001 and the balance sheet data as of the end of such
periods have been derived from our consolidated financial statements, which
have been audited by Arthur Andersen LLP, independent public accountants.
This information should be read in conjunction with our consolidated
financial statements and related notes thereto and the report of our
independent public accountants included in our consolidated financial
statements incorporated by reference into this prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
Year Ended December 31,
----------------------------------------------------------
Restated
----------------------
1997 1998 1999(1) 2000 2001
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
Statement of Operations
Data:
REVENUES
Net sales............... $1,252,070 $1,272,365 $2,310,056 $2,381,220 $2,276,154
Other income, net(2).... 9,524 22,794 17,229 46,151 38,570
---------- ---------- ---------- ---------- ----------
Total Revenues......... 1,261,594 1,295,159 2,327,285 2,427,371 2,314,724
COSTS AND EXPENSES
Cost of sales(3)........ 835,019 876,706 1,544,032 1,618,501 1,606,329
Selling, general and
administrative(4)...... 328,196 328,146 503,787 538,593 489,221
Depreciation and
amortization(5)........ 42,873 52,577 100,462 96,070 110,343
Acquisition related
expenses(6)............ -- 10,645 75,077 34,400 --
Asset impairment(7)..... -- 29,613 -- -- --
Charges related to asset
disposals(8)........... -- -- 13,910 9,952 --
Taxes other than
income................. 7,104 8,330 12,897 14,081 18,788
Affiliated interest..... 56,374 56,372 -- -- --
Interest charges........ 5,406 13,571 80,588 94,895 92,079
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAX...... (13,378) (80,801) (3,468) 20,879 (2,036)
Income tax provision
(benefit).............. (1,274) (36,994) 7,790 16,595 8,505
---------- ---------- ---------- ---------- ----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS.. (12,104) (43,807) (11,258) 4,284 (10,541)
DISCONTINUED OPERATIONS:
Loss from operations,
net of tax............. (10,378) (20,704) (300,459) (51,665) --
Estimated loss on
disposal, net of tax... -- -- -- (40,431) (22,467)
---------- ---------- ---------- ---------- ----------
LOSS BEFORE
EXTRAORDINARY ITEM..... (22,482) (64,511) (311,717) (87,812) (33,008)
Extraordinary item, net
of tax................. -- -- -- -- (937)
---------- ---------- ---------- ---------- ----------
NET LOSS................ $ (22,482) $ (64,511) $ (311,717) $ (87,812) $ (33,945)
========== ========== ========== ========== ==========
Year Ended
December 31,
----------------------------------------------------------
Restated
----------------------
1997 1998 1999(1) 2000 2001
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
Other Financial Data:
EBITDA(9)............... $ 91,275 $ 41,719 $ 177,582 $ 211,844 $ 200,386
Net cash provided by
(used in) operating
activities(10)......... NA (235,506) 26,039 108,328 89,323
Net cash provided by
(used in) investing
activities(10)......... NA (31,124) 25,259 (95,800) (25,043)
Net cash provided by
(used in) financing
activities(10)......... NA 149,121 (70,988) 101,439 (112,365)
Capital expenditures.... 58,146 69,988 70,604 78,491 51,866
Ratio of earnings to
fixed charges(11)...... -- -- -- 1.18x --
27
As of December 31,
------------------------------------------------------
Restated
---------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ---------
(dollars in thousands)
Balance Sheet Data:
Cash and cash
equivalents............ $ 9,132 $ 14,899 $ 20,155 $ 38,263 $ 86,412
Working capital......... (465,847) 256,785 281,010 275,175 169,082
Total assets............ 1,600,922 3,111,875 2,738,287 2,801,067 2,696,317
Total debt and capital
lease obligations...... 458,567 1,105,617 1,110,046 1,275,773 1,197,915
Total shareholders'
equity................. 277,374 1,352,556 961,431 820,979 764,551
- --------
(1) On December 30, 1998, we acquired Quaker State Corporation. The increases
in net sales, cost of sales, selling, general and administrative expenses,
depreciation and amortization and interest charges for 1999 were primarily
the result of the Quaker State acquisition.
(2) Includes pretax charges of: (a) $4.7 million in 1998 in international
operations, $6.4 million for a write-down of corporate assets and $1.7
million relating to a Jiffy Lube sales tax audit and (b) $2.8 million in
2001 associated with the 2001 cost reduction plan and $4.7 million as a
result of the currency devaluation in Argentina.
(3) Includes pretax charges of: (a) $25.0 million in 1998 associated with the
voluntary withdrawal and reformulation of Fix-A-Flat(R) tire inflator
products and $5.5 million associated with a loss on sale of inventory; (b)
$4.0 million in 1999 associated with a sales tax audit in the Jiffy Lube
segment, $1.0 million for a contract settlement and $0.4 million for a loss
on sale of assets; and (c) $25.3 million in 2001 associated with the 2001
cost reduction plan and $3.4 million related to the impairment of Jiffy
Lube's total investments in CarClub.com and Q-Lube Marine.
(4) Includes pretax charges of: (a) $6.2 million in 1998 associated with
litigation settlements, $1.1 million associated with international
operations and $2.7 million in acquisition-related expenses; (b) $1.4
million in 1999 of restructuring charges; (c) $29.0 million in 2000
associated with the 2000 cost reduction plan and $0.2 million for other
matters; and (d) $39.5 million in 2001 associated with the 2001 cost
reduction plan, $16.0 million to reflect an increase in the allowance for
doubtful accounts resulting from the Chapter 11 bankruptcy filing of K-
Mart, $1.2 million to reflect an increase in the allowance for doubtful
accounts resulting from the impact of economic uncertainty on certain
customers in Argentina and $0.3 million for other matters.
(5) Includes pretax charges of $9.3 million in 2001 associated with the 2001
cost reduction plan.
(6) Includes Quaker State acquisition-and integration-related charges of $10.6
million in 1998, $75.1 million in 1999 and $34.4 million in 2000. There
were no such charges in 2001.
(7) Included in depreciation and amortization in our consolidated financial
statements. Includes pretax charges of $29.6 million in 1998 associated
with the impairment of Jiffy Lube assets required under Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
(8) Includes pretax charges of: (a) $13.9 million in 1999 associated with the
closure of the Rouseville, Pennsylvania blending and packaging plant and
(b) $10.0 million in 2000 related to the sales of our Carson and San
Antonio blending and packaging plants.
(9) EBITDA is income from continuing operations plus interest charges (net of
interest income), income taxes and depreciation and amortization. EBITDA is
not a measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to either net
income as an indicator of our operating performance or cash flows as an
indicator of our profitability or liquidity. EBITDA has been calculated for
the periods presented as follows:
Year Ended
December 31,
------------------------------------
Restated
-------------
1997 1998 1999 2000 2001
------ ------ ------ ----- ------
(dollars in millions)
Income (loss) from continuing
operations............................. $(12.1) $(43.8) $(11.3) $ 4.3 $(10.5)
Plus:
Interest charges....................... 61.8 69.9 80.6 94.9 92.1
Income tax provision................... (1.3) (37.0) 7.8 16.6 8.5
Depreciation and amortization.......... 42.9 52.6 100.5 96.1 110.3
------ ------ ------ ----- ------
EBITDA................................ 91.3 41.7 177.6 211.9 200.4
(10) Not available for 1997, a period during which our predecessor operations
were conducted through subsidiaries of Pennzoil Company.
(11) The ratio of earnings to fixed charges has been computed by dividing (a)
earnings before income taxes, plus fixed charges (excluding capitalized
interest), amortization of capitalized interest and undistributed equity
earnings (losses) of joint venture by (b) fixed charges, which consist of
interest charges (including capitalized interest) plus the portion of
rental expense that includes an interest factor. No ratio is shown for
1997, 1998, 1999 and 2001 because earnings were insufficient to cover
fixed charges by $15.7 million in 1997, $79.2 million in 1998, $2.0
million in 1999 and $1.2 million in 2001.
28
THE EXCHANGE OFFER
We are offering to issue new 10% senior notes due 2008 in exchange for a
like principal amount of our old 10% senior notes due 2008. We may extend,
delay or terminate the exchange offer, and holders of old notes will need to
complete the exchange offer documentation related to the exchange.
Purpose and Effect of the Exchange Offer
We entered into a registration rights agreement with the initial purchasers
of the old notes in which we agreed to file a registration statement relating
to an offer to issue the new notes in exchange for old notes as soon as
practicable after the closing of the offering and to use our best efforts to
have it declared effective within 180 days after issuing the old notes. We are
offering the new notes under this prospectus to satisfy those obligations under
the registration rights agreement.
If the exchange offer as contemplated by the registration rights agreement:
. is not permitted by applicable law or SEC policy; or
. the exchange offer is not, for any reason, completed by May 2, 2002; or
. the exchange offer has been completed and in the opinion of counsel for
the initial purchasers a registration statement must be filed and a
prospectus delivered by the initial purchasers in connection with any
offering or sale of the old notes;
we will use our reasonable best efforts to file with the SEC a shelf
registration statement to cover resales of old notes. See "Registration Rights
Agreement--Shelf Registration Statement."
To receive transferable new notes in exchange for your old notes in the
exchange offer, you, as the holder of that old note, will be required to make
the following representations:
. you are not one of our "affiliates," as defined in Rule 144 of the
Securities Act, or a broker-dealer tendering old notes acquired
directly from us for your own account;
. if you are not a broker-dealer or are a broker-dealer but will not
receive new notes for your own account in exchange for old notes, you
are not engaged in and do not intend to participate in a distribution
of the new notes;
. you have no arrangement or understanding with any person to participate
in a distribution of the old notes or the new notes within the meaning
of the Securities Act;
. you are acquiring the new notes in the ordinary course of your
business; and
. if you are a broker-dealer that will receive new notes for your own
account in exchange for old notes, you represent that the old notes to
be exchanged for new notes were acquired by you as a result of market-
making activities or other trading activities and you acknowledge that
you will deliver a prospectus meeting the requirements of the
Securities Act in connection with the resale of any new notes. It is
understood that you are not admitting that you are an "underwriter"
within the meaning of the Securities Act by acknowledging that you will
deliver, and by delivery of, a prospectus.
Resale of New Notes
Based on interpretations of the SEC staff in "no action letters" issued to
third parties, we believe that each new note issued under the exchange offer
may be offered for resale, resold
29
and otherwise transferred by you, the holder of that new note, without
compliance with the registration and prospectus delivery provisions of the
Securities Act if:
. you are not our "affiliate" within the meaning of Rule 144 under the
Securities Act;
. the new note is acquired in the ordinary course of your business; and
. you do not intend to participate in the distribution of new notes.
However, the SEC has not considered the legality of our exchange offer in
the context of a "no action letter," and there can be no assurance that the SEC
staff would make a similar determination with respect to our exchange offer as
in other circumstances.
If you tender old notes in the exchange offer with the intention of
participating in any manner in a distribution of the new notes:
. you cannot rely on these interpretations by the SEC staff; and
. you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary
resale transaction.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act containing the selling security
holder's information required by Item 507 or Item 508, as applicable, of
Regulation S-K under the Securities Act. This prospectus may be used by you to
offer for resale, resell or otherwise transfer new notes only as specifically
described in this prospectus. Failure to comply with the registration and
prospectus delivery requirements by a holder subject to these requirements
could result in that holder incurring liability for which it is not indemnified
by us. Only broker-dealers that acquired the old notes as a result of market-
making activities or other trading activities may participate in the exchange
offer. Please read the section captioned "Plan of Distribution" for more
details regarding the transfer of new notes.
Terms of the Exchange Offer
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept for exchange any old notes
properly tendered and not withdrawn before the expiration date. We will issue
$1,000 principal amount of new notes in exchange for each $1,000 principal
amount of old notes surrendered under the exchange offer. Old notes may be
tendered only in integral multiples of $1,000. The exchange offer is not
conditioned upon any minimum aggregate principal amount of old notes being
tendered for exchange.
As of the date of this prospectus, $250 million aggregate principal amount
of old notes are outstanding. This prospectus and the letter of transmittal
included with this prospectus are being sent to all registered holders of old
notes. There will be no fixed record date for determining registered holders of
old notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer according to the provisions of the
registration rights agreement, the applicable requirements of the Securities
Act and the Exchange Act and the rules and regulations of the SEC. Old notes
that are not tendered for exchange in the exchange offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits the holders have under the indenture relating to the notes.
30
We will be deemed to have accepted for exchange properly tendered old notes
when we have given oral or written notice of the acceptance to the exchange
agent and complied with the applicable provisions of the registration rights
agreement. The exchange agent will act as agent for the tendering holders for
the purposes of receiving the new notes.
Holders tendering old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes, We
will pay all charges and expenses, other than certain applicable taxes
described below, in connection with the exchange offer. It is important for
holders to read the section labeled "--Fees and Expenses" for more details
regarding fees and expenses incurred in the exchange offer.
We will return any old notes that we do not accept for exchange for any
reason without expense to the tendering holder as promptly as practicable after
the expiration or termination of the exchange offer.
Expiration Date
The exchange offer will expire at 5:00 p.m., New York City time, on May 1,
2002 unless, in our sole discretion, we extend the exchange offer.
Extensions, Delay in Acceptance, Termination or Amendment
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. During any
extensions, all old notes previously tendered will remain subject to the
exchange offer, and we may accept them for exchange.
To extend the exchange offer, we will notify the exchange agent orally or in
writing of any extension. We will also make a public announcement of the
extension no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
If any of the conditions described below under "--Conditions to the Exchange
Offer" have not been satisfied, we reserve the right, in our sole discretion:
. to delay accepting for exchange any old notes;
. to extend the exchange offer; or
. to terminate the exchange offer;
in each case by giving oral or written notice of a delay, extension or
termination to the exchange agent. Subject to the terms of the registration
rights agreement, we also reserve the right to amend the terms of the exchange
offer in any manner.
Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice to the registered
holders of the old notes. If we amend an exchange offer in a manner we
determine to constitute a material change, we will promptly disclose the
amendment by means of a prospectus supplement. The supplement will be
distributed to the registered holders of the old notes. Depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, we will extend the exchange offer if the exchange offer would
otherwise expire during that period.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the exchange offer, we will have no obligation to publish, advertise or
otherwise communicate any public announcement, other than by making a timely
release to the Dow Jones News Service.
31
Conditions to the Exchange Offer
Despite any other term of the exchange offer, if in our reasonable judgment
the exchange offer, or the making of any exchange by a holder of old notes,
would violate applicable law or any applicable interpretation of the staff of
the SEC:
. we will not be required to accept for exchange, or exchange any new
notes for, any old notes; and
. we may terminate the exchange offer as provided in this prospectus
before accepting any old notes for exchange.
In addition, we will not be obligated to accept for exchange the old notes of
any holder that has not made the following:
. the representations described under "--Purpose and Effect of the
Exchange Offer," "--Procedures for Tendering" and "Plan of
Distribution"; and
. other representations as may be reasonably necessary under applicable
SEC rules, regulations or interpretations to make available to us an
appropriate form for registration of the new notes under the Securities
Act.
We expressly reserve the right to amend or terminate the exchange offer, and
to reject for exchange any old notes not previously accepted for exchange, upon
the occurrence of any of the conditions to the exchange offer specified above.
We will give oral or written notice of any extension, amendment, nonacceptance
or termination to the holders of the old notes as promptly as practicable.
These conditions are for our sole benefit, and we may assert them or waive
them, in whole or in part, at any time or at various times in our sole
discretion. If we fail at any time to exercise any of these rights, this
failure will not mean that we have waived our rights. Each right will be deemed
an ongoing right that we may assert at any time or at various times. In
addition, we will not accept for exchange any old notes tendered and will not
issue new notes in exchange for any old notes, if at that time any stop order
has been threatened or is in effect with respect to the registration statement
of which this prospectus constitutes a part or the qualification of the
indenture relating to the notes under the Trust Indenture Act of 1939.
Procedures for Tendering
How to Tender Generally
Only a holder of old notes may tender their old notes in the exchange offer.
To tender in the exchange offer, you must either comply with the procedures for
manual tender or comply with the automated tender offer program procedures of
DTC described below under "--Tendering Through DTC's Automated Tender Offer
Program."
To complete a manual tender, you must:
. complete, sign and date the letter of transmittal, or a facsimile of
the letter of transmittal;
. have the signature on the letter of transmittal guaranteed if the
letter of transmittal so requires;
. mail or deliver the letter of transmittal or a facsimile of the letter
of transmittal to the exchange agent before the expiration date; and
. deliver and the exchange agent must receive, before the expiration
date:
. the old notes along with the letter of transmittal; or
32
. a timely confirmation of book-entry transfer of the old notes into
the exchange agent's account at DTC according to the procedure for
book-entry transfer described below under "--Book-Entry Transfer."
If you wish to tender your old notes and cannot comply with the requirement
to deliver the letter of transmittal and your old notes or use the automated
tender offer program of DTC before the expiration date, you must tender your
old notes according to the guaranteed delivery procedures described below.
To be tendered effectively, the exchange agent must receive physical
delivery of the letter of transmittal and other required documents at its
address provided above under "Prospectus Summary--The Exchange Agent" before
the expiration date. The tender by a holder that is not withdrawn before the
expiration date will constitute an agreement between the holder and us
according to the terms and subject to the conditions described in this
prospectus and in the letter of transmittal.
The method of delivery of old notes, the letter of transmittal and all other
required documents to the exchange agent is at your election and risk. Rather
than mail these items, we recommend that you use an overnight or hand delivery
service. In all cases, you should allow sufficient time to assure delivery to
the exchange agent before the expiration date. You should not send the letter
of transmittal or old notes to us. You may request your brokers, dealers,
commercial banks, trust companies or other nominees to effect the above
transactions on your behalf.
Book-Entry Transfer
The exchange agent will make a request to establish an account with respect
to the old notes at DTC for purposes of the exchange offer promptly after the
date of this prospectus. Any financial institution participating in DTC's
system may make book-entry delivery of old notes by causing DTC to transfer the
old notes into the exchange agent's account at DTC according to DTC's
procedures for transfer. Holders of old notes who are unable to deliver
confirmation of the book-entry tender of their old notes into the exchange
agent's account at DTC or all other documents required by the letter of
transmittal to the exchange agent on or before the expiration date must tender
their old notes according to the guaranteed delivery procedures described
below.
Tendering Through DTC's Automated Tender Offer Program
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's automated tender offer
program to tender its old notes. Participants in the program may, instead of
physically completing and signing the letter of transmittal and delivering it
to the exchange agent, transmit their acceptance of the exchange offer
electronically. They may do so by causing DTC to transfer the old notes to the
exchange agent according to its procedures for transfer. DTC will then send an
agent's message to the exchange agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, stating
that:
. DTC has received an express acknowledgment from a participant in its
automated tender offer program that the participant is tendering old
notes that are the subject of book-entry confirmation;
33
. the participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, that the participant has received and agrees to be
bound by the applicable notice of guaranteed delivery; and
. the agreement may be enforced against the participant.
How to Tender if You Are a Beneficial Owner
If you beneficially own old notes that are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and you wish to
tender those notes, you should contact the registered holder promptly and
instruct it to tender on your behalf. If you are a beneficial owner and wish to
tender on your own behalf, you must, before completing and executing the letter
of transmittal and delivering your old notes, either:
. make appropriate arrangements to register ownership of the old notes in
your name; or
. obtain a properly completed bond power from the registered holder of
old notes.
The transfer of registered ownership may take considerable time and may not
be completed before the expiration date.
Signatures and Signature Guarantees
Except as described below, you must have signatures on a letter of
transmittal or a notice of withdrawal described below guaranteed by:
. a member firm of a registered national securities exchange;
. a member of the National Association of Securities Dealers, Inc.;
. a commercial bank or trust company having an office or correspondent in
the United States; or
. an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act.
The above must be a member of one of the recognized signature guarantee
programs identified in the letter of transmittal. No signature guarantee is
required if the old notes are tendered:
. by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal and the new notes are being issued directly to the
registered holder of the old notes tendered in the exchange for those
new notes; or
. for the account of a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in
the United States, or an eligible guarantor institution.
When Endorsements or Bond Powers are Needed
If the letter of transmittal is signed by a person other than the registered
holder of any old notes, the old notes must be endorsed or accompanied by a
properly completed bond power. The bond power must be signed by the registered
holder as the registered holder's name appears on the old notes and a member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having
34
an office or correspondent in the United States or an eligible guarantor
institution must guarantee the signature on the bond power.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. They should also submit evidence of
their authority to deliver the letter of transmittal satisfactory to us unless
we waive this requirement.
Determinations Under the Exchange Offer
We will determine in our sole discretion all questions as to the validity,
form, eligibility, time of receipt, acceptance of tendered old notes and
withdrawal of tendered old notes. Our determination will be final and binding.
We reserve the absolute right to reject any old notes not properly tendered or
any old notes our acceptance of which would, in the opinion of our counsel, be
unlawful. We also reserve the right to waive any defects, irregularities or
conditions of tender as to particular old notes. Our interpretation of the
terms and conditions of the exchange offer, including the instructions in the
letter of transmittal, will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of old notes must be
cured within the time we shall determine. Neither we, the exchange agent nor
any other person will be under any duty to give notification of defects or
irregularities with respect to tenders of old notes, and none of the
aforementioned will incur liability for failure to give notification. Tenders
of old notes will not be deemed made until any defects or irregularities have
been cured or waived. Any old notes received by the exchange agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned to the tendering holder, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date.
When We Will Issue New Notes
In all cases, we will issue new notes for old notes that we have accepted
for exchange under the exchange offer only after the exchange agent timely
receives:
. old notes or a timely book-entry confirmation of the old notes into the
exchange agent's account at DTC; and
. a properly completed and duly executed letter of transmittal and all
other required documents or properly transmitted agent's message.
Return of Old Notes Not Accepted or Exchanged
If we do not accept any tendered old notes for exchange for any reason
described in the terms and conditions of the exchange offer or if old notes are
submitted for a greater principal amount than the holder desires to exchange,
the unaccepted or nonexchanged old notes will be returned without expense to
their tendering holder. In the case of old notes tendered by book-entry
transfer into the exchange agent's account at DTC according to the procedures
described below, the nonexchanged old notes will be credited to an account
maintained with DTC. These actions will occur as promptly as practicable after
the expiration or termination of the exchange offer.
35
Your Representations to Us
By signing or agreeing to be bound by the letter of transmittal, you will
represent that, among other things:
. you are not our "affiliate" as defined in Rule 144 of the Securities
Act or a broker-dealer tendering old notes acquired directly from the
Company for your own account;
. if you are not a broker-dealer or are a broker-dealer but will not
receive new notes for your own account in exchange for old notes, you
are not engaged in and do not intend to participate in a distribution
of the new notes;
. you have no arrangement or understanding with any person to participate
in a distribution of the old notes or the new notes within the meaning
of the Securities Act;
. you are acquiring the new notes in the ordinary course of your
business; and
. if you are a broker-dealer that will receive new notes for your own
account in exchange for old notes, you represent that the old notes to
be exchanged for new notes were acquired by you as a result of market-
making activities or other trading activities and you acknowledge that
you will deliver a prospectus meeting the requirements of the
Securities Act in connection with the resale of any new notes. It is
understood that you are not admitting that you are an "underwriter"
within the meaning of the Securities Act by acknowledging that you will
deliver, and by delivery of, a prospectus.
Guaranteed Delivery Procedures
If you wish to tender your old notes but your old notes are not immediately
available or you cannot deliver your old notes, the letter of transmittal or
any other required documents to the exchange agent or comply with the
applicable procedures under DTC's automated tender offer program before the
expiration date, you may tender if:
. the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an eligible guarantor
institution;
. before the expiration date, the exchange agent receives from the member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., commercial bank or trust
company having an office or correspondent in the United States, or
eligible guarantor institution either a properly completed and duly
executed notice of guaranteed delivery by facsimile transmission, mail
or hand delivery or a properly transmitted agent's message and notice
of guaranteed delivery:
. stating your name and address, the registered number(s) of your old
notes and the principal amount of old notes tendered;
. stating that the tender is being made; and
. guaranteeing that, within three business days after the expiration
date, the letter of transmittal or facsimile thereof, together with
the old notes or a book-entry confirmation and any other documents
required by the letter of transmittal will be deposited by the
eligible guarantor institution with the exchange agent; and
. the exchange agent receives the properly completed and executed letter
of transmittal or facsimile thereof, as well as all tendered old notes
in proper form for transfer or a book-entry confirmation, and all other
documents required by the letter of transmittal, within three business
days after the expiration date.
36
Upon request to the exchange agent, the exchange agent will send you a
notice of guaranteed delivery if you wish to tender your old notes using the
guaranteed delivery procedures described above.
Withdrawal of Tenders
Except as otherwise provided in this prospectus, you may withdraw your
tender at any time before 5:00 p.m., New York City time, on the expiration date
unless previously accepted for exchange. For a withdrawal to be effective:
. the exchange agent must receive a written notice of withdrawal at one
of the addresses listed above under "Prospectus Summary--The Exchange
Agent"; or
. the withdrawing holder must comply with the appropriate procedures of
DTC's automated tender offer program system.
Any notice of withdrawal must:
. specify the name of the person who tendered the old notes to be
withdrawn (the "Depositor");
. identify the old notes to be withdrawn, including the registration
number or numbers and the principal amount of the old notes;
. be signed by the Depositor in the same manner as the original signature
on the letter of transmittal used to deposit those old notes or be
accompanied by documents of transfer sufficient to permit the trustee
for the old notes to register the transfer into the name of the
Depositor withdrawing the tender; and
. specify the name in which the old notes are to be registered, if
different from that of the Depositor.
If old notes have been tendered under the procedure for book-entry transfer
described above, any notice of withdrawal must specify the name and number of
the account at DTC to be credited with the withdrawn old notes and otherwise
comply with the procedures of DTC.
We will determine all questions as to the validity, form, eligibility and
time of receipt of notice of withdrawal, and our determination shall be final
and binding on all parties. We will deem any old notes so withdrawn not to have
been validly tendered for exchange for purposes of the exchange offer.
Any old notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder or, in the case of old notes tendered by book-entry transfer into the
exchange agent's account at DTC according to the procedures described above,
the old notes will be credited to an account maintained with DTC for the old
notes. This return or crediting will take place as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. Holders
may retender properly withdrawn old notes by following one of the procedures
described under "--Procedures for Tendering" above at any time on or before the
expiration date.
Fees and Expenses
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
37
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses. We may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this prospectus, letters of
transmittal and related documents to the beneficial owners of the old notes and
in handling or forwarding tenders for exchange.
We will pay the cash expenses to be incurred in connection with the exchange
offer, including:
. SEC registration fees;
. fees and expenses of the exchange agent and trustee;
. accounting and legal fees and printing costs; and
. related fees and expenses.
Transfer Taxes
We will pay all transfer taxes, if any, applicable to the exchange of old
notes under the exchange offer. The tendering holder, however, will be required
to pay any transfer taxes, whether imposed on the registered holder or any
other person, if:
. certificates representing old notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be issued in
the name of, any person other than the registered holder of old notes
tendered;
. tendered old notes are registered in the name of any person other than
the person signing the letter of transmittal; or
. a transfer tax is imposed for any reason other than the exchange of old
notes under the exchange offer.
If satisfactory evidence of payment of any transfer taxes payable by a note
holder is not submitted with the letter of transmittal, the amount of the
transfer taxes will be billed directly to that tendering holder.
Consequences of Failure to Exchange
If you do not exchange your old notes for new notes in the exchange offer,
your notes will remain subject to the existing restrictions on transfer. In
general, you may not offer or sell the old notes unless they are registered
under the Securities Act or the offer or sale is exempt from registration under
the Securities Act and applicable state securities laws. Except as required by
the registration rights agreement, we do not intend to register resales of the
old notes under the Securities Act. Based on interpretations of the SEC staff,
you may offer for resale, resell or otherwise transfer new notes issued in the
exchange offer without compliance with the registration and prospectus delivery
provisions of the Securities Act, if:
. you are not our "affiliate" within the meaning of Rule 144 under the
Securities Act;
. you acquired the new notes in the ordinary course of your business; and
. you have no arrangement or understanding with respect to the
distribution of the new notes to be acquired in the exchange offer.
38
If you tender in the exchange offer for the purpose of participating in a
distribution of the new notes:
. you cannot rely on the applicable interpretations of the SEC; and
. you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary
resale transaction.
Accounting Treatment
We will not recognize a gain or loss for accounting purposes upon the
consummation of the exchange offer. We will amortize expenses of the exchange
offer over the term of the new notes under accounting principles generally
accepted in the United States of America.
Other
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
We may, in the future, seek to acquire untendered old notes in open market
or privately negotiated transactions, through subsequent exchange offers or
otherwise. We have no present plans to acquire any old notes that are not
tendered in the exchange offer or to file a registration statement to permit
resales of any untendered old notes.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is not a complete description of our business
affairs. You should read it in conjunction with our financial statements and
the notes to those statements, which are included in, and incorporated by
reference into, this prospectus.
General
Pennzoil-Quaker State Company is the result of the spin-off of the
lubricants, consumer products and fast oil change operations of Pennzoil
Company and our acquisition of Quaker State Corporation in December 1998.
During 1999, we undertook a strategic review of some of our manufacturing
assets and commodity businesses, including our refining assets, non-branded and
non-consumer businesses and specialty industrial products businesses. During
the review, we evaluated the advantages and disadvantages of these assets and
businesses and their strategic importance to our objective. Based on the
results of our review, we decided to sell our refining assets and to exit our
non-branded and non-consumer businesses and specialty industrial products
businesses. Accordingly, our consolidated financial statements have been
restated to present the net assets and results of operations of these assets
and businesses as discontinued operations. For more information, see "--Non-
recurring Charges" and "--Discontinued Operations."
In the first quarter of 2001, we announced an organizational restructuring
of our segments. As a result of the restructuring, our businesses are
organized, managed and internally reported under five segments instead of the
previously reported three segments, namely lubricants and consumer products,
Jiffy Lube, and supply chain investments. We have organized our business by
products and services and will report going forward on the following basis:
. Lubricants;
. Consumer products;
. International;
. Jiffy Lube; and
. Supply chain investments.
Transactions between our reportable segments are recorded at market.
Intersegment sales are primarily from the supply chain investments segment to
the lubricants segment, from the lubricants segment to the Jiffy Lube segment
and from the consumer products segment to the international and lubricants
segments. We exclude interest expense and income tax expense or benefit from
segment profit or loss.
We are equal partners with Conoco Inc. in Excel Paralubes, which operates a
base oil processing facility located adjacent to Conoco's refinery in Lake
Charles, Louisiana. Conoco operates the plant with support positions staffed
primarily by Conoco.
Our revenues consist of net sales and other income, net. Net sales consist
primarily of sales of automotive consumer products, which include motor oils
and car care products, to retail and installed customers worldwide. Net sales
also include sales from company-owned Jiffy Lube(R) service centers and
royalties received from franchisee-operated Jiffy Lube(R) service centers.
Other income, net, consists primarily of equity earnings from our Excel
Paralubes joint venture,
40
gains and losses from asset sales, revenues from an insurance subsidiary,
results of our trade receivables sales program and other miscellaneous items.
Our largest raw material expenditures are base oils and additives for the
lubricants segment. Approximately 50% of our base oil requirements are obtained
internally from our Excel Paralubes joint venture. Our remaining requirements
are purchased at prices no higher than prevailing market prices. Additives are
readily available from a number of specialty chemical companies and,
historically, we have obtained additives from a range of suppliers. We
manufacture approximately 30% of our automotive consumer products and outsource
our remaining manufacturing needs to third-party contractors.
Under a co-products sale and purchase agreement between Conoco and Excel
Paralubes, certain co-products produced at an adjacent Conoco facility are
allocated to Excel Paralubes and Conoco based upon Excel Paralubes' feed stream
flow rates and compositions. Excel Paralubes recently determined that the
measurements of the allocation of co-products between Excel Paralubes and
Conoco had been in error since the commencement of Excel's Paralubes operations
in 1997. As a result of this error, previously reported pretax income of Excel
Paralubes for the year ended December 31, 2000 was overstated by $5.4 million
and for the year ended December 31, 1999 was overstated by $1.8 million.
Consequently, we have restated previously issued financial statements to reduce
our net income for the year ended December 31, 2000 by $1.6 million ($0.02 per
share) and for the year ended December 31, 1999 by $0.6 million ($0.00 per
share). There was no impact on reported cash flow or cash flows from
operations. Under the co-products sale and purchase agreement, no adjustment is
required for periods prior to 1999. Our share of results from Excel Paralubes'
operations are included in the results of operations of the supply chain
investments segment.
Non-recurring Charges
The following table sets forth the pretax charges we recorded during 1999,
2000 and 2001. A description of each type of material charge follows the table.
Year Ended
December 31,
------------------
1999 2000 2001
----- ----- ------
(dollars in
millions)
Charges related to:
. Acquisition and integration of Quaker State, and
strategic review of assets including sale and closure
of non-strategic assets................................ $89.0 $44.4 $ --
. 2000 general and administrative cost reduction plan.... -- 29.0 --
. 2001 cost reduction plan in lubricants, consumer
products, international segments (including
depreciation and amortization) and other............... -- -- 77.1
. Jiffy Lube asset impairment............................ -- -- 3.4
. Write-off of K-Mart receivables........................ -- -- 16.0
. Argentina currency devaluation......................... -- -- 5.9
. Litigation, loss on sale of assets and other........... 6.8 0.2 0.3
----- ----- ------
Total...................................................... $95.8 $73.6 $102.7
===== ===== ======
41
Acquisition-Related Charges; Strategic Review of Assets
In connection with the Quaker State acquisition, we incurred acquisition-
related costs of $75.1 million in 1999 and $34.4 million in 2000. These charges
were primarily the result of the consolidation and closure of various
facilities and the resolution of certain geographic overlap conflicts between
Jiffy Lube(R) and Q Lube(R) service centers acquired in the Quaker State
transaction.
During 1999, we completed a strategic review of the combined blending,
packaging and distribution assets of Pennzoil and Quaker State, including some
of our blending and packaging plants. In 2000, the lubricants segment recorded
a charge of $10.0 million related to the sale of two of our blending and
packaging plants. In 1999, the lubricants segment recorded a charge of $13.9
million related to the closure of the Rouseville blending and packaging plant.
See Note 2 of Notes to Consolidated Financial Statements for additional
information.
2000 General and Administrative Cost Reduction Plan Charges
In 2000, we implemented a general and administrative cost reduction plan. As
part of our plan, we decided to reduce the number of our employees and
consolidate office space in order to reduce general and administrative
expenses. In 2000, we recorded a pretax charge of $29.0 million associated with
the plan. The charge was allocated as follows: lubricants-- $8.1 million;
consumer products--$2.6 million; international--$0.3 million; Jiffy Lube--$1.0
million; and corporate and other--$17.0 million. Of these charges, $24.6
million relate to severance for approximately 400 administrative and
operational employees and the accrual of future lease obligations and
consolidation costs of office space in Houston. Also included in the charges
was the write-off of obsolete information technology assets. We expect to
complete our cost reduction efforts under this plan by the end of 2001.
Severance payments for the former employees are expected to be paid out over
a minimum period of two months and a maximum period of two years. For the year
ended December 31, 2000, approximately 400 employees had been terminated under
the 2000 cost reduction plan. The accrued liability at December 31, 2000
totaled $13.8 million. The accrued liability at the end of 2000 was reduced by
$11.5 million during 2001 and the remaining accrual at December 31, 2001
totaled $2.3 million.
2001 Cost Reduction Plan Charges
In 2001, we recorded a $77.1 million charge to accrue costs associated with
a restructuring program to reduce costs and streamline operations. As part of
the 2001 cost reduction plan, our lubricants segment took steps to reduce
manufacturing and selling expense. The consumer products segment consolidated
the management and administration of its two marketing groups into one
organization in Houston at the end of 2001. The international segment exited
low margin operations, facilities and distribution channels. The 2001 charges
related to the four operating segments are as follows: lubricants--$16.7
million; consumer products--$22.2 million; international--$34.1 million; and
other--$4.1 million. These charges primarily included severance for
approximately 670 administrative and operational employees. All of the
employees were terminated or were notified of a termination date by December
31, 2001. The severance payments for the former employees are expected to be
paid out over a minimum period of two months with a maximum period of up to two
years. As a result of these charges, we recorded a liability of $28.1 million
to reflect obligations for severance. The remaining total severance accrual at
December 31, 2001 was $17.1 million recorded in other current liabilities and
$2.8 million recorded in other liabilities. Included in the $34.1 million of
charges for the
42
international segment were charges of $6.5 million associated with the
impairment of goodwill. These charges are recorded in cost of sales; selling,
general and administrative expenses and depreciation and amortization expense
in the statement of operations.
Write-off of K-Mart receivables; Argentina Currency Devaluation
In 2001, we provided a $16.0 million charge to reflect an increase in the
allowance for doubtful accounts resulting from the Chapter 11 bankruptcy filing
of K-Mart. We are currently shipping products to K-Mart.
In 2001, we also provided a $5.9 million charge associated with our
operations in Argentina as a direct result of the year-end economic conditions
in that country and the subsequent currency devaluation. We have an office and
direct operations in Argentina that purchase products primarily from the United
States in U.S. dollars and sell locally to customers. Of the $5.9 million in
charges, $4.7 million was due to a foreign currency devaluation and $1.2
million was the result of an increase in the allowance for doubtful accounts as
a result of the impact of economic uncertainty on certain customers. We are
currently considering other changes in the Argentina operations. Options being
reviewed include the establishment of local sourcing of products, reduction in
size of current operations and change in sales mix between direct and
distributor sales. As of January 2002, our current investment in Argentina was
approximately $7 million.
