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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 1-14501
PENNZOIL-QUAKER STATE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0200625
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
PENNZOIL PLACE, P.O. BOX 2967
HOUSTON, TEXAS 77252-2967
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 546-4000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $0.10 per share New York Stock Exchange
Pacific Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Aggregate market value of the voting stock held by non-affiliates of the
registrant: $884.2 million as of January 31, 2000.
Number of shares outstanding of each class of the registrant's classes of
common stock, as of the latest practicable date, January 31, 2000: Common Stock,
par value $0.10 per share: 78,160,971.
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE PROXY STATEMENT TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A
UNDER THE SECURITIES EXCHANGE ACT OF 1934 IN CONNECTION WITH THE COMPANY'S 2000
ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III
HEREOF (TO THE EXTENT SET FORTH IN ITEMS 10, 11, 12 AND 13 OF PART III OF THIS
ANNUAL REPORT ON FORM 10-K).
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FORWARD-LOOKING STATEMENTS -- SAFE HARBOR PROVISIONS
This annual report on Form 10-K of Pennzoil-Quaker State Company for the
year ended December 31, 1999 contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. To the extent that
such statements are not recitations of historical fact, such statements
constitute forward-looking statements which, by definition, involve risks and
uncertainties. In particular, statements (i) under the captions (a) "Lubricants
and Consumer Products," (b) "Fast Lube Operations" and (c) "Base Oil and
Specialty Products" under "Item 1. Business and Item 2. Properties" and (ii)
under the captions (a) "Results of Operations," (b) "Disclosures About Market
Risk" and (c) "Capital Resources and Liquidity" under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contain forward-looking statements. Where, in any forward-looking statement,
Pennzoil-Quaker State Company expresses an expectation or belief as to future
results or events, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The following are factors that could cause actual results or events to
differ materially from those anticipated, and include but are not limited to
general economic, financial and business conditions; commodity prices for crude
oil; competition in the motor oil marketing business; base oil margins and
supply and demand in the base oil business; the success and costs of advertising
and promotional efforts; mechanical failure in refining operations;
unanticipated environmental liabilities; changes in and compliance with
governmental regulations; changes in tax laws; and the costs and effects of
legal proceedings.
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PART I
ITEM 1. BUSINESS AND ITEM 2. PROPERTIES.
Pennzoil-Quaker State Company (the "Company" or "Pennzoil-Quaker State") is
a premier worldwide automotive aftermarket products and consumer car care
company. The Company is engaged primarily in the manufacturing and marketing of
lubricants and car care products, in the franchising, ownership and operation of
fast lube centers and in the manufacturing of base oils and specialty industrial
products. Pennzoil-Quaker State has strong brand-name recognition in key product
categories such as motor oil with Pennzoil(R), Quaker State(R) and Wolf's
Head(R), fast lube centers with Jiffy Lube(R) and car care products with Slick
50(R), Rain-X(R), Blue Coral(R), Black Magic(R), Westley's(R), Medo(R),
Axius(TM), Gumout(R), Fix-A-Flat(R), The Outlaw(R), Snap(R), Classic(R) car wax,
Pennzoil Roadside(TM) Rescue(R) and others.
Pennzoil-Quaker State is the result of the consolidation and separation on
December 30, 1998 (the "Spin-off") of the lubricants and consumer products, fast
lube and base oil and specialty products operations of Pennzoil Company and the
acquisition by the Company of Quaker State Corporation ("Quaker State") in a
merger transaction immediately following the Spin-off. Reference is made to Note
2 of Notes to Consolidated Financial Statements for additional information.
SEGMENT FINANCIAL INFORMATION
Pennzoil-Quaker State's businesses are organized, managed and internally
reported as three segments. The segments, which are based on differences in
products and services, are (1) lubricants and consumer products, (2) fast lube
operations and (3) base oils and specialty products. These segments have
worldwide responsibility for virtually all of the Company's product lines.
Transactions between reportable segments are recorded at market. The
majority of intersegment sales are from the base oil and specialty products
segment to the lubricants and consumer products segment. The Company excludes
interest expense and income tax expense or benefit from segment profit or loss.
Reference is made to Note 14 of Notes to Consolidated Financial Statements for
additional segment financial information and for financial information about
geographic areas.
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1999 1998 1997
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(EXPRESSED IN THOUSANDS)
NET SALES(1)
Lubricants and Consumer Products(2)...................... $1,894,280 $ 960,493 $ 966,195
Fast Lube Operations(2).................................. 423,413 322,704 316,068
Base Oil and Specialty Products(3)....................... 853,073 717,358 916,759
Other.................................................... 296 248 264
Intersegment Sales....................................... (219,706) (199,127) (217,138)
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$2,951,356 $1,801,676 $1,982,148
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OPERATING INCOME (LOSS)(1)(4)
Lubricants and Consumer Products(2)...................... $ 166,477 $ 55,923 $ 76,460
Fast Lube Operations(5).................................. (16,435) (4,054) 24,492
Base Oil and Specialty Products(6)....................... (13,154) 16,003 19,375
Impairment of Long-Lived Assets(7)....................... (493,910) (29,613) --
Other.................................................... 3,366 (8,099) 1,919
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(353,656) 30,160 122,246
Corporate Administrative Expense(2)...................... 81,134 44,422 54,810
Interest Expense(2)...................................... 80,588 69,943 61,780
Income Tax Provision (Benefit)........................... (194,447) (38,338) 6,245
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Net Loss....................................... $ (320,931) $ (45,867) $ (589)
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IDENTIFIABLE ASSETS(1)
Lubricants and Consumer Products(7)...................... $1,598,767 $1,667,429 $ 371,057
Fast Lube Operations(8).................................. 428,954 527,387 348,764
Base Oil and Specialty Products(7)(9).................... 174,650 700,546 757,042
Other(8)................................................. 530,850 249,632 82,760
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$2,733,221 $3,144,994 $1,559,623
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DEPRECIATION AND AMORTIZATION(1)
Lubricants and Consumer Products......................... $ 58,832 $ 23,709 $ 17,885
Fast Lube Operations..................................... 33,060 24,507 21,439
Base Oil and Specialty Products.......................... 26,437 28,169 25,153
Other.................................................... 5,034 825 13
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$ 123,363 $ 77,210 $ 64,490
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CAPITAL EXPENDITURES(1)(10)
Lubricants and Consumer Products......................... $ 23,785 $ 23,739 $ 32,310
Fast Lube Operations..................................... 18,481 28,651 25,836
Base Oil and Specialty Products(11)...................... 7,510 18,352 89,648
Other(12)................................................ 28,338 17,598 --
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$ 78,114 $ 88,340 $ 147,794
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(1) On December 30, 1998, the Company acquired Quaker State in a merger
transaction. Reference is made to Note 2 of Notes to Consolidated Financial
Statements for additional information. Net sales, operating income (loss),
depreciation and amortization and capital expenditures for 1998 and 1997 do
not include Quaker State. Assets and liabilities of Quaker State are
included in the Company's consolidated balance sheet beginning on December
31, 1998.
(2) The increase in net sales and operating income for the lubricants and
consumer products segment in 1999 was the result of the acquisition of
Quaker State on December 30, 1998 and higher product sales volumes. The
increase in net sales for the fast lube operations segment, corporate
administrative expense and interest expense in 1999 was the result of the
acquisition of Quaker State.
(3) The increase in net sales for the base oil and speciality products segment
in 1999 was the result of higher sales prices of products manufactured. In
October 1997, the Company contributed most of its specialty industrial
products business to Penreco, a partnership with Conoco Inc. The
partnership is accounted for under the equity method with the Company's
share of net earnings being reported as a component of other income for the
base oil and speciality products segment.
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(4) Total 1999 operating income includes $86.2 million in pretax charges
related to the December 30, 1998 acquisition of Quaker State and $12.1
million in pretax charges for restructuring costs and other matters. Total
1998 operating income includes pretax charges of $10.6 million related to
the acquisition of Quaker State. Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and Note 2 of Notes to Consolidated
Financial Statements for additional information.
(5) The decrease in operating income for the fast lube operations segment in
1999 compared to 1998 includes $28.5 million of charges as a result of
acquisition expenses and $5.4 million of other charges. The decrease in
operating income for that segment in 1998 compared to 1997 includes $14.8
million of charges as a result of acquisition expenses, legal settlements
and other liabilities.
(6) Operating income includes Pennzoil-Quaker State's share of equity income
from its Excel Paralubes, Penreco, Bareco and other partnerships of $26.5
million, $32.9 million and $4.4 million for the years ended December 31,
1999, 1998 and 1997, respectively. Reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Base Oil and Specialty Products" for additional information.
(7) In December 1999, the base oil and specialty products segment recorded a
pretax charge of $480.0 million related to the expected disposition of its
refineries, and the lubricants and consumer products segment recorded a
pretax charge of $13.9 million related to the closure of the Rouseville
blending and packaging plant. In December 1998, the fast lube operations
segment recorded a pretax charge of $29.6 million to reflect the impairment
of long-lived assets as required under Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." These impairment
charges have not been included in depreciation and amortization expenses in
the table above. Reference is made to "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 3 of Notes to
Consolidated Financial Statements for additional information.
(8) The decrease in identifiable assets for the fast lube operations segment in
1999 compared to 1998 was the result of the sale of certain company owned
stores to franchisees. The increase in Other in 1999 compared to 1998 was
primarily the result of the increase in deferred tax assets associated with
the write-down of the Company's refineries.
(9) Identifiable assets includes $13.2 million, $16.9 million and $32.5 million
in net investment in equity method investees at December 31, 1999, 1998 and
1997, respectively.
(10) There was no capitalized interest in 1999. Includes interest capitalized of
$0.3 million and $7.4 million in 1998 and 1997, respectively.
(11) Total 1997 capital expenditures includes $42.0 million relating to the
upgrade of the Company's Shreveport manufacturing facility.
(12) Other capital expenditures primarily consist of building leasehold
upgrades.
Narrative descriptions of these business segments follow, with emphasis on
1999 developments. Unless otherwise indicated by the context, references to the
Company or Pennzoil-Quaker State include its subsidiaries.
LUBRICANTS AND CONSUMER PRODUCTS
The Company's lubricants and consumer products segment manufactures and
markets lubricants and other automotive aftermarket consumer products.
LUBRICANTS. The Company manufactures and markets Pennzoil(R), Quaker
State(R), Wolf's Head(R) and Lubriguard(R) motor oil. The Company also
manufactures and markets transmission fluids, gear lubricants and greases, as
well as specialty lubricants designed for sport utility vehicles, heavy duty
agricultural and construction equipment, marine craft, motorcycles and
snowmobiles. These other lubricants are sold under the Pennzoil(R) and Quaker
State(R) brand names and certain private label and proprietary brand names. The
Company also markets automobile consumer products such as oil and air filters
and antifreeze produced by third parties and provides collection, transportation
and recycling services for used oil, antifreeze and used oil filters in certain
regions of the United States.
The primary markets for the Company's lubricants are mass merchandisers,
auto parts stores, lube centers and automobile dealerships. Secondary markets
include convenience stores, drug stores, grocery stores, tire stores and
independent automotive repair facilities. The Company markets its branded motor
oils in packages ranging in size from four ounces to 55 gallons and sells a
significant amount in bulk to the installed market. Packaged motor oil is
primarily sold in one quart plastic bottles.
Consumer marketing for the Company's lubricants focuses primarily on the
driving conditions experienced by vehicle owners and the technical benefits that
lubricants can provide under those conditions. Key components of the marketing
strategy include targeted media, motorsports participation, public relations and
consumer promotions. Targeted media includes national and local television,
radio and print advertising
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designed to reach specific populations of consumers based upon their usage.
Motorsports participation includes team sponsorships in NASCAR(R), Indy Racing
League(R), NHRA(R) and the sponsorship of the Pennzoil World of Outlaws(R), a
grass roots sprint car racing series. In addition, several national and local
racing events are sponsored by the Company.
In marketing its lubricants, the Company utilizes a brand management
structure. Under this approach, the Company centralizes all brand-related
activity under a single manager for each brand, allowing coordination of all
strategic and tactical decisions for advertising and promotions, product
packaging and positioning, formulation strategy and pricing. The brand manager
is responsible for developing the annual marketing plan that is designed to
enhance brand equity.
During the fourth quarter of 1999, Pennzoil-Quaker State launched
Pennzoil(R) Synthetic with Pennzane(R), a synthetic motor oil. Pennzane(R) was
developed for the space program and is used by NASA to lubricate space-going
satellite mechanisms, including bearings, momentum wheels, boom/array deployment
mechanisms and payload gimbals.
Motor oils and lubricants are produced by the Company by blending additives
and lubricant base oils in thirteen domestic blending and packaging plants.
These plants are located in Portland, Oregon; Vernon, California; Alameda,
California; Carson, California; Shreveport, Louisiana (where two are located);
Rouseville, Pennsylvania; Mundy's Corner, Pennsylvania; St. Louis, Missouri;
Marion, Illinois; Newell, West Virginia; Vicksburg, Mississippi; and San
Antonio, Texas. The Company will shut down its Rouseville, Pennsylvania blending
and packaging plant in conjunction with the proposed sale of the Rouseville wax
processing facilities in 2000. The Newell, West Virginia location is leased and
the other locations are owned by the Company. Base oils processed by the
Company's blending and packaging plants are purchased at prevailing market
prices and supplied by the Company's manufacturing facilities, Excel Paralubes
(either directly or through exchanges) and other outside suppliers.
Substantially all additives are purchased from outside suppliers. The Company
believes that alternative sources of supply for base oils and additives are
readily available.
At the end of 1999, the Company's lubricants were distributed domestically
through 67 owned and operated distribution facilities in 27 states. The
Company's products are also distributed through independent distributors and
directly from third-party suppliers.
The Company markets Pennzoil(R) and Quaker State(R) lubricants and car care
products in more than 80 countries outside of the United States through directly
and indirectly wholly and partly owned subsidiary companies, joint ventures,
licensees, distributors and jobbers. During 1999, the Company's largest national
markets outside the United States (by total lubricant sales volume) were Mexico,
Canada, Thailand, India and Indonesia. The Company's motor oil and other
lubricants are blended and packaged by wholly owned subsidiaries of the Company
in Australia and Spain, by a majority owned subsidiary in India, by joint
ventures in Bolivia, Malaysia, South Africa and Peru and by licensees in
Indonesia, Mexico, the Philippines and Thailand.
CONSUMER PRODUCTS. The Company manufactures and markets automotive
polishes, car wash products and automotive air fresheners, and markets
automobile engine and fuel treatments, automotive window shades, automotive
glass treatments, tire inflators and automotive accessories.
The Company's products are marketed under national brand names such as
Slick 50(R), Rain-X(R), Blue Coral(R), Black Magic(R), Westley's(R), Medo(R),
Axius(TM), Gumout(R), Snap(R), Fix-A-Flat(R), The Outlaw(R), Classic(R) car wax,
Pennzoil Roadside(TM) Rescue(R) and other proprietary brand names. The divisions
of the Company included in the consumer product segment are described below.
The Blue Coral/Slick 50 division markets Slick 50(R) automotive engine
treatments and related automotive chemical products and manufactures and markets
Blue Coral(R) automobile appearance products. Slick 50(R) branded products are
produced by third party contract manufacturers and distributed directly to
customers or shipped to company locations for distribution to customers. Blue
Coral purchases chemicals, waxes and cleaners from a variety of suppliers and
blends and packages finished products at its leased facility in Cleveland, Ohio.
The Blue Coral/Slick 50 division also markets Rain-X(R), the leading brand of
rain repellant for automobile windows and other appearance products, Black
Magic(R) non-waterbased tire
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protectant and dressing products and Westley's(R) car washes and cleaners. The
majority of the Rain-X(R), Black Magic(R) and Westley's(R) brand products are
manufactured and distributed by third party contract manufacturers.
The Medo division designs, manufactures and markets air fresheners
primarily for use in automobiles. Medo purchases paperboard, containers and
fragrance from a variety of suppliers, and manufactures and distributes finished
air fresheners from a leased Baltimore, Maryland facility.
The Axius division designs and markets automotive window sun protection
products and automotive accessories. Axius purchases its automotive window sun
protection and other accessory products from a variety of suppliers and
distributes sunshades and other automotive accessories from a leased Moorpark,
California facility.
The Company's automotive chemicals division manufactures and markets
Fix-A-Flat(R) tire inflators, Gumout(R) fuel additives and cleaners, The
Outlaw(R) fuel additives, Snap(R) fuel additives, cleaners and performance
fluids, Classic(R) car waxes and washes, Pennzoil Roadside(TM) Rescue(R)
emergency fuel additive and other private and house brand automotive chemicals.
Fix-A-Flat(R) is the number one seller of tire inflators in the United States,
and Gumout(R) is the number one seller of carburetor spray cleaners in the
United States. Fix-A-Flat(R), Gumout(R), Rescue(R), The Outlaw(R) and Snap(R)
products are manufactured through arrangements with third party contract
manufacturers.
Pennzoil-Quaker State launched a new product, Pennzoil Roadside(TM)
Rescue(R), during the fourth quarter of 1999. Pennzoil Roadside(TM) Rescue(R)
emergency fuel additive is intended for use by motorists who have run out of
gas. The product is poured into a vehicle's fuel tank while the engine is still
hot, allowing a restart in a few minutes time. The new product is packaged in
convenient half-gallon containers that are stored in the car. Each half-gallon
of Rescue(R) provides enough fuel for most vehicles to travel approximately 10
miles.
The Company's consumer products are marketed primarily to the consumer
through mass merchandisers and auto parts stores, and secondarily through the
installed market (lube centers, service stations, automobile dealerships, etc.).
Outside the United States, the Company's consumer products are manufactured
by third parties in the United Kingdom. Products are sold in 48 countries
through wholly and partly owned subsidiaries, licensees, sales agents and
distributors.
FAST LUBE OPERATIONS
The Company provides fast automotive preventive maintenance services in the
United States through Jiffy Lube(R) and Q Lube(R) service centers and in Canada
through Q Lube(R) service centers only.
During 1999, the Company initiated a program to rebrand all its Q Lube(R)
service centers to Jiffy Lube(R) service centers to achieve single system
synergies. As of December 31, 1998, 590 Q Lube(R) service centers were open in
the United States, 28 in Canada and one in Puerto Rico. The Company
substantially completed the program during 1999 and had 40 Q Lube(R) service
centers as of December 31, 1999.
As of December 31, 1999, 2,144 Jiffy Lube(R) service centers were open in
metropolitan areas throughout the United States with a heavy concentration of
centers in the northeastern and eastern part of the United States. Franchisees
operated 1,595 of these service centers and the other 549 service centers were
owned and operated by Jiffy Lube, including 25 franchised service centers and 82
company-operated service centers at Sears Auto Centers across the country.
Jiffy Lube's primary service is Jiffy Lube Signature Service(TM), which can
generally be performed in 10 minutes or less, and which 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. All tires are inflated
to proper levels, the battery fluid and engine coolant levels are checked, and
the air filter and windshield wiper blades are inspected. Coolant replenishment
is at an additional charge, as is replacement of air filters and wiper blades. A
number of other authorized services and products, including Pennzoil-Quaker
State products, are also available at Jiffy Lube(R) service centers at an
additional cost. Pennzoil(R) and Quaker State(R) motor oils are the featured
motor oils in company-operated service centers and in most franchise-operated
centers. Pennzoil(R) and Quaker State(R) brands constituted approximately 86% of
the lubricants used by Jiffy Lube in 1999.
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Jiffy Lube was ranked fifth in the world among all franchises in the 21st
Annual Franchise 500 (Entrepreneur, January 2000), rising from last year's
ranking of number 61. Jiffy Lube also maintained its first-place ranking among
fast oil change centers in the Franchise 500 (Entrepreneur, January 2000). In
addition, Jiffy Lube continues to be recognized as a "super brand" in
BrandWeek's annual rating of the top 2000 brands in America.
BASE OIL AND SPECIALTY PRODUCTS
During 1999, the Company completed a strategic review of its manufacturing
assets and businesses, including refineries, partnerships and packaging plants.
