<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from ..... to .....
Commission file number 1-5263
THE LUBRIZOL CORPORATION
(Exact name of registrant as specified in its charter)
OHIO 34-0367600
(State of incorporation) (I.R.S. Employer Identification No.)
29400 Lakeland Boulevard
Wickliffe, Ohio 44092-2298
(Address of principal executive officers, including zip code)
Registrant's telephone number, including area code: (216) 943-4200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Shares without par value New York Stock Exchange
Common Share purchase rights New York Stock Exchange
Preferred Share purchase rights New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value (on basis of closing sale price) of voting stock
held by nonaffiliates as of March 7, 1997: $2,002,703,196
Number of the registrant's Common Shares, without par value,
outstanding as of March 7, 1997 58,490,294
Documents Incorporated By Reference
-----------------------------------
Portions of the registrant's 1996 Annual Report to its shareholders
(Incorporated into Part I and II of this Form 10-K)
Portions of the registrant's Proxy Statement dated March 19, 1997
(Incorporated into Part III of this Form 10-K)
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PART I
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ITEM 1. BUSINESS
The Lubrizol Corporation was organized under the laws of Ohio
in 1928. The company began business as a compounder of special-purpose
lubricants, and in the early 1930's was among the first to commence research in
the field of lubricant additives. Today, the company is a worldwide supplier of
performance chemicals for lubricants, fuels and other specialty chemical
markets. These specialty chemical products are created through the application
of advanced chemical and mechanical technologies to enhance the performance,
quality and value of the customer products in which they are used. The company
develops, produces and sells specialty additive systems for gasoline and diesel
engine lubricating oils, automatic transmission fluids, gear oils, marine and
tractor lubricants, fuel products and industrial fluids. The company also
supplies coatings additives, refinery and oil field chemicals, specialty
monomers, process chemicals, synthetic refrigerant compressor lubricants, fluid
metering devices and particulate emission trap devices.
Prior to December 1, 1992, the company had a separately
reportable Agribusiness segment. That segment developed, produced and marketed
planting seeds and specialty vegetable oils, and also conducted strategic
biotechnology research and development. Over the past five years the company has
divested its non-strategic assets comprised primarily of its assets associated
with its former Agribusiness segment, including its investments in Mycogen
Corporation, and its investments in Genentech, Inc. common stock. The company
has substantially liquidated its non-strategic assets as of December 31,
1996. (Please refer to Note 8 to the Financial Statements which is included in
the company's 1996 Annual Report to its shareholders and is incorporated herein
by reference.)
PRINCIPAL PRODUCTS. The company's principal products are
specialty additive systems for gasoline and diesel engine lubricating oils,
automatic transmission fluids, gear oils, industrial fluids, metalworking
compounds and fuels. The company also offers other specialty chemical products,
fluid metering devices and particulate emission trap devices. Additives for
engine lubricating oils accounted for 51% of consolidated revenues in 1996, 1995
and 1994. Additives for driveline oils accounted for 25%, 24% and 24% of
consolidated revenues for these respective periods.
Additives improve the lubricants and fuels used in cars,
trucks, buses, off-highway equipment, marine engines and industrial
applications. In lubricants, additives enable oil to withstand a broader range
of temperatures, limit the buildup of sludge and varnish deposits, reduce wear,
inhibit the formation of foam, rust and corrosion, and retard oxidation. In
fuels, additives help maintain efficient operation of the fuel delivery system,
help control deposits and corrosion, improve combustion and assist in preventing
decomposition during storage.
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Due to the variety in the properties and applications of oils,
a number of different chemicals are used to formulate the company's products.
Each additive combination is designed to fit the characteristics of the
customer's base oil and the level of performance specified. Engine oils for
passenger cars contain a combination of chemical additives which usually
includes one or more detergents, dispersants, oxidation inhibitors and wear
inhibitors, pour point depressants and viscosity improvers. Other chemical
combinations are used in specialty additive systems for heavy duty engine oils
used by trucks and off-highway equipment and in formulations for gear oils,
automatic transmission fluids, industrial oils, metalworking fluids, and
gasoline, diesel and residual fuels.
COMPETITION. The chemical additive field is highly competitive
in terms of price, technology development, product performance and customer
service. The company's principal competitors, both in the United States and
overseas, are three major petroleum companies and one chemical company. The
petroleum companies produce lubricant and fuel additives for their own use, and
also sell additives to others. These competing companies are also customers of
the company. Excluding viscosity improvers, management believes, based on volume
sold, that the company is the largest supplier to the petroleum industry of
performance additive systems for lubricants.
CUSTOMERS. In the United States, the company markets its
additive products through its own sales organization. The company's additive
customers consist primarily of oil refiners and independent oil blenders and are
located in more than 100 countries. Approximately 40% of the company's sales are
made to customers in North America, 33% in Europe and 27% in Asia-Pacific,
Middle East and Latin America. Sales to Mobil Corporation and its affiliates
accounted for 10% of consolidated sales in 1996 and 1995, and no customer
exceeded 10% of consolidated sales in 1994. The company's ten largest customers,
most of which are international oil companies and a number of which are groups
of affiliated entities, accounted for approximately 44% of consolidated sales in
1996. The loss of one or more of these customers could have a material adverse
effect on the company's business. However, the largest of these customers are
made up of a number of separate business units that the company believes make
independent purchasing decisions with respect to chemical additives.
RAW MATERIALS. The company utilizes a broad variety of
chemical raw materials in the manufacture of its additives and uses oil in
processing and blending additives. These materials are obtainable from several
sources, and for the most part are derived from petroleum. Unstable political
and economic conditions in the Middle East have, in the past, caused and may
continue to cause the cost of raw materials to fluctuate significantly; however,
the availability of raw materials to the company has not been significantly
affected when these conditions occurred. The company expects raw materials to be
available in adequate quantities during 1997.
RESEARCH, TESTING AND DEVELOPMENT. The company has
historically emphasized research and has developed a large percentage of the
additives it manufactures and sells. Technological developments in the design of
engines and other automotive equipment, combined with rising demands for
environmental protection and fuel economy, require increasingly sophisticated
chemical additives to meet industry performance standards. The frequency of
changes in industry performance standards compresses time
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cycles for new product development and affects the company's technical
spending patterns.
Research and development expenditures were $93.4 million in
1996, $104.9 million in 1995 and $90.7 million in 1994. These amounts were
equivalent to 5.8%, 6.3% and 5.7% of the respective revenues for such years.
These amounts include expenditures for the performance evaluation of additive
developments in engines and other types of mechanical equipment as well as
expenditures for the development of specialty chemicals for industrial
applications. In addition, $67.6 million, $74.7 million and $74.8 million was
spent in 1996, 1995 and 1994, respectively, for technical service activities,
principally for evaluation in mechanical equipment of specific lubricant
formulations designed for the needs of petroleum industry customers throughout
the world.
The company has two research facilities at Wickliffe, Ohio,
one of which is principally for lubricant additive research and the other for
research in the field of other specialty chemicals. The company also maintains a
mechanical testing laboratory at Wickliffe, equipped with a variety of gasoline
and diesel engines and other mechanical equipment to evaluate the performance of
additives for lubricants and fuels. The company has similar mechanical testing
laboratories in England and Japan and, in addition, makes extensive use of
independent contract research firms. Extensive field testing is also conducted
through various arrangements with fleet operators and others.
Liaison offices in Detroit, Michigan; Hazelwood, England;
Hamburg, Germany; Tokyo, Japan; and Paris, France maintain close contact with
the principal automotive and equipment manufacturers of the world and keep the
company abreast of the performance requirements for its products in the face of
changing technologies. These liaison activities also serve as contacts for
cooperative development and evaluation of products for future applications.
Contacts with the automotive and equipment industry are important so the company
may have the necessary direction and lead time to develop products for use in
engines, transmissions, gear sets, and other areas of equipment that require
lubricants of advanced design.
PATENTS. The company owns certain United States patents
relating to lubricant and fuel additives, lubricants, chemical compositions and
processes, and protective coating materials and processes. It also owns similar
patents in foreign countries. While such domestic and foreign patents expire
from time to time, the company continues to apply for and obtain patent
protection on an ongoing basis. Although the company believes that, in the
aggregate, its patents constitute an important asset, it does not regard its
business as being materially dependent upon any single patent or any group of
related patents.
The company has filed claims against Exxon Corporation and its
affiliates ("Exxon") alleging infringements by Exxon of certain of the company's
patents. These suits are pending in the United States, Canada, France and the
United Kingdom, and are at various stages. The international suits allege
infringement of patents that correspond to a United States patent admitted as
valid by Exxon in a settlement in 1988. In the suit in Canada, a determination
of liability has been made by the courts against Exxon and in favor of the
company, and the case has been returned to the
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trial court for an assessment of damages. In the suit in the United Kingdom, a
patent trial court declared the company's patent invalid and the company will
appeal that decision. In another patent infringement suit, instituted by Exxon
in the United States, liability and damage determinations, previously made in
favor of Exxon and against the company, have been overturned by an appeals court
which has been affirmed by the U.S. Supreme Court. For further information
regarding these cases, refer to Note 18 to the Financial Statements which is
included in the company's 1996 Annual Report to its shareholders and is
incorporated herein by reference.
ENVIRONMENTAL MATTERS. The company is subject to federal,
state and local laws and regulations designed to protect the environment and
limit manufacturing wastes and emissions. The company believes that as a general
matter its policies, practices and procedures are properly designed to prevent
unreasonable risk of environmental damage and the consequent financial liability
to the company. Compliance with the environmental laws and regulations requires
continuing management effort and expenditures by the company. Capital
expenditures for environmental projects approximated $8 million in 1996, and
over the past three years have averaged 15% of annual capital spending.
Management believes that the cost of complying with environmental laws and
regulations will not have a material affect on the earnings, liquidity or
competitive position of the company.
The company is engaged in the handling, manufacture, use,
transportation and disposal of substances that are classified as hazardous or
toxic by one or more regulatory agencies. The company believes that its
handling, manufacture, use, transportation and disposal of such substances
generally have been in accord with environmental laws and regulations.
Among other environmental laws, the company is subject to the
federal "Superfund" law, under which the company has been designated as a
"potentially responsible party" that may be liable for cleanup costs associated
with various waste sites, some of which are on the U.S. Environmental Protection
Agency Superfund priority list. The company's experience, consistent with what
it believes to be the experience of others in similar cases, is that Superfund
site liability tends to be apportioned among parties based upon contribution of
materials to the Superfund site. Accordingly, the company measures its liability
and carries out its financial reporting responsibilities with respect to
Superfund sites based upon this standard, even though Superfund site liability
is technically joint and several in nature. The company views the expense of
remedial cleanup as a part of its product cost, and accrues for estimated
environmental liabilities with charges to cost of sales. Management considers
its environmental accrual to be adequate to provide for its portion of costs for
all known environmental matters, including Superfund sites. Based upon
consideration of currently available information, management does not believe
liabilities for environmental matters will have a material adverse affect on the
company's financial position, operating results or liquidity.
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GENERAL
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EMPLOYEES. At December 31, 1996 the company and its wholly-
owned subsidiaries had 4,358 employees of which approximately 64% were in
the U.S.
INTERNATIONAL OPERATIONS. Financial information with respect
to domestic and foreign operations is contained in Note 14 to the Financial
Statements which is included in the company's 1996 Annual Report to its
shareholders and is incorporated herein by reference.
The company supplies its additive customers abroad from
overseas manufacturing plants and through export from the United States. Sales
and technical service offices are maintained in more than 30 countries outside
the United States. As a result, the company is subject to business risks
inherent in non-U.S. activities, including political uncertainty, import and
export limitations, exchange controls and currency fluctuations. The company
believes risks related to its foreign operations are mitigated due to the
political and economic stability of the countries in which its largest foreign
operations are located.
While changes in the U.S. dollar value of foreign currencies
will affect earnings from time to time, the longer term economic effect of these
changes should not be significant given the company's net asset exposure,
currency mix and pricing flexibility. Generally, the income statement effect of
changes in the U.S. dollar value of foreign currencies is partially or wholly
offset by the company's ability to make corresponding price changes in local
currency. The company's consolidated net income will generally benefit as
foreign currencies increase in value compared to the U.S. dollar and will
generally decline as foreign currencies decrease in value.
ITEM 2. PROPERTIES
The general offices of the company are located in Wickliffe,
Ohio. The company has various leases for general office space primarily located
in Houston, Texas; and London, England. The company owns three additive
manufacturing plants in the United States; one located in the Cleveland, Ohio
area, at Painesville, and two near Houston, Texas, at Deer Park and Bayport.
Outside the United States, the company owns additive manufacturing/blending
plants in Australia, Brazil, Canada, England, France (three locations), Japan,
South Africa and Singapore. All of these plants, other than Singapore, are owned
in fee. In Singapore, the company owns the plant but leases the land on which
the plant is located. The company owns in fee research, development and testing
facilities in Wickliffe, Ohio; Hazelwood, England; and Atsugi, Japan. The
company also owns in fee a facility in Midland, Michigan, at which air and
refrigeration compressor lubricants are developed and marketed; a manufacturing
plant in Germany that manufactures performance chemical additives for the
coatings industry; a manufacturing plant in Atlanta, Georgia, that manufactures
fluid metering devices; and a manufacturing plant in Newmarket, Ontario, Canada,
that manufactures particulate emission control devices.
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Additive manufacturing plants in India and Saudi Arabia, are
owned and operated by joint venture companies licensed by Lubrizol. Lubrizol's
ownership of each of these companies ranges from 40% to 49%.
The company has entered into long-term contracts for its
exclusive use of major marine terminal facilities at the Port of Houston, Texas.
In addition, Lubrizol has leases for storage facilities in Australia, Chile,
Ecuador, Finland, France, Holland, Singapore, Spain, South Africa, Sweden, and
Turkey; East Liverpool, Ohio; Los Angeles, California; St. Paul, Minnesota;
Bayonne, New Jersey; and Tacoma, Washington. In some cases, the ownership or
leasing of such facilities is through certain of its subsidiaries or affiliates.
Management continues to maintain a capital expenditure program
to support the company's operations and believes that the company's facilities
are adequate for its present operations and for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The company is a party in a case brought by Exxon Corporation
and its affiliates, Exxon Chemical Patents, Inc. and Exxon Research &
Engineering Company, in the Southern District of Texas, Houston Division on
September 19, 1989. In December 1992, the trial jury rendered a verdict that the
company willfully infringed an Exxon patent pertaining to an oil soluble copper
additive component. In early 1993, the court prohibited the company from making
or selling any additive packages in the United States that contained this
component and awarded Exxon $18.1 million for attorneys' fees. In November 1993,
another jury in the same case awarded Exxon $48 million in damages, and in
February 1994, the trial court judge doubled the damages amount and awarded
prejudgment interest, court costs and additional attorney's fees for a total
judgment of $129 million. The findings of infringement and validity of the Exxon
patent as well as the $129 million judgment were appealed to the United States
Court of Appeals for the Federal Circuit in Washington, D.C., which has
jurisdiction over all patent cases. On September 1, 1995, the Appellate Court
overturned the jury verdict that the company infringed the Exxon patent and
entered judgment in favor of the company as a matter of law. The ruling also
vacated the injunction against the company and the $129 million judgment. On
February 23, 1996, the same court in Washington, D.C., denied Exxon's request
for a rehearing. On June 24, 1996, the U.S. Supreme Court denied Exxon's request
to review the Appellate Court judgment. The Supreme Court decision finalizes the
Appellate Court judgment. Notwithstanding the Supreme Court decision, Exxon
filed a motion for another trial under the patent on an allegedly different
theory of infringement, which motion was denied by the trial judge following the
Supreme Court ruling. However, Exxon has pursued an appeal of the denial of the
motion for another trial, which appeal is pending.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of the security holders
during the three months ended December 31, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the name, age, recent business experience and
certain other information relative to each person who is an executive officer of
the company as of March 1, 1997.
