1
EXHIBIT 13
FINANCIAL SUMMARY
16 Management's discussion and analysis
18 Segment information
20 Five-year statistical summary
21 Financial statements
25 Notes to financial statements
1. Summary of significant accounting policies
2. Acquisitions
26 3. Usual items
4. Income taxes
27 5. Discontinued operations
28 6. Inventories
7. Property, plant and equipment
8. Other assets
9. Long-term debt and financial instruments
29 10. Other long-term liabilities
11. Commitments, contingencies and related parties
30 12. Stock options and management incentive plans
31 13. Employee benefit plans
32 14. Supplemental cash flow information
15. Segment information
33 16. Financial results by quarter
34 Report of independent accountants and Management report
35 Market prices by quarters
36 Board of Directors, Officers and Divisions
2
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The consolidated financial statements and related notes (pages 21 to 33) and
the segment information included on pages 18 to 19 should be read as an
integral part of this review.
In 1995, the company made significant progress in focusing on its core
business of lubricant and lubricant services, by selling the assets of its
Natural Gas Exploration and Production Division, acquiring Slick 50, Inc., and
moving its Motor Oil Division and corporate headquarters to the Dallas, Texas
area.
In April 1995, the company announced plans to relocate the corporate
headquarters, the headquarters of its Motor Oil Division and the headquarters
of certain of its subsidiaries to the Dallas, Texas area. The restructuring
program was aimed at integrating recent acquisitions, consolidating management
and administrative activities and streamlining operations. Total restructuring
costs were $22.6 million, $13.8 million after tax. (See Note 3 to the
Consolidated Financial Statements.) The company currently estimates that upon
the completion of its restructuring program in 1996, it will realize an
annualized reduction in operating costs of up to $10 million.
In July 1995, the company acquired Slick 50, Inc. (Slick 50), a
marketer of automotive engine treatments and related automotive chemicals, for
$22.6 million in cash, 1,260,403 shares of the company's capital stock and paid
$11 million in satisfaction of certain Slick 50 indebtedness. Additional
consideration may be payable in the event that certain financial performance
levels are achieved by Slick 50 during 1996, 1997 and 1998, subject to offset
for indemnification obligations of Slick 50 stockholders. It is expected that
the Slick 50 acquisition will add over $80 million in annual revenues. The
revenues and operating results of Slick 50 are reported as part of the Motor
Oil segment.
During 1995, the company completed the sale of the assets of its
Natural Gas Exploration and Production Division (E&P) for $67.7 million. The
company recognized a pretax gain of $19.5 million, $12 million after tax, as a
result of the sale. Accordingly, the operating results of E&P, including the
gain on the sale have been excluded from continuing operations and reclassified
as discontinued operations in the accompanying Consolidated Statement of
Income for each of the three years ended December 31, 1995.
These actions accompanied by the company's 1994 sale of Heritage
Insurance Group, Inc. (Heritage) (see Note 5 to the Consolidated Financial
Statements) and acquisition of Specialty Oil Companies (Specialty) and Westland
Oil Company, Inc. (Westland) (see Note 2 to the Consolidated Financial
Statements) have enhanced the company's core lubricant and lubricant services
businesses.
CONSOLIDATED REVIEW OF OPERATIONS
Net income for 1995 was $12.1 million, or $.38 per share compared to $18.8
million, or $.66 per share, in 1994. Net income for 1995 included $16.5
million, net of taxes, or $.51 per share, related to two unusual items,
restructuring charges of $13.8 million, or $.43 per share, and the settlement
of a class-action lawsuit for $2.7 million, or $.08 per share (see Note 3 to
the Consolidated Financial Statements), $14.5 million, or $.45 per share,
related to discontinued operations (see Note 5 to the Consolidated Financial
Statements) and $4.1 million, or $.13 per share, for an extraordinary loss
related to early extinguishment of debt (see Note 9 to the Consolidated
Financial Statements). Net income in 1994 included $9.3 million, or $.33 per
share, related to discontinued operations (see Note 5 to the Consolidated
Financial Statements). Net income of $13.7 million, or $.50 per share in 1993
included $6.7 million, or $.25 per share, related to discontinued operations.
Income from continuing operations in 1995 was $1.8 million, or $.06
per share, compared to $9.5 million, or $.33 per share, in 1994. Included in
income from continuing operations in 1995 is $27 million, related to the two
unusual items and the operating results of Slick 50, Specialty and Westland.
Operating profits before unusual items at Motor Oil and Q Lube were up 104% and
45%, respectively, due to increased sales volume over 1994. Operating profit at
Truck-Lite was down 16%, due to a decrease in volumes relating to automotive
lighting.
Income from continuing operations in 1994 was up 36% from $7.0 million
in 1993. Operating profit improvements, were primarily based on sales volume
increases over 1993. Operating profit rose 88% at Q Lube due to increased car
counts. Automotive and heavy duty lighting sales were up, increasing operating
profit at Truck-Lite by 105%. Branded motor oil sales were up, but higher
selling, marketing, freight and administrative expenses reduced Motor Oil
operating profit by 6% in 1994.
Sales and operating revenues in 1995 were $1,035.6 million compared to
$732.6 million in 1994 and $607.1 million in 1993. The inclusion of recent
Motor Oil acquisitions and increased sales volumes at Q Lube have contributed
to the increase in revenues in 1995. The increase in sales and operating
revenues in 1994 over 1993 was due to increased sales volumes in each of the
company's major businesses.
MOTOR OIL
Operating profits, excluding the restructuring charge of $13.4 million
allocated to the Motor Oil division and the settlement of the class-action
lawsuit of $4.4 million, increased 104% in 1995 to $33.5 million from $16.4
million in 1994. The increase in operating profits was favorably impacted by
the company's recent acquisitions, improved branded motor oil and refinery
product margins, reduced marketing expenses, and LIFO profits of $2.2 million,
offset by plant and equipment write-downs of $1.5 million related primarily to
the blending and packaging facility located in Ontario, Canada. The write-down
in Canada was a result of transferring a portion of the operation to another
facility. Branded motor oil volumes in 1995 were flat compared to 1994.
Operating profit in 1994 was down 6% from 1993 operating profit of
$17.5 million. Branded motor oil sales volume in 1994 increased 7% over 1993
and automotive consumer product sales were up 20% in 1994. The increase in
operating profit was offset by
16
3
a shift in product mix, to more bulk sales where gross margin is lower, and a
$19 million increase in marketing, selling, freight, and administrative
expense, due to aggressive share-building programs geared towards developing
additional sales volumes. In addition, 1994 included $1.7 million of expenses
and reserves associated with a lawsuit commenced against the company for
alleged environmental violations at the Congo Refinery (see Note 11 to the
Consolidated Financial Statements).
Operating revenues were $847.6 million in 1995 compared to $541.2
million in 1994. The increase in revenues is due to the company's recent
acquisitions. Operating revenues from recent acquisitions contributed $377.9
million and $71.4 million in 1995 and 1994. Operating revenues for 1994 were up
23% compared to 1993 operating revenues of $439.3 million primarily due to the
Specialty and Westland acquisition on September 30, 1994.
Q LUBE
Operating profit in 1995 increased 45% to $8.3 million from $5.7 million in
1994. The increase was due to a 5% increase in total car count and a 4%
increase in average ticket price. Average cars serviced per day in 1995
remained consistent with 1994. Due to the conversion of Minit-Lube stores to
the Q Lube format, advertising and depreciation expense were up $1.2 million,
7% and 11%, respectively. The company plans to convert 100 additional stores to
the Q Lube format in 1996.
Operating profit for 1994 increased 88% over 1993 operating profit of
$3 million. This was primarily due to an 8% increase in car counts as a result
of the conversion of 67 stores to the Q Lube format.
Operating revenues were $123.6 million in 1995 compared to $113.7
million in 1994. The increase in operating revenues is due to increased car
counts and increased average ticket price. Operating revenues for 1994 were up
8% compared to 1993 operating revenues of $105.4 million.
TRUCK-LITE
As a result of a softening automotive market, operating profits decreased to
$9.8 million in 1995 compared to $11.8 million in 1994. In 1995, Truck-Lite
began a transition out of the automotive original equipment supply business
which coincides with a strategy to focus on the heavy-duty truck and trailer
business. The transition out of the automotive business will continue in 1996.
Operating profit in 1994 was up 105% over $5.7 million in 1993. Strong sales in
the automotive and heavy-duty safety lighting businesses in 1994 resulted in a
record year. The 1994 results also included a $1.5 million charge to reserve
for future losses associated with an automotive lighting contract.
