1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): June 28, 1996
-------------
Quaker State Corporation
------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-2677 25-0742820
-------- ------ ----------
(State of incorporation) (Commission File No.) (IRS Employer ID No.)
225 E. John Carpenter Freeway, Irving, Texas 75062
- -------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(214) 868-0400
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former Name or Former Address, If Changed Since Last Report)
2
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 12, 1996, Quaker State Corporation ("Quaker State") filed a current
report on Form 8-K and reported under Item 2 that on June 28, 1996, Quaker
State completed the acquisition of all the capital stock of Blue Coral, Inc.
Because it was impracticable to provide the required financial statements for
the acquired business and pro forma financial information related to the
transaction at the time of filing, such financial statements and pro forma
financial information were not included with that report on Form 8-K. Quaker
State hereby amends Item 7, Financial Statements, Pro Forma Financial
Information, and Exhibits, of its report on Form 8-K filed on July 12, 1996, as
set forth below.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Combined Financial Statements of Business Acquired:
1. Report of Independent Public Accountants.
2. Balance Sheets as of October 31, 1995 and 1994.
3. Statements of Income for the Fiscal Years ending
October 31, 1995, 1994 and 1993.
4. Statements of Stockholder's Equity for the Fiscal
Years ending October 31, 1995, 1994 and 1993.
5. Statements of Cash Flows for the Fiscal Years ending
October 31, 1995, 1994 and 1993.
6. Notes to Financial Statements.
(b) Pro Forma Financial Information:
1. Pro Forma Consolidated Statements of Operations of
Quaker State Corporation and Subsidiaries and combine
statements of income of Blue Coral, Inc. for the year
ended December 31, 1995 and for the six months ended
June 30, 1996 are included. No Pro Forma Balance Sheet
for Quaker State Corporation and Subsidiaries and
Combined Balance Sheet of Blue Coral, Inc. is
included because the transaction was reflected in the
balance sheet included with Quaker State's quarterly
report on Form 10-Q for the quarter ending June 30,
1996. The Balance Sheet is incorporated herein by
reference from the Quaker State quarterly report on
Form 10-Q for the quarter ended June 30, 1996.
2. Notes to Pro Forma Consolidated Statements of
Operations.
1
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(c) Exhibits:
Item No. Description
-------- -----------
2 Asset Purchase Agreement by and among the Registrant, BC Acquisition Corporation, Blue
Coral, Inc. and the Stockholders of Blue Coral, Inc. dated as of June 7, 1996, with
list of omitted schedules and exhibits, filed as Exhibit 2 to Form 8-K filed July 12,
1996 and incorporated herein by reference.
4 Escrow Agreement among the Registrant and the Blue Coral Stockholders, dated as of
June 28, 1996, filed as Exhibit 4 to Form 8-K filed July 12, 1996 and incorporated
herein by reference.
23 Consent of Independent Public Accountants, filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
QUAKER STATE CORPORATION
(Registrant)
DATE: September 11, 1996
By: /s/ Conrad A. Conrad
------------------------------------
Conrad A. Conrad
Vice Chairman and
Chief Financial Officer
2
4
Item 7(a) Financial Statements of Business Acquired.
5
BLUE CORAL, INC. AND SUBSIDIARIES
=================================
COMBINED FINANCIAL STATEMENTS
-----------------------------
AS OF OCTOBER 31, 1995 AND 1994
-------------------------------
TOGETHER WITH AUDITORS' REPORT
------------------------------
6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of Blue Coral, Inc.:
We have audited the accompanying combined balance sheets of BLUE CORAL, INC. (a
Delaware corporation) and Subsidiaries (as identified in Note 1) as of October
31, 1995 and 1994, and the related combined statements of income, stockholders'
equity and cash flows for each of the three years in the period ended October
31, 1995. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Blue Coral, Inc.
and Subsidiaries as of October 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 6 to the combined financial statements, the Company
changed its method of accounting for income taxes, effective November 1, 1993,
to comply with the provisions of Statement of Financial Accounting Standards
No. 109.
Arthur Andersen LLP
Toledo, Ohio,
August 21, 1996.