<TABLE>
<CAPTION>
Name Business Experience
---- -------------------
<S> <C>
W. G. Bares Mr. Bares, age 55, became Chairman of the
Board on April 22, 1996, and Chief
Executive Officer on January 1,
1996. He has been President since
1982. From 1987 through 1995, he
was also Chief Operating Officer.
R. A. Andreas Mr. Andreas, age 52, has been Vice President
and Chief Financial Officer since June 1990.
J. W. Bauer Mr. Bauer, age 43, became Vice President and
General Counsel in April 1992, after serving
as General Counsel from August 1991.
S. A. Di Biase Dr. Di Biase, age 44, has been Vice
President since September 1993. He
is responsible for Research and
Development. From 1990 to September
1993, he was Director of Strategic
Research.
G. R. Hill Dr. Hill, age 55, has been Senior Vice
President since 1988. In 1996, he became
responsible for Corporate Strategic
Planning and has been responsible for
Business Development since October
1993. Prior to October 1993, he was
responsible for Research and Development.
J. E. Hodge Mr. Hodge, age 54, has been Vice President
since September 1993. He is responsible for
Operations. During 1989 through 1993,
he was General Manager - Deer Park/Bayport
Plants.
K. H. Hopping Mr. Hopping, age 50, has been Vice President
and Secretary of the Corporation since April
1991.
W. R. Jones Mr. Jones, age 54, has been Treasurer since
1980.
</TABLE>
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<TABLE>
<CAPTION>
Name Business Experience
---- -------------------
<S> <C>
S. F. Kirk Mr. Kirk, age 47, has been Vice President
since September 1993. In April 1996, he
became responsible for Sales. From 1993
to April 1996, he was responsible for
Segment Management. From January 1991
to 1993, he was Senior Vice President -
Marketing and Technology for Lubrizol
Petroleum Chemicals Company.
Y. Le Couedic Mr. Le Couedic, age 49, has been Vice
President since September 1993. He is
responsible for Management Information
Systems. From 1991 to 1993, he was
Division Head - Corporate R&D -
Administrative Services.
G. P. Lieb Mr. Lieb, age 44, was named Controller -
Accounting and Financial Reporting in
November 1993, and was named Principal
Accounting Officer in January 1994. From
October 1991 to October 1993, he was
Administrative Manager for the Hazelwood,
U.K. Laboratory.
M. W. Meister Mr. Meister, age 42, has been Vice President
since April 1993. He is responsible for
Human Resources. From November 1992 to
April 1993, he was General Manager -
Human Resources. During 1989 to 1992, he
was Director - Human Resources for
Agrigenetics Company, formerly a
wholly-owned subsidiary of The Lubrizol
Corporation.
D. A. Muskat Mr. Muskat, age 57, was named Operations
Manager in August 1993. From September 1989
to August 1993 he was Vice President -
Operations for Lubrizol Petroleum Chemicals
Company.
L. M. Reynolds Ms. Reynolds, age 36, was named Assistant
Secretary in April 1995, and has been
Counsel since February 1991.
R. D. Robins Mr. Robins, age 54, became Vice President
in April 1996. He is responsible for
Segment Management. From October 1993 to
April 1996 he was Passenger Car Segment
Manager. From November 1991 to October
1993 he was Fuel Products Group
Business Manager.
</TABLE>
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<TABLE>
<CAPTION>
Name Business Experience
---- -------------------
<S> <C>
J. A. Thomas Mr. Thomas, age 58, has been Vice President
since April 1994. In 1996, he became
responsible for managing Corporate
Strategies in the Asia Pacific Region. From
April 1994 through April 1996, he was
responsible for Corporate Planning and
Development. From December 1990 to April
1994, he was General Manager - Sales for
Asia Pacific, Latin American and the
Middle East.
</TABLE>
All executive officers serve at the pleasure of the Board.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Common Shares of the company are listed on the New York
Stock Exchange under the symbol LZ. The number of shareholders of record of
Common Shares was 5,988 as of March 7, 1997.
Information relating to the recent price and dividend history
of the company's Common Shares follows:
<TABLE>
<CAPTION>
Common Share Price History Dividends
-------------------------- ---------
1996 1995 Per Common Share
---- ---- ----------------
High Low High Low 1996 1995
---- --- ---- --- ---- ----
<C> <C> <C> <C> <C> <C> <C>
1st quarter $31 $26 5/8 $35 1/2 $32 1/2 $ .24 $.23
2nd quarter 30 1/2 27 1/4 36 7/8 34 1/8 .24 .23
3rd quarter 30 1/2 27 7/8 37 3/8 30 .24 .23
4th quarter 32 3/8 28 1/2 33 1/4 25 1/2 .25 .24
--- ----
$.97 $.93
==== ====
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
The summary of selected financial data for each of the last
five years included in the Historical Summary contained on pages 38 and 39 of
the company's 1996 Annual Report to its shareholders is incorporated herein by
reference. Other income (charges) for 1996, 1995, 1994 and 1993 includes $53.3
million, $38.5 million, $41.2 million and $42.4 million, respectively, for gains
on sale of investments; in 1995, a charge of $9.5 million for an asset
impairment; and in 1993, a special charge of $86.3 million (See Notes 8 and 17
to the Financial Statements included in the company's 1996 Annual Report to its
shareholders). In addition, the company changed its method of accounting for
postretirement benefits and for income taxes, effective January 1, 1993, to
comply with two newly effective accounting standards, which reduced 1993 net
income by $39.4 million.
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Total debt reported in the Historical Summary includes the
following amounts classified as long-term at December 31: $157.6 million in
1996, $194.4 million in 1995, $114.2 million in 1994, $55.3 million in 1993 and
$23.3 million in 1992.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Management's Discussion and Analysis of Financial Condition
and Results of Operations, including the company's cautionary statement for
"Safe Harbor" purposes under the Private Securities Litigation Reform Act of
1995, contained on pages 16 through 21, inclusive, of the company's 1996 Annual
Report to its shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the company and its
subsidiaries, together with the independent auditors' report relating thereto,
contained on pages 22 through 36, inclusive, of the company's 1996 Annual Report
to its shareholders, and the Quarterly Financial Data (Unaudited) contained on
page 37 of such 1996 Annual Report, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the heading "Election of
Directors" on pages 2 to 6, inclusive, of the company's Proxy Statement dated
March 19, 1997, is incorporated herein by reference. Information relative to
executive officers of the company is contained under "Executive Officers of the
Registrant" Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation contained
under the headings "Committees and Compensation of the Board of Directors" on
pages 6 and 7, "Executive Compensation" on pages 10 through 12, inclusive, and
under "Employee and Executive Officer Benefit Plans - Pension Plans" and "-
Executive Agreements" on pages 17 through 19, inclusive, of the company's Proxy
Statement dated March 19, 1997, is incorporated herein by reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership set forth under
the heading "Security Ownership of Directors and Management and Certain
Beneficial Owners" on pages 8 and 9 of the company's Proxy Statement dated March
19, 1997, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Annual Report:
1. The following consolidated financial statements of The
Lubrizol Corporation and its subsidiaries, together
with the independent auditors' report relating thereto,
contained on pages 22 through 36, inclusive, of
Lubrizol's 1996 Annual Report to its shareholders and
incorporated herein by reference:
Independent Auditors' Report
Consolidated Statements of Income for the years
ended December 31, 1996, 1995 and 1994
Consolidated Balance Sheets at December 31, 1996 and
1995
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
Quarterly Financial Data (Unaudited)
2. Schedules
No financial statement schedules are required
to be filed as part of this Annual Report.
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3. Exhibits
(3)(a) Amended Articles of Incorporation of The
Lubrizol Corporation, as adopted September
23, 1991. (Reference is made to Exhibit
(3)(a) to The Lubrizol Corporation's Annual
Report on Form 10-K for the year ended
December 31, 1993, which Exhibit is
incorporated herein by reference.)
(3)(b) Regulations of The Lubrizol Corporation, as
amended effective April 27, 1992. (Reference
is made to Exhibit (3)(b) to The Lubrizol
Corporation's Annual Report on Form 10-K for
the year ended December 31, 1993, which
Exhibit is incorporated herein by reference.)
(4)(a) Amendment to Article Fourth of Amended
Articles of Incorporation. (Reference is made
to Exhibits (3)(a) and (4)(a) to The Lubrizol
Corporation's Annual Report on Form 10-K for
the year ended December 31, 1993, which
Exhibits are incorporated herein by
reference.)
(4)(b) The company agrees, upon request, to furnish
to the Securities and Exchange Commission
copies of instruments authorizing long-term
debt. No one instrument authorizes debt in
excess of 10% of the total assets of the
company and its subsidiaries on a
consolidated basis.
(4)(c) Rights Agreement between The Lubrizol
Corporation and National City Bank dated
October 6, 1987. (Reference is made to
Exhibit (4)(c) to The Lubrizol Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1993, which Exhibit is
incorporated herein by reference.)
(4)(d) Amendment to Rights Agreement dated October
6, 1987, between The Lubrizol Corporation and
National City Bank, effective October 24,
1988. (Reference is made to Exhibit (4)(d) to
The Lubrizol Corporation's Annual Report on
Form 10-K for the year ended December 31,
1993, which Exhibit is incorporated herein by
reference.)
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(4)(e) Amendment No. 2 to Rights Agreement dated October
6, 1987, as amended, between The Lubrizol
Corporation and National City Bank, effective
October 28, 1991. (Reference is made to Exhibit
(4)(f) to The Lubrizol Corporation's Annual Report
on Form 10-K for the year ended December 31, 1993,
which Exhibit is incorporated herein by
reference.)
(4)(f) Amendment No. 3 to Rights Agreement dated October
6, 1987, as amended, between The Lubrizol
Corporation and American Stock Transfer & Trust
Company, effective February 17, 1997.
(10)(a)* The Lubrizol Corporation 1985 Employee Stock
Option Plan, as amended. (Reference is made to
Exhibit (10)(b) to The Lubrizol Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1993, which Exhibit is incorporated
herein by reference.)
(10)(b)* The Lubrizol Corporation Amended Deferred
Compensation Plan for Directors. (Reference is
made to Exhibit (10)(b) to The Lubrizol
Corporation's Annual Report on Form 10-K for the
year ended December 31, 1994, which Exhibit is
incorporated herein by reference.)
(10)(c)* Form of Employment Agreement between The Lubrizol
Corporation and certain of its senior executive
officers. (Reference is made to Exhibit (10)(e) to
The Lubrizol Corporation's Annual Report on Form
10-K for the year ended December 31, 1993, which
Exhibit is incorporated herein by reference.)
(10)(d)* The Lubrizol Corporation Excess Defined Benefit
Plan, as amended. (Reference is made to Exhibit
(10)(d) to The Lubrizol Corporation's Annual
Report on Form 10-K for the year ended December
31, 1995, which Exhibit is incorporated herein by
reference.)
(10)(e)* The Lubrizol Corporation Excess Defined
Contribution Plan, as amended. (Reference is made
to Exhibit (10)(e) to The Lubrizol Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1995, which Exhibit is incorporated
herein by reference.)
(10)(f)* The Lubrizol Corporation Performance Pay Plan
(formerly Variable Award Plan), as amended.
-13-
<PAGE> 15
(10)(g)* The Lubrizol Corporation Executive Death Benefit
Plan, as amended. (Reference is made to Exhibit
(10)(g) to The Lubrizol Corporation's Annual
Report on Form 10-K for the year ended December
31, 1995, which Exhibit is incorporated herein by
reference.)
(10)(h)* The Lubrizol Corporation 1991 Stock Incentive
Plan, as amended.
(10)(i)* The Lubrizol Corporation Deferred Stock
Compensation Plan for Outside Directors, as
amended. (Reference is made to Exhibit (10)(i) to
The Lubrizol Corporation's Annual Report on Form
10-K for the year ended December 31, 1995, which
Exhibit is incorporated herein by reference.)
(10)(j)* The Lubrizol Corporation Officers' Supplemental
Retirement Plan, as amended. (Reference is made to
Exhibit (10)(j) to The Lubrizol Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1995, which Exhibit is incorporated
herein by reference.)
(10)(k)* The Lubrizol Corporation Deferred Compensation
Plan for Officers, as amended. (Reference is made
to Exhibit (10) to The Lubrizol Corporation's
Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995, which Exhibit is
incorporated herein by reference.)
(10)(l)* The Lubrizol Corporation Executive Council
Deferred Compensation Plan.
(11) Statement setting forth Computation of Per Share
Earnings.
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) The following portions of The Lubrizol Corporation
1996 Annual Report to its
shareholders:
Pages 16-21 Management's Discussion and
Analysis of Financial Condition
and Results of Operations
Page 22 Independent Auditors' Report
Page 23 Consolidated Statements of Income
for the years ended December 31,
1996, 1995 and 1994
-14-
<PAGE> 16
Page 24 Consolidated Balance Sheets at
December 31, 1996 and 1995
Page 25 Consolidated Statements of Cash
Flows for the years ended December
31, 1996, 1995 and 1994
Page 26 Consolidated Statements of
Shareholders' Equity for the years
ended December 31, 1996, 1995 and
1994
Pages 27-36 Notes to Financial Statements
Page 37 Quarterly Financial Data
(Unaudited)
Pages 38-39 Historical Summary
(21) List of Subsidiaries of The Lubrizol Corporation
(23) Consent of Independent Auditors
(27) Financial Data Schedule
*Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three
months ended December 31, 1996.
-15-
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
March 24, 1997, on its behalf by the undersigned, thereunto duly authorized.
THE LUBRIZOL CORPORATION
BY /S/ W. G. Bares
-------------------------------------------
W. G. Bares, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below on March 24, 1997, by the following
persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
<S> <C>
/s/W. G. Bares Chairman of the Board, President and
- -------------------------------- Chief Executive Officer
W. G. Bares (Principal Executive Officer)
/s/R. A. Andreas Vice President and Chief Financial Officer
- --------------------------------- (Principal Financial Officer)
R. A. Andreas
/s/G. P. Lieb Controller, Accounting and Financial Reporting
- --------------------------------- (Principal Accounting Officer)
G. P. Lieb
/s/Edward F. Bell Director
- ---------------------------------
Edward F. Bell
/s/L. E. Coleman Director
- ---------------------------------
L. E. Coleman
/s/Peggy G. Elliott Director
- ---------------------------------
Peggy G. Elliott
/s/Forest J. Farmer, Sr. Director
- ---------------------------------
Forest J. Farmer, Sr.
/s/Gordon D. Harnett Director
- ---------------------------------
Gordon D. Harnett
/s/Victoria F. Haynes Director
- ----------------------------------
Victoria F. Haynes
/s/David H. Hoag Director
- -----------------------------------
David H. Hoag
/s/Thomas C. MacAvoy Director
- -----------------------------------
Thomas C. MacAvoy
/s/William P. Madar Director
- -----------------------------------
William P. Madar
/s/Ronald A. Mitsch Director
- ------------------------------------
Ronald A. Mitsch
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
Exhibits
<S> <C>
(3)(a) Amended Articles of Incorporation of The Lubrizol
Corporation, as adopted September 23, 1991. (Reference is
made to Exhibit (3)(a) to The Lubrizol Corporation's
Annual Report on Form 10-K for the year ended December
31, 1993, which Exhibit is incorporated herein by
reference.)
