Pennzoil Quaker State 10Q 2002 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934


For the Quarter Ended June 30, 2002		Commission File No. 1-14501

PENNZOIL-QUAKER STATE COMPANY
(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		76-0200625 (I.R.S. Employer Identification No.)

Pennzoil Place, P.O. Box 2967
Houston, Texas 77252-2967
(Address of principal executive offices)

Registrant’s telephone number, including area code: (713) 546-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No .

Number of shares of stock were outstanding, as of latest practicable date, July 31, 2002:

Common Stock, par value $0.10 per share, 80,707,033 shares.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
		CONDENSED CONSOLIDATED BALANCE SHEET
		CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
		CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
		CONDENSED CONSOLIDATING BALANCE SHEET
		CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
PART II. OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
INDEX TO EXHIBITS
Computation of Ratio of Earnings to Fixed Charges

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)


		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2002			2001			2002			2001

		(expressed in thousands except per share amounts)
REVENUES		$	590,434		$	601,001		$	1,154,008		$	1,167,064
COSTS AND EXPENSES
	Cost of sales (excluding depreciation and amortization)		385,400			426,840			758,352			816,713
	Selling, general and administrative		114,081			124,470			226,794			233,012
	Depreciation and amortization		15,588			30,938			31,189			55,634
	Taxes, other than income		4,121			3,919			8,291			7,113
	Interest charges, net		23,023			24,165			45,855			48,877

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX			48,221			(9,331	)		83,527			5,715
Income tax provision (benefit)			19,568			(6,448	)		33,900			308

INCOME (LOSS) FROM CONTINUING OPERATIONS			28,653			(2,883	)		49,627			5,407
LOSS FROM DISCONTINUED OPERATIONS, net of tax			—			(2,465	)		—			(2,465	)

NET INCOME (LOSS)		$	28,653		$	(5,348	)	$	49,627		$	2,942

BASIC EARNINGS (LOSS) PER SHARE
	Continuing operations	$	0.36		$	(0.04	)	$	0.62		$	0.07
	Discontinued operations		—			(0.03	)		—			(0.03	)

		$	0.36		$	(0.07	)	$	0.62		$	0.04

DILUTED EARNINGS (LOSS) PER SHARE
	Continuing operations	$	0.34		$	(0.04	)	$	0.60		$	0.07
	Discontinued operations		—			(0.03	)		—			(0.03	)

		$	0.34		$	(0.07	)	$	0.60		$	0.04

DIVIDENDS PER COMMON SHARE		$	0.0250		$	0.1875		$	0.0500		$	0.3750

AVERAGE SHARES OUTSTANDING:
	BASIC		80,406			79,107			80,110			78,971
	DILUTED		83,840			79,107			82,668			79,693
END OF PERIOD SHARES OUTSTANDING			80,671			79,261			80,671			79,261
NET INCOME (LOSS)		$	28,653		$	(5,348	)	$	49,627		$	2,942
Other comprehensive income (loss) net of tax:
	Foreign currency translation adjustment		(2,076	)		315			(3,839	)		(2,161	)
	Unrealized loss on investment in securities and other		(123	)		(175	)		(91	)		(144	)

	Total other comprehensive income (loss)		(2,199	)		140			(3,930	)		(2,305	)
COMPREHENSIVE INCOME (LOSS)		$	26,454		$	(5,208	)	$	45,697		$	637

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 2

PART I. FINANCIAL INFORMATION — continued

PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET


		June 30,		December 31,
		2002		2001

		(unaudited)
		(expressed in thousands)
ASSETS
Current assets
	Cash and cash equivalents	$	124,980	$	86,412
	Receivables		286,471		269,515
	Inventories		200,098		199,641
	Other current assets		62,104		66,778

Total current assets			673,653		622,346
Property, plant and equipment, net			424,597		438,981
Deferred income taxes			238,541		266,805
Goodwill			714,857		714,939
Other intangibles			401,496		401,261
Other assets			251,078		251,985

TOTAL ASSETS		$	2,704,222	$	2,696,317

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Current maturities of long-term debt	$	94,564	$	133,733
	Accounts payable		177,279		163,537
	Payroll accrued		20,650		14,058
	Other current liabilities		147,432		141,936

Total current liabilities			439,925		453,264
Total long-term debt, less current maturities			1,001,447		1,002,554
Capital lease obligations, less current maturities			52,137		55,329
Other liabilities			390,434		420,619

TOTAL LIABILITIES			1,883,943		1,931,766

COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY			820,279		764,551

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	2,704,222	$	2,696,317

The accompanying notes are an integral part of these condensed consolidated financial statements.
The Condensed Consolidated Balance Sheet as of December 31, 2001 has been derived from audited financial statements.

Page 3

PART I. FINANCIAL INFORMATION — continued

PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)


			Six Months Ended
			June 30,

			2002			2001

			(expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
	Net income		$	49,627		$	2,942
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization		31,189			37,956
		Amortization of goodwill		—			12,286
		Amortization of intangibles determined to have an indefinite life		—			5,392
		Deferred income tax		32,566			(1,292	)
		Earnings in excess of distributions from equity investees		(10,848	)		(3,819	)
		Other non-cash items		11,175			17,770
		Loss from discontinued operations		—			4,074
		Changes in accounts receivable		(22,210	)		(63,995	)
		Changes in inventories		(2,206	)		(32,055	)
		Changes in accounts payable		15,642			(23,381	)
		Changes in other operating assets and liabilities		(11,358	)		(34,782	)

	Net cash provided by (used in) operating activities			93,577			(78,904	)

CASH FLOWS USED IN INVESTING ACTIVITIES
	Capital expenditures			(21,578	)		(24,963	)
	Acquisitions, net of cash acquired			—			(700	)
	Proceeds from sales of assets			7,665			9,592
	Other investing activities			3,440			14,382

	Net cash used in investing activities			(10,473	)		(1,689	)

CASH FLOWS USED IN FINANCING ACTIVITIES
	Repayments of debt			(39,695	)		(38,629	)
	Dividends paid			(4,009	)		(29,628	)
	Other financing activities			(832	)		—

	Net cash used in financing activities			(44,536	)		(68,257	)

NET CASH PROVIDED BY DISCONTINUED OPERATIONS				—			114,270
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS				38,568			(34,580	)
CASH AND CASH EQUIVALENTS, beginning of period				86,412			38,263

CASH AND CASH EQUIVALENTS, end of period			$	124,980		$	3,683

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 4

PART I. FINANCIAL INFORMATION — continued

PENNZOIL-QUAKER STATE COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) General -

The Management’s Discussion and Analysis of Financial Condition and Results of Operations which follows these notes contains additional information on the results of operations and the financial position of Pennzoil-Quaker State Company (“Pennzoil-Quaker State” or the “Company”). Those comments should be read in conjunction with these notes. The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 includes additional information about the Company, its operations, and its financial position, and should be read in conjunction with this quarterly report on Form 10-Q. The foregoing financial statements include only normal recurring accruals and all adjustments which Pennzoil-Quaker State considers necessary for a fair presentation.

In order to conform with the current year presentation, certain prior period items have been reclassified in the condensed consolidated financial statements in accordance with the issuance of Emerging Issues Task Force issue 01-9 entitled, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products” which addresses when sales incentives and discounts should be recognized, as well as where the related revenues and expenses should be classified in the financial statements.

(2) New Accounting Standards -

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires entities to record the fair value of a liability for legal obligations associated with the retirement obligations of tangible long-lived assets in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related asset. The liability is accreted to the fair value at the time of settlement over the useful life of the asset, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is currently evaluating the impact of adopting SFAS No. 143 on its financial position and results of operations.

In May 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS 145 rescinds the automatic treatment of gains or losses from extinguishment of debt as extraordinary unless they meet the criteria for extraordinary items as outlined in APB Opinion No. 30, “Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. As allowed under the provisions of SFAS 145, the Company had decided to early adopt SFAS 145 (see Note 7).

