<PAGE>   1
                                                                      EXHIBIT 13


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION

The consolidated financial statements and related notes (pages 23 to 35) and
the segment information included on pages 20 and 21 should be read as an
integral part of this review.

         In June 1996, the company acquired all the stock of Blue Coral, Inc.
(Blue Coral) for $43.5 million in cash, the issuance of 2,956,328 shares of
capital stock with a market value of $43.5 million, and the payment of $27.9
million to satisfy certain Blue Coral indebtedness. In October 1996, the
company acquired all the stock of Medo Industries, Inc. and its affiliated
companies (Medo) for $142.3 million in cash and the payment of $17.7 million to
satisfy certain Medo indebtedness. These acquisitions are expected to add over
$175 million in annual revenues. In connection with the above acquisitions the
company formed a new Consumer Products segment, combining the operating results
of Blue Coral, Medo and Slick 50, Inc. (Slick 50), which was acquired in 1995.
Slick 50's results, which were previously reported in the Lubricants and
Lubricant Services segment, have been reclassified to the Consumer Products
segment.

         As of January 1, 1996, the company began reporting the results of its
fast lube subsidiary, Q Lube, as a component of its core lubricants and
lubricant services businesses. Prior to that, Q Lube had been reported as a
separate segment. Prior periods have been reclassified to conform to current
presentation.

CONSOLIDATED REVIEW OF OPERATIONS

Net income for 1996 was $13.7 million, or $.40 per share compared to $12.1
million, or $.38 per share in 1995. Net income in 1996 included $9.3 million,
net of taxes, or $.27 per share related to unusual items consisting of the
write-down of certain assets and restructuring charges of $12.4 million, net of
taxes, or $.36 per share, and a gain on the settlement of a long-term
receivable of $3.1 million, net of taxes, or $.09 per share (see Note 3 to the
Consolidated Financial Statements). Net income in 1996 was negatively impacted
by the dilutive effect of the June 1996 acquisition of Blue Coral, due to the
seasonal nature of Blue Coral's business and a shortfall in second-season
sales, partially offset by the positive impact of Medo. Net income for 1995
included $16.5 million, net of taxes, or $.51 per share, related to unusual
items consisting of 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). Additionally, 1995
included $14.5 million, or $.45 per share, related to a gain on sale and income
from discontinued operations (see Note 5 to the Consolidated Financial
Statements) and $4.1 million, or $.13 per share, for an extraordinary item
related to early extinguishment of debt (see Note 9 to the Consolidated
Financial Statements). Net income of $18.8 million, or $.66 per share in 1994
included $9.3 million or $.33 per share, related to discontinued operations.

         Income from continuing operations in 1996 was $13.7 million, or $.40
per share, compared to $1.8 million, or $.06 per share in 1995. Included in
income from continuing operations in 1996 is $14.5 million related to the
unusual items, the operating results of Slick 50 for a full year and the
operating results of Blue Coral and Medo for six and three months,
respectively. Operating profit before unusual items for the Lubricants and
Lubricant Services segment was up 16% over 1995 primarily due to increased
sales volume in both the retail and installed markets. Operating profit at
Truck-Lite was down 32% as the company continued its withdrawal from the
automotive lighting business. 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 unusual items and the operating results of Slick 50 for six months.
Operating profit before unusual items in the Lubricants and Lubricant Services
segment was up 67%, due to increased sales volume over 1994. Operating profit
at Truck-Lite was down 16%, due to a decrease in automotive lighting volume.

         Sales and operating revenues in 1996 were up 16% to $1.2 billion
compared to $1 billion in 1995. Recent acquisitions and increased sales volumes
at each of the company's major businesses contributed to the increase in
revenues in 1996. Sales and operating revenues in 1995 were up 41% over $732.6
million in 1994 as a result of increased sales volumes and the Specialty Oil
Company (Specialty) and Westland Oil Company (Westland) acquisitions.

LUBRICANTS AND LUBRICANT SERVICES

Operating profit before unusual items for 1996 was $46.1 million compared to
$39.9 million in 1995. The increase in operating profit was favorably impacted
by a 7% and 16% increase in branded and private label motor oil volumes, and a
3% increase in car counts and average ticket prices at the company's Q Lube
operations, offset by reduced LIFO



18
<PAGE>   2


profits of $1.1 million. Operating profit before unusual items in 1995 was up
67% over $23.9 million in 1994. The increase was due to improved branded motor
oil and refinery margins, increased car counts and average ticket prices and
LIFO profits of $2.2 million.

         Operating revenues were up 7% to $972.4 million in 1996 compared to
$906.2 million in 1995. The increase in revenues was due to the improved volume
of branded and private label motor oil and increased car counts and average
ticket prices. Operating revenues for 1995 were up 43% compared to 1994
operating revenues of $633 million primarily due to the Specialty and Westland
acquisitions in 1994.

CONSUMER PRODUCTS

Operating profit before unusual items for 1996 was $14.4 million compared to
$2.9 million in 1995. The increase is due to the acquisition of Medo, and the
full-year results accompanied by improved volume at Slick 50, partially offset
by seasonal operating losses at Blue Coral. The Consumer Products segment
recorded revenues of $143.9 million in 1996 compared to $40 million in 1995 due
to the inclusion of Blue Coral, Medo and Slick 50.

TRUCK-LITE

Operating profit decreased to $6.7 million in 1996 compared to $9.8 million in
1995. This decline is attributed to lower sales volume and a change in product
mix as Truck-Lite continued its withdrawal from the automotive lighting
business to focus on the more profitable original equipment and aftermarket
truck lighting business. Operating profit was down 16% in 1995 compared to
$11.8 million in 1994 as a result of the softening automotive market and
initiation of Truck-Lite's transition out of the automotive lighting business.

         Operating revenues were down 4% to $86.7 million in 1996 from $90.3
million in 1995 due to lower sales volume and changes in product mix. Operating
revenues for 1995 were down 9% from $99.6 million in 1994, due to the softening
of the automotive market.

CORPORATE

Corporate income excluding unusual items was down 45% to $3 million in 1996
from $5.5 million in 1995, due to reduced cash on hand and reduced royalty
income received from the acquirer of the coal operations. Corporate expenses
were down 5% to $18.8 million in 1996 compared to $19.8 million in 1995.
Interest expense increased 75% to $12.6 million in 1996 from $7.2 million in
1995 as a result of utilizing debt in recent acquisitions. In 1996, the company
settled a long-term receivable from the acquirer of the coal operations
resulting in an unusual gain of $5 million.

         Corporate income was up 71% 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 increased 6% in 1995 from $18.7 million in 1994. Interest expense
increased 59% in 1995 from $4.5 million in 1994 as a result of an increase in
average debt outstanding in 1995.

LIQUIDITY AND FINANCIAL CONDITION

Cash flow from operations was up $38.9 million primarily due to reduced cash
used for the company's 1995 relocation and restructuring, and favorable working
capital changes compared to 1995.

         The company expects to have $50 million of capital expenditures in
1997 compared to $60.1 million in 1996. The 1997 expenditures will relate
primarily to adding Q Lube stores, through construction or acquisition,
converting various fast lube locations to the Q Lube format and various plant
and equipment expenditures, including environmental capital expenditures.
Capital expenditures could be impacted by the general business economy and
environmental laws.

         The company anticipates expanding its Q Lube operations from 469
company-owned and franchised stores at December 31, 1996, to 1,000
company-owned and franchised stores by the end of the year 2000, subject to
locating and acquiring appropriate sites. Additionally, the company intends to
expand its consumer products business through continued product development and
acquisitions. This growth will be financed by cash from operations and
financing activities.