(3)(b) Regulations of The Lubrizol Corporation, as amended
effective April 27, 1992. (Reference is made to Exhibit
(3)(b) to The Lubrizol Corporation's Annual Report on
Form 10-K for the year ended December 31, 1993, which
Exhibit is incorporated herein by reference.)
(4)(a) Amendment to Article Fourth of Amended Articles of
Incorporation. (Reference is made to Exhibits (3)(a) and
(4)(a) to The Lubrizol Corporation's Annual Report on
Form 10-K for the year ended December 31, 1993, which
Exhibits are incorporated herein by reference.)
(4)(b) The company agrees, upon request, to furnish to the
Securities and Exchange Commission copies of instruments
authorizing long-term debt. No one instrument authorizes
debt in excess of 10% of the total assets of the company
and its subsidiaries on a consolidated basis.
(4)(c) Rights Agreement between The Lubrizol Corporation and
National City Bank dated October 6, 1987. (Reference is
made to Exhibit (4)(c) to The Lubrizol Corporation's
Annual Report on Form 10-K for the year ended December
31, 1993, which Exhibit is incorporated herein by
reference.)
(4)(d) Amendment to Rights Agreement dated October 6, 1987,
between The Lubrizol Corporation and National City Bank,
effective October 24, 1988. (Reference is made to Exhibit
(4)(d) to The Lubrizol Corporation's Annual Report on
Form 10-K for the year ended December 31, 1993, which
Exhibit is incorporated herein by reference.)
(4)(e) Amendment No. 2 to Rights Agreement dated October 6,
1987, as amended, between The Lubrizol Corporation and
National City Bank, effective October 28, 1991.
(Reference is made to Exhibit (4)(f) to The Lubrizol
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993, which Exhibit is incorporated
herein by reference.)
(4)(f) Amendment No. 3 to Rights Agreement dated October 6,
1987, as amended, between The Lubrizol Corporation and
American Stock Transfer & Trust Company, effective
February 17, 1997.
(10)(a)* The Lubrizol Corporation 1985 Employee Stock Option Plan,
as amended. (Reference is made to Exhibit (10)(b) to The
Lubrizol Corporation's Annual Report on Form 10-K for the
year ended December 31, 1993, which Exhibit is
incorporated herein by reference.)
(10)(b)* The Lubrizol Corporation Amended Deferred Compensation
Plan for Directors. (Reference is made to Exhibit (10)(b)
to The Lubrizol Corporation's Annual Report on Form 10-K
for the year ended December 31, 1994, which Exhibit is
incorporated herein by reference.)
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
<S> <C>
(10)(c)* Form of Employment Agreement between The Lubrizol
Corporation and certain of its senior executive officers.
(Reference is made to Exhibit (10)(e) to The Lubrizol
Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993, which Exhibit is incorporated
herein by reference.)
(10)(d)* The Lubrizol Corporation Excess Defined Benefit Plan, as
amended. (Reference is made to Exhibit (10)(d) to The
Lubrizol Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995, which Exhibit is
incorporated herein by reference.)
(10)(e)* The Lubrizol Corporation Excess Defined Contribution
Plan, as amended. (Reference is made to Exhibit (10)(e)
to The Lubrizol Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995, which Exhibit is
incorporated herein by reference.)
(10)(f)* The Lubrizol Corporation Performance Pay Plan (formerly
Variable Award Plan), as amended.
(10)(g)* The Lubrizol Corporation Executive Death Benefit Plan, as
amended. (Reference is made to Exhibit (10)(g) to The
Lubrizol Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995, which Exhibit is
incorporated herein by reference.)
(10)(h)* The Lubrizol Corporation 1991 Stock Incentive Plan, as
amended.
(10)(i)* The Lubrizol Corporation Deferred Stock Compensation Plan
for Outside Directors, as amended. (Reference is made to
Exhibit (10)(i) to The Lubrizol Corporation's Annual
Report on Form 10-K for the year ended December 31, 1995,
which Exhibit is incorporated herein by reference.)
(10)(j)* The Lubrizol Corporation Officers' Supplemental
Retirement Plan, as amended. (Reference is made to
Exhibit (10)(j) to The Lubrizol Corporation's Annual
Report on Form 10-K for the year ended December 31, 1995,
which Exhibit is incorporated herein by reference.)
(10)(k)* The Lubrizol Corporation Deferred Compensation
Plan for Officers, as amended. (Reference is made
to Exhibit (10) to The Lubrizol Corporation's
Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995, which Exhibit is
incorporated herein by reference.)
(10)(l)* The Lubrizol Corporation Executive Council Deferred
Compensation Plan.
(11) Statement setting forth Computation of Per Share Earnings.
(12) Computation of Ratio of Earnings to Fixed Charges.
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
(13) The following portions of The Lubrizol Corporation 1996
Annual Report to its shareholders:
<S> <C> <C>
Pages 16-21 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Page 22 Independent Auditors' Report
Page 23 Consolidated Statements of Income for the years
ended December 31, 1996, 1995 and 1994
Page 24 Consolidated Balance Sheets at December 31, 1996
and 1995
Page 25 Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994
Page 26 Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1996, 1995 and
1994
Pages 27-36 Notes to Financial Statements
Page 37 Quarterly Financial Data (Unaudited)
Pages 38-39 Historical Summary
(21) List of Subsidiaries of The Lubrizol Corporation
(23) Consent of Independent Auditors
(27) Financial Data Schedule
*Indicates management contract or compensatory plan or arrangement.
</TABLE>
<PAGE> 1
Exhibit (4)(f)
February 17, 1997
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11214
RE: Amendment No. 3 to Rights Agreement
Dear Sir or Madam:
Pursuant to Section 26 of the Rights Agreement, dated as of October 6,
1987, between The Lubrizol Corporation, an Ohio corporation (the "Company"), and
National City Bank (which has been succeeded by American Stock Transfer & Trust
Company as Rights Agent), which Agreement has been amended by Amendments to
Rights Agreement, dated October 24, 1988 and October 28, 1991, respectively (as
amended "Rights Agreement"), the Company by resolutions by its Board of
Directors, hereby amends the Rights Agreement as follows:
1. To amend the fifth sentence of Section 21 to change the capital and
surplus requirements from $50 million to $10 million.
Very truly yours,
THE LUBRIZOL CORPORATION
By: /s/ K.H. Hopping
----------------------------------
Name: K. H. Hopping
Title: Vice President and Secretary
Agreed to and Accepted:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: /s/ Herbert J. Lemmer
--------------------------------------
Name: Herbert J. Lemmer
------------------------------------
Title: Vice President
-----------------------------------
<PAGE> 1
Exhibit (10)(f)
THE LUBRIZOL CORPORATION
PERFORMANCE PAY PLAN
(Formerly Variable Award Plan)
(As Amended)
INTRODUCTION
------------
The Lubrizol Corporation (hereinafter referred to as the "Corporation")
hereby amends, effective as of January 1, 1997, The Lubrizol Corporation
Performance Pay Plan (formerly The Lubrizol Corporation Variable Award Plan)
(hereinafter referred to as the "Plan") in order to provide an award for
employees which reflects the pursuit of superior performance, increased customer
satisfaction and enhancement of shareholder value. Awards for participating
employees under the Plan shall depend upon corporate performance measures as
determined by the Committee for the Plan Year.
Except as otherwise provided, the Plan shall be administered by the
Organization and Compensation Committee (hereinafter referred to as the
"Committee") of the Board of Directors of the Corporation. The Committee shall
have conclusive authority to construe and interpret the Plan and any agreements
entered into under the Plan and to establish, amend, and rescind rules and
regulations for its administration. The Committee shall also have any additional
authority as the Board may from time to time determine to be necessary or
desirable.
ARTICLE I
DEFINITIONS
-----------
1.01 DEFINITIONS. The following terms shall have the indicated
meanings for purposes of the Plan:
(a) "Board" shall mean the Board of Directors of the
Corporation.
(b) "Chief Executive Officer" shall mean the chief executive
officer of the Corporation.
(c) "Committee" shall mean the Organization and Compensation
Committee of the Board, or other designated committee of the
Board, consisting of persons who are not Employees or
Foreign Employees.
(d) "Corporation" shall mean The Lubrizol Corporation, a
corporation organized under the laws of the State of Ohio.
(e) "Director" shall mean a member of the Board.
(f) "Employee" shall mean any person other than an Officer, who
is employed for a wage or salary by the Corporation or a
domestic Subsidiary.
(g) "Foreign Employee" shall mean any person who is employed for
a wage or salary by an international Subsidiary of the
Corporation.
1
<PAGE> 2
(h) "Foreign Participant" shall mean any Foreign Employee who
has been selected by the Committee pursuant to Article VI of
the Plan, and who has not for any reason become ineligible
to participate in the Plan.
(i) "Individual Award" shall mean the amount paid (or to be
paid) to a Participant or Foreign Participant, as the case
may be, by the Corporation pursuant to the Plan.
(j) "Individual Performance Shares" shall have the definition,
and shall be determined, as set forth in Section 3.02
herein.
(k) "Officer" shall mean an employee of the Corporation or a
Subsidiary who is a member of the Executive Council of the
Corporation.
(l) "Participant" shall mean all Officers, and any Employee who
has been selected by the Committee pursuant to Article II
herein to participate in the Plan, and have not for any
reason become ineligible to participate in the Plan.
(m) "Pay" shall be determined at the time of calculating the
Individual Performance Shares and shall mean:
(i) for a participating Employee, his current bi-weekly
salary multiplied by 26.
(ii) for a participating Officer:
(A) Add 1.0 to the decimal rate that applies in
computing his quarterly pay;
(B) Multiply his current bi-weekly base pay by the
sum determined in (A); and
(C) Multiply the product determined in (B) by 26.
(n) "Plan" shall mean The Lubrizol Corporation Performance Pay
Plan (formerly The Lubrizol Corporation Variable Award
Plan), effective January 1, 1990, as amended effective
January 1, 1996, and as further amended effective January 1,
1997, as herein set forth.
(o) "Plan Year" shall mean each twelve-month period commencing
January 1 and ending December 31.
(p) "Subsidiary" shall mean any corporation, foreign or
domestic, that is wholly or partially (but not less than
50%) owned directly or indirectly by the Corporation.
1.02 CONSTRUCTION. Where necessary or appropriate to the meaning of a word,
the singular shall be deemed to include the plural, the plural to include the
singular, the masculine to include the feminine, and the feminine to include the
masculine.
2
<PAGE> 3
ARTICLE II
ELIGIBILITY AND PARTICIPATION
-----------------------------
2.01 ELIGIBILITY. All Employees and Officers shall be eligible to
participate in the Plan.
2.02 PARTICIPATION. All Officers shall participate in the Plan. In
addition, the Committee shall determine which Employees shall participate in the
Plan for each Plan Year. The Committee may also determine which Employees hired
during the Plan Year shall participate in the Plan for such Plan Year. The
Committee's selection of Participants shall be after considering recommendations
presented to it by the Chief Executive Officer.
ARTICLE III
INDIVIDUAL PERFORMANCE SHARES
-----------------------------
3.01 IN GENERAL. At the time the Committee selects Participants for any
Plan Year, the Committee shall, after consideration of the recommendations of
the Chief Executive Officer, establish, for each Plan Year, Individual
Performance Shares for each Participant.
3.02 CALCULATION OF INDIVIDUAL PERFORMANCE SHARES. Individual
Performance Shares shall be calculated in the following manner:
(a) The Pay of each Participant shall be multiplied by a
designated percentage which shall take into account the
Participant's position in the Corporation. Such designated
percentage shall be determined by the Committee.
(b) The product for each Participant, determined pursuant to the
calculation in paragraph (a) above, shall be divided by the
sum of all such amounts produced for all Participants
calculated in accordance with paragraph (a) above.
(c) The quotient determined for each Participant, calculated
pursuant to paragraph (b) above, shall be multiplied by 100
and rounded, up or down, to the nearer whole number to produce
the number of each Participant's Individual Performance
Shares.
Individual Performance Shares may be either increased or decreased, at
any time, or from time to time, during a Plan Year, for any Participant at the
sole discretion of the Committee in order to reflect any change in the
individual contribution under the formula set forth in this Section 3.02.
ARTICLE IV
DETERMINATION OF FUND
---------------------
4.01 FUND. A fund shall be accrued on a monthly basis during each Plan
Year, based upon a fixed percentage of the Corporation's monthly consolidated
net income during such Plan Year (the "Fund"), as established by the Committee,
which percentage may be increased or decreased at any time, and from time to
time, prior to the end of the Plan Year at the discretion of the Committee. The
Fund shall consist of bookkeeping accruals on the books of the Corporation and
no cash or other property shall be set aside by the Corporation for these
purposes.
3
<PAGE> 4
4.02 POST-PLAN YEAR FUND ADJUSTMENT. At the beginning of each Plan
Year, corporate initiatives for the Plan Year will be categorized into corporate
performance measures and shall be presented to the Committee by the Chief
Executive Officer. In January following the Plan Year, the Chief Executive
Officer shall evaluate the outcome of the performance measures for the Plan Year
just concluded and shall present his evaluation to the Committee which the
Committee may, at its discretion, increase or decrease the amount of the Fund.
ARTICLE V
INDIVIDUAL AWARDS
-----------------
5.01 ALLOCATION. Each Participant's Individual Award for a Plan Year
shall be calculated in January following the close of the Plan Year and shall be
an amount determined as follows:
(a) Divide the total Fund, as finally approved by the Committee,
by the total Individual Performance Shares of all
Participants;
(b) For each Participant, multiply the amount determined in
paragraph (a) by such Participant's Individual Performance
Shares; and
(c) The product determined in paragraph (b) shall be the
tentative amount of the Participant's Individual Award which
may be increased or decreased in the sole discretion of the
Committee.
The Committee may also in its sole and unrestricted discretion
determine Individual Awards for Participants who were hired during the Plan
Year. No Participant shall have any vested interest in, or be entitled to, any
Individual Award unless and until payment is authorized by the Committee.
5.02 TIME AND METHOD OF PAYMENT OF INDIVIDUAL AWARDS. In the event the
Committee determines that a Participant is entitled to an Individual Award, the
Corporation shall pay such Individual Award to that Participant as soon after
the close of the Plan Year as may be feasible, but in no event later than thirty
30 days after the date that the Corporation releases its public announcement of
the Corporation's earnings for such Plan Year. A Participant, who leaves the
Corporation's employ after the Plan Year but prior to the payment of an
Individual Award, except in the case of retirement under the provisions of a
qualified defined benefit plan maintained by the Corporation, disability or
death, will not be eligible to receive any payment under this Plan. However, an
Individual Award may be made to such a Participant in those instances where
recommendation for such a payment has been made by the Chief Executive Officer
and approved by the Committee.
In the event a Participant dies after the Plan Year but prior to the
payment of any Individual Award with respect to the Plan Year, any Individual
Award determined to be payable by the Committee shall be paid by the Corporation
to the Participant's estate.
5.03 CONDITIONS. Anything contained herein to the contrary
notwithstanding, the payment of Individual Awards to Participants with respect
to any Plan Year is conditioned upon the availability of adequate corporate
profits for the Corporation's fiscal year coinciding with any Plan Year. The
determination of whether adequate corporate profits exist shall be made by the
Board in its sole and unrestricted judgment and discretion and such
determination shall be conclusive and binding.
4
<PAGE> 5
ARTICLE VI
AWARDS FOR FOREIGN EMPLOYEES
----------------------------
6.01 PARTICIPATION. The Committee shall determine which Foreign
Employees shall participate in the Plan for each Plan Year. The Committee's
selection of Foreign Participants shall be made after considering
recommendations presented to it by the Chief Executive Officer.