Page 5

PART I. FINANCIAL INFORMATION — continued

(3) Goodwill and Intangible Assets -

At June 30, 2002 goodwill and other intangible assets consist of the following (expressed in thousands):


	As of June 30, 2002

			Accumulated
	Asset		Amortization			Net

Goodwill	$	845,486	$	(130,629	)	$	714,857
Tradenames (a)		428,048		(29,289	)		398,759
Trademarks		2,909		(436	)		2,473
Licensee agreement		394		(130	)		264

Total	$	1,276,837	$	(160,484	)	$	1,116,353

(a)

Tradenames are not being amortized under SFAS No. 142. Tradenames are deemed to have an indefinite useful life because they are expected to contribute to cash flows indefinitely. Therefore, tradenames would not be amortized until their useful life is no longer indefinite. Tradenames are tested for impairment in accordance with SFAS No. 142.

Estimated amortization expense for each of the years ended December 31, 2002 through 2006 is $83,000.

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement modifies existing generally accepted accounting principles related to the amortization and impairment of goodwill and other intangible assets. Upon adoption of the new standard, goodwill and intangibles determined to have an indefinite life will no longer be amortized. In addition, goodwill must be assessed at least annually for impairment using a fair-value based approach. Effective January 1, 2002, the Company adopted SFAS No. 142. Accordingly, no amortization of goodwill or intangibles determined to have an indefinite life was recognized in the accompanying consolidated statement of operations for the three and six months ended June 30, 2002. In accordance with the provisions of SFAS No. 142, the Company has performed the required transitional impairment test of goodwill and intangibles determined to have an indefinite life and has determined that no impairment loss should be recognized in the current period.

The Company’s effective tax rate decreased primarily as a result of the suspension of amortization of goodwill and intangibles determined to have an indefinite life.

Page 6

PART I. FINANCIAL INFORMATION — continued

The effect of the adoption of SFAS No. 142 on the reported net income and earnings per share for the three and six months ended June 30, 2001 is as follows (expressed in thousands, except per share amounts):


	Three months ended June 30,					Six months ended June 30,

	2002		2001			2002		2001

Reported net income	$	28,653	$	(5,348	)	$	49,627	$	2,942
Amortization of goodwill and intangibles determined to have an indefinite life, net of tax		—		7,052			—		14,237

Net income, as adjusted	$	28,653	$	1,704		$	49,627	$	17,179

Reported basic earnings per share	$	0.36	$	(0.07	)	$	0.62	$	0.04
Amortization of goodwill and intangibles determined to have an indefinite life, net of tax		—		0.09			—		0.18

Basic earnings per share, as adjusted	$	0.36	$	0.02		$	0.62	$	0.22

Reported diluted earnings per share	$	0.34	$	(0.07	)	$	0.60	$	0.04
Amortization of goodwill and intangibles determined to have an indefinite life, net of tax		—		0.09			—		0.18

Diluted earnings per share, as adjusted	$	0.34	$	0.02		$	0.60	$	0.22

(4) Derivative Instruments -

At times, the Company has utilized swaps and forward contracts to manage certain risks resulting from fluctuations in interest rates and foreign currency exchange rates. In connection with the issuance of $150.0 million of two-year fixed rate notes in December 2000, Pennzoil-Quaker State entered into fixed-to-floating interest rate swaps to maintain its mix of variable rate versus fixed rate debt. The Company designated the swaps as fair value hedges. Under SFAS No. 133, changes in the fair value of the swaps are recognized currently in earnings along with the offsetting changes in the fair value of the associated debt. At June 30, 2002, the fair market value of the swap of $1.3 million was recorded in other assets. During the six months ended June 30, 2002, the Company repurchased notes in the amount of $34.8 million and unwound the corresponding swap.

In connection with the acquisition of Quaker State Corporation in December 1998, Pennzoil-Quaker State assumed the obligation for $100 million of Quaker State’s 6.625% Notes due 2005. In January 2002, the Company entered into interest rate swaps relating to the 6.625% Notes due 2005 to adjust the mix of variable rate and fixed rate debt. The swaps were designated as fair value hedges and changes in the fair value are recognized in earnings along with the offsetting changes in the fair value of the associated debt. At June 30, 2002, the fair market value of the swaps of $1.7 million was recorded in other assets.

At June 30, 2002, the Company had $6.0 million of Canadian dollar foreign currency forward contracts to hedge the cash flow variability of U.S. dollar purchases of inventory. The forward contracts are designated as cash flow hedges of forecasted transactions. The forward contracts are recorded at fair value as an asset or liability on the Company’s balance sheet with the effective portion of the gain or loss reported as a component of other comprehensive income and will be reclassified into earnings in the same period during which the transactions are settled. The $6.0 million of hedges outstanding at June 30, 2002 will settle at various times throughout the third quarter of 2002.

Page 7

PART I. FINANCIAL INFORMATION — continued

(5) Summarized Financial Data of Excel Paralubes -

Pennzoil-Quaker State’s net investment in Excel Paralubes, a 50/50 partnership with Conoco Inc., is accounted for using the equity method and is carried as a credit balance of $72.1 million at June 30, 2002 and $83.0 million at December 31, 2001. The credit balance is a result of cumulative distributions in excess of earnings and is included in other liabilities on the condensed consolidated balance sheet.

Summarized financial information for Excel Paralubes for the three and six months ended June 30, 2002 and 2001 on a 100% basis follows:


	Three months ended June 30				Six months ended June 30

	2002		2001		2002		2001

			(Expressed in thousands)
			(Unaudited)
Revenues	$	106,236	$	100,081	$	203,259	$	222,269
Operating earnings		16,757		20,117		53,099		42,802
Net income		7,362		10,048		34,200		22,430

Effective January 1, 2002, Excel Paralubes changed its method of accounting for planned major maintenance costs. Such costs, which were previously accrued, will now be expensed as incurred. Excel Paralubes’ management believes that the new method is preferable as it results in the recognition of such costs in the period they are incurred. The cumulative effect of this accounting change was $14.9 million for Excel Paralubes.

Pennzoil-Quaker State’s share of the cumulative effect was $4.4 million after-tax ($0.05 per share). The pro forma effect of the change in accounting principle would not have been materially different than the reported results for the periods presented.

Page 8

PART I. FINANCIAL INFORMATION — continued

(6) Segment Reporting -

Information with respect to revenues, operating income and other data for the Company’s five operating segments is presented in the following tables (expressed in thousands).


		Three months ended June 30, 2002

				Consumer						Supply Chain		Corporate
		Lubricants		Products		International		Jiffy Lube		Investments		and other (a)			Total

Unaffiliated revenues		$	305,150	$	97,407	$	58,657	$	93,443	$	36,730	$	(953	)	$	590,434
Intersegment revenues			17,853		5,477		84		19		34,488		(57,921	)		—

	Total revenues	$	323,003	$	102,884	$	58,741	$	93,462	$	71,218	$	(58,874	)	$	590,434
Income before interest and income taxes		$	52,103	$	12,678	$	4,494	$	9,077	$	11,312	$	(18,420	)	$	71,244
Goodwill (b)		$	311,235	$	292,149	$	40,095	$	71,378	$	—	$	—		$	714,857
Tradenames (c)		$	281,739	$	117,020	$	—	$	—	$	—	$	—		$	398,759


		Three months ended June 30, 2001

				Consumer								Supply Chain		Corporate
		Lubricants		Products			International			Jiffy Lube		Investments		and other (a)			Total

Unaffiliated revenues		$	316,525	$	96,391		$	66,139		$	88,458	$	35,497	$	(2,009	)	$	601,001
Intersegment revenues			14,835		6,021			—			—		33,769		(54,625	)		—