43
Segment Information
Year Ended December 31,
----------------------------------
Restated
----------------------
1999 2000 2001
---------- ---------- ----------
(Expressed in thousands)
Net Sales
Lubricants(1)............................. $1,379,699 $1,426,604 $1,265,337
Consumer Products......................... 309,044 337,524 351,270
International............................. 214,139 250,587 251,108
Jiffy Lube(2)............................. 423,413 331,899 340,823
Supply Chain Investments(3)............... 164,334 277,492 300,569
Other..................................... 296 312 272
Intersegment Sales(4)..................... (180,869) (243,198) (233,225)
---------- ---------- ----------
$2,310,056 $2,381,220 $2,276,154
========== ========== ==========
Operating Income (Loss)(5)
Lubricants................................ $ 127,647 $ 139,985 $ 116,199
Consumer Products......................... 32,167 29,875 (9,291)
International............................. 11,877 11,237 (27,775)
Jiffy Lube(2)............................. (16,435) 23,591 24,180
Supply Chain Investments(3)............... 14,216 28,888 53,080
Charges Related to Asset Disposals and
Other.................................... (10,544) (9,472) (4,087)
---------- ---------- ----------
158,928 224,104 152,306
Corporate Administrative Expense.......... 81,808 108,330 62,263
Interest Expense.......................... 80,588 94,895 92,079
Income Tax Provision...................... 7,790 16,595 8,505
---------- ---------- ----------
Income (Loss) from Continuing
Operations............................. (11,258) 4,284 (10,541)
Discontinued Operations:
Loss from Operations, Net of Taxes...... (300,459) (51,665) --
Estimated Loss on Disposal, Net of
Taxes.................................. -- (40,431) (22,467)
---------- ---------- ----------
Loss before Extraordinary Item........ (311,717) (87,812) (33,008)
Extraordinary Item(6)................... -- -- (937)
---------- ---------- ----------
Net Loss.............................. $ (311,717) $ (87,812) $ (33,945)
========== ========== ==========
Identifiable Assets(7)
Lubricants................................ $ 953,370 $ 907,325 $ 851,106
Consumer Products......................... 530,500 587,136 598,609
International............................. 170,334 226,308 187,197
Jiffy Lube................................ 428,954 385,076 362,877
Supply Chain Investments.................. 30,560 27,306 38,211
Net Assets of Discontinued Operations..... 98,134 97,260 --
Other(8).................................. 526,435 570,656 658,317
---------- ---------- ----------
$2,738,287 $2,801,067 $2,696,317
========== ========== ==========
44
Year Ended December 31,
-------------------------
Restated
----------------
1999 2000 2001
-------- ------- --------
(Expressed in thousands)
Depreciation and Amortization
Lubricants........................................... $ 39,943 $40,095 $ 42,659
Consumer Products.................................... 13,289 13,506 15,989
International(9)..................................... 5,600 5,954 12,825
Jiffy Lube........................................... 33,060 24,879 25,365
Other................................................ 8,570 11,636 13,505
-------- ------- --------
$100,462 $96,070 $110,343
======== ======= ========
Capital Expenditures
Lubricants........................................... $ 16,600 $30,083 $ 22,802
Consumer Products.................................... 2,023 9,342 4,116
International........................................ 5,162 4,378 4,036
Jiffy Lube........................................... 18,481 23,033 14,556
Other(10)............................................ 28,338 11,655 6,356
-------- ------- --------
$ 70,604 $78,491 $ 51,866
======== ======= ========
- --------
(1) The decrease in net sales for the lubricants segment in 2001 was primarily
due to the sale of non-strategic businesses in 2000 and a decrease in
volumes sold.
(2) The decrease in net sales for the Jiffy Lube segment in 2000 was primarily
due to the sale of company-operated centers to franchisees. The operating
loss for the Jiffy Lube segment in 1999 is the result of $28.5 million of
acquisition expenses and $5.4 million of other charges.
(3) The increase in net sales for the supply chain investments segment in 2001
and 2000 is primarily due to an increase in base oil prices and an
increase in sales to outside parties. The increase in operating income is
the result of an increase in earnings from our equity interest in Excel
Paralubes.
(4) The increase in intersegment sales in 2000 compared to 1999 is due to an
increase of sales from the supply chain investments segment to the
lubricants segment primarily because of higher base oil prices.
(5) Included in 2001 operating income are charges of $77.1 million related to
the our restructuring program, $16.0 million to reflect an increase in the
allowance for doubtful accounts resulting from the Chapter 11 bankruptcy
filing of K-Mart, $4.7 million as the result of the currency devaluation
in Argentina, $1.2 million to reflect an increase in the allowance for
doubtful accounts resulting from the impact of economic uncertainty on
certain customers in Argentina and $3.7 million related to other matters.
2000 operating income includes $34.4 million in charges related to the
acquisition of Quaker State and $29.0 million in charges associated with a
general administrative cost reduction effort recorded in corporate
administrative expense. 1999 operating income includes $75.1 million in
charges related to the acquisition of Quaker State and $6.8 million in
charges for restructuring costs and other matters.
(6) During the year ended December 31, 2001, we chose to purchase and retire
$45.4 million face amount of indebtedness which resulted in an after-tax
extraordinary charge of $0.9 million ($1.5 million pretax), or $0.01 per
share. See Note 5 of Notes to Consolidated Financial Statements for
additional information.
(7) Identifiable assets include equity method investments other than Excel
Paralubes of $5.6 million at December 31, 2001, $5.1 million at December
31, 2000 and $4.5 million at December 31, 1999. Our net investment in
Excel Paralubes is carried as a credit balance in other liabilities in the
consolidated balance sheet. See Note 3 of Notes to Consolidated Financial
Statements for more information.
(8) The increase in other identifiable assets in 2001 compared to 2000 is
primarily due to an increase in cash and accounts receivable. Other
identifiable assets include consolidated deferred tax assets.
(9) Included in 2001 depreciation and amortization expense was $6.5 million
associated with the impairment of goodwill.
(10) Other capital expenditures primarily consist of building leasehold
upgrades.
45
Results of Operations
2001 Compared with 2000
Our net sales in 2001 decreased by $105.1 million, or approximately 4.4%,
compared to 2000. The decrease in net sales was primarily a result of the
disposition of non-strategic operating assets.
Loss from continuing operations was $10.5 million, or 13 cents per basic
share, in 2001, compared to income from continuing operations of $4.3 million,
or 5 cents per basic share in 2000. Results from continuing operations in 2001
included charges of $102.7 million primarily associated with a comprehensive
restructuring program in our lubricants, consumer products, and international
segments.
Results from continuing operations in 2000 included charges of $73.6
million. Included in these charges were $10.0 million in charges associated
with the sale of our Carson and San Antonio blending and packaging plants,
$34.4 million of costs associated with our acquisition of Quaker State, $29.0
million in charges associated with a general and administrative cost reduction
plan and $0.2 million for other matters.
In 2001, we recorded a $77.1 million charge to accrue costs associated with
a restructuring program to reduce costs and streamline operations. As part of
the 2001 cost reduction plan, our lubricants segment took steps to reduce
manufacturing and selling expense. The consumer products segment consolidated
the management and administration of its two marketing groups into one
organization in Houston at the end of 2001. The international segment exited
low margin operations, facilities and distribution channels. The 2001 charges
related to the four operating segments are as follows: lubricants--$16.7
million; consumer products--$22.2 million; international--$34.1 million; and
other--$4.1 million. These charges primarily included severance for
approximately 670 administrative and operational employees. All of the
employees were terminated or were notified of a termination date by December
31, 2001. The severance payments for the former employees are expected to be
paid out over a minimum period of two months with a maximum period of up to two
years. As a result of these charges, we recorded a liability of $28.1 million
to reflect obligations for severance. The remaining total severance accrual at
December 31, 2001 was $17.1 million recorded in other current liabilities and
$2.8 million recorded in other liabilities. Included in the $34.1 million of
charges for the international segment were charges of $6.5 million associated
with the impairment of goodwill. These charges are recorded in cost of sales;
selling, general and administrative expenses and depreciation and amortization
expense in the statement of operations.
In 2000, we implemented a general and administrative cost reduction plan. As
part of our plan, approximately 400 employees were terminated and office space
was consolidated. In 2000, we recorded a charge of $29.0 million associated
with the plan. The accrued liability at December 31, 2000 totaled $13.8
million. The accrued liability at the end of 2000 was reduced by $11.5 million
during 2001 and the remaining accrual at December 31, 2001 totaled $2.3
million.
During 2001, we chose to purchase and retire $45.4 million face amount of
our notes due in 2002, and, as a result, recorded an extraordinary charge of
$0.9 million ($1.5 million pretax), or $0.01 per share. Reference is made to
"--Capital Resources and Liquidity" for additional information.
Lubricants. Net sales for the lubricants segment were $1,265.3 million in
2001 compared to $1,426.6 million in 2000. The 11.3% decrease in net sales was
primarily due to the sale of non-
46
strategic operating assets in 2000 and 2001 and lower sales from remaining
assets as a result of continued softness in the passenger car motor oil market.
Operating income for the lubricants segment was $116.2 million in 2001 compared
to $140.0 million in 2000. Operating income in 2001 included charges of $21.1
million related to the restructuring program and an increase in the allowance
for doubtful accounts resulting from the Chapter 11 bankruptcy filing of K-
Mart. Operating income in 2000 included charges of $16.2 million related to the
Quaker State acquisition. The decrease in operating income is primarily due to
lower sales volumes as a result of continued softness in the passenger car
motor oil market.
Consumer Products. Net sales for the consumer products segment were $351.3
million in 2001 compared to $337.5 million in 2000. The 4.1% increase in net
sales was primarily due to increased automotive seat cover revenues as a result
of the acquisition of Sagaz Industries in early March 2000, partially offset by
lower revenues from car wash and car cleaner products. Operating loss for this
segment in 2001 was $9.3 million compared to $29.9 million in operating income
in 2000. The operating loss for 2001 included charges of $33.8 million related
to the restructuring program and an increase in the allowance for doubtful
accounts resulting from the Chapter 11 bankruptcy filing of K-Mart. Operating
income decreased as a result of lower margins negatively impacted by increased
costs, a less profitable product mix and increased promotional activities.
International. Net sales for the international segment were $251.1 million
in 2001 compared to $250.6 million in 2000. Higher lubricant product sales
prices and higher consumer car care products volumes due to acquisitions
completed in 2000 were partially offset by lower lubricant product sales
volumes. Operating loss in the international segment in 2001 of $27.8 million,
compared to operating income of $11.2 million in 2000, was primarily the result
of restructuring charges, the economic crisis in Argentina and lower product
margins partially offset by extensive reductions in selling, general and
administrative expenses.
During 2001, the international segment extensively reviewed and restructured
its global operations. This restructuring included the termination of
employees, the closure and consolidation of warehouses and customer
rationalization. Included in the 2001 results were charges of $34.1 million
resulting from the restructuring.
Also included in the 2001 results were charges of $5.9 million associated
with our operations in Argentina as a direct result of the year-end economic
conditions in that country and the subsequent currency devaluation. We have an
office and direct operations in Argentina that purchase products primarily from
the United States in U.S. dollars and sells locally to customers. Of the $5.9
million in charges, $4.7 million was due to a foreign currency devaluation and
$1.2 million was the result of an increase in the allowance for doubtful
accounts as a result of the impact of economic uncertainty on certain
customers. We are currently considering other changes in the Argentina
operations. Options being reviewed include the establishment of local sourcing
of product, reduction in size of current operations and change in sales mix
between direct and distributor sales. As of January 2002, our current
investment in Argentina was approximately $7 million.
Jiffy Lube. Net sales for the Jiffy Lube segment were $340.8 million in 2001
compared to net sales of $331.9 million in 2000. The 2.7% increase in net sales
is primarily due to higher comparable store sales resulting from higher average
ticket prices attributable to increased sales of additional products and
services. System-wide sales increased $81.4 million to $1,267.1 million in 2001
compared to $1,185.7 million in 2000 as a result of an increased number of
service centers open and an increase in the average ticket price. System-wide
average ticket prices increased to $43.41 in 2001, compared with $40.23 in
2000, also as a result of increased
47
sales of additional products and services. There were 2,157 service centers
(including 465 company-operated service centers) open in the United States as
of December 31, 2001. Operating income for the Jiffy Lube segment was $24.2
million in 2001 compared to $23.6 million in 2000.
During 2001, the Jiffy Lube segment acquired 18 centers for $2.3 million in
cash and $0.6 million in receivables compared to six centers for $4.3 million
in cash in 2000. During 2001, one real estate site was acquired for $0.5
million in cash compared to five real estate sites for $1.4 million in cash and
a note payable of $0.1 million in 2000. During 2001, the Jiffy Lube segment
sold 21 centers for $2.0 million in cash and notes compared to the sale of 36
centers for $4.7 million in cash and notes in 2000. During 2001, 26 real estate
sites were sold for $10.4 million in cash and notes compared to 19 real estate
sites for $6.3 million in cash and notes in 2000. In addition, 13 centers were
closed in 2001 compared to 38 centers in 2000.
Supply Chain Investments. Net sales for the supply chain investments
segment, primarily intercompany sales to the lubricants segment, were $300.6
million in 2001 compared to net sales of $277.5 million in 2000. The 8.3%
increase in net sales in 2001 compared to 2000 was primarily due to higher base
oil prices and sales volumes. Other income for the supply chain investments
segment for 2001 was $36.5 million compared to $16.2 million for 2000. Other
income primarily represents the earnings from our Excel Paralubes partnership
with Conoco. Our partnership earnings are recorded using the equity method of
accounting. The increase in equity income reflects Excel Paralubes' increased
base oil prices and sales volumes. Operating income for this segment was $53.1
million for 2001 compared to $28.9 million for 2000. The increase in income was
due to higher equity earnings from Excel Paralubes in 2001 as a result of
higher base oil margins and higher volumes in 2001 compared to 2000. Volumes
were lower in 2000 as a result of scheduled maintenance downtime at Excel
Paralubes in the fourth quarter of 2000.
Other. Other operating loss for 2001 was $4.0 million compared to operating
income of $0.5 million for 2000. The operating loss in 2001 is primarily the
result of charges taken for losses related to the sale of receivables and
losses incurred in our captive insurance subsidiary that reinsures our workers'
compensation, automobile and general liability programs. The decrease in
operating income for 2001 compared to 2000 was primarily due to gains on sale
of assets in 2000.
Corporate Administrative Expense. Corporate administrative expenses for 2001
were $62.3 million compared to $108.3 million for 2000. Corporate
administrative expenses for 2000 included $38.8 million charges related to a
general and administrative cost reduction effort and acquisition related
expenses.
2000 Compared with 1999
Our net sales in 2000 increased by $71.2 million, or 3.1%, to $2,381.2
million, compared to 1999. Net sales increased by 3% in the lubricants segment,
9% in the consumer products segment, 17% in the international segment and 69%
in the supply chain investments segment. Net sales in the Jiffy Lube segment
decreased 22%, reflecting fewer company-operated service centers in operation
during 2000.
Net income from continuing operations was $4.3 million in 2000 compared to a
net loss of $11.2 million in 1999. Results from continuing operations for 2000
included charges of $73.6 million. Included in these charges were $10.0 million
related to the sales of our Carson and San Antonio blending and packaging
plants, $34.4 million of costs associated with our acquisition of
48
Quaker State, $29.0 million in charges associated with the 2000 general and
administrative cost reduction plan and $0.2 million for other matters. Results
from continuing operations for 1999 included charges of $95.8 million. Included
in these charges were $75.1 million due to costs associated with the
acquisition of Quaker State, $13.9 million due to costs associated with the
closure of the Rouseville blending and packaging plant and $6.8 million in
restructuring costs and other matters.
Lubricants. Net sales for the lubricants segment in 2000 increased by $46.9
million, or 3%, to $1,426.6 million, compared to $1,379.7 million in 1999. The
increase in nets sales in 2000 compared to 1999 was primarily due to higher
average lubricant product prices. Operating income from this segment was $140.0
million for 2000 compared to $127.6 million for 1999. Operating income from
this segment in 2000 included $16.2 million of expenses associated with the
acquisition of Quaker State. Operating income from this segment in 1999
included $20.5 million of charges associated with the acquisition of Quaker
State.
Consumer Products. Net sales for the consumer products segment in 2000
increased by $28.5 million, or 9%, to $337.5 million, compared to $309.0
million in 1999. The increase in net sales for 2000 compared to 1999 was
primarily due to higher product sales volumes. Operating income from this
segment was $29.9 million for 2000 compared to $32.2 million for 1999.
Operating income in 2000 was reduced by $4.3 million of expenses associated
with the acquisition of Quaker State compared to $3.0 million of such expenses
in 1999.
International. Net sales for the international segment were $250.6 million
in 2000 compared to net sales of $214.1 million in 1999. The increase in net
sales in 2000 compared to 1999 is primarily due to acquisitions completed
toward the end of the first quarter of 2000 and higher lubricating product
prices. Operating income for this segment was $11.2 million in 2000 compared to
$11.9 million in 1999. The decrease in operating income was primarily due to
lower margins resulting from higher lubricant costs.
Jiffy Lube. Net sales recorded by the Jiffy Lube segment decreased 22% in
2000 compared to 1999. The decrease in net sales was primarily due to the sale
of company-operated centers to franchisees. Net sales reported by the Jiffy
Lube segment consist of sales revenues from company-operated service centers,
franchise fees, royalty revenues and rental income. System-wide sales increased
$85.2 million to $1,185.7 million in 2000 compared to $1,100.5 million in 1999
as a result of an increased number of service centers open and an increase in
the average ticket price. System-wide average ticket prices increased to $40.23
in 2000 compared with $37.49 in 1999 as a result of increased sales of
additional products and services. There were 2,143 service centers (including
480 company-operated service centers) open in the United States as of December
31, 2000. Jiffy Lube reported operating income of $23.6 million in 2000
compared to an operating loss of $16.4 million in 1999. Included in 2000
results are charges of $4.3 million for acquisition expenses and in 1999
results are charges of $33.9 million for acquisition, legal and other expenses.
The increase in operating income in 2000 is primarily due to higher rent and
royalty income and lower selling, general and administrative costs.
In 2000, the Jiffy Lube segment acquired six centers for $4.3 million in
cash compared to 32 centers for $26.2 million in cash in 1999. In 2000, five
real estate sites were acquired for $1.4 million in cash and a note payable of
$0.1 million compared to none in 1999. In 2000, the Jiffy Lube segment sold 36
centers for $4.7 million in cash and notes compared to the sale of 423 centers
for $82.1 million in cash and notes in 1999. In 2000, 19 real estate sites were
sold for $6.3 million in cash and notes compared to the sale of four real
estate sites for $1.4 million in cash and notes in 1999. In addition, 38
centers were closed in 2000, compared to 120 centers closed in 1999.
49
Supply Chain Investments. Net sales for the supply chain investments
segment, primarily intercompany sales to the lubricants segment, were $277.5
million in 2000, compared to net sales of $164.3 million in 1999. The 69%
increase in net sales in 2000 compared to 1999 was primarily due to higher base
oil prices. Other income for the supply chain investment segment in 2000 was
$16.2 million compared to $6.4 million in 1999. Other income is primarily the
earnings from the Excel Paralubes partnership with Conoco, which is recorded
using the equity method of accounting. The increase in equity income also
reflects increased margins due to higher base oil prices relative to supply
costs. Operating income from this segment was $28.9 million in 2000 compared to
$14.2 million in 1999. The increase in operating income was primarily due to
higher base oil margins.
Other. Other operating income in 2000 was $0.5 million, compared to $3.4
million in 1999. The decrease in 2000 compared to 1999 was primarily due to
lower income from our captive insurance subsidiary.
Corporate Administrative Expense. Corporate administrative expenses in 2000
were $108.3 million compared to $81.8 million in 1999. The increase in 2000
compared to 1999 is primarily due to charges associated with a general and
administrative cost reduction effort, partially offset by lower merger related
expenses.
Discontinued Operations
Our after-tax loss from discontinued operations was $51.7 million ($85.4
million pretax) for the year ended December 31, 2000 and $300.5 million ($496.6
million pretax) for the year ended December 31, 1999. Our estimated after-tax
loss on disposal of discontinued operations was $22.5 million ($37.1 million
pretax) in 2001 and $40.4 million ($66.8 million pretax) in 2000.
During 2000, we completed a strategic review of our manufacturing assets,
including our refining assets and speciality business. During the review, we
evaluated the strategic and financial advantages and disadvantages we derive
from the vertical integration of our manufacturing and marketing capabilities.
Based on the results of this review, we began to withdraw from the refining
business and to dispose of our refineries and related assets. In 2001 and 2000,
we ceased processing crude oil at our Rouseville refinery, and sold the wax
processing facilities and related assets at the Rouseville refinery and our
interest in the Bareco wax marketing partnership, our share of Penreco, a
specialty industrial products partnership with Conoco and our Shreveport
refinery to Calumet, thus completing our exit from the refining business.
Accordingly, the net assets and results of operations of our refining assets
and specialty industrial products businesses have been combined and reported as
discontinued operations in the accompanying financial statements.
The following table presents financial information for discontinued
operations. Following the table, we describe some of the actions we have taken
as a result of our strategic review.
Year Ended
December 31,
----------------------
1999 2000 2001
------- ------- ----
(dollars in
millions)
Pretax charges related to discontinued operations........ $(490.7) $(150.5) --
In January 2002, we entered into an agreement to pay $20.3 million to
terminate a contract that had required us to continue to supply feedstocks to
operations that had been discontinued and sold. This charge, which represented
an increase in the cost originally estimated to terminate this arrangement, was
recorded as a 2001 adjustment to the estimated
50
loss on the disposition of discontinued operations. We also increased our
estimate of other accruals related to discontinued operations by $10.2 million
($16.8 million pretax) in 2001 and recorded the adjustment as additional
estimated loss on disposition. During 2000, as a result of the Shreveport
refinery disposition, we recorded a pretax charge of $131.3 million related to
(a) $9.3 million in fixed asset impairments, (b) $34.6 million in environmental
costs, (c) $59.1 million for working capital writedowns, (d) $26.7 million in
contract buyouts, and (e) $1.6 million in other disposal costs.
Included in discontinued operations for 1999 is a pretax charge of $445.9
million under SFAS No. 121 to reflect the write-down of our Rouseville and
Shreveport refineries. In addition, we also accrued (a) $7.3 million in
severance costs (b) $12.0 million in environmental costs for cleanup and
removal of tanks and equipment and (c) $14.8 million in other disposal costs.
We estimate the remaining cash used by these businesses to be $17.8 million
in 2002, $8.0 million in 2003 and $21.0 million thereafter.
Disclosures about Market Risk
We are exposed to market risk, including adverse changes in interest rates,
commodity prices and foreign currency exchange rates.
Interest. At December 31, 2001, the fair value of the our long-term debt was
estimated to be $1,037.6 million using quoted market prices or, where such
prices were not available, discounted future cash flows based on estimated
year-end interest rates of debt with the same remaining average maturities and
credit quality. The carrying amount of the long-term debt at December 31, 2001
exceeded its fair value by $98.7 million. A hypothetical 10 percent adverse
change in market interest rates relative to the aforementioned securities would
not have had a material effect on our results of operations for the fiscal year
ended December 31, 2001.
At December 31, 2001, the fair value of our notes receivable was estimated
to be $61.3 million using discounted future cash flows based on estimated year-
end interest rates at which similar loans have been made to borrowers with
similar credit ratings for the same remaining maturities. The carrying amount
of the notes receivable at December 31, 2001 exceeded its fair value by $8.5
million. A hypothetical 10 percent adverse change in market interest rates
relative to the aforementioned securities would not have had a material effect
on our results of operations for the fiscal year ending December 31, 2001.
Hedging Activities. We enter into forward exchange contracts to reduce the
impact of foreign currency fluctuations on certain monetary liabilities and
commitments denominated in foreign currencies. The purpose of entering into
these contracts is to minimize the impact of foreign currency fluctuations on
the results of operations. The unrealized gains and losses on these contracts
are deferred and recognized in the results of operations in the period in which
the hedged transaction is consummated. During the year ended December 31, 2001,
our Canadian and French subsidiaries entered into Canadian dollar and French
franc foreign currency forward contracts to reduce the cash flow variability of
U.S. dollar purchases of inventory. We designated these forward contracts as
cash flow hedges. Under Statement of Financial Accounting Standards ("SFAS")
No. 133, gains and losses on the forward contracts are recorded in other
comprehensive income and then reclassified to earnings as the inventory is
sold. As of December 31, 2001, we had unrealized gains of $0.1 million
associated with outstanding forward currency contracts. As of December 31,
2001, we had $6.3 million of foreign currency forward contracts utilized to
minimize foreign currency fluctuations.
51
In connection with the issuance of $150.0 million of two-year fixed rate
notes in December 2000, we entered into a fixed to floating interest rate swap
to maintain our mix of variable rate and fixed rate debt. We designated the
swap as a fair value hedge and changes in the fair value are recognized
currently in earnings. At December 31, 2001, $104.5 million of the swap
remained outstanding and if terminated at that date, we would have received
$3.8 million from the swap counterparty.
In January 2002, we entered into interest rate swaps relating to the $100.0
million of our 6.625% notes due 2005 to adjust the mix of variable rate and
fixed rate debt. The swaps were designated as fair value hedges and changes in
the fair value will be recognized in earnings.
Exchange and Commodity Risks. We may seek to limit foreign currency exchange
risks through the use of foreign currency borrowings and foreign currency
forward contracts when practical. We may seek to limit commodity risks through
the use of commodity forward contracts and options when practical. We cannot be
sure that these strategies, if implemented, will be successful.
Purchases from Excel Paralubes
We have a long-term agreement with Excel Paralubes to purchase 50% of its
base oil production volume from Excel Paralubes, or approximately 58% of our
requirements, at contract rates based on prevailing market prices. If we fail
to purchase our contracted minimum volumes from Excel Paralubes, we are
obligated to pay to Excel Paralubes the profits that we would have earned had
we made such purchases. Base oil purchases from Excel Paralubes, net of
rebates, were $163.0 million for 2001, $149.8 million for 2000 and $106.9
million for 1999.
Interest Charges, Net
Consolidated interest expense of $92.1 million in 2001 decreased $2.8
million, or 3%, compared to 2000, primarily as a result of lower average debt
balances and lower interest rates.
Consolidated interest expense of $94.9 million in 2000 increased $14.3
million, or 18%, compared to 1999. The increase was primarily due to an
increase in average long-term debt balances and interest rates.
Capital Resources and Liquidity
Liquidity. Our ability to satisfy our debt obligations and to pay principal
and interest on our debt, fund working capital and make capital expenditures
will depend upon our future performance, which is subject to general economic
conditions and other factors, some of which are beyond our control. Based on
current and anticipated levels of operations and conditions in the automotive
consumer products markets, we believe that cash flow from operations will be
adequate for the foreseeable future to make required payments of interest on
debt and fund working capital and capital expenditure requirements. In
addition, we have sufficient availability under our credit facilities to fund
principal maturities, working capital needs and capital expenditures if
necessary. In the event of cash flow constraints, capital expenditures could be
postponed to fund other obligations if required. Beginning in the third quarter
of 2001, we reduced our dividend to the equivalent of $0.10 per share annually.
Cash Flow. For purposes of the consolidated statement of cash flows, all
highly liquid investments purchased with a maturity of three months or less are
considered to be cash equivalents. The effect of changes in foreign exchange
rates on cash balances has been immaterial. We had cash and cash equivalents of
$86.4 million at December 31, 2001, $38.3
52
million at December 31, 2000 and $20.2 million at December 31, 1999. Cash flow
generated from operating activities before changes in operating assets and
liabilities was $134.4 million for the year ended December 31, 2001, $144.7
million for the year ended December 31, 2000 and $133.8 million for the year
ended December 31, 1999. Our cash flow from operations for the year ended
December 31, 2001 decreased $19.0 million compared to the same period in 2000,
and cash flow from operations for the year ended December 31, 2000 increased
$82.3 million compared to the same period in 1999. The decrease in cash
provided by operating activities during 2001 is due to an increase in working
capital as a result of higher inventories and payments associated with
severance and discontinued operations.
Capital Expenditures. Capital expenditures were $51.9 million in 2001, $78.5
million in 2000 and $70.6 million in 1999. Our 2002 capital budget is estimated
to be approximately $80.0 million.
Net Operating Loss Carryforward. As of December 31, 2001, we had a United
States net operating loss carryforward of approximately $471.4 million, which
is available to reduce future federal income taxes payable. Additionally, for
the purposes of determining alternative minimum tax, an approximate $535.7
million net operating loss is available to offset future alternative minimum
taxable income. If not used, these carryovers will expire in years 2009 and
2018 to 2021. In addition, we also have a separate return limitation loss of
$4.0 million and an approximate $2.6 million net operating loss which is
available to offset alternative minimum taxable income. Utilization of the
separate return net operating losses, to the extent generated in separate
return years, is limited based on the separate taxable income of the
subsidiary, or our successor, generating the loss. If not used, these
carryovers will expire in the years 2004 to 2007. A valuation allowance of
approximately $1.4 million has been established to offset the portion of the
deferred tax asset related to the separate return limitation losses expected to
expire before their utilization. In addition, we have approximately $17.0
million of alternative minimum tax credits indefinitely available to reduce
regular tax liability to the extent we exceed the related alternative minimum
tax otherwise due. All net operating loss and credit carryover amounts are
subject to examination by tax authorities. We also have state net operating
loss carryforwards, the tax effect of which was approximately $60.8 million as
of December 31, 2001. A valuation allowance of approximately $14.6 million has
been established to offset the portion of this deferred tax asset related to
state tax loss carryforwards expected to expire before their utilization. We
have a net deferred tax asset of $302.3 million as of December 31, 2001 and we
believes that we will generate sufficient future taxable income to realize this
asset.
Accounts Receivable. Current receivables include trade accounts and notes
receivable and are net of allowances for doubtful accounts of $37.0 million at
December 31, 2001 and $23.9 million at December 31, 2000. Long-term receivables
consist of notes receivable and are net of allowances for doubtful accounts of
$0.9 million at December 31, 2001 and $1.8 million at December 31, 2000. In
2001, we provided a $16.0 million charge to reflect an increase in the
allowance for doubtful accounts resulting from the Chapter 11 bankruptcy filing
of K-Mart and $1.2 million to reflect an increase in the allowance for doubtful
accounts resulting from the impact of economic uncertainty on certain customers
in Argentina. We are currently shipping products to K-Mart.
We sell, through our wholly owned subsidiary, Pennzoil Receivables Company
("PRC"), certain of our accounts receivable to a third party. PRC is a limited
purpose corporation and its assets are available solely to satisfy the claims
of its own creditors and not those of our creditors or our affiliates. The
receivables sales facility was renewed in November 2001 and
53
provides for ongoing sales of up to $110.0 million of accounts receivable until
April 15, 2002 and $85.0 million thereafter until the facility expires on
October 14, 2002. Our net accounts receivable sold under this facility totaled
$110.0 million at December 31, 2001 and $149.1 million at December 31, 2000.
Current receivables included notes receivable of $20.7 million at December
31, 2001 and $15.2 million at December 31, 2000. Other assets included long-
term notes receivable of $49.1 million at December 31, 2001 and $36.3 million
at December 31, 2000. The long-term receivables are loans that are made to
customers to enhance their operations, including updating and replacing signage
and acquiring point-of-sale equipment. Each loan requires a promissory note
between the customer and us, and most require payment of principal and
interest. Similar to other incentive programs, product sales agreements
normally accompany the loans. The average interest rate applicable to long-term
notes receivable was 5.6% during 2001 and 2000.
We maintain a lube center receivable purchase and sale agreement, which
provides for the sale of certain notes receivable up to $275.0 million to third
parties through a wholly owned subsidiary, Pennzoil Lube Center Acceptance
Corporation ("PLCAC"). The program is used to assist purchasers of our
lubricants products in obtaining favorable long-term financing. The lubricant
customers are the primary obligors on the long-term loans. The cumulative sales
amount limit was increased in June 2000 from $220.0 million to $275.0 million.
The assets of PLCAC are available solely to satisfy the claims of its own
creditors and not those of our creditors or our affiliates. The agreement
terminates on March 13, 2004 or on the date on which the aggregate purchase
price reaches $275.0 million. Through December 31, 2001, we sold a total of
$233.3 million of notes receivable under this agreement, of which $145.5
million were outstanding to the third party purchaser at December 31, 2001.
Through December 31, 2000, we sold a total of $220.2 million of notes
receivable under this agreement, of which $159.0 million were outstanding to
the third party purchaser at December 31, 2000.
Inventory. We had inventory of $199.6 million at December 31, 2001 and
$187.0 million at December 31, 2000. The increase in inventory is primarily due
to the fourth quarter 2000 scheduled maintenance downtime at Excel Paralubes
which forced a drawdown in volumes as usage exceeded production and higher
inventory in the consumer products segment in 2001 compared to 2000.
During 2000, 30% of the domestic lubricants inventory was liquidated as a
result of an initiative to reduce overall lubricant and motor oil inventory
levels. We began consolidating distribution centers in 2000 and utilizing new
forecasting methods in order to decrease the amount of inventory on hand needed
to meet customer needs.
The disposition of our remaining refining assets and specialty industrial
products businesses in 2001 resulted in a significant change in the components
of our inventory. We no longer purchase crude oil for refining and do not carry
crude oil or fuels in inventory. In 2000, the crude oil and fuels inventories
were included in discontinued operations. The remaining inventories are
primarily base oils, lubricants and consumer products.
Credit Facilities and Other Obligations. In November 2001, we entered into a
$348 million senior secured revolving credit facility. Under the facility, $325
million is available on a revolving basis until November 2, 2004 and $23
million is available on a revolving basis until November 1, 2002. The credit
facility also provides for letters of credit and borrowings in currencies other
than U.S. Dollars.
54
Borrowings under the credit facility bear interest at a rate equal to the
sum of the base rate or a Eurodollar rate plus an applicable percentage which
is based on our consolidated total leverage ratio, as defined in the credit
facility. We had no outstanding borrowings under this new facility at December
31, 2001.
The credit facility is secured by certain of our receivables, intellectual
property (including trademarks, tradenames, copyrights and patents), inventory,
and a pledge of our common stock ownership of certain of our major
subsidiaries. The credit facility is also unconditionally guaranteed by certain
of our subsidiaries. The security and guarantees are shared on an equal basis
with certain other debt totalling $931.8 million at December 31, 2001.
The covenant provisions of the credit facility require us to maintain
certain specified financial ratios and consolidated net worth and contain other
customary covenants, including covenants which limit our and our subsidiaries'
ability to (i) incur additional debt or issue subsidiary preferred stock, (ii)
increase aggregate dividends on our capital stock above a certain amount, (iii)
redeem or repurchase capital stock, (iv) engage in transactions with
affiliates, except on an arms-length basis, (v) create liens or engage in sale
and leaseback transactions, (vi) make some types of investments and sell
assets, and (vii) consolidate or merge with, or sell substantially all of our
assets to, another person. Our ability to meet the financial ratios and tests
can be affected by events beyond our control. The breach of these covenants
could permit the lenders to declare the loans immediately payable and to
terminate future lending commitments. If we were unable to repay those amounts,
the lenders under our credit facility could proceed against the collateral
granted to them to secure that indebtedness. We were in compliance with all
covenant provisions at December 31, 2001.
In November 2001, we issued $250 million of 10% Senior notes due 2008. Net
proceeds of $237 million, after deducting fees and expenses, including fees and
expenses related to the new revolving credit facility, were used to pay down
all $215 million outstanding under our previous revolving credit facility and
increase cash on hand.
The indenture under which the 10% notes were issued contains covenants that,
subject to exceptions, restrict our ability and that of our subsidiaries to (i)
incur additional debt or issue subsidiary preferred stock, (ii) increase
aggregate dividends on our capital stock above a certain amount, (iii) redeem
or repurchase capital stock, (iv) engage in transactions with affiliates,
except on an arms-length basis, (v) create liens or engage in sale and
leaseback transactions, (vi) make some types of investments and sell assets,
and (vii) consolidate or merge with, or sell substantially all of its assets
to, another person. Some of the covenants will no longer apply if the notes
achieve specified credit ratings. The notes are unconditionally guaranteed by
certain of our subsidiaries that also guarantee the credit facility. There are
no significant restrictions on the ability of our subsidiaries to make
distributions to us. The breach of these covenants could permit the holders to
declare the notes immediately payable. We were in compliance with all covenant
provisions at December 31, 2001.
Prior to November 2001, we had a revolving credit facility with a group of
banks that provided for up to $450.0 million of committed unsecured revolving
credit borrowings through December 13, 2001, with any outstanding borrowings on
such date being converted into a term credit facility terminating on December
13, 2002. The revolving credit facility contained a covenant relating to net
worth, and we were in compliance as of December 31, 2000. There were borrowings
of $195.0 million outstanding under this revolving credit facility at
December 31, 2000. The average interest rate applicable to borrowings under the
revolving credit facility was 5.7% in 2001 and 7.5% during 2000. The net
proceeds of the $250.0 million 10% senior notes due 2008 were used to repay
borrowings outstanding under the revolving credit facility and the revolving
credit facility was terminated upon completion of that offering.
55
Prior to December 2000, we primarily used our commercial paper program to
manage our cash flow needs. During December 2000, we began using our revolving
credit agreement in place of the commercial paper program. Borrowings under
commercial paper facilities totaled $57.7 million at December 31, 2000. The
average interest rate applicable to outstanding commercial paper was 6.8%
during 2000.
In December 2000, we issued $150.0 million of 8.65% notes due 2002. Net
proceeds of $149.1 million were used to reduce our commercial paper borrowings.
The terms of the notes provide that, in the event a rating on our senior
unsecured debt falls and remains below investment grade, the coupon on the
notes increases 0.75% to 9.40% and each noteholder has the option, at any time
on or after June 1, 2001, to require us to purchase its note at 100% of the
principal amount thereof plus accrued and unpaid interest. During the year
ended December 31, 2001, Standard and Poor's, Moody's and Fitch lowered the
senior unsecured debt rating for our debt below investment grade. The notes,
which are carried at fair market value due to the interest rate swaps discussed
below, are currently trading above 100% face value plus accrued interest.