6.02 INDIVIDUAL AWARDS. At the time the Individual Awards are
determined for Participants, the Committee shall, in its discretion, after
consideration of the recommendations of the Chief Executive Officer, establish
for each Plan Year Individual Awards for each Foreign Participant.
6.03 PAYMENT OF AWARDS. Individual Awards to each Foreign Participant
shall be paid by the international Subsidiary that is the employer of such
Foreign Participant at the same time as payment is made to Participants under
Section 5.02. All payments shall be converted from the U.S. dollar measurement
under the Plan to the currency of the country of the such Subsidiary at the
currency exchange rate in effect at the time the Individual Award is determined.
All applicable withholding taxes shall be withheld from the distribution and
remitted by the international subsidiary to the appropriate taxing authority.
6.04 CONDITIONS.
(a) A Foreign Employee who leaves the international Subsidiary's
employ after the end of the Plan Year but prior to the
payment of an Individual Award, except in the case of
retirement in accordance with the customary practice of such
Subsidiary, disability or death, will not be eligible to
receive any payment under this Plan. However, an Individual
Award may be made to such a Foreign Participant in those
instances where recommendation for such a payment has been
made by the Chief Executive Officer and approved by the
Committee.
(b) In the event a Foreign Participant dies after the Plan year
but prior to the payment of any Individual Award with
respect to the Plan Year, any Individual Award determined by
the Committee to be payable, shall be paid by the
international Subsidiary to the Foreign Participant's estate
or in accordance with local laws.
ARTICLE VII
CHANGE OF CONTROL
-----------------
7.01 EFFECT OF CHANGE IN CONTROL. In the event a Change in Control of
the Corporation (as defined in Section 7.02) occurs prior to final determination
by the Committee of the amounts of Individual Awards to be paid under the Plan
with respect to any Plan Year, the Committee shall calculate such Individual
Awards as soon as practicable after such Change in Control. The Fund from which
Individual Awards are to be made shall be based upon accruals by the Corporation
up to the time of such Change in Control and Individual Awards shall be
calculated in accordance with Sections 5.01 and 6.02 herein. Payment of such
Individual Awards shall be made within thirty (30) days of the date on which the
determination is made to compute the payments according to the terms of this
Section 7.01.
5
<PAGE> 6
7.02 For all purposes of the Plan, a "Change in Control of the
Corporation" shall have occurred if any of the following events shall occur:
(a) The Corporation is merged, consolidated or reorganized into
or with another corporation or other legal person, and, as a
result of such merger, consolidation or reorganization, less
than a majority of the combined voting power of the
then-outstanding securities of such surviving corporation or
person entitled to vote, immediately after such transaction,
is held in the aggregate by the holders of Voting Stock (as
hereinafter defined) of the Corporation immediately prior to
such transaction;
(b) The Corporation sells all or substantially all of its assets
to any other corporation or other legal person, and less
than a majority of the combined voting power of the
then-outstanding securities of such corporation or person,
immediately after such sale, is held in the aggregate by the
holders of Voting Stock of the Corporation immediately prior
to such sale;
(c) There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as
promulgated pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), disclosing that any person
(as the term "person" is used in Section 13(d)(3) or Section
14(d)(2) of the Exchange Act) has become the beneficial
owner (as the term "beneficial owner" is defined under Rule
13(d)(3) or any successor rule or regulation promulgated
under the Exchange Act) of securities representing 20% or
more of the combined voting power of the then-outstanding
securities entitled to vote generally in the election of
directors of the Corporation ("Voting Stock");
(d) The Corporation files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange
Act disclosing in response to Form 8-K or Schedule 14A (or
any successor schedule, form or report or item therein) that
a change in control of the Corporation has or may have
occurred or will or may occur in the future pursuant to any
then-existing contract or transaction; or
(e) If during any period of two consecutive years, individuals
who, at the beginning of any such period constitute the
Directors of the Corporation, cease for any reason to
constitute at least a majority thereof, unless the election,
or the nomination for election by the Corporation's
stockholders, of each Director of the Corporation first
elected during such period was approved by a vote of at
least two-thirds of the Directors of the Corporation then
still in office who were Directors of the Corporation at the
beginning of any such period.
Notwithstanding the foregoing provisions, a "Change in Control" shall
not be deemed to have occurred for purposes of the Plan solely because (i) the
Corporation, (ii) an entity in which the Corporation directly or indirectly
beneficially owns 50% or more of the voting securities or (iii) any
Corporation-sponsored employee stock ownership plan or any other employee
benefit plan of the Corporation, either files or becomes obligated to file a
report or a proxy statement under or in response to Schedule 13D, Schedule
14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or
item therein) under the Exchange Act, disclosing beneficial ownership by it of
shares of Voting Stock, whether in excess of 20% or otherwise, or
6
<PAGE> 7
because the Corporation reports that a change in control of the Corporation has
or may have occurred or will or may occur in the future by reason of such
beneficial ownership.
ARTICLE VIII
ADMINISTRATION
--------------
8.01 PLAN ADMINISTRATOR. The Committee shall be the Plan
administrator.
8.02 DUTIES OF PLAN ADMINISTRATOR.
(a) The Committee shall administer the Plan in accordance with its
terms and shall have all powers necessary to carry out the
provisions of the Plan including, but not limited to, the
following:
(1) Determination of Employees and Foreign Employees
who are eligible for Plan participation;
(2) Determination of the amount of the Fund to be
distributed to Participants and Foreign
Participants for each Plan Year; and
(3) Determination of each Officer's actual Individual
Award.
(b) The Committee shall interpret the Plan and shall resolve all
questions arising in the administration, interpretation, and
application of the Plan. Any such determination of the
Committee shall be conclusive and binding on all persons.
(c) The Committee shall establish such procedures and keep such
records or other data as the Committee in its discretion
determines necessary or proper for the administration of the
Plan.
(d) The Committee may delegate administrative responsibilities to
such person or persons as the Committee deems necessary or
desirable in connection with the administration of the Plan.
ARTICLE IX
MISCELLANEOUS
-------------
9.01 UNFUNDED PLAN. The Corporation shall be under no obligation to
segregate or reserve any funds or other assets for purposes relating to this
Plan and no Participant or Foreign Participant shall have any rights whatsoever
in or with respect to any funds or assets of the Corporation.
9.02 NON-ALIENATION. Since a Participant or Foreign Participant does
not have any rights to any Individual Award under the Plan until the time that
payment of such Individual Award is made, no anticipated payment of any
Individual Award shall be subject in any manner to alienation, sale, transfer,
assignment, pledge, attachment, garnishment or encumbrance of any kind. If a
Participant or Foreign Participant attempts to alienate, sell, transfer, assign,
pledge or otherwise encumber any such anticipated Individual Award, or if he has
filed or will be filing for bankruptcy, the Committee in its discretion may
cause such amounts as would otherwise become payable to such Participant or
Foreign Participant at such time or times to be paid to or applied for the
benefit of such one or more of the following as the Committee in its
7
<PAGE> 8
sole and unrestricted judgment and discretion may designate: the Participant or
Foreign Participant, his spouse, child or children, or other dependents.
9.03 UNCLAIMED PAYMENTS. Should the whereabouts of any Participant or
Foreign Participant entitled to receive any Individual Award be unknown to the
Corporation, and unascertainable after reasonable inquiry by the Corporation,
for a period of two years from the date of scheduled payment of the Individual
Award, the right of such person to receive payments hereunder shall be
terminated, and the amounts which would otherwise have been payable to such
person shall be forfeited.
9.04 ACTIONS OR DECISIONS WITH RESPECT TO THE PLAN. Any decision or
action of the Corporation, the Board, or the Committee, arising out of or in
connection with the administration and operation of this Plan, may be made or
taken in their sole and unrestricted judgment and discretion, and such decision
or action shall be conclusive and binding upon all Participants and Foreign
Participants.
9.05 NO EMPLOYMENT RIGHTS. Nothing herein contained shall be construed
as a commitment or agreement upon the part of any Participant, Foreign
Participant, Employee or Foreign Employee hereunder to continue his employment
with the Corporation or a Subsidiary, and nothing herein contained shall be
construed as a commitment on the part of the Corporation or any Subsidiary to
continue the employment or rate of compensation of any Participant or Foreign
Participant hereunder or any Employee or Foreign Employee for any period.
9.06 AMENDMENT OF THE PLAN. The Corporation reserves the right, to be
exercised by instruction from the Committee, to modify or amend this Plan at any
time.
9.07 DURATION AND TERMINATION OF THE PLAN. The Corporation also
reserves the right, to be exercised by action of the Board, to discontinue or
terminate the Plan; provided that, and subject to all the provisions of this
plan, any termination shall be effective only for all Plan Years following
December 31 of the plan Year in which the decision to terminate occurs.
-END-
8
<PAGE> 1
Exhibit (10)(h)
THE LUBRIZOL CORPORATION 1991 STOCK INCENTIVE PLAN
(As Amended January 1, 1997)
SECTION 1. PURPOSE.
The purposes of The Lubrizol Corporation 1991 Stock Incentive Plan are
to encourage selected employees of The Lubrizol Corporation and its Subsidiaries
and directors of the Company to acquire a proprietary and vested interest in the
growth and performance of the Company, to generate an increased incentive to
contribute to the Company's future success and prosperity, thus enhancing the
value of the Company for the benefit of shareholders, and to enhance the ability
of the Company and its Subsidiaries to attract and retain individuals of
exceptional talent upon whom, in large measure, the sustained progress, growth
and profitability of the Company depends.
SECTION 2. DEFINITIONS.
As used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Award" means any Option, Stock Appreciation Right, Restricted
Stock Award, or Stock Award granted pursuant to the provisions of the Plan.
(b) "Award Agreement" means a written document evidencing any Award
granted hereunder, signed by the Company and delivered to the Participant
or Outside Director, as the case may be.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(e) "Committee" means a committee of not less than three (3) Outside
Directors of the Board, each of whom shall be a "disinterested person"
within the meaning of Rule 16b-3(d)(3) promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or any successor rule or statute.
(f) "Company" means The Lubrizol Corporation.
(g) "Employee" means any employee of the Company or of any Subsidiary.
(h) "Fair Market Value" means the average of the high and low price of
a Share on the New York Stock Exchange on the Grant Date (in the case of a
Grant), or any other relevant date.
(i) "Grant Date" means the date on which the Board approves the grant
of an Option, Stock Appreciation Right, Restricted Stock Award, or Stock
Award, and, with
<PAGE> 2
THE LUBRIZOL CORPORATION Page 2
1991 STOCK INCENTIVE PLAN
respect to an Option granted to an Outside Director pursuant to Section 10,
the date of the Shareholders' Meeting on which such Option is granted.
(j) "Incentive Stock Option" means an Option that is intended to meet
the requirements of Section 422A of the Code or any successor provision
thereto.
(k) "Non-Statutory Stock Option" means an Option that is not intended
to be an Incentive Stock Option.
(l) "Option" means an option to purchase Shares granted hereunder.
(m) "Option Price" means the purchase price of each Share under an
Option.
(n) "Outside Director" means a member of the Board who is not an
employee of the Company or of any Subsidiary.
(o) "Participant" means an Employee who is selected by the Committee
to receive an Award under the Plan.
(p) "Plan" means The Lubrizol Corporation 1991 Stock Incentive Plan.
(q) "Restricted Stock Award" means an award of restricted Shares under
Section 8 hereof.
(r) "Restriction Period" means the period of time specified in an
Award Agreement during which the following conditions remain in effect: (i)
certain restrictions on the sale or other disposition of Shares awarded
under the Plan, (ii) subject to the terms of the applicable Award
Agreement, the continued employment of the Participant, and (iii) such
other conditions as may be set forth in the applicable Award Agreement.
(s) "Shareholders' Meeting" means the annual meeting of shareholders
of the Company in each year.
(t) "Shares" means common shares without par value of the Company.
(u) "Stock Appreciation Right" means the right to receive a payment in
cash or in Shares, or in any combination thereof, from the Company equal to
the excess of the Fair Market Value of a stated number of Shares at the
exercise date over a fixed price for such Shares.
(v) "Stock Award" means the grant of unrestricted Shares under the
Plan.
(w) "Subsidiary" means a corporation which is at least 80% owned,
directly or indirectly, by the Company.
(x) "Voting Stock" means the then-outstanding securities entitled to
vote generally in the election of directors of the Company.
<PAGE> 3
THE LUBRIZOL CORPORATION Page 3
1991 STOCK INCENTIVE PLAN
SECTION 3. ADMINISTRATION.
The Plan shall be administered by the Committee. Members of the
Committee shall be appointed by and serve at the pleasure of the Board, and may
resign by written notice filed with the Chairman of the Board or the Secretary
of the Company. A vacancy on the Committee shall be filled by the appointment of
a successor member by the Board. Subject to the express provisions of this Plan,
the Committee shall have conclusive authority to select Employees to be
Participants for Awards and determine the type and number of Awards to be
granted, to construe and interpret the Plan, any Award granted hereunder, and
any Award Agreement entered into hereunder, and to establish, amend, and rescind
rules and regulations for the administration of this Plan and shall have such
additional authority as the Board may from time to time determine to be
necessary or desirable. Notwithstanding the foregoing, the Committee shall not
have discretion with respect to Options granted to Outside Directors pursuant to
Section 10 such as to prevent any Award granted under this Plan from meeting the
requirements for exemption from Section 16(b) of the Exchange Act, as set forth
in Rule 16b-3 thereunder or any successor rule or statute.
SECTION 4. SHARES SUBJECT TO THE PLAN.
(a) Subject to adjustment as provided in the Plan, the total number of
Shares available under the Plan in each calendar year shall be one percent
(1%) of the total outstanding Shares as of the first day of any year for
which the Plan is in effect; provided that such number shall be increased
in any year by the number of Shares available for grant hereunder in
previous years but not covered by Awards granted hereunder in such previous
years; provided further, that a total of no more than two million
(2,000,000) Shares shall be available for the grant of Incentive Stock
Options Under the Plan; and provided further, that no more than four
hundred thousand (400,000) Shares shall be available for grant to any
Participant during a calendar year. Settlement of an Award, whether by the
issuance of Shares or the payment of cash, shall not be deemed to be the
grant of an Award hereunder. In addition, any Shares issued by the Company
through the assumption or substitution of outstanding grants from an
acquired company shall not reduce the Shares available for grants under the
Plan. Any Shares issued hereunder may consist, in whole or in part, of
authorized and unissued Shares or treasury shares. If any Shares subject to
any Award granted hereunder are forfeited or if such Award otherwise
terminates without the issuance of such Shares or payment of other
consideration in lieu of such Shares, the Shares subject to such Award, to
the extent of any such forfeiture or termination, shall again be available
for grant under the Plan as if such Shares had not been subject to an
Award.
(b) The number of Shares which remain available for grant pursuant to
this Plan, together with Shares subject to outstanding Awards, at the time
of any change in the Company's capitalization, including stock splits,
stock dividends, mergers, reorganizations, consolidations,
recapitalizations, or other changes in corporate structure, shall be
appropriately and proportionately adjusted to reflect such change in
capitalization.
<PAGE> 4
THE LUBRIZOL CORPORATION Page 4
1991 STOCK INCENTIVE PLAN
SECTION 5. ELIGIBILITY.
Any Employee shall be eligible to be selected as a Participant.
SECTION 6. STOCK OPTIONS.
