1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
- -------- OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996.
TRANSITION REPORT PURSUANT TO SECTION 13 OR
- -------- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ______________________
Commission File Number 1-2677
QUAKER STATE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 25-0742820
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
225 East John Carpenter Freeway
Irving, Texas 75062
(Address of Principal Executive Offices)
(Zip Code)
(972)868-0400
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of October 31, 1996, 35,938,188 shares of Capital Stock, par value
$1.00 per share, of the registrant were outstanding.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Quaker State Corporation and Subsidiaries
QUARTER NINE MONTHS
------------------------ ---------------------------
9/30/96 9/30/95 9/30/96 9/30/95
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA, UNAUDITED)
REVENUES
Sales and operating revenues $ 309,985 $ 277,109 $ 890,595 $ 774,340
Other, net 1,700 2,241 5,790 6,723
- -----------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 311,685 279,350 896,385 781,063
COSTS AND EXPENSES
Cost of sales and operating costs 209,951 188,937 611,329 543,159
Selling, general and administrative 77,814 72,433 219,030 186,931
Depreciation and amortization 9,398 8,330 26,234 22,900
Interest 3,118 1,777 7,059 4,895
Unusual item - 1,204 - 17,004
- -----------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 300,281 272,681 863,652 774,889
- -----------------------------------------------------------------------------------------------------------------------
Pretax income from continuing operations 11,404 6,669 32,733 6,174
Provision for income taxes 4,650 2,596 13,100 2,408
- -----------------------------------------------------------------------------------------------------------------------
Income from continuing operations 6,754 4,073 19,633 3,766
Income from discontinued operations - 11,255 - 13,933
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 6,754 $ 15,328 $ 19,633 $ 17,699
=======================================================================================================================
PER SHARE:
Income from continuing operations $ 0.19 $ 0.13 $ 0.58 $ 0.12
Income from discontinued operations - 0.34 - 0.43
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.19 $ 0.47 $ 0.58 $ 0.55
=======================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 36,067 32,878 34,002 32,018
=======================================================================================================================
=======================================================================================================================
DIVIDENDS PAID PER SHARE $ 0.10 $ $0.10 $ $0.30 $ $0.30
=======================================================================================================================
The accompanying notes are an integral part of the financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quaker State Corporation and Subsidiaries
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, UNAUDITED)
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 30,546 $ 876
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from disposal of property and equipment 2,914 3,962
Capital expenditures (40,429) (26,066)
Proceeds from sale of discontinued operations -- 62,817
Acquisitions, net of cash acquired (75,633) (30,996)
Other, net (7,920) --
- ---------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (121,068) 9,717
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid (10,159) (9,583)
Proceeds from long-term debt 102,170 31,829
Payments on long-term debt (30,650) (32,700)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 61,361 (10,454)
- ---------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (29,161) 139
Cash and cash equivalents at beginning of period 30,659 29,805
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,498 $ 29,944
=====================================================================================================================
The accompanying notes are an integral part of the financial statements.
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4
CONDENSED CONSOLIDATED BALANCE SHEETS
Quaker State Corporation and Subsidiaries
9/30/96 12/31/95
- ------------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT SHARE DATA) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,498 $ 30,659
Accounts and notes receivable, net 163,020 129,267
Inventories 98,259 80,284
Other current assets 44,429 36,796
- ------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 307,206 277,006
- ------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net of accumulated
depreciation of $226,429 and $210,851 228,596 203,259
Other assets 325,777 236,758
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 861,579 $ 717,023
============================================================================================================
LIABILITIES
Current liabilities:
Accounts payable $ 62,081 $ 53,465
Accrued liabilities 95,605 84,225
Installments on long-term debt, payable within one year 13,024 7,243
- ------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 170,710 144,933
- ------------------------------------------------------------------------------------------------------------
Long-term debt, less current installments 184,258 118,519
Other long-term liabilities 179,991 181,416
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 534,959 444,868
- ------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock, $1.00 par value; authorized shares, 95,000,000;
issued shares, 35,929,453 at 9/30/96 and
32,824,157 at 12/31/95 35,929 32,824
Additional capital 181,404 139,068
Retained earnings 112,982 103,519
Other, net (3,695) (3,256)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 326,620 272,155
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 861,579 $ 717,023
============================================================================================================
The accompanying notes are an integral part of the financial statements.