During 2001, we chose to purchase and retire $45.4 million face amount of the
9.40% notes due in 2002 and, as a result, recorded an extraordinary charge of
$0.9 million ($1.5 million pretax), or $0.01 per share. As of December 31,
2001, the $108.3 million carrying amount of indebtedness under our 9.40% notes
due 2002 (formerly 8.65% notes due 2002) has been classified as short-term. We
intend to use cash on hand and cash from operations to retire the notes upon
maturity in December 2002.
In connection with the issuance of $150.0 million of two-year fixed rate
notes in 2000, we entered into a fixed to floating interest rate swap to
maintain our mix of variable rate and fixed rate debt. We designated the swap
as a fair value hedge and changes in the fair value are currently recognized in
earnings. If the swap had been terminated at December 31, 2001, we would have
received $3.8 million from the swap counterparty. Under SFAS No. 133, the swap
is designated as a hedge of the changes in the fair value of the fixed-rate
debt attributable to changes in the market interest rates. Beginning January 1,
2001, the swap was recognized at its fair value as an asset in our balance
sheet and was marked to fair value through earnings. The interest-related
changes in the debt's fair value are also recognized in earnings.
In connection with the acquisition of Quaker State Corporation in December
1998, we assumed the obligation for $100 million of Quaker State's 6.625% notes
due 2005. In January 2002, we entered into interest rate swaps relating to its
6.625% notes due 2005 to adjust the mix of variable rate and fixed rate debt.
The swaps were designated as fair value hedges and changes in the fair value
will be recognized in earnings.
Our Canadian subsidiary has a revolving credit facility with two Canadian
banks that provides for borrowings of up to US$8.9 million through October
2002. Outstanding borrowings under the credit facility totaled US$7.5 million
at December 31, 2001. Previously, the credit facility provided for borrowings
of up to US$18.0 million and US$13.3 million was outstanding at December 31,
2000. The average interest rates applicable to amounts outstanding under the
credit facility were 5.3% during 2001 and 6.2% during 2000. Principal and
interest are payable in Canadian dollars.
During 2000, our U.K. subsidiary entered into a revolving credit facility
with a bank that provides for borrowings of up to US$20.4 million through July
26, 2002. Outstanding borrowings under the credit facility totaled US$6.7
million at December 31, 2001 and US$17.4 million at December 31, 2000. The
average interest rate applicable to amounts outstanding under the facility was
6.3% during 2001 and 6.7% during 2000. Principal and interest are payable in
pounds sterling.
56
Borrowings under the Canadian and U.K. revolving credit facilities are
classified as short-term debt.
We had a total of $50.6 million, net of discount, in pollution control bonds
issued by three authorities. Issuances by the Industrial Development Board of
the Parish of Caddo, Inc. include $24.6 million issued December 23, 1996, $8.5
million issued December 19, 1997 and $11.8 million, net of discount, issued
December 22, 1998. The three issuances are scheduled for retirement on December
1, 2026, December 1, 2027 and December 1, 2028, respectively. Proceeds from the
bonds were used to help fund pollution control facilities in Louisiana. The
interest rates for the bonds issued in 1996 and 1997 are currently reset weekly
and interest is paid monthly. The interest rate is fixed at 5.6% for the bonds
issued in 1998 and interest is paid semi-annually. Issuances by the Venango
Industrial Development Authority and the Butler County Industrial Development
Authority of $3.4 million and $2.3 million, respectively, were issued on
December 21, 1982 and are scheduled for retirement on December 1, 2012. The
interest rate on both bond issuances is currently reset weekly and interest is
paid monthly. Proceeds from the issuances were used to help fund pollution
control facilities in Pennsylvania. The average interest rate applicable to our
pollution control bonds was 2.9% in 2001 and 4.3% in 2000.
We have additional credit facilities and credit lines in Australia, Spain,
India, Peru, Bolivia and other countries with outstanding borrowings of $10.0
million as of December 31, 2001 and $21.1 million as of December 31, 2000.
At December 31, 2001, aggregated maturities of long-term debt were $133.7
million for 2002, $0.5 million for 2003, $0.5 million for 2004, $100.5 million
for 2005 and $0.3 million for 2006.
We lease various assets and office space with lease periods of one to 20
years. Additionally, we lease sites and equipment which are subleased to
franchisees or used in the operation of our fast oil change service centers.
Certain operating and capital lease payments are contingent upon such factors
as the consumer price index or the prime interest rate with any future changes
reflected in income as accruable. The effects of these changes are not
considered material. The typical lease period for the service centers is 20
years.
57
Future minimum commitments under noncancellable leasing arrangements as of
December 31, 2001 are as follows:
Amounts Payable
as Lessee
-----------------
Capital Operating
Leases Leases
------- ---------
(Expressed in
thousands)
Year Ending December 31:
2002..................................................... $12,846 $ 78,682
2003..................................................... 12,853 70,494
2004..................................................... 12,574 66,825
2005..................................................... 11,859 61,525
2006..................................................... 10,763 56,240
Thereafter............................................... 30,815 273,716
------- --------
Net minimum future lease payments...................... $91,710 $607,482
======= ========
Off-Balance Sheet Items. We are a party to various financial instruments
with off-balance-sheet risk as part of our normal course of business, including
financial guarantees and contractual commitments to extend financial
guarantees, credit and other assistance to customers, franchisees and other
third parties. These financial instruments involve, to varying degrees,
elements of credit risk which are not recognized in our consolidated balance
sheet.
Contractual commitments to extend credit and other assistance are in effect
as long as certain conditions established in the respective contracts are met.
Contractual commitments to extend financial guarantees are conditioned on the
occurrence of specified events. Our exposure to credit losses in the event of
nonperformance by the other parties to these financial instruments is
represented by the contractual or notional amounts. Decisions to extend
financial guarantees and commitments and the amount of remuneration and
collateral required are based on management's credit evaluation of the
counterparties on a case-by-case basis. The collateral held varies but may
include accounts receivable, inventory, equipment, real property, securities
and personal assets. Since these commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Together with Conoco, we also maintain a separate agreement with Excel
Paralubes to provide support to Excel Paralubes in the event of a liquidity
cash flow deficit. Under this agreement, we could be obligated to provide up to
$30 million in support. In addition, we have agreed with Conoco, in the event
Excel Paralubes has not maintained adequate reserves to make payments in
respect of major maintenance expenses, to pay to Excel Paralubes an amount
equal to one-half of the maintenance reserve shortfall, which amount will not
exceed the amount of the distributions from Excel Paralubes to us measured from
the date of the failure to maintain reserves. We provide under our existing
corporate insurance program protection for its interest in Excel Paralubes. We
maintain both property and liability insurance with reputable and financially
viable third-party insurers. We are subject to a retention of $5 million per
occurrence for property losses and $10 million per occurrence for liability
losses. We would be required to make capital contributions to Excel Paralubes
to cover the loss retentions.
58
Following are the amounts related to our financial guarantees and
contractual commitments to extend financial guarantees, credit and other
assistance as of December 31, 2001.
Amount of Commitment
Contract Expiration Per Period
or -------------------------------
Nominal Less than 1-3 4-5 Over 5
Amounts 1 Year Years Years Years
-------- --------- ------ ------ -------
Financial guarantees--Excel
Paralubes........................ $22,462 $ -- $ -- $ -- $22,462
Financial guarantees--Jiffy Lube.. 6,819 -- -- -- 6,819
Financial guarantees--surety
bonds............................ 14,366 1,482 1,942 -- 10,942
Financial guarantees--other....... 4,661 925 1,850 1,850 36
Commitments to extend financial
guarantees
Guarantees of letters of
credit......................... 34,540 -- -- -- 34,540
Guarantees--Red River........... 6,511 636 1,126 950 3,799
------- ------ ------ ------ -------
Total......................... $89,359 $3,043 $4,918 $2,800 $78,598
======= ====== ====== ====== =======
Financial guarantees--Excel Paralubes. Our investment in Excel Paralubes is
recorded using the equity method. Accordingly, the assets and liabilities,
including debt, are not consolidated in our balance sheet. Excel Paralubes'
debt outstanding on December 31, 2001 totalled $597.3 million. This debt is
non-recourse to us except for a debt service reserve of $22.5 million as of
December 31, 2001, which could increase to as much as $28 million over the next
seven years.
Financial guarantees--Jiffy Lube. The financial guarantees include
guarantees made on behalf of Jiffy Lube franchisees primarily with respect to
real estate lease payment guarantees.
Financial guarantees--Surety Bonds. In the normal course of business, we
have certain performance obligations that are supported by surety bonds. The
surety bonds guarantee that we or our subsidiaries will carry out contract
obligations that we have agreed to perform, or will compensate other parties to
the contract for losses resulting from our failure to perform. As of December
31, 2001, we maintained surety bonds in the aggregate amount of approximately
$14.4 million for performance obligations that have not otherwise been recorded
on our balance sheet.
Guarantees of letters of credit. Substantially all the financial guarantees
relating to letters of credit are associated with a lube center receivable
purchase and sale facility ($33.0 million at December 31, 2001) that we
maintain through PLCAC. We issue letters of credit to the financial institution
holding the lubricants customers' notes receivable guaranteeing 15% of the
total receivables sold to the financial institution.
Asset Sales. We received net proceeds from asset sales of $112.6 million
during 2001, of which $95.2 million was related to discontinued operations. We
received net proceeds from asset sales of $77.0 million in 2000, of which $28.0
million was related to discontinued operations. The proceeds from all of these
asset sales have been used principally to reduce indebtedness.
Environmental. We are subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
CERCLA, the Resource Conservation and Recovery Act and similar state statutes.
In response to liabilities associated
59
with these activities, accruals have been established when reasonable estimates
are possible. Such accruals primarily include estimated costs associated with
remediation. We have not used discounting in determining its accrued
liabilities for environmental remediation, and no claims for possible recovery
from third-party insurers or other parties related to environmental costs have
been recognized in our consolidated financial statements. We adjust the
accruals when new remediation responsibilities are discovered and probable
costs become estimable, or when current remediation estimates are adjusted to
reflect new information.
We and certain of our subsidiaries are alleged to be potentially responsible
parties ("PRPs") in matters arising under CERCLA or similar state legislation
with respect to various waste disposal areas owned or operated by third
parties. In addition, we and certain of our subsidiaries are involved in other
environmental remediation activities, including the removal, inspection and
replacement, as necessary, of underground storage tanks. We do not currently
believe there is a reasonable possibility of incurring additional material
costs in excess of the current accruals recognized for such environmental
remediation activities. With respect to the sites in which we or our
subsidiaries are PRPs, our conclusion is based in large part on (i) the
availability of defenses to liability, including the availability of the
"petroleum exclusion" under CERCLA and similar state laws, and/or (ii) our
current belief that our share of wastes at a particular site is or will be
viewed by the EPA or other PRPs as being de minimis. As a result, our monetary
exposure is not expected to be material beyond the amounts reserved.
Liabilities for environmental expenditures are recorded when it is probable
that obligations have been incurred and the amounts can be reasonably
estimated.
Litigation. We and our subsidiaries are involved in various claims, lawsuits
and other proceedings relating to a wide variety of matters incident to the
ordinary course of business. We currently believe that the outcome of all
pending legal proceedings in the aggregate should not have a material adverse
effect on our financial position or results of operations. It is possible,
however, that charges could be required that would be significant to the
operating results of a particular period.
Discussion of Critical Accounting Policies
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States. Actual results
could differ significantly from those estimates under different assumptions and
conditions. We believe that the following discussion addresses our most
critical accounting policies, which are those that are most important to the
portrayal of our financial condition and results and require management's most
difficult, subjective and complex judgements, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Revenue Recognition. Sales are recognized when revenue is realized or
realizable and has been earned, generally at the time that product title passes
to the customer. Net sales reflect units shipped at selling list prices reduced
by discounts and allowances. We have various sales incentive-based arrangements
with customers including performance rebates, cooperative advertising programs
and other incentive programs. For "off-invoice" programs such as volume, cash,
freight or any other discount that are taken directly off the customer's
invoice, both revenues and receivables are reduced. For certain other programs,
such as cooperative advertising programs, we estimate a reduction in revenues
and record a liability based on historical participation factors. Sales
discounts and allowances included in other current liabilities at December 31,
2001 was $31.3 million and at December 31, 2000 was $32.9 million.
60
Inventories. Inventories are stated at the lower of cost or market value.
Cost is principally determined by the average cost method. The physical
condition (e.g., age and quality) of the inventories is considered in
establishing its valuation. These adjustments are estimates, which could vary
significantly, either favorably or unfavorably, from actual requirements if
future economic conditions, customer inventory levels or competitive conditions
differ from expectations.
Property, Plant and Equipment and Intangible Assets. Property, plant and
equipment is initially recorded at cost and depreciation is computed using
either straight-line or accelerated methods over the estimated useful lives of
such assets. Through December 31, 2001, goodwill and tradenames were amortized
on a straight-line basis over periods ranging from 20 to 40 years. Changes in
circumstances such as technological advances, changes to our business model or
changes in our capital strategy can result in the actual useful lives differing
from our estimates. In those cases where we determine that the useful life of
property, plant and equipment, goodwill or tradenames should be shortened, we
would depreciate the net book value in excess of the salvage value over its
revised remaining useful life thereby increasing depreciation expense. Factors
such as changes in the planned use of fixtures or software or closing of
facilities could result in shortened useful lives.
Long-lived assets, including fixed assets, goodwill and other intangibles,
are reviewed by us for impairment whenever events or changes in circumstances
indicate that the carrying amount of any such asset may not be recoverable
through estimated future cash flows from that asset. The estimate of cash flow
is based upon, among other things, certain assumptions about expected future
operating performance. Our estimates of undiscounted cash flow may differ from
actual cash flow due to, among other things, technological changes, economic
conditions, changes to its business model or changes in its operating
performance. If the sum of the undiscounted cash flows (excluding interest) is
less than the carrying value, we recognize an impairment loss, measured as the
amount by which the carrying value exceeds the fair value of the asset.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
which requires, among other things, that companies no longer amortize goodwill,
but instead test goodwill for impairment at least annually. In addition, SFAS
No. 142 requires that we identify reporting units for the purposes of assessing
potential future impairments of goodwill, reassess the useful lives of other
existing recognized intangible assets and cease amortization of intangible
assets with an indefinite useful life. An intangible asset with an indefinite
useful life should be tested for impairment in accordance with the guidelines
in SFAS No. 142. SFAS No. 142 was adopted on January 1, 2002 and applied to all
goodwill and other intangible assets recognized at that date, regardless of
when those assets were initially recognized. It also requires that we complete
a transitional goodwill impairment test within six months from the date of
adoption. We are also required to reassess the useful lives of other intangible
assets within the first interim quarter after adoption of SFAS No. 142. We
expect that beginning in 2002 approximately $36.7 million in annual goodwill
amortization will no longer be required to be expensed. We expect no material
effect on our financial statements relating to the impairment provisions of
SFAS No. 142.
Pension Benefits. We sponsor pension and other retirement plans in various
forms covering substantially all employees who meet eligibility requirements.
Several statistical and other factors which attempt to anticipate future events
are used in calculating the expense and liability related to the plans. These
factors include assumptions about the discount rate, expected return on plan
assets and the rate of future compensation increases that we determine within
certain guidelines. In addition, our actuarial consultants also use subjective
61
factors such as withdrawal and mortality rates to estimate these factors. The
actuarial assumptions we use may differ materially from actual results due to
changing market and economic conditions, higher or lower withdrawal rates or
longer or shorter life spans of participants. These differences may result in a
significant impact to the amount of pension expense we record. Due to decreases
in interest rates and declines in the income of assets in the plans, it is
expected that the pension expense for 2002 will be significantly higher than in
recent years. Due to increases in the health care costs trend rates, it is
expected that postretirement costs for 2002 will be higher than in recent
years.
Other Matters
We do not currently consider the impact of inflation to be significant in
the businesses in which we operate.
62
BUSINESS
Company Overview
We are a leading automotive consumer products and services company in the
United States and we market our products worldwide in approximately 90
countries. We manufacture, market and distribute branded lubricants and car
care products through traditional retailing channels targeting the do-it-
yourself consumer. In addition, we target the do-it-for-me consumer through
automotive service centers such as car dealerships, repair shops and fast oil
change centers, including our Jiffy Lube(R) fast oil change centers. Our
Pennzoil(R) and Quaker State(R) brands hold the #1 and #2 positions,
respectively, in the domestic passenger car motor oil market, and our Jiffy
Lube(R) brand occupies the #1 position in the fast oil change market. For the
year ended December 31, 2001, we generated $2.3 billion of revenues and $200.4
million of EBITDA.
Our current product, service and brand portfolio includes the following:
Estimated
% of Total Selected Product or U.S. Market
Operating Segment Revenues (1) Service Categories Position (2) Representative Brands
----------------- ------------ ------------------- ------------ ---------------------
Lubricants.............. 55.0% Passenger car motor Pennzoil(R) and Quaker
oil..................... 1 State(R)
Consumer Products....... 15.2% Sun shades.............. 1 Axius(R)
Organizers.............. 1 Axius(R)
Steering wheel covers... 1 Axius(R)
Air fresheners.......... 1 Medo(R)
Glass treatments........ 1 Rain-X(R)
Tire sealants........... 1 Fix-A-Flat(R)
Tire and wheel care Black Magic(R) and
products................ 2 Westley's(R)
Seat covers............. 1 Sagaz(R)
Fuel additives.......... 2 Gumout(R) and Snap(R)
Appearance products..... 3 Blue Coral(R)
Engine treatments....... 1 Slick 50(R)
Jiffy Lube.............. 15.1% Fast oil change......... 1 Jiffy Lube(R)
International........... 10.5% Lubricants and consumer
products................ NA Pennzoil(R) and Quaker
State(R) motor oil and
Pennzoil(R) automotive
consumer products
Other................... 4.2% Supply chain
investments, corporate
and other............... NA NA
- --------
(1) For the year ended December 31, 2001, net of intercompany eliminations.
(2) Based on management's estimates and data from NPD Group Inc., Information
Resources Inc. and major customers.
Pennzoil Quaker State Company is the result of the spin-off of the
lubricants, consumer products and fast oil change operations of Pennzoil
Company and our acquisition of Quaker State Corporation in December 1998.
Competitive Strengths
Leading U.S. Market Positions. We are a leading manufacturer and marketer of
automotive consumer products and provider of automotive services in the United
States. Our flagship lubricant brands, Pennzoil(R) and Quaker State(R), are the
#1 and #2 selling passenger car motor oils in the United States, with a
combined market share of approximately 36% for the year ended December 31,
2001. Pennzoil(R) completed its 15th consecutive year as the nation's #1
selling motor oil. Quaker State(R) has been the nation's #2 selling motor oil
in fourteen of the last fifteen years. Our Jiffy Lube business, with 2,157
service centers nationwide at December 31, 2001, is the nation's largest
operator and franchiser of fast oil change locations and, together with
approximately 790 independently owned Pennzoil "10-Minute Oil Change(R)"
centers at December 31, 2001, accounts for approximately half of all domestic
chain-operated
63
fast oil change locations. In January 2002, Entrepreneur Magazine reported that
Jiffy Lube(R) was the #1 U.S. automotive franchise and the #20 franchise among
all U.S. franchises. We are also a market leader in a broad range of automotive
consumer car care products, holding the #1 market position in eight of the
eleven categories in which we compete.
Broad Product, Service and Brand Portfolio. We focus on products and
services which enhance the comfort and safety of our consumers and the
appearance and performance of their automobiles. We offer our customers an
extensive selection of products and services, including some of the most
recognized brands in the U.S. automotive industry. In October 2000, Pennzoil(R)
and Quaker State(R) were ranked as the #1 and #3 automotive brands in 2000 by
DSN Retailing Today. In June 2001, Jiffy Lube(R) was designated as the #1
automotive aftercare "SuperBrand" by Brand Week. We devote significant
resources to building our already strong brands through advertising, marketing
and the development of complementary products and services. Our strong brand
portfolio, enhanced through innovation, enables us to position many of our
products and services at the premium end of the market. Furthermore, our broad
product offerings have enabled us to build a large, loyal customer base, who
see us as a single-source supplier.
Cash Flow Driven by Strong Core Passenger Car Motor Oil Business. For the
year ended December 31, 2001 over half of our revenues were derived from our
lubricants segment, primarily from the sale of motor oil to the U.S. passenger
car market. In 2001, the domestic passenger car motor oil market was estimated
to be $3.5 billion. During the last five years, the Pennzoil(R) and Quaker
State(R) brands have supplied more than one-third of the total U.S. demand for
passenger car motor oils. Our Excel Paralubes partnership provides a low-cost,
secure source of feedstock for our lubricants business, while Jiffy Lube serves
as a distribution platform for the sale of our motor oil to the fast growing
do-it-for-me market. Our significant scale, premium brands and partial vertical
integration provide strong fundamentals for generating significant cash flow.
Multi-Channel Presence. Our broad portfolio of high quality products,
premium brands and leading market positions support our strong presence in
virtually all major domestic distribution channels for automotive consumer
products. Our wide product portfolio makes us an attractive supplier to mass
merchandisers as well as specialty retailers. Furthermore, we distribute a
significant portion of our lubricant products through the do-it-for-me channel,
including Jiffy Lube, in which we have a proprietary interest. Our multi-
channel presence provides us valuable marketing intelligence and affords us a
better opportunity to successfully introduce new products and implement
marketing promotions. We also work in partnership with our customers to provide
value-added services such as logistics, category management and merchandising
solutions, which we believe strengthens our relationships with those customers
and provides a solid foundation for growth. For example, in 1999, we received a
Vendor of the Year award from O'Reilly Auto Parts and a Vendor of the Year
award from Canadian Tire for our Blue Coral(R) products. In 2000, we received a
Vendor of the Year award from Wal*Mart for our Axius(R) products, and we
received a Vendor of the Year award from Advance Auto Parts and the "Extra
Miler Vendor Award" from Autozone for our Blue Coral(R) products. In 2001, we
received a Supplier of the Year award from Sam's Club.
Experienced Management Team with Consumer Products Expertise. We have
assembled a management team of seasoned consumer product veterans. Our senior
operating professionals have substantial prior experience with such leading
consumer products companies as Nabisco, PepsiCo, Anheuser-Busch and Procter &
Gamble. On average, members of our operating team have over 20 years of
relevant consumer products experience, which, combined with our automotive
sector expertise, gives us valuable insight and skill in the execution of our
business strategy.
64
Business Strategy
Our objective is to be the consumers' first choice for automotive products
and services that enhance the car and the driving experience. We expect to
achieve this objective by using the following strategies:
Execute Focused Brand Management. We intend to increase market share by
continuing to invest in our key brands. Our marketing plan has been designed to
create a strong consumer awareness and "pull," while our strong distribution
platform creates a strong "push" for our products. Our marketing plan positions
us to grow our product base successfully through product extensions and to
improve our results of operations by enhancing our product mix. Many of our
brands and products can be extended into complementary uses for the consumer.
For example, we recently introduced Rain-X(R) wiper blades and Rain-X(R) Ice-
X(TM) de-icer to complement our existing Rain-X(R) glass treatment. We expect
that the strong awareness that our brands enjoy in their markets will also
enable us to expand our consumer base. We seek to increase household
penetration as well as the frequency of use of our products and services,
particularly among selected demographic groups, including women and Hispanics.
Finally, using existing distribution channels, we seek to sell a broader array
of our recognized premium brand names by further penetrating these markets.
Together, we expect these efforts to expand the size of our product portfolio
while strengthening the positions of our brands and products.
Develop New Products and Services. New automotive consumer products and
services are essential components of our strategy. During the past two years,
we have introduced a variety of new products, including Black Magic(R) Total
Shine(TM), Rain-X(R) Ice-X(TM) de-icer, Pennzoil(R) Synthetic motor oil with
Pennzane(R), Black Magic(R) Tire Tint(TM), Rain-X(R) wiper blades, and Quaker
State(R) High Mileage Engine(TM) motor oil and Pennzoil(R) Total Care
appearance product. In 2001, we received the NorTech "Innovation Award" for our
new product Black Magic(R) Total Shine(TM) and received the Popular Mechanics
product innovation award for Pennzoil(R) Total Care. We estimate that these and
other new products and services introduced during the past two years generated
more than 6% of our revenues for the period January to September 2001. Our
ongoing goal is to derive at least 10% of our annual revenues from products or
services introduced during the immediately preceding two years. To accomplish
this goal, we have established an infrastructure, including a funded research
and development center and new product development process, that we expect will
allow us to more effectively generate new and innovative products. We also
believe that we will be able to leverage our relationships with major customers
to continue to obtain desirable shelf space and product placement for our new
products. In addition to new product development, we intend to expand the range
of high-margin ancillary services that we offer at our Jiffy Lube(R) service
centers, such as AutoX-ray computer diagnostics, engine oil analysis and
Carfax(TM) automotive history reporting. We believe that our development of
innovative new products and services will provide us significant growth.
Expand Car Care Products Internationally. According to J.D. Power, there are
more than 400 million passenger vehicles outside of the United States, which is
more than twice the number domestically, and we believe the international
market for automotive consumer products is relatively fragmented. To take
advantage of opportunities in this market, we have recently restructured and
consolidated our international operations to leverage our premium brands, our
leading domestic market positions and our strong existing relationships with
retail mass merchandisers such as Wal*Mart. We believe that the international
packaged consumer products category, including motor oil distributed through
traditional retail channels, represents a strong growth opportunity given the
relatively low penetration of automotive consumer products in significant
markets such as Japan, the United Kingdom, Germany, France and Spain.
65
We expect our expansion efforts to provide increased net sales from our
international operations, which were $251.1 million for the year ended
December 31, 2001.
Enhance Customer Relationships. We believe that our customer relations are
critical to the success of our business. Our customers rely on our ability to
deliver innovative products and service solutions on time and to execute
effective merchandising strategies. For larger retail customers, we plan to
offer value-added services, such as category management, in-store
merchandising programs and vendor managed inventory services similar to those
we currently provide to Wal*Mart. For more of our smaller customers, we plan
to offer order tracking, direct marketing support and a web-based ordering
system, among other services. For example, in 2000 we introduced
PQSOpenRoad.com, an on-line business-to-business ordering system targeting
small retail and wholesale customers and auto service centers.
Continue Cost Savings and Strengthen Operations. We have achieved
significant cost savings by focusing on merger synergies, general and
administrative cost savings initiatives and improved supply-chain management.
Since our acquisition of Quaker State at the end of 1998 through the end of
2000, we realized $120 million in cost savings through these initiatives. We
have realized additional cost savings in 2001. In 2001, we reduced selling,
general, and administrative costs (exclusive of non-recurring charges and
advertising) by $52.1 million compared to the same period in 2000. We expect
to further refine our cost structure and enhance our operating efficiency by
continuing to streamline our national distribution network, making additional
improvements in our information systems, seeking improved and more efficient
supply chain strategies and further cutting our general and administrative
costs.
Selectively Acquire Complementary Businesses. We intend to continue to
evaluate opportunities to acquire businesses with complementary products or
services, strong brands, significant market position, international
distribution capability or potential cost synergies.
Lubricants
We manufacture and market conventional and synthetic motors oils under the
Pennzoil(R), Quaker State(R) and Wolf's Head(R) brands, which accounted for
approximately 36% of the domestic passenger car motor oil market for the year
ended December 31, 2001. We also manufacture and market other branded and non-
branded motor oils, transmission fluids, gear lubricants and greases, as well
as specialty lubricants designed for sports utility vehicles, marine craft,
motorcycles and snowmobiles. These other lubricants are sold under the
Pennzoil(R) and Quaker State(R) brand names and various private label and
proprietary brand names. We also market other automobile consumer products in
the lubricants segment such as oil and air filters, transmission fluid and
antifreeze produced by third parties.
We market Pennzoil(R) and Quaker State(R) lubricants throughout the United
States. At the end of 2001, our lubricants were distributed domestically
through 44 owned and operated distribution facilities in 22 states. Our
products are also distributed domestically through independent distributors
and directly from third-party suppliers.
In marketing our lubricants domestically, we utilize a brand management
structure. Under this approach, we centralize all brand-related activity under
a single manager for each brand, allowing coordination of all strategic and
tactical decisions for advertising and promotions, product packaging and
positioning, formulation strategy and pricing. The brand manager is
responsible for developing the annual marketing plan that is designed to
enhance brand equity. We market our branded motor oils in packages ranging in
size from four ounces to 55 gallons and sell a significant amount in bulk to
the do-it-for-me market. Packaged motor oil in the retail channel is primarily
sold in one quart plastic bottles.
66
The primary and secondary distribution channels for our lubricants are as
follows:
Primary Secondary
---------------------------- -------------------------------------------
. mass merchandisers; . convenience stores;
. auto parts stores; . drug stores;
. fast oil change centers;
and . grocery stores;
. automobile dealerships. . tire stores; and
. independent automotive repair facilities.
Consumer marketing for our lubricants focuses primarily on the driving
conditions experienced by vehicle owners and the technical benefits that
lubricants can provide under those conditions. Key components of our lubricants
marketing include:
. targeted media, including national and local television, radio and print
advertising designed to reach specific populations of consumers based
upon their usage;
. motorsports participation, including team sponsorships in NASCAR(R), Indy
Racing League(R), NHRA(R) and the sponsorship of the Pennzoil World of
Outlaws(R), a grass roots sprint car racing series, and several national
and local racing events;
. public relations; and
. consumer promotions.
We produce motor oils and lubricants by blending additives and lubricant
base oils in ten domestic blending and packaging plants located in Oregon,
California, Louisiana, Pennsylvania, Missouri, Illinois, West Virginia and
Mississippi. Substantially all additives are purchased from outside suppliers.
Base oils processed by our blending and packaging plants are purchased at
prevailing market prices and supplied primarily by Excel Paralubes and outside
suppliers.
Consumer Products
We manufacture and market automotive polishes, car wash products, automotive
air fresheners and seat covers and market automobile engine and fuel
treatments, automotive window shades, automotive glass treatments, tire
inflators and other automotive accessories.
Marketing. Our products are marketed under national brand names such as
Rain-X(R), Blue Coral(R), Black Magic(R), Westley's(R), Medo(R), Axius(R),
Gumout(R), Snap(R), Fix-A-Flat(R), The Outlaw(R), Sagaz(R), Pennzoil(R), Slick
50(R) and other proprietary brand names primarily through retail mass
merchandisers and auto parts stores, and through the installed market, which
includes fast oil change centers, service stations and automobile dealerships.
As part of our 2001 cost reduction plan, the consumer products segment
consolidated the management, sales and administration of its two marketing
groups described below into one centralized organization in Houston at the end
of 2001.
Chemicals and Appearance Group. The chemicals and appearance group markets
Rain-X(R), the leading brand of rain repellant for automobile windows and other
appearance products, Black Magic(R) non-waterbased tire protectant and dressing
products and Westley's(R) car washes and cleaners. The majority of the Rain-
X(R), Black Magic(R) and Westley's(R) branded products are manufactured and
distributed by third-party contract manufacturers. The group purchases
chemicals, waxes and cleaners from a variety of suppliers and blends and
packages finished products at our leased facility in Cleveland, Ohio. The group
also markets Slick 50(R) automotive engine treatments and related automotive
chemical products and manufactures and markets Blue Coral(R) automobile
appearance products. Slick 50(R) branded products are produced by
67
third-party contract manufacturers and distributed directly to customers or
shipped to company locations for distribution to customers.
Our chemicals and appearance group also manufactures and markets Fix-A-
Flat(R) tire inflators, Gumout(R) fuel additives and cleaners, The Outlaw(R)
fuel additives, Snap(R) fuel additives, cleaners and performance fluids and
other private and house brand automotive chemicals. Fix-A-Flat(R) is the #1
selling tire inflator in the United States, and Gumout(R) is the best selling
carburetor spray cleaner in the United States. Fix-A-Flat(R), Gumout(R), The
Outlaw(R) and Snap(R) products are manufactured through arrangements with
third-party contract manufacturers.
Accessories Group. The accessories group designs and markets automotive
window sun protection products, steering wheel covers, organizers and other
automotive accessories. The group purchases its automotive window sun
protection and other accessory products from a variety of suppliers and
distributes sunshades and other automotive accessories from a leased Moorpark,
California facility. Outside the United States, the accessories group's
products are manufactured by third parties in Australia, Canada, France, the
United Kingdom, Malaysia, China and Taiwan. In March 2000, we completed the
acquisition of various assets of Sagaz Industries, a manufacturer and marketer
of automobile seat covers, floor mats and cushions in North America. Sagaz was
combined into the our accessories group.
The accessories group also designs, manufactures and markets Medo(R) air
fresheners primarily for use in automobiles. The group purchases paperboard,
containers and fragrance from a variety of suppliers, and manufactures and
distributes finished air fresheners from a leased Baltimore, Maryland facility.
Jiffy Lube
We provide fast automotive preventive maintenance services in the United
States and Canada under the Jiffy Lube(R) name. As of December 31, 2001, 2,157
Jiffy Lube(R) service centers were open in metropolitan areas throughout the
United States with a heavy concentration of centers in the northeastern and
eastern part of the United States. We have 216 franchisees which operate 1,692
of these service centers. Our other 465 service centers are owned and operated
by Jiffy Lube. An additional 38 Jiffy Lube(R) service centers in Canada are
operated by franchisees. Our largest franchisee operates 214 service centers,
and our second largest franchisee operates 138 service centers.
Jiffy Lube's primary service is the Jiffy Lube(R) Signature Service(TM),
which can generally be performed in 10 minutes or less and includes:
. an oil change and oil filter replacement;
. chassis lubrication;
. checking and topping off windshield washer, transmission, differential
and power steering fluid levels;
. vacuuming the interior and cleaning all exterior windows;
. inflating all tires to proper levels;
. checking the battery fluid and engine coolant levels; and
. inspecting the air filter and windshield wiper blades.
68
Pennzoil(R) and Quaker State(R) motor oils are the featured motor oils in
company-operated service centers and in most franchisee-operated centers,
although franchisees are not generally required to use any specific brand of
motor oil.
A number of additional authorized services and products, including our
products, are also available at Jiffy Lube(R) service centers. Additional
authorized services include coolant replenishments, air filter replacement,
transmission services, light bulb replacement, tire rotation and wiper blade
replacement. We are also working to expand the range of services to be offered
through Jiffy Lube(R) service centers. These new services include AutoX-ray(TM)
computer diagnostics, engine oil analysis and Carfax(TM) automotive history
reporting. Pennzoil(R) and Quaker State(R) brands constituted approximately 88%
of the lubricants used by Jiffy Lube in 2000.
Jiffy Lube was ranked 20th in the United States among all franchises in the
23rd Annual Franchise 500 (Entrepreneur Magazine, January 2002). Jiffy Lube
also maintained its #1 ranking in the automotive category in the Franchise 500.
International
We market lubricants and consumer car care products in approximately 90
countries outside the United States. During 2001, our five largest
international markets (by total lubricant sales volume including licensees)
were Canada (21%), Mexico (35%), Thailand (8%), India (4%) and Indonesia (8%).
Our motor oil and other lubricants are blended and packaged by our wholly owned
subsidiaries in Australia, Bolivia and Spain, by a majority owned subsidiary in
India, by joint ventures in Malaysia and Peru and by licensees in Indonesia,
Mexico, the Philippines, Switzerland and Thailand.
We are focused on increasing international recognition of our core branded
products, including our flagship motor oil and our consumer car care products.
By using these brands and capitalizing on our extensive portfolio of consumer
car care products, we believe that there are attractive opportunities for
growth in international markets, particularly in significant markets such as
Japan, the United Kingdom, Germany, France and Spain.
Internationally, our products are distributed primarily through
subsidiaries, joint ventures, licensees, distributors and jobbers. We intend to
use these distribution channels and our existing relationships with mass
merchandisers to further expand our international presence and to develop new
relationships in international markets.
Supply Chain Investments
Our supply chain investments business includes our equity investment in
Excel Paralubes and base oil trading operations. We are equal partners with
Conoco in Excel Paralubes, which operates a technologically advanced base oil
processing facility located adjacent to Conoco's refinery near Lake Charles,
Louisiana. The facility is capable of producing approximately 21,000 barrels
per day of base oils, which is the primary ingredient in motor oil. Excel
Paralubes is an integral part of our supply chain, providing a significant
portion of high quality base oils needed to produce our finished motor oils and
other lubricant products. Operations of this segment include sales of base oils
purchased from Excel Paralubes and earnings from Excel Paralubes, accounted for
using the equity method of accounting. Conoco operates the plant with support
positions staffed primarily by Conoco. We purchase 50% of base oil production
69
volume of Excel Paralubes, or approximately 58% of our requirements, at
contract rates based on prevailing market prices.
In May 2000, we entered into a ten-year base oil supply agreement with
ExxonMobil, which became effective on August 1, 2000. Under the terms of the
agreement, we purchase over 40% of our base oil requirements from ExxonMobil.
The price of base oil we purchase under the agreement is equal to the lesser of
a fixed spread over a published industry index (not tied to ExxonMobil's posted
base oil price) and a formula price contained in a separate agreement between
the parties. Our remaining requirements of base oil are purchased from various
parties at prevailing market prices.
Competition
The lubricants business is highly competitive. Our major competitors and
their principal brands of motor oil in the United States are Ashland Inc.
(Valvoline(R)), ChevronTexaco Corporation (Havoline(R)), BP p.l.c. (Castrol(R))
and Exxon Mobil Corporation (Mobil(R)). We also compete with a number of
independent blending and packaging companies. Outside of the United States, we
also compete with major fuels marketers and state-owned petroleum companies.