	Total revenues	$	331,360	$	102,412		$	66,139		$	88,458	$	69,266	$	(56,634	)	$	601,001
Income before interest and income taxes (d)		$	32,739	$	(1,497	)	$	(12,969	)	$	4,531	$	8,189	$	(16,159	)	$	14,834


		Six months ended June 30, 2002

				Consumer						Supply Chain		Corporate
		Lubricants		Products		International		Jiffy Lube		Investments (e)		and other (a)			Total

Unaffiliated revenues		$	595,431	$	180,623	$	114,748	$	183,949	$	82,845	$	(3,588	)	$	1,154,008
Intersegment revenues			35,075		11,084		84		19		66,981		(113,243	)		—

	Total revenues	$	630,506	$	191,707	$	114,832	$	183,968	$	149,826	$	(116,831	)	$	1,154,008
Income before interest and income taxes		$	95,855	$	18,654	$	7,950	$	17,261	$	27,836	$	(38,174	)	$	129,382


		Six months ended June 30, 2001

				Consumer							Supply Chain		Corporate
		Lubricants		Products		International			Jiffy Lube		Investments		and other (a)			Total

Unaffiliated revenues		$	619,546	$	176,063	$	128,702		$	172,222	$	74,135	$	(3,604	)	$	1,167,064
Intersegment revenues			30,818		11,288		709			—		77,085		(119,900	)		—

	Total revenues	$	650,364	$	187,351	$	129,411		$	172,222	$	151,220	$	(123,504	)	$	1,167,064
Income before interest and income taxes (d)		$	64,007	$	3,392	$	(11,811	)	$	9,504	$	17,849	$	(28,349	)	$	54,592

(a)		Includes consolidating eliminations.

(b)		Goodwill at December 31, 2001 was $311.2 million for lubricants, $292.1 million for consumer products, $39.3 million for international and $72.3 million for Jiffy Lube.

(c)		Tradenames at December 31, 2001 were $281.7 million for lubricants and $117.0 million for consumer products.

(d)		Includes restructuring charges of $11.8 million for consumer products and $16.7 million for international.

(e)		Includes $7.4 million equity income from Excel Paralubes for change in accounting for planned major maintenance costs.

(7) Debt -

The Company’s $348 million senior secured revolving credit facility contains certain financial covenants, including debt/EBITDA ratios (“leverage ratios”), an interest coverage ratio and a minimum net worth requirement, all of which must be complied with at the end of a quarterly period. The Company was in compliance with these covenants at June 30, 2002. There were no outstanding borrowings under this facility at June 30, 2002.

Page 9

PART I. FINANCIAL INFORMATION — continued

Pennzoil-Quaker State’s Canadian subsidiary maintains a revolving credit facility with Canadian banks, which provides for up to $9.4 million of committed borrowings through October 2002. As of June 30, 2002 borrowings under the Company’s Canadian facility totaled $7.9 million and were classified as short-term debt.

A U.K. subsidiary of the Company maintains a revolving credit facility that provides for borrowings up to $21.5 million through the earlier of November 15, 2002 or thirty days following the closing date of the proposed merger with Shell Oil Company as defined in Note 11. Outstanding borrowings under the facility totaled $7.1 million at June 30, 2002 and were classified as short-term debt.

In December 2000, Pennzoil-Quaker State issued $150.0 million of 8.65% Notes due 2002. Net proceeds of $149.1 million were used to reduce the Company’s commercial paper borrowings. The terms of the notes provide that, in the event a rating on Pennzoil-Quaker State’s senior unsecured debt falls and remains below investment grade, the coupon on the notes increases 0.75% to 9.40% and each noteholder has the option, at any time on or after June 1, 2001, to require the Company to purchase its note at 100% of the principal amount thereof plus accrued and unpaid interest on or after June 1, 2001. During 2001, Standard and Poor’s, Moody’s and Fitch lowered the senior unsecured debt rating for the Company’s debt below investment grade. To date, amounts put to the Company for repurchase have been immaterial. During the six months ended June 30, 2002, the Company chose to purchase and retire $34.8 million face amount of these notes and pretax charges of $1.5 million were recognized in other income.

Debt outstanding is as follows:


		June 30,			December 31,
		2002			2001

		(expressed in thousands)
7.375% Debentures due 2029, net of discount		$	398,205		$	398,172
10.0% Notes due 2008, net of discount			248,556			248,476
6.750% Notes due 2009, net of discount			199,311			199,260
9.40% Notes due 2002, at market value, net of discount			71,050			108,271
6.625% Notes due 2005, at market value, net of discount			101,476			99,770
Pollution control bonds, net of discount			50,564			50,561
International debt facilities			22,978			24,247
Other debt			3,871			7,530

	Total debt		1,096,011			1,136,287
Less amounts classified as current maturities			(94,564	)		(133,733	)

	Total long-term debt	$	1,001,447		$	1,002,554

Page 10

PART I. FINANCIAL INFORMATION — continued

(8) Earnings Per Share -

Computations for basic and diluted earnings (loss) per share for the three and six months ended June 30, 2002 and 2001 consist of the following:


		Three months ended June 30					Six months ended June 30

		2002		2001			2002		2001

		(expressed in thousands except per share amounts)
Income (loss) from continuing operations		$	28,653	$	(2,883	)	$	49,627	$	5,407
Basic weighted average shares			80,406		79,107			80,110		78,971
Effect of dilutive securities (a)
	Options		2,665		—			1,780		468
	Awards		769		—			778		254

Diluted weighted average shares			83,840		79,107			82,668		79,693

Basic earnings (loss) per share		$	0.36	$	(0.04	)	$	0.62	$	0.07

Diluted earnings (loss) per share		$	0.34	$	(0.04	)	$	0.60	$	0.07

(a)

A weighted average number of options to purchase 1.0 million shares of common stock were outstanding for the three months ended June 30, 2002, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares. A weighted average number of options to purchase 9.1 million shares of common stock and awards of 729.8 thousand shares of common stock were outstanding for the three months ended June 30, 2001, but were not included in the computation of diluted earnings per share because these options and awards would have resulted in an antidilutive per share amount. A weighted average number of options to purchase 3.7 million and 6.9 million shares of common stock were outstanding for the six months ended June 30, 2002 and 2001, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares.

(9) Inventories -

Inventory components are summarized as follows:


		June 30,		December 31,
		2002		2001

		(expressed in thousands)
		(Unaudited)
Finished goods and work in process		$	168,978	$	163,241
Raw materials and supplies			31,120		36,400

	Total	$	200,098	$	199,641

(10) Restructuring Charges -

Page 11

PART I. FINANCIAL INFORMATION — continued

exited low margin operations, facilities and distribution channels. These charges primarily included severance for approximately 362 administrative and operational employees, as well as the accrual for the closure and consolidation of warehouses and office space. All of the 362 employees have been terminated or notified of a termination date. The severance payments for the former employees are expected to be paid out over a minimum period of two months with a maximum period of up to two years.

Later in 2001 the Company’s lubricants segment took steps to reduce manufacturing and selling expense. In the aggregate, the 2001 cost reduction plan included terminating approximately 670 administrative and operational employees.

The remaining total severance accrual at June 30, 2002, which relates to remaining payments due terminated employees, was $9.1 million recorded in other current liabilities and $1.0 million recorded in other liabilities. Total severance amounts paid and charged against the liability during the three months ended June 30, 2002 were $3.9 million and during the six months ended June 30, 2002 were $9.8 million.

(11) Proposed Merger with Shell Oil Company -

On March 25, 2002, Pennzoil-Quaker State Company and Shell Oil Company, a wholly-owned member of the Royal Dutch/Shell Group, announced that the companies have entered into a definitive agreement under which Shell Oil Company will acquire Pennzoil-Quaker State Company at a price of $22.00 per share in cash.

Pennzoil-Quaker State Company held a shareholders’ meeting on August 1, 2002 at which time shareholders approved the proposed merger with Shell Oil Company. In addition, we have received most of the international regulatory approvals, including approvals in Austria, Brazil, Canada, Denmark, Ireland and the U.K. Work is continuing to obtain approval from the Federal Trade Commission in the U.S.