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5
SEGMENT INFORMATION
Quaker State Corporation and Subsidiaries
QUARTER ENDED NINE MONTHS ENDED
-------------------- -----------------------
9/30/96 9/30/95 9/30/96 9/30/95
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, UNAUDITED)
OPERATING REVENUES
Lubricant and lubricant services $ 244,558 $ 233,556 $ 730,601 $ 679,508
Consumer products 44,590 22,677 92,764 22,677
Truck-Lite 20,788 20,656 67,055 70,273
Docks 752 701 2,477 2,363
Intersegment sales (703) (481) (2,302) (481)
- -------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES $ 309,985 $ 277,109 $ 890,595 $ 774,340
=============================================================================================================
Operating profits
Lubricant and lubricant services $ 11,987 $ 9,911 $ 35,139 $ 26,925
Consumer products 4,751 1,978 11,770 1,978
Truck-Lite 1,536 1,350 5,557 8,693
Docks 260 144 878 625
- -------------------------------------------------------------------------------------------------------------
TOTAL OPERATING PROFITS 18,534 13,383 53,344 38,221
- -------------------------------------------------------------------------------------------------------------
Interest expense (3,118) (1,808) (7,059) (4,831)
Corporate other income 732 1,093 2,308 3,670
General corporate expense (4,744) (4,795) (15,860) (13,882)
Unusual item - (1,204) - (17,004)
- -------------------------------------------------------------------------------------------------------------
PRETAX INCOME $ 11,404 $ 6,669 $ 32,733 $ 6,174
=============================================================================================================
The accompanying notes are an integral part of the financial statements.
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6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quaker State Corporation and Subsidiaries (unaudited)
1. In the opinion of management of Quaker State Corporation (the company), the
accompanying financial statements include all adjustments which are
necessary for a fair statement of the results for such periods. All of
these adjustments are of a normal recurring nature. The December 31, 1995
condensed consolidated balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. These statements should be read in
conjunction with the financial statements included as part of the 1995
Annual Report on Form 10-K. Certain items in 1995 periods have been
reclassified to conform to the 1996 presentation.
As of January 1, 1996, the company began reporting the results of its fast
lube subsidiary, Q Lube, Inc. (Q Lube) as a component of its core
lubricant and lubricant services business. Prior to that, Q Lube had been
reported as a separate segment. In July 1996, the company formed a new
consumer products segment, which is comprised of Slick 50, Inc. (Slick 50)
and Blue Coral, Inc. (Blue Coral). Slick 50 results, which were previously
reported in lubricant and lubricant services, have been reclassified to the
consumer products segment.
2. In June 1996, the company acquired all of the stock of Blue Coral for $46.1
million in cash, 2,956,328 shares of capital stock with a market value of
$43.5 million and the payment of $25.2 million to satisfy Blue Coral
indebtedness outstanding prior to the closing. Blue Coral is a leading
manufacturer, marketer and distributor of high quality automotive
appearance products. The acquisition has been accounted for under the
purchase method. Accordingly, the operating results of Blue Coral are
included in the accompanying condensed consolidated financial statements
from the date of acquisition. The purchase price allocation to assets and
liabilities is preliminary. The acquisition has resulted in a preliminary
excess of purchase price over fair market value of assets of approximately
$83.5 million recorded in the Condensed Consolidated Balance Sheet at
September 30, 1996.
The following schedule is prepared on a pro forma basis as though Blue
Coral and Slick 50 had been acquired as of the beginning of 1995, after
including the impact of adjustments, such as amortization of intangible
assets, additional interest expense and related tax effects.