Sales and operating revenues in 1995 were $90.3 million, down 9% from
$99.6 million in 1994 as a result of the soft automotive market. Sales and
operating revenues in 1994 were up 23% over $80.8 million in 1993.
DOCKS
Operating profit decreased to $943,000 in 1995 from $1.8 million in 1994 due to
a gain of $1.1 million in 1994 from the termination of a pension plan.
Operating profit in 1994 was up $615,000 over $1.1 million in 1993. Operating
revenues in 1995 were $3.3 million, up from $3.0 million in 1994 and 1993.
CORPORATE
Corporate income was up 71% to $5.5 million in 1995 from $3.2 million in 1994.
The increase resulted primarily from additional royalty income received from
the acquirer of the coal operations. Corporate expenses, excluding
restructuring charges of $9.2 million, increased to $19.8 million in 1995 from
$18.7 million in 1994 as a result of higher employee benefit costs. Interest
expense increased 59% to $7.2 million in 1995 from $4.5 million in 1994 as a
result of an increase in average debt outstanding in 1995.
Corporate income in 1994 was up 18% compared to $2.7 million in 1993
due to increased interest income. Corporate expenses increased 23% in 1994
from $15.2 million in 1993, as a result of increased postretirement benefits,
performance incentives and legal costs. Interest expense in 1994 decreased 16%
compared to 1993, as a result of lower average debt in 1994.
LIQUIDITY AND FINANCIAL CONDITION
The company has successfully divested non-core businesses and acquired core
business complements during 1995 and 1994.
The company expects to spend $39 million on capital expenditures in
1996. These expenditures will relate primarily to adding Q Lube stores,
converting various locations to the Q Lube format and various Motor Oil
expenditures. A $25 million Shreveport port facility project has been delayed,
pending the completion of an evaluation of the company's blending and packaging
facilities.
Capital expenditures in 1995 included conversion of 62 locations to
the Q Lube format, the addition of 31 Q Lubes and the acquisition of Slick 50.
Cash received in connection with the sale of E&P was used to fund the
acquisition of Slick 50.
In 1995, the company retired its $50 million, 8.73% Senior Notes due
2002, as a result of successfully issuing $100 million of 6.625% Notes due
2005. As a result of the early extinguishment, the company paid a premium of
$6.5 million and wrote off $300,000 of debt-issue costs associated with the
8.73% Senior Notes and recorded an extraordinary item of $4.1 million, net of
tax benefits of $2.7 million. The company's total debt was $125.8 million at
December 31, 1995, compared to $73.2 million at December 31, 1994. The company
had available $70 million of committed variable-rate lines of credit at
December 31, 1995.
Working capital at December 31, 1995 was $132.1 million with a ratio
of current assets to current liabilities of 1.91 to 1 compared to $101.4
million and 1.84 to 1 at December 31, 1994.
Cash flow from operations was $4.9 million in 1995 compared to $37.6
million in 1994. The decrease in 1995 was primarily due to increased working
capital needs and cash paid of $10.1 million in connection with the 1995
restructuring program. Cash flow from operations for 1994 was down $9.7 million
from 1993 due to increased working capital requirements.
Cash used in investing activities of $29.7 million in 1995 was
primarily due to $31 million used in the
17
4
acquisition of Slick 50 and $45.1 million of capital expenditures, which were
offset by the sale of E&P, which provided cash of $46.8 million, after current
taxes. In 1994, cash provided by investing activities was $5.5 million, which
primarily comprised $78.5 million of proceeds from the sale of Heritage and
coal assets, the purchase of Specialty and Westland for $28.4 million and
capital expenditures of $36.4 million. In 1993, capital expenditures of $29.8
million primarily accounted for the cash used by investing activities of $28.9
million.
Cash provided by financing activities of $25.6 million in 1995 was
primarily the result of $12.9 million in dividends, the extinguishment of the
$50 million, 8.73% Senior Notes due 2002, and the issuance of $100 million,
6.625% Notes due 2005. Cash used in financing activities in 1994 and 1993 was a
result of $11.4 million and $16.3 million of dividends and $17.6 million and
$27.7 million net payments on debt.
ADDITIONAL FINANCIAL INFORMATION
The net deferred tax asset at December 31, 1995 of $47.6 million will be
realized either through the carryback provisions of the tax law or recovered in
the future through existing levels of taxable income from continuing
operations. The 1995 effective tax rate of 57% for continuing operations is
higher than the 1994 rate of 39% due to lower income and increased
nondeductible goodwill amortization in 1995. The company's effective tax rate
for continuing operations in 1994 increased to 39% from 27% in 1993 primarily
due to higher income in 1994 and benefits in 1993 for rate changes and other
credits. (See Note 4 to the Consolidated Financial Statements.)
Federal, state, and local environmental laws continue to have an
impact on the company's operations. Compliance with such laws has been
accomplished without a material effect on the company's financial position and
results of operations.
In 1993, the United States commenced a lawsuit against the company in
the U.S. District Court for the Northern District of West Virginia. The
complaint alleges the company violated the Federal Resource Conservation and
Recovery Act and the Clean Air Act at the Congo refinery on various dates
starting in 1980 and seeks civil penalties not to exceed $25,000 per day for
each violation. During 1995, the company continued settlement discussions to
resolve this matter.
The company has been named as a party or a potentially responsible
party in a number of government and private actions based on environmental laws
and regulations. The company anticipates some liability for long-term
remediation or reclamation at formerly owned facilities, including three
refineries and various coal operations.
While it is impossible at this time to determine with certainty the
ultimate outcome of all environmental and legal matters involving the company,
the company has accrued for all items which are probable and can be reasonably
estimated, and does not expect any material adverse effect on its financial
position. However, it is possible that one or more of these matters may be
decided against the company and could have a material impact on results of
operations or cash flows in that period.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND STOCK OPTIONS
In March 1995, the Financial Accounting Standards Board issued Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which will require the company to evaluate the
impairment of its long-lived assets using the guidance set forth in the
Standard. The new Standard must be adopted in 1996. The company does not expect
the adoption of the new Standard to have a material impact on its financial
position or results of operations.
In October 1995, the Financial Accounting Standards Board issued
Standard No. 123, "Accounting for Stock-Based Compensation", which introduces a
fair-value based method of accounting for stock-based compensation plans. The
company does not intend to adopt this new method of accounting; however, the
company will make the required disclosures.
SEGMENT INFORMATION
The company's operations are organized into four segments. The Motor Oil
segment produces and markets branded and private label lubricants, markets
related petroleum and automotive aftermarket products to distributors and
national and regional retailers, and collects and transports used motor oil,
brake fluid, antifreeze and oil filters. In July 1995, the company acquired
Slick 50, a marketer of automotive chemicals. In September 1994, the Company
acquired Specialty and Westland. The revenue and operating profit generated by
Slick 50, Specialty and Westland from their respective date of acquisition are
included in the 1995 and 1994 Motor Oil segment revenues and operating profits.
Q Lube is the fast service automobile oil change and lubrication
business operated through company owned and franchised centers. Truck-Lite
manufactures and sells automotive and heavy-duty truck lighting. The Dock
operation is a bulk material handling dock accessible to Lake Superior at
Thunder Bay, Ontario, Canada.
Intersegment sales are at market. Operating profits are total segment
revenues less segment expenses. Corporate expenses are those which are not
directly related to the company's segments. Corporate assets consist
principally of deferred tax assets, cash and cash equivalents and assets not
identifiable with the operations of a segment. Revenues and operating profits
exclude Natural Gas Exploration and Production, which was discontinued in 1995
and Insurance, which was discontinued in 1994. (See Note 5 to Consolidated
Financial Statements).