7
BLUE CORAL, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS
AS OF OCTOBER 31, 1995 AND 1994
A S S E T S (Note 5) 1 9 9 5 1 9 9 4
---------------- ----------- -----------
CURRENT ASSETS:
Cash $ 773,917 $ 322,399
Trade receivables, less allowances
of $3,310,000 in 1995 and
$2,110,000 in 1994 14,518,193 16,532,069
Stockholder receivables 545,270 31,985
Employee and other receivables 592,027 298,057
Inventories (Note 1) -
Raw materials 2,720,419 2,951,254
Packaging supplies 4,275,676 5,111,370
Finished goods 4,884,491 5,298,480
----------- -----------
Total inventories 11,880,586 13,361,104
----------- -----------
Prepaid expenses 1,471,996 1,538,018
----------- -----------
Total current assets 29,781,989 32,083,632
----------- -----------
PROPERTY, PLANT AND EQUIPMENT (Note 1):
Land 551,300 1,182,863
Buildings and leasehold improvements 6,293,775 7,386,619
Machinery and equipment 4,614,869 6,221,212
Furniture and fixtures 2,619,271 2,775,502
Vehicles 299,570 306,703
----------- -----------
14,378,785 17,872,899
Less- Accumulated depreciation (5,569,047) (6,988,220)
----------- -----------
Net property, plant
and equipment 8,809,738 10,884,679
----------- -----------
OTHER ASSETS:
Intangible assets (Note 1) 1,451,146 1,739,638
Property, plant and equipment held
for sale (Note 4) 1,340,436 -
Other (Note 3) 693,364 960,251
----------- -----------
Total other assets 3,484,946 2,699,889
----------- -----------
$42,076,673 $45,668,200
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY 1 9 9 5 1 9 9 4
------------------------------------ ----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt
(Note 5) $ 837,264 $ 1,363,664
Accounts payable 5,039,072 6,640,066
Accrued liabilities (Notes 1, 2 and 4) 6,265,688 4,456,025
----------- -----------
Total current liabilities 12,142,024 12,459,755
LONG-TERM DEBT (Notes 1, 3 and 5) 14,920,970 20,350,832
DUE TO FORMER STOCKHOLDER (Note 2) 2,273,625 2,780,000
DEFERRED TAX LIABILITY (Note 6) 341,000 417,000
----------- -----------
Total liabilities 29,677,619 36,007,587
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 7 and 8)
MINORITY INTEREST IN SUBSIDIARIES 1,013,774 732,414
STOCKHOLDERS' EQUITY:
Common stock, $10 par value,
25,000 shares authorized, 21,568
shares issued in 1995 and 1994, 16,677
and 16,707 shares outstanding in
1995 and 1994, respectively 215,680 215,680
Capital in excess of par value 546,403 546,403
Treasury stock, at cost - 4,891 and 4,861
shares in 1995 and 1994, respectively
(Note 2) (3,589,846) (3,321,387)
Retained earnings (Note 5) 14,170,589 11,440,705
Cumulative translation adjustments
(Note 1) 42,454 46,798
----------- -----------
Total stockholders' equity 11,385,280 8,928,199
----------- -----------
$42,076,673 $45,668,200
=========== ===========
The accompanying notes are an integral part of these combined balance sheets.
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BLUE CORAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
1995 1994 1993
----------- ----------- -----------
NET SALES $94,085,028 $80,291,223 $69,302,165
----------- ----------- -----------
OPERATING EXPENSES:
Cost of sales 53,115,410 44,547,816 38,928,274
Selling, general and administrative 27,517,596 23,342,909 19,886,898
Advertising (Note 1) 8,798,959 7,657,694 5,498,053
Provision for closing and sale of McKay
manufacturing facility (Note 4) 1,500,700 - -
----------- ----------- -----------
90,932,665 75,548,419 64,313,225
----------- ----------- -----------
OPERATING INCOME 3,152,363 4,742,804 4,988,940
----------- ----------- -----------
OTHER (INCOME) EXPENSE:
Interest expense 1,904,711 1,502,444 1,259,187
Minority interest in net income of subsidiaries 281,360 327,268 388,846
Equity in net loss of affiliate (Note 3) 160,000 - -
Net exchange (gain) loss (Note 1) (102) (359) 192,771
Net gain on the sale of Ozium and
Mechanics product lines (Note 3) (3,806,964) - -
----------- ----------- -----------
(1,460,995) 1,829,353 1,840,804
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 4,613,358 2,913,451 3,148,136
PROVISION FOR INCOME TAXES (Note 6) 699,000 930,000 788,000
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 3,914,358 1,983,451 2,360,136
LOSS FROM OPERATIONS OF DISCONTINUED DIVISIONS (Note 3) (47,067) (578,426) (427,246)
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR INCOME TAXES 3,867,291 1,405,025 1,932,890
EXTRAORDINARY ITEMS:
Loss from fire (Note 9) - - (750,000)
Tax benefit from utilization of
net operating loss carryforward - - 110,840
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING FOR INCOME TAXES 3,867,291 1,405,025 1,293,730
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
FOR INCOME TAXES (Note 6) - (107,000) -
----------- ----------- -----------
NET INCOME $ 3,867,291 $ 1,298,025 $ 1,293,730
=========== =========== ===========
The accompanying notes are an integral part of these combined statements.