The principal methods of competition in the motor oil business are breadth of
product portfolio, product quality, price, distribution capability, advertising
and sales promotion. Many of our competitors, particularly the major integrated
oil companies, have substantially greater financial resources than we have.
The car care consumer products business is highly competitive and very
fragmented. The car care industry is composed of several categories, such as
maintenance chemicals, appearance chemicals and accessories. Major competitors
include The Clorox Company (STP(R) in maintenance chemicals and Armor All(R) in
appearance chemicals) and Turtle Wax, Inc. (Turtle Wax(R) in appearance
chemicals). Many other national brands exist in each of the various categories,
although, in general, they have small market shares. Private label brands also
compete with the national brands with respect to some car care products. The
principal methods of competition in car care products are specific product
benefits, distribution capability and advertising and sales promotion. The
consumer car care products business also competes for the limited space
available for the display of these products to the consumer. Moreover, the
general availability of contract manufacturing allows new entrants easy access
to the consumer products markets, which may increase the number of competitors
and adversely affect our competitive position and business. Many competitors in
the car care consumer products business have substantially greater financial,
distribution, marketing and other resources than we have.
The fast oil change business is highly competitive. Major competitors
include Ashland Inc., through its Valvoline Instant Oil Change(R) centers, and
a large number of independent regional and local fast oil change chains. In
addition to competing with other fast oil change centers, Jiffy Lube(R) service
centers compete with mass merchandisers who offer oil change services,
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 any given location, Jiffy
Lube(R) service centers may encounter competition from national, regional or
local companies that have greater financial resources than we have.
Patents and Trademarks
Our trademark portfolio exceeds 2,900 domestic and foreign trademark
registrations and applications, with most of our primary brand names being
protected by registered trademarks. We recognize the importance of our strong
brand names to our business, and we actively
70
monitor the use of our trademarks throughout the world where our products are
sold. We take vigorous action against apparent infringements of our trademarks.
As of December 31, 2001, we had approximately 83 patents and over 92 pending
patent applications. The subject matter of these patents and patent
applications include lubricants, synthetic lubricants, lubricant additives,
automotive chemicals, various hydrocarbon technologies, and automotive
accessories.
Research and Development
Our research and development efforts are focused on consumer products
technology as a major area of our growth. Lubricants and base oil technology,
packaging technology and quality development are also emphasized. Long-term
basic research in automotive trends continues to provide the foundation for
future innovations. As a result of the business-focused deployment of our
research and development, we launched more than 40 new products in 2001. One of
these products, Pennzoil(R) Total Care appearance product, was selected by the
editors of Popular Mechanics to receive their product innovation award for
2001. We spent approximately $15.0 million in 2001, $16.0 million in 2000 and
$16.5 million in 1999 on research activities and quality enhancement in 2001.
Our research and development activities are carried out in a 65,700 square foot
facility located in The Woodlands, Texas.
Employees
As of December 31, 2001, we had approximately 7,467 employees, of whom
approximately 5,150 were full-time employees and approximately 2,317 were
temporary and part-time employees. Approximately 4.5% of our employees are
represented by various labor unions. Collective bargaining agreements are in
force with most of the unions. We consider our relations with our employees and
the unions that represent our employees to be good.
We are subject to various federal and state laws and regulations governing
employment practices and working conditions, including, but not limited to,
Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866, the
Equal Pay Act of 1963, the Civil Rights Act of 1991, the Americans with
Disabilities Act of 1990, the Family and Medical Leave Act of 1993, the Drug
Free Workplace Act of 1989, the Age Discrimination in Employment Act of 1967,
the Rehabilitation Act of 1973, the Vietnam Era Veterans' Readjustment
Assistance Act of 1974, the Occupational Safety and Health Act of 1970, the
Fair Labor Standards Act of 1938, the National Labor Relations Act of 1935,
Executive Order 11246, the Uniformed Services Employment and Reemployment
Rights Act of 1994, and the Veterans Employment Opportunity Act of 1998.
Governmental Regulation
Our operations are affected from time to time in varying degrees by
political developments and federal, state and local laws and regulations.
Environmental Matters
Our operations in the United States are subject to numerous federal, state
and local laws and regulations controlling the discharge of materials into the
environment or otherwise relating to the protection of the environment and
human health and safety.
We are subject to a variety of state and federal Clean Air Act rules
requiring air emission limitations for our operating units and products. The
U.S. Environmental Protection Agency (the "EPA") has adopted more stringent
national ambient air quality standards for ozone and
71
particulate matter, which would designate many more areas of the country as
high pollution areas subject to additional regulatory controls. However,
litigation over the new standards has rendered their implementation uncertain.
The precise effect of these actions on us and other industrial companies is
uncertain because most of the requirements will be implemented through EPA
regulations to be issued over a period of years. However, current estimates
indicate that expenditures associated with such regulations would not have a
material effect on our results of operations.
We are also subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
CERCLA, the Resource Conservation and Recovery Act and similar state statutes.
In response to liabilities associated with these activities, accruals have been
established when reasonable estimates are possible. We adjust the accruals when
new remediation responsibilities are discovered and probable costs become
estimable, or when current remediation estimates are adjusted to reflect new
information.
Our assessment of the potential impact of these environmental laws is
subject to uncertainty due to the difficult process of estimating remediation
costs that are subject to ongoing and evolving change. Initial estimates of
remediation costs reflect a broad-based analysis of site conditions and
potential environmental and human health impacts derived from preliminary site
investigations (including soil and water analysis, migration pathways and
potential risk). Later changes in these initial estimates may be based on
additional site investigations, completion of feasibility studies (comparing
and selecting from among various remediation methods and technologies) and risk
assessments (determining the degree of current and future risk to the
environment and human health, based on current scientific and regulatory
criteria) and the actual implementation of the remediation plan. This process
occurs over relatively long periods of time and is influenced by regulatory and
community approval processes and is subject to the ongoing development of
remediation technologies. Our assessment analysis takes into account the
condition of each site at the time of estimation, the degree of uncertainty
surrounding the estimates for each phase of remediation and other site-specific
factors.
From January 1999 through December 2001, we have made capital outlays of
approximately $0.6 million with respect to environmental protection.
Approximately $1.1 million in capital expenditures for environmental control
facilities are currently expected in 2002.
Franchise Matters
Jiffy Lube is subject to, and devotes substantial efforts to compliance
with, a variety of federal and state laws governing franchise sales and
marketing and franchise trade practices. Although the regulatory environment
differs by state, applicable laws and regulations generally require disclosure
of business information in connection with the sale of franchises. Failure to
obtain or maintain approvals to sell franchises would cause Jiffy Lube to lose
franchise revenues. Because Jiffy Lube plans to grow its business through
franchising, any impairment of the ability to develop new franchised stores
will negatively affect Jiffy Lube.
Some state regulations also affect the ability of the franchisor to revoke
or refuse to renew a franchise and may limit Jiffy Lube's ability to terminate,
or otherwise resolve conflicts with, franchisees. Jiffy Lube seeks to comply
with applicable regulatory requirements. However, given the scope of the Jiffy
Lube business and the nature of franchise regulations, compliance problems can
be encountered from time to time.
72
Legal Proceedings
IQ Products
A lawsuit filed in June 1998 by IQ Products Company in the United States
District Court for the Southern District of Texas, Houston Division, claimed
Snap Products, Inc. and Pennzoil-Quaker State, which purchased certain Snap
Products, Inc. assets in 1997, violated the Lanham Act in connection with the
manufacture and sale of a prior formulation of Fix-A-Flat(R) tire sealant and
inflator. The plaintiff claimed that Snap Products and Pennzoil-Quaker State
(i) should have labeled the product as "flammable," as allegedly required by
the Federal Hazardous Substances Act, and (ii) incorrectly advertised and
labeled the product as containing a "non-explosive formula." Plaintiff's
complaint sought unspecified damages. In July 2001, the court granted
defendants' motion for summary judgment, dismissing all of plaintiff's claims.
Plaintiff is appealing the court's dismissal.
A similar suit has also been filed in the same United States District Court
by Radiator Specialty Company, in which the plaintiff alleges lost market share
and wrongful interference with prospective business relations. The plaintiff
seeks unspecified monetary damages equal to defendants' alleged unjust
enrichment and actual and future damages from alleged false advertising and
tortious competition. We are contesting this action vigorously.
In January 2001, the plaintiff in the IQ Products litigation filed a second
lawsuit against Pennzoil-Quaker State in the United States District Court for
the Southern District of Texas, Houston Division, claiming that we violated
federal and Texas antitrust law in marketing our tire inflation and sealer
products. The plaintiff seeks unspecified actual and trebled damages,
attorneys' fees and interest. We are contesting this action vigorously.
California Scents
In January 2000, a lawsuit styled California Scents, Inc. v. Medo
Industries, Inc. was filed in the United States District Court for the Central
District of California. The plaintiff alleges that it is engaged in the
manufacture and sale of automotive air freshener products in the United States
and that the defendant, Medo Industries, Inc., one of our subsidiaries, has
monopolized and attempted to monopolize that business in violation of federal
antitrust laws. The plaintiff also alleges that the defendant has, in violation
of California state law, tortiously interfered with the plaintiff's prospective
business relationships and engaged in unfair business practices. The plaintiff
claims that the defendant's alleged actions have caused the plaintiff to suffer
actual damages of $16.0 million, plus $4.0 million per year for an unspecified
number of years into the future. The plaintiff seeks trebled damages, punitive
damages, restitution with respect to its claim of unfair business practices and
injunctive relief. We are contesting this action vigorously.
Marquez v. Pennzoil-Quaker State Company
A putative class action suit is pending in the 381st Judicial District Court
of Starr County, Texas against us, alleging that we breached alleged warranties
with respect to advertised product, breached alleged contractual obligations
with purchasers of advertised product and breached the Texas Deceptive Trade
Practices Act due to certain of our advertisements during calendar year 2000.
No class has been certified. We are contesting this action vigorously.
Environmental Protection Agency Matters
As a result of informal negotiations with the EPA and the Department of
Justice, we have reached an agreement to resolve disputed issues arising under
the Clean Air Act, the Clean
73
Water Act, and the Resource Conservation and Recovery Act in connection with
our former operation of a refinery in Shreveport, Louisiana by paying a civil
penalty. No formal proceedings have been initiated against us with respect to
the disputed issues. We believe that the amount of the civil penalty will not
have a material effect on our financial condition or results of operations.
Separately, the EPA has initiated an administrative proceeding alleging that
certain activities of a used oil collection and processing business formerly
operated by us and our predecessors in Shreveport, Louisiana violated
regulatory requirements under the Resource Conservation and Recovery Act. We
are currently evaluating our position with respect to these alleged violations.
Although we dispute the issues raised by the EPA, we anticipate that this
matter will be settled by agreement of the parties, including payment by us of
a civil penalty, the amount of which would not have a material adverse effect
on our financial condition or results of operations.
We are engaged in informal settlement discussions with local, state, and
federal authorities regarding allegations of violations of environmental laws
at a fast oil change service center in Alexandria, Virginia owned and operated
by our Jiffy Lube subsidiary. No formal proceedings have been initiated
regarding these allegations, and we anticipate that this matter will be settled
by agreement of the parties, including payment of a civil penalty, the amount
of which would not have a material adverse effect on our financial condition or
results of operations.
Other
We are involved as a premise-owner defendant in numerous asbestos lawsuits,
pending primarily in Louisiana and West Virginia. The plaintiffs generally
allege exposure to asbestos and asbestos-containing products while working on
the premises of the premise-owner defendants, and strict liability and
negligence actions against the premise-owner defendants, including us. The
plaintiffs do not allege that we manufactured any products containing asbestos.
The plaintiffs generally allege that asbestos-containing products sold,
distributed and supplied by other defendants that manufactured and distributed
products containing asbestos were defective and unreasonably dangerous and that
those other defendants were thus negligent in failing to warn the plaintiffs of
these dangers. We are contesting these actions vigorously.
74
MANAGEMENT
The following table sets forth the name, age as of March 4, 2002 and
position of each of our directors, executive officers and other senior
corporate officers.
Age Title
Name --- -----
James L. Pate............ 66 Chairman of the Board
James J. Postl........... 56 Director, President and Chief Executive Officer
Ahmed Alim............... 54 Senior Vice President and Chief Technology Officer
Douglas S. Boyle......... 44 Group Vice President--Automotive Products
Linda F. Condit.......... 54 Vice President and Corporate Secretary
Mark S. Esselman......... 45 Senior Vice President--Human Resources
Robert A. Falivene....... 42 Group Vice President--Global Supply Chain
Marc C. Graham........... 49 Group Vice President--Jiffy Lube
Thomas P. Kellagher...... 45 Group Vice President and Chief Financial Officer
Michael J. Maratea....... 57 Vice President and Controller
R. Britton Mayo.......... 50 Chief Information Officer
Michael P. Schieffer..... 50 Vice President--Administration
Raymond A. Scippa........ 44 Vice President--Public Relations
Paul B. Siegel........... 56 Senior Vice President and General Counsel
Laurie K. Stewart........ 42 Vice President and Treasurer
H. John Greeniaus........ 57 Director
Forrest R. Haselton...... 63 Director
Berdon Lawrence.......... 59 Director
Terry L. Savage.......... 57 Director
Brent Scowcroft.......... 77 Director
Gerald B. Smith.......... 51 Director
Lorne R. Waxlax.......... 68 Director
James L. Pate has served as our Chairman of the Board since December 1998,
and is Chairman of the Executive Committee and a member of the Nominating and
Governance Committee of the Board. He was our Chief Executive Officer from
December 1998 to June 2000 and retired as an employee in December 2000. Mr.
Pate served as Chairman of the Board of Pennzoil Company (renamed PennzEnergy
Company) from 1994 to 1999, was Chief Executive Officer from 1990 to 1998 and
was President from 1990 until 1997. Mr. Pate also served as Chief Executive
Officer of Pennzoil Products Company from October 1998 to December 1998 and as
President of Pennzoil Products Company from March 1998 to October 1998. Mr.
Pate is also a director of Bowater Incorporated and Crown Cork & Seal Company,
Inc. His current term as one of our directors expires in 2003.
James J. Postl has served as one of our directors since December 1998 and is
a member of the Executive Committee of the Board. He was named our Chief
Executive Officer in June 2000 and has been our President since December 1998.
He was Chief Operating Officer from December 1998 to June 2000. He was
President of Pennzoil Products Company from October 1998 to December 1998 and
President of Nabisco Biscuit Company prior thereto. Mr. Postl is also a
director of PanAmerican Beverages, Inc. His current term as one of our
directors expires in 2004.
Ahmed Alim has been our Senior Vice President and Chief Technology Officer
since August 2000. Prior to his current position, Mr. Alim was our Senior Vice
President--Research and Development from May 1999. He served as Vice
President-- Quality and Technology of Pizza Hut, Inc./Tricon Global
Restaurants, Inc. prior thereto.
Douglas S. Boyle was appointed as our Group Vice President--Automotive
Products in December 2001 and has been our President--Automotive Products
division since November 2001. He was our Group Vice President--Lubricants from
March 2001 to December 2001 and
75
was our President--Lubricants division from February 2001 to November 2001. Mr.
Boyle served as Vice President--Innovation and Technology of Pepsi-Cola North
America from November 1998 to February 2001 and Vice President--Marketing &
Business Development--Fountain Division of Pepsi-Cola North America prior
thereto.
Linda F. Condit was named as our Vice President and Corporate Secretary in
December 1998. From December 1995 to December 1998, she served as Vice
President of Pennzoil Company, and from March 1990 to December 1998, she was
Corporate Secretary of Pennzoil Company. Ms. Condit was Vice President and
Secretary of Pennzoil Products Company from March 1998 to December 1998.
Mark S. Esselman has been our Senior Vice President--Human Resources since
August 1999. From August 1997 to July 1999, he was Vice President--Human
Resources and Communications of Great Lakes Chemical Corporation and was Vice
President--Human Resources in the Network Systems Division of USRobotics prior
thereto.
Robert A. Falivene has been our Group Vice President--Global Supply Chain
since December 2001 and was our Senior Vice President--Supply Chain Development
from May 2000 to December 2001. Previously, Mr. Falivene was Chief Procurement
Officer--Equiva Services, LLC from February 1998 to May 2000. He was Vice
President--Supply Chain Management of PepsiCo Restaurants, Inc. prior thereto.
Marc C. Graham has been our Group Vice President--Jiffy Lube since March
2001 and President--Jiffy Lube International, Inc. since July 1999. From July
1999 until March 2001, he was our Group Vice President--Fast Lube Operations.
Prior thereto, he was President of Paccar Automotive Inc.
Thomas P. Kellagher has been our Group Vice President and Chief Financial
Officer since February 2000. He was our Senior Vice President--Business
Development from January 1999 to February 2000. Prior to joining Pennzoil-
Quaker State, Mr. Kellagher was a Principal of McKinsey & Company, Inc.
Michael J. Maratea has been our Vice President and Controller since December
1998. He was Vice President and Controller of Pennzoil Company prior thereto.
Mr. Maratea was Controller of Pennzoil Products Company from March 1998 to
December 1998.
R. Britton Mayo has been our Chief Information Officer since June 1999.
Prior to his current position, Mr. Mayo served as Director--Information
Technology.
Michael P. Schieffer has been our Vice President--Administration since
August 1999. From December 1998 to August 1999, he was one of our Assistant
Treasurers, and prior to December 1998, he was an Assistant Treasurer of
Pennzoil Company. Mr. Schieffer served as Assistant Treasurer of Pennzoil
Products Company from March 1998 to December 1998.
Raymond A. Scippa has been our Vice President--Public Relations since April
2001. Prior to his current position, Mr. Scippa was the Director--Corporate
Communications from August 1999 to April 2001 and was our Manager--Media
Relations from October 1998 to April 2001. Prior to October 1998, Mr. Scippa
served as Director--Employee Communications with Continental Airlines, Inc.
Paul B. Siegel has been Senior Vice President and General Counsel since
January 2002, and was Vice President from December 1998 to December 2001. He
was Senior Vice President--Legal of Pennzoil Products Group prior thereto. He
was Vice President of Pennzoil Products Company from March 1998 to December
1998.
76
Laurie K. Stewart has been our Vice President and Treasurer since August
1999. From December 1998 until August 1999, she was an Assistant Treasurer. Ms.
Stewart was Manager--Corporate Finance of Pennzoil Company prior thereto. She
was Assistant Treasurer of Pennzoil Products Company from March 1998 until
December 1998.
H. John Greeniaus has served as one of our directors since July 2000 and is
a member of the Audit Committee and the Compensation Committee of the Board. He
has been President of G-Force LLC since 1998, and he was Chairman and Chief
Executive Officer of Nabisco, Inc. from 1993 to 1997. Mr. Greeniaus is also a
director of Interpublic Group of Companies Inc. and PRIMEDIA Inc. His current
term as one of our directors expires in 2004.
Forrest R. Haselton was elected to our Board of Directors in December 1998
and is Chairman of the Compensation Committee of the Board. He served as
President--Retail of the Sears Merchandise Group, a division of Sears Roebuck
and Company, until his retirement in 1993. His current term as one of our
directors expires in 2002.
Berdon Lawrence has served as one of our directors since December 1998 and
is Chairman of the Nominating and Governance Committee and a member of the
Executive Committee of the Board. Mr. Lawrence was named Chairman of the Board
of Kirby Corporation, an operator of tank barges and tow boats, in October
1999. Prior to that time, he was President of Hollywood Marine, Inc. for more
than the past five years. His current term as one of our directors expires in
2002.
Terry L. Savage was elected to our Board of Directors in March 2000 and is a
member of the Compensation Committee of the Board. She is the founder and has
been the president of Terry Savage Productions, Ltd. and a syndicated
columnist, speaker and author on personal finance for more than the past five
years. Ms. Savage is also a director of McDonald's Corporation. Her current
term as one of our directors expires in 2004.
Brent Scowcroft has served as one of our directors since October 1999 and is
a member of the Nominating and Governance Committee. He is President of the
Scowcroft Group, Inc., a firm consulting on national and international security
affairs under former Presidents Ford and Bush. A retired U.S. Air Force
lieutenant general, he also served in numerous other national security posts in
the Pentagon and the White House. From 1989 to 1993, he was Assistant to the
President of the United States for National Security Affairs. Mr. Scowcroft is
also a director of QUALCOMM Incorporated. His current term as one of our
directors expires in 2002.
Gerald B. Smith has been one of our directors since December 1998 and is a
member of the Audit Committee and Executive Committee of the Board. He has been
Chairman and Chief Executive Officer of Smith, Graham & Company, a fixed income
investment management firm, for more than the past five years. He is a member
of the management board of Rorento N.V. and a director of Charles Schwab Family
of Funds and Cooper Industries Inc. His current term as one of our directors
expires in 2003.
Lorne R. Waxlax has served as one of our directors since December 1998 and
is Chairman of the Audit Committee of the Board. He served as Executive Vice
President of the Gillette Company until his retirement in 1993. Mr. Waxlax is
also a director of BJ's Wholesale Club, Inc., Clean Harbors, Inc., Hon
Industries, Inc. and House2Home, Inc. His current term as one of our directors
expires in 2003.
77
DESCRIPTION OF OTHER DEBT
As of December 31, 2000 and 2001, we had the following other debt
outstanding:
As of December 31,
----------------------
2000 2001
---------- ----------
(dollars in
thousands)
10.0% notes due 2008, net of discount................... $ -- $ 248,476
9.40% notes due 2002, net of discount................... 151,017 108,271
6.625% notes due 2005, net of discount.................. 99,708 99,770
6.75% notes due 2009, net of discount................... 199,159 199,260
7.375% debentures due 2029, net of discount............. 398,105 398,172
Existing revolving credit facility...................... 195,000 --
Commercial paper........................................ 57,709 --
Pollution control bonds, net of discount................ 50,522 50,561
International debt facilities........................... 51,808 24,247
Capital lease obligations............................... 67,561 61,628
Other debt.............................................. 5,184 7,530
---------- ----------
Total debt and capital lease obligations.............. 1,275,773 1,197,915
Less amounts classified as current maturities........... (19,486) (140,032)
---------- ----------
Total long-term debt and capital lease obligations.... $1,256,287 $1,057,883
========== ==========
New Revolving Credit Facility
We entered into a new senior secured revolving credit facility on November
2, 2001 in an aggregate principal amount of up to $348 million with a syndicate
of financial institutions, or lenders, for which JPMorgan Chase Bank (formerly
known as The Chase Manhattan Bank) acted as administrative agent and collateral
agent and J.P. Morgan Securities Inc. and Salomon Smith Barney Inc. acted as
co-arrangers. The following is a summary of the material terms and conditions
of the new revolving credit facility and is subject to the detailed provisions
of the new revolving credit facility and the various related documents.
Loans; Availability. The proceeds of the new revolving credit facility were
used to refinance certain existing indebtedness, to finance working capital
needs and for general corporate purposes. Under the new revolving credit
facility, $325 million is available on a revolving basis during the period
commencing on November 2, 2001, and ending on November 2, 2004 and $23 million
is available on a revolving basis during the period commencing on November 2,
2001, and November 1, 2002. In addition, a portion of the new revolving credit
facility not in excess of $75 million is available for borrowing, in certain
foreign currencies to be agreed, by us or one or more of our subsidiaries that
conducts a substantial part of its business outside the United States. Of the
$348 million available under the new revolving credit facility, up to $175
million is available for letters of credit.
Interest. Drawings under the new revolving credit facility, in general, bear
interest at a rate per annum equal to, at our option, either the eurodollar
rate (the London interbank offered rate for eurodollar deposits as adjusted for
statutory reserve requirements) plus the applicable margin (as defined below),
or the alternate base rate, which is the higher of (a) JPMorgan Chase Bank's
prime rate or (b) the federal funds effective rate plus 0.5%, plus the
applicable margin.
Initially, the applicable margin for loans bearing interest based on the
eurodollar rate is 2.50% (for an all-in drawn cost, when added to the facility
fee, of 3.00% over the eurodollar rate) under the three year tranche of the new
revolving credit facility and 1.50% (for an all-in
78
drawn cost, when added to the facility fee, of 1.75% over the eurodollar rate)
under the 364-day tranche of the new revolving credit facility, and the
applicable margin for loans bearing interest based on the alternate base rate
is 1.00% (for an all-in drawn cost, when added to the facility fee, of 1.50%
over the alternate base rate) under the three year tranche of the new revolving
credit facility and 0.00% (for an all-in drawn cost, when added to the facility
fee, of 0.25% over the alternate base rate) under the 364-day tranche of the
new revolving credit facility. The applicable margin is subject to reduction
based on our total leverage ratio provided that no event of default has
occurred and is continuing.
Facility Fee. We pay each lender under the new revolving credit facility a
facility fee on the commitment (whether used or unused) of such lender at a
rate per annum equal to 0.50% under the three year tranche (subject to
reduction based on our total leverage ratio) and 0.25% under the 364-day
tranche.
Voluntary Prepayment. We may, at our option, prepay the loans and reduce the
commitments under the new revolving credit facility, in minimum principal
amounts to be agreed upon.
Guarantees. Our obligations under the new revolving credit facility are
guaranteed by each of our domestic material subsidiaries. In addition, we
guaranteed the obligations of any subsidiary borrowers under the new revolving
credit facility.
Security. The new revolving credit facility and the related guarantees are
secured by a perfected first priority security interest in all of our domestic
inventories, certain of our domestic receivables, all of our domestic
intellectual property, all of the capital stock of each of our direct and
indirect domestic material subsidiaries and 66 2/3% of the capital stock of our
direct foreign material subsidiaries, with certain exceptions.
Covenants. The new revolving credit facility contains affirmative covenants
and negative covenants customary for facilities of this type, including
negative covenants relating to, among other things, limitations on:
indebtedness; guarantee obligations; liens; mergers, consolidations,
liquidations and dissolutions; sales of assets; dividends and other payments in
respect of capital stock; capital expenditures; investments, loans and
advances; payments and modifications of certain debt instruments; transactions
with affiliates; sale and leasebacks; changes in fiscal year; negative pledge
clauses and clauses restricting subsidiary distributions; and changes in lines
of business.
In addition, the new revolving credit facility contains financial covenants
relating to, among other things, minimum net worth, minimum interest coverage
and maximum total and senior secured leverage.
Events of Default. The new revolving credit facility contains events of
default customary for facilities of this type, including, without limitation,
nonpayment of principal when due; nonpayment of interest, fees or other
amounts; material inaccuracy of representations and warranties; violation of
covenants; cross-default to certain other indebtedness and agreements;
bankruptcy events; certain ERISA events; material judgments; actual or asserted
invalidity of any guarantee, security document or security interest; and a
change of control.
79
Prior Revolving Credit Facility
Prior to November 2, 2001, we had a revolving credit facility with a group
of banks that provided for up to $450 million of committed unsecured revolving
credit borrowings through December 13, 2001, with any outstanding borrowings on
such date being converted into a term credit facility due on December 13, 2002.
Outstanding borrowings were $215 million at November 2, 2001. This revolving
credit facility was terminated upon the completion of the offering of the old
notes and the execution of the new revolving credit facility. The average
interest rate applicable to borrowings under the revolving credit facility was
5.7% during 2001.
Canadian Revolving Credit Facility
One of our Canadian subsidiaries maintains a revolving credit facility with
Canadian banks, which provides for up to US$8.9 million of committed borrowings
through October 27, 2002. As of December 31, 2001, borrowings under the
Canadian facility totaled US$7.5 million and were classified as short-term
debt. Principal and interest are payable in Canadian dollars.
U.K. Revolving Credit Facility
One of our U.K. subsidiaries maintains a revolving credit facility that
provides for borrowings up to US$20.4 million through July 26, 2002.
Outstanding borrowings under the facility totaled US$6.7 million at December
31, 2001 and were classified as short-term debt. Principal and interest are
payable in pounds sterling.
Other International
We have additional borrowings under credit facilities and credit lines in
Spain (US$4.6 million), India (US$3.0 million), Peru (US$1.8 million), Bolivia
(US$0.3 million) and other (US$0.3 million).
9.40% Notes due 2002 (formerly 8.65% Notes due 2002)
In December 2000, we issued $150.0 million of 8.65% notes due 2002. Net
proceeds of $149.1 million were used to reduce our commercial paper borrowings.
These notes are not redeemable by us and are not subject to any sinking fund.
The terms of these notes limit our ability to incur liens and enter into sale
and leaseback transactions.
Both Moody's and Standard & Poor's have lowered their senior unsecured debt
rating for our debt below investment grade. The terms of these notes provide
that, in the event a rating on our senior unsecured debt falls and remains
below investment grade, the coupon on the notes increases 0.75% to 9.40% and
each noteholder has the option, at any time on or after June 1, 2001, to
require us to purchase its note at 100% of the principal amount thereof plus
accrued and unpaid interest on or after June 1, 2001. The 9.40% notes are
currently trading above 100% face value plus accrued interest. As of December
31, 2001, we chose to purchase and retire $45.4 million face amount of these
notes.
As of December 31, 2001, the remaining fair market value of $108.3 million
of indebtedness (including $104.5 million, net of discount of $0.1 million, of
outstanding 9.40% notes plus $3.8 million that would have been due from a
counterparty to an interest rate swap) under our 9.40% notes due 2002 has been
classified as short-term debt.
6.75% Notes due 2009 and 7.375% Debentures due 2029
In March 1999, we issued $200.0 million of 6.75% notes due 2009 and $400.0
million of 7.375% debentures due 2029. Net proceeds of $592.2 million were used
to reduce commercial
80
paper borrowings and other short-term debt. These notes and debentures are
redeemable at our option at a redemption price equal to the greater of the
principal amount of these notes and debentures and a make whole price. These
notes and debentures are not subject to any sinking fund. The terms of these
notes and debentures limit our ability to incur liens and enter into sale and
leaseback transactions.
6.625% Notes due 2005
In 1995, Quaker State issued $100.0 million of 6.625% notes due 2005. We
replaced Quaker State as obligor under these notes. These notes are redeemable
at our option at a redemption price equal to the greater of the principal
amount of these notes and a make whole price. These notes are not subject to
any sinking fund. The terms of these notes limit our ability to incur liens and
enter into sale and leaseback transactions.
81
DESCRIPTION OF NOTES
The Company issued the old notes to the initial purchasers on November 2,
2001. The initial purchasers sold all of the outstanding notes to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act, and to
persons outside the United States under Regulation S. The form and term of the
new notes are the same as the form and term of the old notes they will replace,
except that:
. the Company will register the new notes under the Securities Act;
. the new notes, once registered, will not bear legends restricting
transfer; and
. holders of the new notes will not be entitled to some rights under the
registration rights agreement, including our payment of additional
interest for failure to meet specified deadlines, which terminate when
the exchange offer is consummated.
The Company issued the old notes under the Indenture (the "Indenture") among
itself, the Subsidiary Guarantors and JPMorgan Chase Bank (formerly known as
The Chase Manhattan Bank), as trustee (the "Trustee"), in a private transaction
that was not subject to the registration requirements of the Securities Act.
The terms of the Indenture apply to the old notes and the new notes to be
issued in exchange for the old notes in this exchange offer (all such notes
being referred to herein collectively as the "Notes"). The terms of the Notes
include those expressly set forth in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act").
This description of notes is intended to be a useful overview of the
material provisions of the Notes and the Indenture. Since this description of
notes is only a summary, you should refer to the Indenture for a complete
description of the obligations of the Company and your rights.
You will find the definitions of capitalized terms used in this description
under the heading "Certain Definitions." For purposes of this description,
references to "the Company", "we", "our" and "us" refer only to Pennzoil-Quaker
State Company and not to its subsidiaries.
General
The Notes
The Notes:
. are general unsecured, senior obligations of the Company;
. are initially limited to an aggregate principal amount of $250.0 million,
although the Indenture will permit the Company to issue an unlimited
amount of Notes, subject to compliance with the terms of the covenants
described under "Certain Covenants--Limitation on Indebtedness";
. mature on November 1, 2008;
. will be issued in denominations of $1,000 and integral multiples of
$1,000;
. will be represented by one or more registered Notes in global form, but
in certain circumstances may be represented by Notes in definitive form
(see "Book-Entry Settlement and Clearance");
. rank equally in right of payment to any existing or future senior
Indebtedness of the Company, without giving effect to collateral
arrangements;
. effectively rank junior to any Secured Indebtedness of the Company;
. are unconditionally guaranteed on a senior basis by each existing and
future Subsidiary of the Company that Guarantees the Credit Facility (see
"Subsidiary Guarantees"); and
. will be eligible for trading in the PORTAL market.
82
Interest
Interest on the Notes will compound semi-annually and:
. accrue at the rate of 10% per annum;
. accrue from the date of issuance or the most recent interest payment
date;
. be payable in cash semi-annually in arrears on May 1 and November 1,
commencing on May 1, 2002;
. be payable to the holders of record on the April 15 and October 15
immediately preceding the related interest payment dates; and
. be computed on the basis of a 360-day year comprised of twelve 30-day
months.
Payments on the Notes; Paying Agent and Registrar
We will pay principal of, premium, if any, and interest on the Notes at the
office or agency designated by the Company in the Borough of Manhattan, The
City of New York, except that we may, at our option, pay interest on the Notes
by check mailed to holders of the Notes at their registered address as it
appears in the Registrar's books. We have initially designated the corporate
trust office of the Trustee in New York, New York to act as our Paying Agent
and Registrar. We may, however, change the Paying Agent or Registrar without
prior notice to the holders of the Notes, and the Company or any of its
Restricted Subsidiaries may act as Paying Agent or Registrar.
We will pay principal of, premium, if any, and interest on, Notes in global
form registered in the name of or held by The Depository Trust Company or its
nominee in immediately available funds to The Depository Trust Company or its
nominee, as the case may be, as the registered holder of such global Note.
Transfer and Exchange
A holder of Notes may transfer or exchange Notes at the office of the
Registrar in accordance with the Indenture. The Registrar and the Trustee may
require a holder, among other things, to furnish appropriate endorsements and
transfer documents. No service charge will be imposed by the Company, the
Trustee or the Registrar for any registration of transfer or exchange of Notes,
but the Company may require a holder to pay a sum sufficient to cover any
transfer tax or other similar governmental charge required by law or permitted
by the Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
Optional Redemption
Except as described below, the Notes are not redeemable until November 1,
2005. On and after November 1, 2005, the Company may redeem all or, from time
to time, a part of the Notes upon not less than 30 nor more than 60 days'
notice, at the following redemption prices (expressed as a percentage of
principal amount) plus accrued and unpaid interest on the Notes, if any, to the
applicable redemption date (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the 12-month period beginning on November 1 of the
years indicated below:
Year Percentage
---- ----------
2005............................................. 105.00%
2006............................................. 102.50%
2007 and thereafter.............................. 100.00%
83
Prior to November 1, 2004, the Company may on any one or more occasions
redeem up to 35% of the original principal amount of the Notes with the Net
Cash Proceeds of one or more Equity Offerings at a redemption price of 110% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided that:
(1) at least 65% of the original principal amount of the Notes remains
outstanding after each such redemption; and
(2) the redemption occurs within 90 days after the closing of such Equity
Offering.
If the optional redemption date is on or after an interest record date and
on or before the related interest payment date, the accrued and unpaid
interest, if any, will be paid to the Person in whose name the Note is
registered at the close of business on such record date, and no additional
interest will be payable to holders whose Notes will be subject to redemption
by the Company.
In the case of any partial redemption, the Trustee will select the Notes for
redemption in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not listed, then on a pro rata basis, by lot or by such other method as the
Trustee in its sole discretion will deem to be fair and appropriate, although
no Note of $1,000 in original principal amount or less will be redeemed in
part. If any Note is to be redeemed in part only, the notice of redemption
relating to that Note will state the portion of the principal amount thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original Note.
Mandatory Redemption
The Company is not required to make mandatory redemption payments or sinking
fund payments with respect to the Notes.
Ranking
The Notes will be general unsecured obligations of the Company that rank
senior in right of payment to any future Indebtedness that is expressly
subordinated in right of payment to the Notes. The Notes will rank equally in
right of payment with all existing and future liabilities of the Company that
are not so subordinated. In the event of bankruptcy, liquidation,
reorganization or other winding up of the Company or its Restricted
Subsidiaries or upon a default in payment with respect to, or the acceleration
of, any Indebtedness under the Credit Facility or other Secured Indebtedness of
the Company and its consolidated Subsidiaries, including the 2002 Notes, the
2005 Notes, the 2009 Notes and the 2029 Debentures (after such securities, in
accordance with Section 301 of the 1999 Indenture and Section 1008 of the 1995
Indenture, are equally and ratably secured with the Company's obligations under
the Credit Facility), the assets of the Company and its Subsidiary Guarantors
that secure Secured Indebtedness will be available to pay obligations on the
Notes and the Subsidiary Guarantees only after all Indebtedness under such
Credit Facility and other Secured Indebtedness has been repaid in full from
such assets. We advise you that there may not be sufficient assets remaining to
pay amounts due on any or all the Notes and the Subsidiary Guarantees then
outstanding.
At December 31, 2001, Secured Indebtedness of the Company and its
consolidated Subsidiaries was approximately $931.8 million.
84
Subsidiary Guarantees
The Subsidiary Guarantors will, jointly and severally, unconditionally
guarantee on a senior basis the Company's obligations under the Notes and all
obligations under the Indenture. The obligations of Subsidiary Guarantors under
the Subsidiary Guarantees will rank equally in right of payment with other
Indebtedness of such Subsidiary Guarantor, except to the extent such
other Indebtedness is expressly subordinate to the obligations arising under
the Subsidiary Guarantee.
At December 31, 2001, outstanding Indebtedness of Subsidiary Guarantors was
approximately $68 million excluding guarantees of the Notes, approximately $65
million of which would have been secured.