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SEGMENT INFORMATION, CONTINUED
Quaker State Corporation and Subsidiaries
(IN THOUSANDS) 1995 1994 1993
=====================================================================================================
REVENUES
Motor Oil (a)
Lubricants $ 655,719 $ 419,408 $ 343,767
Fuels 50,732 47,874 48,351
Other (primarily filters, antifreeze and chemicals) 141,176 73,923 47,165
-------------------------------------
Total Motor Oil 847,627 541,205 439,283
Q Lube 123,588 113,674 105,361
Truck-Lite 90,312 99,638 80,776
Docks 3,252 2,997 2,955
Intersegment Motor Oil sales (29,209) (24,880) (21,290)
-------------------------------------
$1,035,570 $ 732,634 $ 607,085
=====================================================================================================
OPERATING PROFITS
Motor Oil $ 33,522 $ 16,401 $ 17,484
Unusual items (b) (17,800) -- --
-------------------------------------
Total Motor Oil 15,722 16,401 17,484
Q Lube 8,283 5,726 3,045
Truck-Lite 9,823 11,756 5,731
Docks 943 1,753 1,138
-------------------------------------
Total operating profits 34,771 35,636 27,398
Corporate income 5,523 3,235 2,730
Interest expense (7,228) (4,534) (5,410)
-------------------------------------
Corporate expenses (19,816) (18,669) (15,193)
Unusual item (c) (9,200) -- --
-------------------------------------
Total Corporate expenses (29,016) (18,669) (15,193)
-------------------------------------
Income from continuing operations before income taxes $ 4,050 $ 15,668 $ 9,525
=====================================================================================================
IDENTIFIABLE ASSETS
Motor Oil $ 405,527 $ 309,894 $ 144,687
Q Lube 118,439 113,733 114,703
Truck-Lite 40,636 37,497 33,433
Docks 3,502 2,481 2,112
Discontinued operations 4,279 49,449 389,179
-------------------------------------
572,383 513,054 684,114
Corporate 144,640 116,964 99,563
-------------------------------------
$ 717,023 $ 630,018 $ 783,677
=====================================================================================================
CAPITAL EXPENDITURES
Motor Oil $ 19,396 $ 13,385 $ 11,459
Q Lube 19,948 11,463 5,522
Truck-Lite 5,039 2,978 1,884
Docks 19 -- 5
Discontinued operations 728 8,618 10,890
-------------------------------------
$ 45,130 $ 36,444 $ 29,760
=====================================================================================================
DEPRECIATION, DEPLETION AND AMORTIZATION
Motor Oil $ 22,696 $ 12,784 $ 10,767
Q Lube 7,725 6,597 5,879
Truck-Lite 2,459 2,426 2,496
Docks 39 38 38
Discontinued operations 5,411 10,414 9,578
-------------------------------------
$ 38,330 $ 32,259 $ 28,758
=====================================================================================================
a) In 1995, sales to one customer and its affiliated companies exceeded
10% of consolidated revenues.
b) Represents $13.4 million for restructuring charges and $4.4 million
related to settlement of a class-action lawsuit (see Note 3 to
Consolidated Financial Statements).
c) Represents corporate restructuring charges(see Note 3 to Consolidated
Financial Statements).
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FIVE-YEAR SUMMARY OF NET INCOME AND COMPARATIVE STATISTICAL DATA
Quaker State Corporation and Subsidiaries
YEARS ENDED DECEMBER 31
(In thousands except per share and
statistical data) 1995 1994 1993 1992 1991
==============================================================================================================
REVENUES
Sales and operating revenues $1,035,570 $ 732,634 $ 607,085 $ 592,650 $ 577,613
Other, net 9,894 6,923 5,595 4,063 4,450
---------------------------------------------------------------
1,045,464 739,557 612,680 596,713 582,063
---------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales and operating costs 718,996 503,539 421,894 408,830 399,747
Selling, general and administrative 255,271 193,390 156,359 158,920 139,709
Depreciation and amortization 32,919 21,845 19,181 20,077 20,148
Interest 7,228 5,115 5,721 4,785 4,567
Unusual items (a) 27,000 -- -- 3,200 --
---------------------------------------------------------------
1,041,414 723,889 603,155 595,812 564,171
---------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM 4,050 15,668 9,525 901 17,892
PROVISION FOR INCOME TAXES 2,300 6,167 2,534 245 7,443
---------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM 1,750 9,501 6,991 656 10,449
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS (b) 14,489 9,265 6,711 (31,904) 5,090
---------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGES 16,239 18,766 13,702 (31,248) 15,539
EXTRAORDINARY ITEM (c) (4,139) -- -- -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (d) -- -- -- (62,600) 7,170
---------------------------------------------------------------
NET INCOME (LOSS) $ 12,100 $ 18,766 $ 13,702 $ (93,848) $ 22,709
==============================================================================================================
PER SHARE:
Income from continuing operations before
extraordinary loss and cumulative effect
of accounting changes $ .06 $ .33 $ .25 $ .02 $ .39
Income (loss) from discontinued operations .45 .33 .25 (1.17) .19
Extraordinary item (.13) -- -- -- --
Cumulative effect of accounting changes -- -- -- (2.30) .26
---------------------------------------------------------------
Net income (loss) $ .38 $ .66 $ .50 $ (3.45) $ .84
==============================================================================================================
Dividends:
Cash per share $ .40 $ .40 $ .60 $ .80 $ .80
Amount 12,867 11,358 16,310 21,720 21,704
Capital expenditures 45,130 36,444 29,760 25,706 32,037
Working capital 132,073 101,439 35,403 74,911 43,041
Total assets 717,023 630,018 783,677 792,820 751,496
Total debt 125,762 73,249 51,450 79,183 88,924
Stockholders' equity 272,155 251,850 188,750 191,194 307,790
Book value per share 8.29 8.00 6.93 7.04 11.34
---------------------------------------------------------------
Number of stockholders of record 9,776 11,792 12,147 12,606 12,308
Weighted average capital and equivalent
shares outstanding 32,226,000 28,459,000 27,234,000 27,184,000 27,167,000
==============================================================================================================
a) The company recorded $22.6 million of restructuring charges and $4.4
million for the settlement of a class-action lawsuit in 1995. See Note 3 to
Consolidated Financial Statements. The Company recognized a charge in 1992
for assets to be replaced by future conversion of Minit-Lube stores to Q
Lube format.
b) The company sold its exploration and production business in 1995, its
insurance business in 1994 and discontinued its coal business in 1992.
These businesses have been reported as discontinued operations. See Note 5
to Consolidated Financial Statements.
c) Premium on early extinguishment of $50 million, 8,73% Senior Notes. See
Note 9 to Consolidated Financial Statements.
d) Cumulative effect of implementing Statement of Financial Accounting
Standard No. 106, "Employers' Accounting For Postretirement Benefits Other
Than Pensions" and Standard No. 109, "Accounting For Income Taxes" in 1992
and Standard No. 96, "Accounting For Income Taxes" in 1991.
20
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CONSOLIDATED STATEMENT OF INCOME
Quaker State Corporation and Subsidiaries
YEARS ENDED DECEMBER 31
(In thousands except per share data) 1995 1994 1993
======================================================================================================
REVENUES
Sales and operating revenues $1,035,570 $ 732,634 $ 607,085
Other, net 9,894 6,923 5,595
-------------------------------------
1,045,464 739,557 612,680
-------------------------------------
COSTS AND EXPENSES
Cost of sales and operating costs 718,996 503,539 421,894
Selling, general and administrative 255,271 193,390 156,359
Depreciation and amortization 32,919 21,845 19,181
Interest 7,228 5,115 5,721
Unusual items (Note 3) 27,000 -- --
-------------------------------------
1,041,414 723,889 603,155
-------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 4,050 15,668 9,525
-------------------------------------
PROVISION FOR (BENEFIT FROM) INCOME TAXES (NOTE 4)
Current 11,200 9,550 9,800
Deferred (8,900) (3,383) (7,266)
-------------------------------------
2,300 6,167 2,534
-------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 1,750 9,501 6,991
DISCONTINUED OPERATIONS (NOTE 5)
Income from discontinued operations, net of taxes 1,794 8,888 6,711
Income on disposition, net of taxes 12,695 377 --
-------------------------------------
TOTAL 14,489 9,265 6,711
-------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 16,239 18,766 13,702
EXTRAORDINARY ITEM (NOTE 9) (4,139) -- --
-------------------------------------
NET INCOME $ 12,100 $ 18,766 $ 13,702
======================================================================================================
PER SHARE:
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM $ .06 $ .33 $ .25
INCOME FROM DISCONTINUED OPERATIONS .45 .33 .25
EXTRAORDINARY ITEM (.13) -- --
-------------------------------------
NET INCOME PER SHARE $ .38 $ .66 $ .50
======================================================================================================
The accompanying notes are an integral part of the financial statements.