During the review, it evaluated the strategic and financial advantages and
disadvantages it derives from the vertical integration of its manufacturing and
marketing capabilities. Based on the results of this review, the Company decided
to withdraw from the refining business and to dispose of its refineries and
related assets. In February 2000, the Company ceased processing crude oil at its
Rouseville, Pennsylvania refinery and entered into a definitive agreement to
sell the wax processing facilities and related assets at that refinery, its
interest in the Bareco wax marketing partnership and related assets. The Company
will continue to pursue the divestiture of its Shreveport, Louisiana refinery,
the remaining assets of its Rouseville refinery and related businesses.
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 3 of Notes to Consolidated
Financial Statements for additional information.
BASE OIL. As of December 31, 1999, the Rouseville facility and the
Shreveport facility manufactured base oils and specialty products for the
Company. The paraffinic base oil produced by these manufacturing facilities is
used in the blending of motor oil and other lubricants and for sale to
industrial customers. The manufacturing facilities also produce waxes,
petrolatums, special cut kerosenes, transformer oils, process oils and other
naphthenic base oils for use in producing specialty industrial products or for
sale to industrial customers. In addition, the Company markets gasoline and
distillate products in eight states through wholesale distributors to retail
outlets under the Pennzoil(R) brand name or as an unbranded product.
The Company and Conoco are equal partners in Excel Paralubes, which
operates a state-of-the-art base oil hydrocracker facility located at Conoco's
refinery near Lake Charles, Louisiana. The facility is capable of producing
approximately 20,000 barrels per day of high-quality base oils, the base
ingredient in finished lubricants. Conoco operates the plant with support
positions staffed by both Conoco and the Company. The Company purchases 50% of
base oil production volume of Excel Paralubes at contract rates based on
prevailing market prices.
SPECIALTY PRODUCTS. The Company and Conoco also are partners in Penreco.
The Company contributed to Penreco its operations related to petrolatums, white
oils, ink solvents, sulfonates and other specialty petroleum products, including
its manufacturing facilities in Karns City, Pennsylvania and Dickinson, Texas.
Conoco contributed to Penreco its solvents business, which sells products
primarily into the drilling fluids, mining and cleaning products markets and as
carrier oils for many consumer products. Products from Penreco are marketed
under the Penreco(R), Magie Bros(R), Conosol(R) and LVT(R) brand names. Penreco
markets to manufacturers and end-users directly and through licensed
distributors.
As of December 31, 1999, the Company and Baker Petrolite Corporation, the
specialty chemicals division of Baker Hughes Incorporated, were equal partners
in Bareco Products, which markets a broad line of wax products to domestic and
international purchasers of paraffin, microcrystalline and related synthetic
waxes under the Be Square(R) and other brand names. In February 2000, the
Company agreed to sell its interest in the partnership in connection with the
sale of the Rouseville wax processing facilities.
COMPETITION
The lubricants business is highly competitive. The major competitors of the
Company and their principal brands of motor oil in the United States are Ashland
Inc. (Valvoline(R)), Texaco Inc. (Havoline(R)), Burmah Castrol PLC (Castrol(R)),
and Exxon Mobil Corporation (Mobil(R)). The Company also competes with a number
of independent blending and packaging companies. Outside of the United States,
the Company also
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competes with major fuels marketers and state-owned petroleum companies. The
principal methods of competition in the motor oil business are breadth of
product portfolio, product quality, price, distribution capability, advertising
and sales promotion. Some of the competitors, particularly the major integrated
oil companies, have greater financial resources than the Company.
The car care consumer products business is highly competitive and very
fragmented. The car care industry is composed of several categories, such as
maintenance chemicals, appearance chemicals, tire cleaners and air fresheners.
Major branded competitors in these categories are STP(R), primarily a
maintenance chemical, and appearance products Armor All(R) and Turtle Wax(R).
Many other national brands exist in each of the various categories, although, in
general, they have small market shares. Private label brands also compete with
the national brands with respect to certain car care products. The principal
methods of competition in car care products are specific product benefits,
distribution capability and advertising and sales promotion.
The base oil and specialty products business is highly competitive. The
major competitors are Witco Corporation, Petro-Canada and Lyondell Chemical
Company in the white oils business and several major integrated oil companies in
base oil (primarily Exxon Mobil and Equilon, a joint venture between Texaco and
Shell Oil Company) and the solvents business. Wax products major competitors are
Moore and Munger, Allied Signal Inc., International Group Inc. and National Wax,
a division of Burmah Castrol. Specialty industrial products compete on the basis
of product quality, customer service and price.
The fast lube business is highly competitive. Major competitors include
Ashland Inc. through its Valvoline Instant Oil Change(R) centers. A large number
of independent fast lube chains also compete with Jiffy Lube(R) and Q Lube(R) on
a regional or local basis. In addition to competing with other fast lube
centers, Jiffy Lube(R) and Q Lube(R) service centers compete with automobile
dealers, service stations and garages. The principal methods of competition are
quality of service, speed, location, warranty, price, convenience, reliability
and sales promotion.
PATENTS AND TRADEMARKS
The Company's trademark portfolio exceeds 3,000 domestic and foreign
trademark registrations and applications, with most of its primary brand names
being protected by registered trademarks. Pennzoil-Quaker State recognizes the
importance of its strong brand names to its business. Therefore, the Company
actively polices the use of its trademarks throughout the world where its
products are sold and takes vigorous action against apparent infringements of
its trademarks.
The Company currently has approximately 125 patents and over 50 pending
patent applications. The subject matter of these patents and patent applications
include lubricants, synthetic lubricants, lubricant additives, automotive
chemicals, various hydrocarbon and ester gel technologies, and automotive
accessories.
RESEARCH AND DEVELOPMENT
The Company's research and development division underwent a major
restructuring in 1999. Focus has been placed on Consumer Products technology
with the creation of a new and dedicated department supporting growth plans for
all strategic business units as well as the Automotive Chemicals Division.
Lubricant technology continued to receive attention with focus on new products
and creating beneficial differentiation for the consumer. The Company also
created a new department to build the Company's core competencies in selected
science and technology fields. The Company initiated a major effort to enhance
product quality. The new quality enhancement processes implemented cover a wide
range of activities from product design and specifications to vendor approval
and manufacturing excellence.
As a result of the business-focused deployment of Research and Development,
the Company launched more than ten new products in 1999. One of these products,
Pennzoil Roadside(TM) Rescue(R) emergency fuel additive, was selected by
Business Week magazine as one of the best new products of the year.
The Research and Development division has adopted a goal of becoming a key
business driver, partnering with all business segments including lubricants and
consumer products and fast lube operations. The Company spent approximately
$16.5 million on research activities and quality enhancement in 1999. The
activities are carried out primarily in a 65,700 square foot facility at the
Woodlands, Texas. The Company also operates a state-of-the-art pilot plant at
this location.
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EMPLOYEES
As of December 31, 1999 the Company and its subsidiaries had approximately
8,198 employees, of whom approximately 5,866 were full-time employees and
approximately 2,332 were temporary and part-time employees. Approximately seven
percent of the Company's employees are represented by various labor unions.
Collective bargaining agreements are in force with most of the unions.
The Company is subject to various federal and state laws and regulations
governing employment practices and working conditions, including, but not
limited to, Title VII of the Civil Rights Act of 1964, 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
The Company's operations are affected from time to time in varying degrees
by political developments and federal, state and local laws and regulations.
ENVIRONMENTAL MATTERS. The operations of the Company in the United States
are subject to numerous federal, state and local laws and regulations
controlling the discharge of materials into the environment or otherwise
relating to the protection of the environment and human health and safety.
The Company is subject to a variety of state and federal Clean Air Act
rules requiring air emission reductions from its operating units and fuels.
Currently, the U.S. Environmental Protection Agency ("EPA"), the Ozone Transport
Assessment Group ("OTAG"), Ozone Transport Region ("OTR") and several states are
examining new standards and/or controls which could impose significant costs on
the Company. The EPA recently adopted new, more stringent national ambient air
quality standards for ozone and particulate matter, which would designate many
more areas of the country as high pollution areas subject to additional
regulatory controls, including possible fuel specification requirements.
However, litigation over the new standards has rendered their implementation
uncertain. The multi-state OTAG and OTR groups are developing lists of suggested
controls to limit interstate ozone transport. The EPA has issued a proposal to
require states to begin adopting many of these suggested controls over the next
few years.
The precise effect of these actions on the Company and other industrial
companies is uncertain because most of the requirements will be implemented
through EPA regulations to be issued over a period of years. For example, fuels
produced at the Company's Shreveport refinery will likely be required to be
reformulated to a composition significantly different from the fuels currently
produced, which would involve the installation of additional refining equipment.
However, current estimates indicate that expenditures associated with the
installation of such equipment would not have a material effect on the Company's
results of operations.
The EPA also recently enacted regulations limiting the sulfur content of
gasoline fuels, effective in 2004. The Company believes it is eligible under the
regulations for an extension of this deadline to 2008. The expenditures required
to comply with these requirements may have a material effect on the Company's
results of operations. The EPA is expected to propose, later in 2000, new
regulations limiting the sulfur content of diesel fuels. The potential effect on
the Company of such regulations, if ultimately promulgated, is unknown at this
time.
The Company is also subject to certain laws and regulations relating to
environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act, the
Resource Conservation and Recovery Act and similar state statutes. In response
to liabilities associated with these activities, accruals have been established
when reasonable estimates are possible. The Company adjusts the accruals when
new remediation responsibilities are discovered and probable costs become
estimable, or when current remediation estimates are adjusted to reflect new
information.
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The Company's assessment of the potential impact of these environmental
laws is subject to uncertainty due to the difficult process of estimating
remediation costs that are subject to ongoing and evolving change. Initial
estimates of remediation costs reflect a broad-based analysis of site conditions
and potential environmental and human health impacts derived from preliminary
site investigations (including soil and water analysis, migration pathways and
potential risk). Later changes in these initial estimates may be based on
additional site investigations, completion of feasibility studies (comparing and
selecting from among various remediation methods and technologies) and risk
assessments (determining the degree of current and future risk to the
environment and human health, based on current scientific and regulatory
criteria) and the actual implementation of the remediation plan. This process
occurs over relatively long periods of time and is influenced by regulatory and
community approval processes and is subject to the ongoing development of
remediation technologies. The Company's assessment analysis takes into account
the condition of each site at the time of estimation, the degree of uncertainty
surrounding the estimates for each phase of remediation and other site-specific
factors.
From January 1997 through December 1999, capital outlays of approximately
$10.0 million have been made by the Company with respect to environmental
protection. Capital expenditures for environmental control facilities are
currently expected to be approximately $0.8 million in 2000. Reference is made
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity -- Environmental" for additional
information.
FAST LUBE OPERATIONS MATTERS. Jiffy Lube and Q Lube are subject to, and
devote substantial efforts to compliance with, a variety of federal and state
laws governing franchise sales and marketing and franchise trade practices.
Although the regulatory environment differs by state, applicable laws and
regulations generally require disclosure of business information in connection
with the sale of franchises. Certain state regulations also affect the ability
of the franchisor to revoke or refuse to renew a franchise. Jiffy Lube and Q
Lube seek to comply with applicable regulatory requirements. However, given the
scope of the fast lube business and the nature of franchise regulations,
compliance problems can be encountered from time to time.
ITEM 3. LEGAL PROCEEDINGS.
(a) LOUISIANA FEDERAL COURT EMPLOYMENT ACTION. In September 1997, a lawsuit
styled Kenneth Epperson, et al. v. Pennzoil Co., et al., was filed in the United
States District Court for the Western District of Louisiana, Shreveport
Division. The amended complaint filed by nine named plaintiffs alleges
discriminatory employment policies and practices against African-American and
other minority employees and seeks attorneys' fees and costs, various forms of
injunctive and equitable relief, $50.0 million in damages for back pay, front
pay and emotional distress, and a minimum of three times that amount in punitive
damages. Class certification was denied by the court in September 1999. The
court, however, allowed the lawsuit to be amended to add new individual
plaintiffs. Since that time, approximately 60 additional plaintiffs have joined
the lawsuit. The Company vigorously denies these allegations.
(b) BLUE CORAL. In May 1997, a class action lawsuit was filed in the United
States District Court for the Northern District of Illinois on behalf of a class
of persons who purchased wax, polish or protectant products sold by a number of
defendants. The action names as defendants a number of car wax manufacturers,
including Blue Coral, Inc., a subsidiary of the Company, and certain of its
present and former officers. The complaint alleges that the defendants falsely
advertised and marketed such products and seeks treble damages, attorneys' fees
and costs for the class for alleged violations of the federal Racketeer
Influenced and Corrupt Organizations Act and compensatory damages for alleged
violations of the Ohio Consumer Sales Practices Act as well as for breach of
express warranty. On January 5, 1999, the court certified a nationwide class
consisting of all persons who purchased products marketed, produced or
distributed as "car wax" by the defendants. While no class period has been
specified by the court, the plaintiffs are seeking a class period dating back
four years prior to the filing of the action. On February 2, 1999, the
plaintiffs proposed a joint settlement fund equal to ten percent of each
defendant's 1997 gross revenue from the products. The Company is contesting this
action vigorously.
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(c) 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 in the United States and
that the defendant, Medo Industries, Inc., a subsidiary of the Company, 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. The Company is contesting this action vigorously.
(d) OTHER. The Company is involved in numerous lawsuits, primarily in
Louisiana, involving asbestos and asbestos-containing products. The plaintiffs
generally allege exposure to asbestos and asbestos-containing products while
working on the premises of the premises defendants and strict liability and
negligence actions against the premises' defendants, including the Company. In
addition, the plaintiffs generally allege that asbestos-containing products
sold, distributed and supplied by the other defendants in the lawsuits were
defective and unreasonably dangerous and that those defendants were thus
negligent in failing to warn the plaintiffs of these dangers. The Company is
contesting these actions vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security holders
during the quarter ended December 31, 1999.
ITEM S-K 401(b) EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Set forth below are the names and ages of the executive officers of
Pennzoil-Quaker State Company (at February 29, 2000). Positions, unless
otherwise specified, are with Pennzoil-Quaker State Company.
CARLOS T. ALCANTARA (49)
President -- International Operations
AHMED ALIM (52)
Senior Vice President -- Research and
Development
CLYDE W. BEAHM (62)
Executive Vice President -- Lubricants and
Consumer Products
LINDA F. CONDIT (52)
Vice President and Corporate Secretary
MARK S. ESSELMAN (43)
Senior Vice President -- Human Resources
MARC C. GRAHAM (47)
Group Vice President -- Fast Lube Operations
THOMAS P. KELLAGHER (43)
Group Vice President and Chief Financial Officer
MICHAEL J. MARATEA (55)
Vice President and Controller
JAMES L. PATE (64)(1)
Chairman of the Board and Chief Executive Officer
JAMES J. POSTL (54)(1)
President and Chief Operating Officer
JAMES W. SHADDIX (53)
General Counsel
PAUL B. SIEGEL (54)
Vice President
LAURIE K. STEWART (40)
Vice President and Treasurer
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(1) Director of Pennzoil-Quaker State Company and member of Executive Committee.
(b) Officers are appointed annually to serve for the ensuing year or until
their successors have been appointed. Positions, unless specified otherwise, are
with Pennzoil-Quaker State Company.
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CARLOS T. ALCANTARA -- President -- International Operations since August
1999. Vice President -- International Automotive Products Division of The Clorox
Company from February 1999 to June 1999. Vice President -- Worldwide Business
Development of The Clorox Company from June 1998 to January 1999. Vice
President -- Latin American Division of The Clorox Company prior thereto.
AHMED ALIM -- Senior Vice President -- Research and Development since May
1999. Vice President -- Quality and Technology of Pizza Hut, Inc./Tricon Global
Restaurants, Inc. from March 1996 to April 1999. Vice President -- Technical
Operations of Warner Lambert Company prior to August 1995.
CLYDE W. BEAHM -- Executive Vice President -- Lubricants and Consumer
Products since December 1998. Group Vice President -- Products Marketing of
Pennzoil Company from January 1996 to December 1998. Group Vice
President -- Franchise Operations of Pennzoil Company prior thereto. Vice
President of Pennzoil Products Company from March 1998 to December 1998.
LINDA F. CONDIT -- Vice President and Corporate Secretary since December
1998. Vice President of Pennzoil Company from December 1995 to December 1998.
Corporate Secretary of Pennzoil Company from March 1990 to December 1998. Vice
President and Secretary of Pennzoil Products Company from March 1998 to December
1998.
MARK S. ESSELMAN -- Senior Vice President -- Human Resources since August
1999. Vice President -- Human Resources and Communications of Great Lakes
Chemical Corporation from August 1997 to July 1999. Vice President -- Human
Resources in the Network Systems Division of USRobotics from August 1996 to
April 1997. Vice President -- Human Resources of CompuCom Systems, Inc. prior
thereto.
MARC C. GRAHAM -- Group Vice President -- Fast Lube Operations and
President -- Jiffy Lube International, Inc. since July 1999. President of Paccar
Automotive Inc. prior thereto.
THOMAS P. KELLAGHER -- Group Vice President and Chief Financial Officer
since February 2000. Senior Vice President -- Business Development from January
1999 to February 2000. Principal of McKinsey & Company, Inc. prior thereto.
MICHAEL J. MARATEA -- Vice President and Controller since December 1998.
Vice President of Pennzoil Company from February 1996 to December 1998 and
Controller of Pennzoil Company from May 1995 to December 1998. Vice
President -- Process Improvement of Pennzoil Exploration and Production Company
prior thereto. Controller of Pennzoil Products Company from March 1998 to
December 1998.
JAMES L. PATE -- Chairman of the Board and Chief Executive Officer since
December 1998. Chairman of the Board of Pennzoil Company from May 1994 to August
1999, and Chief Executive Officer of Pennzoil Company from May 1990 to December
1998. President of Pennzoil Company from March 1990 to December 1997. Chief
Executive Officer of Pennzoil Products Company from October 1998 to December
1998 and President of Pennzoil Products Company from March 1998 to October 1998.
JAMES J. POSTL -- President and Chief Operating Officer since December
1998. President of Pennzoil Products Company from October 1998 to December 1998.
President of Nabisco Biscuit Company from December 1995 to February 1998.
President and Chief Executive Officer of Nabisco International prior thereto.
JAMES W. SHADDIX -- General Counsel since December 1998. General Counsel of
Pennzoil Company prior thereto. Vice President of Pennzoil Products Company from
March 1998 to December 1998.
PAUL B. SIEGEL -- Vice President since December 1998. Senior Vice
President -- Legal of Pennzoil Products Group from February 1995 to December
1998. Vice President -- Legal of Pennzoil Products Group prior thereto. Vice
President of Pennzoil Products Company from March 1998 to December 1998.
LAURIE K. STEWART -- Vice President and Treasurer since August 1999.
Assistant Treasurer from December 1998 to July 1999. Manager -- Corporate
Finance of Pennzoil Company from August 1996 to December 1998.
Manager -- Planning and International Finance of Pennzoil Company prior thereto.
Assistant Treasurer of Pennzoil Products Company from March 1998 to December
1998.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table shows high and low sales prices for the common stock of
Pennzoil-Quaker State as reported on the New York Stock Exchange (consolidated
transactions reporting system), the principal market in which the common stock
is traded, and dividends paid per share for the calendar quarters indicated. The
common stock is also listed for trading on the Pacific Exchange. The common
stock began trading "regular way" on the New York Stock Exchange and the Pacific
Exchange on December 31, 1998, the day following the effective date of the
Spin-off and the acquisition of Quaker State.
1999
-----------------------------
MARKET PRICE
----------------
QUARTER ENDED HIGH LOW DIVIDENDS
- ------------- ------ ------ ---------
March 31.............................................. $16.50 $11.88 $.1875
June 30............................................... $15.44 $11.06 $.1875
September 30.......................................... $15.38 $12.31 $.1875
December 31........................................... $12.94 $ 8.50 $.1875
The closing sales price for the common stock of Pennzoil-Quaker State on
December 31, 1999 was $10.1875 as reported on the New York Stock Exchange
(consolidated transactions reporting system), the principal market in which the
common stock is traded.