Non-Statutory Stock Options and Incentive Stock Options may be granted
hereunder to Participants either separately or in conjunction with other Awards
granted under the Plan. Any Option granted to a Participant under the Plan shall
be evidenced by an Award Agreement in such form as the Committee may from time
to time approve. Any such Option shall be subject to the following terms and
conditions and to such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall deem desirable.
(a) OPTION PRICE. The purchase price per Share under an Option shall
be one hundred percent (100%) of the Fair Market Value of the Share on the
Grant Date of the Option. Payment of the Option Price may be made in cash,
Shares, or a combination of cash and Shares, as provided in the Award
Agreement relating thereto.
(b) OPTION PERIOD. The term of each Option shall be fixed by the
Committee in its sole discretion; provided that no Incentive Stock Option
shall be exercisable after the expiration of ten years from the Grant Date;
and provided further, that no reload Option granted to a Participant
pursuant to the terms of Section 6(e) shall be exercisable after the
expiration of the term of the Option that gave rise to the grant of such
reload Option.
(c) EXERCISE OF OPTION. Options shall be exercisable to the extent of
fifty percent (50%) of the Shares subject thereto after one year from the
Grant Date, seventy-five percent (75%) of such Shares after two years from
the Grant Date, and one hundred percent (100%) of such Shares after three
years from the Grant Date, subject to any provisions respecting the
exercisability of Options that may be contained in an Award Agreement;
provided that a reload Option granted to a Participant pursuant to the
terms of Section 6(e) shall be exercisable to the extent of one hundred
percent (100%) of such Shares from the Grant Date.
(d) INCENTIVE STOCK OPTIONS. The aggregate Fair Market Value of the
Shares with respect to which Incentive Stock Options held by any
Participant which are exercisable for the first time by such Participant
during any calendar year under the Plan (and under any other benefit plans
of the Company, of any parent corporation, or Subsidiary) shall not exceed
$100,000 or, if different, the maximum limitation in effect at the Grant
Date under Section 422A of the Code, or any successor provision, and any
regulations promulgated thereunder. The terms of any Incentive Stock Option
granted hereunder shall comply in all respects with the provisions of
Section 422A of the Code, or any successor provision, and any regulations
promulgated thereunder.
<PAGE> 5
THE LUBRIZOL CORPORATION Page 5
1991 STOCK INCENTIVE PLAN
(e) RELOAD. In the event that a Participant or an Outside Director
exercises an Option and pays some or all of the Option Price with Shares,
such Participant or Outside Director shall be granted a reload Option to
purchase the number of Shares equal to the number of Shares used as payment
of the Option Price, such reload Option to be granted at the time and
subject to the limitation described below. The Grant Date for the reload
Option shall be the next date on which the Committee otherwise grants
Options under this Plan to employees generally, whether or not during the
same calendar year in which the original Option is exercised. Options
granted to Participants pursuant to this Section 6(e) shall have terms and
conditions as described in this Section 6 and Options granted to Outside
Directors pursuant to this Section 6(e) shall have terms and conditions as
described in Section 10. Options granted pursuant to this Section 6(e)
shall be of the same character (i.e., Non-Statutory Stock Options or
Incentive Stock Options) as the Option that is exercised to give rise to
the grant of the reload Option, provided that if an Incentive Stock Option
cannot be granted under this Section 6(e) in compliance with Section 422A
of the Code, then a Non-Statutory Stock Option shall be granted in lieu
thereof. Options shall be granted pursuant to this Section 6(e) only to the
extent that the number of Shares covered by such Option grants does not,
when added to the number of Shares covered by Awards previously granted
during such calendar year, exceed the limitation set forth in Section 4(a).
If such limitation would otherwise be exceeded by the operation of this
Section 6(e), each Participant or Outside Director entitled to receive an
Option under this Section 6(e) shall have the number of Shares subject to
such Option reduced appropriately and proportionately (i.e., by the same
percentage) so that the limitation set forth in Section 4(a) will not be
exceeded.
Shares received upon the exercise of an Option granted pursuant to this
Section 6(e) may not be sold or otherwise transferred (i) by a Participant
until such Participant ceases to be employed by the Company or a
Subsidiary, or (ii) by an Outside Director until such Outside Director
ceases to be an Outside Director, provided, however, that a Participant or
Outside Director may use such Shares as payment of the Option Price of
Options granted under this Plan to the extent permitted by the applicable
Award Agreement, in which case a number of the Shares (equal to the number
of Shares used for such payment) purchased by the exercise of such Options
also shall be subject to the same restrictions upon transferability.
Certificates for such Shares with a transferability restriction shall bear
a legend referencing such restriction.
SECTION 7. STOCK APPRECIATION RIGHTS.
Stock Appreciation Rights may be granted hereunder to Participants
either separately or in conjunction with other Awards granted under the Plan and
may, but need not, relate to a specific Option granted under Section 6. The
provisions of Stock Appreciation Rights need not be the same with respect to
each Participant. Any Stock Appreciation Right related to a Non-Statutory Stock
Option may be granted at the same time such Option is granted or at any time
thereafter before exercise or expiration of such Option. Any Stock Appreciation
Right related to an Incentive Stock Option must be granted at the same time such
Option is granted. Any Stock Appreciation Right related to an Option shall be
exercisable only to the extent the related Option is exercisable. In the case of
any Stock Appreciation Right related to any Option, the Stock Appreciation Right
or
<PAGE> 6
THE LUBRIZOL CORPORATION Page 6
1991 STOCK INCENTIVE PLAN
applicable portion thereof shall terminate and no longer be exercisable upon
the termination or exercise of the related Option. Similarly, upon exercise of a
Stock Appreciation Right as to some or all of the Shares covered by a related
Option, the related Option shall be canceled automatically to the extent of the
Stock Appreciation Rights exercised, and such Shares shall not thereafter be
eligible for grant under Section 4(a). The Committee may impose such conditions
or restrictions on the exercise of any Stock Appreciation Right as it shall deem
appropriate.
SECTION 8. RESTRICTED STOCK AWARDS.
(a) ISSUANCE. Restricted Stock Awards may be issued hereunder to
Participants, either separately or in conjunction with other Awards granted
under the Plan. Each Award under this Section 8 shall be evidenced by an
Award Agreement between the Participant and the Company which shall specify
the vesting schedule, any rights of acceleration and such other terms and
conditions as the Board shall determine, which need not be the same with
respect to each Participant.
(b) REGISTRATION. Shares issued under this Section 8 shall be
evidenced by issuance of a stock certificate or certificates registered in
the name of the Participant bearing the following legend and any other
legend required by, or deemed appropriate under, any federal or state
securities laws:
The sale or other transfer of the common shares represented by this
certificate is subject to certain restrictions set forth in the Award
Agreement between ___________________ (the registered owner) and The
Lubrizol Corporation dated _______________, under The Lubrizol
Corporation 1991 Stock Incentive Plan. A copy of the Plan and Award
Agreement may be obtained from the Secretary of The Lubrizol
Corporation.
Unless otherwise provided in the Award Agreement between the Participant
and the Company, such certificates shall be retained by the Company until
the expiration of the Restriction Period. Upon the expiration of the
Restriction Period, the Company shall (i) cause the removal of the legend
from the certificates for such Shares as to which a Participant is entitled
in accordance with the Award Agreement between the Participant and the
Company and (ii) release such Shares to the custody of the Participant.
(c) FORFEITURE. Except as otherwise determined by the Committee at the
Grant Date, upon termination of employment of the Participant for any
reason during the Restriction Period, all Shares still subject to
restriction shall be forfeited by the Participant and retained by the
Company; provided that in the event of a Participant's retirement,
permanent disability, death, or in cases of special circumstances, the
Committee may, in its sole discretion, when it finds that a waiver would be
in the best interests of the Company, waive in whole or in part any or all
remaining restrictions with respect to such Participant's Shares. In such
case, unrestricted Shares shall be issued to the Participant at such time
as the Committee determines.
<PAGE> 7
THE LUBRIZOL CORPORATION Page 7
1991 STOCK INCENTIVE PLAN
(d) RIGHTS AS SHAREHOLDERS. At all times during the Restriction
Period, Participants shall be entitled to full voting rights with respect
to all Shares awarded under this Section 8 and shall be entitled to
dividends with respect to such Shares.
SECTION 9. STOCK AWARDS.
Awards of Shares may be granted hereunder to Participants, either
separately or in conjunction with other Awards granted under the Plan. Subject
to the provisions of the Plan, the Committee shall have sole and complete
authority to determine (i) the Employees to whom such Awards shall be granted,
(ii) the time or times at which such Awards shall be granted, (iii) the number
of Shares to be granted pursuant to such Awards, and (iv) all other conditions
of the Awards. Such conditions may include issuance of Shares at the time of the
Award is granted or issuance of Shares at a time or times subsequent to the time
the Award is granted, which subsequent times may be specifically established by
the Committee and/or may be determined by reference to the satisfaction of one
or more performance measures specified by the Committee. The provisions of stock
awards need not be the same with respect to each Participant.
SECTION 10. OUTSIDE DIRECTORS' OPTIONS.
On the close of business on the date of each Shareholders' Meeting,
each Outside Director shall automatically be granted an Option to purchase 2,000
Shares. All such Options shall be Non-Statutory Stock Options and shall be
subject to the following terms and conditions and to such additional terms and
conditions, not inconsistent with the provisions of the Plan, as are contained
in the applicable Award Agreement.
(a) OPTION PRICE. The purchase price per Share shall be one hundred
percent (100%) of the Fair Market Value of the Share on the Grant Date.
Payment of the Option Price may be made in cash, Shares, or a combination
of cash and Shares, as provided in the Award Agreement in effect from time
to time.
(b) OPTION PERIOD. The term during which Options granted under this
Section 10 shall be exercisable shall be ten (10) years from the Grant
Date; provided that no reload Option granted to an Outside Director
pursuant to the terms of Section 6(e) shall be exercisable after the
expiration of the term of the Option that gave rise to the grant of such
reload Option.
(c) EXERCISE OF OPTIONS. Subject to the provisions of this Section
10(c), Options shall be exercisable to the extent of fifty percent (50%) of
the Shares subject thereto after one year from the Grant Date, seventy-five
percent (75%) of such Shares after two years from the Grant Date, and one
hundred percent (100%) of such Shares after three years from the Grant
Date; provided that a reload Option granted to an Outside Director pursuant
to the terms of Section 6(e) shall be exercisable to the extent of one
hundred percent (100%) of such Shares from the Grant Date. Options may be
exercised by an Outside Director during the period that the Outside
Director remains a member of the Board and under the circumstances
described below.
<PAGE> 8
THE LUBRIZOL CORPORATION Page 8
1991 STOCK INCENTIVE PLAN
(i) If an Outside Director retires under a retirement plan or
policy of the Company, then Options held by such Outside Director may
be exercised for a period of thirty-six (36) months following
retirement, to the extent of 100% of the Shares covered by such
Options (notwithstanding the extent to which the Outside Director
otherwise would have been entitled to exercise such Options at the
date of retirement), provided that in no event shall an Option be
exercisable after the expiration of the Option period provided in
Section 10(b).
(ii) In the event of the death of an Outside Director while
serving as a director, Options held by such Outside Director may be
exercised for a period of twelve (12) months following the date of
death, (A) to the extent of 100% of the Shares covered by such Options
(notwithstanding the extent to which the Outside Director otherwise
would have been entitled to exercise the Option at the date of death),
and (B) only by the executor or administrator of the Outside
Director's estate or by the person or persons to whom the Outside
Director's rights under the Options shall pass by the Outside
Director's will or the laws of descent and distribution, provided that
in no event shall an Option be exercisable after the expiration of the
Option period provided in Section 10(b).
(iii) If an Outside Director shall cease to be a director for any
reason other than retirement under a retirement plan or policy of the
Company or death, Options held by such Outside Director may be
exercised for a period of three (3) months following such cessation,
to the extent of 100% of the Shares covered by such Options
(notwithstanding the extent to which the Outside Director otherwise
would have been entitled to exercise such Options at the date of such
cessation), provided that in no event shall an Option be exercisable
after the expiration of the Option period provided in Section 10(b).
(iv) In the event an Outside Director, after ceasing to be a
director, dies during and subject to one of the periods described in
Section 10(c)(i) or (iii), while possessed of unexercised Options, the
executor or administrator of the Outside Director's estate, or the
person entitled by will or the applicable laws of descent and
distribution, may exercise such Options held by the Outside Director
at the time of the Outside Director's death during the period that is
applicable, as follows:
(A) If Section 10(c)(i) was in effect, for one year after
the Outside Director's death;
(B) If Section 10(c)(iii) was in effect, for three months
after the Outside Director's death;
<PAGE> 9
THE LUBRIZOL CORPORATION Page 9
1991 STOCK INCENTIVE PLAN
provided that, in no event shall the Option be exercisable after
the expiration of the Option period provided in Section 10(b).
SECTION 11. CHANGE IN CONTROL.
Notwithstanding the provisions of Sections 6(c) and 10(c), Options
shall become exercisable with respect to 100% of the Shares upon the occurrence
of any Change in Control (as hereafter defined) of the Company; except that no
Options shall be exercised prior to the end of six months from the Grant Date.
Notwithstanding the provisions of Section 8 and the applicable Award
Agreement, any restricted Shares shall be 100% vested and without any
restrictions upon the occurrence of any Change in Control of the Company.
For all purposes of the Plan, a "Change in Control" shall have occurred
if any of the following events shall occur:
(a) The Company is merged, consolidated or reorganized into or
with another corporation or other legal person, and immediately after
such merger, consolidation or reorganization less than a majority of
the combined voting power of the then-outstanding securities of such
corporation or person immediately after such transaction are held in
the aggregate by the holders of Voting Stock of the Company immediately
prior to such transaction;
(b) The Company sells all or substantially all of its assets
to any other corporation or other legal person, and less than a
majority of the combined voting power of the then-outstanding
securities of such corporation or person immediately after such sale
are held in the aggregate by the holders of Voting Stock of the Company
immediately prior to such sale;
(c) There is a report filed on Schedule 13D or Schedule 14D-I
(or any successor schedule, form or report), each as promulgated
pursuant to the Exchange Act, disclosing that any person (as the term
"person" is used in Section 13(d)(3) or Section 14(d)(2) of the
Exchange Act) has become the beneficial owner (as the term "beneficial
owner" is defined under Rule 13(d)(3) or any successor rule or
regulation promulgated under the Exchange Act) of securities
representing 20% or more of the Voting Stock;
(d) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a change in control of
the Company has or may have occurred or will or may occur in the future
pursuant to any then-existing contract or transaction; or
<PAGE> 10
THE LUBRIZOL CORPORATION Page 10
1991 STOCK INCENTIVE PLAN
(e) If during any period of two consecutive years, individuals
who at the beginning of any such period constitute the Directors of the
Company cease for any reason to constitute at least a majority thereof,
provided, however, that for purposes of this Section 11(e), each
Director who is first elected, or first nominated for election by the
Company's stockholders, by a vote of at least two thirds of the
Directors of the Company (or a committee thereof) then still in office
who were Directors of the Company at the beginning of any such period
will be deemed to have been a Director of the Company at the beginning
of such period.
Notwithstanding the foregoing provisions of Section 11(c) or 11(d)
hereof, unless otherwise determined in a specific case by majority vote of the
Board, a "Change in Control" shall not be deemed to have occurred for purposes
of the Plan solely because (i) the Company, (ii) an entity in which the Company
directly or indirectly beneficially owns 50% or more of the voting securities,
or (iii) any employee stock ownership plan or any other employee benefit plan
sponsored by the Company, either files or becomes obligated to file a report or
a proxy statement under or in response to Schedule 13D, Schedule 14D-I, Form 8-K
or Schedule 14A (or any successor schedule, form or report or item therein)
under the Exchange Act, disclosing beneficial ownership by it of shares of
Voting Stock, whether in excess of 20% or otherwise, or because the Company
reports that a change in control of the Company has or may have occurred or will
or may occur in the future by reason of such beneficial ownership.