         As a result of the company's Blue Coral and Medo acquisitions, total 
debt was up $275.8 million to $401.6 million at December 31, 1996, compared to
$125.8 million at December 31, 1995. A portion of the debt is interim financing
which the company plans to refinance in 1997, through a capital stock offering
or permanent financing.

         In December 1996, the company purchased 1,550,934 shares of its
capital stock for $24.8 million (see Note 11 to the Consolidated Financial
Statements).

         The company's working capital was $20.4 million at December 31, 1996,
with a current ratio of 1.1 to 1, compared to $132.1 million and 1.9 to 1 at
December 31, 1995.



                                                                             19
<PAGE>   3


This decrease is due to the inclusion in current liabilities of $142 million of
debt which the company plans to refinance in 1997. Excluding the debt to be
refinanced the current ratio for 1996 is 1.9 to 1.

ADDITIONAL FINANCIAL INFORMATION

The net deferred tax assets at December 31, 1996 of $55.8 million will be
either realized through the carryback provisions of the tax law or recovered in
the future through existing levels of taxable income from continuing
operations.

         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 December 1993, the United States commenced a lawsuit against the
company alleging that the company violated the federal Resource Conservation
and Recovery Act and the federal Clean Air Act at its Congo refinery. In 1996,
a $2.9 million settlement was reached that requires the company to pay $1.7
million in cash penalties and complete supplemental environmental projects
valued at $1.2 million. The cash penalties are provided for in the company's
current environmental reserves. Additionally, the company has agreed to make
other capital improvements at this facility.

         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.

         In 1996, the Federal Trade Commission (FTC) filed an administrative
proceeding seeking an order that Slick 50 cease from making certain product
claims and refrain from making other product claims without adequate
substantiation. In addition, Slick 50 was named as a defendant in a number of
class actions alleging false, misleading, deceptive and/or unsubstantiated
advertising claims relating to Slick 50(R) engine treatment. These actions seek
damages on behalf of the purported classes. The company is vigorously defending
the FTC proceeding and the lawsuits.

         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 flow in that period.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995

Certain 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.

SEGMENT INFORMATION

The company's operations are organized into three segments. The Lubricants and
Lubricant Services segment produces and markets branded and private label
lubricants and provides fast service automobile oil changes through the
company's Q Lube subsidiary. The Consumer Products segment manufactures and
markets automotive aftermarket products, including automotive chemicals, car
appearance and air freshener products. The company's third segment, Truck-Lite,
manufactures and sells automotive and heavy-duty truck lighting.

         Intersegment sales are at market. Corporate assets consist principally
of deferred tax assets, cash and cash equivalents and assets not identifiable
with the operations of a segment.

         In July 1996, the company formed a new Consumer Products segment,
combining the operating results of Blue Coral, Medo and Slick 50. Slick 50's
results, which were previously reported in the Lubricants and Lubricant
Services segment, have been reclassified to the Consumer Products segment. As
of January 1, 1996, the company began reporting the results of its fast lube
subsidiary, Q Lube, as a component of its core Lubricants and Lubricant
Services segment. Prior to that, Q Lube had been reported as a separate
segment. As of December 31, 1996, the company began reporting the results of
its bulk handling facility, Docks, as a component of its Lubricants and
Lubricant Services segment. Prior periods have been reclassified to conform to
current presentation.



20
<PAGE>   4


SEGMENT INFORMATION (continued)
Quaker State Corporation and Subsidiaries

<TABLE>
<CAPTION>
(in thousands)                                                   1996           1995           1994
------------------------------------------------------------------------------------------------------

<S>                                                          <C>            <C>            <C>        
REVENUES (a)
Lubricants and lubricant services ........................   $   972,390    $   906,158    $   632,996
Consumer products ........................................       143,929         39,962           --
Truck-Lite ...............................................        86,725         90,312         99,638
Intersegment sales .......................................        (2,815)          (862)          --
                                                             -----------    -----------    -----------
                                                             $ 1,200,229    $ 1,035,570    $   732,634
======================================================================================================
OPERATING PROFITS
Lubricants and lubricant services ........................   $    46,061    $    39,868    $    23,880
   Unusual items (b) .....................................       (17,871)       (17,800)          --
                                                             -----------    -----------    -----------
Total lubricants and lubricant services ..................        28,190         22,068         23,880
                                                             -----------    -----------    -----------
Consumer products ........................................        14,383          2,880           --
   Unusual items (b) .....................................          (239)          --             --
                                                             -----------    -----------    -----------
Total consumer products ..................................        14,144          2,880           --
                                                             -----------    -----------    -----------
Truck-Lite ...............................................         6,703          9,823         11,756
                                                             -----------    -----------    -----------
Total operating profits ..................................        49,037         34,771         35,636
Corporate income .........................................         3,013          5,523          3,235
Interest expense .........................................       (12,640)        (7,228)        (4,534)
Corporate expenses .......................................       (18,790)       (19,816)       (18,669)
   Unusual items (b) .....................................         3,603         (9,200)          --
                                                             -----------    -----------    -----------
Total corporate expenses .................................       (15,187)       (29,016)       (18,669)
                                                             -----------    -----------    -----------
Income from continuing operations before income taxes ....   $    24,223    $     4,050    $    15,668
======================================================================================================
IDENTIFIABLE ASSETS
Lubricants and lubricant services ........................   $   505,236    $   448,674    $   426,108
Consumer products ........................................       375,892         78,794           --
Truck-Lite ...............................................        41,586         40,636         37,497
Discontinued operations ..................................         3,039          4,279         49,449
                                                             -----------    -----------    -----------
                                                                 925,753        572,383        513,054
Corporate ................................................       111,083        144,640        116,964
                                                             -----------    -----------    -----------
                                                             $ 1,036,836    $   717,023    $   630,018
======================================================================================================
CAPITAL EXPENDITURES
Lubricants and lubricant services ........................   $    53,519    $    39,363    $    24,848
Consumer products ........................................         2,100           --             --
Truck-Lite ...............................................         4,504          5,039          2,978
Discontinued operations ..................................          --              728          8,618
                                                             -----------    -----------    -----------
                                                             $    60,123    $    45,130    $    36,444
======================================================================================================
DEPRECIATION, DEPLETION AND AMORTIZATION
Lubricants and lubricant services ........................   $    27,659    $    27,940    $    19,419
Consumer products ........................................         8,113          2,520           --
Truck-Lite ...............................................         2,806          2,459          2,426
Discontinued operations ..................................          --            5,411         10,414
                                                             -----------    -----------    -----------
                                                             $    38,578    $    38,330    $    32,259
======================================================================================================
</TABLE>

a.   In 1996 and 1995, sales to one customer and its affiliated companies
exceeded 10% of consolidated revenues.
b.   In 1996, unusual items primarily relate to asset write-downs,
restructuring charges and a gain on the settlement of a long-term
receivable. In 1995, unusual items primarily relate to restructuring
charges and the settlement of a class-action lawsuit.