(12) Commitments and Contingencies -

Upon the completion of the proposed merger with Shell Oil Company as described in Note 11, the Company will be required to make payments of approximately $214 million related to accelerated vesting of options, bonuses, excise tax reimbursement, payments for deferred compensation to certain current and former executive officers and investment banking fees which are payable upon a change in control of the Company. Additionally, severance payments of up to $42 million may become due under the Company’s Executive Severance Plan in the event plan participants’ employment is terminated within three years. The Company anticipates that, upon completion of the merger, Shell Oil Company will fund the necessary cash needed to make these payments.

The Company anticipates being in compliance with change of control or similar provisions contained in its various debt instruments.

The Company must pay to Shell Oil Company a termination fee of $65 million if the merger agreement is terminated under the circumstances described in the Company’s proxy statement filed with the U. S. Securities and Exchange Commission on June 24, 2002.

Pennzoil-Quaker State’s directors have been named as defendants in two lawsuits filed on March 28, 2002 and April 4, 2002 in the District Court of Harris County, Texas by two purported Pennzoil-Quaker State stockholders. The petitions seek class certification on behalf of the holders of Pennzoil-Quaker State’s stock and are styledJohn F. Havens v. James Pate, et al.andHoward Lasker v. James L. Pate, et al.The petitions in the stockholder actions alleged that the directors breached their fiduciary duties in connection with the proposed sale of Pennzoil-Quaker State to Shell Oil Company at a price alleged to be grossly inadequate and unfair. The petitions further alleged that the

Page 12

PART I. FINANCIAL INFORMATION — continued

defendants derived unspecified personal financial benefits from the acquisition at the expense of Pennzoil-Quaker State’s stockholders. The petitions seek similar relief, including declaratory and injunctive relief barring defendants from breaching their fiduciary duties to the plaintiffs and the putative class members; seeking to enjoin the defendants from consummating the acquisition of Pennzoil-Quaker State by Shell Oil Company; and requiring defendants to implement a sale or auction of Pennzoil-Quaker State. At a hearing held on July 18, 2002, the plaintiffs’ motion for injunctive relief was denied.

Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Pennzoil-Quaker State’s operations are conducted primarily through the following five segments: (1) lubricants, (2) consumer products, (3) international, (4) Jiffy Lube and (5) supply chain investments.

New Accounting Standards

Critical Accounting Policies

A summary of the Company’s critical accounting policies is presented beginning on page 27 of our 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2002.

Environmental Matters

A summary of the Company’s environmental matters is presented beginning on page 8 of our 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2002. There were no significant changes during 2002.

Page 13

PART I. FINANCIAL INFORMATION — continued

Legal Proceedings

A summary of the Company’s legal proceedings is presented beginning on page 9 of our 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2002. There were no significant changes during 2002.

Restructuring Charges

In the second quarter of 2001, the Company recorded a $28.5 million pretax charge to accrue the costs associated with a restructuring program to reduce costs, streamline operations and position the Company to continue its long-term growth plan. The charge was classified as a $6.0 million pretax charge to cost of sales, a $16.0 million pretax charge to selling, general and administrative expense and a $6.5 million pretax charge to depreciation and amortization and related to two operating segments as follows: consumer products — $11.8 million and international — $16.7 million. Included in the $16.7 million of international charges were charges of $6.5 million associated with the impairment of goodwill. The consumer products segment consolidated the management and administration of its two marketing groups into one organization in Houston at the end of 2001. The international segment exited low margin operations, facilities and distribution channels. These charges primarily included severance for approximately 362 administrative and operational employees, as well as the accrual for the closure and consolidation of warehouses and office space. All of the 362 employees have been terminated or notified of a termination date. The severance payments for the former employees are expected to be paid out over a minimum period of two months with a maximum period of up to two years.

Results of Operations

Second Quarter 2002 compared with Second Quarter 2001

Net sales for Pennzoil-Quaker State were $583.5 million for the quarter ended June 30, 2002, a decrease of $10.9 million, or approximately 1.8%, from the same period in 2001. The decrease was primarily a result of reduced sales of low margin and unbranded products.

Net income for the quarter ended June 30, 2002 was $28.6 million, or 36 cents per basic share. This compares with net loss from continuing operations of $2.9 million, or 4 cents per basic share, for the quarter ended June 30, 2001. Results for the quarter ended June 30, 2001 include $7.1 million in after-tax amortization expense suspended in 2002 (see Note 3 of Condensed Consolidated Financial Statements) and $14.9 million in after-tax charges primarily related to restructuring costs in the consumer products and international segments. The increase reflects a combination of improved marketplace factors and normalized motor oil margins. In addition, benefits from an overall lower cost structure as a result of the restructuring activities completed in 2001 are reflected in the second quarter 2002 operating results.

Page 14

PART I. FINANCIAL INFORMATION — continued

The Company’s effective tax rate decreased primarily as a result of the suspension of amortization of goodwill and intangibles determined to have an indefinite life.

Lubricants. Net sales for the lubricants segment were $321.2 million for the quarter ended June 30, 2002, compared to $329.2 million for the same period last year. The decrease in net sales is primarily a result of lower sales volumes associated with non-branded, low margin products. Operating income for this segment was $52.1 million for the quarter ended June 30, 2002, compared to $32.7 million for the same period last year. The increase in operating income is primarily due to improved motor oil margins, reduced selling expense and the $3.8 million suspension of amortization of goodwill and intangibles determined to have an indefinite life as the result of new accounting standards. Primarily as a result of the Company’s restructuring program in 2001 to reduce cost and streamline operations, the lubricants segment reduced selling expense by $1.9 million for the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001. These reductions were partially offset by an increase in marketing and advertising expense of $0.9 million for the quarter ended June 30, 2002 compared to the same period last year.

Consumer Products. Net sales for the consumer products segment were $102.8 million for the quarter ended June 30, 2002, compared to $102.4 million for the same period last year. The increase in net sales is primarily due to higher sales of chemicals and appearance products. Operating income (loss) for this segment was $12.7 million for the quarter ended June 30, 2002, compared to $(1.5) million for the same period last year. The increase in operating income is primarily due to the $11.8 million restructuring charges recorded in 2001. Excluding these restructuring charges operating income increased $2.4 million. The increase in operating income was primarily due to $2.9 million from suspension of the amortization of goodwill and intangibles determined to have an indefinite life as the result of new accounting standards partially offset by lower margins on fashion and accessory products. Primarily as a result of the Company’s restructuring program in 2001 to reduce cost and streamline operations, the consumer products segment reduced selling expense by $0.6 million in the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001. These reductions were offset by an increase in marketing and advertising expense of $1.1 million for the quarter ended June 30, 2002 compared to the same period last year.

International. Net sales for the international segment were $58.6 million for the quarter ended June 30, 2002, compared to $66.2 million for the same period last year. The decrease in net sales is primarily due to restructuring actions to scale back low margin operations, facilities and distribution channels. Operating income (loss) for this segment was $4.5 million for the quarter ended June 30, 2002, compared to $(13.0) million for the same period last year. The increase in operating income was primarily due to $16.7 million restructuring charges recorded in 2001. Excluding the restructuring charges, operating income increased $0.8 million. The increase in operating income was primarily due to lower selling, general and administrative expense and lower depreciation and amortization expense. The lower selling, general and administrative expense is partially the result of restructuring activities completed in late 2001.

Jiffy Lube.Net sales for this segment were $91.2 million for the quarter ended June 30, 2002, compared to net sales of $86.8 million for the same period in 2001. Other income for this segment for the quarter ended June 30, 2002 was $2.3 million, compared to $1.6 million for the same period in 2001. Operating income from this segment for the quarter ended June 30, 2002 was $9.1 million, compared to $4.5 million for the same period in 2001. The increase in operating income is primarily due to higher comparable sales in company-operated centers in 2002 and $1.7 million from suspension of the amortization of goodwill.