As of December 31, 1999, Pennzoil-Quaker State had 18,935 record holders of
its common stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table contains selected financial data for the five years
indicated.
AS OF AND FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -----------
(EXPRESSED IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Revenues(1)................................... $2,988.9 $1,850.1 $2,013.2 $1,968.0 $1,807.7
Net loss(2)................................... $ (320.9) $ (45.9) $ (0.6) $ (9.2) $ (53.2)
Basic and diluted loss per share.............. $ (4.12) $ (0.96) $ (0.01) $ (0.19) $ (1.11)
Dividends per common share.................... $ 0.75 -- -- -- --
Total assets(3)............................... $2,733.2 $3,145.0 $1,559.6 $1,370.5 $1,278.7
Total debt and capital lease
obligations(3)(4)........................... $1,100.4 $1,105.6 $ 458.6 $ 458.5 $ 435.2
Total shareholders' equity(3)................. $ 949.9 $1,350.2 $ 256.4 $ 235.7 $ 224.8
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(1) The increase in revenues for the year ended December 31, 1999 compared to
the year ended December 31, 1998 was primarily due to the acquisition of
Quaker State Corporation on December 30, 1998. The decrease in revenues for
the year ended December 31, 1998 compared to the year ended December 31,
1997 was primarily the result of the Company's contribution of most of its
specialty industrial products business to a partnership with Conoco called
Penreco in October 1997. Beginning in the fourth quarter of 1997, the
Company's share of Penreco's earnings, net of expenses, are reflected in
revenues. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional information.
(2) The 1999 net loss includes after-tax charges of $359.1 million ($592.2
million pretax). These charges include $493.9 million in pretax charges
required under SFAS No. 121 related to the expected disposition of the
Company's Rouseville and Shreveport refineries and costs associated with the
closure of the Rouseville, Pennsylvania blending and packaging plant, $86.2
million in pretax charges related to the December 30, 1998 acquisition of
Quaker State and $12.1 million in pretax charges for restructuring costs and
other matters. The 1998 net loss includes after-tax charges of $59.0 million
($91.9 million pretax). These charges include $10.6 million in pretax
expenses related to the acquisition of Quaker State, $29.6 million in pretax
charges for the impairment of fast lube assets required under SFAS No. 121,
$25.0 million in pretax charges associated with the voluntary withdrawal and
reformulation of Fix-A-Flat(R) tire inflator products and $26.7 million in
pretax charges for litigation settlement expenses, net loss on sales of
assets and other matters. The 1997 net loss includes pretax charges of $22.0
million allocated to the Company by its former parent company. The 1996 net
loss includes a pretax charge of $24.4 million for pre-operating expenses of
Excel Paralubes. The 1995
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net loss includes pretax charges of $20.0 million relating to a fire at the
Company's Rouseville manufacturing facility, $10.0 million for a settlement of
certain franchisee litigation, $9.0 million for pre-operating expenses of Excel
Paralubes, $5.7 million associated with international marketing restructuring
charges and $8.2 million associated with a general and administrative cost
reduction program. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information related to
1997 through 1999.
(3) In 1999, the Company wrote down its Rouseville and Shreveport refineries to
their fair values less costs to sell. On December 30, 1998, the Company
acquired Quaker State. Reference is made to Notes 2 and 3 of Notes to
Consolidated Financial Statements for additional information.
(4) Includes current maturities of long-term debt and current portion of capital
lease obligations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to Segment Financial Information included in Item 1.
Business and Item 2. Properties and the Consolidated Financial Statements
beginning on page F-3 for additional information.
Pennzoil-Quaker State Company is the result of the consolidation and
separation on December 30, 1998 of the lubricants and consumer products, fast
lube and base oil and specialty products operations of Pennzoil Company and the
acquisition by the Company of Quaker State in a merger transaction immediately
following the separation.
Results of operations for Pennzoil-Quaker State do not include Quaker
State's results prior to the acquisition. In addition, operating results in 1997
and 1998 include certain affiliated charges for interest and services provided
by Pennzoil Company to Pennzoil-Quaker State that were not incurred by
Pennzoil-Quaker State in 1999. Assets and liabilities of Quaker State are
included in the Company's consolidated balance sheet beginning on December 31,
1998.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998
The Company had net sales of $2,951.4 million for the year ended December
31, 1999, an increase of $1,149.7 million, or 64%, from 1998. The increase in
net sales was primarily due to the acquisition of Quaker State.
A net loss of $320.9 million was recorded for 1999 compared to a net loss
of $45.9 million in 1998. Results of operations for 1999 included pretax charges
of $592.2 million. Included in these charges are $493.9 million related to the
expected disposition of the Rouseville and Shreveport refineries and closure of
the Rouseville blending and packaging plant, $86.2 million due to costs
associated with the Company's acquisition of Quaker State and $12.1 million for
restructuring costs and other matters. Excluding these items, net income was
$38.2 million for 1999. Results of operations for 1998 include $10.6 million in
pretax expenses related to the acquisition of Quaker State, $29.6 million in
pretax charges for the impairment of fast lube assets required under SFAS No.
121, $25.0 million in pretax charges associated with the voluntary withdrawal
and reformulation of Fix-A-Flat(R) tire inflator products and $26.7 million in
pretax charges for litigation settlement expenses, loss on sales of assets and
other matters. Excluding these items, net income was $13.1 million in 1998.
Reference is made to Note 2 and Note 3 of Notes to Consolidated Financial
Statements for additional information.
LUBRICANTS AND CONSUMER PRODUCTS. Net sales for the lubricants and consumer
products segment in 1999 were $1,894.3 million compared to net sales of $960.5
million for 1998. The 97% increase in net sales from 1998 to 1999 was primarily
due to the acquisition of Quaker State and higher lubricating product sales
volumes. Operating income from this segment was $166.5 million for 1999 compared
to $55.9 million in 1998. Operating income in 1999 included $31.4 million of
certain expenses associated with the acquisition of Quaker State. Operating
income in 1998 included charges of $25.0 million associated with the voluntary
withdrawal and reformulation of Fix-A-Flat(R) tire inflator products and $14.2
million for impairments, write-offs and other charges. Excluding these charges,
operating income was $197.9 million in 1999, an increase of $102.8 million, or
108%, over 1998. Operating income increased primarily due to the acquisition of
Quaker State.
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FAST LUBE OPERATIONS. Net sales recorded by the fast lube operations
segment, operating through Jiffy Lube and Q Lube, increased 31% for 1999
compared to 1998. The increase in net sales was due primarily to an increase in
the number of service centers resulting from the addition of Quaker State Q Lube
operations. Net sales reported by the fast lube operations segment consist of
sales revenues from company-operated service centers and franchise fees, royalty
revenues, rental income and proceeds from automotive product sales to franchisee
operated service centers. System-wide sales increased $282.9 million to $1,100.5
million for 1999 compared to $817.6 million for 1998 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 $37.49 in 1999 compared with
$36.71 in 1998, as customers continue to take advantage of additional authorized
services and products available at service centers. There were 2,144 service
centers (including 549 company-operated service centers) open as of December 31,
1999.
The fast lube operations segment reported an operating loss of $16.4
million during 1999 compared to an operating loss of $4.1 million during 1998.
Included in 1999 and 1998 results are charges of $33.9 million and $14.8
million, respectively, for acquisition expenses, legal expenses and other
liabilities. Adjusted to exclude these charges, operating income totaled $17.5
million in 1999 compared to $10.7 million in 1998. The increase in operating
income in 1999 over 1998 is primarily due to the addition of Quaker State's Q
Lube operations.
During 1999, the fast lube operations segment acquired 32 centers for cash
of $26.2 million and sold 423 Q Lube(R) and Jiffy Lube(R) service centers for
cash of $76.0 million and $6.1 million in notes issued. In addition, 71 Q
Lube(R) and 49 Jiffy Lube(R) centers were closed during the year.
BASE OIL AND SPECIALTY PRODUCTS. During 1999, the Company completed a
strategic review of its manufacturing assets and businesses, including
refineries, partnerships and packaging plants. During the review, it evaluated
the strategic and financial advantages and disadvantages it derives from the
vertical integration of its manufacturing and marketing capabilities. Based on
the results of this review, the Company decided to withdraw from the refining
business and to dispose of its refineries and related assets. In December 1999,
the Company recorded a pretax charge of $480.0 million to reflect the impairment
of its Rouseville and Shreveport refineries related to the expected disposition
of those refineries. SFAS No. 121 requires assets to be disposed of be reported
at the lower of the carrying amount or the fair values less costs to sell. The
write-down will reduce annual pretax depreciation and amortization expense by
approximately $21 million. In February 2000, the Company ceased processing crude
oil at its Rouseville refinery and entered into a definitive agreement to sell
the wax processing facilities and related assets at that refinery, its interest
in the Bareco partnership and related assets. The Company will continue to
pursue divestitures of its refineries and related businesses as it withdraws
from such businesses. Reference is made to Note 3 of Notes to Consolidated
Financial Statements for additional information.
Net sales for the base oil and specialty products segment increased 19% for
1999 compared to the same period in 1998. The increase was due to the effect of
increased crude oil prices on average sales prices for base oils, fuels and
other refined petroleum products.
Excluding the refinery impairment, gross margin decreased $9.6 million, or
48%, in 1999 from 1998. The decrease was primarily due to lower margins for base
oils, fuels and waxes as prices for these products failed to keep pace with the
rapidly increasing price of crude oil and other refinery feedstocks. The lower
margins were partially offset by a $42.6 million reduction in operating
expenses.
Other income for the segment was $15.3 million lower in 1999 than in 1998.
The decrease was primarily due to the sale of the Roosevelt, Utah refinery in
1998 and to lower equity income in the Company's partnerships related to the
effects of higher feedstock costs in 1999.
Selling, general and administrative expenses increased $5.6 million, or
41%, in 1999 compared to 1998. The increase was due to costs related to the
strategic review of assets and related restructuring activities.
OTHER. Other operating income in 1999 was $3.4 million, compared to a loss
of $8.1 million in 1998. The increase in 1999 compared to 1998 was primarily due
to higher income from the Company's captive insurance subsidiary.
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CORPORATE ADMINISTRATIVE. Corporate administrative expenses in 1999 were
$81.1 million compared to $44.4 million in 1998. The increase in 1999 compared
to 1998 is primarily due to the addition of Quaker State and the related
acquisition costs.
1998 COMPARED WITH 1997
The Company had net sales of $1,801.7 million for the year ended December
31, 1998, a decrease of $180.5 million, or 9%, from the comparable period in
1997. The decrease was primarily due to the contribution of most of the
Company's specialty industrial products business to the Penreco partnership in
October 1997. Prior to the creation of this partnership, net sales from the
contributed operations were consolidated in the financial statements of the
Company. In 1998, the Company's share of Penreco earnings was accounted for
under the equity method of accounting and reported as a component of other
income, net.
Excluding the impact of specialty industrial products operation contributed
to Penreco, gross margin (i.e., net sales less cost of sales and purchases from
affiliates) in 1998 decreased 7% from 1997 primarily due to lower fuels margins.
A net loss of $45.9 million was recorded for 1998 compared to a net loss of
$0.6 million in 1997. Results of operations for 1998 include $10.6 million in
pretax expenses related to the acquisition of Quaker State, $29.6 million in
pretax charges for the impairment of fast lube assets required under SFAS No.
121, $25.0 million in pretax charges associated with the voluntary withdrawal
and reformulation of Fix-A-Flat(R) tire inflator products and $26.7 million in
pretax charges for litigation settlement expenses, net loss on sales of assets
and other matters. Depreciation expense increased $12.7 million for 1998
compared to 1997, primarily due to the Shreveport manufacturing facility upgrade
and the implementation of a new information technology system in January 1998.
Reference is made to Note 2 and Note 3 of Notes to Consolidated Financial
Statements for additional information.
LUBRICANTS AND CONSUMER PRODUCTS. Net sales for this segment in 1998 were
$960.5 million, approximately the same as 1997 revenues. Operating income for
this segment was $55.9 million in 1998 compared to $76.5 million in 1997.
Operating income in 1998 included $25.0 million in pretax charges associated
with the voluntary withdrawal and reformulation of Fix-A-Flat(R) tire inflator
products and $14.2 million in pretax charges for impairments, write-offs and
other special charges. Excluding these charges, the year-over-year increase in
operating income was due to a full year's impact of income from acquisitions
made in late 1997, lower raw material costs and lower expenses, partially offset
by increased promotional spending from lubricants and lower filter and
automotive chemicals sales volumes.
FAST LUBE OPERATIONS. Net sales recorded by the fast lube operations
segment were up $6.6 million in 1998 compared to 1997. This increase was due to
an increase in the number of company-operated service centers.
In December 1998, the fast lube operations segment recorded a pretax charge
of $29.6 million to reflect the impairment of long-lived assets as required
under SFAS No. 121.
The fast lube operations segment reported an operating loss of $4.1 million
for the year ended December 31, 1998 compared to operating income of $24.5
million during the same period in 1997. Included in 1998 results are charges of
$14.8 million for acquisition expenses, legal settlements and other liabilities.
Adjusted to exclude these charges, operating income totaled $10.7 million in
1998 compared to $24.5 million in 1997. The year-over-year decline in earnings
was due to increased salaries and other operating costs within company-operated
centers, higher selling, general and administrative costs and higher
depreciation expense.
During 1998, Jiffy Lube acquired 22 centers together with related real
estate in exchange for cash of $8.6 million and liabilities and debt assumed of
$3.5 million. Also, during 1998, 16 centers were sold for $6.5 million in cash.
During 1997, Jiffy Lube acquired 35 centers together with related real
estate in exchange for cash of $17.8 million and liabilities and debt assumed of
$2.5 million. Also, during 1997, 24 centers were sold for
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18
$3.1 million in cash and $0.4 million in forgiveness of debt. Also during 1997,
six company-owned service centers were exchanged for six franchisee-operated
stores.
BASE OIL AND SPECIALTY PRODUCTS. Net sales for the base oil and specialty
products segment decreased 22% for 1998 compared to 1997. The decrease was
primarily due to the Company's contribution of most of its specialty industrial
products business to the Penreco partnership. Excluding the net sales associated
with the contributed specialty industrial business, net sales decreased 10% in
1998 compared to 1997 primarily due to lower average sales prices for base oils,
fuels and other refined petroleum products. The decline in sales prices
generally followed the market price decrease of crude oil and other petroleum
feedstocks. Partially offsetting this decrease was an increase in fuels
production volumes as a result of the completion of the Shreveport manufacturing
facility upgrade in April 1997.
Gross margin decreased $35.4 million in 1998 from 1997. The decrease was
primarily due to lower fuels margins, which were primarily caused by lower fuels
sales prices, which decreased faster than crude oil and other feedstock prices.
Other income for this segment increased $24.2 million in 1998 compared to
1997 primarily due to higher equity income in the Company's partnerships, which
was up $28.5 million in 1998 compared to 1997. Equity income related to Excel
Paralubes increased $20.0 million in 1998 over 1997, primarily due to higher
base oil volumes. In addition, equity income attributable to the Penreco
partnership increased $7.0 million in 1998 compared to 1997.
Other income for 1998 included income of $1.6 million related to the sale
of the Company's refinery in Roosevelt, Utah.
Selling, general and administrative expenses decreased $8.5 million in 1998
compared to 1997 due in part to the impact of the specialty industrial products
operations contributed to Penreco.
OTHER. Other operating income in 1998 was a loss of $8.1 million, compared
to income of $1.9 million in 1997. The decrease in 1998 compared to 1997 was
primarily due to the writedown of fixed assets at corporate headquarters.
CORPORATE ADMINISTRATIVE. Corporate administrative expenses in 1998 were
$44.4 million compared to $54.8 million in 1997. The decrease in 1998 compared
to 1997 is primarily due to one-time expenses incurred by Pennzoil Company in
1997.
DISCLOSURES ABOUT MARKET RISK
Pennzoil-Quaker State is exposed to market risk, including adverse changes
in interest rates, commodity prices and foreign currency exchange rates.
Reference is made to Note 9, Note 10 and Note 11 of the Notes to Consolidated
Financial Statements.
INTEREST. At December 31, 1999, the fair value of the Company's long-term
debt, including commercial paper and short-term variable rate credit agreements,
was estimated to be $839.4 million using quoted market prices or, where such
prices are not available, on estimated year-end interest rates of debt with the
same remaining average maturities and credit quality. The carrying amount of the
long-term debt at December 31, 1999 exceeded its fair value by $187.8 million. A
hypothetical 10 percent adverse change in market interest rate relative to the
aforementioned securities would not have had a material effect on the Company's
results of operations for the fiscal year ending December 31, 1999.
At December 31, 1999, the fair value of the Company's notes receivable was
estimated to be $52.7 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
fair value of the notes receivable at December 31, 1999 exceeded its carrying
amount by $8.9 million. A hypothetical 10 percent adverse change in market
interest rate relative to the aforementioned securities would not have had a
material effect on the Company's results of operations for the fiscal year
ending December 31, 1999.
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HEDGING ACTIVITIES. Pennzoil-Quaker State enters into forward exchange
contracts and options to hedge the impact of foreign currency fluctuations on
certain monetary liabilities and commitments denominated in foreign currencies.
The purpose of entering into these hedges is to minimize the impact of foreign
currency fluctuations on the results of operations. The unrealized gains and
losses on these contracts are deferred and recognized in the results of
operations in the period in which the hedged transaction is consummated. There
were no unrealized gains or losses at December 31, 1999 and unrealized gains at
December 31, 1998 are not material.
In 1998, the Company entered into four interest rate locks, based upon the
30-year Treasury rate, to lock-in interest rates for future issuances of
long-term indebtedness. The hedge contracts matured in March 1999 when the
Company issued $400.0 million of 30-year debentures. The total loss of $2.1
million on the interest rate hedges was treated as an adjustment to the issue
price of the debentures, effectively creating a discount that will be amortized
over the life of the borrowings.
Pennzoil-Quaker State also entered into swap contracts to reduce the impact
of fluctuations in refining margins on results of operations. The Company
accounted for these transactions as a hedge, and unrealized gains and losses are
deferred and recognized in the results of operations in the period in which the
hedged transaction is consummated. There were no unrealized gains or losses at
December 31, 1999. Realized gains on refining margin swaps in 1999 were not
material.
In January 2000, Pennzoil-Quaker State approved a tactical hedging program
to lock-in refining margins on up to 90% of its production of certain refined
fuel products through July 2000.
INTEREST CHARGES, NET
Interest charges, net, for the Company increased $10.6 million, or 15%, for
the year ended December 31, 1999 compared to the same period in 1998. The
increase was primarily due to an increase in average long-term debt outstanding
for a full twelve month period as a result of the acquisition of Quaker State on
December 30, 1998, partially offset by a decrease in interest rates.
Interest charges, net, increased $8.2 million, or 13%, in 1998 compared to
1997. The increase was primarily due to a decrease in interest capitalized as a
result of the completion of the Shreveport manufacturing facility upgrade in
April 1997.
YEAR ENDED DECEMBER 31
---------------------------
1999 1998 1997
------- ------- -------
(EXPRESSED IN THOUSANDS)
Interest expense........................................ $80,588 $13,826 $12,847
Affiliated interest charges............................. -- 56,372 56,374
Less: interest capitalized.............................. -- (255) (7,441)
------- ------- -------
Interest charges, net................................... $80,588 $69,943 $61,780
======= ======= =======
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW. The Company had cash and cash equivalents of $20.2 million,
$14.9 million and $9.1 million at December 31, 1999, 1998 and 1997,
respectively. Cash flow generated from operating activities before changes in
operating assets and liabilities was $160.4 million, $125.4 million and $149.6
million for the years ended December 31, 1999, 1998 and 1997, respectively. The
increase in cash flow from operations before changes in assets and liabilities
for the year ended December 31, 1999 compared to the same period in 1998
resulted primarily from improved operating earnings. The Company's cash flow
from operations for the year ended December 31, 1999 increased $154.4 million
compared to the same period in 1998, and cash flow from operations for the year
ended December 31, 1998 decreased by $281.0 million compared to the same period
in 1997. Reference is made to Note 3 of Notes to Consolidated Financial
Statements for additional information.