For the nine months ended September 30
(in thousands except per share data) 1996 1995
----------------------------------------------------------------------------
Sales and operating revenues $ 944,275 $ 883,316
Income from continuing operations $ 20,102 $ 2,643
Income per share from continuing operations $ .56 $ .07
----------------------------------------------------------------------------
3. The effective tax rate for the three and nine months ended September 30,
1996 of 40% for continuing operations is higher than the 35% federal rate
due to the impact of state and foreign taxes and nondeductible intangible
asset amortization.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quaker State Corporation and Subsidiaries (unaudited)
4. 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 lubricants and vehicular lighting products; and on the first-in,
first-out (FIFO) basis for consumer products. The reserve to reduce the
carrying value of inventories from FIFO basis to LIFO basis amounted to
$22.5 million at September 30, 1996 and $18.9 million at December 31, 1995.
Inventories consist of:
(in thousands) 9/30/96 12/31/95
---------------------------------------------------------------------
Crude oil, lubricants and related materials $ 71,724 $ 60,202
Vehicular lighting products 12,033 14,727
Automotive consumer products 14,502 5,355
---------------------------------------------------------------------
Total $ 98,259 $ 80,284
=====================================================================
5. In December 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 that 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. A tentative settlement has been
reached that will require the company to pay civil penalties and to
complete supplemental environmental projects with a total value of $2.9
million. This settlement is provided for in the company's current
environmental reserves.
In addition, the company and certain of its subsidiaries have received
notices from the U.S. Environmental Protection Agency (EPA) and others that
each 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.
In the June 30, 1996 Quarterly Report on Form 10-Q the company disclosed,
among other things, that its subsidiary Quaker State-Slick 50, Inc. (QS
Slick 50) and several of its subsidiaries had been named as defendants in
four separate proceedings alleging that QS Slick 50 made false, misleading,
deceptive and/or unsubstantiated advertising claims relating to Slick 50(R)
engine treatment. Two additional purported class action suits were filed
during the third quarter of 1996. These complaints seek compensatory and
punitive damages, restitution and injunctive relief, attorneys' fees, court
costs and interest on behalf of the purported classes. The company intends
to vigorously defend these lawsuits.
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 when resolved.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quaker State Corporation and Subsidiaries (unaudited)
6. In April 1996, the company replaced its $45 million line of credit with a
$90 million credit agreement, which was increased to $140 million in
September 1996. This credit agreement provides for loans from time to time
not in excess of $140 million outstanding at any time, and provides for
various interest rate elections by the company. The credit agreement
expires in September 2001. The company utilized $71.3 million of the
credit agreement in the acquisition of Blue Coral in June 1996. As of
September 30, 1996, the company had $83 million available for borrowing
under the credit agreement.
On September 30, 1996, the company entered into a $165 million credit
agreement, which expires in September 1997. The credit agreement provides
for loans from time to time not in excess of $165 million outstanding at
any time, and provides for various interest rate elections by the company.
As of October 2, 1996, the credit agreement was fully utilized, in
connection with the Medo acquisition (see Note 7). The company intends to
replace this credit agreement with equity and/or long-term financing prior
to September 1997.
The company has various other uncommitted lines of credit which it borrows
under from time to time at various interest rates. As of September 30,
1996, the company had borrowings of $20 million outstanding on one such
line of credit.
7. On October 2, 1996, the company acquired all of the stock of Medo
Industries, Inc. and its affiliated companies (Medo) for $160 million in
cash. The cash consideration for the transaction included the payment of
certain Medo indebtedness totaling $17.7 million prior to closing. Medo is
engaged in the design, manufacture and marketing of air freshener products
primarily for use in automobiles. The acquisition has been accounted for
under the purchase method. Accordingly, the operating results of Medo are
not included in the accompanying condensed consolidated financial
statements for the three and nine months ended September 30, 1996. The
operating results of Medo will be included in the new consumer products
segment.
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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The condensed consolidated financial statements, segment information and
related notes for Quaker State Corporation (the company) included in this Form
10-Q, should be read as an integral part of this analysis.