                                                                             21
<PAGE>   5


FIVE-YEAR SUMMARY OF NET INCOME AND COMPARATIVE STATISTICAL DATA
Quaker State Corporation and Subsidiaries

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(in thousands except per share and statistical data)          1996           1995            1994           1993           1992
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>            <C>             <C>            <C>            <C>         
REVENUES
Sales and operating revenues .........................   $  1,200,229   $  1,035,570    $    732,634   $    607,085   $    592,650
Other, net ...........................................          7,470          9,894           6,923          5,595          4,063
                                                         ------------   ------------    ------------   ------------   ------------
                                                            1,207,699      1,045,464         739,557        612,680        596,713
                                                         ------------   ------------    ------------   ------------   ------------
COSTS AND EXPENSES
Cost of sales and operating costs ....................        821,530        718,996         503,539        421,894        408,830
Selling, general and administrative ..................        296,221        255,271         193,390        156,359        158,920
Depreciation and amortization ........................         38,578         32,919          21,845         19,181         20,077
Interest .............................................         12,640          7,228           5,115          5,721          4,785
Unusual items (a) ....................................         14,507         27,000            --             --            3,200
                                                         ------------   ------------    ------------   ------------   ------------
                                                            1,183,476      1,041,414         723,889        603,155        595,812
                                                         ------------   ------------    ------------   ------------   ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
   INCOME TAXES AND EXTRAORDINARY ITEM ...............         24,223          4,050          15,668          9,525            901
PROVISION FOR INCOME TAXES ...........................         10,500          2,300           6,167          2,534            245
                                                         ------------   ------------    ------------   ------------   ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
   EXTRAORDINARY ITEM ................................         13,723          1,750           9,501          6,991            656
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (b) .......           --           14,489           9,265          6,711        (31,904)
                                                         ------------   ------------    ------------   ------------   ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND
   CUMULATIVE EFFECT OF ACCOUNTING CHANGES ...........         13,723         16,239          18,766         13,702        (31,248)
EXTRAORDINARY ITEM (c) ...............................           --           (4,139)           --             --             --
CUMULATIVE EFFECT OF ACCOUNTING CHANGES (d) ..........           --             --              --             --          (62,600)
                                                         ------------   ------------    ------------   ------------   ------------
NET INCOME (LOSS) ....................................   $     13,723   $     12,100    $     18,766   $     13,702   $    (93,848)
===================================================================================================================================
PER SHARE:
Income from continuing operations
   before extraordinary item and cumulative
   effect of accounting changes ......................   $        .40   $        .06    $        .33   $        .25   $        .02
Income (loss) from discontinued operations ...........           --              .45             .33            .25          (1.17)
Extraordinary item ...................................           --             (.13)           --             --             --
Cumulative effect of accounting changes ..............           --             --              --             --            (2.30)
                                                         ------------   ------------    ------------   ------------   ------------
Net income (loss) ....................................   $        .40   $        .38    $        .66   $        .50   $      (3.45)
==================================================================================================================================
Dividends:
   Cash per share ....................................   $        .40   $        .40    $        .40   $        .60   $        .80
   Amount ............................................         13,762         12,867          11,358         16,310         21,720
Capital expenditures .................................         60,123         45,130          36,444         29,760         25,706
As of December 31:
Working capital (e) ..................................         20,376        132,073         101,439         35,403         74,911
Total assets .........................................      1,036,836        717,023         630,018        783,677        792,820
Total debt ...........................................        401,608        125,762          73,249         51,450         79,183
Stockholders' equity .................................        298,669        272,155         251,850        188,750        191,194
Book value per share .................................           8.60           8.29            8.00           6.93           7.04
===================================================================================================================================
Number of stockholders of record .....................          9,193          9,776          11,792         12,147         12,606
Weighted average capital and equivalent
   shares outstanding ................................     34,465,000     32,226,000      28,459,000     27,234,000     27,184,000
===================================================================================================================================
</TABLE>

a. In 1996, the company recorded $19.5 million related primarily to asset
write-downs and restructuring charges and a $5 million gain upon the settlement
of a long-term receivable (see Note 3 to Consolidated Financial Statements).
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 recorded a charge in 1992 for
assets to be replaced by future conversion of Minit-Lube stores to the Q Lube
format. 
b. The company sold its exploration and production business in 1995,
and 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. 
e. Working Capital at December 31, 1996, has been reduced by $142 million of 
debt which the company plans to refinance in 1997.



22
<PAGE>   6


CONSOLIDATED STATEMENT OF INCOME
Quaker State Corporation and Subsidiaries


<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(in thousands, except per share data)                                   1996          1995          1994
=============================================================================================================

<S>                                                                 <C>            <C>             <C>     
REVENUES
Sales and operating revenues ....................................   $ 1,200,229    $ 1,035,570    $   732,634
Other, net ......................................................         7,470          9,894          6,923
                                                                    -----------    -----------    -----------
                                                                      1,207,699      1,045,464        739,557
                                                                    -----------    -----------    -----------
COSTS AND EXPENSES
Cost of sales and operating costs ...............................       821,530        718,996        503,539
Selling, general and administrative .............................       296,221        255,271        193,390
Depreciation and amortization ...................................        38,578         32,919         21,845
Interest ........................................................        12,640          7,228          5,115
Unusual items (Note 3) ..........................................        14,507         27,000           --
                                                                    -----------    -----------    -----------
                                                                      1,183,476      1,041,414        723,889
                                                                    -----------    -----------    -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
   AND EXTRAORDINARY ITEM .......................................        24,223          4,050         15,668
PROVISION FOR (BENEFIT FROM) INCOME TAXES (NOTE 4)
   Current ......................................................        27,500         11,200          9,550
   Deferred .....................................................       (17,000)        (8,900)        (3,383)
                                                                    -----------    -----------    -----------
                                                                         10,500          2,300          6,167
                                                                    -----------    -----------    -----------
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM .....        13,723          1,750          9,501
DISCONTINUED OPERATIONS (NOTE 5)
   Discontinued operations, net of taxes ........................          --            1,794          8,888
   Income on disposition, net of taxes ..........................          --           12,695            377
                                                                    -----------    -----------    -----------
                                                                           --           14,489          9,265
=============================================================================================================
INCOME BEFORE EXTRAORDINARY ITEM ................................        13,723         16,239         18,766
EXTRAORDINARY ITEM, NET OF TAXES (NOTE 9) .......................          --           (4,139)          --

NET INCOME ......................................................   $    13,723    $    12,100    $    18,766
PER SHARE:
INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM .....   $       .40    $       .06    $       .33
INCOME FROM DISCONTINUED OPERATIONS .............................          --              .45            .33
EXTRAORDINARY ITEM ..............................................          --             (.13)          --
                                                                    -----------    -----------    -----------
NET INCOME PER SHARE ............................................   $       .40    $       .38    $       .66
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.



                                                                             23
<PAGE>   7


CONSOLIDATED STATEMENT OF CASH FLOWS
Quaker State Corporation and Subsidiaries

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(in thousands)                                                                               1996        1995         1994
----------------------------------------------------------------------------------------------------------------------------