21
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CONSOLIDATED STATEMENT OF CASH FLOWS
Quaker State Corporation and Subsidiaries
YEARS ENDED DECEMBER 31
(IN THOUSANDS) 1995 1994 1993
========================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,100 $ 18,766 $ 13,702
Adjustment to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 38,330 32,259 28,758
Unusual item - noncurrent 7,864 -- --
Gain on disposition of discontinued operations (Note 5) (12,695) (377) --
Extraordinary loss on extinguishment of debt 4,139 -- --
Deferred income taxes and investment tax credit (17,937) 2,669 3,380
Changes in discontinued operations 1,359 2,663 11,472
Increase (decrease) from changes in:
Receivables (22,078) (1,154) 3,703
Inventories (1,120) (3,719) 12,035
Other current assets (7,548) 5,018 2,335
Accounts payable (7,039) (7,920) 2,745
Accrued liabilities 4,999 (11,509) (24,970)
Other 4,554 866 (5,925)
-------------------------------------
Net cash provided by operating activities 4,928 37,562 47,235
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (45,130) (36,444) (29,760)
Proceeds from disposal of property and equipment 4,910 4,556 1,741
Proceeds from sale of discontinued operations, net of
discontinued operations cash and current taxes (Note 5) 47,213 78,529 6,261
Discontinued insurance operations:
Proceeds from sale of bonds and securities -- 47,781 105,052
Purchase of bonds and securities -- (60,513) (112,206)
Acquisition of businesses, net of cash acquired (Note 2) (31,008) (28,366) --
Other, net (5,685) -- --
-------------------------------------
Net cash provided by (used in) investing activities (29,700) 5,543 (28,912)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (12,867) (11,358) (16,310)
Proceeds from debt 99,375 418 223
Payments on debt (60,882) (17,988) (27,956)
-------------------------------------
Net cash provided by (used in) financing activities 25,626 (28,928) (44,043)
-------------------------------------
Net increase (decrease) in cash and cash equivalents 854 14,177 (25,720)
-------------------------------------
Cash and cash equivalents at beginning of year:
Other than insurance 29,805 6,220 34,146
Discontinued insurance operations -- 9,408 7,202
-------------------------------------
Total cash and cash equivalents at beginning of year 29,805 15,628 41,348
-------------------------------------
Cash and cash equivalents at end of year:
Other than insurance 30,659 29,805 6,220
Discontinued insurance operations -- -- 9,408
-------------------------------------
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR $ 30,659 $ 29,805 $ 15,628
========================================================================================================
The accompanying notes are an integral part of the financial statements.
22
9
CONSOLIDATED BALANCE SHEET
Quaker State Corporation and Subsidiaries
DECEMBER 31
(In thousands except per share data) 1995 1994
========================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 30,659 $ 29,805
Accounts and notes receivable, less allowance of
$3,495 and $2,173 in 1995 and 1994 129,267 91,858
Inventories (Note 6) 80,284 73,442
Deferred income taxes (Note 4) 12,050 11,790
Other current assets 23,792 11,708
Discontinued operation assets (Note 5) 954 3,537
----------------------------
Total current assets 277,006 222,140
----------------------------
Property, plant and equipment, net of accumulated
depreciation (Note 7) 203,259 199,983
Other assets (Note 8) 236,666 170,404
Discontinued operation assets (Note 5) 92 37,491
----------------------------
TOTAL ASSETS $ 717,023 $ 630,018
========================================================================================================
LIABILITIES
Current liabilities:
Accounts payable $ 53,465 $ 58,500
Accrued liabilities 84,225 58,487
Debt payable within one year 7,243 3,714
----------------------------
Total current liabilities 144,933 120,701
----------------------------
Long-term debt, less debt payable within one year (Note 9) 118,519 69,535
Other long-term liabilities (Note 10) 181,416 187,932
----------------------------
Total liabilities 444,868 378,168
----------------------------
Commitments and contingencies (Notes 11)
STOCKHOLDERS' EQUITY
Capital stock $1.00 par value; authorized shares, 95,000,000
and 37,500,000 at December 31, 1995 and 1994; issued and
outstanding shares, 32,824,157 and 31,517,305 in 1995 and 1994 32,824 31,517
Additional capital 139,068 120,131
Retained earnings 103,519 104,286
Cumulative foreign currency translation adjustment (111) (709)
Treasury stock, at cost, 8,447 and 33,948 shares in 1995 and 1994 (120) (467)
Unearned compensation (Note 12) (3,025) (2,908)
----------------------------
Total stockholders' equity 272,155 251,850
----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 717,023 $ 630,018
========================================================================================================
The accompanying notes are an integral part of the financial statements.
23
10
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Quaker State Corporation and Subsidiaries
YEARS ENDED DECEMBER 31
(In thousands except shares and per share)
Foreign
Currency
Capital Additional Retained Translation Treasury Unearned
Stock Capital Earnings Adjustment Stock Compensation Total
========================================================================================================================
BALANCE, DECEMBER 31, 1992 $ 27,152 $ 62,004 $101,635 $ 403 -- -- $ 191,194
-----------------------------------------------------------------------------
Net income -- -- 13,702 -- -- -- 13,702
Cash dividends ($.60 per share) -- -- (16,310) -- -- -- (16,310)
98,963 shares of capital stock issued
under incentive plans 99 1,040 -- -- -- $ (497) 642
Net changes in unrealized gains and
losses on marketable securities -- -- (150) -- -- -- (150)
Change in foreign currency translation -- -- -- (328) -- -- (328)
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 27,251 63,044 98,877 75 -- (497) 188,750
-----------------------------------------------------------------------------
Net income -- -- 18,766 -- -- -- 18,766
Cash dividends ($.40 per share) -- -- (11,358) -- -- -- (11,358)
265,687 shares of capital stock issued
under incentive plans 266 3,337 -- -- -- (2,411) 1,192
Net changes in unrealized gains and
losses on marketable securities -- -- (1,999) -- -- -- (1,999)
Change in foreign currency translation -- -- -- (784) -- -- (784)
4,000,000 shares issued for acquisition 4,000 53,750 -- -- -- -- 57,750
Purchase of 33,948 shares -- -- -- $ (467) -- (467)
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 31,517 120,131 104,286 (709) (467) (2,908) 251,850
-----------------------------------------------------------------------------
Net income -- -- 12,100 -- -- -- 12,100
Cash dividends ($.40 per share) -- -- (12,867) -- -- -- (12,867)
103,030 shares of capital stock issued
under incentive plans 47 661 -- -- 789 (117) 1,380
Change in foreign currency translation -- -- 598 -- -- 598
1,260,403 shares issued for acquisition 1,260 18,276 -- -- -- -- 19,536
Purchase of 30,529 shares (442) (442)
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 $ 32,824 $139,068 $103,519 $ (111) $ (120) $ (3,025) $ 272,155
========================================================================================================================
The accompanying notes are an integral part of the financial statements.
24
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUAKER STATE CORPORATION AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Quaker State Corporation and Subsidiaries (the company) are engaged principally
in the manufacturing and marketing of lubricants and lubricant services.
Branded and private label products are sold to distributors and national and
regional retailers. Through its wholly owned subsidiary Q Lube, the company
provides fast automobile oil change and lubrication services.
a. Basis of consolidation: The consolidated financial statements include
the accounts of Quaker State Corporation and all of its subsidiaries more than
50% owned. Intercompany accounts and transactions are eliminated.
b. Cash equivalents: The company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
c. Inventories: Inventories are stated at the lower of cost or market. Cost
is determined on the last-in, first-out (LIFO) basis for all crude oil, the
majority of company refined petroleum products and vehicular lighting. For
other inventories, including purchased finished lubricating oils and automotive
aftermarket products, cost is determined on the first-in, first-out (FIFO)
basis.
d. Property, plant and equipment, at cost: Costs of buildings and equipment
are charged against income over their estimated useful lives, using the
straight-line method of depreciation. Repairs and maintenance, which are not
considered betterments and do not extend the useful life of property, are
charged to expense as incurred. When property, plant and equipment is retired
or otherwise disposed of, the asset and accumulated depreciation are removed
from the accounts and the resulting profit or loss is reflected in income.
e. Intangibles: Goodwill and other intangible assets are amortized on a
straight-line basis over periods not exceeding 40 years. The company regularly
evaluates whether events or circumstances have occurred that indicate the
intangible asset may not be recoverable. When factors indicate the asset may
not be recoverable, the company uses an estimate of the related undiscounted
future cash flows compared to the carrying value of intangibles to determine if
an impairment exists. Adjustments are made if the sum of expected future net
cash flows is less than carrying value.
f. Environmental expenditures: Costs in connection with compliance and
monitoring of compliance with existing environmental regulations as they relate
to ongoing operations are expensed or capitalized as appropriate. Costs
associated with remediation efforts resulting from prior activities are
recorded when it is probable that a liability exists and a cost can be
reasonably estimated. All cleanup estimates are based on current technology.
Evaluations of the probability of potential insurance or other third-party
recoveries are made independently of the liability assessment. Environmental
costs are capitalized only if they extend the life, increase the capacity, or
improve the safety or efficiency of the property.
g. Pre-opening costs: Costs associated with the opening of new Q Lube
automobile lubrication centers are expensed as incurred.
h. Advertising Costs: Advertising costs are expensed as incurred.