CAPITAL EXPENDITURES. Capital expenditures were $78.1 million in 1999,
$88.3 million in 1998 and $147.8 million in 1997. Capital expenditures in 1997
included $42.0 million for the upgrade of the Company's
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Shreveport manufacturing facility, $17.0 million for the installation of
facilities near the Company's motor oil packaging facilities to store base oils
manufactured by Excel Paralubes and $12.8 million for the implementation of new
information technology software. The 2000 capital budget for the Company is
estimated to be approximately $114.3 million, including $17.5 million for system
upgrades, $12.8 million for the construction or purchase of new fast lube
centers and $11.0 million for the upgrade of a consumer products manufacturing
facility. The Company believes that its cash flow from operations, supplemented
as required by additional borrowings, provides it with sufficient resources to
finance operations and planned capital needs.
ACCOUNTS RECEIVABLE. Current receivables include trade accounts and notes
receivable and are net of allowances for doubtful accounts of $18.8 million and
$18.2 million at December 31, 1999 and 1998, respectively. Long-term receivables
consist of notes receivable and are net of allowances for doubtful accounts of
$1.0 million and $0.9 million at December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, current receivables included notes
receivable of $19.9 million and $16.6 million, respectively. Other assets
included long-term notes receivable of $41.8 million and $53.2 million at
December 31, 1999 and 1998, respectively. The long-term receivables are loans
that are made to customers to enhance their operations. Each loan requires a
promissory note between the customer and the Company, and most require payment
of principal and interest. Similar to other incentive programs, sales agreements
normally accompany the loans.
Pennzoil-Quaker State, through its wholly owned subsidiary Pennzoil
Receivables Company ("PRC"), sells certain of its accounts receivable to a third
party purchaser. PRC is a special limited purpose corporation and the assets of
PRC are available solely to satisfy the claims of its own creditors and not
those of Pennzoil-Quaker State or its affiliates. The Company increased and
extended its one-year receivables sales facility in June 1999 to provide for
ongoing sales of up to $160.0 million of accounts receivable. The Company's net
accounts receivable sold under this facility totaled $153.1 and $115.0 million
at December 31, 1999 and 1998, respectively.
CREDIT FACILITIES AND OTHER DEBT. Pennzoil-Quaker State primarily utilizes
its commercial paper programs to manage its cash flow needs. Pennzoil-Quaker
State currently limits aggregate borrowings under its commercial paper programs
to $600.0 million. Borrowings under commercial paper facilities totaled $242.6
million at December 31, 1999. The average interest rate applicable to
outstanding commercial paper was 5.6% during 1999 and 6.0% at year-end 1998.
The Company has a revolving credit facility with a group of banks that
provides for up to $600.0 million of committed unsecured revolving credit
borrowings through November 14, 2000, with any outstanding borrowings on such
date being converted into a term credit facility terminating on November 14,
2001. There were no borrowings outstanding under this revolving credit facility
at December 31, 1999 or December 31, 1998. The Company had borrowings under a
Quaker State revolving credit agreement of $370.0 million at December 31, 1998.
In January 1999, the Company repaid these borrowings with borrowings under its
commercial paper facility and terminated the Quaker State revolving credit
facility. The average interest rate applicable to the outstanding Quaker State
revolving credit borrowings was 5.8% during 1998.
The Company had three short-term variable-rate credit arrangements with
banks at year-end 1999 and intends to enter into several additional
arrangements. The Company currently limits its aggregate borrowings under these
types of credit arrangements to $300.0 million. Outstanding borrowings were
$16.0 million at December 31, 1999. The Company had no outstanding borrowings at
December 31, 1998. None of the banks under these credit arrangements has any
obligation to continue to extend credit after the maturities of outstanding
borrowings or to extend the maturities of any borrowings.
In March 1999, Pennzoil-Quaker State issued debt in the form of $200.0
million of 6 3/4% Notes due 2009 and $400.0 million of 7 3/8% Debentures due
2029. Net proceeds of $592.2 million from the Notes and Debentures were used to
reduce the Company's outstanding commercial paper borrowing and short-term
variable rate debt.
The Company has a revolving credit facility with a Canadian bank that
provides for borrowings of up to US$18.7 million through October 29, 2000, with
any outstanding borrowings on such date being converted
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21
into a term credit facility terminating on October 29, 2001. Outstanding
borrowings under the credit facility totaled US$13.8 million and US$9.6 million
at December 31, 1999 and 1998, respectively. The average interest rates
applicable to amounts outstanding under the credit facility were 4.9% and 5.0%
during 1999 and 1998, respectively.
Reference is made to Note 9 of Notes to Consolidated Financial Statements
for additional information regarding the Company's indebtedness and credit
facilities.
CLASSIFICATION OF BORROWINGS UNDER CREDIT FACILITIES. As of December 31,
1999, borrowings totaling $258.6 million under Pennzoil-Quaker State's
commercial paper programs and variable-rate credit agreements have been
classified as long-term debt. Such debt classification is based upon the
availability of committed long-term credit facilities to refinance such
short-term facilities and the Company's intent to maintain such commitments in
excess of one year.
ENVIRONMENTAL. The Company is subject to certain laws and regulations
relating to environmental remediation activities associated with past
operations, such as the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"), the Resource Conservation and Recovery Act and similar
state statutes. In response to liabilities associated with these activities,
accruals have been established when reasonable estimates are possible. Such
accruals primarily include estimated costs associated with remediation. The
Company has not used discounting in determining its accrued liabilities for
environmental remediation, and no claims for possible recovery from third-party
insurers or other parties related to environmental costs have been recognized in
the Company's consolidated financial statements. The Company adjusts the
accruals when new remediation responsibilities are discovered and probable costs
become estimatable, or when current remediation estimates are adjusted to
reflect new information.
Certain of the Company's subsidiaries are involved in matters in which it
has been alleged that such subsidiaries are potentially responsible parties
("PRPs") under CERCLA or similar state legislation with respect to various waste
disposal areas owned or operated by third parties. In addition, certain of the
Company's subsidiaries are involved in other environmental remediation
activities, including the removal, inspection and replacement, as necessary, of
underground storage tanks. As of December 31, 1999 and 1998, the Company's
consolidated balance sheet included accrued liabilities for environmental
remediation of $38.0 million and $27.2 million, respectively. Of these reserves,
$5.4 million and $4.2 million are reflected on the consolidated balance sheet as
current liabilities as of December 31, 1999 and 1998, respectively, and $32.6
million and $23.0 million are reflected as other liabilities as of December 31,
1999 and 1998, respectively. The Company does not currently believe there is a
reasonable possibility of incurring additional material costs in excess of the
current accruals recognized for such environmental remediation activities. With
respect to the sites in which the Company's subsidiaries are PRPs, the Company's
conclusion is based in large part on (i) the availability of defenses to
liability, including the availability of the "petroleum exclusion" under CERCLA
and similar state laws, and/or (ii) the Company's current belief that its share
of wastes at a particular site is or will be viewed by the Environmental
Protection Agency or other PRPs as being de minimis. As a result,
Pennzoil-Quaker State's monetary exposure is not expected to be material beyond
the amounts reserved.
YEAR 2000 ISSUES
The Company has completed its program designed to address the issue of
computer systems and embedded chips that would be unable to accommodate the year
2000 and beyond. This program included reviews of computer systems and embedded
technologies at all its locations as well as identification of critical
customers, vendors and service providers to ensure any year 2000 issues were
appropriately mitigated. In addition, contingency and test plans were developed
to mitigate possible disruptions in operations from year 2000 issues.
To date, no significant year 2000 issues have been incurred and no
corresponding operating disruptions have been realized.
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22
The cost of year 2000 compliance including consulting fees was less than $5
million and had no significant impact on the Company's financial condition.
There were no major information technology projects deferred due to year 2000
compliance matters, nor were any major information technology systems
accelerated to remedy year 2000 problems.
OTHER MATTERS
The Company does not currently consider the impact of inflation to be
significant in the businesses in which the Company operates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by Item 305 of Regulation S-K is included under
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 10 and Note 11 of the Notes to the Consolidated
Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Pennzoil-Quaker State, together
with the report thereon of Arthur Andersen LLP dated February 29, 2000 and the
supplementary financial data specified by Item 302 of Regulation S-K, are set
forth on pages F-1 through F-33 hereof. (See Item 14 for Index.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing under the captions "Nominees," "Directors with
Terms Expiring in 2001 and 2002" and "Compliance with Section 16(a) of the
Exchange Act" set forth within the section entitled "Election of Directors" in
the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 in connection with the Company's 2000
Meeting of Shareholders (the "Proxy Statement") is incorporated herein by
reference. See also Item S-K 401(b) appearing in Part I of this Annual Report on
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the captions "Director Remuneration" set
forth within the section entitled "Election of Directors" and under the captions
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Security Ownership of
Directors and Officers" set forth within the section entitled "Election of
Directors" and under the caption "Security Ownership of Certain Shareholders"
set forth within the section entitled "Additional Information" in the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the captions "Director Remuneration" and
"Certain Transactions" set forth within the section entitled "Election of
Directors" and under the caption "Security Ownership of Certain Shareholders"
set forth within the section entitled "Additional Information" and under the
caption "Compen-
20
23
sation Committee Interlocks and Insider Participation" in the Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Supplementary Data.
PAGE
----
Report of Independent Public Accountants.................... F-1
Consolidated Statement of Operations and Comprehensive
Income.................................................... F-3
Consolidated Balance Sheet.................................. F-4
Consolidated Statement of Shareholders' Equity.............. F-6
Consolidated Statement of Cash Flows........................ F-7
Notes to Consolidated Financial Statements.................. F-8
The supplementary financial data specified by Item 302 of Regulation S-K
are included in "Supplemental Financial and Statistical
Information -- Unaudited" beginning on page F-33.
(a)(2) FINANCIAL STATEMENT SCHEDULES.
Schedules of the Company and its subsidiaries are omitted because of the
absence of the conditions under which they are required or because the required
information is included in the financial statements or notes thereto.
(a)(3) EXHIBITS.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
*3.1(a) -- Restated Certificate of Incorporation of the Company
(filed as exhibit 4.2 to the Current Report on Form 8-K
of the Company filed on December 29, 1998 (File No.
001-14501) and incorporated herein by reference).
3.1(b) -- Certificate of Designations of Series A Junior
Participating Preferred Stock of the Company.
*3.2 -- By-Laws of the Company (filed as exhibit 4.2 to the
Registration Statement on Form S-8 of the Company
(Registration No. 333-72835) and incorporated herein by
reference).
*3.3 -- Form of Common Stock Certificate of the Company (filed as
exhibit 3.5 to the Registration Statement on Form S-4 of
the Company (Registration No. 333-61541) and incorporated
herein by reference).
*3.4 -- Rights Agreement dated as of December 18, 1998 between
the Company and The Chase Manhattan Bank (filed as
exhibit 1 to the Current Report on Form 8-K of the
Company filed on December 18, 1998 (File No. 001-14501)
and incorporated herein by reference).
*4.1 -- Indenture, dated as of February 1, 1999 (the
"Indenture"), between the Company and Chase Bank of
Texas, National Association, as Trustee (filed as exhibit
4.1 to the Current Report on Form 8-K of the Company
filed on March 30, 1999 (File No. 001-14501) and
incorporated herein by reference).
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24
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
*4.2 -- Officer's Certificate dated as of March 30, 1999
delivered pursuant to Section 301 of the Indenture,
providing for the issuance of the 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 the Company filed on March
30, 1999 (File No. 001-14501) and incorporated herein by
reference).
The 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 the Company and its
subsidiaries on a consolidated basis. Pursuant to
paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, the
Company agrees to furnish a copy of such instruments to
the Securities and Exchange Commission upon request.
*10.1(a) -- Credit Agreement dated as of November 17, 1998 among
Pennzoil Products Company and the lenders named therein
(filed as exhibit 10.1 to the Annual Report on Form 10-K
of the Company for the fiscal year ended December 31,
1998 (File No. 001-14501) and incorporated herein by
reference).
10.1(b) -- First Amendment to Exhibit 10.1(a) dated as of November
5, 1999.
10.1(c) -- Amended and Restated Credit Agreement dated as of
November 16, 1999 among Pennzoil-Quaker State Company and
the lenders named therein.
+*10.2 -- Pennzoil-Quaker State Company 1998 Incentive Plan (filed
as exhibit 4.3 to the Registration Statement of the
Company on Form S-8 (Registration No. 333-69837) and
incorporated herein by reference).
+10.3 -- Pennzoil-Quaker State Company 1999 Long-Term Performance
Incentive Program.
+*10.4 -- Form of Indemnification Agreement between Pennzoil-Quaker
State Company and directors and executive officers of the
Company (filed as exhibit 10.7 to the Registration
Statement of the Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
+*10.5 -- Pennzoil-Quaker State Company Deferred Compensation Plan
(filed as exhibit 10.4 to the Annual Report on Form 10-K
of the Company for the fiscal year ended December 31,
1998 (File No. 001-14501) and incorporated herein by
reference).
+*10.6 -- Pennzoil-Quaker State Company Medical Expenses
Reimbursement Plan (filed as exhibit 10.5 to the Annual
Report on Form 10-K of the Company for the fiscal year
ended December 31, 1998 (File No. 001-14501) and
incorporated herein by reference).
+*10.7 -- Pennzoil-Quaker State Company Supplemental Disability
Plan (filed as exhibit 10.6 to the Annual Report on Form
10-K of the Company for the fiscal year ended December
31, 1998 (File No. 001-14501) and incorporated herein by
reference).
+*10.8 -- Pennzoil-Quaker State Company Salary Continuation Plan
(filed as exhibit 10.7 to the Annual Report on Form 10-K
of the Company for the fiscal year ended December 31,
1998 (File No. 001-14501) and incorporated herein by
reference).
+*10.9 -- Pennzoil-Quaker State Company Supplemental Life Insurance
Plan (filed as exhibit 10.8 to the Annual Report on Form
10-K of the Company for the fiscal year ended December
31, 1998 (File No. 001-14501) and incorporated herein by
reference).
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25
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
+*10.10 -- Pennzoil-Quaker State Company Executive Severance Plan
(filed as exhibit 10.9 to the Annual Report on Form 10-K
of the Company for the fiscal year ended December 31,
1998 (File No. 001-14501) and incorporated herein by
reference).
+*10.11 -- Form of Pennzoil-Quaker State Company Supplemental
Medical and Retirement Benefits Agreement (filed as
exhibit 10.10 to the Annual Report on Form 10-K of the
Company for the fiscal year ended December 31, 1998 (File
No. 001-14501) and incorporated herein by reference).
+*10.12 -- Employment Agreement between the Company and James J.
Postl (filed as exhibit 10.11 to the Annual Report on
Form 10-K of the Company for the fiscal year ended
December 31, 1998 (File No. 001-14501) and incorporated
herein by reference).
12.1 -- Computation of Ratio of Earnings to Fixed Charges for the
years ended December 31, 1999, 1998, 1997, 1996 and 1995.
21.1 -- Subsidiaries of Pennzoil-Quaker State Company.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
24.1 -- Powers of Attorney.
27.1 -- Financial Data Schedule.
99.1 -- Financial Statements of Excel Paralubes.
99.2(a) -- First Amendment to the Pennzoil-Quaker State Company
Savings and Investment Plan.
99.2(b) -- Second Amendment to the Pennzoil-Quaker State Company
Savings and Investment Plan.
99.3(a) -- First Amendment to the Pennzoil Company Savings and
Investment Plan for Hourly Employees.
99.3(b) -- Second Amendment to the Pennzoil Company Savings and
Investment Plan for Hourly Employees.
99.3(c) -- Third Amendment to the Pennzoil Company Savings and
Investment Plan for Hourly Employees.
99.3(d) -- Fourth Amendment to the Pennzoil Company Savings and
Investment Plan for Hourly Employees.
99.3(e) -- Fifth Amendment to the Pennzoil-Quaker State Company
Savings and Investment Plan for Hourly Employees (f/k/a
Pennzoil Company Savings and Investment Plan for Hourly
Employees).
99.4(a) -- First Amendment to the Quaker State Corporation Thrift
and Stock Purchase Plan.
99.4(b) -- Second Amendment to the Pennzoil-Quaker State Thrift and
Stock Purchase Plan (f/k/a Quaker State Corporation
Thrift and Stock Purchase Plan).
99.4(c) -- Third Amendment to the Pennzoil-Quaker State Thrift and
Stock Purchase Plan.
- ---------------
* Incorporated by reference as indicated.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
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26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENNZOIL-QUAKER STATE COMPANY
By: /s/ JAMES L. PATE
------------------------------------
(James L. Pate, Chairman of the
Board and
Chief Executive Officer)
Date: March 9, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES L. PATE Principal Executive Officer March 9, 2000
- ----------------------------------------------------- and Director
(James L. Pate, Chairman of the Board and
Chief Executive Officer)
/s/ THOMAS P. KELLAGHER Principal Financial and March 9, 2000
- ----------------------------------------------------- Accounting Officer
(Thomas P. Kellagher, Group Vice President and Chief
Financial Officer)
HOWARD H. BAKER, JR.*
W. L. LYONS BROWN, JR.*
ERNEST H. COCKRELL*
ALFONSO FANJUL*
FORREST R. HASELTON* A majority of the Directors
BERDON LAWRENCE* of the Registrant March 9, 2000
JAMES J. POSTL*
TERRY L. SAVAGE*
BRENT SCOWCROFT*
GERALD B. SMITH*
LORNE R. WAXLAX*
*By: /s/ MICHAEL J. MARATEA
------------------------------------------------
(Michael J. Maratea, Attorney-In-Fact)
24
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennzoil-Quaker State Company:
We have audited the accompanying consolidated balance sheet of
Pennzoil-Quaker State Company (a Delaware corporation) and subsidiaries, as of
December 31, 1999 and 1998, and the related consolidated statements of
operations and comprehensive income, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Excel Paralubes (a
50%-owned equity investee of Pennzoil-Quaker State Company), the investment in
which is reflected in the accompanying financial statements using the equity
method of accounting. The Company's equity interest in the earnings (loss) of
Excel Paralubes was $7.3 million, $14.7 million and ($2.8) million for the years
ended December 31, 1999, 1998 and 1997, respectively. The summarized financial
data for Excel Paralubes contained in Note 5 are derived from the financial
statements of Excel Paralubes. The financial statements of Excel Paralubes were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to the amounts and disclosures included for Excel
Paralubes, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Pennzoil-Quaker State Company and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
February 29, 2000
F-1
28
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
29
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31
------------------------------------
1999 1998 1997
---------- ---------- ----------
(EXPRESSED IN THOUSANDS EXCEPT FOR
PER SHARE AMOUNTS)
REVENUES
Net sales.............................................. $2,951,356 $1,801,676 $1,982,148
Other income, net...................................... 37,576 48,462 31,012
---------- ---------- ----------
2,988,932 1,850,138 2,013,160
COSTS AND EXPENSES
Cost of sales.......................................... 2,182,632 1,279,220 1,182,742
Purchases from affiliate............................... -- 115,703 336,413
Selling, general and administrative.................... 520,660 339,799 350,123
Depreciation and amortization.......................... 123,363 77,210 64,490
Acquisition related expenses (Note 2).................. 86,173 10,645 --
Impairment of long-lived assets:
Assets held for use................................. -- 29,613 --
Assets held for disposal, including costs to sell
(Note 3).......................................... 493,910 -- --
Taxes, other than income............................... 16,984 12,210 11,956
Interest charges....................................... 80,588 13,826 12,847
Affiliated interest.................................... -- 56,372 56,374
Interest capitalized................................... -- (255) (7,441)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX.......................... (515,378) (84,205) 5,656
Income tax provision (benefit)........................... (194,447) (38,338) 6,245
---------- ---------- ----------
NET LOSS................................................. $ (320,931) $ (45,867) $ (589)
---------- ---------- ----------
BASIC AND DILUTED LOSS PER SHARE......................... $ (4.12) $ (0.96) $ (0.01)
========== ========== ==========
NET LOSS................................................. $ (320,931) $ (45,867) $ (589)
Change in:
Foreign currency translation adjustment................ 6,810 (1,506) (5,584)
Unrealized gain (loss) on investment in securities..... (1,420) 925 (1,768)
---------- ---------- ----------
5,390 (581) (7,352)
---------- ---------- ----------
COMPREHENSIVE LOSS....................................... $ (315,541) $ (46,448) $ (7,941)
========== ========== ==========
See Notes to Consolidated Financial Statements.