Page 15

PART I. FINANCIAL INFORMATION — continued

Supply Chain Investments. Net sales for this segment were $67.5 million for the quarter ended June 30, 2002, compared to net sales of $64.2 million for the same period in 2001. Other income for this segment for the quarter ended June 30, 2002, was $3.7 million compared to $5.0 million for the same period in 2001. Income from the Excel Paralubes 50/50 partnership with Conoco Inc., which is recorded using the equity method of accounting, is included in other income. Operating income from this segment for the period ended June 30, 2002 was $11.3 million compared to operating income of $8.2 million for the same period in 2001. The increase in operating income reflects increased base oil production partially offset by lower base oil margins.

Six Months Ended June 30, 2002 compared with Six Months Ended June 30, 2001

Net sales for Pennzoil-Quaker State were $1,132.2 million for the six months ended June 30, 2002, a decrease of $20.8 million, or approximately 1.8% from the same period in 2001. The decrease was primarily a result of reduced sales of low margin and unbranded products.

Net income for the six months ended June 30, 2002 was $49.6 million, or 62 cents per basic share. This compares with net income from continuing operations of $5.4 million, or 7 cents per basic share, for the six months ended June 30, 2001. Results for the six months ended June 30, 2001 include $14.2 million in after-tax amortization expense suspended in 2002 (see Note 3 of Condensed Consolidated Financial Statements) and $14.9 million in after-tax charges primarily related to restructuring costs in the consumer products and international segments. The increase reflects a combination of improved marketplace factors, normalized motor oil margins and a change in turnaround expense accruals of $4.4 million after-tax. In addition, benefits from an overall lower cost structure as a result of the restructuring activities completed in 2001 are reflected in the first quarter 2002 operating results.

The Company’s effective tax rate decreased primarily as a result of the suspension of amortization of goodwill and intangibles determined to have an indefinite life.

Lubricants. Net sales for the lubricants segment were $628.0 million for the six months ended June 30, 2002, compared to $646.6 million for the same period last year. The decrease in net sales is primarily a result of lower sales volumes associated with non-branded, low margin products. Operating income for this segment was $95.8 million for the six months ended June 30, 2002, compared to $64.0 million for the same period last year. The increase in operating income is primarily due to improved motor oil margins, lower selling expense and the $7.7 million suspension of amortization of goodwill and intangibles determined to have an indefinite life as the result of new accounting standards. Primarily as a result of the Company’s restructuring program in 2001 to reduce cost and streamline operations, the lubricants segment reduced selling expense by $4.1 million for the six months ended June 30, 2002 compared to the six months ended June 30, 2001. These reductions were partially offset by an increase in marketing and advertising expense of $3.2 million for the six months ended June 30, 2002 compared to the same period last year.

Consumer Products. Net sales for the consumer products segment were $191.6 million for the six months ended June 30, 2002, compared to $187.3 million for the same period last year. The increase in net sales is primarily due to higher sales of chemicals and appearance products. Operating income for this segment was $18.7 million for the six months ended June 30, 2002, compared to $3.4 million for the same period last year. The increase in operating income is primarily due to $11.8 million restructuring charges recorded in 2001. Excluding these restructuring charges operating income increased $3.5 million. The increase in operating income was primarily due to $6.0 million suspension of the amortization of goodwill and intangibles determined to have an indefinite life as the

Page 16

PART I. FINANCIAL INFORMATION — continued

result of new accounting standards partially offset by lower margins on fashion and accessory products. Primarily as a result of the Company’s restructuring program in 2001 to reduce cost and streamline operations, the consumer products segment reduced selling expense by $0.9 million in the six months ended June 30, 2002 compared to the six months ended June 30, 2001. These reductions were offset by an increase in marketing and advertising expense of $3.8 million for the six months ended June 30, 2002 compared to the same period last year.

International. Net sales for the international segment were $114.5 million for the six months ended June 30, 2002, compared to $129.3 million for the same period last year. The decrease in net sales is primarily due to restructuring actions to scale back low margin operations, facilities and distribution channels. Operating income (loss) for this segment was $8.0 million for the six months ended June 30, 2002, compared to $(11.8) million for the same period last year. The increase in operating income was primarily due to $16.7 million of restructuring charges recorded in 2001. Excluding restructuring charges, income for the six months ended June 30, 2002 was $3.1 million above the same period last year. The increase in income was due to lower selling, general and administrative expenses and higher margins partially offset by lower volumes. The lower selling, general and administrative expense is primarily the result of restructuring activities completed in late 2001.

Jiffy Lube.Net sales for this segment were $178.7 million for the six months ended June 30, 2002, compared to net sales of $169.5 million for the same period in 2001. Other income for this segment for the six months ended June 30, 2002 was $5.3 million, compared to $2.7 million for the same period in 2001. Operating income from this segment for the six months ended June 30, 2002 was $17.3 million, compared to $9.5 million for the same period in 2001. The increase in operating income is primarily due to higher comparable sales in company-operated centers in 2002 and $3.4 million from suspension of the amortization of goodwill.

Supply Chain Investments. Net sales for this segment were $132.6 million for the six months ended June 30, 2002, compared to net sales of $140.0 million for the same period in 2001. Other income for this segment for the six months ended June 30, 2002, was $17.2 million compared to $11.2 million for the same period in 2001. Income from the Excel Paralubes 50/50 partnership with Conoco Inc., which is recorded using the equity method of accounting, is included in other income. Operating income from this segment for the six months ended June 30, 2002 was $27.8 million compared to operating income of $17.8 million for the same period in 2001. The increase in operating income reflects increased base oil production and a $7.4 million pretax change in turnaround expense accruals (see Note 5 of Condensed Consolidated Financial Statements), partially offset by lower base oil margins.

Capital Resources and Liquidity

Cash Flow. As of June 30, 2002, Pennzoil-Quaker State had cash and cash equivalents of $125.0 million. During the six months ended June 30, 2002, cash and cash equivalents increased $38.6 million. The increase in cash is due to improved earnings and reduced dividends partially offset by an increase in working capital.

Liquidity. The Company’s ability to satisfy its debt obligations and to pay principal and interest on its debt, fund existing working capital and make capital expenditures will depend upon its future performance, which is subject to general economic conditions and other factors, some of which are beyond its control. Based on current and anticipated levels of operations and conditions in our markets, the Company believes that cash on hand plus cash flow from operations will be adequate for

Page 17

PART I. FINANCIAL INFORMATION — continued

the foreseeable future to make required payments of principal and interest on debt, and fund existing working capital and capital expenditure requirements. In addition, the Company has sufficient availability under its credit facilities to fund existing working capital needs and capital expenditures if necessary. In the event of cash flow constraints, capital expenditures could be postponed to fund other obligations if required. Beginning in the third quarter of 2001, the Company reduced its dividend to the equivalent of $0.10 per share annually.

Upon the completion of the proposed merger with Shell Oil Company as described in Note 11 of Condensed Consolidated Financial Statements, the Company will be required to make payments of approximately $214 million related to accelerated vesting of options, bonuses, excise tax reimbursement, payments for deferred compensation to certain current and former executive officers and investment banking fees which are payable upon a change in control of the Company. Additionally, severance payments of up to $42 million may become due under the Company’s Executive Severance Plan in the event plan participants’ employment is terminated within three years. The Company anticipates that, upon completion of the merger, Shell Oil Company will fund the necessary cash needed to make these payments.

Debt Instruments and Repayments. Pennzoil-Quaker State entered into a new $348 million senior secured revolving credit facility on November 2, 2001. Under the facility, $325 million is available on a revolving basis until November 2, 2004 and $23 million is available on a revolving basis until November 1, 2002. There were no outstanding borrowings under this facility as of June 30, 2002.

