1
EXHIBIT 99.1
EXCEL PARALUBES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Excel Paralubes
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of partners' deficit and of cash flows
present fairly, in all material respects, the financial position of Excel
Paralubes (the Partnership) at December 31, 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. These financial statements are the responsibility
of the Partnership's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Notes 7 and 10 to the consolidated financial statements, the
Partnership has significant transactions with its partners.
PricewaterhouseCoopers LLP
Houston, Texas
February 10, 2000
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EXCEL PARALUBES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 444,598 $ 587,935
Accounts receivable - related parties 54,309,277 39,704,186
Inventory 11,405,294 12,176,257
Other current assets 1,077,024 804,666
------------- -------------
Total current assets 67,236,193 53,273,044
Property, plant and equipment, net 395,742,089 406,348,515
Intangible assets and deferred charges, net 34,147,022 36,414,904
------------- -------------
$ 497,125,304 $ 496,036,463
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities -
related party $ 5,865,824 $ 5,766,179
Short-term notes payable 84,501,000 69,200,000
Interest payable 5,945,833 5,945,833
------------- -------------
Total current liabilities 96,312,657 80,912,012
Long-term debt 490,000,000 490,000,000
Long-term liabilities 33,888,637 28,765,025
Partners' deficit (123,075,990) (103,640,574)
------------- -------------
$ 497,125,304 $ 496,036,463
============= =============
The accompanying notes are an integral part of these financial statements.
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EXCEL PARALUBES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- ------------------------------------------------------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Revenues
Net sales-related parties $ 306,353,812 $ 269,663,968 $ 254,726,101
Processing fees-related party 9,675,680 9,665,420 9,662,000
Other 354,370 433,563
------------- ------------- -------------
Total revenues 316,029,492 279,683,758 264,821,664
------------- ------------- -------------
Costs and expenses:
Cost of goods sold - related party 196,893,691 145,882,471 164,487,535
Operating expense 46,798,951 47,712,610 48,549,398
General and administrative expense 1,098,486 1,064,681 1,057,665
Project construction expenses 368,532
Depreciation and amortization 17,661,409 17,281,029 17,738,395
Interest expense 38,888,051 38,046,184 38,133,795
Taxes other than Income 124,320 208,663 163,284
------------- ------------- -------------
Total costs and expenses 301,464,908 250,195,638 270,498,604
------------- ------------- -------------
Net Income (loss) $ 14,564,584 $ 29,488,120 $ (5,676,940)
============= ============= =============
The accompanying notes are an integral part of these financial statements.
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EXCEL PARALUBES
CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT
- --------------------------------------------------------------------------------
ATLAS
CONOCO, PROCESSING
INC. CO. TOTAL
Balance, December 31, 1996 $ (34,350,877) $ (34,350,877) $ (68,701,754)
Contributions 12,500,000 12,500,000 25,000,000
Distributions (12,700,000) (12,700,000) (25,400,000)
Net loss for the year ended
December 31, 1997 (2,838,470) (2,838,470) (5,676,940)
------------- ------------- -------------
Balance, December 31, 1997 (37,389,347) (37,389,347) (74,778,694)
Distributions (29,175,000) (29,175,000) (58,350,000)
Net income for the year ended
December 31, 1998 14,744,060 14,744,060 29,488,120
------------- ------------- -------------
Balance, December 31, 1998 (51,820,287) (51,820,287) (103,640,574)
Distributions (17,000,000) (17,000,000) (34,000,000)
Net income for the year ended
December 31, 1999 7,282,292 7,282,292 14,564,584
------------- ------------- -------------
Balance, December 31, 1999 $ (61,537,995) $ (61,537,995) $(123,075,990)
============= ============= =============
The accompanying notes are an integral part of these financial statements.