F-3
30
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31
------------------------
1999 1998
---------- ----------
(EXPRESSED IN THOUSANDS)
CURRENT ASSETS
Cash and cash equivalents................................. $ 20,155 $ 14,899
Receivables............................................... 312,320 291,997
Inventories............................................... 298,202 306,512
Materials and supplies, at average cost................... 11,063 12,422
Deferred income taxes..................................... -- 47,413
Other current assets...................................... 44,298 63,328
---------- ----------
TOTAL CURRENT ASSETS.............................. 686,038 736,571
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Lubricants and consumer products.......................... 355,579 336,946
Fast lube operations...................................... 384,509 399,447
Base oil and specialty products........................... 940,678 937,039
Other..................................................... 70,579 47,562
---------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT............... 1,751,345 1,720,994
Less accumulated depreciation and amortization............ 1,249,244 688,918
---------- ----------
NET PROPERTY, PLANT AND EQUIPMENT................. 502,101 1,032,076
---------- ----------
DEFERRED INCOME TAXES....................................... 272,677 36,614
OTHER ASSETS
Goodwill and other intangibles............................ 1,065,143 1,104,353
Other..................................................... 207,262 235,380
---------- ----------
TOTAL OTHER ASSETS................................ 1,272,405 1,339,733
---------- ----------
TOTAL ASSETS................................................ $2,733,221 $3,144,994
========== ==========
See Notes to Consolidated Financial Statements.
F-4
31
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31
-------------------------
1999 1998
----------- -----------
(EXPRESSED IN THOUSANDS)
CURRENT LIABILITIES
Current maturities of long-term debt...................... $ 1,080 $ 1,283
Accounts payable.......................................... 210,700 245,721
Payroll accrued........................................... 28,328 18,734
Other current liabilities................................. 129,295 147,609
---------- ----------
TOTAL CURRENT LIABILITIES......................... 369,403 413,347
---------- ----------
LONG-TERM DEBT, less current maturities..................... 1,026,153 1,026,054
CAPITAL LEASE OBLIGATIONS................................... 68,786 74,464
OTHER LIABILITIES........................................... 319,011 280,922
---------- ----------
TOTAL LIABILITIES................................. 1,783,353 1,794,787
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY
Common stock, par value $0.10 per share -- authorized
100,000,000 shares, issued and outstanding shares of
78,286,296 at December 31, 1999 and 77,619,765 at
December 31, 1998...................................... 7,829 7,762
Additional capital........................................ 1,506,041 1,532,531
Accumulated deficit....................................... (559,522) (180,216)
Net unrealized holding loss on investments in
securities............................................. (2,263) (843)
Cumulative foreign currency translation adjustment........ (2,217) (9,027)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 949,868 1,350,207
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $2,733,221 $3,144,994
========== ==========
See Notes to Consolidated Financial Statements.
F-5
32
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31
--------------------------------------------------------------
1999 1998 1997
------------------- ------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ---------- ------ ---------- ------ ---------
(EXPRESSED IN THOUSANDS)
COMMON STOCK, $0.10 par --
Authorized 100,000,000 shares
Balance, January 1..................... 77,620 $ 7,762 47,847 $ 4,785 47,847 $ 4,785
Acquisition of Quaker State
Corporation....................... -- -- 29,773 2,977 -- --
Shares issued....................... 666 67 -- -- -- --
------ ---------- ------ ---------- ------ ---------
Balance, December 31................... 78,286 7,829 77,620 7,762 47,847 4,785
------ ---------- ------ ---------- ------ ---------
ADDITIONAL CAPITAL
Balance, January 1..................... 1,532,531 395,233 366,653
Capital contribution from
affiliate......................... (31,368) 412,448 28,580
Acquisition of Quaker State
Corporation....................... -- 724,850 --
Shares issued....................... 4,878 -- --
---------- ---------- ---------
Balance, December 31................... 1,506,041 1,532,531 395,233
---------- ---------- ---------
ACCUMULATED DEFICIT
Balance, January 1..................... (180,216) (134,349) (133,760)
Net loss............................ (320,931) (45,867) (589)
Dividends on common stock........... (58,375) -- --
---------- ---------- ---------
Balance, December 31................... (559,522) (180,216) (134,349)
---------- ---------- ---------
NET UNREALIZED HOLDING LOSS ON
INVESTMENTS IN SECURITIES
Balance, January 1..................... (843) (1,768) --
Change in unrealized holding loss... (1,420) 925 (1,768)
---------- ---------- ---------
Balance, December 31................... (2,263) (843) (1,768)
---------- ---------- ---------
CUMULATIVE FOREIGN CURRENCY TRANSLATION
ADJUSTMENT
Balance, January 1..................... (9,027) (7,521) (1,937)
Change in translation adjustment.... 6,810 (1,506) (5,584)
---------- ---------- ---------
Balance, December 31................... (2,217) (9,027) (7,521)
------ ---------- ------ ---------- ------ ---------
TOTAL SHAREHOLDERS' EQUITY............... 78,286 $ 949,868 77,620 $1,350,207 47,847 $ 256,380
====== ========== ====== ========== ====== =========
See Notes to Consolidated Financial Statements.
F-6
33
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
---------------------------------
1999 1998 1997
--------- --------- ---------
(EXPRESSED IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................ $(320,931) $ (45,867) $ (589)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 123,363 77,210 64,490
Asset impairments.................................... 493,910 29,613 --
Deferred income taxes................................ (197,574) (38,814) 36,029
Loss (gain) on sales of assets....................... 5,459 (4,357) (3,072)
Distributions from equity investees in excess of
earnings........................................... 12,046 27,834 23,774
Non-cash accruals.................................... 33,409 53,830 25,366
Other non-cash items................................. 10,728 25,969 3,555
Change in operating assets and liabilities (Note
3)................................................. (102,059) (221,605) 35,227
--------- --------- ---------
Net cash provided by (used in) operating
activities.................................... 58,351 (96,187) 184,780
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................... (78,114) (88,340) (147,794)
Acquisition of Snap Automotive Products assets.......... -- -- (41,000)
Proceeds from sales of assets........................... 105,815 26,539 14,350
Other investing activities.............................. (9,808) 14,634 (28,222)
--------- --------- ---------
Net cash provided by (used in) investing
activities.................................... 17,893 (47,167) (202,666)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper borrowings (repayments)................ (229,835) 488,409 --
Debt repayments......................................... (376,109) (8,405) (10,457)
Proceeds from issuances of debt......................... 600,655 13,457 8,500
Proceeds from note payable to affiliate................. -- 25,622 13,178
Payment of intercompany indebtedness to affiliate....... (7,324) (369,962) --
Dividends paid.......................................... (58,375) -- --
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................... (70,988) 149,121 11,221
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 5,256 5,767 (6,665)
CASH AND CASH EQUIVALENTS, beginning of period............ 14,899 9,132 15,797
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.................. $ 20,155 $ 14,899 $ 9,132
========= ========= =========
See Notes to Consolidated Financial Statements.
F-7
34
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SPIN-OFF FROM PENNZOIL COMPANY AND PRINCIPLES OF CONSOLIDATION --
Spin-off from Pennzoil Company --
On December 30, 1998, Pennzoil Company distributed (the "Spin-off") to its
stockholders 47.8 million shares of common stock of its wholly owned subsidiary
Pennzoil-Quaker State Company ("Pennzoil-Quaker State" or the "Company")
representing all of the shares of the Company owned by Pennzoil Company, which
was acquired by Devon Energy Corporation ("Devon") in a separate transaction on
August 17, 1999.
Principles of Consolidation --
Pennzoil-Quaker State is engaged primarily in the manufacturing and
marketing of lubricants, car care products, base oils and specialty industrial
products and in the franchising, ownership and operation of fast lube centers.
The accompanying consolidated financial statements reflect the historical costs
and results of operations of Pennzoil-Quaker State, including all majority-owned
subsidiaries of the Company. All significant intercompany accounts and
transactions within Pennzoil-Quaker State have been eliminated. Pennzoil-Quaker
State follows the equity method of accounting for investments in 20% to 50%
owned entities.
(2) ACQUISITIONS --
Acquisition of Quaker State --
On December 30, 1998, the Company acquired Quaker State Corporation
("Quaker State") in a merger transaction, and Quaker State became a wholly owned
subsidiary of the Company. As a result of the acquisition, stockholders of
Quaker State received .8204 of a share of common stock of the Company in
exchange for each share of Quaker State capital stock previously owned. The
total purchase price, including acquisition-related costs and expenses, was
$812.1 million.
Pennzoil-Quaker State accounted for the acquisition using the purchase
method of accounting. The purchase price, which was calculated based on the
market capitalization of Quaker State, was allocated to the assets and
liabilities acquired based upon the fair value of those assets and liabilities
as of the acquisition date. The excess of the aggregate purchase price over fair
value of the net assets acquired was recorded as goodwill and is being amortized
on a straight-line basis over 40 years. The purchase price was initially
allocated as follows (in thousands):
Fair value of tangible assets acquired...................... $ 659,071
Goodwill and other intangible assets........................ 943,398
Fair value of liabilities assumed........................... (874,642)
---------
Net purchase price.......................................... 727,827
Quaker State acquisition-related costs and expenses......... 80,557
Pennzoil-Quaker State acquisition-related costs and
expenses.................................................. 3,720
---------
Total purchase price........................................ $ 812,104
=========
The Company has completed its final calculation and allocation of the
purchase price. The effect of adjustments recorded subsequent to the acquisition
date were not material.
At December 31, 1998, Pennzoil-Quaker State recognized certain liabilities
assumed in connection with the acquisition of Quaker State totaling $27.9
million and adjusted the purchase cost accordingly. The preliminary allocation
of the purchase price to liabilities assumed included (a) $16.6 million in
severance costs for certain Quaker State employees, (b) $9.0 million in closing
costs of Quaker State's Q Lube company-operated fast lube service centers and
(c) $2.3 million in relocation costs of certain Quaker State employees. During
the year ended December 31, 1999, those liabilities were reduced by cash
payments of
F-8
35
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$18.3 million for severance to Quaker State employees and closing costs of
certain of Quaker State's Q Lube company-operated fast lube centers. No
additional liabilities were recorded in 1999 in connection with the Quaker State
acquisition. The remaining accrual of $9.6 million at December 31, 1999,
included in accounts payable, relates primarily to future severance payments to
Quaker State employees.
Pennzoil-Quaker State also incurred $10.6 million in 1998 expenses related
to the acquisition of Quaker State. These charges were the result of
management's changes in strategic plans, restructurings and reorganizations
related to the acquisition and were primarily due to the estimated expenses of
closing Jiffy Lube company-operated fast lube service centers and the resolution
of certain conflicts between Jiffy Lube and Q Lube franchise-operated service
centers. During the year ended December 31, 1999, those liabilities were reduced
by cash payments of $4.7 million to resolve certain conflicts between Jiffy Lube
and Q Lube franchise-operated service centers. No additional liabilities
resulting from restructuring or reorganizations related to the Quaker State
acquisition were recorded in 1999. The remaining accrual of $5.9 million at
December 31, 1999, included in accounts payable, relates primarily to estimated
expenses of closing Jiffy Lube company-operated fast lube service centers.
Acquisition-related expenses of $80.6 million incurred by Quaker State
prior to the acquisition were recognized in Quaker State's 1998 results of
operations and are not included in Pennzoil-Quaker State's results of operations
for 1998.
The following unaudited pro forma information has been prepared as if the
acquisition of Quaker State occurred on January 1, 1997 after including
amortization of goodwill, brands and other intangible assets, interest expense
and related income tax effects. The unaudited pro forma information does not
reflect adjustments for any estimated general and administrative expense
savings, operational efficiencies and costs related to the acquisition of Quaker
State. The unaudited pro forma information is not necessarily indicative of
results that would have actually occurred had the acquisition of Quaker State
been consummated on January 1, 1997 or future results of operations.
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
(EXPRESSED IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Revenues.................................................... $3,021,565 $3,217,020
Net loss(1)................................................. (33,191) (1,729)
Basic and diluted loss per share............................ (0.43) (0.02)
- ---------------
(1) The 1998 net loss includes certain after-tax charges of $82.5 million
($124.5 million pretax) related to the acquisition of Quaker State,
impairment of long-lived assets, restructuring charges and other matters.
Acquisition of Assets of Snap Automotive Products --
In November 1997, the Company acquired the marketing and distribution
assets of Snap Automotive Products, Inc. for $41.0 million in cash. The
acquisition was accounted for using the purchase method of accounting, and the
results of operations of Snap subsequent to November 1997 have been included in
Pennzoil-Quaker State's consolidated statement of operations.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Use of Estimates --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-9
36
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Receivables --
Current receivables include trade accounts and notes receivable and are net
of allowances for doubtful accounts of $18.8 million and $18.2 million as of
December 31, 1999 and 1998, respectively. Long-term receivables consist of notes
receivable and are net of allowances for doubtful accounts of $1.0 million and
$0.9 million as of December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, current receivables included notes
receivable of $19.9 million and $16.6 million, respectively. Other assets
included long-term notes receivable of $41.8 million and $53.2 million at
December 31, 1999 and 1998, respectively.
The Company's net accounts receivable sold under its receivables sales
facility totaled $153.1 million and $115.0 million as of December 31, 1999 and
1998, respectively. The accounts receivable are sold to a third party through
the Company's wholly owned subsidiary, Pennzoil Receivables Company ("PRC"). PRC
is a special limited purpose corporation and its assets are available solely to
satisfy the claims of its own creditors and not those of Pennzoil-Quaker State
or its affiliates. The Company increased and extended its one-year sales
facility in June 1999 to provide for ongoing sales of up to $160.0 million of
accounts receivable.
The Company maintains a lube center receivable purchase and sale agreement,
which provides for the sale of certain notes receivable up to $210.0 million
through a wholly owned subsidiary, Pennzoil Lube Center Acceptance Corporation
("PLCAC"). The aggregate purchase price limit was increased in January 2000 from
$200.0 million to $210.0 million. PLCAC is a Nevada corporation and the assets
of PLCAC are available solely to satisfy the claims of its own creditors and not
those of Pennzoil-Quaker State or its affiliates. The agreement terminates on
March 13, 2001 or on the date on which the aggregate purchase price reaches
$210.0 million. The Company's notes receivable sold under the agreement totaled
$153.2 million and $97.3 million as of December 31, 1999 and 1998, respectively.
Inventories --
Inventories consist primarily of lubricants, consumer products, base oils
and specialty products. A majority of inventories is reported at cost using the
last-in, first-out ("LIFO") method, which is lower than market. Substantially
all other inventories are reported at cost using the first-in, first-out method.
Inventories valued on the LIFO method totaled $181.4 million and $187.5 million
at December 31, 1999 and 1998, respectively. The current cost of LIFO
inventories was approximately $201.1 million and $187.5 million at December 31,
1999 and 1998, respectively.
Property, Plant and Equipment and Depreciation and Amortization --
Property, plant and equipment additions are recorded at cost. Depreciation
of property, plant and equipment is computed using the straight-line or
accelerated methods over estimated useful lives. Pennzoil-Quaker State
capitalizes the interest cost associated with major construction projects based
on the effective interest rate on aggregate borrowings. No interest was
capitalized in 1999.
Impairment of Long-Lived Assets --
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" requires that long-lived assets be reviewed for impairment whenever there is
evidence that the carrying amount of such assets may not be recoverable. This
consists of comparing the carrying amount of the asset with its expected future
undiscounted cash flows without interest costs. If the asset carrying amount is
less than such cash flow estimate, it is written down to its
F-10
37
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fair value. Estimates of expected future cash flows are to represent
management's best estimate based on reasonable and supportable assumptions. Any
impairment recognized in accordance with SFAS No. 121 is permanent and may not
be restored. Due principally to the incurrence of operating losses at certain
Jiffy Lube company-operated stores, an impairment totaling $29.6 million was
recorded with respect to such stores during 1998. No long-lived asset
impairments were required during 1997.
SFAS No. 121 also requires that assets to be disposed of be reported at the
lower of the carrying amount or fair value less cost to sell. During 1999, the
Company completed a strategic review of its manufacturing assets and businesses
including refineries, interests in manufacturing partnerships and packaging
plants. Based on the results of this review, the Company decided to withdraw
from the refining business and to dispose of its refineries and related assets.
As a result of this decision, Pennzoil-Quaker State recorded a pretax charge of
$445.9 million to reflect the writedown of its Rouseville and Shreveport
refineries to their fair values less costs to sell related to the expected
disposition of those facilities. The assets and results of operations related to
the Rouseville and Shreveport refineries are included in the Base Oil and
Specialty Products segment. The Company also recorded a pretax charge of $11.4
million to reflect the impairment of its Rouseville blending and packaging plant
related to its anticipated closure. The assets and results of operations related
to the Rouseville blending and packaging plant are included in the Lubricants
and Consumer Products segment.
In connection with the above actions, Pennzoil-Quaker State also accrued
$36.6 million in additional expenses related to the sale and closure of the
Rouseville and Shreveport refineries and the Rouseville blending and packaging
plant. These additional expenses included (a) $9.8 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. Reference is made to
Note 15 for further discussion.
Goodwill and Other Intangible Assets --
Total goodwill as of December 31, 1999 and 1998 was $644.7 million and
$646.4 million, respectively. Tradenames totaled $420.6 million and $431.4
million as of December 31, 1999 and 1998, respectively. Goodwill and tradenames
are being amortized on a straight-line basis over periods ranging from 20 to 40
years. Amortization expense recorded in 1999, 1998 and 1997 was $42.7 million,
$14.1 million and $13.1 million, respectively. Accumulated amortization as of
December 31, 1999 and 1998 was $119.7 million and $71.2 million, respectively.
Deferred Refinery Turnaround Costs --
A turnaround is a periodically required standard procedure for maintenance
of a refinery, which involves the shutdown and inspection of major processing
units and generally occurs approximately every three years. The estimated costs
of major maintenance, including turnarounds at refineries, are accrued. Accruals
for turnarounds included in other current and long-term liabilities in the
accompanying consolidated balance sheet totaled $4.6 million at December 31,
1999 and $15.2 million at December 31, 1998.
Other expenditures for maintenance and repairs are charged to expense when
incurred. Renewals and improvements are treated as additions to property, plant
and equipment, and items replaced are treated as retirements.
Advertising Costs --
Advertising costs are expensed as incurred. Advertising costs were $162.2
million, $114.4 million and $118.1 million for the years ended December 31,
1999, 1998 and 1997 respectively.
F-11
38
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Environmental Expenditures --
Environmental expenditures are expensed or capitalized in accordance with
generally accepted accounting principles. Liabilities for these expenditures are
recorded when it is probable that obligations have been incurred and the amounts
can be reasonably estimated. Reference is made to Note 12 for a discussion of
amounts recorded for these liabilities.
Cash Flow Information --
For purposes of the consolidated statement of cash flows, all highly liquid
investments purchased with a maturity of three months or less are considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances has been immaterial. In 1999, the Company received net cash tax refunds
of $25.0 million. No cash was paid or received for income taxes in 1998 or 1997.