Advertising costs were $92.7 million, $77.8 million and $71.3 million in 1995,
1994, and 1993, respectively.
i. Income taxes and investment credit: The company uses the liability
method of accounting for income taxes. The company accounts for investment
credit on the deferral method which recognizes the investment credit as a
reduction of the provision for income taxes over the life of the related
assets.
j. Earnings per share: The calculation of earnings per share is based on
the weighted average number of shares of capital stock outstanding and capital
stock equivalents which would arise from the exercise of stock options.
k. Foreign currency translation: For all foreign operations the functional
currency is the local currency. The assets and liabilities for the company's
foreign operations are translated into U.S. dollars using current exchange
rates. Income statement items are translated at average exchange rates
prevailing during the period. Exchange gains or losses are not material.
l. Estimates: The preparation of the consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent assets and
liabilities and reported amounts of revenues and expenses. Actual results could
differ from those estimates.
2. ACQUISITIONS:
In July 1995, the company completed the acquisition of all the stock of Slick
50, Inc. (Slick 50) for $22.6 million in cash, 1,260,403 shares of capital
stock with a market value of $19.5 million, and the payment of $11 million to
satisfy certain Slick 50 indebtedness outstanding prior to the closing.
Additional consideration may be payable by the company, depending upon
performance during 1996, 1997 and 1998 but subject to offset for
indemnification obligations of Slick 50 stockholders. The acquisition has been
accounted for under the purchase method and, accordingly, the operating results
of Slick 50 are included in the accompanying consolidated financial statements
from the date of acquisition. The acquisition resulted in $63 million of
intangible assets. These items are being amortized on a straight-line basis
over periods not exceeding 40 years.
In September 1994, the company acquired all the stock of the Specialty Oil
Companies (Specialty) and Westland Oil Company, Inc. (Westland) for $19.5
million and 4,000,000 shares of capital stock with a market value of $57.8
million. The company also purchased certain related equipment for
approximately $1.5 million and assumed approximately $40 million of debt of the
acquired companies, of which $22 million was satisfied by the company at the
time of closing. The acquisition was accounted for under the purchase method
and, accordingly, the operating results of Specialty and Westland are included
in the accompanying consolidated financial statements from the date of
acquisition. The agreements provide for the purchase by the company of certain
real property used in the acquired companies' operations for $9 million. This
property will be acquired in February 1996. The company indemnified the prior
25
12
owners for certain loan obligations, tax-related and other liabilities. The
acquisition resulted in $80.6 million of intangible assets. These items are
being amortized on a straight-line basis over periods not exceeding 40 years.
The following summary is prepared on a pro forma basis as though Slick 50,
Specialty and Westland had been acquired as of January 1, 1994 after including
the impact of adjustments, such as amortization of intangible assets, the
intercompany sales elimination, interest expense adjustments and related tax
effects. The discontinued E&P and insurance operations have been excluded.
(Unaudited, in thousands except per share amounts) 1995 1994
=====================================================================================================
REVENUES $ 1,084,685 $ 1,071,089
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (56) $ 9,388
INCOME PER SHARE FROM CONTINUING OPERATIONS $ -- $ .29
======================================================================================================
The pro forma results are not necessarily indicative of what would have
occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combining
the operations.
3. UNUSUAL ITEMS:
In April 1995, the company announced plans to restructure its organization, to
integrate recent acquisitions, consolidate management and administrative
activities, and relocate its Motor Oil Division and corporate headquarters to
the Dallas, Texas area. The pretax costs and expenses associated with the
restructuring were $22.6 million, ($13.8 million after tax).
A reserve of $15.8 million ($9.5 million after tax) was recorded in the
second quarter of 1995, which primarily related to the write-down and disposal
of the Oil City headquarter facilities and severance and employee benefits to
terminated employees. At December 31, 1995, a reserve of $5.6 million remained
that relates primarily to disposal costs of the Oil City headquarters and
severance and benefit payments to terminated employees. The company expects to
make these payments in 1996. In addition, the company expensed as incurred $6.8
million in connection with the restructuring.
In April 1994, purported class actions were commenced in the U.S. District
Court for the Western District of Pennsylvania against the company and two
other refiners of Pennsylvania Grade crude oil. The complaints alleged
violations of Section 1 of the Sherman Act. In 1995, the company settled this
matter for $4.4 million, ($2.7 million after tax). The company paid $2.2
million under the settlement agreement in December 1995 with the remainder paid
in January 1996. The settlement is subject to court approval.
4. INCOME TAXES:
Income before income taxes from continuing operations consists of:
(IN THOUSANDS) 1995 1994 1993
==================================================================================================
DOMESTIC $ 4,028 $12,914 $8,471
FOREIGN 22 2,754 1,054
-------------------------------
TOTAL $ 4,050 $15,668 $9,525
==================================================================================================
The components of the provision for income taxes from continuing operations are
as follows:
(IN THOUSANDS) 1995 1994 1993
==================================================================================================
CURRENT:
FEDERAL $ 8,900 $ 7,170 $ 6,394
STATE 1,600 680 2,056
FOREIGN 700 1,700 1,350
DEFERRED:
FEDERAL (6,900) (2,827) (4,531)
STATE (1,200) 44 (1,835)
FOREIGN (600) (200) --
TAX CREDITS AMORTIZED (200) (400) (900)
-------------------------------
TOTAL $ 2,300 $ 6,167 $ 2,534
==================================================================================================
26
13
The 1993 tax provision benefited from an adjustment of $1.2 million to
deferred taxes for the enacted U.S. tax rate changes and an adjustment to the
beginning-of-the-year valuation allowance of $1.4 million to recognize the
realizability of deferred tax assets in future years. A reconciliation from the
federal statutory tax rate to the effective tax rate for continuing operations
follows:
(% of pretax income) 1995 1994 1993
====================================================================================================
FEDERAL STATUTORY TAX RATE 35.0 35.0 35.0
ADD (DEDUCT) THE TAX EFFECT OF:
GOODWILL AMORTIZATION 17.2 1.8 1.6
INVESTMENT CREDIT (3.8) (2.4) (6.6)
NET ADJUSTMENT TO VALUATION ALLOWANCE -- -- (14.3)
ENACTED RATE CHANGE -- -- (12.4)
OTHER TAX CREDITS (10.4) (1.2) (2.1)
STATE AND FOREIGN INCOME TAXES 8.0 4.7 11.7
OTHER, NET 10.8 1.4 13.7
--------------------------------
EFFECTIVE TAX RATE 56.8 39.3 26.6
====================================================================================================
The deferred tax assets and liabilities as of December 31, 1995 and 1994 are as
follows:
1995 1994
------------------------- ------------------------
Deferred Deferred Tax Deferred Deferred Tax
(IN THOUSANDS) Tax Assets Liabilities Tax Assets Liabilities
============================================================================================================
DEPRECIATION, DEPLETION AND AMORTIZATION -- $30,645 -- $32,553
EMPLOYEE BENEFITS $58,774 -- $56,287 --
ENVIRONMENTAL RESERVES 8,293 -- 8,308 --
OTHER 23,804 12,167 16,416 7,595
-------------------------------------------------
SUBTOTAL 90,871 42,812 81,011 40,148
VALUATION ALLOWANCE 460 -- 539 --
-------------------------------------------------
TOTAL $90,411 $42,812 $80,472 $40,148
============================================================================================================
5. DISCONTINUED OPERATIONS:
In the third and fourth quarters of 1995, the company sold the assets of its
Natural Gas Exploration and Production Division (E&P) for $67.7 million.
Accordingly, the operating results of E&P have been reported as discontinued
operations in the accompanying Consolidated Statement of Income for the
three years ended December 31, 1995. The sales resulted in a gain on
disposition of $12 million, net of taxes of $7.5 million. Additionally, the
assets of E&P are reported as discontinued operation assets on the Consolidated
Balance Sheet as of December 31, 1995 and 1994.