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EXCEL PARALUBES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
Cash flows from operating activities:
Net income (loss) $ 14,564,584 $ 29,488,120 $ (5,676,940)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 17,661,409 17,281,029 17,738,395
(Increase) decrease in accounts
receivable (14,605,091) 2,011,862 (21,565,500)
(Increase) decrease in inventory 770,963 1,721,292 (3,544,858)
Increase in other current assets (272,358) (18,924) (49,193)
Increase (decrease) in accounts
payable and accrued liabilities 99,645 (17,105,118) (12,023,980)
Increase in interest payable 190,000
Increase in long-term liabilities 5,123,612 11,601,197 11,913,828
Other, net 56,955 (48,069)
------------- ------------- -------------
Net cash provided by (used in)
operating activities 23,342,764 45,036,413 (13,066,317)
------------- ------------- -------------
Cash flows from investing activities:
Additions to property, plant
and equipment (4,787,101) (2,557,498) (10,602,742)
Acquisition of license agreements (8,260,140)
Proceeds from sale of asset 12,500 1,286,759
------------- ------------- -------------
Net cash used in investing activities (4,787,101) (2,544,998) (17,576,123)
------------- ------------- -------------
Cash flows from financing activities:
Cash distributions to partners (34,000,000) (58,350,000) (25,400,000)
Cash contributions from partners 25,000,000
Net proceeds from issuance of
commercial paper 15,301,000 16,400,000 31,000,000
------------- ------------- -------------
Net cash provided by (used in)
financing activities (18,699,000) (41,950,000) 30,600,000
------------- ------------- -------------
Net increase (decrease) in cash (143,337) 541,415 (42,440)
Cash balance at beginning of year 587,935 46,520 88,960
------------- ------------- -------------
Cash balance at end of year $ 444,598 $ 587,935 $ 46,520
============= ============= =============
Supplementary cash flow information:
Cash paid for interest $ 39,160,407 $ 38,096,674 $ 37,943,795
The accompanying notes are an integral part of these financial statements.
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION
Excel Paralubes (Excel or the Partnership), a general partnership, was
formed pursuant to the laws of the state of Texas on August 2, 1994 and was
created for the purpose of constructing and operating a $500 million lube
oil hydrocracker facility. Excel is a partnership which is equally owned by
Conoco Inc. (Conoco) and Atlas Processing Company (Atlas Processing), a
100%-owned subsidiary of Pennzoil-Quaker State Company (Pennzoil). Excel
Paralubes Funding Corporation (Excel Funding), a Delaware corporation, was
formed to execute and administer the financing arrangements of the
Partnership and is a wholly-owned subsidiary of Excel.
As more fully described in Notes 7 and 10, Excel and its partners have
entered into several long-term purchase and supply contracts, processing
agreements and partner guarantees.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES
The accompanying financial statements have been prepared on the accrual
basis in accordance with generally accepted accounting principles.
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Excel and its
wholly-owned subsidiary. All Intercompany accounts and transactions have
been eliminated.
CASH AND CASH EQUIVALENTS
Cash consists of cash on deposit at financial institutions and cash
equivalents in the form of time deposits with original maturities of three
months or less. There were time deposits of $244,000 and $387,000 at
December 31, 1999 and 1998, respectively.
INVENTORIES
Inventories consist principally of feedstocks. All inventories are valued
at lower of cost or market, cost being determined by the last-in,
first-out (LIFO) method. The total LIFO reserves required at December 31,
1999 and 1998 were $1,376,006 and $5,591,252, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is carried at cost and consists primarily of
roads, parking lots, buildings, furniture and refining equipment in
service at year end. Property, plant and equipment is being depreciated on
a straight-line basis principally over 28 years, the estimated life of the
assets.
CATALYST RECLAMATION AND TURNAROUND COSTS
Catalyst reclamation and turnaround costs are accrued as long-term
liabilities over the period between reclamations and turnarounds based on
estimates of the scope and the future costs for these activities.
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
INTANGIBLE ASSETS AND DEFERRED CHARGES
Intangible assets and deferred charges consist of license fees, deferred
bond termination fees and debt issue costs. License fees are being
amortized on a straight-line basis principally over the life of the license
agreement. Deferred bond termination fees and debt issue costs are being
amortized over the life of the bonds using a method which approximates the
interest method. Intangible assets are reassessed annually to determine
whether any potential impairment exists.
REVENUE RECOGNITION
Revenues from the sale of base oil and co-products are recognized in the
period of delivery.
OPERATING COSTS
Operating costs are expensed as incurred and consist primarily of labor,
utilities, maintenance, turnaround accruals, catalyst replacement, pilot
plant, environmental remediation, land rental and other miscellaneous
costs associated with operating the hydrocracker facility.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are recorded in operating expenses
and primarily represent pilot plant costs surrounding the operating
activities of the hydrocracker facility. For the years ended December 31,
1999, 1998, 1997, Excel recorded $1,371,836, $1,029,216, and $763,943,
respectively, for research and development expenditures.