SECTION 12. AMENDMENTS AND TERMINATION.
The Board may, at any time, amend, alter or terminate the Plan, but no
amendment, alteration, or termination shall be made that would impair the rights
of an Outside Director or Participant under an Award theretofore granted,
without the Outside Director's or Participant's consent, or that without the
approval of the shareholders would:
(a) except as is provided in Sections 4(b) and 13(c) of the Plan,
increase the total number of Shares which may be issued under the Plan;
(b) change the class of employees eligible to participate in the Plan;
or
(c) materially increase the benefits accruing to Participants under
the Plan;
so long as such approval is required by law or regulation; provided that, as
long as required by law or regulation, the provisions of Section 10 hereof may
not be amended or altered more than once every six (6) months, other than to
comport with changes in the Code, the Employee Retirement Income Security Act,
or the rules thereunder.
The Committee may amend the terms of any Award heretofore granted
(except, with respect to Options granted pursuant to Section 10 hereof, only to
the extent not inconsistent with Rule 16b-3 under the Exchange Act or any
successor rule or statute), prospectively or retroactively, but no such
amendment shall impair the rights of any Participant or Outside Director without
his consent.
<PAGE> 11
THE LUBRIZOL CORPORATION Page 11
1991 STOCK INCENTIVE PLAN
SECTION 13. GENERAL PROVISIONS.
(a) No Option, Stock Appreciation Right, or Restricted Stock Award
shall be assignable or transferable by a Participant or an Outside Director
otherwise than by will or the laws of descent and distribution, and Options
and Stock Appreciation Rights may be exercised during the Participant's or
Outside Director's lifetime only by the Participant or the Outside Director
or, if permissible under applicable law, by the guardian or legal
representative of the Participant or Outside Director.
(b) The term of each Award shall be for such period of months or years
from its Grant Date as may be determined by the Committee or as set forth
in the Plan; provided that in no event shall the term of any Incentive
Stock Option or any Stock Appreciation Right related to any Incentive Stock
Option exceed a period of ten (10) years from the Grant Date.
(c) In the event of a merger, reorganization, consolidation,
recapitalization, stock dividend or other change in corporate structure
such that Shares are changed into or become exchangeable for a larger or
smaller number of Shares, thereafter the number of Shares subject to
outstanding Awards granted to Participants and to any Shares subject to
Awards to be granted to Participants pursuant to this Plan shall be
increased or decreased, as the case may be, in direct proportion to the
increase or decrease in the number of Shares by reason of such change in
corporate structure; provided, however, that the number of Shares shall
always be a whole number, and the purchase price per Share of any
outstanding Options shall, in the case of an increase in the number of
Shares, be proportionately reduced, and, in the case of a decrease in the
number of Shares, shall be proportionately increased. The above adjustment
shall also apply to any Shares subject to Options granted to Outside
Directors pursuant to the provisions of Section 10.
(d) No Employee shall have any claim to be granted any Award under the
Plan and there is no obligation for uniformity of treatment of Employees or
Participants under the Plan.
(e) The prospective recipient of any Award under the Plan shall not,
with respect to such Award, be deemed to have become a Participant, or to
have any rights with respect to such Award, until and unless such recipient
shall have executed an Award Agreement, and otherwise complied with the
then applicable terms and conditions.
(f) All certificates for Shares delivered under the Plan pursuant to
any Award shall be subject to such stock-transfer orders and other
restrictions as the Committee may deem advisable under the rules,
regulations, and other requirements of the Securities and Exchange
Commission, any stock exchange upon which the Shares are then listed, and
any applicable federal or state securities law, and the Committee may cause
a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
<PAGE> 12
THE LUBRIZOL CORPORATION Page 12
1991 STOCK INCENTIVE PLAN
(g) Except as otherwise required in any applicable Award Agreement or
by the terms of the Plan, Participants shall not be required, under the
Plan, to make any payment other than the rendering of services.
(h) The Company shall be authorized to withhold from any payment under
the Plan, whether such payment is in Shares or cash, all withholding taxes
due in respect of such payment hereunder and to take such other action as
may be necessary in the opinion of the Company to satisfy all obligations
for the payment of such taxes.
(i) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such arrangements
may be either generally applicable or applicable only in specific cases.
(j) Nothing in the Plan shall interfere with or limit in any way the
right of the Company or any Subsidiary to terminate any Participant's
employment at any time, nor shall the Plan confer upon any Participant any
right to continued employment with the Company or any Subsidiary.
SECTION 14. EFFECTIVE DATE AND TERM OF PLAN.
The Plan shall be effective as of April 22, 1991, and shall continue in
effect until terminated by the Board.
<PAGE> 1
Exhibit (10)(l)
THE LUBRIZOL CORPORATION
EXECUTIVE COUNCIL
DEFERRED COMPENSATION PLAN
1. PURPOSE. The purpose of this Executive Council Deferred Compensation Plan
(the "Plan") is to permit a member of the Executive Council (sometimes
hereinafter referred to as the "Member" or as the "Participant") who is employed
by The Lubrizol Corporation (the "Company"), to defer a portion of such Member's
compensation as provided in this Plan.
2. ADMINISTRATION. The Plan shall be administered by the Organization and
Compensation Committee of the Board of Directors of the Company (the
"Committee"). The Committee's interpretation and construction of all provisions
of the Plan shall be binding and conclusive upon all Participants and their
heirs and/or successors.
3. RIGHT TO DEFER COMPENSATION.
(a) A Member may, at any time prior to January 1 of a given calendar year,
elect, for one or more future successive calendar years (each a "Participation
Year"), to defer under the Plan a pre-selected fixed dollar amount or percentage
of such Member's variable compensation (the "deferred compensation"), if any,
under The Lubrizol Corporation Performance Pay Plan, ("Performance Pay Plan"),
if any, which such Participant may thereafter be entitled to receive for
services performed during each elected Participation Year.
(b) The election under this Section 3 shall take effect on the first day of
the first elected Participation Year and such election shall be irrevocable for
any elected Participation Year after such Participation Year shall have
commenced.
(c) Notwithstanding paragraphs (a) and (b), when an individual Member first
becomes eligible to participate in the Plan, the newly eligible Member may make
the election under this Section 3 to defer the specified compensation for
services to be performed subsequent to the date specified in the election and
for the remainder of the calendar year in which the election under this Section
3 is made, provided that such election is made within 30 days after the date
that the Member is notified of the Member's eligibility.
(d) All elections under this Plan shall be made by written notice (on a
form provided by the Company) specifying (i) the number of calendar years, one
or more, during which the election shall apply, and (ii) the deferred
compensation, if any, determined under paragraph (a).
(e) A Participant may designate that the election under this Section 3
shall remain in effect until the Participant, on a prospective basis, withdraws
the election or changes the amount to be deferred. Any notice of the withdrawal
or change in the amount of the election shall be effective on the first day of
the calendar year following the date on which such notice is given; PROVIDED
THAT, such notice shall not change, alter or terminate the deferral of the
Member's participation in the Performance Pay Plan
1
<PAGE> 2
for the year in which such notice of withdrawal is given which, except for the
deferral, would be payable in the calendar year following the date on which such
notice of withdrawal is given. Notwithstanding paragraph (d) and the first
sentence of this paragraph (e), any variable compensation earned after the end
of the first month in which a Participant under this Plan no longer is a Member,
as defined in Section 1, but continues to be employed by the Company, shall not
be deferred, PROVIDED HOWEVER, the balance in the Participant's STOCK DEFERRAL
ACCOUNTS shall continue to be held and administered pursuant to the Plan.
(f) All notices by a Participant under the Plan shall be in writing and
shall be given to the Company's Vice President, Human Resources.
4. STOCK DEFERRAL ACCOUNTS.
(a) At the close of business of the day on which the Performance Pay Plan
deferred compensation would have been payable to the Participant in the absence
of the election under the Plan to defer payment thereof, there shall be credited
to a separate STOCK DEFERRAL ACCOUNT for Participant full and fractional stock
equivalent units ("Units") which shall be established as hereinafter provided
and shall be maintained for each Participant on the Company's records.
(b) The number of full and fractional Units that shall be credited to a
separate STOCK DEFERRAL ACCOUNT for the Participant shall be determined by:
(i) Dividing the deferral compensation by the average closing price
for Lubrizol Common Shares ("Shares") on the New York Stock
Exchange ("NYSE") composite transactions reporting system
("composite tape") for the ten trading days immediately prior to
the date described in paragraph (a); and
(ii) multiplying the quotient determined in subparagraph (i) by 1.25.
(c) To the extent that, at the time Units are credited to a STOCK DEFERRAL
ACCOUNT of a Participant, any federal, state or local payroll withholding tax
applies (e.g., Medicare withholding tax), the Participant shall be responsible
for the payment of such amount to the Company and the Company shall promptly
remit such amount to the proper taxing authority.
(d) The amount of deferred compensation used in the formula set forth in
paragraph (b) shall not constitute a sum due and owing to Participant. Such
amount shall be used solely as part of the formula to determine the number of
full and fractional Units that are the equivalent of Shares.
(e) As of each dividend record date established by the Company for the
payment of cash dividends with respect to its Shares, the Company shall credit
each STOCK DEFERRAL ACCOUNT of a Participant with an additional number of whole
and/or fractional Units equal to:
2
<PAGE> 3
(i) the product of (x) the dividend per Share which is payable with
respect to such dividend record date, multiplied by (y) the number
of whole and fractional Units credited to the STOCK DEFERRAL
ACCOUNT of Participant as of such record date;
DIVIDED BY
----------
(ii) the closing price of a Share on the dividend record date (or if
Shares were not traded on that date, on the next preceding day on
which Shares were so traded), as reported on the NYSE-composite
tape.
(f) At no time prior to actual delivery of Shares pursuant to the Plan,
shall the Company be obligated to purchase or reserve Shares for delivery to
Participant and the Participant shall not be a shareholder nor have any of the
rights of a shareholder with respect to the Units credited to the STOCK DEFERRAL
ACCOUNTS of a Participant.
5. PAYMENT OF DEFERRED COMPENSATION.
(a) All Units credited to a separate STOCK DEFERRAL ACCOUNT of Participant,
including dividend equivalents thereon, shall be distributed to the Participant
at the end of three years from the first date of Units were credited to the
separate STOCK DEFERRAL ACCOUNT of the Participant under Section 4(a); provided,
however, that if a Participant's employment is terminated for any reason other
than retirement or death, the Units credited to a separate STOCK DEFERRAL
ACCOUNT of Participant as of the Participant's termination of employment date,
including the dividend equivalents thereon, shall be distributed to the
Participant within 30 days of such termination of employment.
(b) Payment to Participant shall be made in Shares equal to the number of
whole Units credited to the STOCK DEFERRAL ACCOUNT of Participant which are
payable in accordance with Section 5(a). Any fractional number of Units shall be
paid in cash in lieu of Shares.
(c) To the extent that, at the time Shares are distributed to a
Participant, any federal, state or local payroll withholding tax applies, the
Participant shall be responsible for the payment of such amount to the Company
and the Company shall promptly remit such amount to the proper taxing authority;
provided that, the Committee may adopt a policy to permit the Participant to
direct that all or a part of such withholding taxes may be paid by withholding
shares from the distribution to Participant.
(d) In the event a Participant dies prior to receiving payment of the
entire amount in any STOCK DEFERRAL ACCOUNT of Participant, the unpaid balance
shall be paid to such beneficiary as the Participant may have designated in
writing to the Vice President, Human Resources, of the Company as the
beneficiary to receive any such post-death distribution under the Plan or, in
the absence of such written designation, to the Participant's legal
representative or to the beneficiary designated in the Participant's last will
as the one to receive such distributions. Distributions subsequent to the death
of a Participant may be made either in a lump sum in accordance with Section
5(a) and (b) or earlier, as determined by the Committee.
3
<PAGE> 4
(e) To the extent the Committee deems necessary, the Shares distributed to
a Participant pursuant to Section 5(a) and (b) or 6(a) or to a successor
pursuant to Section 5(d) may contain such restrictions on the right of immediate
transfer as the Committee may reasonably determine.
6. ACCELERATION OF PAYMENTS.
(a) The Committee may accelerate the distribution of part or all of a
Participant's STOCK DEFERRAL ACCOUNT for reasons of severe financial hardship.
For purposes of the Plan, severe financial hardship shall be deemed to exist in
the event the Committee determines that a Participant needs a distribution to
meet immediate and heavy financial needs resulting from a sudden or unexpected
illness or accident of the Participant or a member of the Participant's family,
loss of the Participant's property due to casualty, or other similar
extraordinary and unforeseeable circumstance arising as a result of events
beyond the control of the Participant. A distribution based on financial
hardship shall not exceed the amount required to meet the immediate financial
need created by the hardship.
7. NON-ASSIGNABILITY. None of the rights or interests in a Participant's STOCK
DEFERRAL ACCOUNT shall, at any time prior to actual payment or distribution
pursuant to the Plan, be assignable or transferable in whole or in part, either
voluntarily or by operation of law or otherwise, and such rights and interest
shall not be subject to payment of debts by execution, levy, garnishment,
attachment, pledge, bankruptcy or in any other manner; provided that, upon the
occurrence of any such assignment or transfer or the attempted assignment or
transfer, all payments under Section 5 shall be payable in the sole and
unrestricted judgment and discretion of the Committee, as to time and amount,
and shall be distributable to the person who would have received the payment but
for this Section 7 only at such time or times and in such amounts as the
Committee, from time to time, and in its sole and unrestricted judgment and
discretion, shall determine. Should an event covered by this Section 7 occur
prior to the death of a Participant, the balance, if any, in the Participant's
STOCK DEFERRAL ACCOUNT shall, after such death, be thereafter distributed as
provided in Section 5(c) subject to the provisions of this Section 7.
8. PLAN TO BE UNFUNDED. The Company shall be under no obligation to segregate or
reserve any funds or other assets for purposes relating to the Plan and, except
as set forth in this Plan, no Participant shall have any rights whatsoever in or
with respect to any funds or other assets held by the Company for purposes of
the Plan or otherwise. Each Participant's STOCK DEFERRAL ACCOUNT maintained for
purposes of the Plan merely constitutes a bookkeeping entry on records of the
Company, constitutes the unsecured promise and obligation of the Company to make
payments as provided herein, and shall not constitute any allocation whatsoever
of any cash or other assets of the Company or be deemed to create any trust or
special deposit with respect to any of the Company's assets.
9. MISCELLANEOUS. In the event of any change in the number of outstanding Shares
by reason of any stock dividend, stock split up, recapitalization, merger,
consolidation, exchange of shares or other similar corporate change, the number
of Units in each
4
<PAGE> 5
separate STOCK DEFERRAL ACCOUNT of a Participant shall be appropriately adjusted
to take into account any such event.
10. AMENDMENT. The Board of Directors of the Company may, from time to time,
amend or terminate the Plan, provided that no such amendment or termination of
the Plan shall adversely affect a Participant's STOCK DEFERRAL ACCOUNT as it
existed immediately before such amendment or termination or the manner of
distribution thereof, unless such Participant shall have consented thereto in
writing. Notice of any amendment or termination of the Plan shall be given
promptly to all Participants.
11. PLAN IMPLEMENTATION. This Plan is adopted and effective on the 1st day of
January, 1997.