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BLUE CORAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
Capital in
Common Excess of Treasury Retained
Stock Par Value Stock Earnings
----------------------------------------------------------------
BALANCE, OCTOBER 31, 1992 $214,970 $480,670 $ - $ 9,883,155
Net income - - - 1,293,730
Stockholder distributions - - - (1,034,205)
Translation adjustments (Note 1) - - - -
Issuance of common stock (71 shares) 710 36,818 - -
Issuance of subsidiary's stock - 28,915 - -
-------- -------- ----------- -----------
BALANCE, OCTOBER 31, 1993 215,680 546,403 - 10,142,680
Net income - - - 1,298,025
Translation adjustments (Note 1) - - - -
Repurchase of common stock (Note 2) - - (3,321,387) -
-------- -------- ----------- -----------
BALANCE, OCTOBER 31, 1994 215,680 546,403 (3,321,387) 11,440,705
Net income - - - 3,867,291
Stockholder distributions - - - (1,137,407)
Translation adjustments (Note 1) - - - -
Repurchase of common stock (Note 2) - - (268,459) -
-------- -------- ----------- -----------
BALANCE, OCTOBER 31, 1995 $215,680 $546,403 $(3,589,846) $14,170,589
======== ======== =========== ===========
Cumulative
Translation
Adjustments Total
-------------------------------
BALANCE, OCTOBER 31, 1992 $35,693 $10,614,488
Net income - 1,293,730
Stockholder distributions - (1,034,205)
Translation adjustments (Note 1) 8,162 8,162
Issuance of common stock (71 shares) - 37,528
Issuance of subsidiary's stock - 28,915
------- -----------
BALANCE, OCTOBER 31, 1993 43,855 10,948,618
Net income - 1,298,025
Translation adjustments (Note 1) 2,943 2,943
Repurchase of common stock (Note 2) - (3,321,387)
------- -----------
BALANCE, OCTOBER 31, 1994 46,798 8,928,199
Net income - 3,867,291
Stockholder distributions - (1,137,407)
Translation adjustments (Note 1) (4,344) (4,344)
Repurchase of common stock (Note 2) - (268,459)
------- -----------
BALANCE, OCTOBER 31, 1995 $42,454 $11,385,280
======= ===========
The accompanying notes are an integral part of these combined statements.
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BLUE CORAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
1 9 9 5 1 9 9 4
----------- ------------
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income $ 3,867,291 $ 1,298,025
Adjustments to reconcile net income to net cash (used in)
provided by operating activities-
Noncash items-
Cumulative effect of change in accounting for income taxes - 107,000
Net gain on the sale of Ozium and Mechanics product lines (3,806,964) -
Depreciation and amortization 1,513,030 1,412,823
Minority interest in net income of subsidiaries 281,360 327,268
Equity in net loss of affiliate 160,000 -
Provision for deferred income taxes (76,000) 197,000
Net loss on dispositions of property, plant and equipment 11,876 2,577
Changes in working capital-
Increase in receivables (47,940) (625,028)
(Increase) decrease in inventories (2,251,318) (3,613,107)
(Increase) decrease in prepaid expenses (47,840) 222,833
(Decrease) increase in accounts payable (1,047,308) 674,552
Increase (decrease) in accrued liabilities 922,939 (761,291)
----------- ------------
Net cash (used in) provided by operating activities (520,874) (757,348)
----------- ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Proceeds from the sale of Ozium and Mechanics product lines 6,595,000 -
Proceeds from the sale of Chemifax 2,850,000 -
Property, plant and equipment acquisitions (1,383,767) (1,314,089)
Blue Coral Chemical Company acquisition - -
Investment in CAR+ - (372,439)
Loans to CAR+ officers - (186,220)
Collections on loans to CAR+ officers 21,787 -
Other investing activities, net - (24,739)
----------- ------------
Net cash provided by (used in) investing activities 8,083,020 (1,897,487)
----------- ------------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Issuance of long-term debt and net borrowings under line of credit agreement - 20,604,967
Net repayments under line of credit agreement (2,900,000) -
Repayment of long-term debt (3,056,262) (17,833,636)
Distributions paid (1,137,407) -
Issuance of common stock - -
Repurchase of common stock (16,959) (541,387)
----------- ------------
Net cash (used in) provided by financing activities (7,110,628) 2,229,944
----------- ------------
CASH:
Increase (decrease) for the period 451,518 (424,891)
Balance, beginning of period 322,399 747,290
----------- ------------
Balance, end of period $ 773,917 $ 322,399
=========== ============
1 9 9 3
-----------
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net income $ 1,293,730
Adjustments to reconcile net income to net cash (used in)
provided by operating activities-
Noncash items-
Cumulative effect of change in accounting for income taxes -
Net gain on the sale of Ozium and Mechanics product lines -
Depreciation and amortization 1,391,576
Minority interest in net income of subsidiaries 388,846
Equity in net loss of affiliate -
Provision for deferred income taxes -
Net loss on dispositions of property, plant and equipment 32,769
Changes in working capital-
Increase in receivables (3,666,396)
(Increase) decrease in inventories 865,179
(Increase) decrease in prepaid expenses (340,397)
(Decrease) increase in accounts payable 660,560
Increase (decrease) in accrued liabilities 637,938
-----------
Net cash (used in) provided by operating activities 1,263,805
-----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Proceeds from the sale of Ozium and Mechanics product lines -
Proceeds from the sale of Chemifax -
Property, plant and equipment acquisitions (1,855,139)
Blue Coral Chemical Company acquisition (1,694,195)
Investment in CAR+ -
Loans to CAR+ officers -
Collections on loans to CAR+ officers -
Other investing activities, net (67,015)
-----------
Net cash provided by (used in) investing activities (3,616,349)
-----------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Issuance of long-term debt and net borrowings under line of credit agreement 4,520,539
Net repayments under line of credit agreement -
Repayment of long-term debt (1,150,860)
Distributions paid (1,034,205)
Issuance of common stock 66,443
Repurchase of common stock -
-----------
Net cash (used in) provided by financing activities 2,401,917
-----------
CASH:
Increase (decrease) for the period 49,373
Balance, beginning of period 697,917
-----------
Balance, end of period $ 747,290
===========
The accompanying notes are an integral part of these combined statements.