Changes in operating assets and liabilities consist of the following:
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
--------- --------- --------
(EXPRESSED IN THOUSANDS)
Receivables................................................ $ (26,648) $ (31,277) $(30,432)
Inventories................................................ 8,311 (21,077) (34,121)
Other long-term assets..................................... (26,151) (21,855) (30,011)
Payable to Pennzoil Company(1)............................. -- (60,000) 153,535
Other current liabilities.................................. (82,187) (43,824) (1,751)
Other operating assets and liabilities..................... 24,616 (43,572) (21,993)
--------- --------- --------
Decrease (increase) in operating assets and liabilities.... $(102,059) $(221,605) $ 35,227
========= ========= ========
Cash paid during the period for:
Interest (net of amounts capitalized)(2)................. $ 60,121 $ 13,256 $ 4,954
- ---------------
(1) Historically, changes in operating cash flows pertaining to intercompany
balances were a function of the timing of intercompany settlements, level of
investment activity and operating performance of the user of such funds.
(2) Cash paid for interest increased in 1999 primarily due to the increase in
average long-term debt outstanding for the full twelve month period ended
December 31, 1999 as a result of the Quaker State acquisition on December
30, 1998, partially offset by a decrease in interest rates.
Earnings Per Share --
Pennzoil-Quaker State computes earnings per share in accordance with SFAS
No. 128, "Earnings Per Share." Under the provisions of SFAS No. 128, basic
earnings per share are computed based on the weighted average shares of common
stock outstanding, while diluted earnings per share also reflects the impact of
potentially dilutive securities such as outstanding options. Computations for
basic and diluted loss per share for the years ended 1999, 1998 and 1997 consist
of the following:
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
--------- -------- -------
(EXPRESSED IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Net loss................................................... $(320,931) $(45,867) $ (589)
Basic and diluted weighted average shares(1)............... 77,850 48,009 47,847
Basic and diluted loss per share........................... (4.12) (0.96) (0.01)
- ---------------
(1) Options to purchase 3,367,286 and 3,409,474 shares of common stock and
conditional stock awards of 270,356 and 137,636 were outstanding at December
31, 1999 and 1998, respectively, but were not included in the computation of
diluted loss per share because the impact of these options and awards was
antidilutive. No options or awards were outstanding as of December 31, 1997.
F-12
39
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
International Operations --
Pennzoil-Quaker State's income (loss) before income tax includes income or
loss from international operations of $9.0 million, $0.3 million and ($9.3)
million in 1999, 1998 and 1997, respectively.
Foreign Currency Translation --
For subsidiaries whose functional currency is deemed to be other than the
U.S. dollar, asset and liability accounts are translated at year-end exchange
rates and revenue and expenses are translated at average exchange rates
prevailing during the year. Translation adjustments are included as a separate
component of shareholders' equity. Any gains or losses on transactions or
monetary assets or liabilities in currencies other than the functional currency
are included in net income in the current period.
Comprehensive Income --
Effective January 1, 1998, Pennzoil-Quaker State adopted SFAS No. 130,
"Reporting Comprehensive Income," which established standards for reporting and
display of comprehensive income and its components. SFAS No. 130 requires
companies to report, in addition to net income, other components of
comprehensive income including unrealized gains or losses on available-for-sale
securities and foreign currency translation adjustments and the related tax
effects. For the years ended December 31, 1999, 1998 and 1997, unrealized
holding gains (losses) on marketable securities includes income tax expense
(benefit) of ($1.2) million, $0.5 million and ($1.0) million, respectively. No
tax benefit associated with foreign currency translation losses has been
recorded through December 31, 1999.
Costs of Start-Up Activities --
Effective January 1, 1999, Pennzoil-Quaker State adopted Statement of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-Up Activities,"
which required costs of start-up activities to be expensed as incurred. The
adoption of this SOP had no material effect on the Company's financial position
or results of operations.
Recent Accounting Pronouncements --
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The standard requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" which defers the effective date of SFAS No. 133 until
all fiscal years beginning after June 15, 2000. The Company is currently
assessing SFAS No. 133 to determine what impact, if any, this pronouncement will
have on the Company's financial position or results of operations.
(4) TRANSACTIONS WITH PENNZOIL COMPANY --
Purchases from Affiliate --
Purchases from affiliate included purchases of crude oil from Pennzoil
Company at market prices of $115.7 million and $336.4 million in 1998 and 1997,
respectively.
F-13
40
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Allocated General and Administrative Expenses and Other Items --
Prior to the Spin-off, Pennzoil Company charged Pennzoil-Quaker State for
all direct and indirect administrative costs associated with its operations
through a monthly charge that allocated indirect costs on a formula that
considered the total assets, sales and employees of Pennzoil-Quaker State.
Pennzoil Company and Pennzoil-Quaker State entered into an arrangement to share
certain services for a period of up to one year following the Spin-off. Costs of
these services were shared by each company accordingly. The cost sharing
arrangement terminated on December 31, 1999.
Receivable from Affiliate --
At December 31, 1998, receivables included amounts due from Pennzoil
Company of $11.8 million for borrowings by Pennzoil Company after the Spin-off.
The full amount was repaid in 1999. At December 31, 1999, receivables included
$4.2 million due from Devon for services under the cost sharing arrangement.
(5) SUMMARIZED FINANCIAL DATA --
The Company and Conoco Inc. ("Conoco") are equal partners in Excel
Paralubes, which operates a state-of-the-art base oil hydro-cracker located at
Conoco's refinery in Lake Charles, Louisiana. The facility is capable of
producing approximately 20,000 barrels per day of high-quality base oils, the
base ingredient in finished lubricants. Conoco operates the plant with support
positions staffed by both companies.
Pennzoil-Quaker State's net investment in Excel Paralubes, carried as a
credit balance of $61.5 million and $51.8 million at December 31, 1999 and 1998,
respectively, is netted against other equity investments and included in other
assets on the consolidated balance sheet. Pennzoil-Quaker State's 1999, 1998 and
1997 equity in Excel Paralubes' pretax income (loss) of $7.3 million, $14.7
million and $(2.8) million, respectively, is included in other income in the
consolidated statement of operations.
Summarized balance sheet and operations information for Excel Paralubes (on
a 100% basis) as of December 31, 1999 and 1998 and for the three years in the
period ended December 31, 1999 follows:
DECEMBER 31
-------------------------
1999 1998
----------- -----------
(EXPRESSED IN THOUSANDS)
Current assets.............................................. $ 67,236 $ 53,273
Noncurrent assets........................................... 429,889 442,763
Current liabilities......................................... 96,313 80,912
Noncurrent liabilities...................................... 523,888 518,765
Partners' deficit........................................... (123,076) (103,641)
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(EXPRESSED IN THOUSANDS)
Revenues............................................... $316,029 $279,329 $264,388
Operating earnings..................................... 53,453 67,180 32,023
Net income (loss)...................................... 14,565 29,488 (5,677)
At December 31, 1999, Excel Paralubes had total debt of $574.5 million,
consisting of $240.0 million of 7.125% senior bonds due 2011, $250.0 million of
7.43% senior bonds due 2015, and $84.5 million of variable rate borrowings under
commercial paper facilities with banks. Borrowings under commercial paper
facilities are due in 2000 and are classified as short-term. Recourse for the
partners under the bonds is limited to the revenues and assets of Excel
Paralubes. Certain restrictive covenants may limit the ability of Excel
Paralubes to incur debt, make distributions to the partners, make investments or
create liens. Conoco and Pennzoil-
F-14
41
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Quaker State maintain an agreement with Excel Paralubes to provide support to
Excel Paralubes up to an aggregate amount of $60.0 million should a liquidity
cash flow deficit occur.
(6) BENEFIT PLANS --
Pensions and Other Postretirement Benefits --
Substantially all Pennzoil-Quaker State employees are covered by
non-contributory defined benefit pension plans which provide benefits based on
the participants' years of service and compensation or stated amounts for each
year of service. Contributions to the plans are made in accordance with the
minimum funding provisions of ERISA where applicable, but not in excess of the
maximum amount that can be deducted for federal income tax purposes.
In addition, Pennzoil-Quaker State sponsors unfunded defined benefit
postretirement plans that cover substantially all of its employees. The plans
provide medical and life insurance benefits and are, depending on the type of
plan, either contributory or non-contributory. The accounting for the health
care plans anticipates future cost-sharing changes that are consistent with
Pennzoil-Quaker State's expressed intent to increase, where possible,
contributions from future retirees to a minimum of 30% of the total annual cost.
Furthermore, future contributions for both current and future retirees have been
limited, where possible, to 200% of the average 1992 benefit cost.
As a result of the acquisition of Quaker State, Pennzoil-Quaker State
assumed the obligations and assets of the pension and postretirement benefit
plans for Quaker State employees. The pension benefit obligation and plan assets
assumed by Pennzoil-Quaker State as of December 31, 1998 were $157.8 million and
$172.6 million, respectively. The accumulated postretirement benefit obligation
assumed by Pennzoil-Quaker State from Quaker State as of December 31, 1998 was
$86.9 million.
F-15
42
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the Pennzoil-Quaker State plans' benefit
obligations, plan assets, reconciliation of funded status, amounts recognized in
the consolidated balance sheets, components of net periodic benefit cost, and
the actuarial assumptions used in determining the recognized obligations:
PENSION BENEFITS OTHER BENEFITS
AS OF DECEMBER 31 AS OF DECEMBER 31
------------------- ---------------------
1999 1998 1999 1998
-------- -------- --------- ---------
(EXPRESSED IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year......... $333,622 $159,060 $ 124,155 $ 39,406
Service cost................................. 9,569 7,143 1,770 579
Interest cost................................ 22,370 11,891 8,360 2,607
Plan amendments.............................. (5,512) 2,342 (5,690) --
Acquisitions................................. -- 157,815 498 86,902
Curtailment gain............................. (3,930) -- (2,296) --
Benefits paid................................ (19,001) (7,377) (8,467) (3,266)
Actuarial (gain) or loss..................... (29,892) 2,748 5,661 (2,073)
-------- -------- --------- ---------
Benefit obligation at end of year............... $307,226 $333,622 $ 123,991 $ 124,155
======== ======== ========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of
year......................................... $398,181 $186,169 $ -- $ --
Actual return on plan assets................. 29,178 46,274 -- --
Acquisitions................................. -- 172,600 -- --
Employer contributions....................... 1,541 515 8,467 3,266
Benefits paid................................ (19,001) (7,377) (8,467) (3,266)
-------- -------- --------- ---------
Fair value of plan assets at end of year........ $409,899 $398,181 $ -- $ --
======== ======== ========= =========
RECONCILIATION OF FUNDED STATUS:
Over (under) funded status................... $102,673 $ 64,559 $(123,991) $(124,155)
Unrecognized actuarial gain.................. (92,392) (79,899) (2,770) (2,690)
Unrecognized transition asset................ (484) (696) -- --
Unrecognized prior service cost.............. 15,436 23,686 -- --
-------- -------- --------- ---------
Net amount over (under) funded at year-end...... $ 25,233 $ 7,650 $(126,761) $(126,845)
======== ======== ========= =========
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEET CONSIST OF:
Prepaid benefit cost......................... $ 54,767 $ 38,420 $ -- $ --
Accrued benefit liability.................... (33,035) (34,060) (126,761) (126,845)
Intangible asset............................. 2,785 3,131 -- --
Accumulated other comprehensive income....... 716 159 -- --
-------- -------- --------- ---------
Net asset (liability) recognized at year-end.... $ 25,233 $ 7,650 $(126,761) $(126,845)
======== ======== ========= =========
Other comprehensive income attributable to
change in additional minimum liability
recognition................................ 557 137 -- --
The benefit obligation for the defined benefit pension plans with benefit
obligations in excess of plan assets was $15.5 million and $15.9 million, as of
December 31, 1999 and December 31, 1998, respectively. Fair value of plan assets
for the underfunded plans was $0.2 million as of December 31, 1999. No plan
assets related to the underfunded plans existed for the plans at December 31,
1998.
The projected benefit obligation and accumulated benefit obligation for the
defined benefit pension plans with accumulated benefit obligations in excess of
plan assets were $15.5 million and $14.3 million, respectively, as of December
31, 1999, and $15.9 million and $13.6 million, respectively, as of December 31,
1998. The fair value of plan assets was $0.2 million as of December 31, 1999. No
plan assets related to the underfunded plans existed for these plans at December
31, 1998.
F-16
43
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic benefit cost included the following components:
PENSION BENEFITS OTHER BENEFITS
------------------------------ -------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ------- ------ ------
(EXPRESSED IN THOUSANDS)
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost....................... $ 9,569 $ 7,142 $ 5,934 $ 1,770 $ 579 $ 760
Interest cost...................... 22,370 11,891 10,499 8,360 2,607 2,734
Expected return on plan assets..... (40,959) (19,810) (16,406) -- -- --
Amortization of prior service
cost............................. 2,741 2,570 2,197 -- -- --
Amortization of transition asset... (212) (212) (212) -- -- --
Recognized actuarial gain.......... (5,545) (3,252) (2,682) -- -- --
-------- -------- -------- ------- ------ ------
Net periodic benefit cost (income).... $(12,036) $ (1,671) $ (670) $10,130 $3,186 $3,494
======== ======== ======== ======= ====== ======
Additional gain recognized due to
curtailment........................... $ (3,930) -- -- $(2,296) -- --
Weighted-average assumptions were:
PENSION BENEFITS OTHER BENEFITS
AS OF DECEMBER 31 AS OF DECEMBER 31
----------------------- ---------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ----- ---- ----
Discount rates............................... 7.75% 7.00% 7.25% 7.75% 7.00% 7.25%
Expected long-term rate of return on plan
assets..................................... 10.50% 10.50% 10.50% -- -- --
Rate of compensation increase................ 4.20% 4.20% 4.60% -- -- --
For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2000; the rate was assumed
to decrease gradually to 5.25% for the year 2005 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plan. A one percentage-point change in
assumed health care cost trend rates would have the following effects:
ONE-PERCENTAGE ONE-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(EXPRESSED IN THOUSANDS)
Effect on total of service and interest cost components for
1999...................................................... $1,040 $ (895)
Effect on year-end 1999 postretirement benefit obligation... 9,436 (8,349)
Contribution Plans --
Prior to the Spin-off, employees of Pennzoil-Quaker State who had completed
one year of service were also covered by a defined contribution plan of Pennzoil
Company. Employee contributions of not less than 1% to not more than 6% of each
covered employee's compensation were matched between 50% and 100% by Pennzoil
Company. Pennzoil-Quaker State was charged $6.2 million and $6.5 million by
Pennzoil Company for such contributions in 1998 and 1997, respectively. The
Company assumed responsibility for the defined contribution plans related to all
Pennzoil-Quaker State employees on December 30, 1998. The cost of the Company's
contributions totaled $8.8 million in 1999.
F-17
44
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) CAPITAL STOCK AND STOCK OPTIONS --
Common Stock --
Pennzoil-Quaker State's Restated Certificate of Incorporation authorizes
the issuance of up to 100,000,000 shares of common stock. At December 31, 1999,
78,286,296 shares were issued and outstanding.
Preferred Stock --
Pennzoil-Quaker State's Restated Certificate of Incorporation authorizes
the issuance of up to 10,000,000 shares of preferred stock. None of these shares
were issued or outstanding at December 31, 1999. On December 14, 1998, the Board
of Directors of Pennzoil-Quaker State declared a dividend of one right to
purchase preferred stock ("Right") for each outstanding share of the
Pennzoil-Quaker State common stock, to stockholders of record at the close of
business on December 18, 1998. Each Right entitles the registered holder to
purchase from Pennzoil-Quaker State a unit consisting of one one-hundredth of a
share of Series A Junior Participating Preferred Stock at a purchase price of
$90 per share upon the occurrence of certain specified events.
Stock Option Plans --
In connection with the Spin-off on December 30, 1998, Pennzoil-Quaker State
issued 3,409,474 stock options, on a one-for-one basis, to the holders of
Pennzoil Company stock options outstanding on that date. The exercise prices
were based upon the original exercise prices of outstanding Pennzoil Company
options allocated in proportion to the market value of common stock of
Pennzoil-Quaker State relative to the market value of common stock of Pennzoil
Company immediately following the Spin-off. Options issued on December 30, 1998
have a maximum term of ten years and are exercisable under the terms of the
respective option agreements. At December 31, 1998, expiration dates for the
outstanding options ranged from October 1999 to October 2008 and the weighted
average exercise price per share was $26.54. Payment of the exercise price may
be made in cash or in shares of Pennzoil-Quaker State common stock previously
owned by the optionee, valued at the then-current market value.
At December 31, 1999, Pennzoil-Quaker State had nonqualified stock option
plans covering a total of 8,170,456 shares of Pennzoil-Quaker State common
stock, of which 1,462,433 shares remained available for granting of options.
Options granted under the plans have a maximum term of ten years and are
exercisable under the terms of the respective option agreements at the market
price of the common stock at the date of grant, subject to antidilution
adjustments in certain circumstances. At December 31, 1999, expiration dates for
the outstanding options ranged from April 2000 to December 2009 and the weighted
average exercise price per share was $21.08. Payment of the exercise price may
be made in cash or in shares of Pennzoil-Quaker State common stock previously
owned by the optionee, valued at the then-current market value.
Additional information with respect to the stock option activity during
1999 is summarized in the following table:
WTD. AVG.
EXERCISE
STOCK OPTIONS SHARES PRICE
------------- --------- ---------
Outstanding at beginning of year............................ 3,409,474 $26.54
Granted................................................... 3,668,615 $15.57
Exercised................................................. 3,000 $ 6.00
Lapsed.................................................... 361,716 $16.40
Expired................................................... 5,350 $39.29
---------
Outstanding at end of year.................................. 6,708,023 $21.08
=========
Options exercisable at year-end............................. 3,367,286 $26.56
=========
F-18
45
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ---------------------------
NUMBER OF WEIGHTED WEIGHTED NUMBER OF WEIGHTED
OPTIONS AVERAGE AVERAGE OPTIONS AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT DEC. 31, 1999 LIFE IN YEARS PRICE AT DEC. 31, 1999 PRICE
------------------------ ---------------- ------------- -------- ---------------- --------
$ 5.63-$15.00.................... 127,200 9.2 13.37 9,000 6.51
$15.01-$23.00.................... 4,204,838 8.3 16.72 982,301 20.34
$23.01-$30.00.................... 1,278,185 5.4 25.76 1,278,185 25.76
$30.01-$39.08.................... 1,097,800 5.7 33.23 1,097,800 33.23
--------- ---------
$ 5.63-$39.08.................... 6,708,023 21.08 3,367,286 26.56
On December 30, 1998, holders of 137,636 units of Pennzoil Company common
stock granted to participating employees under Pennzoil Company's conditional
stock award programs were granted, on a one-for-one basis, units of
Pennzoil-Quaker State common stock. In 1999, there were 180,150 units of common
stock granted to selected employees under Pennzoil-Quaker State's conditional
stock award programs. Awards under the programs are made in the form of units
which entitle the recipient to receive, at the end of a specified period,
subject to certain conditions of continued employment, a number of shares of
Pennzoil-Quaker State common stock equal to the number of units granted. At
December 31, 1999, units covering 270,356 shares of Pennzoil-Quaker State common
stock were outstanding (compared to 137,636 shares at December 31, 1998). In
1999, 19,860 shares of Pennzoil-Quaker State common stock were distributed to
selected employees upon maturity of awards granted under Pennzoil-Quaker State's
conditional stock award programs. During 1999, units covering 27,570 shares of
Pennzoil-Quaker State's common stock lapsed. These units had been granted in
previous years under Pennzoil-Quaker State's conditional stock award programs.
Pennzoil-Quaker State applies Accounting Principles Board ("APB") Opinion
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock-based compensation plans. APB Opinion 25 does not
require compensation expense to be recorded on options which have exercise
prices at least equal to the market price of the stock on the date of grant.
Accordingly, no compensation expense has been recognized for Pennzoil-Quaker
State's stock-based plans. Had compensation expense for Pennzoil-Quaker State's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the optional accounting
method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation,"
Pennzoil-Quaker State's net loss and loss per share would have been reduced to
the pro forma amounts indicated below:
1999 1998
------------ -----------
(EXPRESSED IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
Net loss.......................................... As reported $(320,931) $(45,867)
Pro forma $(332,375) $(51,812)
Basic and diluted loss per share.................. As reported $ (4.12) $ (.96)
Pro forma $ (4.27) $ (1.08)
The fair value calculated under SFAS No. 123 of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions for 1999 and 1998, respectively: risk-free interest
rates ranging from 4.84% to 6.36% and 6.25%; dividend yield of 2.29% and 3.07%;
stock price volatility factor of .2880 and .2891; and expected option lives of 7
years. The weighted average fair value of options granted during 1999 and 1998
was $4.79 and $12.46, per option, respectively.