Certain of the matters discussed herein are forward-looking statements that
involve risks and uncertainties, including, but not limited to, economic
conditions, product demand, competitive products and pricing, availability of
raw materials, changes in inventory due to shifts in market demand,
environmental and trade regulations, litigation and other risks indicated in
filings with the Securities and Exchange Commission. Such factors could cause
actual results to differ significantly from estimates.
In June 1996, the company acquired all of the stock of Blue Coral, Inc. (Blue
Coral) for $46.1 million in cash, 2,956,328 shares of capital stock with a
market value of $43.5 million and the payment of $25.2 million to satisfy Blue
Coral indebtedness outstanding prior to the closing. Blue Coral is a leading
manufacturer, marketer and distributor of high quality automotive appearance
products. The acquisition has been accounted for under the purchase method.
Accordingly, the operating results of Blue Coral are included in the
accompanying condensed consolidated financial statements from the date of
acquisition. The purchase price allocation to assets and liabilities is
preliminary. The acquisition has resulted in a preliminary excess of purchase
price over fair market value of assets of approximately $83.5 million recorded
in the Condensed Consolidated Balance Sheet at September 30, 1996. The Blue
Coral acquisition diluted earnings in the third quarter by $0.02 per share, due
to the seasonality of the business. It is projected that Blue Coral will have a
similar effect on earnings in the fourth quarter.
On October 2, 1996, the company acquired all of the stock of Medo Industries,
Inc. and its affiliated companies (Medo) for $160 million in cash. The cash
consideration for the transaction included the payment of certain Medo
indebtedness totaling $17.7 million prior to closing. Medo is engaged in the
design, manufacture and marketing of air freshener products primarily for use
in automobiles. The acquisition has been accounted for under the purchase
method. Accordingly, the operating results of Medo are not included in the
accompanying condensed consolidated financial statements for the three and nine
months ended September 30, 1996.
Effective July 1, 1996 the company formed a new consumer products segment, as a
result of combining the Blue Coral and Slick 50 operating results. Slick 50's
results which were previously reported in the lubricant and lubricant services
segment have been reclassified to the consumer products segment. The operating
results of Medo will be included in the consumer products segment.
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10
Management's Discussion and Analysis of Results of Operations and Financial
Condition, continued
The company reported net income of $6.8 million or $.19 per share for the
quarter ended September 30, 1996, compared to a net income of $15.3 million or
$.47 per share for the quarter ended September 30, 1995. The Blue Coral
acquisition diluted earnings in the quarter ended September 30, 1996 by $0.02.
The quarter ended September 30, 1995 included $11.3 million, or $.34 per share,
of income from discontinued operations. In addition, the quarter ended
September 30, 1995 included a restructuring charge of $1.2 million, $722,000
after-tax. The weighted average shares of capital stock outstanding for the
quarter ended September 30, 1996 increased 3.2 million shares compared to the
same period in 1995, primarily as a result of issuing shares in connection with
the acquisition of Blue Coral in June 1996. Sales and operating revenues from
continuing operations were $310 million for the quarter ended September 30,
1996, up $32.9 million from $277.1 million for the quarter ended September 30,
1995. Sales and operating revenues include $20.7 million from Blue Coral for
the quarter ended September 30, 1996. Operating profit from continuing
operations for the quarter ended September 30, 1996 increased 38% to $18.5
million from $13.4 million for the quarter ended September 30, 1995.
Lubricant and lubricant services operating profit was $12 million for the
quarter ended September 30, 1996, up 21% compared to $9.9 million operating
profit before the restructuring charge for the quarter ended September 30,
1995. Revenues for the quarter ended September 30, 1996 were $244.6 million,
up $11 million from $233.6 million for the quarter ended September 30, 1995.
Branded and private label motor oil sales volumes for the quarter ended
September 30, 1996 increased 8% and 13%, respectively, compared to the same
quarter in 1995. Car counts for the quarter ended September 30, 1996 were up
1% and the average ticket price was up 1% at the company's Q Lube operations,
compared to the same quarter in 1995. As of January 1, 1996, the company began
reporting the results of its fast lube subsidiary, Q Lube, as a component of
its core lubricant and lubricant services business. Prior to that, Q Lube had
been reported as a separate segment.