For the year ended December 31, 2000, revenues, operating income and EBITDA
of the Company's Subsidiaries that were not Subsidiary Guarantors were
approximately $454 million, $35 million and $46 million, respectively.
For the year ended December 31, 2001, revenues, operating income and EBITDA
of the Company's Subsidiaries that were not Subsidiary Guarantors were
approximately $292 million, $34 million and $51 million, respectively.
Although the Indenture will limit the amount of Indebtedness that Restricted
Subsidiaries may incur, such Indebtedness may be substantial and all of it may
be Indebtedness of Subsidiary Guarantors.
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee
will be limited as necessary to prevent that Subsidiary Guarantee from
constituting a fraudulent conveyance or fraudulent transfer under applicable
law.
In the event a Subsidiary Guarantor is sold or disposed of (whether by
merger, consolidation, the sale of its Capital Stock or the sale of all or
substantially all of its assets (other than by lease)) and whether or not the
Subsidiary Guarantor is the surviving corporation in such transaction to a
Person which is not the Company or a Restricted Subsidiary of the Company
(other than a Receivables Entity), such Subsidiary Guarantor will be released
from its obligations under its Subsidiary Guarantee if:
(1) the sale or other disposition is in compliance with the Indenture,
including the covenants "Limitation on Sales of Assets and Subsidiary
Stock" and "Limitation on Sales of Capital Stock of Restricted
Subsidiaries"; and
(2) all the obligations of such Subsidiary Guarantor under the Credit
Facility and related documentation and any other agreements relating to
any other indebtedness of the Company or its Restricted Subsidiaries
terminate upon consummation of such transaction.
In addition, a Subsidiary Guarantor will be released from its obligations
under the Indenture, the Subsidiary Guarantee and the Registration Rights
Agreement if (i) the Company designates such Subsidiary as an Unrestricted
Subsidiary and such designation complies with the other applicable provisions
of the Indenture or (ii) such Subsidiary ceases to be a guarantor under each
Credit Facility then in existence; provided that to the extent such Subsidiary
at any future time issues a Guarantee of a Credit Facility, then the provisions
of the covenant "Future Subsidiary Guarantors" shall be applicable (to the
extent such covenant remains in effect).
Change of Control
If a Change of Control occurs, each registered holder of Notes will have the
right to require the Company to repurchase all or any part (equal to $1,000 or
an integral multiple thereof) of
85
such holder's Notes at a purchase price in cash equal to 101% of the principal
amount of the Notes plus accrued and unpaid interest, if any, to the date of
purchase (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date).
Within 30 days following any Change of Control, the Company will mail a
notice (the "Change of Control Offer") to each registered holder with a copy to
the Trustee stating, among other things:
(1) that a Change of Control has occurred and that such holder has the
right to require the Company to purchase such holder's Notes at a
purchase price in cash equal to 101% of the principal amount of such
Notes plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of holders of record on a record date to receive
interest on the relevant interest payment date) (the "Change of Control
Payment");
(2) the repurchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed) (the "Change of
Control Payment Date"); and
(3) the procedures determined by the Company, consistent with the
Indenture, that a holder must follow in order to have its Notes
repurchased.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all Notes or portions of Notes (in integral
multiples of $1,000) properly tendered under the Change of Control
Offer;
(2) deposit with the paying agent an amount equal to the Change of Control
Payment in respect of all Notes or portions of Notes so tendered; and
(3) deliver or cause to be delivered to the Trustee the Notes so accepted
together with an Officers' Certificate stating the aggregate principal
amount of Notes or portions of Notes being purchased by the Company.
The paying agent will promptly mail to each holder of Notes so tendered the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple of $1,000. The Company shall publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
If the Change of Control Payment Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest, if any, will be paid to the Person in whose name a Note is registered
at the close of business on such record date, and no additional interest will
be payable to holders who tender pursuant to the Change of Control Offer.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the holders to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
Prior to mailing a Change of Control Offer, and as a condition to such
mailing (i) the requisite holders of each issue of Indebtedness issued under an
indenture or other agreement that may be violated by such payment shall have
consented to such Change of Control Offer being made and waived the event of
default, if any, caused by the Change of Control or (ii) the
86
Company will repay all outstanding Indebtedness issued under an indenture or
other agreement that may be violated by a payment to the holders of Notes under
a Change of Control Offer or the Company must offer to repay all such
Indebtedness, and make payment to
the holders of such Indebtedness that accept such offer and obtain waivers of
any event of default from the remaining holders of such Indebtedness. The
Company covenants to effect such repayment or obtain such consent and waiver
within 30 days following any Change of Control, it being a default of the
Change of Control provision of the Indenture if the Company fails to comply
with such covenant.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations described in the Indenture by virtue of the conflict.
The Company's ability to repurchase Notes pursuant to a Change of Control
Offer may be limited by a number of factors. The occurrence of certain of the
events that constitute a Change of Control would constitute a default under the
new revolving credit facility. In addition, certain events that may constitute
a change of control under the new revolving credit facility and cause a default
thereunder may not constitute a Change of Control under the Indenture. Future
Indebtedness of the Company and its Subsidiaries may also contain prohibitions
of certain events that would constitute a Change of Control or require such
Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of their right to require the Company to repurchase the Notes
could cause a default under such Indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on the Company.
Finally, the Company's ability to pay cash to the holders upon a repurchase may
be limited by the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases.
Even if sufficient funds were otherwise available, the terms of the
revolving credit facility will and future Indebtedness may prohibit the
Company's prepayment of the Notes before their scheduled maturity.
Consequently, if the Company is not able to prepay the Indebtedness under the
new revolving credit facility and any such other Indebtedness containing
similar restrictions or obtain requisite consents, as described above, the
Company will be unable to fulfill its repurchase obligations if holders of
Notes exercise their repurchase rights following a Change of Control, resulting
in a default under the Indenture. An Event of Default under the Indenture will
result in a cross-default under the new revolving credit facility.
The Change of Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company by increasing
the capital required to effectuate such transactions. The definition of "Change
of Control" includes a disposition of all or substantially all of the property
and assets of the Company and its Restricted Subsidiaries taken as a whole to
any Person. Although there is a limited body of case law interpreting the
phrase "substantially all", there is no precise established definition of the
phrase under applicable law. Accordingly, in certain circumstances there may be
a degree of uncertainty as to whether a particular transaction would involve a
disposition of "all or substantially all" of the
87
property or assets of a Person. As a result, it may be unclear as to whether a
Change of Control
has occurred and whether a holder of Notes may require the Company to make an
offer to repurchase the Notes as described above.
Certain Covenants
Limitation on Indebtedness
The Company will not, and will not permit any of its Restricted Subsidiaries
to, Incur any Indebtedness; provided, however, that the Company and the
Subsidiary Guarantors may Incur Indebtedness if on the date thereof:
(1) the Consolidated Coverage Ratio for the Company and its Restricted
Subsidiaries is at least 2.00 to 1.00; and
(2) no Default or Event of Default will have occurred and be continuing or
would occur as a consequence of Incurring the Indebtedness.
The first paragraph of this covenant will not prohibit the Incurrence of the
following Indebtedness:
(1) Indebtedness Incurred pursuant to the Credit Facility in an aggregate
principal amount up to $348.0 million at any time outstanding and
Guarantees of Restricted Subsidiaries and the Company in respect of the
Indebtedness Incurred pursuant to the Credit Facility;
(2) the principal component of amounts outstanding under Qualified
Receivables Transactions in an aggregate principal amount of $170.0
million at any time outstanding and the related Purchase Money Note;
(3) the Subsidiary Guarantees and the Guarantee by the Company or any
Restricted Subsidiary of Indebtedness of the Company or a Restricted
Subsidiary that was Incurred in accordance with the provisions of the
Indenture; provided that in the event such Indebtedness that is being
Guaranteed is a Subordinated Obligation or a Guarantor Subordinated
Obligation, then the related Guarantee shall be subordinated in right
of payment to the Subsidiary Guarantee or the Notes, as the case may
be;
(4) Indebtedness of the Company owing to and held by any Restricted
Subsidiary (other than a Receivables Entity) or Indebtedness of a
Restricted Subsidiary owing to and held by the Company or any
Restricted Subsidiary (other than a Receivables Entity), provided,
however;
(a) if the Company is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full
in cash of all obligations with respect to the Notes; and
(b)(i) any subsequent issuance or transfer of Capital Stock or any
other event which results in any such Indebtedness being
beneficially held by a Person other than the Company or a
Restricted Subsidiary (other than a Receivables Entity) of the
Company; and
(ii) any sale or other transfer of any such Indebtedness to a Person
other than the Company or a Restricted Subsidiary (other than a
Receivables Entity) of the Company,
shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness by the Company or such Subsidiary, as the case may be;
(5) Indebtedness represented by (a) the Notes, (b) any Indebtedness (other
than the Indebtedness described in clauses (1), (2), (3), (4), (7),
(9), (10) and (11)) outstanding on
88
the Issue Date and (c) any Refinancing Indebtedness Incurred in respect
of any Indebtedness described in this clause (5) or clause (6) or
Incurred pursuant to the first paragraph of this covenant;
(6) Indebtedness of a Restricted Subsidiary incurred and outstanding on the
date on which such Restricted Subsidiary was acquired by the Company
(including, without limitation, Indebtedness Incurred (a) to provide
all or any portion of the funds utilized to consummate the transaction
or series of related transactions pursuant to which such Restricted
Subsidiary became a Subsidiary or was otherwise acquired by the Company
or (b) otherwise in connection with, or in contemplation of, such
acquisition); provided, however, that at the time such Restricted
Subsidiary is acquired by the Company, the Company would have been able
to Incur $1.00 of additional Indebtedness pursuant to the first
paragraph of this covenant after giving effect to the Incurrence of
such Indebtedness pursuant to this clause (6);
(7) Indebtedness under Currency Agreements and Interest Rate Agreements;
provided that in the case of Currency Agreements, such Currency
Agreements are related to business transactions of the Company or its
Restricted Subsidiaries entered into in the ordinary course of business
or in the case of Currency Agreements and Interest Rate Agreements,
such Currency Agreements and Interest Rate Agreements are entered into
for bona fide hedging purposes of the Company or its Restricted
Subsidiaries (as determined in good faith by the Board of Directors or
senior management of the Company) and substantially correspond in terms
of notional amount, duration, currencies and interest rates, as
applicable, to Indebtedness of the Company or its Restricted
Subsidiaries Incurred without violation of the Indenture;
(8) the incurrence by the Company or any of its Restricted Subsidiaries of
Indebtedness represented by Capitalized Lease Obligations, mortgage
financings or purchase money obligations or other Indebtedness Incurred
with respect to assets other than Capital Stock or other Investments,
in each case incurred for the purpose of financing all or any part of
the purchase price or cost of construction or improvements of property
used in the business of the Company or such Restricted Subsidiary, in
an aggregate principal amount not to exceed $70.0 million at any time
outstanding;
(9) Indebtedness incurred in respect of workers' compensation claims, self-
insurance obligations, performance, surety and similar bonds and
completion guarantees provided by the Company or a Restricted
Subsidiary in the ordinary course of business;
(10) Indebtedness arising from agreements of the Company or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price
or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or Capital
Stock of a Restricted Subsidiary, provided that the maximum aggregate
liability in respect of all such Indebtedness shall at no time exceed
the gross proceeds actually received by the Company and its Restricted
Subsidiaries in connection with such disposition;
(11) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft, instruction or similar instrument drawn
against insufficient funds in the ordinary course of business,
provided, however, that such Indebtedness is extinguished within five
business days of Incurrence;
(12) Guarantees given in connection with the sale of notes receivable under
the PLCAC Agreement in an aggregate principal amount not to exceed
$15.0 million at any time outstanding;
(13) Guarantees given in connection with fast lube customer agreements in
an aggregate principal amount not to exceed $11.7 million at any time
outstanding;
89
(14) Indebtedness under the International Facilities in an aggregate
principal amount not to exceed $55.0 million at any time outstanding;
or
(15) in addition to the items referred to in clauses (1) through (14)
above, Indebtedness of the Company and its Restricted Subsidiaries in
an aggregate outstanding principal amount which, when taken together
with the principal amount of all other Indebtedness Incurred pursuant
to this clause (15) and then outstanding, will not exceed $45.0
million.
The Company will not Incur any Indebtedness under the preceding paragraphs
if the proceeds thereof are used, directly or indirectly, to refinance any
Subordinated Obligations of the Company unless such Indebtedness will be
subordinated to the Notes to at least the same extent as such Subordinated
Obligations. No Subsidiary Guarantor will incur any Indebtedness if the
proceeds thereof are used, directly or indirectly, to refinance any Guarantor
Subordinated Obligations of such Subsidiary Guarantor unless such Indebtedness
will be subordinated to the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee to at least the same extent as such Guarantor Subordinated
Obligations. No Restricted Subsidiary (other than a Subsidiary Guarantor) may
Incur any Indebtedness if the proceeds are used to refinance Indebtedness of
the Company, except to the extent the proceeds of such Indebtedness are applied
to refinance an intercompany note or advance.
For purposes of determining compliance with, and the outstanding principal
amount of any particular Indebtedness incurred pursuant to and in compliance
with, this covenant:
(1) in the event that Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the first and second paragraphs
of this covenant, the Company, in its sole discretion, will classify
such item of Indebtedness on the date of Incurrence and only be
required to include the amount and type of such Indebtedness in the
clause so selected, except that the Company may reclassify Indebtedness
between clauses (1) and (15) of the second paragraph of this covenant
and between clauses (8) and (15) of the second paragraph of this
covenant and between clauses (12) and (15) of the second paragraph of
this covenant and between clauses (13) and (15) of the second paragraph
of this covenant; provided that the Indebtedness so reclassified is of
the nature referred to in the clause into which such Indebtedness is
reclassified;
(2) all Indebtedness outstanding on the date of the Indenture under the
Credit Facility should be deemed outstanding under clause (1) of the
second paragraph of this covenant;
(3) all amounts outstanding under Qualified Receivables Transactions on the
date of the Indenture shall be deemed outstanding under clause (2) of
the second paragraph of this covenant; and
(4) the amount of Indebtedness issued at a price that is less than the
principal amount thereof will be equal to the amount of the liability
in respect thereof determined in accordance with GAAP.
Accrual of interest, accrual of dividends, the accretion of accreted value,
the payment of interest in the form of additional Indebtedness and the payment
of dividends in the form of additional shares of Preferred Stock will not be
deemed to be an incurrence of Indebtedness for purposes of this covenant. The
amount of any Indebtedness outstanding as of any date shall be (i) the accreted
value of the Indebtedness in the case of any Indebtedness issued with original
issue discount and (ii) the principal amount or liquidation preference thereof,
together with any interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.
90
In addition, the Company will not permit any of its Unrestricted
Subsidiaries to Incur any Indebtedness or issue any shares of Disqualified
Stock, other than Non-Recourse Debt. If at any time an Unrestricted Subsidiary
becomes a Restricted Subsidiary, any Indebtedness of such Subsidiary shall be
deemed to be Incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be Incurred as of such date
under this "Limitation on Indebtedness" covenant, the Company shall be in
Default of this covenant).
For purposes of determining compliance with any U.S. dollar-denominated
restriction on the Incurrence of Indebtedness, the U.S. dollar-equivalent
principal amount of Indebtedness denominated in a foreign currency shall be
calculated based on the relevant currency exchange rate in effect on the date
such Indebtedness was Incurred, in the case of term Indebtedness, or first
committed, in the case of revolving credit Indebtedness; provided that if such
Indebtedness is Incurred to refinance other Indebtedness denominated in a
foreign currency, and such refinancing would cause the applicable U.S. dollar-
denominated restriction to be exceeded if calculated at the relevant currency
exchange rate in effect on the date of such refinancing, such U.S. dollar-
denominated restriction shall be deemed not to have been exceeded so long as
the principal amount of such refinancing Indebtedness does not exceed the
principal amount of such Indebtedness being refinanced. Notwithstanding any
other provision of this covenant, the maximum amount of Indebtedness that the
Company may Incur pursuant to this covenant shall not be deemed to be exceeded
solely as a result of fluctuations in the exchange rate of currencies. The
principal amount of any Indebtedness incurred to refinance other Indebtedness,
if Incurred in a different currency from the Indebtedness being refinanced,
shall be calculated based on the currency exchange rate applicable to the
currencies in which such Refinancing Indebtedness is denominated that is in
effect on the date of such refinancing.
Limitation on Restricted Payments
The Company will not, and will not permit any of its Restricted
Subsidiaries, directly or indirectly, to:
(1) declare or pay any dividend or make any distribution on or in respect
of its Capital Stock (including any payment in connection with any
merger or consolidation involving the Company or any of its Restricted
Subsidiaries) except:
(a) dividends or distributions payable in Capital Stock of the Company
(other than Disqualified Stock) or in options, warrants or other
rights to purchase such Capital Stock of the Company; and
(b) dividends or distributions payable to the Company or a Restricted
Subsidiary of the Company (and if such Restricted Subsidiary is not
a Wholly-Owned Subsidiary, to its other holders of common Capital
Stock on a pro rata basis);
(2) purchase, redeem, retire or otherwise acquire for value any Capital
Stock of the Company or any direct or indirect parent of the Company
held by Persons other than the Company or a Restricted Subsidiary of
the Company (other than in exchange for Capital Stock of the Company
(other than Disqualified Stock));
(3) purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment, any Subordinated Obligations or
Guarantor Subordinated Obligations (other than the purchase, repurchase
or other acquisition of Subordinated Obligations or Guarantor
Subordinated Obligations purchased in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in
each case due within one year of the date of purchase, repurchase or
acquisition); or
91
(4) make any Restricted Investment in any Person;
(any such dividend, distribution, purchase, redemption, repurchase, defeasance,
other acquisition, retirement or Restricted Investment referred to in clauses
(1) through (4) shall be referred to herein as a "Restricted Payment"), if at
the time the Company or such Restricted Subsidiary makes such Restricted
Payment:
(a) a Default shall have occurred and be continuing (or would result
therefrom); or
(b) the Company is not able to Incur an additional $1.00 of
Indebtedness pursuant to the first paragraph under the "Limitation
on Indebtedness" covenant after giving effect, on a pro forma
basis, to such Restricted Payment; or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date
(except as otherwise indicated below) would exceed the sum of
(without duplication):
(i) 50% of Consolidated Net Income for the period (treated as one
accounting period) from October 1, 2001 to the end of the most
recent fiscal quarter ending prior to the date of such
Restricted Payment for which financial statements are in
existence (or, in case such Consolidated Net Income is a
deficit, minus 100% of such deficit);
(ii) the aggregate Net Cash Proceeds received by the Company from
the issue or sale of its Capital Stock (other than Disqualified
Stock) or other capital contributions subsequent to the Issue
Date (other than Net Cash Proceeds received from an issuance or
sale of such Capital Stock to a Subsidiary of the Company or an
employee stock ownership plan, option plan or similar trust to
the extent such sale to an employee stock ownership plan,
option plan or similar trust is financed by loans from or
guaranteed by the Company or any Restricted Subsidiary unless
such loans have been repaid with cash on or prior to the date
of determination);
(iii) the amount by which Indebtedness of the Company or any
Restricted Subsidiary is reduced on the Company's balance
sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date of any
Indebtedness of the Company or any Restricted Subsidiary
convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any
cash, or other property, distributed by the Company or any
Restricted Subsidiary upon such conversion or exchange); and
(iv) the amount equal to the net reduction in Restricted Investments
made by the Company or any of its Restricted Subsidiaries in
any Person resulting from:
(A) repurchases or redemptions of such Restricted Investments by
such Person, proceeds realized upon the sale of such
Restricted Investment to an unaffiliated purchaser,
repayments of loans or advances or other transfers of assets
(including by way of dividend or distribution) by such
Person to the Company or any Restricted Subsidiary of the
Company; or
(B) the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the
definition of "Investment") not to exceed, in the case of
any Unrestricted Subsidiary, the amount of Investments
previously made by the Company or any Restricted Subsidiary
in such Unrestricted Subsidiary,
92
which amount in each case under this clause (iv) was included in the
calculation of the amount of Restricted Payments; provided, however,
that no amount will be included under this clause (iv) to the extent
it is already included in Consolidated Net Income.
The provisions of the preceding paragraph will not prohibit the
following actions and (except as otherwise specifically indicated) shall
not reduce the amount that would otherwise be available for Restricted
Payments under the preceding paragraph:
(1) any defeasance, purchase or redemption of Capital Stock or Subordinated
Obligations of the Company or Guarantor Subordinated Obligations of any
Subsidiary Guarantors made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or
sold to a Subsidiary or an employee stock ownership plan or similar
trust to the extent such sale to an employee stock ownership plan or
similar trust is financed by loans from or guaranteed by the Company or
any Restricted Subsidiary unless such loans have been repaid with cash
on or prior to the date of determination); provided, however, that (a)
such defeasance, purchase or redemption will be excluded in subsequent
calculations of the amount of Restricted Payments and (b) the Net Cash
Proceeds from such sale will be excluded from clause (c)(ii) of the
preceding paragraph;
(2) any defeasance, purchase or redemption of Subordinated Obligations of
the Company or Guarantor Subordinated Obligations of any Subsidiary
Guarantors made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Subordinated Obligations of the
Company that qualifies as Refinancing Indebtedness;
(3) so long as no Default or Event of Default has occurred and is
continuing, any defeasance, purchase or redemption of Subordinated
Obligations from Net Available Cash to the extent permitted under
"Limitation on Sales of Assets and Subsidiary Stock" below;
(4) so long as no Default or Event of Default has occurred and is
continuing,
(a) the purchase, redemption or other acquisition, cancellation or
retirement for value of Capital Stock, or options, warrants, equity
appreciation rights or other rights to purchase or acquire Capital
Stock of the Company or any Restricted Subsidiary of the Company or
any parent of the Company held by any existing or former employees
or management of the Company or any Subsidiary of the Company or
their assigns, estates or heirs, in each case in connection with
the repurchase provisions under employee stock option or stock
purchase agreements or other agreements to compensate management
employees; provided that such redemptions or repurchases pursuant
to this clause will not exceed $2.0 million in the aggregate during
any calendar year and $5.0 million in the aggregate for all such
redemptions and repurchases; provided, however, that the amount of
any such repurchase or redemption will be included in subsequent
calculations of the amount of Restricted Payments; and
(b) loans or advances to employees or directors of the Company or any
Subsidiary of the Company the proceeds of which are used to
purchase Capital Stock of the Company, in an aggregate amount not
in excess of $2.0 million at any one time outstanding; provided,
however, that the amount of such loans and advances will be
included in subsequent calculations of the amount of Restricted
Payments;
(5) so long as no Default or Event of Default has occurred and is
continuing, the declaration and payment of dividends to holders of any
class or series of Disqualified
93
Stock of the Company issued in accordance with the terms of the
Indenture to the extent such dividends are included in the definition of
"Consolidated Interest Expense";
(6) repricing of employee stock options or repurchases of Capital Stock
deemed to occur upon the exercise of stock options if such Capital
Stock represents a portion of the exercise price thereof;
(7) so long as no Default or Event of Default has occurred and is
continuing, the payment of dividends on the Company's Common Stock in
an amount not to exceed $10.0 million in the aggregate in any fiscal
year; provided, however, that the amount of such payment will be
included in subsequent calculations of the amount of Restricted
Payments;
(8) so long as no Default or Event of Default has occurred and is
continuing, the payment of dividends in respect of Common Stock of the
Company issued to acquire assets or Capital Stock of another Person in
an amount not to exceed in any fiscal year the product of (x) $0.10 per
share of Common Stock (such number adjusted to reflect any stock split,
combination, subdivision, reclassification, merger or other similar
event that occurs subsequent to the date of the Indenture) and (y) the
number of shares so issued in such a stock acquisition; provided that
after giving pro forma effect to such dividend, the Company would have
been able to Incur $1.00 of additional Indebtedness pursuant to the
first paragraph under the "Limitation on Indebtedness" covenant;
provided, however, that the amount of such payment will be included in
subsequent calculations of the amount of Restricted Payments;
(9) Restricted Payments in an amount not to exceed $15.0 million (after
giving effect to any reductions in the aggregate amount of Restricted
Investments made pursuant to this clause (9) as a result of the receipt
of cash due to the disposition thereof, including through liquidation,
repayment or other reduction, including by way of dividend or
distribution, the aggregate amount of such reductions not to exceed the
aggregate amount of such Restricted Investments outstanding and
previously made pursuant to this clause (9)); provided, however, that
the amount of such payments will be included in subsequent calculations
of the amount of Restricted Payments;
(10) Restricted Investments in any Joint Venture made during any fiscal
year of the Company or within 45 days after the end of such fiscal
year in amounts that, together with all other Restricted Investments
made in such Joint Venture during such fiscal year in reliance on this
clause (10) during such fiscal year or within 45 days after the end of
such fiscal year, do not exceed the amount of dividends or
distributions previously paid during such fiscal year to the Company
or any Restricted Subsidiary by such Joint Venture; provided that the
amount of such dividends and distributions so applied as a Restricted
Investment pursuant to this clause (10) shall be excluded from clause
(c)(i) of the first paragraph of this covenant;
(11) the purchase by the Company of fractional shares arising out of stock
dividends, splits or combinations or business combinations; provided,
however, that the amount of such payment will be included in
subsequent calculations of the amount of Restricted Payments;
(12) indemnity payments permitted by clause (10) under the covenant
"Limitation on Indebtedness;"
(13) Restricted Payments constituting Limited Recourse Obligations;
(14) the acquisition in open-market purchases of the Company's Common Stock
for contributions to its employee stock purchase and deferred
compensation plans in the ordinary course of business or payments in
settlement of stock appreciation rights existing on the Issue Date in
an amount not to exceed $2.0 million in any fiscal year or $4.0
million in the aggregate; provided, however, that the amount of such
payment will be included in subsequent calculations of the amount of
Restricted Payments; or
94
(15) the payment of any dividend on any Capital Stock of the Company within
60 days after the date of declaration thereof, if at such declaration
date such declaration complied with the provisions of the first
paragraph above (and such payment shall be deemed to have been paid on
such date of declaration for purposes of any calculation required by
the provisions of the first paragraph above); provided, however, that
the amount of such payment will be included in subsequent calculations
of the amount of Restricted Payments.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of such Restricted Payment of the asset(s) or
securities proposed to be paid, transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment.
The fair market value of any cash Restricted Payment shall be its face amount.
The fair market value of any non-cash Restricted Payment shall be determined
conclusively by the Board of Directors or senior management of the Company
acting in good faith whose resolution, in the case of the Board of Directors,
or an Officers' Certificate, in the case of senior management, with respect
thereto shall be delivered to the Trustee within 30 days thereafter. Not later
than 30 days after the date of making any Restricted Payment pursuant to the
first paragraph of this covenant, the Company shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by the covenant
"Restricted Payments" were computed, together with a copy of any fairness
opinion or appraisal required by the Indenture. In computing Consolidated Net
Income of the Company under clause (C)(1) of the first paragraph of this
covenant, (1) the Company shall use audited financial statements for the
portions of the relevant period for which audited financial statements are
available on the date of determination and unaudited financial statements and
other current financial data based on the books and records of the Company for
the remaining portion of such period and (2) the Company shall be permitted to
rely in good faith on the financial statements and other financial data derived
from the books and records of the Company that are available on the date of
determination. If the Company makes a Restricted Payment which, at the time of
the making of such Restricted Payment would in the good faith determination of
the Company be permitted under the requirements of the Indenture, such
Restricted Payment shall be deemed to have been made in compliance with the
Indenture notwithstanding any subsequent adjustments made in good faith to the
Company's consolidated financial statements affecting Consolidated Net Income
of the Company for any period.
Limitation on Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur or suffer to exist any Lien (other
than Permitted Liens) upon any of its property or assets (including Capital
Stock), whether owned on the date of the Indenture or acquired after that date,
securing any Indebtedness, unless contemporaneously with the Incurrence of the
Liens effective provision is made to secure the Indebtedness due under the
Indenture and the Notes or, in respect of Liens on any Restricted Subsidiary's
property or assets, any Subsidiary Guarantee of such Restricted Subsidiary,
equally and ratably with (or prior to in the case of Liens with respect to
Subordinated Obligations or Guarantor Subordinated Obligations, as the case may
be) the Indebtedness secured by such Lien for so long as such Indebtedness is
so secured.
Limitation on Sale/Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries
to, enter into any Sale/Leaseback Transaction unless:
(1) the Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale/Leaseback Transaction at least
equal to the fair market value
95
(as evidenced by an Officer's Certificate or a determination by the
Board of Directors) of the property subject to such transaction;
(2) the Company or such Restricted Subsidiary could have Incurred
Indebtedness in an amount equal to the Capitalized Lease Obligation in
respect of such Sale/Leaseback Transaction pursuant to the covenant
described under "Limitation on Indebtedness" (to the extent such
covenant remains in effect);
(3) the Company or such Restricted Subsidiary would be permitted to create
a Lien (other than with respect to operating leases) on the property
subject to such Sale/Leaseback Transaction without securing the Notes
by the covenant described under "Limitation on Liens" (to the extent
such covenant remains in effect); and
(4) the Sale/Leaseback Transaction is treated as an Asset Disposition
(except in connection with Permitted Sale/Leaseback Dispositions) and
all of the conditions of the Indenture described under "Limitation on
Sale of Assets and Subsidiary Stock" (including the provisions
concerning the application of Net Available Cash) are satisfied with
respect to such Sale/Leaseback Transaction, treating all of the
consideration received in such Sale/Leaseback Transaction as Net
Available Cash for purposes of such covenant.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or consensual restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock or
pay any Indebtedness or other obligations owed to the Company or any
Restricted Subsidiary;
(2) make any loans or advances to the Company or any Restricted Subsidiary;
or
(3) transfer any of its property or assets to the Company or any Restricted
Subsidiary.
The preceding provisions will not prohibit:
(i) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the date of the Indenture, including, without
limitation, the Indenture and the Credit Facility in effect on such
date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by a Restricted Subsidiary on or before the date on which
such Restricted Subsidiary was acquired by the Company (other than
Indebtedness Incurred as consideration in, or to provide all or any
portion of the funds utilized to consummate, the transaction or
series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the
Company or in contemplation of the transaction) and outstanding on
such date;
(iii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement effecting a refunding,
replacement or refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (ii) of this paragraph or
this clause (iii) or contained in any amendment to an agreement
referred to in clause (i) or (ii) of this paragraph or this clause
(iii); provided, however, that the encumbrances and restrictions
with respect to such Restricted Subsidiary contained in any such
agreement are no less favorable in any material respect to the
holders of the Notes than the encumbrances and restrictions
contained in such agreements referred to in clauses (i) or (ii) of
this paragraph on the Issue Date or the date such Restricted
Subsidiary became a Restricted Subsidiary, whichever is
applicable;
96
(iv) in the case of clause (3) of the first paragraph of this covenant,
any encumbrance or restriction:
(a) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease,
license or similar contract, or the assignment or transfer of
any such lease, license or other contract;
(b) contained in mortgages, pledges or other security agreements
permitted under the Indenture securing Indebtedness of the
Company or a Restricted Subsidiary to the extent such
encumbrances or restrictions restrict the transfer of the
property subject to such mortgages, pledges or other security
agreements; or
(c) pursuant to customary provisions restricting dispositions of
real property interests set forth in any reciprocal easement
agreements of the Company or any Restricted Subsidiary;
(v) purchase money obligations for property acquired in the ordinary
course of business that impose encumbrances or restrictions of the
nature described in clause (3) of the first paragraph of this
covenant on the property so acquired;
(vi) any Purchase Money Note or other Indebtedness or contractual
requirements incurred with respect to a Qualified Receivables
Transaction relating exclusively to a Receivables Entity that, in
the good faith determination of the Board of Directors or senior
management, are necessary to effect such Qualified Receivables
Transaction;
(vii) any restriction with respect to a Restricted Subsidiary (or any
of its property or assets) imposed pursuant to an agreement
entered into for the direct or indirect sale or disposition of
assets (including the Capital Stock or assets of such Restricted
Subsidiary) (or the property or assets that are subject to such
restriction) pending the closing of such sale or disposition;
(viii) encumbrances or restrictions arising or existing by reason of
applicable law or any applicable rule, regulation or order; and
(ix) customary provisions with respect to the disposition or
distribution of assets or property in joint venture agreements.
Limitation on Sales of Assets and Subsidiary Stock
The Company will not, and will not permit any of its Restricted Subsidiaries
to, make any Asset Disposition unless:
(1) the Company and/or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Disposition at least
equal to the fair market value, as determined in good faith by the
Board of Directors (including as to the value of all non-cash
consideration), of the shares and assets subject to such Asset
Disposition;
(2) at least 75% of the consideration from such Asset Disposition received
by the Company and/or such Restricted Subsidiary, as the case may be,
is in the form of cash or Cash Equivalents or Additional Assets; and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company or such Restricted Subsidiary, as
the case may be:
(a) to the extent the Company or any Restricted Subsidiary, as the
case may be, elects (or is required by the terms of any
Indebtedness), to prepay, repay or
97
purchase Secured Indebtedness (other than Disqualified Stock or
Subordinated Obligations) of the Company or Secured Indebtedness
(other than any Preferred Stock or Guarantor Subordinated
Obligation) of a Restricted Subsidiary (in each case other than
Indebtedness owed to the Company or an Affiliate of the Company)
or the Credit Facility (whether the Credit Facility is secured or
unsecured) within 360 days from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash;
provided, however, that, in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to this clause
(a), the Company or such Restricted Subsidiary will retire such
Indebtedness and will cause the related commitment (if any) to be
permanently reduced in an amount equal to the principal amount so
prepaid, repaid or purchased; or
(b) to the extent of the balance of such Net Available Cash after
application in accordance with clause (a), to the extent the
Company or such Restricted Subsidiary elects, to invest in
Additional Assets within 360 days from the later of the date of
such Asset Disposition or the receipt of such Net Available
Cash.
Pending the final application of any such Net Available Cash, the Company
and its applicable Restricted Subsidiaries may temporarily reduce the
revolving Indebtedness under the Credit Facility or otherwise invest such Net
Available Cash in cash or Cash Equivalents. Any Net Available Cash from Asset
Dispositions that are not applied or invested as provided in the preceding
paragraph will be deemed to constitute "Excess Proceeds." On the 361st day
after an Asset Disposition, if the aggregate amount of Excess Proceeds exceeds
$10.0 million, the Company will be required to make an offer ("Asset
Disposition Offer") to all holders of Notes and to the extent required by the
terms of other Pari Passu Indebtedness, to all holders of other Pari Passu
Indebtedness outstanding with similar provisions requiring the Company to make
an offer to purchase such Pari Passu Indebtedness with the proceeds from any
Asset Disposition ("Pari Passu Notes"), to purchase the maximum principal
amount of Notes and any such Pari Passu Notes to which the Asset Disposition
Offer applies that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount of the Notes
and Pari Passu Notes plus accrued and unpaid interest to the date of purchase,
plus premium, if any, in accordance with the procedures set forth in the
Indenture or the agreements governing the Pari Passu Notes, as applicable, in
each case in integral multiples of $1,000. To the extent that the aggregate
amount of Notes and Pari Passu Notes so validly tendered and not properly
withdrawn pursuant to an Asset Disposition Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes, subject to the other covenants contained in the Indenture.
If the aggregate principal amount of Notes surrendered by holders thereof and
other Pari Passu Notes surrendered by holders or lenders, collectively,
exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and
Pari Passu Notes to be purchased on a pro rata basis on the basis of the
aggregate principal amount of tendered Notes and Pari Passu Notes. Upon
completion of such Asset Disposition Offer, the amount of Excess Proceeds
shall be reset at zero.
The Asset Disposition Offer will remain open for a period of 20 Business
Days following its commencement, except to the extent that a longer period is
required by applicable law (the "Asset Disposition Offer Period"). No later
than five Business Days after the termination of the Asset Disposition Offer
Period (the "Asset Disposition Purchase Date"), the Company will purchase the
principal amount of Notes and Pari Passu Notes required to be purchased
pursuant to this covenant (the "Asset Disposition Offer Amount") or, if less
than the Asset Disposition Offer Amount has been so validly tendered, all
Notes and Pari Passu Notes validly tendered in response to the Asset
Disposition Offer.
98
If the Asset Disposition Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to holders of the Notes who tender Notes pursuant to the Asset
Disposition Offer.
On or before the Asset Disposition Purchase Date, the Company will, to the
extent lawful, accept for payment, on a pro rata basis to the extent necessary,
the Asset Disposition Offer Amount of Notes and Pari Passu Notes or portions of
Notes and Pari Passu Notes so validly tendered and not properly withdrawn
pursuant to the Asset Disposition Offer, or if less than the Asset Disposition
Offer Amount has been validly tendered and not properly withdrawn, all Notes
and Pari Passu Notes so validly tendered and not properly withdrawn, in each
case in integral multiples of $1,000. The Company will deliver to the Trustee
an Officers' Certificate stating that such Notes or portions thereof were
accepted for payment by the Company in accordance with the terms of this
covenant and, in addition, the Company will deliver all certificates and notes
required, if any, by the agreements governing the Pari Passu Notes. The Company
or the Paying Agent, as the case may be, will promptly (but in any case not
later than five Business Days after termination of the Asset Disposition Offer
Period) mail or deliver to each tendering holder of Notes or holder or lender
of Pari Passu Notes, as the case may be, an amount equal to the purchase price
of the Notes or Pari Passu Notes so validly tendered and not properly withdrawn
by such holder or lender, as the case may be, and accepted by the Company for
purchase, and the Company will promptly issue a new Note, and the Trustee, upon
delivery of an Officers' Certificate from the Company will authenticate and
mail or deliver such new Note to such holder, in a principal amount equal to
any unpurchased portion of the Note surrendered; provided that each such new
Note will be in a principal amount of $1,000 or an integral multiple of $1,000.