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BLUE CORAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
(Continued)
1 9 9 5 1 9 9 4 1 9 9 3
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for -
Interest $2,244,000 $1,688,000 $1,328,000
========== ========== ==========
Income taxes $ 435,000 $ 607,000 $ 644,000
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
(Notes 2 and 3)
The accompanying notes are an integral part of these combined statements.
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BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared on a
combined basis to include the holdings of Blue Coral, Inc. and
its major stockholder (collectively referred to as the
"Company"). The combined statements include the following:
Blue Coral, Inc. (BCI) (a Delaware corporation) - BCI is a
North American manufacturer and distributor of automotive
appearance products.
Blue Coral Chemical Company (BCCC) (a division of BCI) -
BCCC is a North American manufacturer and distributor of
automatic car wash products. Prior to December 1995,
BCCC was a Delaware corporation 90% owned by BCI and its
major stockholder. In December 1995, BCI exchanged 726
shares of BCI for the minority ownership of BCCC and
dissolved its corporate existence.
Blue Coral International, Limited (International) (a United
Kingdom corporation) - International is a European
manufacturer and distributor of automotive appearance
products. International is 99% owned by BCI and its
major stockholder.
NicSand, Inc. (NicSand) (an Ohio corporation) - NicSand is a
North American manufacturer of sandpaper products.
NicSand is 67% owned by BCI.
McKay Chemical Company (McKay) (a division of BCI) - McKay
manufactured under-the-hood automotive products with the
Mechanics and McKay brand names. BCI is in the process
of closing McKay's facility and has sold the Mechanics
brand (Notes 3 and 4).
Chemifax (a division of BCI) - Chemifax was sold during
1995. The Chemifax operations primarily included the
manufacturing of floor cleaners and waxes (Note 3).
Household Products Group (HPG) (a division of BCI) - HPG
manufacturers household cleaners. HPG was sold
subsequent to October 31, 1995, (Note 3).
6
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BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
All significant intercompany accounts and transactions have been
eliminated in combination.
Subsequent to October 31, 1995, the Company changed its fiscal
year-end from October 31 to December 31.
Inventories
Inventories are stated at cost, which is less than market value,
and include material, labor and manufacturing overhead.
Inventories are valued using the first-in, first-out (FIFO)
method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Maintenance,
repairs and minor replacements are expensed as incurred. When
property, plant or equipment is retired or otherwise disposed
of, the related cost and accumulated depreciation are removed
from the respective accounts. Any gain or loss on disposition
is credited or charged to income.
Property, plant and equipment are depreciated over their estimated
useful lives on the straight-line method. The average useful
lives are as follows:
Buildings and leasehold improvements 8-40 years
Machinery and equipment 5-10 years
Furniture and fixtures 3-8 years
Vehicles 5 years
For the years ended December 31, 1995, 1994 and 1993, depreciation
expense was $1,322,030, $1,186,823 and $1,066,576,
respectively.
Accrued Liabilities
The components of accrued liabilities as of October 31, 1995 and
1994, are as follows:
1 9 9 5 1 9 9 4
--------- ---------
Advertising $1,051,644 $1,150,778
Payroll and related accruals 2,389,872 1,269,056
Reserve for closing and sale
of McKay manufacturing
facility (Note 4) 1,150,000 -
Other 1,674,172 2,036,191
---------- ----------
$6,265,688 $4,456,025
========== ==========
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BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
Foreign Currency Translation
The Company's foreign subsidiary's assets and liabilities are
translated at year-end exchange rates while income and expenses
are translated at average exchange rates in effect during the
year. The resulting translation adjustments are recorded as a
separate component of stockholders' equity.
Advertising
The Company expenses advertising costs the first time the
advertising takes place. The Company also records all revenues
and expenses related to its infomercial advertising campaigns
in advertising expense.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each category of the Company's financial
instruments.
Cash and short-term financial instruments
The carrying amount approximates fair value due to the short
maturity of these instruments.
Long-term financial instruments
The fair value has been estimated using the expected future
cash flows discounted at market interest rates. The
carrying amount approximates fair value.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities 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 those estimates.
8
15
BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
Intangible Assets
The following intangible assets are being amortized on a
straight-line basis over the following periods:
October 31, October 31,
1995 1994
---------- -----------
Goodwill 10-20 years $2,135,632 $ 2,142,245
Trademarks 14-40 years 258,042 1,089,404
---------- -----------
2,393,674 3,231,649
Less - Accumulated amortization (942,528) (1,492,011)
---------- -----------
$1,451,146 $ 1,739,638
========== ===========
The Company continually evaluates whether events and circumstances
have occurred that indicate the remaining estimated useful
lives of intangible assets may warrant revision or that the
remaining balance of these intangible assets may not be
recoverable. When factors indicate that intangible assets
should be evaluated for possible impairment, the Company uses
an estimate of the related business segment's undiscounted net
income over the remaining life of the intangible asset in
measuring whether the intangible asset is recoverable. The
Company writes off intangible assets at the time they become
fully amortized.