The new Consumer Products segment recorded revenues of $44.6 million for the
quarter ended September 30, 1996, compared to $22.7 million for the same
quarter last year. Operating profit for the quarter ended September 30, 1996
was $4.8 million compared to $2 million for the quarter ended September 30,
1995. The increases are due to increased volume at Slick 50 and the
acquisition of Blue Coral.
Truck-Lite operating profit for the quarter ended September 30, 1996 was $1.5
million, up 14% compared to $1.4 million for the quarter ended September 30,
1995. Revenues were basically flat with $20.8 million in 1996 compared to
$20.7 million for the quarter ended September 30, 1995.
For the quarter ended September 30, 1996, corporate income was $732,000
compared to $1,093,000 for the quarter ended September 30, 1995. The decrease
is primarily due to additional interest income received in 1995. Interest
expense increased for the quarter ended September 30, 1996 as a result of the
issuance of $100 million of Notes in October 1995 and the increased debt due to
the Blue Coral acquisition.
9
11
Management's Discussion and Analysis of Results of Operations and Financial
Condition, continued
Net income for the nine months ended September 30, 1996 was $19.6 million or
$.58 per share, compared to net income of $17.7 million or $.55 per share for
the nine months ended September 30, 1995. The nine months ended September 30,
1995 included $13.9 million, or $.43 per share, of income from discontinued
operations. In addition, the nine months ended September 30, 1995 included a
restructuring charge of $17 million, or $10.2 million after-tax. The weighted
average shares of capital stock outstanding for the nine months ended September
30, 1996 increased two million shares compared to the same period in 1995,
primarily as a result of issuing shares in connection with the acquisitions of
Blue Coral and Slick 50. Sales and operating revenues from continuing
operations were $890.6 million for the nine months ended September 30, 1996, up
$116.3 million from $774.3 million for the nine months ended September 30,
1995. The increase in sales and operating revenues is attributable to
increased motor oil volume and the inclusion of Slick 50 for a full nine months
and Blue Coral for three months. Operating profit from continuing operations
for the nine months ended September 30, 1996 increased 40% to $53.3 million
from $38.2 million for the nine months ended September 30, 1995.
Lubricant and lubricant services operating profit was $35.1 million for the
nine months ended September 30, 1996, up 31% compared to $26.9 million for the
nine months ended September 30, 1995. Revenues for the nine months ended
September 30, 1996 were $730.6 million, up $51.1 million from $679.5 million
for the nine months ended September 30, 1995. Branded and private label motor
oil sales volumes for the nine months ended September 30, 1995 increased 6% and
15%, respectively, compared to the same nine month period in 1995. In addition,
1995 operating results included $1.5 million of LIFO inventory profits. Car
counts for 1996 were up 4% and the average ticket price was up 4% at the
company's Q Lube operations as compared to the same nine month period in 1995.
The new Consumer Products segment recorded revenues of $92.8 million for the
nine months ended September 30, 1996 compared to $22.7 million for the same
period last year. Operating profit for the nine months ended September 30, 1996
was $11.8 million compared to $2 million for the quarter ended September 30,
1995. The increase is due to the inclusion of Slick 50 for nine months and
Blue Coral for three months in 1996.
Truck-Lite operating profit for the nine months ended September 30, 1996 was
$5.6 million, down 36% compared to $8.7 million for the nine months ended
September 30, 1995. Revenues were down $3.2 million to $67.1 million from
$70.3 million for the nine months ended September 30, 1995. For the nine
months, Truck-Lite suffered from softening of the overall truck market. The
operating profit and revenue declines are attributable to Truck-Lite changing
its product mix to emphasize truck and trailer lighting coupled with overall
industry declines in truck and trailer builds.
For the nine months ended September 30, 1996, corporate income was $2.3 million
compared to $3.7 million for the nine months ended September 30, 1995. The
decrease is primarily due to additional royalty and interest income received in
1995. Interest expense increased for the nine months ended September 30, 1996
as a result of the issuance of $100 million of Notes in October 1995 and the
increased debt due to the Blue Coral acquisition. Corporate expenses for the
nine months ended September 30, 1996 increased to $15.9 million from $13.9
million for the same period in 1995, due to the increased benefit and lease
costs and higher than expected transition costs.