<S>                                                                                      <C>          <C>          <C>      
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...........................................................................   $  13,723    $  12,100    $  18,766
Adjustments to reconcile net income to net cash provided by operating activities:
   Depreciation, depletion and amortization ..........................................      38,578       38,330       32,259
   Unusual items - noncurrent ........................................................      17,712        7,864         --
   Gain on settlement of long-term receivable ........................................      (5,053)        --           --
   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 ...................................     (10,547)     (17,937)       2,669
   Increase (decrease) from changes in:
      Receivables ....................................................................      (5,397)     (22,078)      (1,154)
      Inventories ....................................................................     (16,523)      (1,120)      (3,719)
      Other current assets ...........................................................       6,955       (7,548)       5,018
      Accounts payable ...............................................................      12,197       (7,039)      (7,920)
      Accrued liabilities ............................................................      (1,415)       4,999      (11,509)
      Other ..........................................................................      (6,446)       5,913        3,529
                                                                                         ---------    ---------    ---------
   Net cash provided by operating activities .........................................      43,784        4,928       37,562
                                                                                         ---------    ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .................................................................     (60,123)     (45,130)     (36,444)
Proceeds from disposal of property and equipment .....................................       2,953        4,910        4,556
Proceeds from settlement of long-term receivable, net of taxes .......................      15,380         --           --
Acquisition of businesses, net of cash acquired (Note 2) .............................    (234,106)     (31,008)     (28,366)
Proceeds from sale of discontinued operations, net of discontinued
   operations cash and taxes (Note 5) ................................................        --         47,213       78,529
Discontinued insurance operations investing activities, net ..........................        --           --        (12,732)
Other, net ...........................................................................      (8,046)      (5,685)        --
                                                                                         ---------    ---------    ---------
   Net cash provided by (used in) investing activities ...............................    (283,942)     (29,700)       5,543
                                                                                         ---------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid .......................................................................     (13,762)     (12,867)     (11,358)
Purchase of treasury stock ...........................................................     (25,313)        --           --
Proceeds from debt ...................................................................     282,774       99,375          418
Payments on debt .....................................................................      (6,990)     (60,882)     (17,988)
Other ................................................................................       2,187         --           --
                                                                                         ---------    ---------    ---------
   Net cash provided by (used in) financing activities ...............................     238,896       25,626      (28,928)
                                                                                         ---------    ---------    ---------
Net increase (decrease) in cash and cash equivalents .................................      (1,262)         854       14,177
Total cash and cash equivalents at beginning of year .................................      30,659       29,805       15,628
                                                                                         ---------    ---------    ---------
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR .......................................   $  29,397    $  30,659    $  29,805
============================================================================================================================
</TABLE>

The accompanying notes are an integral part of the financial statements.



24
<PAGE>   8


CONSOLIDATED BALANCE SHEET
Quaker State Corporation and Subsidiaries

<TABLE>
<CAPTION>
DECEMBER 31
(in thousands except share data)                                                                 1996          1995
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>            <C>        
ASSETS
Current assets:
Cash and cash equivalents ...............................................................   $    29,397    $    30,659
Accounts and notes receivable, less allowance of $4,160 and $3,495 in 1996 and 1995 .....       171,346        129,267
Inventories (Note 6) ....................................................................       113,970         80,284
Other current assets ....................................................................        26,518         36,796
                                                                                            -----------    -----------
   Total current assets .................................................................       341,231        277,006
                                                                                            -----------    -----------
Property, plant and equipment, at cost (Note 7) .........................................       227,876        203,259
Goodwill, brands and other assets (Note 8) ..............................................       467,729        236,758
                                                                                            -----------    -----------
      TOTAL ASSETS ......................................................................   $ 1,036,836    $   717,023
======================================================================================================================

LIABILITIES
Current liabilities:
Accounts payable ........................................................................   $    73,959    $    53,465
Accrued liabilities .....................................................................        87,559         84,225
Debt payable within one year ............................................................        17,337          7,243
Debt to be refinanced (Note 9) ..........................................................       142,000           --
                                                                                            -----------    -----------
   Total current liabilities ............................................................       320,855        144,933
                                                                                            -----------    -----------
Long-term debt (Note 9) .................................................................       242,271        118,519
Other long-term liabilities (Note 10) ...................................................       175,041        181,416
                                                                                            -----------    -----------
   Total liabilities ....................................................................       738,167        444,868
                                                                                            -----------    -----------
Commitments and contingencies (Note 11)


STOCKHOLDERS' EQUITY
Capital stock $1.00 par value; authorized shares, 95,000,000;
    issued shares, 36,322,312 and 32,824,157 in 1996 and 1995 ...........................        36,322         32,824
Additional capital ......................................................................       187,560        139,068
Retained earnings .......................................................................       103,480        103,519
Cumulative foreign currency translation adjustment ......................................           411           (111)
Treasury stock, at cost, 1,593,582 and 8,447 shares in 1996 and 1995 ....................       (25,433)          (120)
Unearned compensation ...................................................................        (3,671)        (3,025)
                                                                                            -----------    -----------
   Total stockholders' equity ...........................................................       298,669        272,155
                                                                                            -----------    -----------
      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................   $ 1,036,836    $   717,023
======================================================================================================================
</TABLE>

The accompanying notes are an integral part of the financial statements.



                                                                             25
<PAGE>   9


CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Quaker State Corporation and Subsidiaries

<TABLE>
<CAPTION>
                                                                             Foreign
                                                                            Currency             Unearned
                                            Capital  Additional  Retained   Translation Treasury   Compen-
(in thousands except shares and per share)   Stock     Capital   Earnings   Adjustment    Stock    sation    Total
--------------------------------------------------------------------------------------------------------------------

<S>                                          <C>      <C>        <C>          <C>    <C>       <C>         <C>      
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 33,498 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 ($.40 per share) ...........     --        --       (12,867)     --         --        --      (12,867)
103,030 shares of capital stock
    issued under incentive plans ..........       47       661        --        --        789      (117)       1,380
Change in foreign currency translation ....     --        --           598      --         --       598
1,260,403 shares issued for acquisition ...    1,260    18,276        --        --         --        --       19,536
Purchase of 30,529 shares .................     --        --          --        --       (442)       --         (442)
                                             -------  --------   ---------    ----             --------    ---------
BALANCE, DECEMBER 31, 1995 ................   32,824   139,068     103,519    (111)      (120)   (3,025)     272,155
                                             -------  --------   ---------    ----             --------    ---------
Net income ................................     --        --        13,723      --         --        --       13,723
Cash dividends ($.40 per share) ...........     --        --       (13,762)     --         --        --      (13,762)
187,453 shares of capital stock issued
   under incentive plans ..................      187     2,345        --        --         --      (646)       1,886
Change in foreign currency translation ....     --        --          --       522         --        --          522
3,310,700 shares issued for acquisitions ..    3,311    46,147        --        --         --        --       49,458
Purchase of 1,585,135 shares ..............     --        --          --        --    (25,313)       --      (25,313)
                                             -------  --------   ---------    ----             --------    ---------
BALANCE, DECEMBER 31, 1996 ................  $36,322 $ 187,560   $ 103,480    $411   $(25,433)  $(3,671)   $ 298,669
====================================================================================================================
</TABLE>

The accompanying notes are an integral part of the financial statements.



26
<PAGE>   10


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quaker State Corporation and Subsidiaries

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Quaker State Corporation and Subsidiaries (the company) is principally a
producer of motor oil and lubricants, and a manufacturer and marketer of
consumer products and services in the automotive aftermarket. Branded and
private label products are sold to distributors and national and regional
retailers.

         a. Basis of presentation: The consolidated financial statements
include the accounts of Quaker State Corporation and all of its subsidiaries
more than 50% owned. 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.

         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 crude oil and
manufactured products. For other inventories, such as purchased finished
lubricating oils and purchased automotive aftermarket products, cost is
determined on the first-in, first-out (FIFO) basis.

         d. Depreciation, amortization and valuation of intangibles:
Depreciation is recorded on a straight-line basis. Goodwill, brands and other
intangible assets are amortized on a straight line basis over periods not
exceeding 40 years. When factors indicate an intangible asset may not be
recoverable, the company uses an estimate of the related undiscounted future
cash flows compared to the carrying value of the intangible asset to determine
if an impairment exists.

         e. 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 no later than at the completion of an environmental site assessment. A
liability is recorded earlier if it is probable that a liability exists and a
cost can be reasonably estimated. All cleanup estimates are based on current
technology.

         f. Advertising Costs: Advertising costs are expensed as incurred.
Advertising costs were $123.3 million, $92.7 million and $77.8 million in 1996,
1995, and 1994, respectively.

         g. 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.

         h. Earnings per share: Earnings per share is based on the weighted 
average number of shares of capital stock outstanding and capital stock
equivalents.

         i. Foreign currency translation: For all foreign operations, the 
functional currency is the local currency. The assets and liabilities of 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.