-END-
5
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 11
THE LUBRIZOL CORPORATION
Computation of Per Share Earnings
(In Thousands, Except Per Share Data)
The computation of primary earnings per share and fully diluted earnings per
share is as follows:
For the Year Ended December 31
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Average shares outstanding
for computation of primary
earnings per share 60,694 63,840 65,737
Add adjustment to treat
shares for options exercised
as if such shares were out-
standing during the entire
year 52 37 183
Add equivalent shares for
unexercised options at end
of year (A) 213 352 473
------ ------ ------
Average shares outstanding
for computation of fully
diluted earnings per share 60,959 64,229 66,393
====== ====== ======
Primary earnings per share $2.80 $2.37 $2.67
===== ===== =====
Fully diluted earnings per
share (B) $2.79 $2.36 $2.64
===== ===== =====
<FN>
NOTES: (A) Computed under the "Treasury Stock Method" using the higher of
quoted ending or average market price.
(B) Fully diluted earnings per share have not been presented in
the consolidated statements of income because the dilutive
effect is less than 3%.
</TABLE>
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 12
THE LUBRIZOL CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(all amounts except ratios are shown in thousands)
1996 1995 1994 1993 1992
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Pretax income $250,608 $225,574 $251,459 $119,651 $177,144
Deduct earnings of less
than 50% owned affiliates
(net of distributed
earnings) included in
pretax income (48) (1,384) (871) (2,355) 9
Add losses of less than 50%
owned affiliates included
in pretax income 56 1,808 490 21,063 2,769
Add fixed charges net of
capitalized interest 10,955 10,376 3,149 4,154 3,615
Add previously capitalized
interest amortized during
period 968 1,096 452 272 162
-------- -------- -------- -------- --------
"Earnings" $262,539 $237,470 $254,679 $142,785 $183,699
======== ======== ======== ======== ========
Gross interest expense
including capitalized
interest ("Fixed Charges") $ 14,010 $ 14,693 $ 6,922 $ 6,292 $ 4,981
Ratio of earnings to
fixed charges 18.7 16.2 36.8 22.7 36.9
Special adjustments:
- --------------------
"Earnings" $262,539 $237,470 $254,679 $142,785
Plus asset impairment
and special charges 9,489 86,303
Less gains on investments (53,280) (38,459) (41,235) (42,443)
-------- -------- -------- --------
Adjusted "Earnings" $209,259 $208,500 $213,444 $186,645
======== ======== ======== ========
Ratio of adjusted earnings
to fixed charges 14.9 14.2 30.8 29.7
</TABLE>
<PAGE> 1
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Lubrizol Corporation is a full-service supplier of performance chemicals and
products to diverse markets worldwide. These specialty chemical products are
created through the application of advanced chemical and mechanical technologies
to enhance the performance, quality and value of the products in which they are
used. The company develops, produces and sells specialty additive systems for
gasoline and diesel engine lubricating oils, automatic transmission fluids, gear
oils, marine and tractor lubricants, fuel products and industrial fluids. The
company also supplies coatings additives, refinery and oil field chemicals,
specialty monomers, process chemicals, synthetic refrigerant compressor
lubricants, fluid metering devices and particulate emission trap devices.
As discussed in Note 17 to the financial statements, the company has been
engaged in initiatives since late 1993 to eliminate its separate business unit
structure and realign activities into one combined organization and to
consolidate intermediate production activities, improve the timeliness of
product development, simplify its product offerings and complete the divestiture
of its agribusiness investments. At December 31, 1996, these initiatives were
substantially complete as the number of intermediate production units has been
reduced by almost one-third and the number of employees reduced by nearly 9%
(versus an original target of 5%). Approximately $45 million of cash has been
expended through December 31, 1996, with future cash expenditures of $7 million
estimated to complete these initiatives. For the four-year period preceding
1994, the company's manufacturing, technology and selling and administrative
costs for its additives businesses were growing at an annual rate of
approximately 9%. Through implementation of these initiatives and aggressive
cost management, the cost trend beginning in 1994 has significantly changed.
Compared with the respective preceding year, 1994 costs increased 1%, 1995
increased 4% and 1996 costs decreased 6%. These initiatives reduced the rate of
increase in the operating costs of the company, and the results have exceeded
original expectations of annual savings approximating $50 million.
In 1996, there were announcements of acquisitions, mergers and joint ventures
within the lubricant industry. Customers are searching for stronger, longer-term
relationships with a few key suppliers for help in reducing costs and improving
the quality and performance of their products and services. This, along with a
weak demand for finished lubricants, is causing a more competitive marketplace
in certain product lines and continuing pressure on prices for the company's
products. The company expects this environment to continue in 1997. Although the
company generally experiences both gains and losses of business in the normal
course of its operations, such changes may occur more frequently under these
conditions and in periods when new industry specifications are being introduced.
The company has entered into and will continue to actively pursue strategic
relationships with finished lubricant suppliers in order to eliminate redundant
cost structures and jointly pursue business growth in developing regions of the
world. In addition, management has various initiatives relating to the cost
structure of the company, both short-term and long-term, to enhance its
competitiveness and market leadership position. Management believes that the
company is well positioned to compete in the current industry environment and
gain market share from these opportunities.
1996 RESULTS OF OPERATIONS
IN 1996, management of the company took action early in the year to improve its
cost structure as part of its continuing efforts to enhance its efficiency as an
additive supplier. Although revenues in 1996 declined 4% from 1995, this was
offset by the effects of aggressive cost management and management's focus on
strengthening of customer and supplier relationships. In addition, lower working
capital, significantly reduced capital expenditures and the sale of
non-strategic investments resulted in improved cash flow and enabled the company
to repurchase 7% of its common shares outstanding during 1996. As a result, the
company was able to grow net income and earnings per share, despite unfavorable
currency effects.
<TABLE>
<CAPTION>
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES (millions) $1,525.5 $1,599.0 $1,663.6 $1,597.6
</TABLE>
Consolidated revenues were $1.60 billion in 1996, a decrease of $66 million, or
4%, from record 1995 levels. Volume in 1996 was equal with 1995 despite the
introduction of a new industry specification discussed below. Revenues decreased
2% due to price/mix effects and 1% due to unfavorable currency effects. In
addition, the sale of the specialty vegetable oil business in September 1996
reduced consolidated revenues by 1% as compared with 1995.
During 1996, new passenger car engine oil additives were introduced to meet a
new U.S. industry specification. Most of the company's customers converted to
this new specification by September 1996. This new specification required
approximately 10% less additive than the prior specification, and the company
estimates that it negatively impacted annual sales volume in North America by 2%
in 1996 (1% worldwide).
THE LUBRIZOL CORPORATION 16
<PAGE> 2
However, other volume gains, primarily in heavy duty engine oils, more than
offset the impact from the new specification and overall volume in North
America increased 1% over 1995. Internationally, volume declined 1%, as growth
in Asia-Pacific was offset by lower volume in Western Europe.
<TABLE>
<CAPTION>
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
GROSS PROFIT (millions) $485.4 $520.7 $532.4 $509.5
</TABLE>
Gross profit (sales less cost of sales) of $509.5 million was $23.0 million, or
4%, lower in 1996 compared with 1995. Unfavorable currency effects accounted for
one-half of this decline with the balance attributable to lower revenues.
However, the company aggressively managed its procurement costs of raw materials
and continued its cost management efforts under the manufacturing
rationalization initiative discussed below. These efforts lowered the cost of
production to maintain gross profit as a percent of sales at 32% for 1996.
The company has continued to lower its operating costs through aggressive cost
management. This included a worldwide freeze on salary increases and hiring
throughout all of 1996 and the manufacturing rationalization and organizational
realignment initiatives that began in 1993. Employee levels, excluding
acquisitions and divestitures during the year, were reduced by nearly 6% at
December 31, 1996, compared with December 31, 1995, as retiring or departing
employees were not replaced. The company's manufacturing costs and selling,
administrative and technology expenses in 1996 were each lower than in 1995 and,
in the aggregate, declined nearly 6%, or $40 million. Currency had a favorable
effect on costs and accounted for approximately 25% of this reduction. In 1997,
the company has eliminated the freeze on salary increases.
<TABLE>
<CAPTION>
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
RESEARCH TESTING & DEVELOPMENT
(millions) $171.5 $165.5 $179.6 $161.0
</TABLE>
Research, testing and development expenses (technology expenses) decreased 10%
in 1996 compared with 1995. In addition to the effects of cost management
strategies discussed above, the decrease was due to reduced testing
requirements for product specifications primarily within driveline and engine
oils. The effect of currency on technology expenses was not significant.
Product standards change periodically as engine and transmission designs
are improved by the equipment manufacturers to meet new emissions, efficiency,
durability and other performance factors. The company expects additional new
performance specifications in 1998 for heavy-duty engine oils and, in 2000,
for passenger car engine oils. These changes will influence the timing and
amount of technology expenses in the future.
Primarily as a result of the above factors, total costs and expenses declined
$65.5 million in 1996, offsetting the revenue decline for the year.
During 1996, the company completed the divestiture of substantially all of its
agribusiness assets comprised of its equity investment in Mycogen Corporation
and the assets of the company's wholly-owned subsidiary, SVO Specialty Products,
Inc. (SVO). These transactions generated cash proceeds of $149.0 million and,
after losses on other investment activity, resulted in the $53.3 million ($34.6
million or $.57 per share after taxes) gain on investments. The $38.5 million
gain ($.39 per share after taxes) recognized in 1995 was from the sale of
Genentech common stock. (See Note 8 to the financial statements.) The company
has substantially liquidated its non-strategic investments and does not
anticipate significant investment gains in 1997.
The company transacts business in over 100 countries and has a number of
operating facilities in countries outside of the United States. As a result, the
company is subject to business risks inherent in non-U.S. activities, including
political uncertainty, import and export limitations, exchange controls and
currency fluctuations. The company believes risks related to its foreign
operations are mitigated due to the political and economic stability of the
countries in which its largest foreign operations are located. While changes in
the dollar value of foreign currencies will affect earnings from time to time,
the longer term economic effect of these changes should not be significant given
the company's net asset exposure, currency mix and pricing flexibility.
Generally, the income statement effect of changes in the dollar value of foreign
currencies is partially or wholly offset by the company's ability to make
corresponding price changes in local currency. The company's consolidated net
income will generally benefit as foreign currencies increase in value compared
with the U.S. dollar and will generally decline as foreign currencies decrease
in value. The U.S. dollar strengthened during 1996 as compared with exchange
rates in effect during 1995, particularly against the French franc, German
deutsche mark and Japanese yen, causing an unfavorable effect on 1996 net income
of $4.9 million or $.08 per share.
Interest expense, net of interest income, declined $2.4 million in 1996 compared
with 1995. Proceeds collected from the sale of investments were used to
temporarily reduce commercial paper borrowings and acquire short-term
investments until used in the company's share repurchase program. The average
daily balance of total debt outstanding during 1996 was $188 million as compared
with $203 million for 1995.
17 THE LUBRIZOL CORPORATION
<PAGE> 3
As a result of the factors discussed above and the 1995 provision for asset
impairment (discussed below), 1996 net income was $169.8 million, an increase of
12% or $18.2 million from 1995. Earnings per share for 1996 was $2.80, or 18%
higher than in 1995 and reflected the impact of the company's share repurchase
program. Excluding the gains on investments from both years and the provision
for asset impairment in 1995, net income increased to $135.2 million from $132.8
million in 1995, a 2% increase. The corresponding earnings per share of $2.23 in
1996 was a 7% increase from the $2.08 earnings per share in 1995.
1995 RESULTS OF OPERATIONS
IN 1995, the company achieved record revenues but, despite a strong first half,
annual earnings declined from the record earnings of 1994. As discussed below,
the primary factors contributing to the 1995 results were lower demand for
engine oil additives particularly during the second half of 1995, the U.S.
Government trade restrictions regarding sales to certain customers in the Middle
East and the inability to maintain profit margins during a period of rising raw
material costs.
Consolidated revenues were $1.66 billion, an increase of $64.6 million, or 4%,
in 1995 compared with 1994. Price increases implemented in early 1995 and a more
favorable product mix increased 1995 revenues by 3% and the translation of
various international currencies, which strengthened during the period when
compared with the U.S. dollar, increased revenues by 3%. Volume declined 2% from
the 1994 level. Sequentially, revenues in the second half of 1995 were 5% lower
than the first half due to lower volume (3%) and unfavorable price/product mix
(2%).
For the year, sales volume declined in 1995 compared with 1994, principally in
international markets. North American volume declined less than 1% from 1994.
International volume declined 3% mainly because of the cessation of spot
business with certain customers in the Middle East due to a U.S. Presidential
Order restricting such trade. Excluding from the comparison this 1994 spot
business, which occurred during the first half of the year, international volume
increased 1%, and worldwide volume in 1995 was even with 1994. Sequentially,
volume declined 3% in North America and 4% internationally in the second half
compared with the first half of 1995 as demand for engine oil lubricants in
North America and Europe weakened, causing lower additive shipment volumes.
Gross profit increased 2% to $532.4 million in 1995 from $520.7 million in 1994.
Despite lower volume, the amount of gross profit increased as higher average
selling prices, aided by favorable currency and mix, more than offset an
increase in average material cost of 9%, over half of which was due to the
effects of currency and mix. However, gross profit as a percent of sales
declined to 32.1% in 1995 from 32.7% in 1994 as raw material costs increased
faster than selling prices and, combined with slightly higher manufacturing
costs and lower volumes, negatively impacted margin percentage. Sequentially,
gross profit percentage declined to 30.5% in the second half of 1995 compared
with 33.6% in the first half due to the effect of unfavorable price/mix, less
favorable currency, higher raw material costs and lower volume.
The company's manufacturing rationalization and organizational realignment
initiatives have slowed the rate of increase in the company's cost and expenses.
The company's manufacturing expenses, as well as its selling and administrative
expenses, increased 3% in 1995 as compared with 1994. Excluding increases in
expenses due to currency translation and an acquisition made during 1995,
manufacturing costs and selling and administrative expenses were each level with
the 1994 amounts.
Technology expenses increased 9% to $179.6 million. Technology expenses
increased, as anticipated, due to worldwide testing programs for the engine
oils, driveline oils and fuel products areas together with a greater emphasis on
longer-term strategic research.
Primarily as a result of the above factors, total cost and expenses increased
$7.0 million more than the increase in total revenues in 1995.
The company recorded a provision for asset impairment of $9.5 million ($.10 per
share after taxes) in the fourth quarter of 1995. This charge related primarily
to an intermediate processing unit that became permanently impaired due to a
change in product formulation caused by a new industry-wide product
specification.
The company sold all of its remaining shares of Genentech, Inc. common stock
during the first half of 1995 and realized a pretax gain of $38.5 million ($.39
per share after taxes). During 1994, the company had a pretax gain on the sale
of Genentech common stock of $41.2 million ($.41 per share after taxes).
Other income - net, was $7.1 million in 1995 compared with $7.3 million in 1994
(see Note 9 to the financial statements). Other income was impacted by equity
losses recognized from the company's investment in Mycogen Corporation and by
other transactions involving Mycogen. Mycogen's results are seasonal with the
majority of its income recorded in the first half of the calendar year and
losses recorded in the second half. The company recorded equity losses from
Mycogen of $5.4 million in 1995 compared with equity losses of $.1 million in
1994. In late 1995, the company recognized a noncash gain of $4.5 million,
representing an increase in the value of the company's ownership interest in the
net assets of Mycogen, when Mycogen issued new common shares to another
investor.