On November 2, 2001, the Company issued $250.0 million of 10% Senior Notes due 2008. Net proceeds of $242.8 million were used to pay down all outstanding revolving credit borrowings under the Company’s previous revolving credit facility and increase cash on hand.

In December 2000, Pennzoil-Quaker State issued $150.0 million of 8.65% Notes due 2002. Net proceeds of $149.1 million were used to reduce the Company’s commercial paper borrowings. The terms of the notes provide that, in the event a rating on Pennzoil-Quaker State’s senior unsecured debt falls and remains below investment grade, the coupon on the notes increases 0.75% to 9.40% and each noteholder has the option, at any time on or after June 1, 2001, to require the Company to purchase its note at 100% of the principal amount thereof plus accrued and unpaid interest on or after June 1, 2001. During 2001, Standard and Poor’s, Moody’s and Fitch lowered the senior unsecured debt rating for the Company’s debt below investment grade. The notes, which are carried at fair market value due to the interest rate swaps discussed in Note 4, are currently trading above 100% face value plus accrued interest. To date, amounts put to the Company for repurchase have been immaterial. During the six months ended June 30, 2002, the Company chose to purchase and retire $34.8 million

Page 18

PART I. FINANCIAL INFORMATION — continued

face amount of these notes. As of June 30, 2002, the carrying amount of $71.1 million of indebtedness under Pennzoil-Quaker State’s 9.40% Notes due in 2002 (formerly 8.65% Notes due in 2002) has been classified as short-term debt.

Accounts Receivable. Pennzoil-Quaker State, through its wholly owned subsidiary Pennzoil Receivables Company (“PRC”), sells certain of its accounts receivable to a third party purchaser. PRC is a special limited purpose corporation and the assets of PRC are available solely to satisfy the claims of its own creditors and not those of Pennzoil-Quaker State or its affiliates. The Company renewed the receivable sales facility in April 2002 to provide for ongoing sales of up to $110.0 million through October 14, 2002. The Company’s net accounts receivable sold under its receivable sales facility totaled $110.0 million at June 30, 2002 and December 31, 2001. As of July 31, 2002 there were no accounts receivable sold under this facility.

The Company maintains a lube center receivable purchase and sale agreement, which provides for the sale of certain notes receivable up to $275.0 million, through a wholly owned subsidiary, Pennzoil Lube Center Acceptance Corporation (“PLCAC”). The assets of PLCAC are available solely to satisfy the claims of its own creditors and not those of Pennzoil-Quaker State or its affiliates. Through June 30, 2002, the Company sold a total of $235.8 million of notes receivable under this agreement, of which $133.8 million were outstanding to the third party purchaser at June 30, 2002. Through December 31, 2001, the Company sold a total of $233.3 million of notes receivable under this agreement, of which $145.5 million were outstanding to the third party purchaser at December 31, 2001.

Hedging Activities

In connection with the issuance of $150.0 million of two-year fixed rate notes in December 2000, Pennzoil-Quaker State entered into fixed-to-floating interest rate swap to maintain its mix of variable rate versus fixed rate debt. During six months ended June 30, 2002, the Company repurchased notes in the amount of $34.8 million and unwound the corresponding swap. At June 30, 2002, the fair market value of the swap of $1.3 million was recorded in other assets.

In January 2002, the Company entered into interest rate swaps relating to the 6.625% Notes due 2005 to adjust the mix of variable rate and fixed rate debt. At June 30, 2002, the fair market value of the swap of $1.7 million was recorded in other assets.

Pennzoil-Quaker State enters into forward exchange contracts and options to minimize the impact of foreign currency fluctuations on the results of operations. At June 30, 2002, the Company had $6.0 million of Canadian dollar foreign currency forward contracts to hedge the cash flow variability of U.S. dollar purchases of inventory. The $6.0 million of hedges outstanding at June 30, 2002 will settle at various times throughout the third quarter of 2002.

Forward-Looking Statements — Safe Harbor Provisions

This quarterly report on Form 10-Q of Pennzoil-Quaker State for the quarter ended June 30, 2002 contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. To the extent that such statements are not recitations of historical fact, such statements constitute forward-looking statements, which, by definition, involve risks and uncertainties. Where, in any forward-looking statements, Pennzoil-Quaker State expresses an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished.

Page 19

PART I. FINANCIAL INFORMATION — continued

The factors described in Pennzoil-Quaker State’s latest annual report on Form 10-K under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors” and the following are factors that could cause actual results or events to differ materially from those anticipated, and include but are not limited to: general economic, financial and business conditions; energy prices; unanticipated environmental liabilities; changes in and compliance with governmental regulations; changes in tax laws; and the cost and effects of legal proceedings.

Guarantor Condensed Consolidating Financial Statements

In November 2001, Pennzoil-Quaker State issued $250 million of Senior Notes due in 2008. Certain of the Company’s direct and indirect wholly owned subsidiaries (the “Guarantors”) fully and unconditionally guarantee the notes and the related credit facility of Pennzoil-Quaker State and all guarantees are joint and several.

The following are condensed consolidating financial statements which present, in separate columns: Pennzoil-Quaker State Company carrying its investment in subsidiaries under the equity method (the “Parent”); the subsidiary Guarantors on a combined, or where appropriate, consolidated basis, carrying its investment in the subsidiary non-guarantors under the equity method; and the remaining subsidiaries (the “Non-Guarantors”) on a consolidated basis. Additional columns present eliminating adjustments and consolidated totals as of June 30, 2002 and December 31, 2001 and for the quarters and six months ended June 30, 2002 and 2001.

Page 20

PART I. FINANCIAL INFORMATION — continued

PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2002


		Parent Only											Consolidated
		Pennzoil-											Pennzoil-
		Quaker State											Quaker State
		Company			Guarantors		Non-Guarantors			Eliminations			Company

		(expressed in thousands)
		(unaudited)
REVENUES
	Net sales	$	375,887		$	175,456	$	58,392		$	(26,236	)	$	583,499
	Other income, net		(1,886	)		2,192		6,683			(54	)		6,935
	Equity in earnings of unconsolidated subsidiaries		22,070			399		—			(22,469	)		—

			396,071			178,047		65,075			(48,759	)		590,434
COSTS AND EXPENSES
	Cost of sales		252,011			118,419		41,206			(26,236	)		385,400
	Selling, general and administrative		78,573			24,646		10,916			(54	)		114,081
	Depreciation and amortization		9,044			5,272		1,272			—			15,588
	Taxes, other than income		1,819			1,479		823			—			4,121
	Interest charges		19,519			1,664		1,840			—			23,023

INCOME BEFORE INCOME TAX			35,105			26,567		9,018			(22,469	)		48,221
Income tax provision			6,452			9,231		3,885			—			19,568

NET INCOME		$	28,653		$	17,336	$	5,133		$	(22,469	)	$	28,653

NET INCOME		$	28,653		$	17,336	$	5,133		$	(22,469	)	$	28,653
Other comprehensive income (loss), net of tax:
	Foreign currency translation adjustment		—			2,535		(4,611	)		—			(2,076	)
	Unrealized loss on investment in securities		—			—		(123	)		—			(123	)

	Total other comprehensive income (loss)		—			2,535		(4,734	)		—			(2,199	)
COMPREHENSIVE INCOME		$	28,653		$	19,871	$	399		$	(22,469	)	$	26,454

Page 21

PART I. FINANCIAL INFORMATION — continued

PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002


		Parent Only											Consolidated
		Pennzoil-											Pennzoil-
		Quaker State											Quaker State
		Company			Guarantors		Non-Guarantors			Eliminations			Company

		(expressed in thousands)
		(unaudited)
REVENUES
	Net sales	$	733,984		$	337,007	$	153,862		$	(92,634	)	$	1,132,219
	Other income, net		(5,507	)		4,933		23,033			(670	)		21,789
	Equity in earnings of unconsolidated subsidiaries		44,337			550		—			(44,887	)		—

