================================================================================
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 MARCH 31, 2002 COMMISSION FILE NO. 1-14501
PENNZOIL-QUAKER STATE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
DELAWARE 76-0200625
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</Table>
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, April 30, 2002:
Common Stock, par value $0.10 per share, 80,365,853 shares.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
<Table>
<Caption>
Three Months Ended
March 31
--------------------------
2002 2001
---------- ----------
(expressed in thousands
except per share amounts)
REVENUES $ 563,574 $ 566,063
COSTS AND EXPENSES
Cost of sales 372,952 389,873
Selling, general and administrative 112,713 108,542
Depreciation and amortization 15,601 24,696
Taxes, other than income 4,170 3,194
Interest charges 22,832 24,712
---------- ----------
INCOME BEFORE INCOME TAX 35,306 15,046
Income tax provision 14,332 6,756
---------- ----------
NET INCOME $ 20,974 $ 8,290
========== ==========
BASIC EARNINGS PER SHARE $ 0.26 $ 0.11
========== ==========
DILUTED EARNINGS PER SHARE $ 0.26 $ 0.10
========== ==========
DIVIDENDS PER COMMON SHARE $ 0.0250 $ 0.1875
========== ==========
AVERAGE SHARES OUTSTANDING:
BASIC 79,787 78,836
DILUTED 81,482 80,279
END OF PERIOD SHARES OUTSTANDING 80,001 78,970
NET INCOME $ 20,974 $ 8,290
Other comprehensive loss, net of tax:
Foreign currency translation adjustment (1,763) (2,476)
Unrealized gain on investment in securities 32 31
---------- ----------
Total other comprehensive loss (1,731) (2,445)
COMPREHENSIVE INCOME $ 19,243 $ 5,845
========== ==========
</Table>
See Notes to Condensed Consolidated Financial Statements.
Page 2
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
March 31, December 31,
2002 2001
------------ ------------
(Unaudited)
(expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 80,200 $ 86,412
Receivables 294,492 269,515
Inventories 209,625 199,641
Other current assets 58,841 66,778
------------ ------------
Total current assets 643,158 622,346
Property, plant and equipment, net 429,538 438,981
Deferred income taxes 253,129 266,805
Goodwill 714,069 714,939
Other intangibles 401,346 401,261
Other assets 248,977 251,985
------------ ------------
TOTAL ASSETS $ 2,690,217 $ 2,696,317
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 98,102 $ 133,733
Accounts payable 172,076 163,537
Payroll accrued 15,151 14,058
Other current liabilities 170,029 141,936
------------ ------------
Total current liabilities 455,358 453,264
Total long-term debt, less current maturities 1,001,058 1,002,554
Capital lease obligations, less current maturities 54,164 55,329
Other liabilities 394,015 420,619
------------ ------------
TOTAL LIABILITIES 1,904,595 1,931,766
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 785,622 764,551
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,690,217 $ 2,696,317
============ ============
</Table>
See Notes to 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)
<Table>
<Caption>
Three Months Ended
March 31
------------------------------
2002 2001
------------ ------------
(expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,974 $ 8,290
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 15,601 15,775
Amortization of goodwill -- 6,225
Amortization of intangibles determined
to have an indefinite life -- 2,696
Deferred income tax 13,836 6,534
Earnings in excess of distributions from
equity investees (13,406) (6,190)
Other non-cash items 4,817 1,705
Changes in accounts receivable (28,364) (38,797)
Changes in inventories (10,580) (22,551)
Changes in other operating assets and liabilities 31,610 (17,499)
------------ ------------
Net cash provided by (used in) operating activities 34,488 (43,812)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (9,647) (13,689)
Acquisitions, net of cash acquired -- (600)
Proceeds from sales of assets 6,746 6,622
Other investing activities 2,735 1,285
------------ ------------
Net cash used in investing activities (166) (6,382)
------------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES
Repayments of debt (35,167) (2,648)
Dividends paid (1,995) (14,784)
Other financing activities (3,372) --
------------ ------------
Net cash used in financing activities (40,534) (17,432)
------------ ------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS -- 65,624
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,212) (2,002)
CASH AND CASH EQUIVALENTS, beginning of period 86,412 38,263
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 80,200 $ 36,261
============ ============
</Table>
See Notes to 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 unaudited condensed consolidated financial statements included
herein have been prepared by Pennzoil-Quaker State Company ("Pennzoil-Quaker
State" or the "Company") and should be read in conjunction with the financial
statements and the notes thereto included in Pennzoil-Quaker State's latest
annual report. 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". SFAS
145 is effective for the Company for all financial statements issued in 2003;
however, 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 March 31, 2002 goodwill and other intangible assets consist of
the following (expressed in thousands):
<Table>
<Caption>
As of March 31, 2002
----------------------------------------
Accumulated
Asset Amortization Net
----------- ------------ -----------
Goodwill $ 846,143 $ (132,074) $ 714,069
Tradenames(a) 428,048 (29,220) 398,828
Trademarks 2,673 (410) 2,263
Licensee agreement 367 (112) 255
----------- ------------ -----------
Total $ 1,277,231 $ (161,816) $ 1,115,415
=========== ============ ===========
</Table>
(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 thousand.
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 months ended March 31, 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 effect of the adoption of SFAS No. 142 on the reported net
income and earnings per share for the three months ended March 31, 2001 is as
follows (expressed in thousands, except per share amounts):
<Table>
<Caption>
Three months ended Three months ended
March 31, 2002 March 31, 2001
------------------ ------------------
Reported net income $ 20,974 $ 8,290
Amortization of goodwill and intangibles
determined to have an indefinite life, net of tax -- 7,185
------------------ ------------------
Net income, as adjusted $ 20,974 $ 15,475
================== ==================
Reported basic earnings per share $ 0.26 $ 0.11
Amortization of goodwill and intangibles
determined to have an indefinite life, net of tax -- 0.09
------------------ ------------------
Basic earnings per share, as adjusted $ 0.26 $ 0.20
================== ==================
Reported diluted earnings per share $ 0.26 $ 0.10
Amortization of goodwill and intangibles
determined to have an indefinite life, net of tax -- 0.09
------------------ ------------------
Diluted earnings per share, as adjusted $ 0.26 $ 0.19
================== ==================
</Table>
Page 6
PART I. FINANCIAL INFORMATION - continued
(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. On January 1, 2001, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended,
which established accounting and reporting standards requiring that every
derivative instrument be recorded on the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative instrument's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. The adoption of this standard did
not impact the Company's results of operations or financial position.
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 March 31, 2002, the fair market value of the swaps of $1.8
million was recorded in other assets. During the three months ended March 31,
2002, the Company repurchased notes in the amount of $33.1 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 March 31, 2002,
the fair market value of the swaps of ($1.3) million was recorded in other
assets.
At March 31, 2002, the Company had $5.0 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 $5.0 million of hedges outstanding at March
31, 2002 will settle at various times throughout the second quarter of 2002.
(5) SUMMARIZED FINANCIAL DATA OF EXCEL PARALUBES -
Pennzoil-Quaker State's net investment in Excel Paralubes,
accounted for using the equity method and carried as a credit balance of $69.6
million at March 31, 2002 and $83.0 million at December 31, 2001 as a result of
cumulative distributions in excess of earnings, is included in other liabilities
on the condensed consolidated balance sheet.
Page 7
PART I. FINANCIAL INFORMATION - continued
Summarized financial information for Excel Paralubes for the three
months ended March 31, 2002 and 2001 on a 100% basis follows:
<Table>
<Caption>
Three months ended March 31
--------------------------------
2002 2001
------------ -----------
(expressed in thousands)
(Unaudited)
Revenues $ 97,023 $ 122,188
Gross profit 36,342 22,685
Net income 26,838 12,382
</Table>
Effective January 1, 2002, Excel Paralubes changed its method of
accounting for planned major maintenance costs. Such costs, which were
previously accrued, will 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.
(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).
<Table>
<Caption>
Three months ended March 31, 2002
----------------------------------------------------------------------------------------
Consumer Supply Chain Corporate
Lubricants Products International Jiffy Lube Investments and other (b) Total
---------- -------- ------------- ---------- ------------ ------------- ---------
Unaffiliated revenues (a) $ 290,281 $ 83,216 $ 56,091 $ 90,506 $ 46,115 $ (2,635) $ 563,574
Intersegment revenues 17,222 5,607 -- -- 32,493 (55,322) --
---------- -------- ------------- ---------- ------------ ------------- ---------
Total revenues $ 307,503 $ 88,823 $ 56,091 $ 90,506 $ 78,608 $ (57,957) $ 563,574
Income (loss) before
interest and income taxes $ 43,752 $ 5,976 $ 3,456 $ 8,184 $ 16,524 $ (19,754) $ 58,138
Goodwill (c) $ 311,235 $292,149 $ 38,348 $ 72,337 $ -- $ -- $ 714,069
Tradenames (d) $ 281,739 $117,089 $ -- $ -- $ -- $ -- $ 398,828
</Table>
<Table>
<Caption>
Three months ended March 31, 2001
----------------------------------------------------------------------------------------
Consumer Supply Chain Corporate
Lubricants Products International Jiffy Lube Investments and other (b) Total
---------- -------- ------------- ---------- ------------ ------------- ---------
Unaffiliated revenues (a) $ 303,021 $ 79,672 $ 62,563 $ 83,764 $ 38,638 $ (1,595) $ 566,063
Intersegment revenues 15,983 5,267 709 -- 43,316 (65,275) --
---------- -------- ------------- ---------- ------------ ------------- ---------
Total revenues $ 319,004 $ 84,939 $ 63,272 $ 83,764 $ 81,954 $ (66,870) $ 566,063
Income (loss) before
interest and income taxes $ 31,268 $ 4,889 $ 1,158 $ 4,973 $ 9,660 $ (12,190) $ 39,758
</Table>
(a) Unaffiliated revenues include sales to unconsolidated affiliates.
(b) Includes consolidating eliminations.
(c) 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.
(d) Tradenames at December 31, 2001 were $281.7 for lubricants and $117.0 for
consumer products.
Page 8
PART I. FINANCIAL INFORMATION - continued
(7) DEBT -
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.
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.
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 March 31, 2002.
Pennzoil-Quaker State's Canadian subsidiary also maintains a
revolving credit facility with Canadian banks, which provides for up to $8.9
million of committed borrowings through October 2002. As of March 31, 2002
borrowings under the Company's Canadian facility totaled $7.5 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 $20.0 million through July 28, 2002.
Outstanding borrowings under the facility totaled $6.6 million at March 31, 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 three months ended March 31, 2002,
the Company chose to purchase and retire $33.1 million face amount of these
notes and pretax charges of $1.4 million were recognized in other income on
these transactions. As of March 31, 2002, the carrying amount of $73.2 million
of indebtedness under Pennzoil-Quaker State's 9.40% Notes due in 2002 (formerly
8.65% Notes due in 2002), which includes the fair value of the swap of $1.8
million, has been classified as short-term debt.
Debt outstanding was as follows:
<Table>
<Caption>
March 31, December 31,
2002 2001
----------- ------------
(expressed in thousands)
7.375% Debentures due 2029, net of discount $ 398,189 $ 398,172
10.0% Notes due 2008, net of discount 248,516 248,476
6.750% Notes due 2009, net of discount 199,286 199,260
9.40% Notes due 2002, at market value, net of discount 73,232 108,271
6.625 % Notes due 2005, at market value, net of discount 98,442 99,770
Pollution control bonds, net of discount 50,562 50,561
International debt facilities 24,290 24,247
Other debt 6,643 7,530
----------- ------------
Total debt 1,099,160 1,136,287
Less amounts classified as current maturities (98,102) (133,733)
----------- ------------
Total long-term debt $ 1,001,058 $ 1,002,554
=========== ============
</Table>
Page 9
PART I. FINANCIAL INFORMATION - continued
(8) EARNINGS PER SHARE -
Computations for basic and diluted earnings per share for the three
months ended March 31, 2002 and 2001 consist of the following:
<Table>
<Caption>
Three months ended March 31
---------------------------
2002 2001
-------- --------
(expressed in thousands
except per share amounts)
Net Income $ 20,974 $ 8,290
Basic weighted average shares 79,787 78,836
Effect of dilutive securities (a)
Options 904 935
Awards 791 508
-------- --------
Diluted weighted average shares 81,482 80,279
-------- --------
Basic earnings per share $ 0.26 $ 0.11
======== ========
Diluted earnings per share $ 0.26 $ 0.10
======== ========
</Table>
(a) A weighted average number of options to purchase 6.5 million shares of
common stock were outstanding for the three months ended March 31, 2002 and
a weighted average number of options to purchase 4.7 million shares of
common stock were outstanding for the three months ended March 31, 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:
<Table>
<Caption>
March 31, December 31,
2002 2001
----------- ------------
(expressed in thousands)
(Unaudited)
Finished goods and work in process $ 172,923 $ 163,241
Raw materials and supplies 36,702 36,400
----------- ------------
Total $ 209,625 $ 199,641
=========== ============
</Table>
(10) 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.
Under the transaction, Shell Oil Company will acquire
Pennzoil-Quaker State Company through a cash merger. Completion of the
transaction is subject to approval by Pennzoil-Quaker State Company stockholders
and customary reviews by regulatory agencies in the United States and other
relevant jurisdictions. It is expected that the transaction will be completed in
the second half of 2002.
(11) RESTRUCTURING CHARGES -
In 2001, the Company undertook a restructuring program to reduce
costs and streamline operations. As part of the 2001 cost reduction plan, the
Company's lubricants segment took steps to
Page 10
PART I. FINANCIAL INFORMATION - continued
reduce manufacturing and selling expense. The consumer products segment
consolidated the management and administration of its two marketing groups into
one organization in Houston at the end of 2001. These charges primarily included
severance for approximately 670 administrative and operational employees. As of
March 31, 2002, substantially all of the employees were terminated. The
remaining total severance accrual at March 31, 2002 was $11.8 million recorded
in other current liabilities and $2.2 million recorded in other liabilities.
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.
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 the first quarter of 2002.
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
the first quarter of 2002.
RESULTS OF OPERATIONS
FIRST QUARTER 2002 COMPARED WITH FIRST QUARTER 2001
Net sales for Pennzoil-Quaker State were $548.7 million for the
quarter ended March 31, 2002, a decrease of $9.9 million, or approximately 1.8%,
from the same period in 2001. The decrease was primarily a result of lower sales
in the lubricants and international segments, partially offset by higher sales
in the consumer products and Jiffy Lube segments.
Net income for the quarter ended March 31, 2002 was $21.0 million,
or 26 cents per basic share. This compares with net income of $8.3 million, or
11 cents per basic share, for the quarter ended March 31, 2001. The increase
reflects a combination of improved marketplace factors, normalized motor oil
margins and a change in turnaround expense accruals combined with lower
amortization expense across most segments (see Note 3). 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.
Page 11
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 $306.8
million for the quarter ended March 31, 2002, compared to $317.4 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 $43.8 million for the quarter ended March 31, 2002,
compared to $31.3 million for the same period last year. The increase in
operating income is primarily due to improved motor oil margins 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 $2.1
million and general and administrative expense by $1.1 million in the first
quarter of 2002 compared to the first quarter of 2001. These reductions were
partially offset by an increase in marketing and advertising expense of $2.3
million in the same period compared to last year.
CONSUMER PRODUCTS. Net sales for the consumer products segment were
$88.8 million for the quarter ended March 31, 2002, compared to $84.9 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 $6.0 million for the quarter ended March 31, 2002, compared to $4.9
million for the same period last year. The increase in operating income is
primarily due to the $3.0 million suspension of 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 $0.4 million and general and administrative expense by $1.7
million in the first quarter of 2002 compared to the first quarter of 2001.
These reductions were offset by an increase in marketing and advertising expense
of $2.7 million in the same period compared to last year.
INTERNATIONAL. Net sales for the international segment were $55.9
million for the quarter ended March 31, 2002, compared to $63.1 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 for this segment was $3.5 million for
the quarter ended March 31, 2002, compared to $1.2 million for the same period
last year. The increase in operating income was primarily due to lower selling,
general and administrative expense and higher product 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 $87.5 million for the
quarter ended March 31, 2002, compared to net sales of $82.7 million for the
same period in 2001. Other income for this segment for the quarter ended March
31, 2002 was $3.0 million, compared to $1.1 million for the same period in 2001.
Operating income from this segment for the quarter ended March 31, 2002 was $8.2
million, compared to $5.0 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 the $1.7 million suspension of the amortization of goodwill.
SUPPLY CHAIN INVESTMENTS. Net sales for this segment were $65.2
million for the quarter ended March 31, 2002, compared to net sales of $75.8
million for the same period in 2001. Other income for this segment for the
quarter ended March 31, 2002, was $13.5 million compared to $6.2
Page 12
PART I. FINANCIAL INFORMATION - continued
million for the same period in 2001. The equity income from the 50/50 Excel
Paralubes 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 quarter ended March 31, 2002 was $16.5 million compared to
operating income of $9.7 million for the same period in 2001. The increase in
operating income reflects increased base oil production and a change in
turnaround expense accruals (see Note 5), partially offset by lower base oil
margins.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW. As of March 31, 2002, Pennzoil-Quaker State had cash and
cash equivalents of $80.2 million. During the three months ended March 31, 2002,
cash and cash equivalents decreased $6.2 million. The increase in cash provided
by operating activities is due to improved earnings and changes in working
capital.
LIQUIDITY. The Company's ability to satisfy its debt obligations
and to pay principal and interest on its debt, fund 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 the foreseeable future to make required payments
of principal and interest on debt, and fund working capital and capital
expenditure requirements. In addition, the Company has sufficient availability
under its credit facilities to fund 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.
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.
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.
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 March 31, 2002.
Pennzoil-Quaker State's Canadian subsidiary also maintains a
revolving credit facility with Canadian banks, which provides for up to $8.9
million of committed borrowings through October 2002. As of March 31, 2002
borrowings under the Company's Canadian facility totaled $7.5 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 $20.0 million through July 28, 2002.
Outstanding borrowings under the facility totaled $6.6 million at March 31, 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. To date, amounts put
to the Company for repurchase have been immaterial. During
Page 13
PART I. FINANCIAL INFORMATION - continued
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. During the
three months ended March 31, 2002, the Company chose to purchase and retire
$33.1 million face amount of these notes. As of March 31, 2002, the carrying
amount of $73.2 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 March 31, 2002 and December 31, 2001.
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 March 31, 2002, the Company sold a total of $234.4 million
of notes receivable under this agreement, of which $138.7 million were
outstanding to the third party purchaser at March 31, 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 swaps to maintain its mix of variable rate
versus fixed rate debt. During the three months ended March 31, 2002, the
Company repurchased notes in the amount of $33.1 million and unwound the
corresponding swap.
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 March 31, 2002, the fair market value of the swap of ($1.3)
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 March 31, 2002, the Company had $5.0 million of Canadian
dollar foreign currency forward contracts to hedge the cash flow variability of
U.S. dollar purchases of inventory. The $5.0 million of hedges outstanding at
March 31, 2002 will settle at various times throughout the second quarter of
2002.
FORWARD-LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
This quarterly report on Form 10-Q of Pennzoil-Quaker State for the
quarter ended March 31, 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
Page 14
PART I. FINANCIAL INFORMATION - continued
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.
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. See Note 7 of Notes to Condensed Consolidated
Financial Statements for further discussion of the notes. 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 March 31, 2002 and December 31, 2001 and for the quarters ended
March 31, 2002 and 2001.
Page 15
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE QUARTER ENDED MARCH 31, 2002
<Table>
<Caption>
Parent Only Consolidated
Pennzoil- Pennzoil-
Quaker State Quaker State
Company Guarantors Non-Guarantors Eliminations Company
------------ ---------- -------------- ------------ ------------
(expressed in thousands)
(unaudited)
REVENUES
Net sales $ 358,097 $ 161,551 $ 95,470 $ (66,398) $ 548,720
Other income, net (3,621) 2,741 16,350 (616) 14,854
Equity in earnings (losses) of
unconsolidated subsidiaries 22,267 151 -- (22,418) --
------------ ---------- -------------- ------------ ------------
376,743 164,443 111,820 (89,432) 563,574
COSTS AND EXPENSES
Cost of sales 247,416 112,130 79,804 (66,398) 372,952
Selling, general and administrative 78,244 25,059 10,026 (616) 112,713
Depreciation and amortization 8,913 5,397 1,291 -- 15,601
Taxes, other than income 1,856 1,590 724 -- 4,170
Interest charges 18,403 1,983 2,446 -- 22,832
------------ ---------- -------------- ------------ ------------
INCOME BEFORE INCOME TAX 21,911 18,284 17,529 (22,418) 35,306
Income tax provision 937 6,431 6,964 14,332
------------ ---------- -------------- ------------ ------------
NET INCOME $ 20,974 $ 11,853 $ 10,565 $ (22,418) $ 20,974
============ ========== ============== ============ ============
NET INCOME $ 20,974 $ 11,853 $ 10,565 $ (22,418) $ 20,974
Other comprehensive loss, net of tax:
Foreign currency translation adjustment -- 140 (1,903) -- (1,763)
Unrealized gain on
investment in securities -- -- 32 -- 32
------------ ---------- -------------- ------------ ------------
Total other comprehensive loss -- 140 (1,871) -- (1,731)
COMPREHENSIVE INCOME $ 20,974 $ 11,993 $ 8,694 $ (22,418) $ 19,243
============ ========== ============== ============ ============
</Table>
Page 16
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE QUARTER ENDED MARCH 31, 2001
<Table>
<Caption>
Parent Only Consolidated
Pennzoil- Pennzoil-
Quaker State Quaker State
Company Guarantors Non-Guarantors Eliminations Company
------------ ---------- -------------- ------------ ------------
(expressed in thousands)
(unaudited)
REVENUES
Net sales $ 355,197 $ 155,998 $ 108,506 $ (61,083) $ 558,618
Other income, net (1,655) 1,105 11,556 (3,561) 7,445
Equity in earnings (losses ) of
unconsolidated subsidiaries 23,358 (1,698) -- (21,660) --
------------ ---------- -------------- ------------ ------------
376,900 155,405 120,062 (86,304) 566,063
COSTS AND EXPENSES
Cost of sales 255,787 104,471 90,698 (61,083) 389,873
Selling, general and administrative 72,641 27,395 12,067 (3,561) 108,542
Depreciation and amortization 12,434 9,550 2,712 -- 24,696
Taxes, other than income 1,511 1,231 452 -- 3,194
Interest charges 20,383 1,998 2,331 -- 24,712
------------ ---------- -------------- ------------ ------------
INCOME BEFORE INCOME TAX 14,144 10,760 11,802 (21,660) 15,046
Income tax provision 5,854 734 168 -- 6,756
------------ ---------- -------------- ------------ ------------
NET INCOME $ 8,290 $ 10,026 $ 11,634 $ (21,660) $ 8,290
============ ========== ============== ============ ============
NET INCOME (LOSS) $ 8,290 $ 10,026 $ 11,634 $ (21,660) $ 8,290
Other comprehensive loss, net of tax:
Foreign currency translation adjustment -- (623) (1,853) -- (2,476)
Unrealized gain on
investment in securities -- -- 31 -- 31
------------ ---------- -------------- ------------ ------------
Total other comprehensive loss -- (623) (1,822) -- (2,445)
COMPREHENSIVE INCOME $ 8,290 $ 9,403 $ 9,812 $ (21,660) $ 5,845
============ ========== ============== ============ ============
</Table>
Page 17
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2002
<Table>
<Caption>
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 $ 63,341 $ 1,614 $ 15,245 $ -- $ 80,200
Receivables 51,764 92,970 147,842 1,916 294,492
Accounts receivable affiliated 2,680,131 764,487 36,250 (3,480,868) --
Inventories 113,265 70,466 25,894 -- 209,625
Other current assets 10,886 7,922 4,729 35,304 58,841
------------ ---------- -------------- ------------ ------------
Total current assets 2,919,387 937,459 229,960 (3,443,648) 643,158
Property, plant and equipment, net 184,380 217,152 28,006 -- 429,538
Investment in consolidated subsidiaries 2,403 -- 3,026 -- 5,429
Investment in unconsolidated subsidiaries 998,031 41,556 161,874 (1,201,461) --
Deferred income taxes -- -- -- 253,129 253,129
Goodwill 350,490 318,276 45,303 -- 714,069
Other intangibles 281,819 117,032 2,495 -- 401,346
Other assets 172,485 45,285 25,778 -- 243,548
------------ ---------- -------------- ------------ ------------
TOTAL ASSETS $ 4,908,995 $1,676,760 $ 496,442 $ (4,391,980) $ 2,690,217
============ ========== ============== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 73,424 $ 375 $ 24,303 $ -- $ 98,102
Accounts payable 109,633 41,324 23,324 (2,205) 172,076
Accounts payable affiliated 2,914,915 955,731 (416,318) (3,454,328) --
Payroll accrued 9,995 4,737 419 -- 15,151
Other current liabilities 94,282 54,748 19,083 1,916 170,029
------------ ---------- -------------- ------------ ------------
Total current liabilities 3,202,249 1,056,915 (349,189) (3,454,617) 455,358
Total long-term debt, less current maturities 995,252 5,617 189 -- 1,001,058
Long-term debt affiliated 8,000 (23,663) 15,663 -- --
Deferred income taxes (325,935) 10,889 26,613 288,433 --
Capital lease obligations -- 52,642 1,522 -- 54,164
Investment in unconsolidated subsidiaries -- -- 69,586 -- 69,586
Other liabilities 231,740 12,755 79,934 -- 324,429
------------ ---------- -------------- ------------ ------------
TOTAL LIABILITIES 4,111,306 1,115,155 (155,682) (3,166,184) 1,904,595
------------ ---------- -------------- ------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 797,689 561,605 652,124 (1,225,796) 785,622
------------ ---------- -------------- ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 4,908,995 $1,676,760 $ 496,442 $ (4,391,980) $ 2,690,217
============ ========== ============== ============ ============
</Table>
Page 18
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001
<Table>
<Caption>
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
============ ========== ============== ============ ============
</Table>
Page 19
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING CASH FLOWS
AS OF MARCH 31, 2002
<Table>
<Caption>
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 $ 28,900 $ 2,200 $ 3,388 $ -- $ 34,488
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital Expenditures (5,525) (3,769) (353) -- (9,647)
Proceeds from sales of assets 30 6,687 29 -- 6,746
Other investing activities 1,024 1,853 (142) -- 2,735
------------ ---------- -------------- ------------ ------------
Net cash used in investing activities (4,471) 4,771 (466) -- (166)
------------ ---------- -------------- ------------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES
Repayments of debt (33,202) (1,520) (445) -- (35,167)
Dividends paid (1,995) -- -- -- (1,995)
Other financing activities (3,372) -- -- -- (3,372)
------------ ---------- -------------- ------------ ------------
Net cash used in financing activities (38,569) (1,520) (445) -- (40,534)
------------ ---------- -------------- ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (14,140) 5,451 2,477 -- (6,212)
CASH AND CASH EQUIVALENTS, beginning of period 77,481 (3,837) 12,768 -- 86,412
------------ ---------- -------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 63,341 $ 1,614 $ 15,245 $ -- $ 80,200
============ ========== ============== ============ ============
</Table>
Page 20
PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATING CASH FLOWS
AS OF MARCH 31, 2001
<Table>
<Caption>
Parent Only Consolidated
Pennzoil- Pennzoil-
Quaker State Quaker State
Company Guarantors Non-Guarantors Eliminations Company
------------ ---------- -------------- ------------ ------------
(expressed in thousands)
(Audited)
CASH FLOWS USED IN OPERATING ACTIVITIES
Net cash used in operating activities $ 18,132 $ (4,720) $ (57,224) $ -- $ (43,812)
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital Expenditures (8,112) (3,134) (2,443) -- (13,689)
Acquisitions, net of cash acquired -- -- (600) -- (600)
Proceeds from sales of assets 5,061 1,496 65 -- 6,622
Other investing activities 897 903 (515) -- 1,285
------------ ---------- -------------- ------------ ------------
Net cash used in investing activities (2,154) (735) (3,493) -- (6,382)
------------ ---------- -------------- ------------ ------------
CASH FLOWS USED IN FINANCING ACTIVITIES
Net proceeds from (repayments of) debt 5,390 587 (8,625) -- (2,648)
Dividends paid (14,784) -- -- -- (14,784)
------------ ---------- -------------- ------------ ------------
Net cash used in financing activities (9,394) 587 (8,625) -- (17,432)
------------ ---------- -------------- ------------ ------------
CASH PROVIDED BY DISCONTINUED OPERATIONS -- -- 65,624 -- 65,624
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,584 (4,868) (3,718) -- (2,002)
CASH AND CASH EQUIVALENTS, beginning of period 18,777 1,745 17,741 -- 38,263
------------ ---------- -------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 25,361 $ (3,123) $ 14,023 $ -- $ 36,261
============ ========== ============== ============ ============
</Table>
Page 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
10.1(a) Pennzoil-Quaker State Company 2000 Long-Term Performance
Incentive Program (as amended and restated March 25, 2002).
10.1(b) Pennzoil-Quaker State Company 2001 Long-Term Performance
Incentive Program (as amended and restated March 25, 2002).
10.1(c) Pennzoil-Quaker State Company 2002 Long-Term Performance
Incentive Program (as amended and restated March 25, 2002).
10.2 First Amendment to Executive Severance Plan dated March 25,
2002.
10.3 Consulting Agreement with James L. Pate dated March 5,
2002.
10.4 Consulting Agreement with James J. Postl dated March 5,
2002.
12 Computation of Ratio of Earnings to Fixed Charges for the
three months ended March 31, 2002 and 2001.
(b) Reports -
During the first quarter of 2002, Pennzoil-Quaker State filed the
following Current Reports on Form 8-K with the Securities and Exchange
Commission:
<Table>
<Caption>
Date of Report Items Reported
-------------- --------------
February 4, 2002 Restatement of financial results for the
quarters ended September 30, June 30 and
March 31, 2001, for each quarter in the year
ended December 31, 2000 and for the years
ended December 31, 2000 and 1999.
March 25, 2002 Change in Pennzoil-Quaker State's certifying
accountants from Arthur Andersen LLP to
PricewaterhouseCoopers LLP.
March 29, 2002 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.
</Table>
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
May 9, 2002
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1(a) Pennzoil-Quaker State Company 2000 Long-Term Performance
Incentive Program (as amended and restated March 25, 2002).
10.1(b) Pennzoil-Quaker State Company 2001 Long-Term Performance
Incentive Program (as amended and restated March 25, 2002).
10.1(c) Pennzoil-Quaker State Company 2002 Long-Term Performance
Incentive Program (as amended and restated March 25, 2002).
10.2 First Amendment to Executive Severance Plan dated March 25,
2002.
10.3 Consulting Agreement with James L. Pate dated March 5,
2002.
10.4 Consulting Agreement with James J. Postl dated March 5,
2002.
12 Computation of Ratio of Earnings to Fixed Charges for the
three months ended March 31, 2002 and 2001.
</Table>