INCOME TAXES
Excel is treated as a tax partnership under the provisions of Subchapter K
of the Internal Revenue Code. Accordingly, the accompanying financial
statements do not reflect a provision for income taxes since Excel's
results of operations and related credits and deductions will be passed
through to and taken into account by its partners in computing their
respective tax liabilities. No income taxes have been recorded for Excel's
wholly-owned subsidiary as it has had no taxable income or temporary
differences since its inception.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Accruals for environmental matters are recorded in operating expenses when
it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated.
CONCENTRATION OF RISK
All of Excel's trade receivables are from Conoco and Atlas Processing.
Although collection of these receivables could be influenced by economic
factors affecting the petroleum industry, the risk of significant loss is
considered remote.
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1999 and 1998 is summarized
below:
1999 1998
Plant and equipment $ 416,665,463 $ 413,618,376
Buildings 6,673,213 6,673,213
Improvements 17,241,508 17,241,508
Office furniture and equipment 1,710,774 1,700,343
Construction in progress 2,462,020 732,508
------------- -------------
444,752,978 439,965,948
Less - accumulated depreciation 49,010,889 33,617,433
------------- -------------
$ 395,742,089 $ 406,348,515
============= =============
Depreciation expense was $15,014,760, $15,439,073 and $15,049,612 for the
years ended December 31, 1999, 1998 and 1997, respectively.
4. INTANGIBLE ASSETS AND DEFERRED CHARGES
Intangible assets and deferred charges at December 31, 1999 and 1998 are
summarized below:
1999 1998
License fees $ 27,650,202 $ 27,650,202
Deferred bond termination fees (Note 6) 6,756,133 6,756,133
Debt issue costs 7,339,309 7,339,309
------------- -------------
41,745,644 41,745,644
Less - accumulated amortization 7,598,622 5,330,740
------------- -------------
$ 34,147,022 $ 36,414,904
============= =============
Amortization cost associated with intangible assets and deferred charges
was $2,267,882, $2,231,417 and $2,299,322 in 1999, 1998 and 1997,
respectively.
5. DEBT
On November 5, 1996, Excel Funding issued $240 million of 7.125% senior
bonds. These bonds are due in 2011 with interest payable on May 1 and
November 1 each year. The first interest payment was paid on May 1, 1997
and the first principal payments of $1,828,800 are due on May 1 and
November 1, 2001. Proceeds were applied to repay outstanding short-term
borrowings of $202 million and to finance operations through December 1996.
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
On November 6, 1995, Excel Funding issued $250 million of 7.43% senior
bonds. These bonds are due in 2015 with interest payable on May 1 and
November 1 each year. The first interest payment was paid on May 1, 1996
and the first principal payments of $19,375,000 are due on May 1 and
November 1, 2011. Proceeds were applied to repay outstanding short-term
borrowings of $201 million and to finance operations through December 1995.
Maturities of Excel's senior bonds are as follows:
YEAR ENDED
DECEMBER 31,
2001 $ 3,657,600
2002 13,348,800
2003 15,691,200
2004 20,073,600
2005 21,734,400
Thereafter 415,494,400
-------------
$ 490,000,000
=============
Recourse under the bonds is limited to the revenues and assets of Excel.
Certain restrictive covenants may limit the ability of Excel to incur debt,
make distributions to the partners, make investments or create liens.
On May 22, 1995, Excel entered into a variable rate $300 million line of
credit with a syndicate of banks which was reduced to $145 million during
1997. The line of credit was extended through May 1999. At December 31,
1999 and 1998, the line of credit remained unused. This credit facility is
intended for support of commercial notes. Through the credit facility, the
commercial notes can be converted to term loans with the related bank
syndicate at the Company's discretion for a period not to exceed one year.
On June 21, 1995, Excel began issuing commercial paper as short-term
financing for the construction of the lube oil hydrocracker. Additional
commercial paper was sold during 1999 and 1998. The weighted-average
interest rate on the $84.5 million and $69.2 million of commercial paper
outstanding at December 31, 1999 and 1998, respectively, was 6.5%.