			772,814			342,490		176,895			(138,191	)		1,154,008
COSTS AND EXPENSES
	Cost of sales		499,427			230,549		121,010			(92,634	)		758,352
	Selling, general and administrative		156,817			49,705		20,942			(670	)		226,794
	Depreciation and amortization		17,957			10,669		2,563			—			31,189
	Taxes, other than income		3,675			3,069		1,547			—			8,291
	Interest charges		37,922			3,647		4,286			—			45,855

INCOME BEFORE INCOME TAX			57,016			44,851		26,547			(44,887	)		83,527
Income tax provision			7,389			15,662		10,849			—			33,900

NET INCOME		$	49,627		$	29,189	$	15,698		$	(44,887	)	$	49,627

NET INCOME		$	49,627		$	29,189	$	15,698		$	(44,887	)	$	49,627
Other comprehensive income (loss), net of tax:
	Foreign currency translation adjustment		—			2,675		(6,514	)		—			(3,839	)
	Unrealized loss on investment in securities		—			—		(91	)		—			(91	)

	Total other comprehensive income (loss)		—			2,675		(6,605	)		—			(3,930	)
COMPREHENSIVE INCOME		$	49,627		$	31,864	$	9,093		$	(44,887	)	$	45,697

Page 22

PART I. FINANCIAL INFORMATION — continued

PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2001


		Parent Only												Consolidated
		Pennzoil-												Pennzoil-
		Quaker State												Quaker State
		Company			Guarantors			Non-Guarantors			Eliminations			Company

		(expressed in thousands)
		(unaudited)
REVENUES
	Net sales	$	369,358		$	175,928		$	65,416		$	(16,341	)	$	594,361
	Other income, net		(1,893	)		1,391			6,642			500			6,640
	Equity in earnings (losses) of unconsolidated subsidiaries		8,481			(17,532	)		—			9,051			—

			375,946			159,787			72,058			(6,790	)		601,001
COSTS AND EXPENSES
	Cost of sales		267,839			122,747			52,595			(16,341	)		426,840
	Selling, general and administrative		83,270			23,943			16,757			500			124,470
	Depreciation and amortization		12,452			9,446			9,040			—			30,938
	Taxes, other than income		1,623			1,314			982			—			3,919
	Interest charges		19,642			1,869			2,654			—			24,165

INCOME BEFORE INCOME TAX			(8,880	)		468			(9,970	)		9,051			(9,331	)
Income tax provision			(5,997	)		—			(451	)		—			(6,448	)

INCOME (LOSS) FROM CONTINUING OPERATIONS			(2,883	)		468			(9,519	)		9,051			(2,883	)
LOSS FROM DISCONTINUED OPERATIONS, net of tax			—			—			(2,465	)		—			(2,465	)

NET INCOME (LOSS)		$	(2,883	)	$	468		$	(11,984	)	$	9,051		$	(5,348	)

NET INCOME (LOSS)		$	(2,883	)	$	468		$	(11,984	)	$	9,051		$	(5,348	)
Other comprehensive income (loss), net of tax:
	Foreign currency translation adjustment		—			146			169			—			315
	Unrealized loss on investment in securities		—			—			(175	)		—			(175	)

	Total other comprehensive income (loss)		—			146			(6	)		—			140
COMPREHENSIVE INCOME (LOSS)		$	(2,883	)	$	614		$	(11,990	)	$	9,051		$	(5,208	)

Page 23

PART I. FINANCIAL INFORMATION — continued

PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2001


		Parent Only												Consolidated
		Pennzoil-												Pennzoil-
		Quaker State												Quaker State
		Company			Guarantors			Non-Guarantors			Eliminations			Company

		(expressed in thousands)
		(unaudited)
REVENUES
	Net sales	$	724,555		$	331,926		$	173,922		$	(77,424	)	$	1,152,979
	Other income, net		(3,548	)		2,496			18,198			(3,061	)		14,085
	Equity in earnings (losses) of unconsolidated subsidiaries		31,839			(19,230	)		—			(12,609	)		—

			752,846			315,192			192,120			(93,094	)		1,167,064
COSTS AND EXPENSES
	Cost of sales		523,626			227,218			143,293			(77,424	)		816,713
	Selling, general and administrative		155,911			51,338			28,824			(3,061	)		233,012
	Depreciation and amortization		24,886			18,996			11,752			—			55,634
	Taxes, other than income		3,134			2,545			1,434			—			7,113
	Interest charges		40,025			3,867			4,985			—			48,877

INCOME BEFORE INCOME TAX			5,264			11,228			1,832			(12,609	)		5,715
Income tax provision			(143	)		734			(283	)		—			308

INCOME (LOSS) FROM CONTINUING OPERATIONS			5,407			10,494			2,115			(12,609	)		5,407
LOSS FROM DISCONTINUED OPERATIONS, net of tax			—			—			(2,465	)		—			(2,465	)

NET INCOME (LOSS)		$	5,407		$	10,494		$	(350	)	$	(12,609	)	$	2,942

NET INCOME (LOSS)		$	5,407		$	10,494		$	(350	)	$	(12,609	)	$	2,942
Other comprehensive loss, net of tax:
	Foreign currency translation adjustment		—			(477	)		(1,684	)		—			(2,161	)
	Unrealized loss on investment in securities		—			—			(144	)		—			(144	)

	Total other comprehensive loss		—			(477	)		(1,828	)		—			(2,305	)
COMPREHENSIVE INCOME (LOSS)		$	5,407		$	10,017		$	(2,178	)	$	(12,609	)	$	637

Page 24

PART I. FINANCIAL INFORMATION — continued

PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2002


				Parent Only												Consolidated
				Pennzoil-												Pennzoil-
				Quaker State												Quaker State
				Company			Guarantors			Non-Guarantors			Eliminations			Company

				(expressed in thousands)
				(unaudited)
		ASSETS
Current assets
			Cash and cash equivalents	$	102,834		$	6,852		$	15,294		$	—		$	124,980
			Receivables		40,972			83,103			162,147			249			286,471
			Accounts receivable affiliated		3,199,562			825,020			34,576			(4,059,158	)		—
			Inventories		115,384			58,919			25,795			—			200,098
			Other current assets		8,547			11,216			11,000			31,341			62,104

Total current assets					3,467,299			985,110			248,812			(4,027,568	)		673,653
Property, plant and equipment, net					183,170			213,521			27,906			—			424,597
Investment in consolidated subsidiaries					1,020,454			43,950			161,938			(1,226,342	)		—
Investment in unconsolidated subsidiaries					2,410			—			2,955			—			5,365
Deferred income taxes					—			—			—			238,541			238,541
Goodwill					350,490			317,317			47,050			—			714,857
Other intangibles					281,946			117,044			2,506			—			401,496
Other assets					187,821			43,853			14,039			—			245,713

TOTAL ASSETS				$	5,493,590		$	1,720,795		$	505,206		$	(5,015,369	)	$	2,704,222

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
			Current maturities of long-term debt	$	71,225		$	357		$	22,982		$	—		$	94,564
			Accounts payable		111,500			39,987			23,818			1,974			177,279
			Accounts payable affiliated		3,486,243			971,701			(421,147	)		(4,036,797	)		—
			Payroll accrued		13,075			6,983			592			—			20,650
			Other current liabilities		73,849			51,752			21,582			249			147,432

Total current liabilities					3,755,892			1,070,780			(352,173	)		(4,034,574	)		439,925
Total long-term debt, less current maturities					998,385			2,880			182			—			1,001,447
Long-term debt affiliated					8,000			(23,947	)		15,947			—			—
Deferred income taxes					(328,928	)		26,861			32,185			269,882			—
Capital lease obligations					—			50,561			1,576			—			52,137
Investment in unconsolidated subsidiaries					—			—			72,105			—			72,105
Other liabilities					225,337			12,445			80,547			—			318,329