Condensed income statements relating to the E&P operations for the seven
months ended July 31, 1995 and the years ended December 31, 1994 and 1993 are
presented below:
(IN THOUSANDS) 1995 1994 1993
===========================================================================================================
REVENUES $14,641 $29,751 $28,010
COSTS AND EXPENSES 12,617 24,364 24,907
----------------------------------
INCOME BEFORE INCOME TAXES 2,024 5,387 3,103
PROVISION FOR INCOME TAXES 230 883 202
----------------------------------
NET INCOME $ 1,794 $ 4,504 $ 2,901
===========================================================================================================
In 1994, the company sold the stock of its wholly owned subsidiary,
Heritage Insurance Group, Inc. (Heritage), for $82 million after satisfaction
of certain intercompany obligations. Accordingly, the operating results of
Heritage, including the gain on the sale, are reported as discontinued
operations in the accompanying Consolidated Statement of Income. The sale
resulted in a gain of $377,000, net of taxes of $2.7 million. During 1995, the
company recognized additional gain on sale of $650,000 as a result of settling
certain sale related contingencies. Condensed income statements relating to
Heritage's operations for the eight months ended August 31, 1994 and the year
ended December 31, 1993 are presented below:
(IN THOUSANDS) 1994 1993
===========================================================================================================
REVENUES $87,566 $131,265
COST AND EXPENSES 82,392 127,741
----------------------
INCOME BEFORE INCOME TAXES 5,174 3,524
PROVISION FOR (BENEFIT FROM) INCOME TAXES 790 (286)
----------------------
NET INCOME $ 4,384 $ 3,810
===========================================================================================================
27
14
6. INVENTORIES:
Inventories consist of:
(IN THOUSANDS) 1995 1994
===============================================================================================
CRUDE OIL $ 4,718 $ 1,328
FINISHED AND IN-PROCESS PETROLEUM PRODUCTS 51,658 49,252
OTHER 23,908 22,862
-----------------
TOTAL $80,284 $73,442
===============================================================================================
The reserve to reduce the carrying value of inventories from current costs
to the LIFO basis amounted to $18.9 million in 1995 and $19.9 million in 1994.
At December 31, 1995 and 1994, $32.1 million and $38.3 million,
respectively, of inventories were valued on the LIFO basis.
In 1995 and 1993, certain inventory quantities were reduced resulting in
liquidations of LIFO inventory. The effect of these liquidations was an
increase in net income of $1.3 million or $.04 per share, in 1995 and a
decrease in net income of $900,000 or $.03 per share, in 1993.
7. PROPERTY, PLANT AND EQUIPMENT:
Major classes of property, including land and construction work in progress of
$46.6 million in 1995 and $45.2 million in 1994 are:
(IN THOUSANDS) 1995 1994
================================================================================================
MOTOR OIL
REFINING $ 99,102 $ 97,710
MARKETING 133,484 126,360
Q LUBE 132,506 122,611
TRUCK-LITE 36,051 31,341
DOCKS 12,967 12,948
-------------------
SUBTOTAL 414,110 390,970
LESS: ACCUMULATED DEPRECIATION 210,851 190,987
-------------------
TOTAL $203,259 $199,983
================================================================================================
Depreciation expense was $27.4 million, $20.9 million and $18.3 million in
1995, 1994 and 1993, respectively.
8. OTHER ASSETS:
Other assets consist of:
(IN THOUSANDS) 1995 1994
=================================================================================================
GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $5,806 AND $3,680 $ 88,567 $ 58,656
OTHER INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION
OF $8,958 AND $5,762 67,823 32,861
DEFERRED TAX ASSET 35,549 39,300
NOTES AND ROYALTIES RECEIVABLE 35,927 28,726
PREPAID PENSION COST 8,768 9,483
OTHER 32 1,378
--------------------
TOTAL $236,666 $170,404
=================================================================================================
9. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS:
Long-term debt consists of:
(IN THOUSANDS) 1995 1994
=================================================================================================
6.625% NOTES DUE 2005, NET OF DISCOUNT $ 99,396 --
8.73% SENIOR NOTES DUE 2002 -- $ 50,000
LIBOR PLUS 1% REVOLVING CREDIT LOAN DUE 1997 9,540 9,000
LIBOR PLUS 1% TERM LOAN, PAYABLE MONTHLY, DUE 1997 8,040 10,184
PRIME PLUS 1% NOTE, PAYABLE MONTHLY, DUE 1996 3,836 --
OTHER, 2% TO 9% DUE IN VARIOUS INSTALLMENTS TO 2005 4,950 4,065
--------------------
SUBTOTAL 125,762 73,249
LESS: PAYMENTS DUE WITHIN ONE YEAR 7,243 3,714
--------------------
TOTAL $118,519 $ 69,535
=================================================================================================
28
15
In 1995, the company issued $100 million of 6.625% Notes due 2005. A
portion of the proceeds of these notes was used to retire $50 million of 8.73%
Senior Notes due 2002. In connection with the early retirement of the notes,
the company paid a premium of $6.5 million and wrote off $300,000 of
unamortized issuance costs. These transactions resulted in an extraordinary
charge of $4.1 million, net of tax benefits of $2.7 million.
The revolving credit and term loans due in 1997 are collateralized by
certain assets of the company's subsidiary, Westland. These loans are
guaranteed by a current Vice Chairman and a Vice President of the Motor Oil
Division, both previous owners of Westland.
As of December 31, 1995, the company had available $70 million of committed
variable rate lines of credit. The largest of these is a $45 million line which
expires September 1996. Borrowings outstanding under these lines of credit as
of December 31, 1995, were $9.5 million. The lines of credit contain various
covenants pertaining to tangible net worth, financial ratios, and interest
coverage. Under the most restrictive of these provisions, $23.8 million of
consolidated retained earnings as of December 31, 1995 was free of any
restrictions as to the payment of cash dividends. The company intends to
negotiate a new revolving credit facility in 1996.
The aggregate long-term debt maturing in the next five years is as follows:
1996-$7.2 million; 1997-$16.2 million; 1998-$.8 million; 1999-$.8 million;
2000-$.2 million.
The fair value of debt at December 31, 1995 was $128.6 million and for
other financial instruments the fair value does not materially differ from the
value reflected in the financial statements. The fair value of the instruments
was based upon quoted market prices of the same or similar instruments or on a
discounted basis using the rates available to the company for instruments of
similar maturity.
10. OTHER LONG-TERM LIABILITIES:
Other long-term liabilities consist of:
(IN THOUSANDS) 1995 1994
===============================================================================================
POSTRETIREMENT BENEFITS $ 94,784 $ 91,206
ENVIRONMENTAL RESERVES 18,399 19,822
OTHER 15,328 15,525
DISCONTINUED COAL LIABILITIES:
WORKER'S COMPENSATION AND BLACK LUNG 15,658 17,200
HEALTH CARE AND DEATH BENEFITS 20,133 22,300
OTHER 17,114 21,879
------------------
TOTAL $181,416 $187,932
===============================================================================================
11. COMMITMENTS, CONTINGENCIES AND RELATED PARTIES:
The company has operating leases for continuing operations in effect for
equipment and facilities with initial terms ranging from 2 to 20 years, with
renewal options generally being available. Future minimum annual rentals, net
of estimated sublease rentals under operating leases of $8.2 million, during
each of the next five years are: 1996-$15.2 million; 1997-$11.3 million;
1998-$10.2 million; 1999-$9 million; 2000-$8.6 million and thereafter $38.5
million.
Rental expenses for continuing operations amounted to approximately $18.3
million, $15.5 million and $15.2 million for 1995, 1994 and 1993, respectively,
net of sublease rentals of approximately $3.3 million, $3.8 million and $3.9
million for 1995, 1994 and 1993, respectively.
As part of its acquisition of Specialty and Westland (see Note 2) the
company assumed the terms of ten operating leases, which expire in 2004, for
various facilities. These facilities are leased from a real estate firm that is
owned, in part, by a current Vice Chairman. The company paid $1.5 million and
$376,000 in 1995 and 1994 for these leases.
In 1994, the company entered into license and construction agreements with
Interline Resources Corporation (Interline), that provide for the exclusive use
of Interline's used oil rerefining technology in North America and for the
construction of facilities. Under the agreement the company could pay up to
$9.4 million over six years to maintain the exclusivity rights; however, the
company is not obligated to pay in full for these rights. The company paid
$500,000 in 1995 and 1994 for these rights.
Westland regularly purchases lubricant base stocks from Calumet Lubricants
Co., the President of which is a Director of the company. Westland purchased
$1.6 million and $393,000 of base stocks in 1995 and 1994 at prices comparable
to other purchases. In addition, in October 1994, the company and Legacy
Resources Company (Legacy), a limited partnership in which the same Director
owns partnership interests, entered into a farm-out agreement for the
development of certain oil and gas properties owned by the company. The amount
paid to the company by Legacy was $364,000.