F-19
46
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES --
Accounting for Income Taxes --
Pennzoil-Quaker State accounts for income taxes under the provisions of
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition
of deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Federal, State and Foreign --
Federal, state and foreign income tax expense (benefit) consists of the
following:
YEAR ENDED DECEMBER 31
-------------------------------
1999 1998 1997
--------- -------- --------
(EXPRESSED IN THOUSANDS)
Current
United States..................................... $ -- $ -- $(30,044)
Foreign........................................... 1,637 700 239
State............................................. 1,493 (224) 20
Deferred
United States..................................... (158,443) (37,104) 32,470
Foreign........................................... -- -- (442)
State............................................. (39,134) (1,710) 4,002
--------- -------- --------
Income tax provision (benefit)...................... $(194,447) $(38,338) $ 6,245
========= ======== ========
Pennzoil-Quaker State's net deferred tax asset is as follows:
DECEMBER 31
-------------------------
1999 1998
----------- -----------
(EXPRESSED IN THOUSANDS)
Deferred tax liability...................................... $ 85,138 $ 194,457
Deferred tax asset.......................................... (374,019) (302,327)
Valuation allowance......................................... 16,204 23,843
--------- ---------
Net deferred tax asset............................ $(272,677) $ (84,027)
========= =========
F-20
47
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Temporary differences and carryforwards, which comprise significant
portions of deferred tax assets and liabilities, are as follows:
DECEMBER 31
------------------------
1999 1998
----------- ----------
(EXPRESSED IN THOUSANDS)
Inventory................................................... $ (12,267) $(10,310)
Product liability........................................... (2,573) (8,750)
Property, plant and equipment............................... (65,919) 154,563
Investments in foreign subsidiaries......................... 4,782 (7,373)
Benefit related accruals.................................... (57,779) (86,322)
Environmental accruals...................................... (10,601) (11,088)
Alternative minimum tax credit carryforward................. (17,000) (35,229)
Net operating loss carryforwards............................ (87,098) (52,530)
Other, net.................................................. (40,426) (50,831)
Valuation allowance......................................... 16,204 23,843
--------- --------
Net deferred tax asset............................ $(272,677) $(84,027)
========= ========
The principal items accounting for the difference in income taxes on income
computed at the federal statutory rate and income taxes as recorded are as
follows:
YEAR ENDED DECEMBER 31
-----------------------------
1999 1998 1997
--------- -------- ------
(EXPRESSED IN THOUSANDS)
Income tax provision (benefit) at statutory rate...... $(180,381) $(29,472) $1,980
Increases (reductions) resulting from:
State income taxes, net............................. (24,467) (1,257) 2,592
Taxes on foreign income less than statutory rate.... 1,064 456 (149)
Nondeductible goodwill.............................. 5,971 1,040 1,173
Tax sharing benefit received from parent............ -- (9,721) --
Other, net.......................................... 3,366 616 649
--------- -------- ------
Income tax provision (benefit)........................ $(194,447) $(38,338) $6,245
========= ======== ======
Prior to the 1999 tax year, Pennzoil-Quaker State was included in Pennzoil
Company's U.S. consolidated income tax returns and was a participant in Pennzoil
Company's intercompany tax sharing agreement. The 1998 income tax benefit
includes a favorable adjustment of $9.7 million to reflect the apportionment of
tax attributes formerly shared with Pennzoil Company.
In connection with the Spin-off, Pennzoil-Quaker State entered into a tax
separation agreement with Pennzoil Company which provides, among other things,
that (1) Pennzoil-Quaker State will be responsible for and indemnify Pennzoil
Company against all taxes that are attributable to certain inventory
adjustments, (2) Pennzoil Company will be responsible for and indemnify
Pennzoil-Quaker State against any other consolidated federal or state income tax
liability for periods ended on or before the date of the Spin-off, (3) any other
taxes will be borne by the party on whom such taxes are imposed by law. The
rights and obligations of Pennzoil Company under this agreement were assumed by
Devon in its August 1999 acquisition of Pennzoil Company. The agreement also
establishes procedures for the conduct and settlement of certain tax audits and
related proceedings. Pennzoil-Quaker State and Quaker State filed separate tax
returns for the 1998 tax year. Pennzoil-Quaker State will file a consolidated
tax return beginning with the 1999 tax year.
F-21
48
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 30, 1998, Pennzoil-Quaker State estimated certain net deferred
tax assets associated with the spun-off assets and liabilities and the
allocation of certain tax attributes associated with the tax separation
agreement. Those net deferred tax assets were considered in calculating the
capital contribution of $412.4 million made by Pennzoil Company to the Company
as part of the Spin-off.
In 1999, Pennzoil-Quaker State adjusted its deferred tax asset in
connection with the allocation of deferred tax assets and liabilities from
Pennzoil Company. The adjustments related primarily to the finalization of
estimates made in 1998 of the allocations of net operating losses, alternative
minimum tax credits and deferred tax liabilities created in foreign
subsidiaries. As a result of these adjustments to tax attributes related to the
spun-off assets and liabilities, the Company decreased its net deferred tax
asset and adjusted the capital contribution related to the Spin-off by $31.4
million in 1999.
As of December 31, 1999, Pennzoil-Quaker State had a United States net
operating loss carryforward of approximately $139.4 million, which is available
to reduce future federal income taxes payable. Additionally, for the purposes of
determining alternative minimum tax, an approximate $50.1 million net operating
loss is available to offset future alternative minimum taxable income. If not
used, these carryovers will expire in years 2018 and 2019. In addition,
Pennzoil-Quaker State also has a separate return limitation loss of $4.5 million
and an approximate $3.1 million net operating loss which is available to offset
alternative minimum taxable income. Utilization of 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 its successor,
generating the loss. If not used, these carryovers will expire in the years 2000
to 2006. A valuation allowance of approximately $1.6 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, Pennzoil-Quaker State has approximately $17.0 million of
alternative minimum tax credits indefinitely available to reduce regular tax
liability to the extent it exceeds the related alternative minimum tax otherwise
due. All net operating loss and credit carryover amounts are subject to
examination by the tax authorities.
Pennzoil-Quaker State also had state net operating loss carryforwards, the
tax effect of which was approximately $38.3 million as of December 31, 1999. 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.
F-22
49
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) DEBT --
Debt outstanding was as follows:
DECEMBER 31
-------------------------
1999 1998
----------- -----------
(EXPRESSED IN THOUSANDS)
7.375% Debentures due 2029, net of discount................. $ 398,038 $ --
6.750% Notes due 2009, net of discount...................... 199,057 --
6.625% Notes due 2005, net of discount...................... 99,647 99,578
Commercial paper............................................ 242,578 488,409
Pollution control bonds, net of discount.................... 50,549 50,544
International debt facilities............................... 13,830 11,033
Quaker State variable-rate revolving credit agreements...... -- 370,000
Other variable-rate credit arrangements with banks.......... 16,000 --
Other debt.................................................. 7,534 7,773
---------- ----------
Total debt........................................ 1,027,233 1,027,337
Less amounts classified as current maturities............... (1,080) (1,283)
---------- ----------
Total long-term debt.............................. $1,026,153 $1,026,054
========== ==========
On March 30, 1999, Pennzoil-Quaker State issued debt in the form of $200.0
million of 6 3/4% Notes due April 1, 2009 and $400.0 million of 7 3/8%
Debentures due April 1, 2029. Net proceeds of $592.2 million from the Notes and
Debentures were used to reduce the Company's outstanding commercial paper
borrowings and variable rate debt.
The Company has a revolving credit facility with a group of banks that
provides for up to $600.0 million of committed unsecured revolving credit
borrowings through November 14, 2000, with any outstanding borrowings on such
date being converted into a term credit facility terminating on November 14,
2001. There were no borrowings outstanding under this revolving credit facility
at December 31, 1999 or 1998.
The Company has currently limited aggregate borrowings under its commercial
paper programs to $600.0 million. Borrowings under commercial paper facilities
totaled $242.6 million and $488.4 million at December 31, 1999 and 1998,
respectively. The average interest rate applicable to outstanding commercial
paper was 5.6% during 1999 and 6.0% at year-end 1998.
The Company had three short-term variable-rate credit arrangements with
banks at year-end 1999 and intends to enter into several additional
arrangements. The Company currently limits its aggregate borrowings under these
types of credit arrangements to $300.0 million. Outstanding borrowings were
$16.0 million at December 31, 1999 and zero at December 31, 1998. None of the
banks under these credit arrangements has any obligation to continue to extend
credit after the maturities of outstanding borrowings or to extend the
maturities of any borrowings.
The Company has a revolving credit facility with a Canadian bank that
provides for borrowings of up to US$18.7 million through October 29, 2000, with
any outstanding borrowings on such date being converted into a term credit
facility terminating on October 29, 2001. Outstanding borrowings under the
credit facility totaled US$13.8 million and US$9.6 million at December 31, 1999
and 1998, respectively. The average interest rate applicable to amounts
outstanding under the credit facility were 4.9% and 5.0% during 1999 and 1998,
respectively.
Prior to the Spin-off, the Company had revolving credit arrangements with
Pennzoil Company that provided for borrowings of up to $590.0 million through
December 31, 1998 and $340.0 million through
F-23
50
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004. Amounts borrowed under the credit arrangements bore interest
at variable and fixed rates.
In December 1998, in connection with its separation from Pennzoil Company,
the Company repaid $430.0 million in intercompany indebtedness and certain
accounts payable to Pennzoil Company. Intercompany indebtedness of $412.4
million to Pennzoil Company was not repaid and was treated as a capital
contribution to the Company in connection with the separation. This amount was
reclassified from payable to affiliate to shareholders' equity. Interest
associated with the affiliated debt was $56.4 million for the years ended
December 31, 1998 and 1997. The average interest rates applicable to amounts
outstanding under these credit arrangements during 1998 and 1997 was 9.8%.
At December 31, 1998, Quaker State had total debt of $472.7 million,
consisting of $99.6 million, net of discount, of 6.625% Notes due 2005, $370.0
million of variable rate borrowings under a revolving credit facility and $3.1
million in various notes due in installments through 2005. On January 4, 1999,
variable rate borrowings of $370.0 million under the revolving credit facility
were repaid by Pennzoil-Quaker State.
The Company has a total of $50.5 million, net of discount, in pollution
control bonds issued by three authorities. Issuances by the Industrial
Development Board of the Parish of Caddo, Inc. include $24.6 million issued
December 23, 1996, $8.5 million issued December 19, 1997 and $11.8 million, net
of discount, issued December 22, 1998. The three issuances are scheduled for
retirement on December 1, 2026, December 1, 2027 and December 1, 2028,
respectively. Proceeds from the bonds were used to help fund an upgrade to the
Company's Shreveport refinery. The interest rates for the bonds issued in 1996
and 1997 are currently reset weekly and interest is paid monthly. The interest
rate is fixed at 5.6% for the bonds issued in 1998 and interest is paid
semi-annually. 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 related to facilities in Pennsylvania.
As of December 31, 1999, borrowings totaling $258.6 million under
Pennzoil-Quaker State's commercial paper programs and variable-rate credit
agreements have been classified as long-term debt. Such debt classification is
based upon the availability of committed long-term credit facilities to
refinance such short-term facilities and the Company's intent to maintain such
commitments in excess of one year.
At December 31, 1999, aggregated maturities of long-term debt for the years
ending December 31, 2000 through 2004 were $1.0 million, $273.2 million, $0.9
million, $0.3 million and $0.3 million, respectively.
(10) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK --
Financial Instruments With Off-Balance-Sheet Risk --
Pennzoil-Quaker State is a party to various financial instruments with
off-balance-sheet risk as part of its normal course of business, including
financial guarantees and contractual commitments to extend financial guarantees,
credit and other assistance to customers, franchisees and other third parties.
These financial instruments involve, to varying degrees, elements of credit risk
which are not recognized in Pennzoil-Quaker State's consolidated balance sheet.
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.
F-24
51
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Following are the amounts related to Pennzoil-Quaker State's financial
guarantees and contractual commitments to extend financial guarantees, credit
and other assistance as of December 31, 1999 and 1998.
CONTRACT OR
NOTIONAL AMOUNTS
DECEMBER 31
-----------------
1999 1998
------- -------
(EXPRESSED IN
THOUSANDS)
Financial guarantees relating to Excel Paralubes............ $20,218 $17,710
Financial guarantees -- fast lube........................... 34,536 41,609
Financial guarantees -- other............................... 5,815 5,730
Commitments to extend financial guarantees:
Guarantees of letters of credit........................... 28,075 21,537
Guarantees -- Red River................................... 7,915 8,701
------- -------
Total............................................. $96,559 $95,287
======= =======
Pennzoil-Quaker State's exposure to credit losses in the event of
nonperformance by the other parties to these financial instruments is
represented by the contractual or notional amounts. Decisions to extend
financial guarantees and commitments and the amount of remuneration and
collateral required are based on management's credit evaluation of the
counterparties on a case-by-case basis. The collateral held varies but may
include accounts receivable, inventory, equipment, real property, securities and
personal assets. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Use of Derivatives --
In 1998, the Company entered into four interest rate locks, based upon the
30-year Treasury rate, to lock in interest rates for future issuances of
long-term indebtedness. The hedge contracts matured in March 1999 when the
Company issued $400.0 million of 30-year debentures. The total loss of $2.1
million on the interest rate hedges was treated as an adjustment to the issue
price of the debentures, effectively creating a discount that will be amortized
over the life of the borrowings.
Pennzoil-Quaker State also entered into swap contracts to reduce the impact
of fluctuations in refining margins on results of operations. The Company
accounted for these transactions as a hedge and unrealized gains and losses are
deferred and recognized in the results of operations in the period in which the
hedged transaction is consummated. There were no unrealized gains or losses at
December 31, 1999. Realized gains on refining margin swaps in 1999 were not
material.
In January 2000, Pennzoil-Quaker State approved a tactical hedging program
to lock-in refining margins on up to ninety percent of its production of certain
refined fuel products through July 2000.
Concentrations of Credit Risk --
Pennzoil-Quaker State extends credit to various companies in the lubricants
and consumer products, base oil and specialty products and fast lube operations
industries in the normal course of business. Within these industries, certain
concentrations of credit risk exist. These concentrations of credit risk may be
similarly affected by changes in economic or other conditions and may,
accordingly, impact Pennzoil-Quaker State's overall credit risk. However,
management believes that Pennzoil-Quaker State's receivables are well
diversified, thereby reducing potential credit risk to Pennzoil-Quaker State,
and that allowances for doubtful accounts are adequate to absorb estimated
losses as of December 31, 1999. Pennzoil-Quaker State's policies concerning
collateral requirements and the types of collateral obtained for
on-balance-sheet financial
F-25
52
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
instruments are the same as those described above under "Financial Instruments
With Off-Balance-Sheet Risk."
As of December 31, 1999, receivables related to group concentration in the
lubricants and consumer products, fast lube operations and base oil and
specialty products segments were $289.7 million, $39.1 million and $27.5
million, respectively, compared with $274.0 million, $40.1 million and $37.4
million, respectively, at December 31, 1998. The Company's net accounts
receivable sold under its receivables sales facility totaled $153.1 million and
$115.0 million as of December 31, 1999 and 1998, respectively. Reference is made
to Note 3 for further information.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS --
Balance Sheet Financial Instruments --
The carrying amounts of Pennzoil-Quaker State's short-term financial
instruments, including cash equivalents, other investments, trade accounts
receivable, trade accounts payable and notes payable, approximate their fair
values based on the short maturities of those instruments.
The following table summarizes the carrying amounts and estimated fair
values of Pennzoil-Quaker State's other balance sheet financial instruments.
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(EXPRESSED IN THOUSANDS)
Notes receivable.............................. $ 61,681 $ 52,738 $ 69,848 $ 70,212
Debt.......................................... 1,027,233 839,426 1,027,337 1,000,970
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument included above:
Notes Receivable. The estimated fair value of notes receivable is
based on discounting future cash flows using estimated year-end interest
rates at which similar loans have been made to borrowers with similar
credit ratings for the same remaining maturities.
Debt. The estimated fair value of long-term debt is based on quoted
market prices or, where such prices are not available, on estimated
year-end interest rates of debt with the same remaining average maturities
and credit quality.
Off-Balance-Sheet Financial Instruments --
The estimated fair value of certain financial guarantees written and
commitments to extend financial guarantees was $14.5 million and $13.7 million
as of December 31, 1999 and 1998, respectively. The estimated fair value of
certain financial guarantees written and commitments to extend financial
guarantees is based on the estimated cost to Pennzoil-Quaker State to obtain
third party letters of credit to relieve Pennzoil-Quaker State of its
obligations under such guarantees or, in the case of certain lease guarantees
related to Jiffy Lube franchisees, the present value of expected future cash
flows using a discount rate commensurate with the risks involved.
(12) COMMITMENTS AND CONTINGENCIES --
Environmental Matters --
The operations of the Company in the United States are subject to numerous
federal, state and local laws and regulations controlling the discharge of
materials into the environment or otherwise relating to the protection of the
environment and human health and safety.
F-26
53
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company is subject to a variety of state and federal Clean Air Act
rules requiring air emission reductions from its operating units and fuels.
Currently, the U.S. Environmental Protection Agency ("EPA"), the Ozone Transport
Assessment Group ("OTAG"), Ozone Transport Region ("OTR") and several states are
examining new standards and/or controls which could impose significant costs on
the Company. The EPA has recently adopted new, more stringent national ambient
air quality standards for ozone and particulate matter, which would designate
many more areas of the country as high pollution areas subject to additional
regulatory controls, including possible fuel specification requirements.
However, litigation over the new standards has rendered their implementation
uncertain. The multi-state OTAG and OTR groups are developing lists of suggested
controls to limit interstate ozone transport. The EPA has issued a proposal to
require states to begin adopting many of these suggested controls over the next
few years.
The precise effect of these actions on the Company and other industrial
companies is uncertain because most of the requirements will be implemented
through EPA regulations to be issued over a period of years. For example, fuels
produced at the Company's Shreveport refinery will likely be required to be
reformulated to a composition significantly different from the fuels currently
produced, which would involve the installation of additional refining equipment.
However, current estimates indicate that expenditures associated with the
installation of such equipment would not have a material effect on the Company's
results of operations.
The EPA also recently enacted regulations limiting the sulfur content of
gasoline fuels, effective in 2004. The Company believes it is eligible under the
regulations for an extension of this deadline to 2008. The expenditures required
to comply with these requirements may have a material effect on the Company's
results of operations. The EPA is expected to propose, later in 2000, new
regulations limiting the sulfur content of diesel fuels. The potential effect on
the Company of such regulations, if ultimately promulgated, is unknown at this
time.
Pennzoil-Quaker State is subject to certain laws and regulations relating
to environmental remediation activities associated with past operations, such as
the Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), the Resource Conservation and Recovery Act and similar state
statutes. In response to liabilities associated with these activities, accruals
have been established when reasonable estimates are possible. Such accruals
primarily include estimated costs associated with remediation. Pennzoil-Quaker
State has not used discounting in determining its accrued liabilities for
environmental remediation, and no claims for possible recovery from third party
insurers or other parties related to environmental costs have been recognized in
Pennzoil-Quaker State's combined financial statements. Pennzoil-Quaker State
adjusts the accruals when new remediation responsibilities are discovered and
probable costs become estimable, or when current remediation estimates are
adjusted to reflect new information.
The Company's assessment of the potential impact of these environmental
laws is subject to uncertainty due to the difficult process of estimating
remediation costs that are subject to ongoing and evolving change. Initial
estimates of remediation costs reflect a broad-based analysis of site conditions
and potential environmental and human health impacts derived from preliminary
site investigations (including soil and water analysis, migration pathways and
potential risk). Later changes in these initial estimates may be based on
additional site investigations, completion of feasibility studies (comparing and
selecting from among various remediation methods and technologies) and risk
assessments (determining the degree of current and future risk to the
environment and human health, based on current scientific and regulatory
criteria) and the actual implementation of the remediation plan. This process
occurs over relatively long periods of time and is influenced by regulatory and
community approval processes and is subject to the ongoing development of
remediation technologies. The Company's assessment analysis takes into account
the condition of each site at the time of estimation, the degree of uncertainty
surrounding the estimates for each phase of remediation and other site-specific
factors.
F-27
54
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain of Pennzoil-Quaker State's subsidiaries are involved in matters in
which it has been alleged that such subsidiaries are potentially responsible
parties ("PRPs") under CERCLA or similar state legislation with respect to
various waste disposal areas owned or operated by third parties. In addition,
certain of Pennzoil-Quaker State's subsidiaries are involved in other
environmental remediation activities, including the removal, inspection and
replacement, as necessary, of underground storage tanks. As of December 31, 1999
and 1998, Pennzoil-Quaker State's consolidated balance sheet included accrued
liabilities for environmental remediation of $38.0 million and $27.2 million,
respectively. Of these reserves, $5.4 million and $4.2 million are reflected on
the consolidated balance sheet as current liabilities as of December 31, 1999
and 1998, respectively, and $32.6 million and $23.0 million are reflected as
other long-term liabilities as of December 31, 1999 and 1998, respectively.
Pennzoil-Quaker State does not currently believe there is a reasonable
possibility of incurring additional material costs in excess of the current
accruals recognized for such environmental remediation activities. With respect
to the sites in which Pennzoil-Quaker State subsidiaries are PRPs,
Pennzoil-Quaker State's conclusion is based in large part on (i) the
availability of defenses to liability, including the availability of the
"petroleum exclusion" under CERCLA and similar state laws, and/or (ii)
Pennzoil-Quaker State's current belief that its share of wastes at a particular
site is or will be viewed by the EPA or other PRPs as being de minimis. As a
result, Pennzoil-Quaker State's monetary exposure is not expected to be material
beyond the amounts reserved.
From January 1997 through December 1999, capital outlays of approximately
$10.0 million have been made by the Company with respect to environmental
protection. Capital expenditures for environmental control facilities are
currently expected to be approximately $0.8 million in 2000.
Louisiana Federal Court Employment Action --
In September 1997, a lawsuit styled Kenneth Epperson, et al. vs. Pennzoil
Co., et al., was filed in the United States District Court for the Western
District of Louisiana, Shreveport Division. The amended complaint filed by nine
named plaintiffs alleges discriminatory employment policies and practices
against African-American and other minority employees and seeks attorney's fees
and costs, various forms of injunctive and equitable relief, $50.0 million in
damages for back pay, front pay, and emotional distress, and a minimum of three
times that amount in punitive damages. Class certification was denied by the
court in September 1999. The court, however, allowed the lawsuit to be amended
to add new individual plaintiffs. Since that time, approximately 60 additional
plaintiffs have joined the lawsuit. The Company vigorously denies these
allegations.
Blue Coral --
In May 1997, a class action lawsuit was filed in the United States District
Court for the Northern District of Illinois on behalf of a class of persons who
purchased wax, polish or protectant products sold by a number of defendants. The
action names as defendants a number of car wax manufacturers including Blue
Coral, Inc., a subsidiary of the Company and certain of its present and former
officers. The complaint alleges that the defendants falsely advertised and
marketed such products and seeks treble damages, attorneys' fees and costs for
the class for alleged violations of the federal Racketeer Influenced and Corrupt
Organizations Act and compensatory damages for alleged violations of the Ohio
Consumer Sales Practices Act as well as for breach of express warranty. On
January 5, 1999, the court certified a nationwide class consisting of all
persons who purchased products marketed, produced or distributed as "car wax" by
the defendants. While no class period has been specified by the court, the
plaintiffs are seeking a class period dating back four years prior to the filing
of the action. On February 2, 1999, the plaintiffs proposed a joint settlement
fund equal to ten percent of each defendant's 1997 gross revenue from the
products. The Company is contesting this action vigorously.
F-28
55
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 in the United States and that
the defendant, Medo Industries, Inc., a subsidiary of the Company, 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. The Company is contesting this action vigorously.
Other --
The Company is involved in numerous lawsuits, primarily in Louisiana,
involving asbestos and asbestos-containing products. The plaintiffs generally
allege exposure to asbestos and asbestos-containing products while working on
the premises of the premises defendants and strict liability and negligence
actions against the premises' defendants, including the Company. In addition,
the plaintiffs generally allege that asbestos-containing products sold,
distributed and supplied by the other defendants in the lawsuits were defective
and unreasonably dangerous and that those defendants were thus negligent in
failing to warn the plaintiffs of these dangers. The Company is contesting these
actions vigorously.
Pennzoil-Quaker State and its subsidiaries are also involved in various
other claims, lawsuits and other proceedings relating to a wide variety of
matters. While uncertainties are inherent in the final outcome of all claims,
lawsuits and other proceedings and it is presently impossible to determine the
actual costs that ultimately may be incurred, management currently believes that
the resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on Pennzoil-Quaker State's financial position or
results of operations.
(13) LEASES --
As Lessee --
Pennzoil-Quaker State leases various assets and office space with lease
periods of one to 20 years. Additionally, Pennzoil-Quaker State leases sites and
equipment which are subleased to franchisees or used in the operation of
automotive fast lubrication and fluid maintenance service centers operated by
Pennzoil-Quaker State. The typical lease period for the service centers is 20
years with escalation clauses generally increasing the lease payments by 9%
every third year, with some leases containing renewal options generally for
periods of five years. These leases, excluding leases for land that are
classified as operating leases, are accounted for as capital leases and are
capitalized using interest rates appropriate at the inception of each lease.
Certain operating and capital lease payments are contingent upon such
factors as the consumer price index or the prime interest rate with any future
changes reflected in income as accruable. The effects of these changes are not
considered material.
Total operating lease rental expenses for Pennzoil-Quaker State were $88.4
million, $61.9 million and $55.1 million for 1999, 1998 and 1997, respectively.
Interest expense related to Pennzoil-Quaker State's capital lease obligations
was $9.0 million, $8.3 million and $8.6 million for 1999, 1998 and 1997,
respectively.
F-29
56
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum commitments under noncancellable leasing arrangements as of
December 31, 1999 are as follows:
AMOUNTS PAYABLE
AS LESSEE
------------------------
CAPITAL OPERATING
LEASES LEASES
--------- ----------
(EXPRESSED IN THOUSANDS)
YEAR ENDING DECEMBER 31:
2000........................................................ $ 13,495 $ 87,818
2001........................................................ 13,563 68,592
2002........................................................ 13,473 61,181
2003........................................................ 13,467 56,366
2004........................................................ 13,053 57,526
Thereafter.................................................. 55,552 372,429
-------- --------
Net minimum future lease payments........................... $122,603 $703,912
========
Less interest............................................... 49,268
--------
Present value of net minimum lease payments at December 31,
1999...................................................... $ 73,355
========
Assets recorded under capital lease obligations of $74.4 million and $11.9
million at December 31, 1999 are classified as property, plant and equipment and
other assets, respectively, in the accompanying consolidated balance sheet.
Assets recorded under capital lease obligations of $74.5 million and $12.9
million at December 31, 1998 are classified as property, plant and equipment and
other assets, respectively, in the accompanying consolidated balance sheet.
As Lessor --
Pennzoil-Quaker State owns or leases numerous service center sites which
are leased or subleased to franchisees. Buildings owned or leased that meet the
criteria for direct financing leases are carried at the gross investment in the
lease less unearned income. Unearned income is recognized in such a manner as to
produce a constant periodic rate of return on the net investment in the direct
financing lease. Any buildings leased or subleased that do not meet the criteria
for a direct financing lease and any land leased or subleased are accounted for
as operating leases. The typical lease period is 20 years and some leases
contain renewal options. The franchisee is responsible for the payment of
property taxes, insurance and maintenance costs related to the leased property.
The net investment in direct financing leases is classified as other assets in
the accompanying consolidated balance sheet.
F-30
57
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payment receivables under noncancellable leasing
arrangements as of December 31, 1999 are as follows:
AMOUNTS RECEIVABLE
AS LESSOR
-------------------------
DIRECT
FINANCING OPERATING
LEASES LEASES
---------- ----------
(EXPRESSED IN THOUSANDS)
YEAR ENDING DECEMBER 31:
2000........................................................ $ 4,533 $ 30,713
2001........................................................ 4,556 28,387
2002........................................................ 4,571 27,055
2003........................................................ 4,531 25,038
2004........................................................ 4,553 23,368
Thereafter.................................................. 18,217 132,803
------- --------
Net minimum future lease payments........................... $40,961 $267,364
========
Less unearned income........................................ 16,746
-------
Net investment in direct financing leases at December 31,
1999...................................................... $24,215
=======
The carrying value of owned property leased under operating leases or held for
lease was $34.7 million and $16.5 million (net of accumulated depreciation of
$18.7 million and $9.6 million) at December 31, 1999 and 1998, respectively.
(14) SEGMENT FINANCIAL INFORMATION --
Information with respect to revenues, operating income and other data by
operating segment is presented in Item 1. Business and Item 2. Properties of
this Annual Report on Form 10-K. The tabular presentation below sets forth
certain financial information regarding Pennzoil-Quaker State's net sales by
classes of similar products and services and net sales and identifiable assets
by geographic area for the years ended December 31, 1999, 1998, and 1997.
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(EXPRESSED IN THOUSANDS)
NET SALES BY CLASSES OF SIMILAR PRODUCTS OR
SERVICES:
Lubricants(1)............................................... $1,398,243 $ 818,166 $ 840,383
Consumer Products(1)........................................ 300,443 56,310 31,284
Base Oils................................................... 288,203 263,421 258,061
Specialty Products(2)....................................... 62,368 65,336 210,602
Fast Lube Operations........................................ 423,413 322,704 316,068
All Other Products.......................................... 698,392 474,866 542,888
Intersegment Sales(3)....................................... (219,706) (199,127) (217,138)
---------- ---------- ----------
Total(1)........................................... $2,951,356 $1,801,676 $1,982,148
========== ========== ==========
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(EXPRESSED IN THOUSANDS)
GEOGRAPHIC AREAS:
Net Sales
Domestic(4)............................................... $2,765,059 $1,695,453 $1,875,264
Foreign(4)................................................ 186,297 106,223 106,884
Identifiable Assets
Domestic.................................................. 2,566,667 $2,948,320 $1,422,777
Foreign................................................... 166,554 196,674 136,846
- ---------------
(1) The increase in net sales in 1999 was the result of the acquisition of
Quaker State on December 30, 1998. Net sales for 1998 and 1997 do not
include Quaker State.
F-31
58
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) In October 1997, the Company contributed most of its specialty industrial
products business to Penreco, a partnership with Conoco. The partnership is
accounted for under the equity method with the Company's share of net
earnings being reported as a component of other income.
(3) Intersegment sales are priced at market. The majority of intersegment sales
are from the base oil and specialty products segment to the lubricants and
consumer products segment.
(4) Export sales to foreign customers originating from domestic offices are
shown in this table as domestic sales.
(15) SUBSEQUENT EVENTS
On January 11, 2000, the Company agreed to acquire the assets of Sagaz
Industries, Inc., a leading manufacturer and marketer of automobile seat covers
and cushions in the United States and Canada, for approximately $62.5 million.
The Company expects to consummate the purchase of Sagaz in the first quarter of
2000.
On February 2, 2000, the Company acquired Auto Fashions, a 25-year-old
Australian automotive accessories firm. Auto Fashions is a leader in the
Australian automotive air freshener, sunshade and comfort accessories market.
On February 7, 2000 the Company entered into a definitive agreement with
Calumet Lubricants Company, LP to sell the Company's Rouseville, Pennsylvania
wax processing facilities and related assets, including the Company's Reno,
Pennsylvania packaging plant and its crude oil gathering and trucking operations
in the state of Utah. Also included in the sale is Pennzoil-Quaker State's share
of its Bareco partnership with Baker Petrolite, a division of Baker Hughes
Incorporated. The sale is expected to close by April 15, 2000, and no
significant gain or loss is expected.
F-32
59
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION -- UNAUDITED
QUARTERLY RESULTS --
BASIC AND
DILUTED
OPERATING NET INCOME EARNINGS (LOSS)
REVENUES INCOME (LOSS)(1) (LOSS) PER SHARE
---------- ---------------- ---------- ---------------
(EXPRESSED IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1998
First Quarter.......................... $ 443,442 $ 28,748 $ 599 $ 0.01
Second Quarter......................... 498,969 38,460 6,050 0.13
Third Quarter.......................... 474,852 31,843 636 0.01
Fourth Quarter......................... 432,875 (68,891) (53,152) (1.11)
---------- --------- --------- ------
$1,850,138 $ 30,160 $ (45,867) $(0.96)
========== ========= ========= ======
1999
First Quarter.......................... $ 704,066 $ 39,741 $ (2,219) $(0.03)
Second Quarter......................... 759,920 54,213 6,302 0.08
Third Quarter.......................... 759,892 29,996 (6,744) (0.09)
Fourth Quarter......................... 765,054 (477,606) (318,270) (4.08)
---------- --------- --------- ------
$2,988,932 $(353,656) $(320,931) $(4.12)
========== ========= ========= ======
- ---------------
(1) Operating income is defined as net revenues less costs and operating
expenses.
F-33
60
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
*3.1(a) -- Restated Certificate of Incorporation of the Company
(filed as exhibit 4.2 to the Current Report on Form 8-K
of the Company filed on December 29, 1998 (File No.
001-14501) and incorporated herein by reference).
3.1(b) -- Certificate of Designations of Series A Junior
Participating Preferred Stock of the Company.
*3.2 -- By-Laws of the Company (filed as exhibit 4.2 to the
Registration Statement on Form S-8 of the Company
(Registration No. 333-72835) and incorporated herein by
reference).
*3.3 -- Form of Common Stock Certificate of the Company (filed as
exhibit 3.5 to the Registration Statement on Form S-4 of
the Company (Registration No. 333-61541) and incorporated
herein by reference).
*3.4 -- Rights Agreement dated as of December 18, 1998 between
the Company and The Chase Manhattan Bank (filed as
exhibit 1 to the Current Report on Form 8-K of the
Company filed on December 18, 1998 (File No. 001-14501)
and incorporated herein by reference).
*4.1 -- Indenture, dated as of February 1, 1999 (the
"Indenture"), between the Company and Chase Bank of
Texas, National Association, as Trustee (filed as exhibit
4.1 to the Current Report on Form 8-K of the Company
filed on March 30, 1999 (File No. 001-14501) and
incorporated herein by reference).
*4.2 -- Officer's Certificate dated as of March 30, 1999
delivered pursuant to Section 301 of the Indenture,
providing for the issuance of the 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 the Company filed on March
30, 1999 (File No. 001-14501) and incorporated herein by
reference).
The 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 the Company and its
subsidiaries on a consolidated basis. Pursuant to
paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, the
Company agrees to furnish a copy of such instruments to
the Securities and Exchange Commission upon request.
*10.1(a) -- Credit Agreement dated as of November 17, 1998 among
Pennzoil Products Company and the lenders named therein
(filed as exhibit 10.1 to the Annual Report on Form 10-K
of the Company for the fiscal year ended December 31,
1998 (File No. 001-14501) and incorporated herein by
reference).
10.1(b) -- First Amendment to Exhibit 10.1(a) dated as of November
5, 1999.
10.1(c) -- Amended and Restated Credit Agreement dated as of
November 16, 1999 among Pennzoil-Quaker State Company and
the lenders named therein.
+*10.2 -- Pennzoil-Quaker State Company 1998 Incentive Plan (filed
as exhibit 4.3 to the Registration Statement of the
Company on Form S-8 (Registration No. 333-69837) and
incorporated herein by reference).
+10.3 -- Pennzoil-Quaker State Company 1999 Long-Term Performance
Incentive Program.
+*10.4 -- Form of Indemnification Agreement between Pennzoil-Quaker
State Company and directors and executive officers of the
Company (filed as exhibit 10.7 to the Registration
Statement of the Company on Form S-4 (Registration No.
333-61541) and incorporated herein by reference).
61
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
+*10.5 -- Pennzoil-Quaker State Company Deferred Compensation Plan
(filed as exhibit 10.4 to the Annual Report on Form 10-K
of the Company for the fiscal year ended December 31,
1998 (File No. 001-14501) and incorporated herein by
reference).
+*10.6 -- Pennzoil-Quaker State Company Medical Expenses
Reimbursement Plan (filed as exhibit 10.5 to the Annual
Report on Form 10-K of the Company for the fiscal year
ended December 31, 1998 (File No. 001-14501) and
incorporated herein by reference).
+*10.7 -- Pennzoil-Quaker State Company Supplemental Disability
Plan (filed as exhibit 10.6 to the Annual Report on Form
10-K of the Company for the fiscal year ended December
31, 1998 (File No. 001-14501) and incorporated herein by
reference).
+*10.8 -- Pennzoil-Quaker State Company Salary Continuation Plan
(filed as exhibit 10.7 to the Annual Report on Form 10-K
of the Company for the fiscal year ended December 31,
1998 (File No. 001-14501) and incorporated herein by
reference).
+*10.9 -- Pennzoil-Quaker State Company Supplemental Life Insurance
Plan (filed as exhibit 10.8 to the Annual Report on Form
10-K of the Company for the fiscal year ended December
31, 1998 (File No. 001-14501) and incorporated herein by
reference).
+*10.10 -- Pennzoil-Quaker State Company Executive Severance Plan
(filed as exhibit 10.9 to the Annual Report on Form 10-K
of the Company for the fiscal year ended December 31,
1998 (File No. 001-14501) and incorporated herein by
reference).
+*10.11 -- Form of Pennzoil-Quaker State Company Supplemental
Medical and Retirement Benefits Agreement (filed as
exhibit 10.10 to the Annual Report on Form 10-K of the
Company for the fiscal year ended December 31, 1998 (File
No. 001-14501) and incorporated herein by reference).
+*10.12 -- Employment Agreement between the Company and James J.
Postl (filed as exhibit 10.11 to the Annual Report on
Form 10-K of the Company for the fiscal year ended
December 31, 1998 (File No. 001-14501) and incorporated
herein by reference).
12.1 -- Computation of Ratio of Earnings to Fixed Charges for the
years ended December 31, 1999, 1998, 1997, 1996 and 1995.
21.1 -- Subsidiaries of Pennzoil-Quaker State Company.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
24.1 -- Powers of Attorney.
27.1 -- Financial Data Schedule.
99.1 -- Financial Statements of Excel Paralubes.
99.2(a) -- First Amendment to the Pennzoil-Quaker State Company
Savings and Investment Plan.
99.2(b) -- Second Amendment to the Pennzoil-Quaker State Company
Savings and Investment Plan.
99.3(a) -- First Amendment to the Pennzoil Company Savings and
Investment Plan for Hourly Employees.
99.3(b) -- Second Amendment to the Pennzoil Company Savings and
Investment Plan for Hourly Employees.
99.3(c) -- Third Amendment to the Pennzoil Company Savings and
Investment Plan for Hourly Employees.
62
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
99.3(d) -- Fourth Amendment to the Pennzoil Company Savings and
Investment Plan for Hourly Employees.
99.3(e) -- Fifth Amendment to the Pennzoil-Quaker State Company
Savings and Investment Plan for Hourly Employees (f/k/a
Pennzoil Company Savings and Investment Plan for Hourly
Employees).
99.4(a) -- First Amendment to the Quaker State Corporation Thrift
and Stock Purchase Plan.
99.4(b) -- Second Amendment to the Pennzoil-Quaker State Thrift and
Stock Purchase Plan (f/k/a Quaker State Corporation
Thrift and Stock Purchase Plan).
99.4(c) -- Third Amendment to the Pennzoil-Quaker State Thrift and
Stock Purchase Plan.
- ---------------
* Incorporated by reference as indicated.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K.