For the years ended October 31, 1995, 1994 and 1993, amortization
for these intangible assets was approximately $191,000,
$226,000 and $325,000, respectively.
Reclassifications
Certain amounts in the October 31, 1994 and 1993, financial
statements have been reclassified to conform with
classifications used in the October 31, 1995, financial
statements.
9
16
BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
(2) STOCK REPURCHASE AND CONSULTING AGREEMENTS
The Company entered into several agreements with its former president
during 1994. Under these agreements, the Company repurchased 856
shares of common stock in 1994 at a price of $541,387.
Additionally, the Company was granted the option to repurchase the
balance of the former president's stock in the Company (4,005
shares) during the period from July 20, 1994, through July 15, 1998.
The agreement also granted the former president a put option
exercisable during the period beginning July 16, 1998, through July
15, 1999. The Company recorded $2,780,000 in 1994 to reflect
management's best estimate of the repurchase price of these shares.
In January 1996, the Company exercised its option at a total price
of $3,031,500 through the payment of $757,875 of cash and the
issuance of an 8% note due in annual principal payments of $757,875
from 1997 through 1999. At October 31, 1995 and 1994, these shares
were classified as treasury stock and a corresponding liability was
recorded in accrued liabilities and due to former stockholder in the
accompanying combined balance sheets. In connection with the
acquisition of the Company (Note 10), all amounts due the former
president, plus accrued interest, were paid in full.
The Company also entered into a $200,000 per annum consulting
agreement with the former president from July 1994 through July
1998. This agreement was terminated in January 1996 in connection
with the Company's exercise of its stock repurchase option.
In addition to the above provisions, the agreements require payments
to the former president if the Company completes an initial public
offering of its stock, a business combination or a liquidation or
dissolution. As a result of the acquisition of the Company (Note
10), the Company paid the former president an additional $2,736,000
pursuant to these agreements.
(3) DISPOSITIONS AND ACQUISITIONS
Sale of Ozium and Mechanics Product Lines
The Company sold its Ozium and Mechanics product lines during
1995. The Company received $6,595,000 in exchange for their
related inventory, equipment and intangible assets.
Sale of Discontinued Chemifax and HPG Divisions
On June 26, 1995, the Company sold its Chemifax division for
approximately $2,850,000, the net book value of the assets
sold. In March 1996, the Company sold its HPG division for
approximately $2,800,000, realizing a gain of approximately
$2,300,000. Summary operating results of the discontinued
operations were as follows:
10
17
BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
October 31,
------------------------------------------------------
1 9 9 5 1 9 9 4 1 9 9 3
----------- ----------- -----------
Sales $13,865,367 $18,693,971 $19,669,079
Costs and expenses 13,912,434 19,272,397 20,096,325
----------- ----------- -----------
Loss from
operations of
discontinued
divisions $ (47,067) $ (578,426) $ (427,246)
=========== =========== ===========
The components of net assets of discontinued operations included
in the combined balance sheets as of October 31, 1995 and 1994,
are as follows:
1 9 9 5 1 9 9 4
--------- ----------
Trade and other
receivables, net $ 313,000 $1,886,000
Inventories - 1,874,000
Prepaid expenses - 87,000
Property, plant and
equipment, net 29,000 809,000
Other assets 128,000 237,000
Notes payable - (69,000)
Accounts payable (33,000) (854,000)
Accrued liabilities (269,000) (992,000)
--------- ----------
$ 168,000 $2,978,000
========= ==========
Investment in CAR+
During 1994, the Company invested approximately $372,000 in CAR+,
an auto products distributor in France. The Company owns
approximately 43% of CAR+ and accounts for this ownership
interest using the equity method. At October 31, 1995 and
1994, the investment in CAR+ was $212,000 and $372,000,
respectively. The Company also has loans approximating
$164,000 and $186,000 to the officers of CAR+ at October 31,
1995 and 1994, respectively. The investment and loans
receivable are recorded in other assets on the accompanying
combined balance sheets.
11
18
BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
Acquisition of STS Ventures
Prior to December 31, 1992, BCCC held a 50% interest in STS
Ventures, an Arizona joint venture and distributor of
automobile cleaning products with one other partner holding the
remaining interest. On December 31, 1992, STS Ventures
purchased and retired the partnership interest held by its
other 50% venture partner leaving BCCC as sole owner. The
partnership interest was purchased for $1,845,000.
This acquisition was accounted for using the purchase method of
accounting and, accordingly, the combined financial statements
for the year ended October 31, 1993, include the operations of
STS Ventures (now BCCC). The purchase price and related
expenses exceeded the fair value of STS Ventures' net assets by
approximately $1.7 million. This amount, included in
intangible assets (Note 1), is being amortized on a
straight-line basis over 10 years.
(4) PROVISION FOR CLOSING AND SALE OF McKAY MANUFACTURING FACILITY
During 1995, the Company recorded a charge of $1,500,700 related to
the closing and sale of its McKay manufacturing facility in Los
Angeles. Items included in the charge are severance costs, the
write-off of certain assets and other incremental costs.
Approximately $1,150,000 of the related reserve remained in accrued
liabilities at October 31, 1995, relating primarily to the write-off
of certain assets and other incremental costs. Summary operating
results of McKay were as follows:
October 31,
---------------------------------------------------
1 9 9 5 1 9 9 4 1 9 9 3
----------- ---------- -----------
Sales $ 835,452 $7,894,419 $10,220,295
Costs and expenses 2,522,599 7,669,583 10,696,023
----------- ---------- -----------
Net income (loss) $(1,687,147) $ 224,836 $ (475,728)
=========== ========== ===========
12
19
BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
(5) FINANCING ARRANGEMENTS
Borrowings of the Company at October 31, 1995 and 1994, consisted of
the following:
1 9 9 5 1 9 9 4
----------- -----------
Bank credit facility:
BCI revolving loan payable, interest at
prime plus 1/4%, (effective rate of 9%
as of October 31, 1995), due July 31, 1997 $10,700,000 $13,600,000
BCI term loan payable, interest at prime plus
1/4% (effective rate of 9% as of
October 31, 1995), monthly principal
payments of $60,000 with remainder
payable August 1999 3,950,000 6,820,000
BCI open-end real estate mortgage, interest
at prime plus 1/4% (effective rate of 9%
as of October 31, 1995), monthly principal
payments of $8,472 through June 2000 457,502 558,334
BCI mortgage payable to related party on
McKay facility, interest at 8%, monthly
principal and interest payments of $5,730
through July 2013 650,732 666,722
Other debt - 69,440
----------- -----------
Total debt 15,758,234 21,714,496
Less- Current portion 837,264 1,363,664
----------- -----------
Long-term debt $14,920,970 $20,350,832
=========== ===========
The Company has a bank credit facility whereby it has available an
$18,000,000 (adjusted seasonally to a high of $25,000,000) revolving
loan payable that expires July 31, 1997, a $7,000,000 term loan and
a $1,000,000 open end real estate mortgage. Borrowings under the
revolving loan payable are based on eligible accounts receivable and
inventories, as defined in the agreement. The credit facility is
secured by substantially all of the Company's assets.
13
20
BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
The credit facility contains certain restrictions which include
requirements to maintain minimum amounts of net worth and working
capital. The Company's distributions to stockholders are limited to
50% of the Company's net income. The Company pays a 3/8% annual
commitment fee on the unused portion of the revolving loan.
In 1993, McKay purchased a portion of its manufacturing and
warehousing facilities from a party related to a major stockholder
of the Company for $785,000. To finance this purchase, the Company
signed a promissory note in the amount of $685,000 payable in
monthly installments, which include interest at 8%, through July
2013.
Debt principal payments beyond October 31, 1995, are approximately:
Year ended
October 31,
-----------
1996 $ 837,264
1997 11,540,301
1998 841,848
1999 1,913,523
2000 74,610
Thereafter 550,688
-----------
$15,758,234
===========
In connection with the acquisition of the Company (Note 10), all of
the Company's indebtedness, plus accrued interest, was paid in full.
(6) INCOME TAXES
BCI has elected to be taxed as an S Corporation under the provisions
of the Internal Revenue Code. As such, taxable income of BCI and
its divisions (Note 1) is included in the individual tax returns of
the Company's stockholders for federal income tax purposes as well
as for certain state income taxes. However, federal, state, local
and applicable foreign income taxes were paid by the Company for
BCCC, NicSand and International.
Effective November 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". The cumulative effect of adopting this standard
decreased net income by $107,000 as of November 1, 1993.
14
21
BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
The Company's provision for income taxes is comprised of the following
for the years ended October 31, 1995, 1994 and 1993:
1995 1994 1993
-------- -------- --------
Current:
U.S. Federal $642,000 $570,000 $605,000
State and local 133,000 163,000 183,000
-------- -------- --------
Total current 775,000 733,000 788,000
-------- -------- --------
Deferred U.S. Federal
and state taxes (76,000) 197,000 -
-------- -------- --------
Total provision
for income taxes $699,000 $930,000 $788,000
======== ======== ========
The reconciliation between the U.S. Federal statutory rate and the
Company's effective income tax rate for the years ended October 31,
1995, 1994 and 1993, is as follows:
1 9 9 5 1 9 9 4 1 9 9 3
------- ------- -------
U.S. Federal statutory rate 34% 34% 34%
Effect of entities taxed
as S Corporations (22) (6) (13)
State and local taxes 3 4 4
--- --- ---
Effective income tax rate 15% 32% 25%
=== === ===
The Company has a total of $341,000 and $417,000 of deferred tax
liabilities at October 31, 1995 and 1994, respectively, relating to
certain intangible assets deducted for tax purposes and capitalized
for book purposes.