TOTAL LIABILITIES					4,658,686			1,139,580			(149,631	)		(3,764,692	)		1,883,943

SHAREHOLDERS’ EQUITY					834,904			581,215			654,837			(1,250,677	)		820,279

TOTAL LIABILITIES AND
	SHAREHOLDERS’ EQUITY			$	5,493,590		$	1,720,795		$	505,206		$	(5,015,369	)	$	2,704,222

Page 25

PART I. FINANCIAL INFORMATION — continued

PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001


				Parent Only												Consolidated
				Pennzoil-												Pennzoil-
				Quaker State												Quaker State
				Company			Guarantors			Non-Guarantors			Eliminations			Company

				(expressed in thousands)
				(audited)
		ASSETS
Current assets
			Cash and cash equivalents	$	77,481		$	(3,837	)	$	12,768		$	—		$	86,412
			Receivables		8,400			90,835			170,280			—			269,515
			Accounts receivable affiliated		2,880,055			691,811			36,233			(3,608,099	)		—
			Inventories		100,334			74,055			25,252			—			199,641
			Other current assets		12,987			14,143			4,162			35,486			66,778

Total current assets					3,079,257			867,007			248,695			(3,572,613	)		622,346
Property, plant and equipment, net					183,156			226,774			29,051			—			438,981
Investment in consolidated subsidiaries					991,079			42,113			161,874			(1,195,066	)		—
Investment in unconsolidated subsidiaries					2,578			—			3,071			—			5,649
Deferred income taxes					—			—			—			266,805			266,805
Goodwill					350,480			318,286			46,173			—			714,939
Other intangibles					281,750			117,032			2,479			—			401,261
Other assets					201,578			46,748			(1,990	)		—			246,336

TOTAL ASSETS				$	5,089,878		$	1,617,960		$	489,353		$	(4,500,874	)	$	2,696,317

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
			Current maturities of long-term debt	$	108,505		$	516		$	24,712		$	—		$	133,733
			Accounts payable		108,129			44,973			12,923			(2,488	)		163,537
			Accounts payable affiliated		3,116,229			884,656			(419,611	)		(3,581,274	)		—
			Payroll accrued		7,849			5,669			540			—			14,058
			Other current liabilities		65,511			57,760			18,665			—			141,936

Total current liabilities					3,406,223			993,574			(362,771	)		(3,583,762	)		453,264
Total long-term debt, less current maturities					996,604			5,757			193			—			1,002,554
Long-term debt affiliated					8,000			(23,423	)		15,423			—			—
Deferred income taxes					(338,093	)		8,771			27,031			302,291			—
Capital lease obligations					—			53,779			1,550			—			55,329
Investment in unconsolidated subsidiaries					—			—			83,005			—			83,005
Other liabilities					242,259			14,271			81,084			—			337,614

TOTAL LIABILITIES					4,314,993			1,052,729			(154,485	)		(3,281,471	)		1,931,766

COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY					774,885			565,231			643,838			(1,219,403	)		764,551

TOTAL LIABILITIES AND
	SHAREHOLDERS’ EQUITY			$	5,089,878		$	1,617,960		$	489,353		$	(4,500,874	)	$	2,696,317

Page 26

PART I. FINANCIAL INFORMATION — continued

PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002


				Parent Only											Consolidated
				Pennzoil-											Pennzoil-
				Quaker State											Quaker State
				Company			Guarantors			Non-Guarantors			Eliminations		Company

			(expressed in thousands)
			(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
	Net cash provided by operating activities			$	74,404		$	12,127		$	7,046		$	—	$	93,577
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
	Capital Expenditures				(12,357	)		(8,167	)		(1,054	)		—		(21,578	)
	Proceeds from sales of assets				355			7,121			189			—		7,665
	Other investing activities				2,714			2,667			(1,941	)		—		3,440

		Net cash provided by (used in) investing activities			(9,288	)		1,621			(2,806	)		—		(10,473	)

CASH FLOWS USED IN FINANCING ACTIVITIES
	Repayments of debt				(34,922	)		(3,059	)		(1,714	)		—		(39,695	)
	Dividends paid				(4,009	)		—			—			—		(4,009	)
	Other financing activities				(832	)		—			—			—		(832	)

		Net cash used in financing activities			(39,763	)		(3,059	)		(1,714	)		—		(44,536	)

NET INCREASE IN CASH AND CASH EQUIVALENTS					25,353			10,689			2,526			—		38,568
CASH AND CASH EQUIVALENTS, beginning of period					77,481			(3,837	)		12,768			—		86,412

CASH AND CASH EQUIVALENTS, end of period				$	102,834		$	6,852		$	15,294		$	—	$	124,980

Page 27

PART I. FINANCIAL INFORMATION — continued

PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001


			Parent Only											Consolidated
			Pennzoil-											Pennzoil-
			Quaker State											Quaker State
			Company			Guarantors			Non-Guarantors			Eliminations		Company

			(expressed in thousands)
			(unaudited)
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
	Net cash provided by (used in) operating activities		$	38,155		$	(14,308	)	$	(102,751	)	$	—	$	(78,904	)
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
	Capital Expenditures			(17,321	)		(3,486	)		(4,156	)		—		(24,963	)
	Acquisitions, net of cash acquired			—			—			(700	)		—		(700	)
	Proceeds from sales of assets			5,487			4,069			36			—		9,592
	Other investing activities			13,075			2,171			(864	)		—		14,382

		Net cash provided by (used in) investing activities		1,241			2,754			(5,684	)		—		(1,689	)

CASH FLOWS USED IN FINANCING ACTIVITIES
	Net proceeds from (repayments of) debt			(34,728	)		(826	)		(3,075	)		—		(38,629	)
	Dividends paid			(29,628	)		—			—			—		(29,628	)

		Net cash used in financing activities		(64,356	)		(826	)		(3,075	)		—		(68,257	)

CASH PROVIDED BY DISCONTINUED OPERATIONS				—			—			114,270			—		114,270
NET INCREASE (DECREASE) IN CASH
	AND CASH EQUIVALENTS			(24,960	)		(12,380	)		2,760			—		(34,580	)
CASH AND CASH EQUIVALENTS, beginning of period				18,777			1,745			17,741			—		38,263

CASH AND CASH EQUIVALENTS, end of period			$	(6,183	)	$	(10,635	)	$	20,501		$	—	$	3,683

Page 28

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

(a)		Annual Meeting of Shareholders

		August 1, 2002

(b)


										Broker
		For		Against		Withheld		Abstain		Non-Votes

Election of Directors
	Forrest R. Haselton		68,813,046		—		1,524,361		—		—
	Berdon Lawrence		68,815,808		—		1,521,599		—		—
	Brent Scowcoft		68,771,467		—		1,565,940		—		—
Approval of Agreement and Plan of Merger, dated March 25, 2002 with Shell Oil Company			53,451,058		404,408		—		108,536		—
Approval of Appointment of PricewaterhouseCoopers LLP As Independent Public Accountants			68,639,070		901,923		—		796,414		—

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits -

Computation of Ratio of Earnings to Fixed Charges for the six months ended June 30, 2002 and 2001.

(b)

Reports -

During the second quarter of 2002, Pennzoil-Quaker State filed the following Current Reports on Form 8-K with the Securities and Exchange Commission:


Date of Report		Items Reported

April 2, 2002		Amended information related to Pennzoil-Quaker State’s Agreement and Plan of merger with Shell Oil Company, Shell ND Company and a wholly owned subsidiary of Shell.

Page 29

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PENNZOIL-QUAKER STATE COMPANY Registrant

		S/N Michael J. Maratea

		Michael J. Maratea Vice President and Controller

August 12, 2002

INDEX TO EXHIBITS


Exhibit
No.		Description

12		Computation of Ratio of Earnings to Fixed Charges for the six months ended June 30, 2002 and 2001.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Pennzoil Quaker State Inactive 10-Q2002 Q2 Quarterly report

Content analysis

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents