10-Q/A 1 qa1.htm AMENDED FIRST QUARTER 10Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Quarterly Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the Quarter Ended March 31, 2001 Commission File No. 1-14501

PENNZOIL-QUAKER STATE COMPANY

(Exact name of registrant as specified in its charter)

Delaware 76-0200625

(State or other jurisdiction of incorporation or organization) (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, April 30, 2001:

Common Stock, par value $0.10 per share, 79,031,282 shares.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
		Restated
		Three Months Ended
		March 31
		2001	2000
		(Expressed in thousands
		except per share amounts)
REVENUES		$ 568,190	$ 584,982
COSTS AND EXPENSES
	Cost of sales	389,873	382,520
	Selling, general and administrative	110,669	158,522
	Acquisition related expenses	-	3,955
	Depreciation and amortization	24,696	24,969
	Taxes, other than income	3,194	3,475
	Interest charges, net	24,712	21,641
INCOME (LOSS) FROM CONTINUING OPERATIONS
	BEFORE INCOME TAX	15,046	(10,100)
Income tax provision (benefit)		6,756	(8,569)
INCOME (LOSS) FROM CONTINUING OPERATIONS		8,290	(1,531)
LOSS FROM DISCONTINUED OPERATIONS, net of tax		-	(6,634)
NET INCOME (LOSS)		$ 8,290	$ (8,165)
BASIC EARNINGS (LOSS) PER SHARE
	Continuing operations	$ 0.11	$ (0.02)
	Discontinued operations	-	(0.08)
		$ 0.11	$ (0.10)
DILUTED EARNINGS (LOSS) PER SHARE
	Continuing operations	$ 0.10	$ (0.02)
	Discontinued operations	-	(0.08)
		$ 0.10	$ (0.10)
DIVIDENDS PER COMMON SHARE		$ 0.1875	$ 0.1875
AVERAGE SHARES OUTSTANDING:
	BASIC	78,836	78,216
	DILUTED	80,279	78,216
END OF PERIOD SHARES OUTSTANDING		78,970	78,318
NET INCOME (LOSS)		$ 8,290	$ (8,165)
Other comprehensive income (loss) net of tax:
	Foreign currency translation adjustment	(2,476)	(63)
	Unrealized gain on investment in securities and other	31	371
	Total other comprehensive income (loss)	(2,445)	308
COMPREHENSIVE INCOME (LOSS)		$ 5,845	$ (7,857)
See Notes to Condensed Consolidated Financial Statements.

PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
		Restated
		March 31	December 31
		2001	2000
		(Unaudited)
		(Expressed in thousands)
ASSETS
Current assets
	Cash and cash equivalents	$ 36,261	$ 38,263
	Receivables	351,025	315,710
	Inventories	209,636	186,999
	Other current assets	73,831	52,775
Total current assets		670,753	593,747
Property, plant and equipment, net		463,341	476,134
Deferred income taxes		275,505	282,198
Goodwill and other intangibles		1,131,555	1,139,413
Other assets		224,001	212,316
Net assets of discontinued operations		36,367	97,259
TOTAL ASSETS		$ 2,801,522	$ 2,801,067
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
	Current maturities of long-term debt	$ 18,195	$ 13,786
	Accounts payable	176,706	166,056
	Payroll accrued	16,202	17,215
	Other current liabilities	127,428	121,515
Total current liabilities		338,531	318,572
Total long-term debt, less current maturities		1,195,549	1,194,426
Capital lease obligations, less current maturities		59,972	61,861
Other liabilities		392,796	405,229
TOTAL LIABILITIES		1,986,848	1,980,088
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY		814,674	820,979
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$ 2,801,522	$ 2,801,067
See Notes to Condensed Consolidated Financial Statements.

PART I. FINANCIAL INFORMATION - continued
PENNZOIL-QUAKER STATE COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
				Restated
				Three Months Ended
				March 31
				2001	2000
				(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
	Net income (loss)			$ 8,290	$ (8,165)
	Adjustments to reconcile net income (loss) to net cash
		used in operating activities:
			Depreciation and amortization	24,696	24,969
			Deferred income tax	6,534	(12,554)
			Earnings in excess of distributions from
			equity investees	(6,190)	(1,581)
			Other non-cash items	1,705	16,226
			Loss from discontinued operations	-	10,963
			Changes in accounts receivable	(38,797)	(50,448)
			Changes in inventories	(22,551)	(47,814)
			Changes in other operating assets and liabilities	(17,499)	5,491
	Net cash used in operating activities			(43,812)	(62,913)

CASH FLOWS FROM INVESTING ACTIVITIES
	Capital expenditures			(13,689)	(10,584)
	Acquisitions, net of cash acquired			(600)	(64,941)
	Proceeds from sales of assets			6,622	3,707
	Other investing activities			1,285	(986)
	Net cash used in investing activities			(6,382)	(72,804)

CASH FLOWS FROM FINANCING ACTIVITIES
	Net proceeds from (repayments of) debt			(2,648)	166,137
	Dividends paid			(14,784)	(14,581)
	Net cash provided by (used in) financing activities			(17,432)	151,556

NET CASH PROVIDED BY (USED IN)
	DISCONTINUED OPERATIONS			65,624	(3,804)

NET INCREASE (DECREASE) IN CASH
	AND CASH EQUIVALENTS			(2,002)	12,035

CASH AND CASH EQUIVALENTS, beginning of period				38,263	20,155

CASH AND CASH EQUIVALENTS, end of period				$ 36,261	$ 32,190

See Notes to Condensed Consolidated Financial Statements.

PENNZOIL-QUAKER STATE COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) General -

The condensed consolidated financial statements included herein have been prepared by Pennzoil-Quaker State Company ("Pennzoil-Quaker State" or the "Company") without audit 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. Certain prior period items have been reclassified in the condensed consolidated financial statements in order to conform with the current year presentation.

During the first quarter of 2001, the Company determined that certain continuing operations had been included as part of the discontinued operations presentation that was initially presented in the Company's December 31, 2000 financial statements. Previously issued financial results have been adjusted herein to appropriately reflect these operations as part of continuing operations. This adjustment had no effect on previously reported income from continuing operations or net income and an insignificant effect on previously reported revenues, cost of sales and certain assets and liability accounts.

The Company is restating its financial results for the quarters ended March 31, 2001 and 2000. The restatement results from an error in the consolidated financial statements of Excel Paralubes, in which the Company and Conoco Inc. ("Conoco") are equal partners. Details surrounding the restatement are included in Note 3.

(2) 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 Statement of Financial Accounting Standards ("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 in 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 a fixed to floating interest rate swap to maintain its mix of variable rate versus fixed rate debt. The Company designated the swap as a fair value hedge. Under SFAS No. 133, changes in the fair value of the swap are recognized currently in earnings along with the offsetting changes in the fair value of the associated debt. At March 31, 2001, the fair market value of the swap of $6.6 million was recorded in other current assets. In March 2001, the Company purchased $6.8 million of the notes and unwound the corresponding swaps. No material gain or loss was recognized on this transaction.

(3) Summarized Financial Data of Excel Paralubes and Correction of an Error -

The Company and Conoco are equal partners in Excel Paralubes, which operates a base oil processing facility located adjacent to Conoco's refinery in Lake Charles, Louisiana. The facility is capable of producing approximately 21,000 barrels per day of high-quality base oils, the base ingredient in finished lubricants. Conoco operates the plant with support positions staffed primarily by Conoco.

Under a co-products sale and purchase agreement, certain co-products produced at an adjacent Conoco facility are allocated between Excel Paralubes and Conoco based upon Excel Paralubes' feed stream flow rates and compositions. Excel Paralubes recently determined that the measurements of the allocation of co-products between Excel Paralubes and Conoco had been in error since the commencement of Excel Paralubes' operations in 1997. As a result of this error, pretax income of Excel Paralubes for the quarters ended March 31, 2001 and 2000 was overstated by $0.8 million and $0.6 million, respectively. This requires a restatement of the Company's previously filed financial statements to reduce net income of the Company for the quarters ended March 30, 2001 and 2000 by $0.4 million ($0.00 per share) and $0.4 million ($0.00 per share), respectively. There was no impact on cash flow or cash flows from operations. Under the co-products sale and purchase agreement, no adjustment is required for periods prior to 1999.

Pennzoil-Quaker State's net investment in Excel Paralubes, accounted for using the equity method and carried as a credit balance of $69.0 million and $75.2 million at March 31, 2001 and December 31, 2000, respectively, is included in other liabilities on the condensed consolidated balance sheet. Pennzoil-Quaker State's equity in Excel Paralubes' restated pretax income for the three months ended March 31, 2001 and 2000 of $6.2 million and $1.6 million, respectively, is included in other income in the condensed consolidated statement of operations and comprehensive income.

Summarized financial information for Excel Paralubes for the three months ended March 31, 2001 and 2000 on a 100% basis follows:

	Restated
	Three months ended March 31
	2001	2000
	(Expressed in thousands)
	(Unaudited)
Revenues	$ 122,188	$ 113,654
Operating earnings	22,685	13,260
Net income	12,382	3,163

(4) Segment Reporting -

During the first quarter of 2001, the Company realigned its business segments to report five separate operating segments. Results for the first three months of 2000 have been restated to conform with the new presentation. Information with respect to revenues, operating income and other data is presented in the following tables (expressed in thousands).


		Three months ended March 31, 2001 (Restated)
			Consumer			Supply Chain	Corporate
		Lubricants	Products	International	Jiffy Lube	Investments	and other (b)	Total
Unaffiliated revenues (a)		$ 305,148	$ 79,672	$ 62,563	$ 83,764	$ 38,638	$ (1,595)	$ 568,190
Intersegment revenues		15,983	5,267	709	-	43,316	(65,275)	-
	Total revenues	$ 321,131	$ 84,939	$ 63,272	$ 83,764	$ 81,954	$ (66,870)	$ 568,190
Income before interest
	and income taxes	$ 31,268	$ 4,889	$ 1,158	$ 4,973	$ 9,660	$ (12,190)	$ 39,758

		Three months ended March 31, 2000 (Restated)
			Consumer			Supply Chain	Corporate
		Lubricants	Products	International	Jiffy Lube	Investments	and other (b)	Total
Unaffiliated revenues (a)		$ 335,517	$ 79,454	$ 58,691	$ 83,831	$ 24,751	$ 2,738	$ 584,982
Intersegment revenues		14,685	4,633	-	-	42,509	(61,827)	-
	Total revenues	$ 350,202	$ 84,087	$ 58,691	$ 83,831	$ 67,260	$ (59,089)	$ 584,982
Income before interest
	and income taxes	$ 34,585	$ 12,018	$ 4,951	$ 3,249	$ 4,895	$ (48,157)	$ 11,541

(a)	Unaffiliated revenues include sales to unconsolidated affiliates.
(b) Includes consolidating eliminations.

(5) Debt -

Pennzoil-Quaker State has a revolving credit facility with a group of banks that provides for up to $450.0 million of committed unsecured revolving credit borrowings through December 13, 2001, with any outstanding borrowings on such date being converted into a term credit facility due on December 13, 2002. Outstanding borrowings were $265.0 million under the revolving credit facility at March 31, 2001 and were classified as long-term debt. The average interest rate applicable to borrowings under the revolving credit facility was 6.78% during the first three months of 2001.

Pennzoil-Quaker State's Canadian subsidiary also maintains a revolving credit facility with Canadian banks, which provides for up to $17.1 million of committed borrowings through October 28, 2001, with any outstanding borrowings on such date being converted into a term credit facility due on October 28, 2002. As of March 31, 2001 borrowings under the Company's Canadian facility totaled $8.9 million and were classified as long-term debt.

A U.K. subsidiary of the Company maintains a revolving credit facility that provides for borrowings up to $20.1 million through July 26, 2002. Outstanding borrowings under the facility totaled $17.4 million at March 31, 2001 and were classified as long-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 9.4% 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. On March 2, 2001 Standard and Poor's lowered the senior unsecured debt rating for the Company's debt below investment grade. The notes are currently trading above 100% face value plus accrued interest. During March 2001, the Company purchased and retired $6.8 million face amount of these notes and no material gain or loss was recognized. In April, the Company purchased and retired $5.0 million face amount of these notes.

As of March 31, 2001, $138.2 million of indebtedness under Pennzoil-Quaker State's 8.65% Notes due in 2002 has been classified as long-term debt. Such debt classification is based upon the availability of committed long-term credit facilities to refinance such short - term obligations and the Company's intent to maintain such commitments in excess of one year.

Debt outstanding was as follows:

		March 31	December 31
		2001	2000
		(Expressed in thousands)
7.375% Debentures due 2029, net of discount		$ 398,122	$ 398,105
6.750% Notes due 2009, net of discount		199,184	199,159
8.65% Notes due 2002, net of discount		143,039	149,746
6.625 % Notes due 2005, net of discount		99,724	99,708
Commercial paper		-	57,709
Revolving credit facility		265,000	195,000
Pollution control bonds, net of discount		50,556	50,522
International debt facilities		43,768	51,808
Fair Value of Interest Rate Swap		6,644	1,271
Other debt		7,707	5,184
	Total debt	1,213,744	1,208,212
Less amounts classified as current maturities		(18,195)	(13,786)
	Total long-term debt	$ 1,195,549	$ 1,194,426

(6) Earnings Per Share -

Computations for basic and diluted earnings (loss) per share for the three months ended March 31, 2001 and 2000 consist of the following:

		Restated
		Three months ended March 31
		2001	2000
		(Expressed in thousands
		except per share amounts)
Income (loss) from continuing operations		$ 8,290	$ (1,531)
Basic weighted average shares		78,836	78,216
Effect of dilutive securities (a)
	Options	935	-
	Awards	508	-
Diluted weighted average shares		80,279	78,216
Basic earnings (loss) per share		$ 0.11	$ (0.02)

Diluted earnings (loss) per share		$ 0.10	$ (0.02)

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 that were not included in the computation of diluted earnings per share because the options' prices were greater than the average market price of the common shares. A weighted average number of options to purchase 9.8 million shares of common stock were outstanding for the three months ended March 31, 2000 and awards of 583.7 thousand shares of common stock were outstanding for the three months ended March 31, 2000, 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.

(7) Cash Flow Information -

Cash paid for interest during the three months ended March 31, 2001 and 2000 was $11.1 million and $13.7 million, respectively. Income tax payments (refunds) of $0.1 million and $(0.7) million were paid (received) during the three months ended March 31, 2001 and 2000, respectively.

(8) Discontinued Operations -

During 2000, the Company completed a strategic review of its manufacturing assets, including its refining assets and specialty business. During the review, it evaluated the strategic and financial advantages and disadvantages it derives from the vertical integration of its manufacturing and marketing capabilities. Based on the results of the review, the Company began to withdraw from the refining business and to dispose of its refineries and related assets. In 2001 and 2000, the Company sold the wax processing facilities and related assets at the Rouseville, Pennsylvania refinery and its interest in the Bareco wax marketing partnership, its share of Penreco, a specialty industrial products partnership with Conoco and its Shreveport refinery to Calumet, thus completing the Company's exit from the refinery business. Accordingly, the net assets and results of operations of the Company's refining assets and specialty industrial products businesses have been combined and reported as discontinued operations in the accompanying financial statements.

No earnings or loss from discontinued operations was reported for the quarter ended March 31, 2001. After-tax losses from discontinued operations for the quarter ended March 31, 2000 totaled $6.6 million ($10.9 million pretax). Operating revenues for discontinued operations for the quarter ended March 31, 2001 was $155.2 million compared to $198.3 million for the same period last year. Included in net cash provided by discontinued operations for the 2001 period are proceeds of $70.0 million from the sale of Penreco.

In April 2001, Pennzoil-Quaker State completed the sale of its Shreveport, Louisiana, refinery to Calumet Lubricants Company, LP. The Company received $25.2 million from the sale, which consisted of $14.2 million in cash proceeds and a note for $11.0 million. Results of the Shreveport refinery's operations, including the expected loss on its sale of $40.4 million after-tax that was accrued as of December 31, 2000, are included in Pennzoil-Quaker State's discontinued operations.

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.

The Company and Conoco are equal partners in Excel Paralubes, which operates a base oil processing facility located adjacent to Conoco's refinery in Lake Charles, Louisiana. Conoco operates the plant with support positions staffed primarily by Conoco.

Under a co-products sale and purchase agreement, certain co-products produced at an adjacent Conoco facility are allocated between Excel Paralubes and Conoco based upon Excel Paralubes' feed stream flow rates and compositions. Excel Paralubes recently determined that the measurements of the allocation of co-products between Excel Paralubes and Conoco had been in error since the commencement of Excel Paralubes' operations in 1997. As a result of this error, pretax income of Excel Paralubes for the quarters ended March 31, 2001 and 2000 was overstated by $0.8 million and $0.6 million, respectively. This requires a restatement of the Company's previously filed financial statements to reduce net income of the Company for the quarters ended March 31, 2001 and 2000 by $0.4 million ($0.00 per share) and $0.4 million ($0.00 per share), respectively. There was no impact on cash flow or cash flows from operations. Under the co-products sale and purchase agreement, no adjustment is required for periods prior to 1999.

Results of Operations

Net sales for Pennzoil-Quaker State decreased by $15.6 million from the year earlier period, or approximately 2.7% for the quarter ended March 31, 2001, to $560.7 million. The decrease in net sales was primarily a result of the disposition of non-strategic operating assets associated with the Viscosity Oil Division during 2000.

Income from continuing operations for the quarter ended March 31, 2001 was $8.3 million, or 11 cents per basic share. This compares with a loss from continuing operations of $1.5 million, or 2 cents per basic share for the quarter ended March 31, 2000. The increase in income for the quarter ended March 31, 2001, compared to the same period in 2000, is primarily due to charges associated with the Company's general and administrative cost reduction project recorded in the first quarter of 2000, improved operating results for the Supply Chain Investments segment due to higher base oil margins, and higher results in Jiffy Lube primarily due to higher comparable store sales. These improvements were partially offset by lower results from consumer products, lubricants and international and higher interest expense.

Lubricants

Net sales for the Lubricants segment were $319.5 million for the quarter ended March 31, 2001, compared to $347.9 million for the same period last year. The decrease in net sales is primarily a result of the disposition of non-strategic operating assets associated with the Viscosity Oil Division during the fourth quarter of 2000. Operating income for this segment was $31.3 million for the quarter ended March 31, 2001, compared to $34.6 million for the same period last year. The decrease in operating income for the quarter ended March 31, 2001 is primarily due to lower volumes partially offset by lower selling, general and administrative expenses.

Consumer Products

Net sales for the Consumer Products segment were $84.9 million for the quarter ended March 31, 2001, compared to $84.0 million for the same period last year. The increase in net sales is primarily due to increased automotive seat cover and floor mat revenues as a result of the acquisition of Sagaz Industries in early March 2000, partially offset by lower revenues from car washes and cleaners. Operating income for this segment was $4.9 million for the quarter ended March 31, 2001, compared to $12.0 million for the same period last year. The decrease in operating income is primarily due to increased cost of sales.

International

Net sales for the International segment were $63.1 million for the quarter ended March 31, 2001, compared to $58.5 million for the same period last year. The increase in net sales for the first quarter of 2001 compared to the same period last year is primarily due to acquisitions completed toward the end of the first quarter of 2000 and higher lubricating product prices. These increases were partially offset by lower volumes. Operating income for this segment was $1.2 million for the quarter ended March 31, 2001, compared to $5.0 million for the same period last year. The decrease in operating income is primarily due to lower lubricating product margins resulting from higher base oil costs.

Jiffy Lube

Net sales for this segment were $82.7 million for the quarter ended March 31, 2001. This compares to net sales of $82.1 million for the same period in 2000. Other income for this segment for the quarter ended March 31, 2001, was $1.1 million compared to $1.7 million for the same period in 2000. Operating income from this segment for the quarter ended March 31, 2001 was $5.0 million compared to $3.2 million for the same period in 2000. The improvement in operating income was primarily due to higher comparable store sales and lower costs.

Supply Chain Investments

Net sales for this segment, primarily intercompany sales to Lubricants, were $75.8 million for the quarter ended March 31, 2001. This compares to net sales of $65.7 million for the same period in 2000. Other income for this segment for the quarter ended March 31, 2001, was $6.2 million compared to $1.6 million for the same period in 2000. Other income represents the equity income from the 50/50 Excel Paralubes partnership with Conoco Inc., which is recorded using the equity method of accounting. The increase in equity income reflects higher base oil margins. Operating income from this segment for the quarter ended March 31, 2001 was $9.7 million compared to operating income of $4.9 million for the same period in 2000. The increase in operating income for the quarter ended March 31, 2001 was primarily due to higher base oil margins.

Discontinued Operations

No earnings or loss from discontinued operations was reported for the quarter ended March 31, 2001. After-tax loss from discontinued operations for the quarter ended March 31, 2000 was $6.6 million ($10.9 million pretax). Operating revenues for discontinued operations for the quarter ended March 31, 2001 was $155.2 million compared to $198.3 million for the same period last year.

Corporate Administrative Expense

Corporate administrative expense decreased $32.4 million to $14.5 million for the quarter ended March 31, 2001, compared to the same period in 2000. The decrease for the quarter ended March 31, 2001 is primarily due to charges in 2000 related to a general and administrative cost reduction project.

Capital Resources and Liquidity

Cash Flow. As of March 31, 2001, Pennzoil-Quaker State had cash and cash equivalents of $36.3 million. During the quarter ended March 31, 2001, cash and cash equivalents decreased $2.0 million.

Cash flow used in operating activities for the first three months ended March 31, 2001 decreased due to improved operating results.

Debt Instruments and Repayments. Pennzoil-Quaker State has a revolving credit facility with a group of banks that provides for up to $450.0 million of committed unsecured revolving credit borrowings through December 13, 2001, with any outstanding borrowings on such date being converted into a term credit facility due on December 13, 2002. Outstanding borrowings were $265.0 million under the revolving credit facility at March 31, 2001 and were classified as long-term debt. The average interest rate applicable to borrowings under the revolving credit facility was 6.78% during the first three months of 2001.

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 9.4% 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. On March 2, 2001 Standard and Poor's lowered the senior unsecured debt rating for the Company's debt below investment grade. The notes are currently trading above 100% face value plus accrued interest. In March 2001, the Company purchased and retired $6.8 million face amount of these notes.

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 and increased the receivable sales facility during August 2000. The renewed facility provides for ongoing sales of up to $170.0 million through August 2001, at which time the Company intends to renew the facility. The Company's net accounts receivable sold under its receivable sales facility totaled $139.5 million and $149.1 million at March 31, 2001 and December 31, 2000, respectively.

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, 2001, the Company sold a total of $223.9 million of notes receivable under this agreement, of which $152.6 million were outstanding to the third party purchaser at March 31, 2001. Through December 31, 2000, the Company sold a total of $220.8 million of notes receivable under this agreement, of which $159.0 million were outstanding to the third party purchaser at December 31, 2000.

Disclosures about Market Risk

The Company's primary exposure to market risk includes changes in interest rates, commodity prices 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 a fixed to floating interest rate swap to maintain its mix of variable rate versus fixed rate debt. The Company designated the swap as a fair value hedge. Under SFAS No. 133, changes in the fair value of the swap are recognized currently in earnings along with the offsetting changes in the fair value of the associated debt. At March 31, 2001, the fair market value of the swap was $6.6 million. In March 2001, the Company purchased $6.8 million of the notes and unwound the corresponding swaps. No material gain or loss was recognized on this transaction.

Pennzoil-Quaker State enters into forward exchange contracts and options to hedge the impact of foreign currency fluctuations on certain monetary liabilities and commitments denominated in foreign currencies. The purpose of entering into these hedges is to minimize the impact of foreign currency fluctuations on the results of operations. The unrealized gains and losses on these contracts are deferred and recognized in the results of operations in the period in which the hedged transaction is consummated. During April 2001, the Company's Canadian subsidiary entered into several foreign currency forward contracts to reduce the impact of fluctuating foreign exchange rates for a total amount of $6.0 million. The contracts will settle over the next four months. The forward contracts are designated as cash flow hedges of forecasted transactions. The forward contracts will be 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.

Forward-Looking Statements - Safe Harbor Provisions

This quarterly report on Form 10-Q of Pennzoil-Quaker State for the quarter ended March 31, 2001 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.

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; competition in the motor oil and marketing business; base oil margins and supply and demand in the base oil business; the success and cost of advertising and promotional efforts; mechanical failure in refining operations; unanticipated environmental liabilities; changes in and compliance with governmental regulations; changes in tax laws; and the cost and effects of legal proceedings.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits -

12 Computation of Ratio of Earnings to Fixed Charges for the three months ended
March 31, 2001 and 2000.

(b) Reports -

No reports on Form 8-K were filed during the quarter for which this report was filed.

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

March 8, 2002