(7) RETIREMENT PLANS
The Company offers a retirement savings plan (the Plan) to all
eligible employees as defined in the Plan agreement. Employees may
contribute up to 15% of their gross wages to the Plan on a pre-tax
basis. The Company's contributions to the Plan are discretionary.
For the years ended October 31, 1995, 1994 and 1993, the Company
made no contributions to the Plan.
15
22
BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
Effective January 1, 1996, the Company offered an additional
retirement savings plan (the Plan) to all eligible employees covered
by a collective bargaining agreement. Employees may contribute up
to 15% of their gross wages to the Plan on a pre-tax basis. The
Company's contributions to the Plan are discretionary.
During the year ended October 31, 1995, the Company entered into a
phantom stock agreement with one of its key executives. This
agreement rateably awards the executive 215 phantom stock shares
based on service provided through November 1, 1996. Upon
termination of employment, death or disability, the Company will pay
the executive an amount of cash per phantom share equal to the book
value per share of the Company, as defined in the agreement, at the
time of separation. If the Company completes an initial public
offering of its stock, a business combination or a dissolution, the
Company will pay the executive an amount of cash per phantom share
equal to the transaction price per common share. The Company
expensed $100,000 related to this plan for the year ended October
31, 1995. As a result of the acquisition of the Company (Note 10),
the Company paid the key executive approximately $800,000 pursuant
to this agreement.
(8) COMMITMENTS AND CONTINGENCIES
BCCC leases its office under a seven-year operating lease agreement.
In addition, the Company leases certain machinery and equipment under
short-term operating lease agreements and leases additional
warehouse space under a four-year operating lease agreement, which
requires payments for taxes and insurance.
Total rent expense for all leases of the Company for the years ended
October 31, 1995, 1994 and 1993, was approximately $1,228,000,
$733,000 and $700,000, respectively. Minimum annual rental
commitments beyond 1995 for the Company's operating leases are as
follows:
Year Ended
October 31,
-----------
1996 $ 709,000
1997 454,000
1998 257,000
1999 223,000
2000 224,000
Thereafter 146,000
----------
$2,013,000
==========
16
23
BLUE CORAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(Continued)
The Company is a party to lawsuits and claims in the ordinary course
of business. Although the ultimate outcome of these lawsuits and
claims cannot presently be determined, management believes that the
resolution of these claims and lawsuits will not have a materially
adverse effect on the Company's financial position or results of
operations.
(9) FIRE AT McKAY DIVISION
In October 1993, a fire completely destroyed a finished goods
warehouse and all of its contents at the McKay facility in Los
Angeles, California. The property loss, which was approximately
$2,000,000, was covered by the Company's insurance policy. The
production facility adjacent to the warehouse was virtually
unaffected and production was interrupted for only one month. The
Company incurred significant costs relating to the clean-up of the
debris and chemicals spilled resulting from the fire. The Company
reflected a $750,000 loss as an extraordinary item in the
accompanying combined statements of income related to this event.
(10) SUBSEQUENT EVENT
On June 28, 1996, Quaker State Corporation (Quaker State) acquired all
of the stock of the Company for $46.1 million in cash, 2,956,328
shares of Quaker State capital stock with a market value of $43.5
million and the payment of $25.2 million to satisfy indebtedness of
the Company prior to the closing (Notes 2, 5 and 7). Through a
previously existing agreement, the minority stockholder of NicSand
has the option to purchase the Company's 67% ownership interest in
the division as a result of this transaction.
17
24
Item 7(b) Pro Forma Financial Information
PRO FORMA FINANCIAL INFORMATION
On June 28, 1996 Quaker State Corporation ("Quaker State") acquired all the
stock of Blue Coral, Inc. ("Blue Coral"). The acquisition has been accounted
for under the purchase method and, accordingly, the operating results of Blue
Coral have been included in the consolidated financial statements of Quaker
State from the date of acquisition. The purchase accounting adjustments
presented in the following Pro Forma statements are preliminary estimates and
subsequent revisions may be necessary. The following Pro Forma financial
statements should be read in conjunction with the historical financial
statements and other financial information of Blue Coral appearing elsewhere in
Quaker State's Form 8-K/A-1 and the historical financial statements and other
financial information of Quaker State appearing in its 1995 Annual Report on
Form 10-K and its quarterly reports on Form 10-Q for the quarters ended June 30,
1996 and March 31, 1996.
PRO FORMA CONSOLIDATED BALANCE SHEET
No Pro Forma Consolidated Balance Sheet of Quaker State Corporation and
Subsidiaries as of June 30, 1996 is included in this current report on Form
8-K/A-1 because the purchase of Blue Coral is reflected in the Consolidated
Balance Sheet in Quaker State Corporation's quarterly report on Form 10-Q for
the quarter ended June 30, 1996. The Balance Sheet of Quaker State Corporation
and Subsidiaries as of June 30, 1996 is incorporated herein by reference from
the Quaker State quarterly report on Form 10-Q for the quarter ended June 30,
1996.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited Pro Forma Consolidated Statements of Operations of
Quaker State Corporation and Subsidiaries for the year ended December 31, 1995
and the six months ended June 30, 1996 present the separate historical results
of Quaker State and Blue Coral (prior to the acquisition date of June 28, 1996)
and consolidated pro forma results as though such purchase had occurred on
January 1, 1995. The unaudited Pro Forma Consolidated Statements of Operations
do not purport to be indicative of the results which actually would have
occurred if the acquisition had been consummated on January 1, 1995 or which
may occur in the future.