10
12
Management's Discussion and Analysis of Results of Operations and Financial
Condition, continued
The effective tax rate for the quarter and nine months ended September 30, 1996
of 40% for continuing operations is higher than the 35% federal rate due to the
impact of state and foreign income taxes and nondeductible intangible asset
amortization.
In April 1996, the company replaced its $45 million line of credit with a $90
million credit agreement, which was increased to $140 million in September
1996. This credit agreement provides for loans from time to time not in excess
of $140 million outstanding at any time, and provides for various interest rate
elections by the company. The credit agreement expires September 2001. The
company utilized $71.3 million of the credit agreement in the acquisition of
Blue Coral in June 1996. As of September 30, 1996, the company had $83 million
available under the credit agreement.
On September 30, 1996, the company entered into a $165 million credit
agreement, which expires in September 1997. The credit agreement provides for
loans from time to time not in excess of $165 million outstanding at any time,
and provides for various interest rate elections by the company. As of October
2, 1996, the credit agreement was fully utilized, in connection with the Medo
acquisition. The company expects to replace this credit agreement with equity
and/or long-term financing prior to September 1997.
The company has various other uncommitted lines of credit which it borrows
under from time to time at various interest rates. As of September 30, 1996,
the company had borrowings of $20 million outstanding on one such line of
credit.
Cash and cash equivalents decreased by $29.2 million over the nine months ended
September 30, 1996. The decrease was comprised of $30.5 million net cash
provided by operations, $121.1 million net cash used in investing activities
and $61.4 million net cash provided by financing activities.
Cash used in investing activities of $121.1 million was primarily due to the
$75.6 million cash used in acquisition of businesses, a substantial portion of
which related to Blue Coral, and $40.4 million of capital expenditures. Cash
provided by financing activities of $61.4 million was primarily due to $10.2
million of cash used for payment of dividends and net borrowings of $71.5
million, a substantial portion of which was used to acquire Blue Coral.
The company plans to open approximately 50 new Q Lube locations over the next
twelve to fifteen months, 25 to 30 of which will be free standing units. The
remaining units are expected to come from the company's strategic alliances
with Monro Muffler and Discount Auto. This expansion is dependent on
identifying appropriate locations, availability of capital and economic
conditions.
On October 24, 1996 the Board of Directors of the company authorized a
quarterly dividend of $.10 per share, payable to shareholders of record as of
November 15, 1996.
11
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In its quarterly report on Form 10-Q for the quarter ended June 30, 1996, the
company disclosed that the company's subsidiary, Quaker State-Slick 50, Inc.
(QS Slick 50) and several of its subsidiaries were named as defendants in four
separate proceedings alleging false, misleading, deceptive and/or
unsubstantiated advertising claims relating to Slick 50(R) engine treatment.
Two additional purported class action suits were filed during the third quarter
of 1996. One additional suit filed by Neal Hargett, et. al., in U.S. District
Court, for the Northern District of Alabama, on September 24, 1996, alleges
conspiracy, fraud, misrepresentation, breach of contract and breach of
warranty. A suit filed by Christina Kerksieck, et. al., in the Superior Court
for San Francisco County, California on October 11, 1996 alleges violations of
the California Consumer Legal Remedies Act, California Business and Professions
Code, false advertising, unfair competition, fraud, deceit and negligent
misrepresentation. These complaints seek compensatory and punitive damages,
imposition of a constructive trust, restitution and injunctive relief,
attorneys' fees, court costs and interest on behalf of the purported classes.
The company intends to vigorously defend these lawsuits.
12
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Item 6. Exhibits and Reports on Form 8-K
(a) 3 Bylaws of the Company, as amended and restated on July 25,
1996, filed herewith.
4(a) Indenture between Quaker State and Chemical Bank, as Trustee,
related to $100,000,000 of 6.625% Notes due 2005, dated
October 24, 1995, filed herewith.
4(b) Amended and restated $140 million Credit Agreement, dated
April 17, 1996 and amended and restated September 27, 1996,
between Quaker State and Morgan Guaranty Trust Company of New
York, as Agent, with a list of omitted Schedules and Exhibits
filed herewith.
4(c) $165 million Credit Agreement between Quaker State and Texas
Commerce Bank National Association, as Agent, dated as of
September 30, 1996, with a list of omitted Schedules and
Exhibits filed herewith.
10(a) Amendment to Employment Agreement with Herbert M. Baum dated
May 10, 1996, filed herewith.
10(b) First Amendment to the 1994 Stock Incentive Plan, dated
October 24, 1996, filed herewith.
10(c) Third Amendment to the 1986 Stock Option Plan, dated October
24, 1996, filed herewith.
10(d) First Amendment to the 1994 Non-Employee Directors' Stock
Option Plan, dated October 24, 1996, filed herewith.
10(e) 1996 Directors' Fee Plan, as amended and restated October 24,
1996 to be effective January 1,1997, filed herewith.
11 Computation of net income per share for the quarters and nine
month periods ending September 30, 1996 and 1995, filed
herewith.
27 Financial Data Schedule, filed herewith.
(b) A current report on Form 8-K was filed by Quaker State on July 13,
1996 and amended on September 11, 1996. Quaker State reported under
Item 2 the completion of the acquisition of Blue Coral Inc. Financial
statements for Blue Coral Inc. and pro forma financial information
related to this acquisition were included in an amendment to this
report on Form 8-K filed on September 11, 1996.
A current report on Form 8-K was filed by Quaker State on October 10,
1996. Quaker State reported under Item 2 the completion of the
acquisition of Medo Industries Inc. and its affiliated companies
(Medo). The report included financial statements for Medo. Interim
financial and pro forma financial information related to the
acquisition will be filed by an amendment to this report to be filed
not later than 60 days following the required date for filing.
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SIGNATURES
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 thereunto duly authorized.
QUAKER STATE CORPORATION
(Registrant)
Date November 13, 1996 By /s/ Herbert M. Baum
------------------ ----------------------------
Herbert M. Baum
Chairman of the Board and
Chief Executive Officer
Date November 13, 1996 By /s/ C. A. Conrad
------------------ ----------------------------
Conrad A. Conrad
Vice Chairman and
Chief Financial Officer
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QUAKER STATE CORPORATION
EXHIBIT LIST
The following Exhibits are required to be filed with this quarterly report on
Form 10-Q.
Exhibit No. and Document
3 Bylaws of the Company, as amended and restated on July 25,
1996, filed herewith.
4(a) Indenture between Quaker State and Chemical Bank, as Trustee,
related to $100,000,000 of 6.625% Notes due 2005, dated
October 24, 1995, filed herewith.
4(b)) Amended and restated $140 million Credit Agreement, dated
April 17, 1996 and amended and restated September 27, 1996,
between Quaker State and Morgan Guaranty Trust Company of New
York, as Agent with a list of omitted Schedules and Exhibits,
filed herewith.
4(c) $165 million Credit Agreement between Quaker State and Texas
Commerce Bank National Association, as Agent, dated as of
September 30, 1996 with a list of omitted Schedules and
Exhibits, filed herewith.
10(a) Amendment to Employment Agreement with Herbert M. Baum dated
May 10, 1996, filed herewith.
10(b) First Amendment to the 1994 Stock Incentive Plan, dated
October 24, 1996, filed herewith.
10(c) Third Amendment to the 1986 Stock Option Plan, dated October
24, 1996, filed herewith.
10(d) First Amendment to the 1994 Non-Employee Directors' Stock
Option Plan, dated October 24, 1996, filed herewith.
10(e) 1996 Directors' Fee Plan, as amended and restated October 24,
1996 to be effective January 1,1997, filed herewith.
11 Computation of net income per share for the quarters and nine
month periods ending September 30, 1996 and 1995, filed
herewith.
27 Financial Data Schedule, filed herewith.
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