In 1993, the United States commenced a lawsuit against the company in the
U.S. District Court for the Northern District of West Virginia. The complaint
alleges the company violated the federal Resource Conservation and Recovery Act
and the federal Clean Air Act at the Congo refinery on various dates starting
in 1980 and seeks civil penalties not to exceed $25,000 per day for each
violation. During 1995, the company continued settlement discussions to resolve
this matter. A charge of $1 million was recorded in 1994 as the company's
estimate of probable liability associated with this lawsuit.
In addition, the company has received notices from the EPA and others that
it is a "potentially responsible party" relative to certain waste disposal
sites identified by the EPA and may be required to share in the cost of
cleanup. The company has accrued for all matters which are probable and can be
reasonably estimated.
29
16
Contingent liabilities of an indeterminate amount exist in connection with
suits and claims arising in the ordinary course of business.
In the opinion of management, all matters discussed above are adequately
accrued for or covered by insurance or, if not so provided for, are without
merit or the disposition is not anticipated to have a material effect on the
company's financial position; however, one or more of these matters could have
a material effect on future quarterly or annual results of operations or cash
flow when resolved.
12. STOCK OPTIONS AND MANAGEMENT INCENTIVE PLANS:
The company has various stock option, incentive and award plans.
Under these plans, options have been granted to employees to purchase
capital stock at a price no less than 100% of the market value on the date of
grant. Options granted may not be exercised for at least six months from the
date of grant and substantially all options must be exercised within ten years
of the date granted. Options issued prior to December 31, 1991, also provide
for stock appreciation rights (SARs), which are an alternate form of settlement
on an option giving an optionee the right, subject to certain conditions, to
surrender an option or portion of an option and receive cash and/or shares of
capital stock of the company, having a value equal to the appreciation on such
option or portion thereof. The change in appreciation of the optioned shares
most likely to be surrendered for SARs results in a charge or credit to income
as applicable.
In 1994, the company's stockholders approved the 1994 Stock Incentive Plan.
Under this plan, 1,250,000 shares may be issued and the plan includes stock
options, SARs, cash payment rights, restricted shares, performance shares and
other share awards. In 1995 and 1994, 72,845 and 225,800 shares were issued
under this plan to certain key employees as follows: (1) 1995 - 37,845, 1994 -
165,800 performance restricted shares and (2) 1995 - 35,000, 1994 - 60,000
restricted shares. Of the performance restricted shares, 103,645 shares are
subject to forfeiture if certain three-year performance goals are not met and
are expensed as compensation expense over the performance period. The remaining
100,000 performance restricted shares are subject to forfeiture if the market
price of the company's stock does not achieve specified levels prior to August
1999. Compensation expense will be recorded related to these shares when it is
probable the specified stock market price levels will be achieved. The 95,000
restricted shares are subject to certain employment restrictions that expire at
various dates through June 2000 and are expensed as compensation expense over
the restriction period. As a result of these grants, the company recognized
$842,000 and $485,000 as compensation expense in 1995 and 1994. Unearned
compensation and related compensation expense are adjusted for the performance
restricted shares based on the appreciation or depreciation in the company's
stock market price.
In 1994, the company's stockholders also approved the 1994 Non-Employee
Directors' Stock Option Plan. The number of shares which may be issued under
this plan is 100,000. Each non-employee who is a member of the Board of
Directors of the company is annually granted a non-statutory stock option to
purchase 1,000 shares of the company's capital stock. The exercise price for
each stock option is the fair market value of the stock on the date the stock
option is granted. In 1995 and 1994, 9,000 and 8,000 shares were granted under
this plan. In conjunction with the acquisition of Specialty and Westland (see
Note 2) employment contracts were issued to certain key employees of those
companies. These contracts were for five years and included provisions for a
base salary, grants of an aggregate of 390,000 stock options and non-
competition clauses that extend three years beyond the end of the employment
contracts.
The company has employment contracts with two key executives, that provide
for annual compensation, bonus, restricted awards and stock option grants.
Compensation expense on restricted awards is charged to earnings over the
contract terms.
Information with respect to shares under option follows:
==================================================================================================
BALANCE, JANUARY 1, 1993 1,073,414
GRANTED 378,200
SURRENDERED FOR SARS (24,287)
CANCELLED OR EXPIRED (74,460)
EXERCISED ($13.125 TO $15.9375) (8,963)
---------------
BALANCE, DECEMBER 31, 1993 ($9.4375 TO $27.00) 1,343,904
GRANTED 434,000
SURRENDERED FOR SARS (49,296)
CANCELLED OR EXPIRED (80,833)
EXERCISED ($13.125 TO $15.9375) (40,704)
---------------
BALANCE, DECEMBER 31, 1994 ($9.4375 TO $26.4375) 1,607,071
GRANTED 486,500
SURRENDERED FOR SARS (38,579)
CANCELLED OR EXPIRED (40,420)
EXERCISED ($10.1875 TO $16.25) (25,622)
---------------
BALANCE, DECEMBER 31, 1995 ($10.1875 TO $26.4375) 1,988,950
==================================================================================================
AT DECEMBER 31, 1995:
SHARES EXERCISABLE 1,168,950
SHARES AVAILABLE FOR OPTION (905,449 AT DECEMBER 31, 1994) 420,604
CAPITAL STOCK RESERVED (2,512,520 AT DECEMBER 31, 1994) 2,409,554
==================================================================================================
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17
13. EMPLOYEE BENEFIT PLANS:
The company has noncontributory pension plans covering substantially all of its
employees. Plans covering salaried employees provide pension benefits that are
generally based on the employees' compensation and length of service. Plans
covering hourly employees provide benefits of stated amounts for each year of
service. The company's funding policy is based on an actuarially determined
cost method allowable under statutory regulations.
Net pension cost for 1995, 1994, and 1993 is summarized below:
(IN THOUSANDS) 1995 1994 1993
===================================================================================================
SERVICE COST BENEFITS EARNED DURING THE PERIOD $ 4,033 $ 3,675 $ 3,130
INTEREST COST 9,629 9,015 8,840
ACTUAL RETURN ON ASSETS (22,791) (1,025) (13,371)
NET AMORTIZATION AND DEFERRAL 11,121 (11,188) 1,325
----------------------------------
TOTAL PENSION COST (INCOME) (A) $ 1,992 $ 477 $ (76)
===================================================================================================
a) Excludes $1.8 million and $800,000 curtailment gain and $3 million and
$500,000 cost of special termination benefits due to restructuring and
sale of E&P in 1995.
The funded status of the plans is reconciled to prepaid pension cost at
December 31, 1995 and 1994 as follows:
(IN THOUSANDS) 1995 1994
===================================================================================================
PLAN ASSETS AT FAIR VALUE, PRIMARILY INVESTMENTS IN IPG INSURANCE
CONTRACTS AND POOLED SEPARATE ACCOUNTS $ 142,683 $ 127,623
-----------------------
ACCUMULATED BENEFIT OBLIGATION, INCLUDING VESTED BENEFITS OF:
1995 $128.8 MILLION; 1994 $104.3 MILLION 134,930 111,640
EFFECT OF FUTURE SALARY INCREASES 8,183 11,692
-----------------------
PROJECTED BENEFIT OBLIGATION 143,113 123,332
-----------------------
PLAN ASSETS (LESS THAN) IN EXCESS OF PROJECTED BENEFIT
OBLIGATION (430) 4,291
UNRECOGNIZED NET LOSS 18,439 16,458
UNRECOGNIZED TRANSITION ASSET (9,241) (11,266)
-----------------------
PREPAID PENSION COST $ 8,768 $ 9,483
===================================================================================================
Significant assumptions used in determining net pension costs and related
pension obligations are:
DECEMBER 31, 1995 1994 1993
==================================================================================================
DISCOUNT RATE 7% 8% 7%
RATE OF INCREASE IN COMPENSATION LEVELS 4% 4 1/2% 4 1/2%
EXPECTED LONG-TERM RATE OF RETURN ON ASSETS 9% 9% 9%
==================================================================================================
The Docks operation terminated a pension plan that resulted in a pre-tax
gain of $1.1 million in 1994.
The company has certain defined contribution plans including a Thrift and
Stock Purchase Plan and an Employee Stock Ownership Plan. The cost of these
plans was $1.4 million, $2,5 million and $1.1 million in 1995, 1994 and 1993,
respectively.
In addition to providing pension benefits, the company provides health care
and life insurance benefits for active and retired employees of certain
subsidiaries. These plans are unfunded, and the company retains the right to
modify or eliminate these benefits.
The components of periodic expense for postretirement benefits in 1995,
1994 and 1993 were as follows:
(IN THOUSANDS) 1995 1994 1993
==================================================================================================
SERVICE COST BENEFITS EARNED $ 697 $ 805 $ 947
INTEREST COST ON LIABILITY 7,565 6,812 7,300
AMORTIZATION OF GAIN OR (LOSS) 129 (115) (240)
--------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST (A) $ 8,391 $ 7,502 $ 8,007
==================================================================================================
a) Excludes $600,000 and $800,000 cost of curtailment due to
restructuring and sale of E&P in 1995.
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18
The accumulated postretirement benefit obligation (APBO) at December 31, 1995
and 1994 is summarized below:
(IN THOUSANDS) 1995 1994
===================================================================================================
RETIREES $ 98,035 $ 74,154
FULLY ELIGIBLE ACTIVE PARTICIPANTS 7,784 6,906
OTHER ACTIVE PARTICIPANTS 7,914 9,910
---------------------
APBO 113,733 90,970
UNRECOGNIZED NET GAIN OR (LOSS) (13,949) 5,236
LESS: CURRENT PORTION (5,000) (5,000)
---------------------
LONG-TERM PORTION $ 94,784 $ 91,206
===================================================================================================
For measurement purposes, a 10% annual rate of increase in the per capita
claims cost was assumed for 1996, declining gradually to 5% by the year 2002
and thereafter.
Significant assumptions used in determining postretirement benefit expenses
and accumulated postretirement benefit obligations are:
DECEMBER 31, 1995 1994 1993
=================================================================================================
DISCOUNT RATE 7% 8% 7 1/2%
RATE OF INCREASE IN COMPENSATION LEVELS 4% 4 1/2% 5%
=================================================================================================
The health care cost trend rate assumption can have a significant effect on
the APBO, health care and death benefit liabilities and net periodic benefit
costs.
A 1% increase in the trend rate for health care costs would have increased
the APBO at December 31, 1995 by 11% and 1995 service and interest costs by
12%.
14. SUPPLEMENTAL CASH FLOW INFORMATION:
(IN THOUSANDS) 1995 1994 1993
==================================================================================================
CASH PAID DURING THE YEAR FOR:
INTEREST, NET OF AMOUNTS CAPITALIZED $ 6,911 $ 5,101 $ 5,717
INCOME TAXES 30,562 9,174 9,714
==================================================================================================
NONCASH INVESTING AND FINANCING ACTIVITIES:
CAPITAL STOCK ISSUED FOR ACQUISITION (NOTE 2) $ 19,536 $57,750 --
CAPITAL STOCK ISSUED UNDER INCENTIVE PLAN (NOTE 12) 1,055 3,109 --
==================================================================================================
DETAILS OF ACQUISITION (NOTE 2):
FAIR VALUE OF ASSETS ACQUIRED $ 79,486 $171,219 --
LIABILITIES ASSUMED (26,289) (82,748) --
STOCK ISSUED (19,536) (57,750) --
--------------------------------
CASH PAID 33,661 30,721 --
LESS CASH ACQUIRED (2,653) (2,355) --
--------------------------------
NET CASH PAID FOR ACQUISITION $ 31,008 $ 28,366 --
==================================================================================================
15. Segment Information:
Information on the company's operations in different segments is contained on
pages 18 to 19 of this report.
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19
16. FINANCIAL RESULTS BY QUARTER (UNAUDITED):
(In thousands except per share data)
1995
----------------------------------------------------------------
QUARTERS ENDED March 31, June 30, September 30, December 31, Total
=================================================================================================================
Revenues(a) $ 239,533 $ 257,698 $ 277,109 $ 261,230 $ 1,035,570
Gross profit(a)(b)(c) 68,454 59,010 86,474 75,636 289,574
Income (loss) from continuing operations(a)(d) 4,221 (4,528) 4,073 (2,016) 1,750
Income from discontinued operations 1,375 1,303 11,255 556 14,489
Extraordinary item -- -- -- (4,139) (4,139)
----------------------------------------------------------------
Net income (loss) $ 5,596 $ (3,225) $ 15,328 $ (5,599) $ 12,100
=================================================================================================================
Per Share:
Income (loss) from continuing operations $ .13 $ (.14) $ .13 $ (.06) $ .06
Income from discontinued operations .05 .04 .34 .02 .45
Extraordinary item -- -- -- (.13) (.13)
Net income (loss) .18 (.10) .47 (.17) .38
Dividends .10 .10 .10 .10 .40
=================================================================================================================
a) The company discontinued its E&P business in 1995 (see Note 5).
b) Gross profit equals total sales and operating revenues less cost of
sales and operating costs (excluding depreciation and amortization)
and unusual items.
c) Gross profit for the second and fourth quarter of 1995 was impacted
positively by the effect of LIFO liquidations of approximately $1.5
million and $700,000.
d) Motor oil operating results included plant and equipment write-downs
of $1.5 million in the fourth quarter.
(In thousands except per share data)
1994
QUARTERS ENDED March 31, June 30, September 30, December 31, Total
=================================================================================================================
Revenues(a) $ 168,515 $ 161,545 $ 179,702 $ 222,872 $ 732,634
Gross profit(a)(b)(c) 58,586 50,958 57,051 62,500 229,095
Income from continuing operations(a)(d) 2,284 1,622 3,872 1,723 9,501
Income from discontinued operations 3,299 3,447 1,526 993 9,265
----------------------------------------------------------------
Net income $ 5,583 $ 5,069 $ 5,398 $ 2,716 $ 18,766
=================================================================================================================
Per Share:
Income from continuing operations $ .08 $ .06 $ .14 $ .06 $ .33
Income from discontinued operations .12 .13 .05 .03 .33
Net income .20 .19 .19 .09 .66
Dividends .10 .10 .10 .10 .40
=================================================================================================================
a) The company discontinued its insurance business in 1994 (see Note 5).
b) Gross profit equals total sales and operating revenues less cost of
sales and operating costs (excluding depreciation and amortization)
and unusual items.
c) Truck-Lite operating results included a $1.5 million charge recorded
in the fourth quarter of 1994 to reserve for future losses associated
with a contract to manufacture automotive safety lights.
d) Income from continuing operations in the third quarter of 1994 was
impacted positively by a change of $1.4 million due to a reduction in
the estimated state tax rate and additional tax credits.
33
20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Stockholders Quaker State Corporation:
We have audited the accompanying consolidated balance sheets of Quaker State
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, cash flows and stockholders' equity for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Quaker State
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Dallas, Texas
January 30, 1996
MANAGEMENT REPORT
Quaker State Corporation and Subsidiaries
The consolidated financial statements of Quaker State Corporation (the company)
and other financial information appearing in this report have been prepared at
the direction of the management of the company, who are responsible for their
integrity and objectivity. The statements, which were prepared in conformity
with generally accepted accounting principles, reflect estimates, where
appropriate, based upon the judgment of management.
The company's system of internal accounting control is designed to provide
reasonable assurance that the financial statements and other financial
information are fairly presented and that the assets of the company are
safeguarded. This system of internal control includes both administrative and
accounting controls with each supplementing the other and both being
complemented by an effective control environment.
As part of the internal control system, the company has a Statement of
Ethical Values and Code of Business Conduct. All directors, officers and key
employees are required to submit annually a signed statement regarding
compliance with these policies.
The Internal Audit Department of the company reviews, evaluates, monitors,
and makes recommendations on both administrative and accounting controls and
thus acts as an integral, but independent, part of the control system. A staff
of professional auditors perform audits at reasonable intervals throughout the
company and its subsidiaries.
The Audit Committee of the Board of Directors, consisting of three outside
directors, is directly responsible for assuring that management fulfills its
financial reporting responsibility and for monitoring the corporate audit
function. Both the internal auditors and the independent auditors periodically
meet alone with the Audit Committee and have access to the Audit Committee at
any time.
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21
QUAKER STATE (KSF) MARKET PRICES BY QUARTER 1995 1994 1993
==================================================================================================
First Quarter High 15 1/8 14 3/8 13
Low 13 3/8 12 5/8 11 1/8
Close 13 3/4 13 12 1/8
- --------------------------------------------------------------------------------------------------
Second Quarter High 15 1/8 16 1/8 12 7/8
Low 13 1/2 12 3/4 11 1/4
Close 15 14 11 3/4
- --------------------------------------------------------------------------------------------------
Third Quarter High 16 1/2 15 3/8 14 1/4
Low 14 5/8 13 1/2 11 3/4
Close 14 5/8 14 1/2 13 7/8
- --------------------------------------------------------------------------------------------------
Fourth Quarter High 14 3/4 14 1/2 15
Low 12 1/8 13 12 1/8
Close 12 3/4 14 13 3/8
==================================================================================================
35