25
QUAKER STATE CORPORATION AND SUBSIDIARIES AND BLUE CORAL, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
Quaker State
Corporation * Blue Coral, Inc. Adjustments Pro Forma
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUES
Sales and operating revenues $1,035,570 $92,257 $1,127,827
Other, net 9,894 0 9,894
- ------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,045,464 92,257 1,137,721
COSTS AND EXPENSES
Cost of sales and operating costs 718,996 52,009 771,005
Selling, general and administrative 255,271 35,464 290,735
Depreciation and amortization 32,919 1,359 $ 2,070 (1) 36,348
Interest 7,228 1,864 2,190 (2) 11,282
Unusual items 27,000 0 27,000
Net gain on sale of product line and
closure of manufacturing facility 0 (2,306) (2,306)
- ------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 1,041,414 88,390 4,260 1,134,064
- ------------------------------------------------------------------------------------------------------
Pretax income (loss) from continuing
operations 4,050 3,867 (4,260) 3,657
Provision for (benefit from) income taxes 2,300 143 (300)(3) 2,143
- ------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 1,750 $ 3,724 $(3,960) $ 1,514
======================================================================================================
Weighted average shares outstanding 32,226 2,956 (4) 35,182
======================================================================================================
Per share:
Income from continuing operations $ 0.06 $ 0.04
======================================================================================================
* In July 1995, Quaker State acquired all of the stock of Slick 50, Inc.
(Slick 50). A Form 8-K was filed regarding Quaker State's acquisition of Slick
50. However, as the acquired business did not meet the definition of the term
"significant" as set out in Item 2, Instruction 4 to Form 8-K and as provided
in Rule 1-02(v) of Regulation S-X, no Pro Forma financial statements were
filed. Therefore, the Pro Forma statements presented herein only include
the results of operations of Slick 50 from the date of acquisition.
The accompanying notes are an integral part of these statements.
1
26
QUAKER STATE CORPORATION AND SUBSIDIARIES AND BLUE CORAL, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
Quaker State
Corporation Blue Coral, Inc. Adjustments Pro Forma
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUES
Sales and operating revenues $580,610 $60,171 $640,781
Other, net 4,090 0 4,090
- ----------------------------------------------------------------------------------------------------
TOTAL REVENUES 584,700 60,171 644,871
COSTS AND EXPENSES
Cost of sales and operating costs 401,378 33,334 434,712
Selling, general and administrative 141,216 21,471 162,687
Depreciation and amortization 16,836 736 $ 1,035 (1) 18,607
Interest 3,941 1,001 1,026 (2) 5,968
- ----------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 563,371 56,542 2,061 621,974
- ----------------------------------------------------------------------------------------------------
Pretax income (loss) from continuing
operations 21,329 3,629 (2,061) 22,897
Provision for income taxes 8,450 411 216 (3) 9,077
- ----------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 12,879 $ 3,218 $(2,277) $ 13,820
====================================================================================================
Weighted average shares outstanding 32,973 2,956 (4) 35,929
====================================================================================================
Per share:
Income from continuing operations $ 0.39 $ 0.38
====================================================================================================
The accompanying notes are an integral part of these statements.
2
27
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, UNAUDITED)
Explanation of adjustments to the Pro Forma Consolidated Statements of
Operations for the six month period ended June 30, 1996 and the year ended
December 31, 1995 in connection with the acquisition of Blue Coral are presented
below:
(1) To record amortization of excess of purchase price over fair market value
of assets acquired by Quaker State. Amortization is calculated on a
straight-line basis over 40 years. Final purchase accounting allocations may
result in certain intangible assets being amortized over a shorter period.
(2) To record net effect of the payment of Blue Coral indebtedness and the
increase in debt due to Quaker State's borrowings in connection with the
acquisition of Blue Coral.
(3) To record an income tax provision (benefit) for the results of operations
of Blue Coral and the income tax effect of pro forma adjustments.
(4) To increase the number of shares issued and outstanding after the
acquisition of Blue Coral.
3
28
EXHIBIT INDEX
Item No. Description
- -------- -----------
2 Asset Purchase Agreement by and among the Registrant, BC Acquisition Corporation, Blue Coral, Inc. and
the Stockholders of Blue Coral, Inc. dated as of June 7, 1996, with list of omitted schedules and
exhibits, filed as Exhibit 2 to Form 8-K filed July 12, 1996 and incorporated herein by reference.
4 Escrow Agreement among the Registrant and the Blue Coral Stockholders, dated as of June 28, 1996, filed
as Exhibit 4 to Form 8-K filed July 12, 1996 and incorporated herein by reference.
23 Consent of Independent Public Accountants filed herewith.