In addition, the Company will take any and all other actions required by the
agreements governing the Pari Passu Notes. Any Note not so accepted will be
promptly mailed or delivered by the Company to the holder thereof. The Company
will publicly announce the results of the Asset Disposition Offer on the Asset
Disposition Purchase Date.
For the purposes of this covenant, the following will be deemed to be cash:
(1) the assumption by the transferee of Indebtedness (other than
Subordinated Obligations or Disqualified Stock) or other liabilities
reflected on the balance sheet of the Company or Indebtedness (other
than Guarantor Subordinated Obligations or Preferred Stock) or other
liabilities reflected on the balance sheet of any Restricted Subsidiary
of the Company and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness or such other
liabilities reflected on the balance sheet of the Company or its
Restricted Subsidiaries in connection with such Asset Disposition (in
which case the Company will, without further action, be deemed to have
applied such deemed cash to Indebtedness in accordance with clause (a)
above); and
(2) securities, notes or other obligations received by the Company or any
Restricted Subsidiary of the Company from the transferee that are
promptly converted or monetized by the Company or such Restricted
Subsidiary into cash.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the Indenture. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Indenture by virtue of any conflict.
99
Limitation on Affiliate Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into or conduct any transaction (including
the purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Company (an "Affiliate Transaction") unless:
(1) the terms of such Affiliate Transaction are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than those
that could be obtained in a comparable transaction at the time of such
transaction in arm's length dealings with a Person who is not such an
Affiliate;
(2) in the event such Affiliate Transaction involves an aggregate amount in
excess of $10.0 million, the terms of such transaction have been
approved by a majority of the members of the Board of Directors of the
Company and by a majority of the members of such Board having no
personal stake in such transaction, if any (and such majority or
majorities, as the case may be, determines that such Affiliate
Transaction satisfies the criteria in clause (1) above); and
(3) in the event such Affiliate Transaction involves an aggregate amount in
excess of $25.0 million, the Company has received a written opinion
from an independent investment banking firm of nationally recognized
standing that such Affiliate Transaction is not materially less
favorable than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's length basis from a
Person that is not an Affiliate.
The preceding paragraph will not apply to:
(1) any Restricted Payment permitted to be made pursuant to the covenant
described under "Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans and
other reasonable fees, compensation, benefits and indemnities paid or
entered into by the Company or its Restricted Subsidiaries in the
ordinary course of business, or indemnification pursuant to the
Company's or a Restricted Subsidiary's charter or by-laws or applicable
corporate law, to or with officers, directors or employees of the
Company and its Restricted Subsidiaries;
(3) loans or advances to officers, employees or directors in the ordinary
course of business of the Company or any of its Restricted
Subsidiaries;
(4) any transaction between or among the Company and/or Restricted
Subsidiaries (other than Receivable Entities);
(5) the payment of reasonable and customary fees and other compensation
paid to, and indemnity provided on behalf of, officers, directors or
employees of the Company or any Restricted Subsidiary of the Company;
(6) the performance of obligations of the Company or any of its Restricted
Subsidiaries under the terms of any agreement to which the Company or
any of its Restricted Subsidiaries is a party, on the one hand, and a
Person other than the Company or a Restricted Subsidiary, on the other
hand, on the Issue Date as these agreements may be amended, modified or
supplemented from time to time; provided, however, that any future
amendment, modification or supplement entered into after the Issue Date
will be permitted to the extent that its terms are not more materially
disadvantageous,
100
taken as a whole, to the holders of the Notes than the terms of the
agreements in effect on the Issue Date;
(7) sales or other transfers or dispositions of accounts receivable and
other related assets customarily transferred in an asset securitization
transaction involving accounts receivable to a Receivables Entity in a
Qualified Receivables Transaction, and acquisitions of Permitted
Investments in connection with a Qualified Receivables Transaction;
(8) sales of Capital Stock of the Company to the extent not prohibited by
the Indenture; and
(9) any transaction or series of transactions between the Company or any
Restricted Subsidiary, on the one hand, and any of their Joint
Ventures, on the other hand, provided that (i) such transaction or
series of transactions is (x) in the ordinary course of business
between the Company or such Restricted Subsidiary and such Joint
Venture, (y) otherwise in compliance with the terms of the Indenture
and (z) on terms at least as favorable as might reasonably have been
obtained at such time from an unaffiliated party and (ii) with respect
to any such Affiliate Transaction involving aggregate consideration in
excess of $25.0 million, such Affiliate Transaction complies with
clause (2) of the initial paragraph above.
Limitation on Sale of Capital Stock of Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary of the
Company to, transfer, convey, sell, lease or otherwise dispose of any Voting
Stock of any Restricted Subsidiary or to issue any of the Voting Stock of a
Restricted Subsidiary (other than, if necessary, shares of its Voting Stock
constituting directors' qualifying shares) to any Person except:
(1) to the Company or a Restricted Subsidiary other than a Receivables
Entity; or
(2) in compliance with the covenant described under "Limitation on Sales of
Assets and Subsidiary Stock" and immediately after giving effect to
such issuance or sale, such Restricted Subsidiary would continue to be
a Restricted Subsidiary.
Notwithstanding the preceding paragraph, (i) the Company and any Restricted
Subsidiary may sell all the Voting Stock of a Restricted Subsidiary as long as
the Company or such Restricted Subsidiary, as the case may be, complies with
the terms of the covenant described under "Limitation on Sales of Assets and
Subsidiary Stock" and (ii) each of Pennzoil-Quaker State India Limited and
Pennzoil-Quaker State France S.A. and any other Subsidiary of the Company
incorporated outside the United States for which a rights offering is the only
alternative allowed under applicable law to increase paid-in capital may engage
in and complete rights offerings to all its shareholders; provided that the
Company participates fully in any such rights offering.
SEC Reports
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, to the extent
permitted by the Exchange Act, the Company will file with the Commission, and
provide the Trustee and the registered holders of the Notes with, the annual
reports and the information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission may by rules and regulations
prescribe) that are specified in Sections 13 and 15(d) of the Exchange Act
within the time periods specified therein; provided that the Company shall be
deemed to have satisfied its delivery obligations under this covenant to the
extent it timely files all such reports on the Commission's EDGAR database. In
the event that the Company is not permitted to file such reports, documents and
information with the Commission pursuant to the Exchange Act, the
101
Company will nevertheless provide such Exchange Act information to the Trustee
and the holders of the Notes as if the Company were subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act within the time periods
specified therein.
If the Company has designated any of its Subsidiaries that, individually or
collectively, constitutes (after intercompany eliminations) in excess of 5% of
Consolidated EBITDA of the Company on a consolidated basis for the relevant
reporting period as an Unrestricted Subsidiary, then the quarterly and annual
financial information required by the preceding paragraph shall include a
reasonably detailed presentation, either on the face of the financial
statements or in the footnotes to the financial statements and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations", of
the financial condition and results of operations of the Company and its
Restricted Subsidiaries.
Merger and Consolidation
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor Company")
will be a corporation, partnership, trust or limited liability company
organized and existing under the laws of the United States of America,
any State of the United States or the District of Columbia and the
Successor Company (if not the Company) will expressly assume, by
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under
the Notes and the Indenture;
(2) immediately after giving effect to such transaction (and treating any
Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as
having been Incurred by the Successor Company or such Subsidiary at the
time of such transaction), no Default or Event of Default shall have
occurred and be continuing;
(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur at least an additional $1.00 of
Indebtedness pursuant to the first paragraph of the "Limitation on
Indebtedness" covenant (to the extent such covenant remains in effect);
(4) each Subsidiary Guarantor (unless it is the other party to the
transactions above, in which case clause (1) shall apply) shall have by
supplemental indenture confirmed that its Subsidiary Guarantee shall
apply to such Person's obligations in respect of the Indenture and the
Notes and its obligations under the Registration Rights Agreement shall
continue to be in effect; and
(5) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer, or other disposition of all or substantially all of the properties
and assets of one or more Subsidiaries of the Company, which properties and
assets, if held by the Company instead of such Subsidiaries, would constitute
all or substantially all of the properties and assets of the Company on a
consolidated basis, shall be deemed to be the transfer of all or substantially
all of the properties and assets of the Company.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but, in the
case of a lease of all or substantially all its assets, the Company will not be
released from the obligation to pay the principal of and interest on the Notes.
102
Although there is a limited body of case law interpreting the phrase
"substantially all", there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve "all
or substantially all" of the property or assets of a Person.
Notwithstanding the preceding clause (3), (4) or (5): (x) any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company and (y) the Company may merge
with an Affiliate incorporated solely for the purpose of reincorporating the
Company in another jurisdiction to realize tax benefits.
Future Subsidiary Guarantors
After the Issue Date, unless such Subsidiary has previously issued a
Subsidiary Guarantee which is then in full force and effect, the Company will
cause each Subsidiary that issues a Guarantee in respect of obligations under a
Credit Facility to execute and deliver to the Trustee a Subsidiary Guarantee
pursuant to which such Subsidiary Guarantor will unconditionally Guarantee, on
a joint and several basis, the full and prompt payment of the principal of,
premium, if any, and interest on the Notes on a senior basis.
Limitation on Lines of Business
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than a Related Business.
Effectiveness of Covenants
The covenants described under "Limitation on Indebtedness," "Limitation on
Restricted Payments," "Limitation on Restrictions on Distributions from
Restricted Subsidiaries," "Limitation on Sales of Assets and Subsidiary Stock,"
"Limitation on Affiliate Transactions," "Limitation on the Sale of Capital
Stock of Restricted Subsidiaries," "SEC Reports," "Future Subsidiary
Guarantors" and "Limitation on Lines of Business" (the "Fall-Away Covenants")
will no longer be in effect upon the Company reaching Investment Grade Status;
provided that at such time, no Default or Event of Default shall have occurred
and be continuing.
Payments for Consent
Neither the Company nor any of its Restricted Subsidiaries will, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fees or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or is
paid to all holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or amendment.
Events of Default
The occurrence and continuance of each of the following is an Event of
Default:
(1) default in any payment of interest or additional interest on any Note
when due, continued for 30 days;
(2) default in the payment of principal of or premium, if any, on any Note
when due at its Stated Maturity, upon optional redemption, upon
required repurchase, upon declaration or otherwise;
103
(3) failure by the Company or any Subsidiary Guarantor to comply with its
obligations under "Certain Covenants--Merger and Consolidation";
(4) failure by the Company to comply for 30 days after notice with any of
its obligations under the covenants described under "Change of Control"
above or under the covenants described under "Certain Covenants" above
(in each case, other than a failure to purchase Notes which will
constitute an Event of Default under clause (2) above and other than a
failure to comply with "Certain Covenants--Merger and Consolidation"
which is covered by clause (3));
(5) failure by the Company to comply for 60 days after notice with its
other obligations contained in the Indenture;
(6) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is Guaranteed by the Company or
any of its Restricted Subsidiaries), which default:
(a) is caused by a failure to pay principal of, or interest or premium,
if any, on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness ("payment default"); or
(b) results in the acceleration of such Indebtedness prior to its
maturity (the "cross acceleration provision");
and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a payment default or the maturity of which has
been so accelerated, aggregates $25.0 million or more; provided, that
this clause (b) shall not apply to (i) Indebtedness of any Receivables
Entity, (ii) Indebtedness owed to the Company or a Restricted
Subsidiary or (iii) Permitted Non-Recourse Indebtedness, whether such
Indebtedness or Guarantee now exists, or is created after the date of
the Indenture;
(7) certain events of bankruptcy, insolvency or reorganization of the
Company or a Significant Subsidiary (other than any Receivables Entity)
or group of Restricted Subsidiaries (other than any Receivables Entity)
that, taken together (as of the latest audited consolidated financial
statements for the Company and its Restricted Subsidiaries), would
constitute a Significant Subsidiary (the "bankruptcy provisions");
(8) failure by the Company or any Significant Subsidiary (other than any
Receivables Entity) or group of Restricted Subsidiaries (other than any
Receivables Entity) that, taken together (as of the latest audited
consolidated financial statements for the Company and its Restricted
Subsidiaries), would constitute a Significant Subsidiary to pay final
judgments of a court of competent jurisdiction aggregating in excess of
$25.0 million (net of any amounts that a reputable and creditworthy
insurance company has acknowledged liability for in writing or which
has been determined to be applicable by a final nonappealable
determination by a court of competent jurisdiction), which judgments
are not paid, discharged or stayed and there shall have been a period
of 90 days after the date on which any period for appeal has expired
and during which a stay of enforcement of such judgment, order or
decree shall not be in effect (the "judgment default provision"); or
(9) any Subsidiary Guarantee ceases to be in full force and effect (except
as contemplated by the terms of the Indenture) or is declared null and
void in a judicial proceeding or any Subsidiary Guarantor denies or
disaffirms its obligations under the Indenture or its Subsidiary
Guarantee.
However, a default under clauses (4) and (5) of this paragraph will not
constitute an Event of Default until the Trustee or the holders of 25% in
principal amount of the outstanding Notes
104
notify the Company of the default and the Company does not cure such default
within the time specified in clauses (4) and (5) of this paragraph after
receipt of such notice.
If an Event of Default (other than an Event of Default described in clause
(7) above) occurs and is continuing, the Trustee by notice to the Company, or
the holders of at least 25% in principal amount of the outstanding Notes by
notice to the Company and the Trustee, may, and the Trustee at the request of
such holders shall, declare the principal of, premium, if any, and accrued and
unpaid interest, if any, on all the Notes to be due and payable. Upon such a
declaration, such principal, premium and accrued and unpaid interest will be
due and payable immediately. In the event of a declaration of acceleration of
the Notes because an Event of Default described in clause (6) under "Events of
Default" has occurred and is continuing, the declaration of acceleration of the
Notes shall be automatically annulled if the event of default or payment
default triggering such Event of Default pursuant to clause (6) shall be
remedied or cured by the Company or a Restricted Subsidiary of the Company or
waived by the holders of the relevant Indebtedness within 20 days after the
declaration of acceleration with respect thereto and if (1) the annulment of
the acceleration of the Notes would not conflict with any judgment or decree of
a court of competent jurisdiction and (2) all existing Events of Default,
except nonpayment of principal, premium or interest on the Notes that became
due solely because of the acceleration of the Notes, have been cured or waived.
If an Event of Default described in clause (7) above occurs and is continuing,
the principal of, premium, if any, and accrued and unpaid interest on all the
Notes will become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holders. The holders of a majority
in principal amount of the outstanding Notes may waive all past defaults
(except with respect to nonpayment of principal, premium or interest) and
rescind any such acceleration with respect to the Notes and its consequences if
(1) rescission would not conflict with any judgment or decree of a court of
competent jurisdiction and (2) all existing Events of Default, other than the
nonpayment of the principal of, premium, if any, and interest on the Notes that
have become due solely by such declaration of acceleration, have been cured or
waived.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Notes unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction that, in the opinion of the
Trustee, is inconsistent with such request within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any
105
proceeding for any remedy available to the Trustee or of exercising any trust
or power conferred on the Trustee. The Indenture provides that in the event an
Event of Default has occurred and is continuing, the Trustee will be required
in the exercise of its powers to use the degree of care that a prudent person
would use in the conduct of its own affairs. The Trustee, however, may refuse
to follow any direction that conflicts with law or the Indenture or that the
Trustee determines is unduly prejudicial to the rights of any other holder or
that would involve the Trustee in personal liability. Prior to taking any
action under the Indenture, the Trustee will be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses
caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of, premium, if any, or interest on any Note, the Trustee
may withhold notice if and so long as a committee of trust officers of the
Trustee in good faith determines that withholding notice is in the interests of
the holders. In addition, the Company is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Company also is required to deliver to the Trustee, within
30 days after knowledge of the occurrence thereof, written notice of any events
which would constitute certain Defaults, their status and what action the
Company is taking or proposes to take in respect thereof.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture or was required to repurchase
the Notes, an equivalent premium shall also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the Notes. If
an Event of Default occurs prior to November 1, 2005 by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding the prohibition on redemption of the Notes prior to
November 1, 2005, the premium specified in the Indenture shall also become
immediately due and payable to the extent permitted by law upon the
acceleration of the Notes.
Amendments and Waivers
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
(including without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Notes) and, subject to certain
exceptions, any past default or compliance with any provisions may be waived
with the consent of the holders of a majority in principal amount of the Notes
then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
However, without the consent of each holder of an outstanding Note affected, no
amendment may, among other things:
(1) reduce the principal amount of Notes whose holders must consent to an
amendment;
(2) reduce the stated rate of or extend the stated time for payment of
interest on any Note;
(3) reduce the principal of or extend the Stated Maturity of any Note;
(4) reduce the premium payable upon the redemption or repurchase of any
Note or change the time at which any Note may be redeemed or
repurchased as described
106
above under "Optional Redemption", "Change of Control", "Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" or any
similar provision, whether through an amendment or waiver of provisions
in the covenants, definitions or otherwise;
(5) make any Note payable in any currency other than that stated in the
Note;
(6) impair the right of any holder to receive payment of, premium, if any,
principal of and interest on such holder's Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment
on or with respect to such holder's Notes; or
(7) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Without the consent of any holder, the Company and the Trustee may amend the
Indenture to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor corporation, partnership,
trust or limited liability company of the obligations of the Company
under the Indenture;
(3) provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section
163(f) (2) (B) of the Code);
(4) add Guarantees with respect to the Notes or release a Subsidiary
Guarantor in accordance with the applicable provisions of the
Indenture;
(5) secure the Notes;
(6) add to the covenants of the Company for the benefit of the holders or
surrender any right or power conferred upon the Company;
(7) make any change that does not materially adversely affect the rights of
any holder, taken as a whole; or
(8) comply with any requirement of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
Indenture becomes effective, the Company is required to mail to the holders a
notice briefly describing such amendment. However, the failure to give such
notice to all the holders, or any defect in the notice, will not impair or
affect the validity of the amendment.
Defeasance
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. If the Company exercises its legal defeasance option, the Subsidiary
Guarantees in effect at such time will terminate.
107
The Company at any time may terminate its obligations under covenants
described under "Certain Covenants" (other than "Merger and Consolidation"),
the operation of the cross-default upon a payment default, cross acceleration
provisions, the bankruptcy provisions with respect to Significant Subsidiaries,
the judgment default provision and the Subsidiary Guarantee provision described
under "Events of Default" above and the limitations contained in clause (3)
under "Certain Covenants--Merger and Consolidation" above ("covenant
defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect to the Notes. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated because
of an Event of Default specified in clause (4), (5), (6), (7) (with respect
only to Significant Subsidiaries), (8) or (9) under "Events of Default" above
or because of the failure of the Company to comply with clause (3) and clause
(4) under "Certain Covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel (subject to customary exceptions and exclusions) to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance
had not occurred. In the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or the Subsidiary Guarantees or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for exchange of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
Concerning the Trustee
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank) is the
Trustee under the Indenture and has been appointed by the Company as Registrar
and Paying Agent with regard to the Notes.
Governing Law
The Indenture provides that each agreement and the Notes will be governed
by, and construed in accordance with, the laws of the State of New York.
Certain Definitions
"1995 Indenture" means the indenture dated as of October 23, 1995 between
the Company, as successor to Quaker State Corporation, and Chemical Bank, as
Trustee, as the same may be amended, supplemented or otherwise modified from
time to time.
108
"1999 Indenture" means the indenture dated as of February 1, 1999, between
the Company and Chase Bank of Texas, National Association, as Trustee, as the
same may be amended, supplemented or otherwise modified from time to time.
"2002 Notes" means the Company's $150 million principal amount of 8.65%
Notes due 2002 issued pursuant to Section 301 of the 1999 Indenture.
"2005 Notes" means the Company's $100 million principal amount of 6 5/8%
Notes due 2005 issued pursuant to the 1995 Indenture. Pennzoil-Quaker State
Company has replaced Quaker State Corporation as obligor under these notes.
"2009 Notes" means the Company's $200 million principal amount of 6 3/4%
Notes due 2009 issued pursuant to Section 301 of the 1999 Indenture.
"2029 Debentures" means the Company's $400 million principal amount of 7
3/8% Debentures due 2029 issued pursuant to Section 301 of the 1999 Indenture.
"Additional Assets" means:
(1) any property or assets (other than Indebtedness and Capital Stock) to
be used by the Company or a Restricted Subsidiary in a Related
Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by the Company or a
Restricted Subsidiary of the Company; or
(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary of the Company;
provided, however, that, in the case of clauses (2) and (3), such Restricted
Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"Asset Disposition" means any direct or indirect sale, lease (other than an
operating lease entered into in the ordinary course of business), transfer,
issuance or other disposition, or a series of related sales, leases, transfers,
issuances or dispositions that are part of a common plan, of shares of Capital
Stock of a Subsidiary (other than directors' qualifying shares), property or
other assets (each referred to for the purposes of this definition as a
"disposition") by the Company or any of its Restricted Subsidiaries, including
any disposition by means of a merger, consolidation or similar transaction.
Notwithstanding the preceding, the following items shall not be deemed to be
Asset Dispositions:
(1) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Restricted Subsidiary (other
than a Receivables Entity);
(2) the sale of Cash Equivalents in the ordinary course of business;
(3) a disposition of inventory in the ordinary course of business;
109
(4) a disposition of obsolete or worn out equipment or equipment that is no
longer useful in the conduct of the business of the Company and its
Restricted Subsidiaries and that is disposed of in each case in the
ordinary course of business;
(5) transactions permitted under "Certain Covenants--Merger and
Consolidation";
(6) an issuance of Capital Stock by a Restricted Subsidiary of the Company
to the Company or to a Restricted Subsidiary (other than a Receivables
Entity);
(7) for purposes of "Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, the making of a Permitted Investment or a
disposition permitted by "Certain Covenants--Limitation on Restricted
Payments";
(8) sales of accounts receivable and related assets or an interest therein
of the type specified in the definition of "Qualified Receivables
Transaction" made in connection with a Qualified Receivables
Transaction;
(9) dispositions of assets in a single transaction or series of related
transactions with an aggregate fair market value in any calendar year
of less than $25.0 million;
(10) dispositions in connection with Permitted Liens;
(11) the licensing or sublicensing of intellectual property or other
general intangibles and licenses, leases or subleases of other
property in the ordinary course of business which do not materially
interfere with the business of the Company and its Restricted
Subsidiaries;
(12) Permitted Sale/Leaseback Dispositions;
(13) foreclosure on assets; and
(14) sales of notes receivable (including, without limitation, any
collateral securing such notes, all contracts and guarantees or other
obligations in respect thereof and all proceeds of the foregoing) in
connection with the PLCAC Agreement.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (1) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (2) the sum of all such payments.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banking institutions are authorized or required by law to
close in New York City.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation will be the capitalized amount of such obligation at the time
any determination thereof is to be made as determined in accordance with GAAP,
and the Stated Maturity thereof will be the date of the last payment of
110
rent or any other amount due under such lease prior to the first date such
lease may be terminated without penalty.
"Cash Equivalents" means:
(1) securities issued or directly and fully guaranteed or insured by the
United States Government or any agency or instrumentality of the United
States, having maturities of not more than one year from the date of
acquisition;
(2) marketable general obligations issued by any state of the United States
of America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of
acquisition of the United States and, at the time of acquisition,
having a credit rating of "A" or better from either Standard & Poor's
Ratings Services or Moody's Investors Service, Inc.;
(3) certificates of deposit, time deposits, eurodollar time deposits,
overnight bank deposits or bankers' acceptances having maturities of
not more than one year from the date of acquisition thereof issued by
any commercial bank (i) in the case of any commercial bank chartered by
the United States Government or any state thereof the long-term debt of
which bank is rated at the time of acquisition thereof at least "A" or
the equivalent thereof by Standard & Poor's Ratings Services, or "A" or
the equivalent thereof by Moody's Investors Service, Inc., and (ii)
having combined capital and surplus in excess of $500.0 million (or the
U.S. dollar equivalent thereof);
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1), (2) and
(3) entered into with any bank meeting the qualifications specified in
clause (3) above;
(5) commercial paper rated at the time of acquisition thereof at least "A-
2" or the equivalent thereof by Standard & Poor's Ratings Services or
"P-2" or the equivalent thereof by Moody's Investors Service, Inc., or
carrying an equivalent rating by a nationally recognized rating agency,
if both of the two named rating agencies cease publishing ratings of
investments, and in any case maturing within one year after the date of
acquisition thereof;
(6) interests in any investment company or money market fund which invests
primarily in instruments of the type specified in clauses (1) through
(5) above;
(7) in the case of Foreign Subsidiaries, substantially similar investments
to those set forth in clauses (1) through (6) above denominated in
foreign currencies; provided that references to the United States
Government shall be deemed to mean foreign countries having a sovereign
rating of "A" or better from either Standard & Poor's Ratings or
Moody's Investors Service, Inc.; and
(8) overnight bank deposits not to exceed $100,000 at any U.S. financial
institution or $350,000 at any non-U.S. financial institution.
"Change of Control" means:
(1) any "person" or "group" of related persons (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that such person or group shall be deemed to have
"beneficial ownership" of all shares that any such person or group has
the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than
50% of the total voting power of the Voting Stock of the Company (or
its successor by merger, consolidation or purchase of all or
substantially all of its assets) (for the purposes of this clause, such
person or group shall be deemed to beneficially own any Voting Stock of
the Company held by a parent entity, if such person or group
"beneficially owns" (as defined above), directly or
111
indirectly, more than 50% of the voting power of the Voting Stock of
such parent entity);
(2) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors; or
(3) the sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company
and its Restricted Subsidiaries taken as a whole to any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act); or
(4) the adoption by the stockholders of the Company of a plan for the
liquidation or dissolution of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means with respect to any Person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such Person's common stock whether or not
outstanding on the Issue Date, and includes, without limitation, all series and
classes of such common stock.
"Consolidated Coverage Ratio" means as of any date of determination, with
respect to any Person, the ratio of (x) the aggregate amount of Consolidated
EBITDA of such Person for the period of the most recent four consecutive fiscal
quarters ending prior to the date of such determination for which financial
statements are in existence to (y) Consolidated Interest Expense for such four
fiscal quarters, provided, however, that:
(1) if the Company or any Restricted Subsidiary:
(a) has Incurred any Indebtedness since the beginning of such period
that remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, Consolidated
EBITDA and Consolidated Interest Expense for such period will be
calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the first
day of such period (except that in making such computation, the
amount of Indebtedness under any revolving credit facility
outstanding on the date of such calculation will be computed based
on (i) the average daily balance of such Indebtedness during such
four fiscal quarters or such shorter period for which such facility
was outstanding or (ii) if such facility was created after the end
of such four fiscal quarters, the average daily balance of such
Indebtedness during the period from the date of creation of such
facility to the date of such calculation) and the discharge of any
other Indebtedness repaid, repurchased, defeased or otherwise
discharged with the proceeds of such new Indebtedness as if such
discharge had occurred on the first day of such period; or
(b) has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of the period that is no longer
outstanding on such date of determination or if the transaction
giving rise to the need to calculate the Consolidated Coverage
Ratio involves a discharge of Indebtedness (in each case other than
Indebtedness incurred under any revolving credit facility unless
such Indebtedness has been permanently repaid and the related
commitment terminated), Consolidated EBITDA and Consolidated
Interest Expense for such period will be calculated after giving
effect on a pro forma basis to such discharge of such Indebtedness,
including with the proceeds of such new Indebtedness, as if such
discharge had occurred on the first day of such period;
112
(2) if since the beginning of such period the Company or any Restricted
Subsidiary will have made any Asset Disposition or if the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio is
an Asset Disposition:
(a) the Consolidated EBITDA for such period will be reduced by an
amount equal to the Consolidated EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset
Disposition for such period or increased by an amount equal to the
Consolidated EBITDA (if negative) directly attributable thereto for
such period; and
(b) Consolidated Interest Expense for such period will be reduced by an
amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted
Subsidiary which has been (or is to be) repaid, repurchased,
defeased or otherwise discharged with respect to the Company and
its continuing Restricted Subsidiaries in connection with such
Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary is sold, the Consolidated Interest Expense
for such period directly attributable to the Indebtedness of such
Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale);
(3) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) will have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted
Subsidiary or is merged with or into the Company) or an acquisition of
assets, including any acquisition of assets occurring in connection
with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit, division or
line of business or for its most recent fiscal year generated operating
income in excess of $1.0 million, Consolidated EBITDA and Consolidated
Interest Expense for such period will be calculated after giving pro
forma effect thereto (including the Incurrence of any Indebtedness) as
if such Investment or acquisition occurred on the first day of such
period; and
(4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company
or any Restricted Subsidiary since the beginning of such period) will
have made any Asset Disposition or any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (2) or
(3) above if made by the Company or a Restricted Subsidiary during such
period, Consolidated EBITDA and Consolidated Interest Expense for such
period will be calculated after giving pro forma effect thereto as if
such Asset Disposition or Investment or acquisition of assets occurred
on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to
any calculation under this definition, the pro forma calculations will be
determined in good faith by a responsible financial or accounting officer of
the Company (including pro forma expense and cost reductions calculated on a
basis consistent with Regulation S-X under the Securities Act). If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness will be calculated as if the
average rate in effect for the four quarter period preceding such date of
determination had been the applicable rate for the entire period (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
"Consolidated EBITDA" for any period means, without duplication, the
Consolidated Net Income for such period, plus the following to the extent
deducted in calculating such Consolidated Net Income:
113
(1) Consolidated Interest Expense;
(2) Consolidated Income Taxes;
(3) consolidated depreciation expense;
(4) consolidated amortization expense; and
(5) other non-cash charges reducing Consolidated Net Income (excluding any
such non-cash charge to the extent it represents an accrual of or
reserve for cash charges in any future period or amortization of a
prepaid cash expense that was paid in a prior period not included in
the calculation).
Notwithstanding the preceding sentence, clauses (2) through (5) relating to
amounts of a Restricted Subsidiary of a Person will be added to Consolidated
Net Income to compute Consolidated EBITDA of such Person only to the extent
(and in the same proportion) that the net income (loss) of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person and, to the extent the amounts set forth in clauses (2) through (5) are
in excess of those necessary to offset a net loss of such Restricted Subsidiary
or if such Restricted Subsidiary has net income for such period included in
Consolidated Net Income, only if a corresponding amount would be permitted at
the date of determination to be dividended, distributed, advanced or loaned to
the Company by such Restricted Subsidiary without prior approval (that has not
been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Income Taxes" means, with respect to any Person for any
period, taxes imposed upon such Person or other payments required to be made by
such Person by any governmental authority which taxes or other payments are
calculated by reference to the income or profits of such Person or such Person
and its Restricted Subsidiaries (to the extent such income or profits were
included in computing Consolidated Net Income for such period), regardless of
whether such taxes or payments are required to be remitted to any governmental
authority.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, whether
paid or accrued, plus, to the extent not included in such interest expense:
(1) interest expense attributable to Capitalized Lease Obligations in
accordance with GAAP and the interest component of any deferred payment
obligations;
(2) amortization of debt discount and debt issuance cost;
(3) non-cash interest expense;
(4) interest actually paid by the Company or any such Restricted Subsidiary
under any Guarantee of Indebtedness of any other Person;
(5) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period;
(6) the product of (a) all dividends paid or payable in cash, Cash
Equivalents or Indebtedness or accrued during such period on any series
of Disqualified Stock of such Person or on Preferred Stock of its
Restricted Subsidiaries payable to a party other than the Company or a
Wholly-Owned Subsidiary, times (b) a fraction, the numerator of which
is one and the denominator of which is one minus the then current
combined federal, state, provincial and local statutory tax rate of
such Person, expressed as a
114
decimal, in each case, on a consolidated basis and in accordance with
GAAP; provided that the foregoing tax adjustment shall only be applied
to the extend dividends on such Preferred Stock or Disqualified Stock
are non-deductible for tax purposes; and
(7) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust
to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust; provided,
however, that there will be excluded therefrom any such interest
expense of any Unrestricted Subsidiary to the extent the related
Indebtedness is not Guaranteed or paid by the Company or any Restricted
Subsidiary.
For purposes of the foregoing, total interest expense will be determined
after giving effect to any net payments made or received or accrued by the
Company and its Subsidiaries with respect to Interest Rate Agreements and with
respect to Indebtedness denominated in foreign currencies, net payments made
or received or accrued by the Company and its Subsidiaries with respect to
Currency Agreements.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Restricted Subsidiaries determined in
accordance with GAAP; provided, however, that there will not be included in
such Consolidated Net Income:
(1) any net income (loss) of any Person if such Person is not a Restricted
Subsidiary, except that:
(a) subject to the limitations contained in clauses (3), (4) and (5)
below, the Company's equity in the net income of any such Person for
such period will be included in such Consolidated Net Income up to
the aggregate amount of cash actually distributed by such Person
during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend
or other distribution to a Restricted Subsidiary, to the limitations
contained in clause (2) below); and
(b) the Company's equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period will be included in
determining such Consolidated Net Income to the extent such loss has
been funded with cash from the Company or a Restricted Subsidiary;
(2) any net income (but not loss) of any Restricted Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends and the making of distributions and advances by
such Restricted Subsidiary, directly or indirectly, to the Company,
except that:
(a) subject to the limitations contained in clauses (3), (4) and (5)
below, the Company's equity in the net income of any such Restricted
Subsidiary for such period will be included in such Consolidated Net
Income up to the aggregate amount of cash that could have been
dividended, distributed or advanced by such Restricted Subsidiary
during such period to the Company or another Restricted Subsidiary
(subject, in the case of a dividend, distribution or advance to
another Restricted Subsidiary, to the limitation contained in this
clause); and
(b) the Company's equity in a net loss of any such Restricted Subsidiary
for such period will be included in determining such Consolidated
Net Income;
(3) any gain (loss) realized upon the sale or other disposition of any
property, plant or equipment of the Company or its consolidated
Restricted Subsidiaries (including pursuant to any Sale/Leaseback
Transaction) which is not sold or otherwise disposed of
115
in the ordinary course of business and any gain (loss) realized upon the
sale or other disposition of any Capital Stock of any Person;
(4) any extraordinary gain or loss; and
(5) the cumulative effect of a change in accounting principles.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who: (1) was a member of such Board
of Directors on the date of the Indenture; or (2) was nominated for election
or elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facility" means one or more debt facilities (including, without
limitation, the new revolving credit agreement entered into among the Company,
JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as
Administrative Agent, and the lenders which are parties thereto from time to
time) or commercial paper facilities with banks or other institutional lenders
providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special
purpose entities formed to borrow from such lenders against such receivables)
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable) or upon the happening of
any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified Stock
(excluding Capital Stock which is convertible or exchangeable solely at
the option of the Company or a Restricted Subsidiary); or
(3) is redeemable at the option of the holder of the Capital Stock thereof,
in whole or in part;
in each case on or prior to the date that is 91 days after the date (a) on
which the Notes mature or (b) on which there are no Notes outstanding,
provided that only the portion of Capital Stock which so matures or is
mandatorily redeemable, is so convertible or exchangeable or is so redeemable
at the option of the holder thereof prior to such date will be deemed to be
Disqualified Stock; provided, further, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a change of control or asset sale (each defined in a
substantially identical manner to the corresponding definitions in the
Indenture) shall not constitute Disqualified Stock if the terms of such
Capital Stock (and all such securities into
116
which it is convertible or for which it is ratable or exchangeable) provide
that the Company may not repurchase or redeem any such Capital Stock (and all
such securities into which it is convertible or for which it is ratable or
exchangeable) pursuant to such provision prior to compliance by the Company
with the provisions of the Indenture described under the captions "Change of
Control" and "Limitation on Sales of Assets and Subsidiary Stock" (to the
extent such provisions remain in effect) and such repurchase or redemption
complies with "Certain Covenants--Restricted Payments".
"Equity Offering" means an offering for cash by the Company of its Capital
Stock (other than Disqualified Stock), or options, warrants or rights with
respect to its Capital Stock (other than Disqualified Stock) made pursuant to a
registration statement that has been declared effective by the Securities and
Exchange Commission (other than on Form S-4 or S-8) or pursuant to a private
placement.
"Excel Paralubes Sponsor Agreement " means the Sponsor Agreement dated as of
May 22, 1995 among Atlas Processing Company, Excel Paralubes, Excel Paralubes
Funding Corporation, and The First National Bank of Chicago, and any
amendments, supplements or other modifications thereto that do not materially
adversely affect the rights of a holder of the Notes taken as a whole; provided
that any amendment, supplement or modification that increases or could increase
the financial obligations of the Company or its Restricted Subsidiaries under
such agreement shall be deemed to materially adversely affect the rights of the
holders of the Notes.
"Excel Paralubes Partner Loan Agreement" means the Partner Loan Agreement
dated as of May 22, 1995 among Conoco Inc., Atlas Processing Company, Excel
Paralubes and The First National Bank of Chicago, and any amendments thereto
that do not materially adversely affect the rights of any holder, taken as a
whole, provided that any amendment, supplement or modification that increases
or could increase the financial obligations of the Company or its Restricted
Subsidiaries under such agreement shall be deemed to materially adversely
affect the rights of the holders of the Notes.