Interest costs incurred in 1999, 1998 and 1997 totaled $38,888,051,
$38,046,184 and $38,133,795, respectively. Interest costs incurred during
the period required to bring assets to the condition and location for their
intended use are capitalized as part of acquisition costs. In 1999, 1998
and 1997, there were no interest costs capitalized.
6. DERIVATIVES AND OTHER HEDGING INSTRUMENTS
Excel Funding entered into certain forward treasury contracts as part of
its program to hedge the interest rate risk related to the 1995 senior bond
offering. These contracts were primarily forward contracts with a syndicate
of investment banks to sell 30-year treasury
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
bonds at 7.625%. On October 30, 1995, Excel Funding locked in the
lower rate of 7.43% on the issuance of $250 million of senior bonds
and, hence, terminated the contracts for a fee of approximately $6.7
million. Excel Funding capitalized the termination fee as a deferred
asset and is amortizing the balance over the life of the bonds as an
adjustment to interest expense. Deferred bond termination fees
amortized during 1999, 1998, and 1997 were $378,767, $378,769 and
$378,767, respectively.
7. RELATED PARTY TRANSACTIONS
One of Excel's partners, Conoco, has been designated as the operator
of the partnership and, in that capacity, provides substantially all
technical and administrative assistance and services in connection
with Excel's operations. Charges for these services were approximately
$9,700,000, $9,400,000 and $8,400,000 during 1999, 1998 and 1997,
respectively, and are included in administrative expenses and
operating costs. Included in such charges are the costs of the
operators' salaries and wages, which include related benefits such as
pensions and other postretirement benefits, allocable to Excel. Excel
has no employees.
Excel and Conoco have joint ownership of certain processing units
constructed at or adjacent to Conoco's Lake Charles Refinery. Variable
costs associated with certain of these units are allocated on the
basis of usage. Fixed costs are allocated based on the ownership
percentage of the applicable units.
As operator, Conoco is responsible for processing and paying Excel's
invoices. Disbursements made by the partner on Excel's behalf are
reimbursed semimonthly by Excel. At December 31, 1999 Excel had
prepaid Conoco by a net amount of $1,050,692. This amount will be used
to offset future amounts owed Conoco. Such amounts due Conoco totaled
$3,326,797 at December 31, 1998.
On May 12, 1995, Excel entered into a long-term sale and purchase
agreement whereby Conoco and Atlas Processing have agreed to purchase
from Excel all base oil production (within certain specifications) and
at least the amount taken by the other party, up to a maximum of 50%
each of Excel's expected output, at a market-based price (less an
annual rebate which is subordinate in right of payment to the senior
debt of Excel). If either Conoco or Atlas Processing fails to purchase
its required amount of Excel's output, that party is obligated to pay
to Excel the amount that Excel would have earned had the party made
such purchases. Base oil sales made to the partners, net of rebates,
were $213,887,942, $198,884,886 and $166,093,946 for 1999, 1998 and
1997, respectively.
Excel and Conoco entered into a long-term sale and purchase agreement
dated May 12, 1995 which requires Conoco to purchase all co-products
(within certain specifications) produced by Excel, with the exception
of sulfur, at market-based prices as specified in the agreement.
Co-product sales made to Conoco were $90,300,000, $70,779,082 and
$87,499,331 during 1999, 1998 and 1997.
On May 12, 1995, Excel and Conoco entered into a long-term feedstock
sale and purchase agreement whereby Excel agrees to purchase from
Conoco all of the required volume of vacuum gas oil (VGO) and hydrogen
needed by the hydrocracker facility. These feedstocks must meet
certain quality specifications and are purchased at a market-based
price as specified in the agreement. Feedstocks purchased by Excel
under the
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EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
agreement were $196,122,727, $143,959,735 and $168,032,993 during 1999,
1998 and 1997, respectively.
Excel and Conoco entered into long-term processing agreements dated May 12,
1995 which require Conoco to pay processing fees for the use of the vacuum
unit and hydrogen supply facilities. The fee for the vacuum unit is equal
to $1.50 for each barrel of VGO produced from the unit, not to exceed
$6,740,000 in any one year. Fees for the hydrogen supply facilities are
$23,000 per day for each day the facilities are utilized, not to exceed
$4,202,000 in any one year. Processing fees received for these facilities
were $9,675,680, $9,665,420 and $9,662,000 during 1999, 1998 and 1997,
respectively.
In accordance with a long-term agreement between Excel and Conoco dated
October 24, 1994, Excel agreed to pay Conoco a fixed monthly fee of $58,850
for use of Conoco's wastewater facility. The fee was increased in May 1998
to $73,875 per month. This adjusted fee will continue through December 31,
2024 and amounted to $886,500, $826,400 and $706,200 in 1999, 1998 and
1997, respectively.
Excel leases the project site land from Conoco. The lease expires on
December 31, 2024; at which time, the lease will automatically be extended
for successive renewal terms of five years each unless either the lessee or
lessor elects to terminate the lease. The following details the future
lease payments required of Excel for the five succeeding years:
2000 $ 2,481,600
2001 $ 2,481,600
2002 $ 2,481,600
2003 $ 2,481,600
2004 $ 2,481,600
Thereafter 49,632,000
------------
$ 62,040,000
============
Rental expense under operating leases was $2,481,600 for 1999, 1998 and
1997.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1999 and 1998, Excel had outstanding long-term debt with a
carrying value of $490 million. Based on borrowing rates currently
available, the fair value of this debt approximates $450 million. The
reported amounts of financial instruments such as cash equivalents,
accounts receivable and short-term notes payable approximate fair value
because of their short maturities.
9. COMMITMENTS AND CONTINGENCIES
Excel does not maintain general liability (including sudden and accidental
pollution) insurance coverage. However, Excel's respective partners
maintain general insurance policies and/or are self-insured.
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13
EXCEL PARALUBES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
On July 31, 1995, a Petition for Class Action was filed in the 14th
Judicial District Court, Parish of Calcasieu, State of Louisiana, against
Conoco and a contractor that excavated soil from the project site, by
persons upon whose property such soil was placed, alleging that the soil
contained harmful and dangerous materials, including asbestos and/or lead.
The plaintiffs seek unspecified damages, including punitive or exemplary,
compensatory and clean-up damages and attorneys' fees. Conoco intends to
vigorously defend the litigation. Conoco is voluntarily removing and
replacing contaminated soils from affected properties. Based on the
agreements that Excel has with Conoco, management of Excel determined that
Excel was potentially obligated to Conoco for a portion of the amounts
paid by Conoco in connection with this litigation and related remediation.
As such, management agreed to reimburse Conoco for a portion of the costs.
Excel paid $70,456, $136,015 and $368,532 in 1999, 1998 and 1997,
respectively. Excel has accrued $829,544 and $900,000 as of December 31,
1999 and 1998, respectively, for anticipated remediation costs for this
matter. Management does not believe that the litigation or future
remediation expenses will have a material adverse effect on Excel's
financial condition or results of operations.
10. GUARANTEES
Conoco and Atlas Processing have entered into a Partner Loan Agreement
with Excel and the First National Bank of Chicago, as agent on behalf of
holders of certain debt of Excel, pursuant to which Conoco and Atlas
Processing agreed to provide liquidity support to Excel up to an aggregate
amount of $60 million outstanding at any time during the existence of a
liquidity cash flow deficit.
Pennzoil has guaranteed all of Atlas Processing's obligations and E.I.
duPont de Nemours and Company (DuPont) has guaranteed all of Conoco's
obligations under all Excel offtake and operating agreements as described
in Note 7.
In August 1999, DuPont completed the final step in its planned divestiture
of its ownership interest in Conoco. As a result of DuPont's ownership
interest in Conoco falling below 50%, the DuPont guarantee of Conoco's
obligations to Excel may be terminated if (i) the ratings of the Excel
senior bonds, after giving effect to DuPont's divestiture, are affirmed to
be at least the lower of (a) A3/A- or (b) the ratings in effect just prior
to divestiture; (ii) all of Excel's senior bonds are paid in full or (iii)
66-2/3% of the senior bond holders agree to a change in the terms of the
guarantee. As of December 31, 1999, the DuPont guarantee of Conoco's
obligations to Excel as described in Note 7 remained in place.