2. ACQUISITIONS:

In June 1996, the company acquired all the stock of Blue Coral, Inc. (Blue
Coral) for $43.5 million in cash, the issuance of 2,956,328 shares of capital
stock with a market value of $43.5 million, and the payment of $27.9 million to
satisfy certain Blue Coral indebtedness. In October 1996, the company sold one
of the Blue Coral businesses for $7.2 million in cash. The acquisition resulted
in $82.2 million of goodwill, brands and other intangible assets.

         In October 1996, the company acquired all the stock of Medo
Industries, Inc. and its affiliated companies (Medo) for $142.3 million in cash
and the payment of $17.7 million to satisfy certain Medo indebtedness. The
acquisition resulted in $145.9 million of goodwill, brands and other intangible
assets.

         In 1995, the company acquired all the stock of Slick 50, Inc. (Slick
50) for $22.6 million in cash, the issuance of 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. In December 1996, under performance
consideration terms of the Merger Agreement, additional consideration of
354,374 shares of capital stock with a market value of $6 million was paid to
the former Slick 50 stockholders. The total goodwill, brands and other
intangible assets resulting from the Slick 50 acquisition was $72.3 million.




                                                                             27
<PAGE>   11


         In 1994, the company acquired all the stock of the Specialty Oil
Companies (Specialty) and Westland Oil Company, Inc. (Westland) for $19.5
million in cash 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 agreements provide for the company to indemnify the prior
owners for certain loan obligations, taxes and other liabilities. The
acquisition resulted in $80.6 million of goodwill, brands and other intangible
assets. In 1996, the company purchased certain real property used in these
operations for $9 million. This property was leased prior to its purchase (see
Note 11).

         The following summary is prepared on a pro forma basis as though Blue
Coral, Medo and Slick 50 had been acquired as of January 1, 1995 after
including the impact of adjustments, such as amortization of goodwill, brands
and other intangible assets, interest expense and related tax effects.

<TABLE>
<CAPTION>
(unaudited, in thousands except
per share amounts)                  1996        1995
------------------------------------------------------
<S>                              <C>          <C>       
Revenues .....................   $1,308,202   $1,216,165
Income from continuing
   operations ................       16,848            4
Income per share from
   continuing operations .....          .49         --
========================================================
</TABLE>

         The pro forma results are not necessarily indicative of what would
have occurred if the acquisitions 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 1996, the company recorded pretax charges of $19.5 million ($12.4 million
after tax) primarily related to the write-down of certain assets to net
realizable value and restructuring costs. Additionally, the company recognized
a pretax gain of $5 million ($3.1 million after tax) in connection with the
settlement of a long-term receivable.

         In 1995, the company recognized pretax costs and expenses associated
with the restructuring and relocation of the Motor Oil division and corporate
headquarters of $22.6 million ($13.8 million after tax) and settled a class
action lawsuit for $4.4 million ($2.7 million after tax).

4. INCOME TAXES:

Income before income taxes from continuing operations consists of:

<TABLE>
<CAPTION>
(in thousands)                      1996      1995     1994
--------------------------------------------------------------

<S>                                <C>       <C>       <C>    
Domestic .......................   $21,128   $ 4,028   $12,914
Foreign ........................     3,095        22     2,754
                                  --------   -------   -------
Total ..........................   $24,223   $ 4,050   $15,668
==============================================================
</TABLE>

         The components of the provision for income taxes from continuing
operations are as follows:

<TABLE>
<CAPTION>
(in thousands)                     1996         1995       1994
-----------------------------------------------------------------
<S>                              <C>         <C>         <C>     
Current:
   Federal ...................   $ 23,100    $  8,900    $  7,170
   State .....................      3,000       1,600         680
   Foreign ...................      1,400         700       1,700
Deferred:
   Federal ...................    (14,800)     (6,900)     (2,827)
   State .....................     (1,900)     (1,200)         44
   Foreign ...................       (100)       (600)       (200)
   Tax credits amortized .....       (200)       (200)       (400)
                                 --------    --------    --------
Total ........................   $ 10,500    $  2,300    $  6,167
=================================================================
</TABLE>

         A reconciliation from the federal statutory tax rate to the effective
tax rate for continuing operations follows:

<TABLE>
<CAPTION>
(% of pretax income)                        1996      1995    1994
------------------------------------------------------------------
<S>                                         <C>       <C>     <C> 
Federal statutory tax rate ............     35.0      35.0    35.0
Add (deduct) the tax effect of:
   Goodwill amortization ..............      3.3      17.2     1.8
   Investment credit ..................      (.7)     (3.8)   (2.4)
   Other tax credits ..................     (2.6)    (10.4)   (1.2)
   State and foreign income taxes .....      4.0       8.0     4.7
   Other, net .........................      4.3      10.8     1.4
                                            ----      ----     ----
Effective tax rate ....................     43.3      56.8     39.3
===================================================================
</TABLE>



28
<PAGE>   12


         The deferred tax assets and liabilities as of December 31, 1996 and
1995 are as follows:

<TABLE>
<CAPTION>
(in thousands)                              1996      1995
------------------------------------------------------------

<S>                                     <C>         <C>     
Deferred tax assets:
   Employee benefits ................   $ 57,966    $ 58,774
   Environmental reserves ...........      7,789       8,293
   Other ............................     26,746      23,804
                                        --------    --------
Gross deferred tax assets ...........     92,501      90,871
Valuation allowance .................       (322)       (460)
                                        --------    --------
Total deferred tax assets ...........     92,179      90,411
                                        --------    --------
Deferred tax liabilities:
   Depreciation and amortization ....     25,656      30,645
   Other ............................     10,708      12,167
                                        --------    --------
Total deferred tax liabilities ......     36,364      42,812
                                        --------    --------
Net deferred tax assets .............   $ 55,815    $ 47,599
============================================================
</TABLE>

5. DISCONTINUED OPERATIONS:

In 1995, the company sold the assets of its Natural Gas Exploration and
Production division (E&P) for $67.7 million. The sale resulted in a gain on
disposition of $12 million, net of taxes of $7.5 million. In 1994, the company
sold its wholly owned subsidiary, Heritage Insurance Group, Inc. (Heritage),
for $82 million. Net of taxes of $2.7 million, the gain on the sale was
$377,000 in 1994 and $650,000 in 1995.

         Condensed income statements relating to the E&P operations for the
seven months ended July 31, 1995 and the year ended December 31, 1994 and the
insurance operations for the eight months ended August 31, 1994 are presented
below:

<TABLE>
<CAPTION>
                                         E&P        Heritage
                                   ---------------------------
(in thousands)                      1995      1994      1994
--------------------------------------------------------------

<S>                                <C>       <C>       <C>    
Revenues .......................   $14,641   $29,751   $87,566
Costs and expenses .............    12,617    24,364    82,392
                                   -------   -------   -------
Income before income
   taxes .......................     2,024     5,387     5,174
Provision for income taxes .....       230       883       790
                                   -------   -------   -------
Net income .....................   $ 1,794   $ 4,504   $ 4,384
==============================================================
</TABLE>

6. INVENTORIES:

Inventories consist of:

<TABLE>
<CAPTION>
(in thousands)                        1996      1995
-------------------------------------------------------

<S>                                 <C>        <C>    
Crude oil, lubricants
   and related materials..........  $ 76,462   $60,202
Consumer products.................    21,060     5,355
Vehicular lighting products.......    16,448    14,727
                                    --------   -------
Total.............................  $113,970   $80,284
======================================================
</TABLE>

         The reserve to reduce the carrying value of inventories from current
costs to the LIFO basis amounted to $21 million in 1996 and $18.9 million in
1995.

         At December 31, 1996 and 1995, $55.7 million and $32.1 million,
respectively, of inventories were valued on the LIFO basis. Certain inventory
quantities were reduced resulting in liquidations of LIFO inventory which
increased net income by $650,000 or $.02 per share in 1996 and $1.3 million or
$.04 per share in 1995.

7. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consist of:

<TABLE>
<CAPTION>
(in thousands)                         1996       1995
---------------------------------------------------------
<S>                                   <C>        <C>
Lubricants and lubricant services ..  $415,902   $375,453
Consumer products ..................    15,634      2,606
Truck-Lite .........................    40,395     36,051
                                      --------   --------
Subtotal ...........................   471,931    414,110
Less: accumulated depreciation .....   244,055    210,851
                                      --------   --------
Total ..............................  $227,876   $203,259
=========================================================
</TABLE>

   Depreciation expense was $26.8 million, $27.4 million and $20.9 million in
1996, 1995 and 1994, respectively.




                                                                             29
<PAGE>   13


8. GOODWILL, BRANDS AND OTHER ASSETS:

Goodwill, brands and other assets consist of:

<TABLE>
<CAPTION>
(in thousands)                         1996       1995
-------------------------------------------------------
<S>                                 <C>        <C>     
Goodwill, net of accumulated
   amortization of $11,051
   and $5,806 ....................  $251,375   $ 88,567
Brands, net of accumulated
   amortization of $2,885
   and $1,000 ....................   113,715     49,000
Other intangible assets, net of
   accumulated amortization
   of $12,749 and $7,958 .........    21,510     18,823
Net deferred tax assets ..........    49,056     35,549
Notes and royalties receivable ...    20,283     35,927
Prepaid pension cost .............     9,001      8,768
Other ............................     2,789        124
                                    --------   --------
Total ............................  $467,729   $236,758
=======================================================
</TABLE>

9. LONG-TERM DEBT AND FINANCIAL INSTRUMENTS:

Long-term debt consists of:

<TABLE>
<CAPTION>
(in thousands)                            1996       1995
----------------------------------------------------------

<S>                                    <C>        <C>     
6.625% Notes due 2005, net
   of discount .....................   $ 99,458   $ 99,396
Variable rate revolving credit
   agreements ......................    292,000      9,540
Other, 2% to 10.50% due in
   various installments to 2010 ....     10,150     16,826
                                       --------   --------
   Subtotal ........................    401,608    125,762
Less: Payments due within
       one year ....................     17,337      7,243
     Debt to be refinanced
       in 1997 .....................    142,000       --
                                       --------   --------
Total ..............................   $242,271   $118,519
==========================================================
</TABLE>

         As of December 31, 1996, the company had available $320 million of
committed revolving credit agreements. The credit agreements provide for
various borrowing rate options and expire from 1997 to 2001. The
weighted-average interest rate on borrowings on these credit agreements as of
December 31, 1996 was 6.12%. The credit agreements contain various covenants
pertaining to financial ratios and interest coverage.

         The company expects to refinance a portion of its debt in 1997 through
a capital stock offering or permanent financing.

         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 debt issuance costs. These transactions resulted in the
extraordinary charge of $4.1 million, net of tax benefits of $2.7 million.

         The aggregate long-term debt maturing in the next five years is as
follows: 1997-$159.3 million; 1998-$823,000; 1999-$657,000; 2000-$225,000;
2001-$140.2 million.

         The fair value of debt at December 31, 1996 was $399.5 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 :

<TABLE>
<CAPTION>
(in thousands)                            1996       1995
----------------------------------------------------------

<S>                                    <C>        <C>     
Postretirement benefits ............   $ 97,955   $ 94,784
Environmental reserves .............     13,203     18,399
Other ..............................     17,635     15,328
Discontinued coal liabilities:
   Employee benefits ...............     43,137     46,791
   Other ...........................      3,111      6,114
                                       --------   --------
Total ..............................   $175,041   $181,416
==========================================================
</TABLE>

11. COMMITMENTS, CONTINGENCIES AND RELATED PARTIES:

The company has operating leases 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 $7.3 million, during each of the next five years are:
1997-$18.5 million; 1998-$17.7 million; 1999-$14.9 million; 2000-$13.6 million;
2001-$11.5 million and thereafter $56.4 million.



30
<PAGE>   14


         Rental expenses amounted to $22.4 million, $18.3 million and $15.5
million for 1996, 1995 and 1994, respectively, net of sublease rentals of $3.4
million, $3.3 million and $3.8 million for 1996, 1995 and 1994, respectively.

         The company leases certain real property from a company that is owned,
in part, by a director of the company. The company paid $465,000, $1.5 million
and $376,000 in 1996, 1995 and 1994, respectively, for rental of the property.

         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. In 1996, the company terminated the
construction agreement and agreed to terminate the license agreement upon the
sale of the existing rerefining unit to Interline.

         In 1996, the company entered into a long-term lube base stock supply
agreement with a major oil company. This agreement requires the company to
purchase a certain volume of lube base stock based on a price formula.

         The company regularly purchases lubricant base stocks from a company,
the president of which is a director of the company. The company purchased $3.3
million, $1.6 million and $393,000 in 1996, 1995 and 1994, respectively, at
prices comparable to other purchases.

         In 1996, the company retained an advertising firm, the vice chairman
of which is a director of the company. The company paid $1.2 million in 1996
for advertising services, at prices comparable to other similar services.

         In December 1996, the company paid $24.8 million for 1,550,934 shares
of its capital stock to a former owner of Blue Coral, who was a director of the
company, and to an affiliated trust.

         In 1993, the United States commenced a lawsuit against the company
alleging that the company violated the federal Resource Conservation and
Recovery Act and the federal Clean Air Act at the Congo refinery. In 1996, a
$2.9 million settlement was reached that requires the company to pay $1.7
million in cash penalties and complete supplemental environmental projects
valued at $1.2 million. The cash penalties are provided for in the company's
current environmental reserves. Additionally, the company has agreed to make
other capital improvements at this facility.

         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 that it 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 1996, the Federal Trade Commission (FTC) filed an administrative
proceeding seeking an order that Slick 50 cease from making certain product
claims and refrain from making other product claims without adequate
substantiation. In addition, class action suits were filed against Slick 50
alleging false, misleading, deceptive and/or unsubstantiated claims relating to
Slick 50(R) engine treatment. These actions seek damages on behalf of the
purported classes. The company is vigorously defending the FTC proceeding and
the 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 or cash flow when resolved.

12. STOCK OPTIONS:

The company has various stock option, incentive and award plans. The company
applies APB Opinion 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for stock options issued under the plans. Had compensation
cost for the company's plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" the company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
(in thousands, except per share amount)      1996         1995
----------------------------------------------------------------

<S>                                      <C>          <C>       
Net income ...........................   $   13,225   $   11,544
Earnings per share ...................          .38          .36
================================================================
</TABLE>


                                                                             31
<PAGE>   15


         Under current plans, 2,785,836 shares have been authorized for
issuance. Collectively, these plans include stock options, stock appreciation
rights (SARs), cash payment rights, restricted shares, performance shares and
other share awards. Under these plans, options have been granted to employees
and non-employee directors to purchase capital stock at a price no less than
100% of the fair market value on the date of grant. Options granted may not be
exercised for at least six months from the date of grant and all options must
be exercised within ten years of the date granted.

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996, 1995 and 1994: dividend
yield of 2.4%, expected volatility of 26%, risk-free interest rates of 6% and
expected lives of 3.5 years. A summary of the status of the company's stock
option plans is presented below:

<TABLE>
<CAPTION>
                                                                                        Weighted-Average
                                                                                Shares   Exercise Price
--------------------------------------------------------------------------------------------------------

<S>                                                                   <C>          <C>    
OUTSTANDING, DECEMBER 31, 1993 ............................................    1,343,904    $ 14.86
Granted
   Option Price equal to
      Market Value ........................................................      309,000    $ 13.58
   Option Price greater than
      Market Value ........................................................      125,000    $ 16.00
Exercised .................................................................      (90,000)   $ 11.80
Canceled or expired .......................................................      (80,833)   $ 17.86
                                                                               ---------    -------
OUTSTANDING, DECEMBER 31, 1994 ............................................    1,607,071    $ 14.65
Granted
   Option Price equal to
      Market Value ........................................................      436,500    $ 14.22
   Option Price greater than
      Market Value ........................................................       50,000    $ 21.74
Exercised .................................................................      (64,201)   $ 12.40
Canceled or expired .......................................................      (40,420)   $ 19.07
                                                                               ---------    -------
OUTSTANDING, DECEMBER 31, 1995 ............................................    1,988,950    $ 14.71
Granted
   Option Price equal to
      Market Value ........................................................      223,500    $ 14.43
   Option Price greater than
      Market Value ........................................................      125,000    $ 16.81
Exercised .................................................................     (179,551)   $ 12.61
Canceled or expired .......................................................     (387,551)   $ 17.20
                                                                               ---------    -------
OUTSTANDING, DECEMBER 31, 1996 ............................................    1,770,348    $ 14.52
========================================================================================================
<CAPTION>

                                                                        1996         1995        1994
--------------------------------------------------------------------------------------------------------
Weighted-average fair value of options granted during the year
   Option Price equal to Market Value ............................   $     3.22   $     3.18     $  3.26
   Option Price greater than Market Value ........................   $     2.31   $     1.79     $  2.75
Options exercisable at December 31 ...............................    1,430,348    1,168,950     958,571
Shares available for option ......................................      134,833      420,604     905,449
Capital stock reserved ...........................................    2,357,881    2,409,554   2,512,520
========================================================================================================
</TABLE>


32
<PAGE>   16


         The following table summarizes information about the company's stock
options outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                                      Options Outstanding                  Options Exercisable
                             -------------------------------------------------------------------------
                                             Weighted-        Weighted-                   Weighted-
                              Number          Average          Average        Number        Average
Range of Exercise Prices    Outstanding    Remaining Life   Exercise Price  Exercisable Exercise Price
------------------------------------------------------------------------------------------------------

<S>      <C>                  <C>               <C>            <C>            <C>         <C>      
$10.19 - $13.31 .........     592,598           6.5            $ 12.48        556,098     $   12.52
$13.38 - $14.69 .........     643,000           8.2            $ 13.89        446,000     $   13.86
$14.75 - $25.69 .........     534,750           6.3            $ 17.54        428,250     $   17.88
                            ---------           ---            -------      ---------     ---------
$10.19 - $25.69 .........   1,770,348           7.0            $ 14.52      1,430,348     $   14.54
======================================================================================================
</TABLE>

         In 1996, 1995, and 1994, the company issued 45,000, 72,845 and 225,800
restricted shares, respectively, with weighted-average fair values of $14.00,
$14.48 and $13.76 to certain key employees. Effective December 31, 1996, 96,477
performance restricted shares that had been issued in 1994 and 1995 were
canceled due to the non-achievement of certain three-year performance goals
resulting in a credit to compensation expense of $1.2 million. The total impact
to compensation expense (benefit) for restricted stock awards was $(291,000),
$842,000 and $485,000 for 1996, 1995, and 1994, respectively.

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 1996, 1995, and 1994 is summarized below:

<TABLE>
<CAPTION>
(in thousands)                      1996       1995      1994
-----------------------------------------------------------------
<S>                              <C>        <C>          <C>
Service cost benefits
   earned during
   the period ...............    $ 3,510    $  4,033     $  3,675
Interest Cost ...............      9,668       9,629        9,015
Actual return on assets .....    (11,543)    (22,791)      (1,025)
Net amortization and
   deferral .................       (858)     11,121      (11,188)
                                 -------    --------     --------
Total pension cost(a) .......    $   777    $  1,992     $    477
=================================================================
</TABLE>

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, 1996 and 1995 as follows:

<TABLE>
<CAPTION>
(in thousands)                                                                       1996         1995
---------------------------------------------------------------------------------------------------------

<S>                                                                                <C>          <C>      
Plan assets at fair value, primarily investments in pooled separate accounts ...   $ 145,468    $ 142,683
Accumulated benefit obligation, including vested benefits of:
   1996-$126.2 million; 1995-$128.8 million ....................................     131,688      134,930
Effect of future salary increases ..............................................       9,058        8,183
                                                                                   ---------    ---------
Projected benefit obligation ...................................................     140,746      143,113
                                                                                   ---------    ---------
Plan assets in excess of (less than) projected benefit obligation ..............       4,722         (430)
Unrecognized net loss ..........................................................      12,082       18,439
Unrecognized transition asset ..................................................      (7,803)      (9,241)
                                                                                   ---------    ---------
Prepaid pension cost ...........................................................   $   9,001    $   8,768
=========================================================================================================
</TABLE>


                                                                             33
<PAGE>   17


         Significant assumptions used in determining net pension costs and
related pension obligations are:


<TABLE>
<CAPTION>
December 31,                        1996   1995   1994
-------------------------------------------------------
<S>                                 <C>     <C>   <C>
Discount rate                       7.5%     7%     8%
Rate of increase in compensation
   levels                             4%     4%   4.5%
Expected long-term rate of return
   on assets                          9%     9%     9%
=======================================================
</TABLE>

         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, $1.4 million and $2.5 million in 1996, 1995 and 1994,
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
1996, 1995 and 1994 were as follows:

<TABLE>
<CAPTION>
(in thousands)                             1996      1995     1994
--------------------------------------------------------------------

<S>                                      <C>       <C>       <C>    
Service costs of benefits
   earned ............................   $ 1,660   $   697   $   805
Interest cost on liability ...........     7,201     7,565     6,812
Amortization of (gain) or loss .......       477       129      (115)
                                         -------   -------   -------
Net periodic postretirement
   benefit cost(a) ...................   $ 9,338   $ 8,391   $ 7,502
====================================================================
</TABLE>

a. Excludes $600,000 and $800,000 cost of curtailment due to restructuring and
sale of E&P in 1995.

         The accumulated postretirement benefit obligation (APBO) at December
31, 1996 and 1995 is summarized below:

<TABLE>
<CAPTION>
(in thousands)                                  1996        1995
-------------------------------------------------------------------
<S>                                          <C>          <C>
Retirees .................................   $  90,526    $  98,035
Fully eligible active participants .......       3,848        7,784
Other active participants ................       7,500        7,914
                                             ---------    ---------
APBO .....................................     101,874      113,733
Unrecognized net gain or (loss) ..........       1,081      (13,949)
Less: current portion ....................      (5,000)      (5,000)
                                             ---------    ---------
Long-term portion ........................   $  97,955    $  94,784
===================================================================
</TABLE>

         For measurement purposes, a 7% annual rate of increase in the per
capita claims cost was assumed for 1997, declining gradually to 5% by the year
2002 and thereafter.

         Significant assumptions used in determining postretirement benefit
expenses and accumulated postretirement benefit obligations are:

<TABLE>
<CAPTION>
December 31,                                     1996        1995       1994
-----------------------------------------------------------------------------

<S>                                               <C>          <C>        <C>
Discount rate ...........................         7.5%         7%         8%
Rate of increase in compensation
   levels ...............................         4%           4%       4.5%
============================================================================
</TABLE>

         The health care cost trend rate assumption has a significant effect on
the APBO and net periodic benefit costs. A 1% increase in the trend rate for
health care costs would have increased the APBO at December 31, 1996 by 12% and
1996 service and interest costs by 12%.

14. SUPPLEMENTAL CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
(in thousands)                                                   1996          1995        1994
--------------------------------------------------------------------------------------------------

<S>                                                            <C>          <C>          <C>      
Cash paid during the year for:
   Interest, net of amounts capitalized ....................   $  11,645    $   6,911    $   5,101
   Income taxes ............................................      11,961       30,562        9,174
==================================================================================================
Noncash investing and financing activities:
   Capital stock issued for acquisitions (Note 2) ..........   $  49,458    $  19,536    $  57,750
   Capital stock issued under incentive plans (Note 12) ....         344        1,055        3,109
==================================================================================================
Details of Acquisitions (Note 2):
   Fair value of assets acquired ...........................   $ 305,915    $  79,486    $ 171,219
   Liabilities assumed .....................................     (21,560)     (26,289)     (82,748)
   Stock issued ............................................     (49,458)     (19,536)     (57,750)
                                                               ---------    ---------    ---------
   Cash paid ...............................................     234,897       33,661       30,721
   Less: cash acquired .....................................        (791)      (2,653)      (2,355)
                                                               ---------    ---------    ---------
   Net cash paid for acquisitions ..........................   $ 234,106    $  31,008    $  28,366
==================================================================================================
</TABLE>



34
<PAGE>   18


15. SEGMENT INFORMATION:

Information on the company's operations in different segments is contained on
pages 20 and 21 of this report.

16. QUARTERLY RESULTS (UNAUDITED):

<TABLE>
<CAPTION>
QUARTERS ENDED                                                                    1996
----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)                   March 31,    June 30,  September 30,  December 31,     Total
----------------------------------------------------------------------------------------------------------------------

<S>                                                  <C>          <C>          <C>            <C>           <C>
Revenues .........................................   $  278,781   $  301,829   $  309,985     $  309,634    $1,200,229
Gross profit (a)(b)(c) ...........................       91,194       87,194       99,940         85,864       364,192
Income (loss) from continuing operations .........        5,706        7,173        6,754         (5,910)       13,723
Net income (loss) ................................   $    5,706   $    7,173   $    6,754     $   (5,910)   $   13,723
======================================================================================================================
Per Share:
Income (loss) from continuing operations .........   $      .17   $      .22   $      .19     $     (.16)   $      .40
Net income (loss) ................................          .17          .22          .19           (.16)          .40
Dividends ........................................          .10          .10          .10            .10           .40
======================================================================================================================
</TABLE>

a. Gross profit equals total sales and operating revenues less cost of sales
and operating costs (excluding depreciation and amortization) and unusual
items. 
b. Gross profit for the second, third and fourth quarters of 1996 was
impacted positively by the effect of LIFO liquidations of $300,000, $200,000
and $600,000, respectively. 
c. Gross profit for the first, second, third and fourth quarters was impacted
negatively by the effect of unusual items of $470,000, $340,000, $90,000 and
$13.6 million, respectively.

<TABLE>
<CAPTION>
QUARTERS ENDED                                                                    1995
--------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)                   March 31,    June 30,    September 30,  December 31,     Total
--------------------------------------------------------------------------------------------------------------------------

<S>                                                  <C>           <C>            <C>           <C>            <C>        
Revenues .........................................   $   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 .........         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
==========================================================================================================================
</TABLE>

a. Gross profit equals total sales and operating revenues less cost of sales
and operating costs (excluding depreciation and amortization) and unusual
items. 
b. Gross profit for the second and fourth quarter of 1995 was impacted
positively by the effect of LIFO liquidations of $1.5 million and $700,000,
respectively.
c. Gross profit for the second, third and fourth quarter of 1995 was impacted
negatively by the effect of unusual items of $15.8 million, $1.2 million and
$10 million, respectively.



                                                                             35
<PAGE>   19


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

TO THE STOCKHOLDERS
QUAKER STATE CORPORATION:

We have audited the accompanying consolidated balance sheets of Quaker State
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, cash flows and stockholders' equity for each
of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.


/s/ COOPERS & LYBRAND L.L.P.

Coopers & Lybrand L.L.P.

Dallas, Texas
January 28, 1997

===============================================================================

MANAGEMENT REPORT

TO THE STOCKHOLDERS
QUAKER STATE CORPORATION:

The consolidated financial statements of Quaker State Corporation (the company)
and other financial information appearing in this report have been prepared by
management of the company, which is responsible for their integrity and
objectivity. The statements were prepared in conformity with generally accepted
accounting principles, and where appropriate, reflect estimates based upon the
judgment of management.

         The company's system of internal accounting control is designed to
provide reasonable assurance that transactions are recorded and reported
appropriately and that the assets of the company are safeguarded. This system
of internal control includes both administrative and accounting controls.
Management's commitment to internal controls is demonstrated through written
policies and procedures (including a statement of ethical values and a code of
business conduct), an effective internal audit function and a qualified
financial staff.

         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 internal
audit function. The Audit Committee meets regularly, and when appropriate
separately with the internal auditors, the independent auditors and management.
Both the internal auditors and the independent auditors have unrestricted
access to the Audit Committee.

/s/ HERBERT M. BAUM                   /s/ CONRAD A. CONRAD

Herbert M. Baum                       Conrad A. Conrad
Chairman and Chief Executive Officer  Vice Chairman and Chief Financial Officer



36
<PAGE>   20


QUAKER STATE (KSF) MARKET PRICES BY QUARTER

<TABLE>
<CAPTION>
                             1996    1995      1994
-----------------------------------------------------

<S>                         <C>      <C>       <C>    
First Quarter
   High .................   14 5/8   15 1/8    14 3/8
   Low ..................   12 3/4   13 3/8    12 5/8
   Close ................   14       13 3/4    13
                            ------   ------    ------
Second Quarter
   High .................   16 1/8   15 1/8    16 1/8
   Low ..................   13 7/8   13 1/2    12 3/4
   Close ................   15       15        14
                            ------   ------    ------
Third Quarter
   High .................   17 1/2   16 1/2    15 3/8
   Low ..................   14       14 5/8    13 1/2
   Close ................   17 1/4   14 5/8    14 1/2
                            ------   ------    ------
Fourth Quarter
   High .................   18 1/4   14 3/4    14 1/2
   Low ..................   14       12 1/8    13
   Close ................   14       12 3/4    14
=====================================================
</TABLE>



                                                                             37