"Foreign Subsidiary" means any Restricted Subsidiary doing business outside
of the United States of America or any state thereof or the District of
Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
United States accounting profession. All ratios and computations based on GAAP
contained in the Indenture will be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and
any obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (including arising
by virtue of partnership arrangements); or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect
117
thereof (in whole or in part) (including by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise);
provided, however, that the term "Guarantee" will not include Limited Recourse
Obligations or endorsements for collection or deposit in the ordinary course
of business. The term "Guarantee" used as a verb has a corresponding meaning.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding
on the Issue Date or thereafter Incurred) which is expressly subordinate in
right of payment to the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee pursuant to a written agreement.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Incur" means issue, create, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition or otherwise) will be deemed to
be incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary; and the terms "Incurred" and "Incurrence" have meanings
correlative to the foregoing.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money;
(2) the principal of and premium (if any) in respect of obligations of such
Person evidenced by bonds, debentures, notes or other similar
instruments, if, and to the extent, any of the foregoing would appear
as a liability on a balance sheet of such Person prepared in accordance
with GAAP;
(3) the principal component of all obligations of such Person in respect of
letters of credit, bankers' acceptances or other similar instruments
(including reimbursement obligations with respect thereto except to the
extent such reimbursement obligation relates to a trade payable and
such obligation is satisfied within 90 days of Incurrence);
(4) the principal component of all obligations of such Person to pay the
deferred and unpaid purchase price of property (except accrued expenses
or trade payables or payments due under supply or service contracts in
the ordinary course of business), which purchase price is due more than
six months after the date of placing such property in service or taking
delivery and title thereto;
(5) Capitalized Lease Obligations of such Person;
(6) the principal component or liquidation preference of all obligations of
such Person with respect to the redemption, repayment or other
repurchase of any Disqualified Stock or, with respect to any
Subsidiary, any Preferred Stock (but excluding, in each case, any
accrued dividends);
(7) the principal component of all Indebtedness of other Persons secured by
a Lien on any asset of such Person (excluding Limited Recourse Stock
Pledges), whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of such Indebtedness will be the
lesser of (a) the fair market value of such asset at such date of
determination and (b) the amount of such Indebtedness of such other
Persons;
118
(8) the principal component of Indebtedness of other Persons to the extent
Guaranteed by such Person; and
(9) to the extent not otherwise included in this definition, net
obligations of such Person under Currency Agreements and Interest Rate
Agreements (the amount of any such obligations to be equal at any time
to the termination value of such agreement or arrangement giving rise
to such obligation that would be payable by such Person at such time).
The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date of all unconditional obligations as described above and
the maximum liability, upon the occurrence of the contingency giving rise to
the obligation, of any contingent obligations as described above at such date.
Notwithstanding the foregoing, (i) money borrowed and set aside at the time of
the Incurrence of any Indebtedness in order to pre-fund the payment of interest
on such Indebtedness shall not be deemed to be "Indebtedness" provided that
such money is held to secure the payment of such interest and (ii) Indebtedness
shall not include obligations under take-or-pay or put-or-pay agreements
entered into in the ordinary course of business.
In addition, "Indebtedness" of any Person shall include Indebtedness
described in the preceding paragraph that would not appear as a liability on
the balance sheet of such Person if:
(1) such Indebtedness is the obligation of a Joint Venture;
(2) such Person or a Restricted Subsidiary of such Person is a general
partner of the Joint Venture or otherwise liable for the debts of such
Joint Venture (a "General Partner"); and
(3) there is recourse, by contract or operation of law, with respect to the
payment of such Indebtedness to property or assets of such Person or a
Restricted Subsidiary of such Person (other than pursuant to Limited
Recourse Obligations); and then such Indebtedness shall be included in
an amount not to exceed:
(a) the amount of such obligations to the extent that there is
recourse, by contract or operation of law, to the property or
assets of such Person or a Restricted Subsidiary of such Person; or
(b) if less than the amount determined pursuant to clause (a)
immediately above, the actual amount of such Indebtedness that is
recourse to such Person or a Restricted Subsidiary of such Person,
if the Indebtedness is evidenced by a writing and is for a
determinable amount and the related interest expense shall be
included in Consolidated Interest Expense to the extent actually
paid by the Company or its Restricted Subsidiaries.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"International Facilities" means the debt facilities in existence on the
Issue Date with respect to Subsidiaries of the Company whose primary business
is outside of the United States, in each case as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time
(whether or not with the original lenders).
119
"Investment" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of any direct or
indirect advance, loan (other than advances to customers in the ordinary course
of business) or other extension of credit (including by way of Guarantee or
similar arrangement, but excluding any debt or extension of credit represented
by a bank deposit other than a time deposit) or capital contribution to (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, Indebtedness or other similar instruments issued
by, such other Person and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided that
none of the following will be deemed to be an Investment:
(1) Hedging Obligations, commodity price protection agreements and
commodity price hedging agreements entered into in the ordinary course
of business and in compliance with the Indenture;
(2) endorsements of negotiable instruments and documents in the ordinary
course of business; and
(3) an acquisition of assets, Capital Stock or other securities by the
Company or a Subsidiary for consideration to the extent such
consideration consists of common equity securities of the Company.
For purposes of "Certain Covenants--Limitation on Restricted Payments":
(1) "Investment" will include the portion (proportionate to the Company's
equity interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets of
such Restricted Subsidiary of the Company at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company will be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount (if
positive) equal to (a) the Company's "Investment" in such Subsidiary at
the time of such redesignation less (b) the portion (proportionate to
the Company's equity interest in such Subsidiary) of the fair market
value of the net assets (as conclusively determined by the Board of
Directors of the Company in good faith) of such Subsidiary at the time
that such Subsidiary is so re-designated a Restricted Subsidiary; and
(2) any property transferred to or from an Unrestricted Subsidiary will be
valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors or senior
management of the Company. If the Company or any Restricted Subsidiary
of the Company sells or otherwise disposes of any Voting Stock of any
Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, such entity is no longer a Subsidiary of
the Company, the Company shall be deemed to have made an Investment on
the date of any such sale or disposition equal to the fair market value
(as conclusively determined by the Board of Directors or senior
management of the Company in good faith) of the Capital Stock of such
Subsidiary not sold or disposed of.
"Investment Grade Status," with respect to the Company, shall occur when the
Notes receive a rating of "BBB-" or higher from Standard & Poor's Ratings Group
and a rating of "Baa3" or higher from Moody's Investors Service, Inc.
"Issue Date" means November 2, 2001, the date on which the old notes were
originally issued.
"Joint Venture" means a partnership or joint venture that is not a
Restricted Subsidiary.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
120
"Limited Recourse Obligations" means:
(1) obligations of the Company or any Restricted Subsidiary to any Joint
Venture under take-or-pay contracts or put-or-pay contracts;
(2) Limited Recourse Stock Pledges;
(3) the extension by the Company or any Restricted Subsidiary of insurance
coverage to any Joint Venture;
(4) the obligation of Atlas Processing Company (or a successor thereof) to
purchase subordinated notes pursuant to the Excel Paralubes Partner
Loan Agreement; and
(5) the obligation of Atlas Processing Company (or a successor thereof)
under the Excel Paralubes Sponsor Agreement to maintain expense
reserves, make capital contributions to cover uninsured property losses
and to deposit funds in the debt service reserve account.
"Limited Recourse Stock Pledge" means the pledge of Capital Stock in any
Joint Venture or any Unrestricted Subsidiary to secure Non-Recourse Debt of
such Joint Venture or Unrestricted Subsidiary.
"Moody's" means Moody's Investors Service, Inc., and its successors.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other noncash form) therefrom, in each case net
of:
(1) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses incurred, and all
Federal, state, provincial, foreign and local taxes required to be paid
or accrued as a liability under GAAP as a consequence of such Asset
Disposition;
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or by applicable
law be repaid out of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition;
(4) the deduction of appropriate amounts to be provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated
with the assets disposed of in such Asset Disposition and retained by
the Company or any Restricted Subsidiary after such Asset Disposition;
and
(5) all payments made with respect to liabilities directly associated with
the assets which are the subject of the Asset Disposition, including,
without limitation, trade payables and other accrued liabilities.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, listing fees,
discounts or commissions and brokerage, consultant and
121
other fees and charges actually incurred in connection with such issuance or
sale and net of taxes paid or payable as a result of such issuance or sale.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Company nor any Restricted Subsidiary (a)
provides any Guarantee or credit support of any kind (including any
undertaking, guarantee, indemnity, agreement or instrument that would
constitute Indebtedness) or (b) is directly or indirectly liable (as a
guarantor or otherwise);
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Indebtedness of the Company or any Restricted
Subsidiary to declare a default under such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated
maturity; and
(3) the explicit terms of which provide there is no recourse against any of
the assets of the Company or its Restricted Subsidiaries.
"Officer" means the Chairman of the Board, the President, the Chief
Executive Officer, the Chief Operating Officer, the Chief Financial Officer,
any Vice President, the Treasurer, the Controller or the Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two Officers or by an
Officer and either an Assistant Treasurer or an Assistant Secretary of the
Company.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Pari Passu Indebtedness" means Indebtedness that ranks equally in right of
payment to the Notes.
"Permitted Sale/Leaseback Disposition" means any Sale/Leaseback Transaction
entered into within 180 days of the date of acquisition of property that is
entered into with any vendor or supplier (or Affiliate thereof) (or any
financial institution acting on behalf of or for the purpose of financing
purchases from such vendor or supplier) to the extent the Indebtedness
thereunder is Incurred for the purpose of financing the acquisition of such
assets or property to be used in a Related Business.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) a Restricted Subsidiary (other than a Receivables Entity) or a Person
which will, upon the making of such Investment, become a Restricted
Subsidiary (other than a Receivables Entity); provided, however, that
the primary business of such Restricted Subsidiary is a Related
Business;
(2) another Person if as a result of such Investment such other Person is
merged, consolidated or amalgamated with or into, or transfers or
conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary (other than a Receivables Entity); provided,
however, that such Person's primary business is a Related Business;
(3) cash and Cash Equivalents;
122
(4) trade receivables or notes receivable owing to the Company or any
Restricted Subsidiary;
(5) payroll, travel and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of
business;
(6) loans or advances to officers, employees or directors made in the
ordinary course of business consistent with past practices of the
Company or such Restricted Subsidiary;
(7) Investments received in settlement of debts created in the ordinary
course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction or settlement of judgments, litigations
or arbitrations, or pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of a debtor;
(8) Investments made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with
"Certain Covenants--Limitation on Sales of Assets and Subsidiary
Stock";
(9) Investments in existence on the Issue Date;
(10) Currency Agreements, Interest Rate Agreements and related Hedging
Obligations, which transactions or obligations are Incurred in
compliance with "Certain Covenants--Limitation on Indebtedness";
(11) Investments by the Company or any of its Restricted Subsidiaries,
together with all other Investments pursuant to this clause (11), in
an aggregate amount at the time of such Investment not to exceed $20.0
million outstanding at any one time;
(12) Guarantees issued in accordance with "Certain Covenants--Limitations
on Indebtedness";
(13) Investments by the Company or a Restricted Subsidiary in a Receivables
Entity or any Investment by a Receivables Entity in any other Person,
in each case, in connection with a Qualified Receivables Transaction,
provided, however, that any Investment in any such Person is in the
form of a Purchase Money Note, or any equity interest or interests in
accounts receivable and related assets generated by the Company or a
Restricted Subsidiary and transferred to any Person in connection with
a Qualified Receivables Transaction or any such Person owning such
accounts receivable; and
(14) Limited Recourse Stock Pledges.
"Permitted Liens" means, with respect to any Person:
(1) Liens securing Indebtedness and other obligations of the Company under
the Credit Facility and related Interest Rate Agreements and liens on
assets of Restricted Subsidiaries securing Guarantees of Indebtedness
and other obligations of the Company under the Credit Facility
permitted to be incurred under the Indenture;
(2) pledges or deposits by such Person under workmen's compensation laws,
unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for
the payment of Indebtedness) or leases, subleases or licenses to which
such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits or cash or United States
government bonds to secure surety or appeal bonds to which such Person
is a party, or deposits as security for contested taxes or import or
customs duties or for the payment of rent, in each case Incurred in the
ordinary course of business;
123
(3) Liens imposed by law, including carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested
in good faith by appropriate proceedings if a reserve or other
appropriate provisions, if any, as shall be required by GAAP shall have
been made in respect thereof;
(4) Liens for taxes, assessments or other governmental charges or claims
not yet subject to penalties for non-payment or which are being
contested in good faith by appropriate proceedings provided appropriate
reserves required pursuant to GAAP have been made in respect thereof;
(5) Liens in favor of issuers of tender, bid, surety, appeal or performance
bonds or letters of credit or bankers' acceptances issued pursuant to
the request of and for the account of such Person in the ordinary
course of its business; provided, however, that such letters of credit
do not support Indebtedness;
(6) encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real properties or liens incidental to
the conduct of the business of such Person or to the ownership of its
properties which do not in the aggregate materially adversely affect
the value of said properties or materially impair their use in the
operation of the business of such Person;
(7) Liens securing Hedging Obligations so long as the related Indebtedness
is, and is permitted to be Incurred under the Indenture;
(8) licenses, leases and subleases of real or personal property which do
not materially interfere with the ordinary conduct of the business of
the Company or any of its Restricted Subsidiaries;
(9) judgment Liens not giving rise to an Event of Default so long as such
Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment have not
been finally terminated or the period within which such proceedings may
be initiated has not expired;
(10) Liens for the purpose of securing the payment of all or a part of the
purchase price or cost of construction or improvement of (or
Indebtedness Incurred in connection therewith), or Capitalized Lease
Obligations with respect to, assets or property acquired or
constructed or improved in the ordinary course of business (including,
without limitation, Permitted Sale Leaseback Dispositions), provided
that:
(a) the aggregate principal amount of Indebtedness secured by such
Liens is otherwise permitted to be Incurred under the Indenture and
does not exceed the cost of the assets or property so acquired or
constructed; and
(b) such Liens are created within 180 days of construction or
acquisition of such assets or property and do not encumber any
other assets or property of the Company or any Restricted
Subsidiary other than such assets or property and assets affixed or
appurtenant thereto or proceeds in respect thereof;
(11) Liens arising solely by virtue of any statutory or common law
provisions relating to banker's Liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds maintained
with a depositary institution, including dedicated cash collateral
accounts to secure obligations under letters of credit;
(12) Liens arising from Uniform Commercial Code financing statement filings
regarding operating leases entered into by the Company and its
Restricted Subsidiaries in the ordinary course of business;
124
(13) Liens existing on the Issue Date;
(14) Liens on property (plus assets or property affixed or appurtenant
thereto or proceeds in respect thereof) or Capital Stock of a Person
at the time such Person becomes a Restricted Subsidiary (plus assets
or property affixed or appurtenant thereto or proceeds in respect
thereof); provided, however, that such Liens are not created, incurred
or assumed in connection with, or in contemplation of, such other
Person becoming a Restricted Subsidiary; provided further, however,
that any such Lien may not extend to any other property owned by the
Company or any Restricted Subsidiary;
(15) Liens on property at the time the Company or a Restricted Subsidiary
acquired the property, including any acquisition by means of a merger
or consolidation with or into the Company or any Restricted Subsidiary
(plus assets or property affixed or appurtenant thereto or proceeds in
respect thereof); provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that such Liens may not extend
to any other property owned by the Company or any Restricted
Subsidiary;
(16) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to the Company or a Restricted Subsidiary (other than
a Receivables Entity);
(17) Liens securing the Notes and Subsidiary Guarantees;
(18) Liens securing Refinancing Indebtedness incurred to refinance
Indebtedness that was previously so secured, provided that any such
Lien is limited to all or part of the same property or assets (plus
assets or property affixed or appurtenant thereto or proceeds in
respect thereof) that secured (or, under the written arrangements
under which the original Lien arose, could secure) the Indebtedness
being refinanced or is in respect of property that is the security for
a Permitted Lien hereunder;
(19) Liens on assets transferred to a Receivables Entity or on assets of a
Receivables Entity, in either case incurred in connection with a
Qualified Receivables Transaction;
(20) Liens securing Indebtedness or other obligations (other than
Subordinated Obligations and Guarantor Subordinated Obligations) in an
aggregate principal amount outstanding at any one time not to exceed
$25.0 million;
(21) Limited Recourse Stock Pledges;
(22) Liens arising out of consignment or similar arrangements for the sale
of goods entered into by the Company or any Restricted Subsidiary in
the ordinary course of business in accordance with industry practice;
(23) Liens incurred or assumed in connection with the issuance of revenue
bonds the interest on which is exempt from federal income taxation
pursuant to Section 103(b) of the Internal Revenue Code;
(24) customary Liens for the fees, costs and expenses of trustees and
escrow agents pursuant to an indenture, escrow agreement or similar
agreement establishing a trust or escrow arrangement, and Liens
pursuant to merger agreements, stock purchase agreements, asset sale
agreements, option agreements and similar agreements in respect of the
disposition of property or assets of the Company or any Restricted
Subsidiary on the property to be disposed of, to the extent such
dispositions are permitted hereunder;
(25) Liens resulting from the deposit of funds or securities in trust for
the purpose of defeasing the 2002 Notes, 2005 Notes, 2009 Notes and
2029 Debentures;
(26) Liens securing the 2002 Notes, the 2005 Notes, the 2009 Notes and the
2029 Debentures, to the extent such Liens are required pursuant to the
terms thereof;
125
(27) Liens securing amounts borrowed, or Guarantees in respect thereof,
under commitments in existence on the Issue Date under the
International Facilities; and
(28) Liens on assets of the Company or any Restricted Subsidiary arising as
a result of a Sale/Leaseback Transaction with respect to such assets;
provided that the Net Available Cash from such Sale/Leaseback
Transaction are applied in accordance with "Certain Covenants--
Limitation on Sale of Assets and Subsidiary Stock" (to the extent such
covenant remains in effect).
"Permitted Non-Recourse Indebtedness" means Indebtedness of the Company or
any Restricted Subsidiary incurred in connection with the acquisition or
construction by the Company or such Restricted Subsidiary of any property with
respect to which:
(1) the holders of such Indebtedness agree that they will look solely to
the property so acquired or constructed and securing such Indebtedness,
and neither the Company nor any Restricted Subsidiary (a) provides
direct or indirect credit support, including any undertaking, agreement
or instrument that would constitute Indebtedness (other than the grant
of a Lien on such acquired or constructed property) or (b) is directly
or indirectly liable for such Indebtedness; and
(2) no default with respect to such Indebtedness would cause, or permit
(after notice or passage of time or otherwise), according to the terms
thereof, any holder (or any representative of any such holder) of any
other Indebtedness of the Company or a Restricted Subsidiary to declare
a default on such other Indebtedness or cause the payment, repurchase,
redemption, defeasance or other acquisition or retirement for value
thereof to be accelerated or payable prior to any scheduled principal
payment, scheduled sinking fund or maturity.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, government or any agency or political subdivision hereof or
any other entity.
"PLCAC Agreement" means the Second Amended and Restated Lube Center
Receivable Purchase and Sale Agreement dated as of June 22, 2000 among Pennzoil
Lube Center Acceptance Corporation, as Seller, Corporate Receivables
Corporation and Liberty Street Funding Corp., as Investors, Citicorp North
America, Inc., as Investor Agent, and The Bank of Nova Scotia, and Liberty
Agent, as amended by the First Amendment thereto dated as of March 13, 2001 and
the Second Amendment thereto dated as of June 14, 2001, as amended, restated,
modified, renewed, refunded, replaced or refinanced in whole or in part from
time to time.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Purchase Money Note" means a promissory note of a Receivables Entity
evidencing a line of credit, which may be irrevocable, from the Company or any
Restricted Subsidiary of the Company in connection with a Qualified Receivables
Transaction to a Receivables Entity, which note is repayable from cash
available to the Receivables Entity, other than amounts required to be
established as reserves pursuant to agreements, amounts paid to investors in
respect of interest, principal and other amounts owing to such investors and
amounts owing to such investors and amounts paid in connection with the
purchase of newly generated accounts receivable.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its Restricted
Subsidiaries pursuant to which the
126
Company or any of its Restricted Subsidiaries may sell, convey or otherwise
transfer to (1) a Receivables Entity (in the case of a transfer by the Company
or any of its Restricted Subsidiaries)
and (2) any other Person (in the case of a transfer by a Receivables Entity),
or may grant a security interest in, any accounts receivable (whether now
existing or arising in the future) of the Company or any of its Restricted
Subsidiaries, and any assets related thereto including, without limitation, all
collateral securing such accounts receivable, all contracts and all guarantees
or other obligations in respect of such accounts receivable, the proceeds of
such receivables and other assets which are customarily transferred, or in
respect of which security interests are customarily granted in connection with
asset securitization involving accounts receivable.
"Receivables Entity" means a Wholly-Owned Subsidiary of the Company (or
another Person in which the Company or any Restricted Subsidiary of the Company
makes an Investment and to which the Company or any Restricted Subsidiary of
the Company transfers accounts receivable and related assets) which engages in
no activities other than in connection with the financing of accounts
receivable and which is designated by the Board of Directors of the Company (as
provided below) as a Receivables Entity:
(1) no portion of the Indebtedness or any other obligations (contingent or
otherwise) of which:
(a) is guaranteed by the Company or any Restricted Subsidiary of the
Company (excluding guarantees of Obligations (other than the
principal of, and interest on, Indebtedness) pursuant to Standard
Securitization Undertakings);
(b) is recourse to or obligates the Company or any Restricted
Subsidiary of the Company in any way other than pursuant to
Standard Securitization Undertakings; or
(c) subjects any property or asset of the Company or any Restricted
Subsidiary of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
Standard Securitization Undertakings;
(2) with which neither the Company nor any Restricted Subsidiary of the
Company has any material contract, agreement, arrangement or
understanding (except in connection with a Purchase Money Note or
Qualified Receivables Transaction) other than on terms no less
favorable to the Company or such Restricted Subsidiary than those that
might be obtained at the time from Persons that are not Affiliates of
the Company, other than fees payable in the ordinary course of business
in connection with servicing accounts receivable; and
(3) to which neither the Company nor any Restricted Subsidiary of the
Company has any obligation to maintain or preserve such entity's
financial condition or cause such entity to achieve certain levels of
operating results (except pursuant to Standard Securitization
Undertakings).
Any such designation by the Board of Directors of the Company shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
resolution of the Board of Directors of the Company giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, exchange, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) (collectively, "refinance," "refinances,"
and "refinanced" shall have a correlative meaning) any Indebtedness existing on
the date of the Indenture or Incurred in compliance with the Indenture
(including Indebtedness of the Company that refinances Indebtedness of any
Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that
refinances
127
Indebtedness of another Restricted Subsidiary) including Indebtedness that
refinances Refinancing Indebtedness, provided, however, that:
(1) (a) if the Stated Maturity of the Indebtedness being refinanced is
earlier than the Stated Maturity of the Notes, the Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity
of the Indebtedness being refinanced or (b) if the Stated Maturity of
the Indebtedness being refinanced is later than the Stated Maturity of
the Notes, the Refinancing Indebtedness has a Stated Maturity at least
91 days later than the Stated Maturity of the Notes;
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being refinanced;
(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the sum of the aggregate principal
amount (or if issued with original issue discount, the aggregate
accreted value) then outstanding of Indebtedness being refinanced
(plus, without duplication, any additional Indebtedness Incurred to pay
interest or premiums required by the instruments governing such
existing Indebtedness or otherwise paid or payable to complete such
repurchase and fees and expenses Incurred in connection therewith); and
(4) if the Indebtedness being refinanced is subordinated in right of
payment to the Notes or the Subsidiary Guarantee, such Refinancing
Indebtedness is subordinated in right of payment to the Notes or the
Subsidiary Guarantee on terms at least as favorable to the holders of
Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Related Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of the Company and its
Restricted Subsidiaries on the date of the Indenture.
"Related Business Assets" means assets used or useful in a Related Business.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person or an Affiliate thereof.
"Secured Indebtedness" means any borrowings under a credit facility or
indenture that are secured by a Lien on assets of the relevant borrower.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"S&P" means Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc., and its successors.
128
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Restricted
Subsidiary of the Company which are reasonably customary in securitization of
accounts receivable transactions.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision, but shall not include any contingent obligations to repay, redeem or
repurchase any such principal prior to the date originally scheduled for the
payment thereof.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership,
joint venture, limited liability company or other business entity of which more
than 50% of the total voting power of shares of Capital Stock or other
interests (including partnership and joint venture interests) entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (1) such Person, (2) such Person and one or more
Subsidiaries of such Person or (3) one or more Subsidiaries of such Person.
Unless otherwise specified herein, each reference to a Subsidiary will refer to
a Subsidiary of the Company.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
Notes by a Subsidiary Guarantor pursuant to the terms of the Indenture and any
supplemental indenture thereto, and, collectively, all such Guarantees. Each
such Subsidiary Guarantee will be in the form prescribed by the Indenture.
"Subsidiary Guarantor" means each Subsidiary of the Company in existence on
the Issue Date and any Restricted Subsidiary created or acquired by the Company
after the Issue Date that Guarantees obligations under a Credit Facility and is
therefore, to the extent required by the Indenture, required to Guarantee
obligations under the Indenture and the Notes or at the Company's option, any
Restricted Subsidiary designated as a Subsidiary Guarantor by the Company.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination shall
be designated an Unrestricted Subsidiary by the Board of Directors of
the Company in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of the Company may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary or a Person
becoming a Subsidiary through merger or consolidation or Investment therein) to
be an Unrestricted Subsidiary only if:
(1) such Subsidiary or any of its Subsidiaries does not own any Capital
Stock or Indebtedness of or have any Investment in, or own or hold any
Lien on any property of, any other Subsidiary of the Company which is
not a Subsidiary of the Subsidiary to be so designated or otherwise an
Unrestricted Subsidiary;
(2) all the Indebtedness of such Subsidiary and its Subsidiaries shall, at
the date of designation, and will at all times thereafter, consist of
Non-Recourse Debt;
129
(3) such designation and the Investment of the Company in such Subsidiary
complies with "Certain Covenants--Limitation on Restricted Payments";
(4) such Subsidiary, either alone or in the aggregate with all other
Unrestricted Subsidiaries, does not operate, directly or indirectly,
all or substantially all of the business of the Company and its
Subsidiaries;
(5) such Subsidiary is a Person with respect to which neither the Company
nor any of its Restricted Subsidiaries has any direct or indirect
obligation:
(a) to subscribe for additional Capital Stock of such Person; or
(b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating
results; and
(6) on the date such Subsidiary is designated an Unrestricted Subsidiary,
such Subsidiary is not a party to any agreement, contract, arrangement
or understanding with the Company or any Restricted Subsidiary with
terms substantially less favorable to the Company than those that might
have been obtained from Persons who are not Affiliates of the Company.
Any such designation by the Board of Directors of the Company shall be
evidenced to the Trustee by filing with the Trustee a resolution of the Board
of Directors of the Company giving effect to such designation and an Officers'
Certificate certifying that such designation complies with the foregoing
conditions. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be Incurred as of such date.
The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that immediately after
giving effect to such designation, no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof and the
Company could incur at least $1.00 of additional Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant on a pro forma basis
taking into account such designation.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, all
of the Capital Stock of which (other than directors' qualifying shares) is
owned by the Company or another Wholly-Owned Subsidiary.
130
BOOK-ENTRY SETTLEMENT AND CLEARANCE
The Global Notes
The old notes were, and the new notes will be, issued in the form of one or
more registered notes in global form, without interest coupons (the "global
notes").
Upon issuance, each of the global notes will be deposited with the Trustee
as custodian for The Depository Trust Company and registered in the name of
Cede & Co., as nominee of DTC.
Ownership of beneficial interests in each global note will be limited to
persons who have accounts with DTC ("DTC participants") or persons who hold
interests through DTC participants. We expect that under procedures established
by DTC:
. upon deposit of each global note with DTC's custodian, DTC will credit
portions of the principal amount of the global note to the accounts of
the DTC participants designated by the initial purchasers; and
. ownership of beneficial interests in each global note will be shown on,
and transfer of ownership of those interests will be effected only
through, records maintained by DTC (with respect to interests of DTC
participants) and the records of DTC participants (with respect to other
owners of beneficial interests in the global note).
Beneficial interests in the global notes may not be exchanged for notes in
physical, certificated form except in the limited circumstances described
below.
Book-Entry Procedures for the Global Notes
All interests in the global notes will be subject to the operations and
procedures of DTC, Euroclear Bank S.A./N.A. and Clearstream Bank, societe
anonyme. We provide the following summaries of those operations and procedures
solely for the convenience of investors. The operations and procedures of each
settlement system are controlled by that settlement system and may be changed
at any time. We are not responsible for those operations or procedures.
DTC has advised us that it is:
. a limited purpose trust company organized under the laws of the State of
New York;
. a "banking organization" within the meaning of the New York State Banking
Law;
. a member of the Federal Reserve System;
. a "clearing corporation" within the meaning of the Uniform Commercial
Code; and
. a "clearing agency" registered under Section 17A of the Exchange Act.
DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between its
participants through electronic book-entry changes to the accounts of its
participants. DTC's participants include securities brokers and dealers,
including the initial purchasers; banks and trust companies; clearing
corporations and other organizations. Indirect access to DTC's system is also
available to others such as banks, brokers, dealers and trust companies; these
indirect participants clear through or maintain a custodial relationship with a
DTC participant, either directly or indirectly. Investors who are not DTC
participants may beneficially own securities held by or on behalf of DTC only
through DTC participants or indirect participants in DTC.
131
So long as DTC's nominee is the registered owner of a global note, that
nominee will be considered the sole owner or holder of the notes represented
by that global note for all purposes under the Indenture. Except as provided
below, owners of beneficial interests in a global note:
. will not be entitled to have notes represented by the global note
registered in their names;
. will not receive or be entitled to receive physical, certificated notes;
and
. will not be considered the owners or holders of the notes under the
Indenture for any purpose, including with respect to the giving of any
direction, instruction or approval to the Trustee under the Indenture.
As a result, each investor who owns a beneficial interest in a global note
must rely on the procedures of DTC to exercise any rights of a holder of notes
under the Indenture (and, if the investor is not a participant or an indirect
participant in DTC, on the procedures of the DTC participant through which the
investor owns its interest).
Payments of principal, premium (if any) and interest with respect to the
notes represented by a global note will be made by the Trustee to DTC's
nominee as the registered holder of the global note. Neither we nor the
Trustee will have any responsibility or liability for the payment of amounts
to owners of beneficial interests in a global note, for any aspect of the
records relating to or payments made on account of those interests by DTC, or
for maintaining, supervising or reviewing any records of DTC relating to those
interests.
Payments by participants and indirect participants in DTC to the owners of
beneficial interests in a global note will be governed by standing
instructions and customary industry practice and will be the responsibility of
those participants or indirect participants and DTC.
Transfers between participants in DTC will be effected under DTC's
procedures and will be settled in same-day funds. Transfers between
participants in Euroclear or Clearstream will be effected in the ordinary way
under the rules and operating procedures of those systems.
Cross-market transfers between DTC participants, on the one hand, and
Euroclear or Clearstream participants, on the other hand, will be effected
within DTC through the DTC participants that are acting as depositaries for
Euroclear and Clearstream. To deliver or receive an interest in a global note
held in a Euroclear or Clearstream account, an investor must send transfer
instructions to Euroclear or Clearstream, as the case may be, under the rules
and procedures of that system and within the established deadlines of that
system. If the transaction meets its settlement requirements, Euroclear or
Clearstream, as the case may be, will send instructions to its DTC depositary
to take action to effect final settlement by delivering or receiving interests
in the relevant global notes in DTC, and making or receiving payment under
normal procedures for same-day funds settlement applicable to DTC. Euroclear
and Clearstream participants may not deliver instructions directly to the DTC
depositaries that are acting for Euroclear or Clearstream.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant that purchases an interest in a global note from a DTC
participant will be credited on the business day for Euroclear or Clearstream
immediately following the DTC settlement date. Cash received in Euroclear or
Clearstream from the sale of an interest in a global note to a DTC participant
will be received with value on the DTC settlement date but will be available
in the relevant Euroclear or Clearstream cash account as of the business day
for Euroclear or Clearstream following the DTC settlement date.
132
DTC, Euroclear and Clearstream have agreed to the above procedures to
facilitate transfers of interests in the global notes among participants in
those settlement systems. However, the settlement systems are not obligated to
perform these procedures and may discontinue or change these procedures at any
time. Neither we nor the Trustee will have any responsibility for the
performance by DTC, Euroclear or Clearstream or their participants or indirect
participants of their obligations under the rules and procedures governing
their operations.
Certificated Notes
Notes in physical, certificated form will be issued and delivered to each
person that DTC identifies as a beneficial owner of the related notes only if:
. DTC notifies us at any time that it is unwilling or unable to continue as
depositary for the global notes and a successor depositary is not
appointed within 90 days;
. DTC ceases to be registered as a clearing agency under the Securities
Exchange Act of 1934 and a successor depositary is not appointed within
90 days;
. we, at our option, notify the Trustee that we elect to cause the issuance
of certificated notes; or
. certain other events provided in the Indenture should occur.
133
REGISTRATION RIGHTS AGREEMENT
The description of the registration rights agreement set forth below is a
summary of the material provisions of the registration rights agreement. The
registration rights agreement is filed as an exhibit to the registration
statement of which this prospectus is a part.
Exchange Offer Registration Statement
In connection with the issuance of the old notes, we entered into a
registration rights agreement. In the registration rights agreement, we agreed:
. to file an exchange offer registration statement with the SEC as soon
as practicable after November 2, 2001;
. to use our best efforts to have it declared effective no later than 180
days after November 2, 2001;
. to keep the exchange offer for the old notes open for a period of not
less than 20 business days; and
. to cause the exchange offer to be consummated no later than 60 days
after the exchange offer registration statement is declared effective
by the SEC.
To participate in an exchange offer, you must represent that:
. you are not one of our "affiliates," as defined in Rule 144 of the
Securities Act, or a broker-dealer tendering old notes acquired
directly from us for your own account;
. if you are not a broker-dealer or are a broker-dealer but will not
receive new notes for your own account in exchange for old notes, you
are not engaged in and do not intend to participate in a distribution
of the new notes;
. you have no arrangement or understanding with any person to participate
in a distribution of the old notes or the new notes within the meaning
of the Securities Act;
. you are acquiring the new notes in the ordinary course of your
business; and
. if you are a broker-dealer that will receive new notes for your own
account in exchange for old notes, you represent that the old notes to
be exchanged for new notes were acquired by you as a result of market-
making activities or other trading activities and you acknowledge that
you will deliver a prospectus meeting the requirements of the
Securities Act in connection with the resale of any new notes. It is
understood that you are not admitting that you are an "underwriter"
within the meaning of the Securities Act by acknowledging that you will
deliver, and by delivery of, a prospectus.
As soon as practicable after the exchange offer registration statement
becomes effective, we will offer the holders of old notes who are not
prohibited by any law or policy of the SEC from participating in these exchange
offers the opportunity to exchange their old notes for new notes registered
under the Securities Act that are substantially identical to the old notes,
except that the new notes will not contain terms with respect to transfer
restrictions, registration rights and liquidated damages.
The registration rights agreement also provides that we:
. shall make available for a period of 180 days after the consummation of
the exchange offer a prospectus meeting the requirements of the
Securities Act to any broker-dealer for use in connection with any
resale of any new notes; and
134
. shall pay all expenses incident to the exchange offer, including the
expense of one counsel to the holders of the notes, and will indemnify
some holders of the notes, including any broker-dealer, against
liabilities, including liabilities under the Securities Act.
A broker-dealer that delivers a prospectus to purchasers in connection with
resales will be subject to various civil liability provisions under the
Securities Act and will be bound by the provisions of the registration rights
agreement, including some of the indemnification rights and obligations.
If the holder is a broker-dealer that will receive new notes for its own
account in exchange for old notes that were acquired as a result of market
making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such new notes.
Shelf Registration Statement
We will use our reasonable best efforts to file with the SEC a shelf
registration statement to cover resales of notes that are "registrable
securities" (as defined below) by those holders who provide required
information in connection with the shelf registration statement under the
following circumstances:
. if the exchange offer as contemplated by the registration rights
agreement is not permitted by applicable law or SEC policy; or
. the exchange offer is not, for any reason, completed by May 2, 2002; or
. the exchange offer has been completed and in the opinion of counsel for
the initial purchasers a registration statement must be filed and a
prospectus delivered by the initial purchasers in connection with any
offering or sale of registrable securities.
If we are required to file a shelf registration statement, we will use our
reasonable best efforts to cause the SEC to declare effective the shelf
registration statement after we file a shelf registration statement. In
addition, each holder will be required to deliver information to be used in
connection with the shelf registration statement in order to have its old notes
included in the shelf registration statement. We will also use our reasonable
best efforts to keep the shelf registration statement effective until the
expiration of the period referred to in Rule 144(k) under the Securities Act
with respect to the registrable securities or such shorter period that will
terminate when all the registrable securities covered by the shelf registration
statement have been sold pursuant to the shelf registration statement.
A holder who sells notes under the shelf registration statement generally
will be:
. required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers;
. subject to certain of the civil liability provisions under the
Securities Act in connection with such sales; and
. bound by the provisions of the registration rights agreement which are
applicable to such a holder (including certain indemnification
obligations).
In addition, each holder of the notes will be required to deliver
information to be used in connection with the shelf registration statement in
order to have its notes included in the shelf registration statement.
135
For the purposes of the registration rights agreement, "registrable
securities" means the old notes; provided, that the old notes shall cease to be
registrable securities:
. when a registration statement with respect to the old notes has been
declared effective under the Securities Act and such notes have been
exchanged or disposed of pursuant to such registration statement; or
. when the old notes have been sold pursuant to Rule 144(k) (or any
similar provision then in force, but not Rule 144A) under the
Securities Act; or
. when such notes cease to be outstanding.
136
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
This section summarizes certain U.S. federal income tax considerations
relating to the exchange offer and the ownership and disposition of the new
notes by U.S. holders and non-U.S. holders (as defined below). This summary is
based on the following materials, all as of the date of this prospectus:
. the Internal Revenue Code of 1986, as amended (the "Code");
. current, temporary and proposed Treasury Regulations promulgated under
the Code;
. current administrative interpretations of the Internal Revenue Service;
and
. court decisions.
Legislation, judicial decisions or administrative changes may be forthcoming
that could affect the accuracy of the statements included in this summary,
possibly on a retroactive basis. There can be no assurance that the Internal
Revenue Service will not challenge one or more of the tax results described
herein, and we have not obtained, nor do we intend to obtain, a ruling from the
Internal Revenue Service with respect to the U.S. federal income tax
consequences described below.
This summary does not discuss all aspects of United States federal income
taxation that may be important to particular holders in light of their
individual investment circumstances, such as notes held by investors subject to
special tax rules (e.g., financial institutions, insurance companies, broker-
dealers, tax-exempt organizations and certain U.S. expatriates) or to persons
that hold the notes as a part of a straddle, hedge or synthetic security
transaction for United States federal income tax purposes or that have a
functional currency other than the United States dollar, all of whom may be
subject to tax rules that differ significantly from those summarized below. In
addition, this summary does not discuss any foreign, state or local tax
considerations.
This summary assumes that investors hold their notes as "capital assets"
(generally, property held for investment) under the Code. This summary applies
only to U.S. holders and non-U.S. holders that receive the new notes in the
exchange offer in exchange for old notes that were purchased for cash on
original issue for their issue price of 99.383% of their face amount. Investors
are urged to consult their tax advisors regarding the United States federal,
state, local and foreign income and other tax considerations of the exchange
offer and the ownership and disposition of the new notes.
For purposes of this summary, a U.S. holder is a beneficial owner of a new
note that is any one of the following:
. an individual who is a citizen or resident of the United States;
. a corporation, partnership or other entity created or organized under
the laws of the United States or any state or political subdivision
thereof;
. an estate that is subject to United States federal income taxation
without regard to the source of its income; or
. a trust (1) whose administration is subject to the primary supervision
of a United States court and which has one or more United States persons
who have the authority to control all substantial decisions of the trust
or (2) that has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a United States person.
A non-U.S. holder is a beneficial owner of a new note that is not a U.S.
holder.
If a partnership holds the new notes, the tax treatment of a partner will
generally depend upon the status of the partner and the activities of the
partnership. A partner in a partnership holding the new notes is urged to
consult its own tax advisor.
137
Exchange Offer
The exchange of an old note for a new note in the exchange offer described
in "The Exchange Offer" will not constitute a taxable exchange of the old note.
Consequently, no gain or loss will be recognized by a holder upon receipt of a
new note, the holding period of the new note will include the holding period of
the old note and the basis of the new note will be the same as the basis of the
old note immediately before the exchange. The old note and the new note will be
treated as the same security for federal income tax purposes.
U.S. Holders
Payment of Interest
Interest on a new note will generally be taxable to a U.S. holder as
ordinary income at the time it is paid or accrued in accordance with the U.S.
holder's method of accounting for tax purposes.
Gain on Disposition
Upon the sale, exchange, redemption or other disposition of a new note, a
U.S. holder will recognize gain or loss equal to the difference between the
amount realized upon the sale, exchange, redemption or other disposition (less
an amount equal to any accrued interest not previously included in income,
which will be taxable as interest income) and the adjusted tax basis of the
note. A U.S. holder's tax basis in a new note will, in general, be the U.S.
holder's original purchase price for the old note in exchange for which the
U.S. holder received the new note. Such gain or loss recognized will be capital
gain or loss. Capital gains of individuals derived in respect of capital assets
held for more than one year are eligible for reduced rates of taxation. The
deductibility of capital losses is subject to limitation.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to certain
payments of principal and interest on new notes and to certain proceeds upon
the sale of a new note made to U.S. holders other than exempt residents (such
as corporations). Backup withholding will apply to such payments (at a rate of
30% for payments made in 2002 or 2003) if the U.S. holder fails to provide a
taxpayer identification number or otherwise fails to comply with applicable
information reporting or certification requirements.
Any amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the Internal
Revenue Service.
Non-U.S. Holders
Payment of Interest
Except as described below, any interest we pay to non-U.S. holders will not
be subject to United States federal income or withholding tax provided that:
. the non-U.S. holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of our voting stock
within the meaning of the Code and applicable U.S. Treasury regulations;
. the non-U.S. holder is not a controlled foreign corporation that is
related to us through stock ownership; and
138
. the requirements of section 871(h) or 881(c) of the Code are satisfied
as described below under the heading "Owner Statement Requirement."
If a non-U.S. holder cannot satisfy the requirements described below under
"Owner Statement Requirement," payments of interest will be subject to the 30%
U.S. federal withholding tax, unless the non-U.S. holder provides us with a
properly executed (1) Internal Revenue Service Form W-8BEN (or successor form)
claiming an exemption from, or reduction in, withholding under the benefit of
an applicable tax treaty or (2) Internal Revenue Service Form W-8ECI (or
successor form) stating that interest paid on a note is not subject to
withholding tax because it is effectively connected with the non-U.S. holder's
conduct of a trade or business in the United States.
A non-U.S. holder that is engaged in the conduct of a United States trade or
business will be subject to United States federal income tax on interest that
is effectively connected with the conduct of such trade or business on a net
income basis in the same manner as if such holder were a United States person.
In addition, if the non-U.S. holder is a corporation, the corporation will be
subject to a United States branch profits tax equal to 30% of its "effectively
connected earnings and profits" as adjusted for the taxable year (subject to
any lower rate or exemption provided by an applicable income tax treaty).
Gain on Disposition
A non-U.S. holder will generally not be subject to United States federal
income tax on gain recognized on sale, exchange, redemption, or other
disposition of a new note unless:
. the gain is effectively connected with the conduct of a trade or
business within the United States by the non-U.S. holder; or
. the non-U.S. holder is present in the United States for 183 or more days
during the taxable year and certain other requirements are met.
Any such gain that is effectively connected with the conduct of a United
States trade or business by a non-U.S. holder will be subject to United States
federal income tax on a net income basis in the same manner as if such holder
were a United States person and, if such non-U.S. holder is a corporation, such
gain will also be subject to the 30% United States branch profits tax described
above (subject to any lower rate or exemption provided by an applicable income
tax treaty).
Federal Estate Taxes
A new note held by an individual who at the time of death is not a citizen
or resident of the United States will not be subject to United States federal
estate tax as a result of such individual's death, provided that:
. the individual does not actually or constructively own 10% or more of
the total combined voting power of all classes of our voting stock
within the meaning of the Code and applicable U.S. Treasury regulations;
and
. the interest accrued on the new note was not effectively connected with
a United States trade or business of the individual at the individual's
death.
Owner Statement Requirement
Sections 871(h) and 881(c) of the Code require that either the beneficial
owner of a new note or a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business and that holds a new note
139
on behalf of such non-U.S. holder file a statement with us or our agent to the
effect that the non-U.S. holder is not a United States person in order to avoid
withholding of United States federal income tax. Under current U.S. Treasury
regulations, this requirement will be satisfied if we or our agent receives:
. Internal Revenue Service Form W-8BEN (or successor form) which includes
a statement from the non-U.S. holder certifying under penalty of perjury
that such holder is not a United States person and that provides such
holder's name and address; or
. a statement from the financial institution holding the new note on
behalf of the non-U.S. holder which satisfies applicable certification
requirements.
The non-U.S. holder must inform us or our agent, as applicable, or the
financial institution, as applicable, within 30 days of any change in
information on the holder's statement.
Information Reporting and Backup Withholding
Payments made on a new note will generally not be subject to information
reporting or backup withholding (at a rate of 30% for payments made in 2002 or
2003) provided that we do not have actual knowledge that the holder is a United
States person and the holder furnishes to the paying agent or broker the
statement described above under "Owner Statement Requirement" or otherwise
establishes an exemption. In addition, proceeds from the sale of a new note
made within the United States or conducted through certain United States
related financial intermediaries will generally not be subject to information
reporting or backup withholding, provided that the payor does not have actual
knowledge that the holder is a United States person and the payor receives the
statement described above under "Owner Statement Requirement" or the holder
otherwise establishes an exemption. Any withheld amounts will generally be
allowed as a refund or a credit against a holder's U.S. federal income tax,
provided the required information is timely filed with the Internal Revenue
Service.
The United States federal income tax discussion set forth above is included
for general information only and may not be applicable depending upon a
holder's particular situation. Holders of the notes should consult tax advisors
with respect to the tax consequences to them of the exchange offer and the
ownership and disposition of the new notes, including the tax consequences
under state, local, foreign and other tax laws and the possible effects of
changes in United States federal or other tax laws.
140
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the SEC in "no action letters"
issued to third parties, we believe that you may transfer new notes issued
under the exchange offer in exchange for the old notes if:
. you acquire the new notes in the ordinary course of your business; and
. you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of new notes.
Broker-dealers receiving new notes in the exchange offer will be subject to
a prospectus delivery requirement with respect to resales of the new notes.
We believe that you may not transfer new notes issued under the exchange
offer in exchange for the old notes if you are:
. our "affiliate" within the meaning of Rule 144 under the Securities
Act;
. a broker-dealer that acquired old notes directly from us; or
. a broker-dealer that acquired old notes as a result of market-making or
other trading activities without compliance with the registration and
prospectus delivery provisions of the Securities Act.
To date, the SEC staff has taken the position that participating broker-
dealers may fulfill their prospectus delivery requirements with respect to
transactions involving an exchange of securities such as this exchange offer,
other than a resale of an unsold allotment from the original sale of the old
notes, with the prospectus contained in the exchange offer registration
statement. In the registration rights agreement, we have agreed to permit
participating broker-dealers use of this prospectus in connection with the
resale of new notes. We have agreed that, for a period of up to 180 days after
the expiration of the exchange offer, we will make this prospectus, and any
amendment or supplement to this prospectus, available to any broker-dealer that
requests these documents in the letter of transmittal.
If you wish to exchange your old notes for new notes in the exchange offer,
you will be required to make representations to us as described in "The
Exchange Offer--Purpose and Effect of the Exchange Offer" and "The Exchange
Offer--Your Representations to Us" of this prospectus and in the letter of
transmittal. In addition, if you are a broker-dealer who receives new notes for
your own account in exchange for old notes that were acquired by you as a
result of market-making activities or other trading activities, you will be
required to acknowledge that you will deliver a prospectus in connection with
any resale by you of new notes.
We will not receive any proceeds from any sale of new notes by broker-
dealers. Broker-dealers who receive new notes for their own account in the
exchange offer may sell them from time to time in one or more transactions
either:
. in the over-the-counter market;
. in negotiated transactions;
. through the writing of options on the new notes or a combination of
methods of resale; or
. at prices related to prevailing market prices or negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any broker-dealer or
141
the purchasers of any new notes. Any broker-dealer that resells new notes it
received for its own account in the exchange offer and any broker or dealer
that participates in a distribution of new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act. Any profit on any
resale of new notes and any commissions or concessions or received by any
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that, by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any broker or dealers. We will indemnify
holders of the old notes, including any broker-dealers, against some
liabilities, including liabilities under the Securities Act, as provided in the
registration rights agreement.
LEGAL MATTERS
The validity of the new notes offered hereby will be passed upon for us by
Baker Botts L.L.P., Houston, Texas.
INDEPENDENT PUBLIC ACCOUNTANTS
The audited consolidated financial statements incorporated by reference in
this prospectus and elsewhere in the registration statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The audited consolidated financial statements of Excel Paralubes as of
December 31, 2001, 2000, and 1999 and for the years then ended, not separately
presented in this registration statement, have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report thereon
appears in Pennzoil-Quaker State Company's 2001 Annual Report on Form 10-K as
exhibit 99.1, incorporated by reference herein. Such consolidated financial
statements, to the extent they have been included in the consolidated financial
statements of Pennzoil-Quaker State Company, have been so included in reliance
on the report of such independent accountants given on the authority of said
firm as experts in accounting and auditing.
142
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the U.S. Securities and Exchange Commission. Our SEC filings
are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. In addition, because our common
stock is listed on the New York Stock Exchange, reports and other information
concerning us can also be inspected at the office of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act, covering the new notes to be issued in the exchange offer. This
prospectus, which is a part of the registration statement, does not contain all
of the information included in the registration statement. We have
"incorporated by reference" certain information, which means that we are
disclosing important information to you by referring you to documents
containing that information. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
SEC will automatically update and supersede the information in this prospectus.
We incorporate by reference the documents listed below and any future filings
made with the SEC (file no. 1-14501) under Section 13(a), 13(c), 14, or 15(d)
of the Exchange Act until we sell all of the notes.
. our annual report on Form 10-K for the year ended December 31, 2001;
. our current report on Form 8-K dated February 4, 2002 and filed on
February 4, 2002; and
. our current report on Form 8-K dated March 25, 2002 and filed on March
25, 2002.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Corporate Secretary
Pennzoil-Quaker State Company
Pennzoil Place, P.O. Box 2967
Houston, Texas 77252-2967
Telephone: (713) 546-4000
143
[LOGO OF PENNZOIL-QUAKER STATE]
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
Delaware Registrants
The following registrants are corporations incorporated in the State of
Delaware: Pennzoil-Quaker State Company, Blue Coral, Inc., Jiffy Lube
International, Inc., Pennzoil-Quaker State Canada Holding Company, Pennzoil-
Quaker State International Corporation and Q Lube, Inc.
Section 145 of the Delaware General Corporation Law, inter alia, empowers a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of another corporation or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Similar indemnity is authorized for such
persons against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of any such threatened,
pending or completed action or suit if such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and provided further that (unless a court of competent
jurisdiction otherwise provides) such person shall not have been adjudged
liable to the corporation. Any such indemnification may be made only as
authorized in each specific case upon a determination by the shareholders or
disinterested directors or by independent legal counsel in a written opinion
that indemnification is proper because the indemnitee has met the applicable
standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
Pennzoil-Quaker State Company maintains policies insuring its and its
subsidiaries' officers and directors against certain liabilities for actions
taken in such capacities, including liabilities under the Securities Act of
1933, as amended.
Article IX of Pennzoil-Quaker State Company's Restated Certificate of
Incorporation eliminates in certain circumstances the monetary liability of
directors of Pennzoil-Quaker State Company for a breach of their fiduciary duty
as directors. These provisions do not eliminate the liability of a director (1)
for a breach of the director's duty of loyalty to the corporation or its
stockholders; (2) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law; (3) under Section 174 of
the Delaware General Corporation Law (relating to the declaration of dividends
and purchase or redemption of shares in violation of the Delaware General
Corporation Law); or (4) for transactions from which the director derived an
improper personal benefit.
Article 9 of the Amended and Restated By-Laws of Pennzoil-Quaker State
Company provides for indemnification of any person who is, or is threatened to
be made, a witness in or
II-1
a party to any proceeding by reason of his Corporate Status, as defined in the
Amended and Restated By-laws, to the extent authorized by applicable law
including, but not limited to, the Delaware General Corporation Law. Pursuant
to Section 145 of the Delaware General Corporation Law a corporation generally
has the power to indemnify its present and former directors, officers,
employees and agents against expenses and liabilities incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in such positions so long as they acted in
good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the corporation, and with respect to any criminal
action, they had no reasonable cause to believe their conduct was unlawful.
With respect to suits by or in the right of a corporation, however,
indemnification is generally limited to attorney's fees and other expenses and
is not available if such person is adjudged to be liable to the corporation
unless the court determines that indemnification is appropriate. In addition, a
corporation has the power to purchase and maintain insurance for such persons.
Article 9 of the Amended and Restated By-laws also expressly provides that the
power to indemnify authorized thereby is not exclusive of any rights granted to
present and former directors, officers, employees and agents, under any bylaw,
agreement, vote of stockholders or disinterested directors, or otherwise.
The certificates of incorporation and/or bylaws of each of the other
Delaware registrants provide that such registrant indemnify its officers and
directors to the maximum extent allowed by Delaware law.
Maryland Registrant
Jiffy Lube International of Maryland, Inc. is a corporation incorporated in
the State of Maryland.
Section 2-418 of the Maryland General Corporation Law (the "MGCL") provides
that Jiffy Lube International of Maryland, Inc. may indemnify any director who
was, is or is threatened to be made a named defendant or respondent to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he is or
was a director of Jiffy Lube International of Maryland, Inc., or while a
director, is or was serving at the request of Jiffy Lube International of
Maryland, Inc. as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
other enterprise or employee benefit plan, against reasonable expenses
(including attorneys' fees), judgments, penalties, fines and settlements,
actually incurred by the director in connection with such action, suit or
proceeding, unless it is established that: (i) the act or omission of the
director was material to the matter giving rise to such action, suit or
proceeding, and was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) the director actually received an improper personal
benefit in money, property or services; or (iii) in the case of any criminal
proceeding, the director had reasonable cause to believe that the act or
omission was unlawful. If the action, suit or proceeding was one by or in the
right of Jiffy Lube International of Maryland, Inc., no indemnification shall
be made with respect to any action, suit or proceeding in which the director
shall have been adjudged to be liable to Jiffy Lube International of Maryland,
Inc. A director also may not be indemnified with respect to any action, suit or
proceeding charging improper personal benefit to the director, whether or not
involving action in the director's official capacity, in which the director is
adjudged to be liable on the basis that a personal benefit was improperly
received. Unless limited by Jiffy Lube International of Maryland, Inc.'s
Charter: (i) a court of appropriate jurisdiction, upon application of a
director, may order such indemnification as the court shall deem proper if it
determines that the director is fairly and reasonably entitled to
indemnification in view of all of the relevant circumstances, regardless of
whether the director
II-2
has met the standards of conduct required by MGCL Section 2-418; and (ii) Jiffy
Lube International of Maryland, Inc. shall indemnify a director if such
director is successful on the merits or otherwise in defense of any action,
suit or proceeding referred to above. However, with respect to any action, suit
or proceeding by or in the right of Jiffy Lube International of Maryland, Inc.
or in which the director was adjudged to be liable on the basis that a personal
benefit was improperly received, Jiffy Lube International of Maryland, Inc. may
only indemnify the director for any expenses (including attorneys' fees)
incurred in connection with such action, suit or proceeding.
MGCL Section 2-418 further provides that unless limited by Jiffy Lube
International of Maryland, Inc.'s Charter, Jiffy Lube International of
Maryland, Inc.: (i) shall (a) indemnify an officer of Jiffy Lube International
of Maryland, Inc. if such officer is successful on the merits or otherwise in
defense of any action, suit or proceeding referred to above, and (b) indemnify
an officer of Jiffy Lube International of Maryland, Inc. if a court of
appropriate jurisdiction, upon application of an officer, shall order
indemnification; (ii) may indemnify and advance expenses to an officer,
employee or agent of Jiffy Lube International of Maryland, Inc. to the same
extent that it may indemnify directors; and (iii) may indemnify and advance
expenses to an officer, employee or agent who is not a director to such further
extent, consistent with law, as may be provided by the Charter, Bylaws, general
or specific action of Jiffy Lube International of Maryland, Inc.'s Board of
Directors or contract.
The charter and bylaws of Jiffy Lube International of Maryland, Inc. do not
contain provisions specifically addressing the indemnification of its officers
and directors.
New York Registrant
Medo Industries, Inc. is a corporation incorporated in the State of New
York.
Section 402(b) of the New York Business Corporation ("NYBCL") statute
generally provides that a company's certificate of incorporation may set forth
a provision eliminating or limiting the personal liability of its directors for
damages for any breach of duty in such capacity, provided that no such
provision shall eliminate or limit: the liability of any director if a judgment
or other final adjudication adverse to him establishes (i) that his acts or
omissions were in bad faith or involved intentional misconduct or a knowing
violation of law; or (ii) that he personally gained in fact a financial profit
or other advantage to which he was not legally entitled; or (iii) that his acts
violated section 719 of the NYBCL.
In addition, section 722(a) of the NYBCL generally provides that a
corporation may indemnify officers made, or threatened to be made, a party to
an action or proceeding, other than one by or in the right of the corporation
to procure a judgment in its favor, including an action by or in the right of
any other corporation, or other enterprise, which any director or officer of
the corporation served in any capacity at the request of the corporation, by
reason of the fact that he was a director or officer of the corporation, or
served such other corporation, or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys fees, if such director or officer acted in good faith.
Section 722(c), in general, further provides that a corporation may
indemnify any person made, or threatened to be made, a party to an action by or
in the right of the corporation to procure a judgment in its favor by reason of
the fact that he is or was a director or officer of the corporation, or is or
was serving at the request of the corporation as a director or officer of any
other corporation, or other enterprise, against amounts paid in settlement and
reasonable expenses, including attorneys fees in connection with the defense or
settlement of such action if such director or officer acted in good faith.
II-3
Generally, Medo Industries, Inc.'s certificate of incorporation eliminates
the personal liability of its directors to the fullest extent permitted by the
provisions of paragraph (b) of Section 402 of the NYBCL.
The certificate of incorporation and bylaws of Medo Industries, Inc. do not
contain provisions specifically addressing the indemnification of its officers
and directors.
Directors and Officers Liability Insurance
Pennzoil-Quaker State Company and each of the other registrants have
purchased directors and officers liability insurance that would indemnify the
directors and officers of Pennzoil-Quaker State Company against damages arising
out of certain kinds of claims that might be made against them based on their
negligent acts or omissions while acting in their capacity as such.
General
The above discussion of the organizational documents of the Registrants and
the laws of the jurisdictions of incorporation or organization of the
Registrants, as applicable, is not intended to be exhaustive and is
respectively qualified in its entirety by such organizational documents and
laws.
II-4
ITEM 21. Exhibits and Financial Statement Schedules
The following instruments and documents are included as Exhibits to this
Registration Statement. Exhibits incorporated by reference are so indicated by
parenthetical information.
Exhibit No. Description of Exhibit
----------- ----------------------
2.1 Agreement and Plan of Merger by and among Shell Oil Company, Shell
ND Company and Pennzoil-Quaker State Company dated as of March 25,
2002
*3.1(a) Restated Certificate of Incorporation of Pennzoil-Quaker State
Company (filed as exhibit 4.2 to the Current Report on Form 8-K of
Pennzoil-Quaker State Company filed on December 29, 1998 (File No.
001-14501) and incorporated herein by reference)
*3.1(b) Certificate of Designations of Series A Junior Participating
Preferred Stock of Pennzoil-Quaker State Company (filed as exhibit
3.1(b) to the Annual Report on Form 10-K of Pennzoil-Quaker State
Company for the fiscal year ended December 31, 1999 (File No. 001-
14501) and incorporated herein by reference)
*3.2 By-Laws of Pennzoil-Quaker State Company (filed as exhibit 3.2 to
the Annual Report on Form 10-K of Pennzoil-Quaker State Company
for the fiscal year ended December 31, 2000 (File No. 001-14501)
and incorporated herein by reference)
*3.3 Form of Common Stock Certificate of Pennzoil-Quaker State Company
(filed as exhibit 3.5 to the Registration Statement on Form S-4 of
Pennzoil-Quaker State Company (Registration No. 333-61541) and
incorporated herein by reference)
*3.4 Rights Agreement dated as of December 18, 1998 between Pennzoil-
Quaker State Company and JPMorgan Chase Bank (formerly known as
The Chase Manhattan Bank) (filed as exhibit 1 to the Current
Report on Form 8-K of Pennzoil-Quaker State Company filed on
December 18, 1998 (File No. 001-14501) and incorporated herein by
reference)
+3.5 Restated Certificate of Incorporation of Blue Coral, Inc.
+3.6 By-Laws of Blue Coral, Inc.
+3.7 Certificate of Incorporation of Jiffy Lube International, Inc.
+3.8 By-Laws of Jiffy Lube International, Inc.
+3.9 Articles of Incorporation of Jiffy Lube International of Maryland,
Inc.
+3.10 By-Laws of Jiffy Lube International of Maryland, Inc.
+3.11 Certificate of Incorporation of Medo Industries, Inc.
+3.12 By-Laws of Medo Industries, Inc.
+3.13 Certificate of Incorporation of Pennzoil-Quaker State Canada
Holding Company
+3.14 By-Laws of Pennzoil-Quaker State Canada Holding Company
+3.15 Certificate of Incorporation of Pennzoil-Quaker State
International Corporation
+3.16 By-Laws of Pennzoil-Quaker State International Corporation
+3.17 Certificate of Incorporation of Q Lube, Inc.
+3.18 By-Laws of Q Lube, Inc.
*4.1 Indenture, dated as of February 1, 1999 (the "Indenture"), between
Pennzoil-Quaker State Company and Chase Bank of Texas, National
Association, as Trustee (filed as exhibit 4.1 to the Current
Report on Form 8-K of Pennzoil-Quaker State Company filed on March
30, 1999 (File No. 001-14501) and incorporated herein by
reference)
II-5
Exhibit No. Description of Exhibit
----------- ----------------------
*4.2 Officer's Certificate dated as of March 30, 1999 delivered
pursuant to Section 301 of the Indenture, providing for the
issuance of Pennzoil-Quaker State Company's 6 3/4% Notes due 2009
and 7 3/8% Debentures due 2029, including the form of Note and
Debenture (filed as exhibit 4.2 to the Current Report on Form 8-K
of Pennzoil-Quaker State Company filed on March 30, 1999 (File No.
001-14501) and incorporated herein by reference)
+4.3 Indenture dated as of November 2, 2001 among Pennzoil-Quaker State
Company, the subsidiary guarantors listed on Schedule 2 to the
Purchase Agreement, and JPMorgan Chase Bank (formerly known as The
Chase Manhattan Bank), as Trustee, which includes the form of the
10% Senior Notes due 2008 as an exhibit thereto
+4.4 Registration Rights Agreement dated November 2, 2001 among
Pennzoil-Quaker State Company, the subsidiary guarantors listed on
Schedule 1 thereto, and J.P. Morgan Securities, Inc., Deutsche
Banc Alex. Brown Inc., Salomon Smith Barney Inc., Scotia Capital
(USA) Inc., Banc One Capital Markets, Inc., Dresdner Kleinwort
Wasserstein--Grantchester, Inc., and Wells Fargo Brokerage
Services, LLC
+4.5 Form of Global Note (included as an exhibit to Exhibit 4.3)
5.1 Opinion of Baker Botts L.L.P.
+12.1 Ratio of Earnings to Fixed Charges
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Baker Botts L.L.P. (included in Exhibit 5.1)
+24.1 Power of Attorney--Pennzoil-Quaker State Company
+24.2 Power of Attorney--Blue Coral, Inc.
+24.3 Power of Attorney--Jiffy Lube International, Inc.
+24.4 Power of Attorney--Jiffy Lube International of Maryland, Inc.
+24.5 Power of Attorney--Medo Industries, Inc.
+24.6 Power of Attorney--Pennzoil-Quaker State Canada Holding Company
+24.7 Power of Attorney--Pennzoil-Quaker State International Corporation
+24.8 Power of Attorney--Q Lube, Inc.
+25.1 Statement of Eligibility of Trustee relating to the Senior Notes
+25.2 Statement of Eligibility of Trustee relating to the Guarantees
+99.1 Form of Letter of Transmittal
+99.2 Form of Notice of Guaranteed Delivery
+99.3 Form of Letter to Depository Trust Company Participants
+99.4 Form of Letter to Clients
- --------
*Incorporated by reference as indicated.
+Previously filed.
II-6
Pennzoil-Quaker State Company is a party to several debt instruments under
which the total amount of securities authorized does not exceed 10% of the
total assets of Pennzoil-Quaker State Company and its subsidiaries on a
consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of
Regulation S-K, Pennzoil-Quaker State Company agrees to furnish a copy of such
instruments to the Securities and Exchange Commission upon request.
ITEM 22. Undertakings
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) under the Securities Act
if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Pennzoil-Quaker State Company hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of Pennzoil-
Quaker State Company's annual report pursuant to section 13(a) or section 15(d)
of the Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
The undersigned registrants hereby undertake to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the Registration Statement when it became effective.
II-7
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrants pursuant to the provisions described under Item 20 above, or
otherwise, the registrants have been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrants in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrants will, unless, in the opinion of its counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Pennzoil-Quaker
State Company has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
the State of Texas on March 29, 2002.
PENNZOIL-QUAKER STATE COMPANY
a Delaware Corporation
/s/ James J. Postl
By:
----------------------------------
James J. Postl
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ James J. Postl Principal Executive March 29, 2002
______________________________________ Officer and Director
(James J. Postl, President and Chief
Executive Officer and Director)
/s/ Thomas P. Kellagher Principal Financial and March 29, 2002
______________________________________ Accounting Officer
(Thomas P. Kellagher, Group Vice
President and Chief Financial Officer)
H. John Greeniaus* A majority of the March 29, 2002
Forrest R. Haselton* Directors of the
Berdon Lawrence* Registrant
James L. Pate*
Terry L. Savage*
Brent Scowcroft*
Gerald B. Smith*
Lorne R. Waxlax*
/s/ Thomas P. Kellagher
*By: _________________________________
(Attorney-In-Fact)
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of Blue
Coral, Inc. and Medo Industries, Inc. has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, the State of Texas on March 29, 2002.
BLUE CORAL, INC.
MEDO INDUSTRIES, INC.
/s/ Douglas S. Boyle
By:----------------------------------
Douglas S. Boyle
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below in relation to each of Blue Coral,
Inc. and Medo Industries, Inc. by the following persons in the capacities and
on the dates indicated.
Name Title Date
---- ----- ----
* President and Director March 29, 2002
______________________________________ (Principal Executive
Douglas S. Boyle Officer)
* Vice President and March 29, 2002
______________________________________ Treasurer (Principal
Laurie K. Stewart Financial Officer)
* Controller (Principal March 29, 2002
______________________________________ Accounting Officer)
Michael J. Maratea
* Vice President and March 29, 2002
______________________________________ Director
Thomas P. Kellagher
* Director March 29, 2002
______________________________________
James J. Postl
/s/ Thomas P. Kellagher
*By: _________________________________
(Attorney-In-Fact)
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of Jiffy
Lube International, Inc., Jiffy Lube International of Maryland, Inc. and Q
Lube, Inc. has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
the State of Texas on March 29, 2002.
JIFFY LUBE INTERNATIONAL, INC.
JIFFY LUBE INTERNATIONAL OF
MARYLAND, INC.
Q LUBE, INC.
/s/ Marc C. Graham
By:----------------------------------
Marc C. Graham
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below in relation to each of Jiffy Lube
International, Inc., Jiffy Lube International of Maryland, Inc. and Q Lube,
Inc. by the following persons in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
* President and Director March 29, 2002
______________________________________ (Principal Executive
Marc C. Graham Officer)
* Vice President and March 29, 2002
______________________________________ Treasurer (Principal
Laurie K. Stewart Financial Officer)
* Controller (Principal March 29, 2002
______________________________________ Accounting Officer)
Thomas M. McConnell
* Vice President and March 29, 2002
______________________________________ Director
Thomas P. Kellagher
* Director March 29, 2002
______________________________________
James J. Postl
/s/ Thomas P. Kellagher
*By: _________________________________
(Attorney-In-Fact)
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Pennzoil-Quaker
State Canada Holding Company has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, the State of Texas on March 29, 2002.
PENNZOIL-QUAKER STATE CANADA HOLDING
COMPANY
/s/ Douglas S. Boyle
By:----------------------------------
Douglas S. Boyle
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
* President and Director March 29, 2002
______________________________________ (Principal Executive
Douglas S. Boyle Officer)
* Vice President and March 29, 2002
______________________________________ Treasurer (Principal
Laurie K. Stewart Financial Officer)
* Controller (Principal March 29, 2002
______________________________________ Accounting Officer)
Michael J. Maratea
* Vice President and March 29, 2002
______________________________________ Director
Thomas P. Kellagher
* Vice President and March 29, 2002
______________________________________ Director
Owen McManamon
* Director March 29, 2002
______________________________________
James J. Postl
/s/ Thomas P. Kellagher
*By: _________________________________
(Attorney-In-Fact)
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Pennzoil-Quaker
State International Corporation has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, the State of Texas on March 29, 2002.
PENNZOIL-QUAKER STATE INTERNATIONAL
CORPORATION
/s/ Thomas P. Kellagher
By:----------------------------------
Thomas P. Kellagher
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
* President and Director March 29, 2002
______________________________________ (Principal Executive
Thomas P. Kellagher Officer)
* Vice President and March 29, 2002
______________________________________ Treasurer (Principal
Laurie K. Stewart Financial Officer)
* Controller (Principal March 29, 2002
______________________________________ Accounting Officer)
Michael J. Maratea
* Director March 29, 2002
______________________________________
Craig A. Bourgeois
* Director March 29, 2002
______________________________________
James J. Postl
/s/ Thomas P. Kellagher
*By: _________________________________
(Attorney-In-Fact)
II-13
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
----------- ----------------------
2.1 Agreement and Plan of Merger by and among Shell Oil Company, Shell
ND Company and Pennzoil-Quaker State Company dated as of March 25,
2002
*3.1(a) Restated Certificate of Incorporation of Pennzoil-Quaker State
Company (filed as exhibit 4.2 to the Current Report on Form 8-K of
Pennzoil-Quaker State Company filed on December 29, 1998 (File No.
001-14501) and incorporated herein by reference)
*3.1(b) Certificate of Designations of Series A Junior Participating
Preferred Stock of Pennzoil-Quaker State Company (filed as exhibit
3.1(b) to the Annual Report on Form 10-K of Pennzoil-Quaker State
Company for the fiscal year ended December 31, 1999 (File No. 001-
14501) and incorporated herein by reference)
*3.2 By-Laws of Pennzoil-Quaker State Company (filed as exhibit 3.2 to
the Annual Report on Form 10-K of Pennzoil-Quaker State Company
for the fiscal year ended December 31, 2000 (File No. 001-14501)
and incorporated herein by reference)
*3.3 Form of Common Stock Certificate of Pennzoil-Quaker State Company
(filed as exhibit 3.5 to the Registration Statement on Form S-4 of
Pennzoil-Quaker State Company (Registration No. 333-61541) and
incorporated herein by reference)
*3.4 Rights Agreement dated as of December 18, 1998 between Pennzoil-
Quaker State Company and JPMorgan Chase Bank (formerly known as
The Chase Manhattan Bank) (filed as exhibit 1 to the Current
Report on Form 8-K of Pennzoil-Quaker State Company filed on
December 18, 1998 (File No. 001-14501) and incorporated herein by
reference)
+3.5 Restated Certificate of Incorporation of Blue Coral, Inc.
+3.6 By-Laws of Blue Coral, Inc.
+3.7 Certificate of Incorporation of Jiffy Lube International, Inc.
+3.8 By-Laws of Jiffy Lube International, Inc.
+3.9 Articles of Incorporation of Jiffy Lube International of Maryland,
Inc.
+3.10 By-Laws of Jiffy Lube International of Maryland, Inc.
+3.11 Certificate of Incorporation of Medo Industries, Inc.
+3.12 By-Laws of Medo Industries, Inc.
+3.13 Certificate of Incorporation of Pennzoil-Quaker State Canada
Holding Company
+3.14 By-Laws of Pennzoil-Quaker State Canada Holding Company
+3.15 Certificate of Incorporation of Pennzoil-Quaker State
International Corporation
+3.16 By-Laws of Pennzoil-Quaker State International Corporation
+3.17 Certificate of Incorporation of Q Lube, Inc.
+3.18 By-Laws of Q Lube, Inc.
*4.1 Indenture, dated as of February 1, 1999 (the "Indenture"), between
Pennzoil-Quaker State Company and Chase Bank of Texas, National
Association, as Trustee (filed as exhibit 4.1 to the Current
Report on Form 8-K of Pennzoil-Quaker State Company filed on March
30, 1999 (File No. 001-14501) and incorporated herein by
reference)
Exhibit No. Description of Exhibit
----------- ----------------------
*4.2 Officer's Certificate dated as of March 30, 1999 delivered
pursuant to Section 301 of the Indenture, providing for the
issuance of Pennzoil-Quaker State Company's 6 3/4% Notes due 2009
and 7 3/8% Debentures due 2029, including the form of Note and
Debenture (filed as exhibit 4.2 to the Current Report on Form 8-K
of Pennzoil-Quaker State Company filed on March 30, 1999 (File No.
001-14501) and incorporated herein by reference)
+4.3 Indenture dated as of November 2, 2001 among Pennzoil-Quaker State
Company, the subsidiary guarantors listed on Schedule 2 to the
Purchase Agreement, and JPMorgan Chase Bank (formerly known as The
Chase Manhattan Bank), as Trustee, which includes the form of the
10% Senior Notes due 2008 as an exhibit thereto
+4.4 Registration Rights Agreement dated November 2, 2001 among
Pennzoil-Quaker State Company, the subsidiary guarantors listed on
Schedule 1 thereto, and J.P. Morgan Securities, Inc., Deutsche
Banc Alex. Brown Inc., Salomon Smith Barney Inc., Scotia Capital
(USA) Inc., Banc One Capital Markets, Inc., Dresdner Kleinwort
Wasserstein--Grantchester, Inc., and Wells Fargo Brokerage
Services, LLC
+4.5 Form of Global Note (included as an exhibit to Exhibit 4.3)
5.1 Opinion of Baker Botts L.L.P.
+12.1 Ratio of Earnings to Fixed Charges
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Baker Botts L.L.P. (included in Exhibit 5.1)
+24.1 Power of Attorney--Pennzoil-Quaker State Company
+24.2 Power of Attorney--Blue Coral, Inc.
+24.3 Power of Attorney--Jiffy Lube International, Inc.
+24.4 Power of Attorney--Jiffy Lube International of Maryland, Inc.
+24.5 Power of Attorney--Medo Industries, Inc.
+24.6 Power of Attorney--Pennzoil-Quaker State Canada Holding Company
+24.7 Power of Attorney--Pennzoil-Quaker State International Corporation
+24.8 Power of Attorney--Q Lube, Inc.
+25.1 Statement of Eligibility of Trustee relating to the Senior Notes
+25.2 Statement of Eligibility of Trustee relating to the Guarantees
+99.1 Form of Letter of Transmittal
+99.2 Form of Notice of Guaranteed Delivery
+99.3 Form of Letter to Depository Trust Company Participants
+99.4 Form of Letter to Clients
- --------
*Incorporated by reference as indicated.
+Previously filed.