- 7 -
14
PENNZOIL-QUAKER STATE COMPANY
1999 LONG TERM PERFORMANCE INCENTIVE COMPENSATION PROGRAM
March 15, 1999
OVERVIEW
o The basic concept of the plan design is to target long-term incentive
values at market (e.g., 50th percentile pay for 50th percentile
performance, 55th percentile pay for 55th percentile performance etc.).
The weighting of compensation delivered under different long-term devices
for senior management is as follows:
================================================================================
PLAN ELEMENT % OF EXPECTED VALUE DELIVERED BY
DEVICE
- --------------------------------------------------------------------------------
Stock Options 40%
Conditional Stock 20%
Long-Term Performance Plan 40%
- --------------------------------------------------------------------------------
Total 100%
================================================================================
o The employees participating in this plan structure for 1999 are the
Executive Tier, Tiers E-1 through E-7 and Tier X-1.
o Pennzoil-Quaker State employees below those listed above will continue to
have the same mix of stock options and conditional stock used in 1998
(i.e., 70% stock options and 30% conditional stock).
o The remainder of this report discusses the following aspects of the
recommended long-term performance plan design:
- -- Plan objectives;
- -- Basic plan design concept;
- -- Eligibility;
- -- Performance measurement;
- -- Performance standards;
- -- Award opportunities;
- -- Plan payouts;
15
- -- Retirement/terminations;
- -- Tax treatment;
- -- Accounting treatment;
- -- Plan administration;
- -- Plan costs; and
- -- Award calculations.
PLAN OBJECTIVES
o Motivate participants to achieve outstanding company performance relative
to peers.
o Enable Pennzoil-Quaker State to attract and retain key employees by having
this plan serve as part of a competitive total pay package.
o Be easy to administer.
o Be reasonable in terms of company cash requirements and overall cost.
o Provide a tax-effective means for the Company to help participants
accumulate capital on a tax-deferred basis.
BASIC PLAN DESIGN CONCEPT
o Under the plan, participants will be provided an opportunity to receive an
award payment based on Pennzoil-Quaker State's total shareholder return
relative to industry peers during overlapping 3-year cycles.
o New performance cycles begin every year following the year the plan is
established.
o In addition to the initial and ongoing awards with 3-year cycles, two
additional awards will be made in 1999. One of the additional awards will
have a 1-year cycle and the other additional award will have a 2-year
cycle. The award opportunity for a 1-year cycle award should be one-third
of the opportunity of a 3-year cycle award, while the award opportunity for
a 2-year cycle award should be two-thirds of the opportunity of a 3-year
cycle award. However, the performance measures and standards would be the
same. The reason for these additional awards is to keep total award
opportunities, in aggregate, competitive for the next three year period.
o The recommended performance/payout cycle relationship is shown in
Exhibit 1.
2
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EXHIBIT 1
PENNZOIL-QUAKER STATE COMPANY
PERFORMANCE/PAYOUT CYCLE RELATIONSHIP
1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ----
_________X
________________________X
________________________________________X
____________________________________X
_________________________________X
_______________________________x
X = Award earned at end of year shown
3
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ELIGIBILITY
o Eligibility for the plan will be reviewed and determined annually by
Pennzoil-Quaker State's CEO and the Compensation Committee of
Pennzoil-Quaker State's Board.
o Plan participation will be extended to key executives that can directly
impact the long-term success of the Company.
o Based on the Company's business needs and competitive market practices,
plan eligibility will be limited to executives in Tiers E-1 through E-7,
and Tier X-1*.
PERFORMANCE MEASUREMENT
o The recommended plan performance measure is Pennzoil-Quaker State's total
shareholder return compared to the industry peers listed in Exhibit 2.
o Total shareholder return will be defined using the same method required in
the total shareholder return graph of the proxy statement. Specifically,
$100 invested in Pennzoil-Quaker State stock on the first day of the
performance cycle, with dividends reinvested, compared to $100 invested in
each of the peer companies, with dividend reinvestment during the same
period.
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EXHIBIT 2
PENNZOIL-QUAKER STATE COMPANY
LISTING OF PEER COMPANIES CONSIDERED FOR TSR
CALCULATIONS FOR LONG-TERM PERFORMANCE PLAN
Church & Dwight Inc. Newell
Clorox Oneida LTD
Colgate Palmolive Procter & Gamble
Dial Ralston Purina Co.
General Housewares Revlon Inc.
Kimberly-Clark Corp. Samsonite Corp.
Lancaster Colony Scotts Company
Libbey Inc. Sunbeam
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PERFORMANCE STANDARDS
o At the start of each new performance cycle, Pennzoil-Quaker State will
define threshold, target, and maximum performance on the total shareholder
return objective.
o The standards shown in the table below will be used for the 1999-2001
performance cycle and for the 1-year and 2-year cycle awards to be made in
1999.
=====================================================================================================
PENNZOIL-QUAKER STATE TSR
RANKING RELATIVE TO
PERFORMANCE LEVEL DEFINITION PEERS*
- -----------------------------------------------------------------------------------------------------
Maximum Outstanding performance 3rd of 17 (88th %ile)
Target Expected or budgeted performance 8th of 17 (56th %ile)
Threshold** Minimal acceptable performance for
incentive payout 13th of 17 (25th %ile)
=====================================================================================================
- --------------------------------------------------------------------------------
* If mergers/acquisitions result in a reduction in the number of peer
companies during the cycle, these rankings will be converted to equivalent
percentiles to calculate awards.
** Pennzoil-Quaker State must also achieve a minimum actual total
shareholder return of 6% per year (averaged over the performance cycle)
before any payouts may be made under the plan.
- --------------------------------------------------------------------------------
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AWARD OPPORTUNITIES
o The long-term performance plan award opportunities for the plan eligible
positions (by performance level) are shown below.
===================================================================================================================
AWARDS AS % OF BASE SALARY, BY EXECUTIVE TIER*
CORPORATE ---------------------------------------------------------------------------------------------
PERFORMANCE E-7 E-6 E-5 E-4 E-3 E-2 E-I X1
- -------------------------------------------------------------------------------------------------------------------
Maximum 282% 240% 192% 162% 150% 129% 90% 75%
Target 94% 80% 64% 54% 50% 43% 30% 25%
Threshold 24% 20% 16% 14% 13% 11% 8% 6%
Below Threshold 0% 0 0 0 0 0 0 0
===================================================================================================================
o These award ranges are for each 3-year performance cycle and assume that a
new cycle is established each year.
o Awards for performance between stated levels would be calculated using the
awards matrix described later in this report.
- --------------------------------------------------------------------------------
* The long-term performance awards will be calculated using the percentages
shown in the table and the participant's base salary on the last day of the
applicable performance cycle. These award levels, at target, represent
market 55th percentile rates when combined with recommended stock option
and conditional stock awards.
- --------------------------------------------------------------------------------
PLAN PAYOUTS
o Payouts under the plan will be made as soon as possible after the
completion of each performance cycle.
o As a rule, the payouts will be made within three months after the
completion of the cycle.
o All awards typically will be paid as one-time lump-sum cash payments with
taxes withheld at a flat rate of 28%.
o Payouts under the plan are both savings and investment plan and retirement
plan eligible.
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RETIREMENT AND TERMINATIONS
o To receive an award under the plan, the participant must generally be
employed on the last day of the performance cycle.
o Exceptions to this policy will be made for retirement, long-term
disability, death, or involuntary termination during the cycle for reasons
other than cause, in which case the award will be prorated to reflect the
actual months of service during the cycle. Award payouts under these
exceptions would still be made at the end of the performance cycle.
TAX TREATMENT
o The employee will have to pay ordinary income tax on all awards when they
are paid to the participant (not when they are earned).
o The company will receive a tax deduction in the amount of income realized
by the participant in the year the award is paid.
ACCOUNTING TREATMENT
o The Company's projected obligation under the long-term performance cash
plan will be an expense that will be estimated and accrued periodically on
its financial statements.
PLAN ADMINISTRATION
o The plan will be administered by Pennzoil-Ouaker State's CEO for all
positions except his own, in which case the Compensation Committee will
administer the plan.
o The Compensation Committee will be responsible for approving award
opportunities, performance measures, performance standards, and actual
award payments.
o Also, any modifications or amendments to the plan will be made at the sole
discretion of the Compensation Committee.
o In addition, the company will retain the right to terminate or modify the
plan at any time. (However, cycles that have already begun are a
contractual obligation of the company.)
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