THE LUBRIZOL CORPORATION 18
<PAGE> 4
Interest expense increased $7.2 million in 1995 over 1994 as a result of higher
average debt outstanding to meet the requirements of the capital expenditure and
share repurchase programs. The average daily balance of total debt outstanding
during 1995 was $203 million as compared with $111 million for 1994.
As discussed previously, the company conducts a significant amount of its
business outside of the United States and is, therefore, subject to certain
related risks including currency fluctuations. During 1995, the U.S. dollar
weakened, primarily against the French franc, German deutsche mark and Japanese
yen, when compared with exchange rates in effect during the year 1994. This
resulted in 1995 net income being favorably impacted by approximately $.20 per
share.
As a result of the factors discussed above, income before income taxes decreased
10%, or $25.9 million, from 1994. The company's 1995 effective tax rate was
32.8% as compared with the 1994 rate of 30.2%, which was lower than normal due
to charitable donations of appreciated securities made by the company in 1994.
After application of the 1995 higher effective tax rate, net income was $151.6
million in 1995, a decrease of 14% or $24.0 million from 1994.
Excluding the gains realized from sale of Genentech common stock in 1995 and
1994 and the provision for asset impairment in 1995, net income decreased 11%
to $132.8 million in 1995 compared with $148.8 million in 1994. The
corresponding earnings per share of $2.08 in 1995 declined 8% compared with
$2.26 in 1994.
1994 RESULTS OF OPERATIONS
IN 1994, the company achieved record revenues and results of operations. As
discussed below, the primary factors contributing to 1994 results were higher
average selling prices, lower research, testing and development expenses and
better results from agribusiness investments.
In 1994, consolidated revenues were $1.6 billion, an increase of $73.5 million
or 5% from 1993. This increase was comprised of 4% higher average selling
prices, including currency, and 1% volume increases. Average selling prices
increased primarily as a result of price increases and new product
introductions. The company implemented price increases in the first quarter of
1994 to more fully recover the costs of product technology and the costs
resulting from increased requirements of environmental, health and safety
regulations at the company's facilities. Higher performing products, which carry
higher selling prices, were introduced late in 1993 to meet new passenger car
motor oil standards in the U.S. markets.
Gross profit increased 7% to $520.7 million in 1994 from $485.4 million in 1993.
The improvement in gross profit was primarily attributable to the positive
effects of implementing selling price increases, new product introductions and
growth from business development activities. These improvements were partially
offset by higher material costs in the second half of the year and higher
manufacturing costs. Gross profit as a percentage of sales increased to 32.7% in
1994 from 32.0% in 1993. Raw material prices increased during the last half of
1994, and at year-end were approximately 7% higher than the prior year.
Additionally, plant operating costs to comply with changing environmental,
health and safety regulations increased during 1994. The company was able to
manage the near-term impact of the higher raw material costs through operating
expense control.
Selling and administrative expenses increased less than 1% to $159.5 million in
1994. This increase was significantly lower than the company's previous
historical cost trend because of lower legal expenses and a decline in the
number of employees as a result of early retirements related to the company's
realignment initiative.
Research, testing and development expenses decreased $6.1 million or 4% to
$165.5 million in 1994. This decrease was primarily attributable to completion
in early 1994 of testing required for passenger car motor oil specification
upgrades, the decline in the number of employees resulting from realignment and
increased efficiencies in the product development process.
Primarily as a result of the above factors, consolidated revenues increased
$38.8 million more than the increase in total costs and expenses in 1994.
The company continued its program of selling its investment in Genentech common
stock. During 1994, the company sold shares of Genentech common stock resulting
in pretax gains of $41.2 million.
Other income - net increased $6.8 million primarily due to improved equity
earnings from the company's investment in Mycogen, including its agribusiness
joint venture, net of a gain on the sale of an agribusiness investment in 1993.
As a result of the above factors and a decrease in interest expense,
consolidated income before taxes increased $131.8 million from 1993. Excluding
the gain on the sales of Genentech stock and the 1993 special charge, income
before taxes increased $46.7 million or 29% from 1993.
The company made donations of Genentech common stock during 1994 (see Note 9 to
the financial statements) which reduced the company's 1994 effective tax rate by
2%. This benefit was nonrecurring.
Excluding gains on the sales of Genentech common stock, the 1993 special charge
($.83 per share after taxes) and accounting changes effective January 1, 1993,
relating to postretirement benefits and income taxes ($39.4 million or $.58 per
share after taxes), net income was $148.8 million in 1994 compared with $113.5
million in 1993, and the related earnings per share amounts improved by 35% to
$2.26 in 1994 from $1.67 in 1993. In 1994, there was not a significant net
earnings effect due to foreign currency fluctuations.
19 THE LUBRIZOL CORPORATION
<PAGE> 5
RETURN ON AVERAGE SHAREHOLDERS' EQUITY
RETURN ON AVERAGE SHAREHOLDERS' EQUITY was 20% in 1996, 18% in 1995 and 22% in
1994. Excluding gains on investments from each year and the 1995 asset
impairment charge, return on average shareholders' equity was 16% in 1996 and
1995 and 19% in 1994.
<TABLE>
<CAPTION>
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
RETURN ON EQUITY* (percent) 15% 19% 16% 16%
*(Before investment gains, the 1995 provision for asset impairment and the 1993
special charge and accounting changes.)
</TABLE>
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES
The company's cash flows for the years 1994 through 1996 are presented in the
consolidated statements of cash flows. Cash provided from operating activities
in 1996 increased 23%, or $43.6 million, to $231.0 million compared with $187.4
million generated in 1995. This increase is primarily attributable to the
benefits of the company's programs to modify its cost structure and reduce
operating costs and the reduction of inventory levels. Excluding cash and
short-term investments, working capital has been reduced by $40.6 million, or
12%, from December 31, 1995, approximately 50% of which was due to liquidation
of SVO inventories and receivables prior to the sale of its assets in September
1996.
<TABLE>
<CAPTION>
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH PROVIDED FROM OPERATING
ACTIVITIES (millions) $162.5 $156.8 $187.4 $231.0
</TABLE>
Over the past several years the company has divested its marketable securities,
primarily Genentech common stock, and its non-strategic assets, primarily
agribusiness assets. The after-tax proceeds from these activities have been used
in the company's share repurchase program discussed below. Proceeds from the
sale of investments for 1996 were comprised principally of $126.2 million from
the sale of Mycogen and $22.8 million from the sale of SVO assets. Proceeds from
the sale of investments in 1995 and 1994 were from the sale of Genentech common
stock. (See Note 8 to the financial statements.)
Capital expenditures for 1996 were $94.3 million, one-half the level of 1995.
Capital expenditures during 1995 reached record levels, as the company completed
several large construction projects to enhance or maintain production
capabilities at plant facilities principally in the United States and France, as
well as investing in new corporate administrative and technical facilities. As
expected, the level of capital spending declined sharply in 1996 due to the
completion of these projects. Approximately 65% of 1996 capital expenditures
(and 70% of 1995) pertained to manufacturing plants to enhance or maintain
production capabilities, including maintaining facilities in compliance with
environmental and safety regulations. Capital spending for environmental and
safety projects totaled $8 million in 1996, $37 million in 1995 and $20 million
in 1994. Capital spending on environmental projects was substantially lower in
1996 compared with 1995 due to the timing of completion of the related projects.
Capital expenditures for 1997 are estimated at $110 million, including
approximately $30 million to be expended in 1997 as part of a multi-year project
to implement a new global computer-based information system.
In December 1996, the company acquired CPI Engineering Services, Inc., a
formulator of specialty synthetic lubricants used by original equipment
manufacturers in air and refrigeration compressors, for $24.6 million in cash.
Also in 1996, the company invested $2.7 million in two joint ventures in China.
The company is prepared to invest further capital in China during 1997 to
strengthen the company's position in this rapidly growing market.
<TABLE>
<CAPTION>
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
CAPITALIZATION (millions)
EQUITY $732.2 $832.0 $849.0 $819.4
TOTAL DEBT $69.6 $167.9 $247.1 $198.5
</TABLE>
The company had net repayments on short- and long-term debt totaling $43.6
million, which when combined with currency effects, reduced total borrowings
outstanding by $48.6 million, or 20%, at December 31, 1996, versus 1995. This
decrease was the result of improved cash flow and lower capital expenditures. In
June 1995, the company publicly issued $100 million of 7.25%, 30-year debentures
and used the net proceeds to repay a portion of the commercial paper borrowings
then outstanding. Debt as a percent of capitalization (shareholders' equity plus
short- and long-term debt) declined to 20% at December 31, 1996, compared with
23% at December 31, 1995. Management plans to maintain the percentage of debt to
capitalization within a range of 20 to 25 percent to leverage its financial
strength while still retaining financial flexibility for future opportunities.
The company maintains an active share repurchase program. In 1996, the company
repurchased 4.5 million, or 7% of its shares outstanding at the beginning of the
year, for $135.2 million using the after-tax proceeds generated from the sale of
its Mycogen investment and SVO assets. In 1995 and 1994, the company expended
$66.6 million and $68.3 million, respectively, to repurchase its shares. Since
the beginning of 1994, the company has repurchased 13% of its shares
outstanding. The company plans to expend at least $40 million during 1997 in its
repurchase program, and at December 31, 1996, had 2.6 million shares remaining
under its current share repurchase authorization.
THE LUBRIZOL CORPORATION 20
<PAGE> 6
Primarily as a result of these activities and the payment of dividends, total
debt, net of cash and short-term investments, decreased $73.1 million to $143.4
million at December 31, 1996.
The company's financial position continues to be strong with a ratio of current
assets to current liabilities of 2.6 to 1 at December 31, 1996, compared to 2.4
to 1 at December 31, 1995. At December 31, 1996, the company had unused
revolving credit agreements and other credit lines aggregating $95 million. As
described in Note 5 to the financial statements, the company has the ability to
refinance up to $56.6 million of its outstanding commercial paper on a long-term
basis under existing revolving credit agreements. Management believes the
company's credit facilities and internally generated funds will be sufficient to
meet its future capital needs.
The company is involved in patent litigation with Exxon Corporation in various
countries. Refer to Note 18 to the financial statements for further discussion
regarding this litigation.
CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations and the letter "To Our Shareholders" from W.
G. Bares, Chairman, President, and Chief Executive Officer of the company,
contains forward-looking statements within the meaning of the federal securities
laws. As a general matter, forward-looking statements are those focused upon
future plans, objectives or performance as opposed to historical items and
include statements of anticipated events or trends and expectations and beliefs
relating to matters not historical in nature. Such forward-looking statements
are subject to uncertainties and factors relating to the company's operations
and business environment, all of which are difficult to predict and many of
which are beyond the control of the company, that could cause actual results of
the company to differ materially from those matters expressed in or implied by
such forward-looking statements.
The company believes that the following factors, among others, could affect its
future performance and cause actual results of the company to differ materially
from those expressed or implied by forward-looking statements made by or on
behalf of the company:
- - the overall demand for lubricant additives on a worldwide basis, which has
been slowing in mature markets such as North America and Europe;
- - the lubricant additive demand in Asia-Pacific and Latin America, which has
been growing at significantly higher rates than mature markets, along with
lubricant additive demand in developing regions such as China and the
former Soviet Union, which geographic areas are an announced focus of the
company's activities;
- - technology developments that affect longer-term trends for lubricant
additives, such as: improved engine design, fuel economy, longer oil drain
intervals and emission system compatibility;
- - the company's success at continuing to develop proprietary technology to
meet or exceed new industry performance standards and individual customer
expectations;
- - the frequency of change in industry performance standards, which affects
the level and timing of the company's technology costs, the product life
cycles and the relative quantity of additives required for new
specifications;
- - the rate of progress in reducing complexities and conversion costs and in
modifying the company's cost structure to maintain and enhance its
competitiveness;
- - the success of the company in strengthening relationships with lubricant
additive customers, growing sales at targeted accounts, and expanding
geographically;
- - the extent to which the company is successful in expanding beyond its core
lubricant additives businesses;
- - the recoveries, judgments, costs, and future impact of legal proceedings,
including those relating to intellectual property litigation with Exxon
Corporation and its affiliates;
- - the potential impact of consolidation among lubricant additive
manufacturers;
- - the relative degree of price pressure for lubricant additives;
- - the cost, availability and quality of raw materials, including
petroleum-based products, required for the manufacture of lubricant
additives;
- - the effects of fluctuations in currency exchange rates upon the company's
reported results from its international operations, together with
noncurrency risks of investing in and conducting significant operations in
foreign countries, including those relating to political, social, economic,
and regulatory factors; and
- - changes in significant government regulations affecting environmental
compliance.
21 THE LUBRIZOL CORPORATION
<PAGE> 7
INDEPENDENT AUDITORS' REPORT DELOITTE & TOUCHE LLP LOGO
To the Shareholders and Board of Directors of
The Lubrizol Corporation
We have audited the accompanying consolidated balance sheets of The Lubrizol
Corporation and its subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Lubrizol Corporation and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
February 4, 1997
THE LUBRIZOL CORPORATION 22
<PAGE> 8
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year Ended December 31
----------------------------------------------
(In Thousands of Dollars Except Per Share Data) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales .................................................. $1,592,877 $1,657,821 $1,592,750
Royalties and other revenues ............................... 4,685 5,773 6,244
---------- ---------- ----------
Total revenues ...................................... 1,597,562 1,663,594 1,598,994
Cost of sales .............................................. 1,083,394 1,125,386 1,072,025
Selling and administrative expenses ........................ 158,633 163,493 159,459
Research, testing and development expenses ................. 160,978 179,649 165,480
---------- ---------- ----------
Total cost and expenses ............................. 1,403,005 1,468,528 1,396,964
Provision for asset impairment ............................. (9,489)
Gain on investments ........................................ 53,280 38,459 41,235
Other income - net ......................................... 6,012 7,150 7,332
Interest income ............................................ 7,714 4,764 4,011
Interest expense ........................................... (10,955) (10,376) (3,149)
---------- ---------- ----------
Income before income taxes ................................. 250,608 225,574 251,459
Provision for income taxes ................................. 80,806 73,959 75,884
---------- ---------- ----------
Net income ................................................. $ 169,802 $ 151,615 $ 175,575
========== ========== ==========
Net income per share ....................................... $2.80 $2.37 $2.67
===== ===== =====
Dividends per share ........................................ $ .97 $ .93 $ .89
===== ===== =====
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
23 THE LUBRIZOL CORPORATION
<PAGE> 9
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31
---------------------------
(In Thousands of Dollars) 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and short-term investments .............................. $ 55,073 $ 30,579
Receivables .................................................. 238,401 255,377
Inventories .................................................. 251,905 310,539
Other current assets ......................................... 39,720 43,199
----------- ----------
Total current assets .................................. 585,099 639,694
----------- ----------
Property and equipment - at cost ............................. 1,529,187 1,477,764
Less accumulated depreciation ................................ 821,873 784,798
----------- ----------
Property and equipment - net .......................... 707,314 692,966
----------- ----------
Investments in nonconsolidated companies ..................... 29,821 100,655
Other assets ................................................. 79,881 58,705
----------- ----------
TOTAL .......................................... $ 1,402,115 $1,492,020
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt ........ $ 40,871 $ 52,685
Accounts payable ............................................. 99,676 125,120
Income taxes and other current liabilities ................... 86,563 87,786
----------- ----------
Total current liabilities ............................. 227,110 265,591
----------- ----------
Long-term debt ............................................... 157,628 194,423
Postretirement health care obligation ........................ 105,463 102,653
Noncurrent liabilities ....................................... 47,284 53,223
Deferred income taxes ........................................ 45,254 27,147
----------- ----------
Total liabilities ..................................... 582,739 643,037
----------- ----------
Contingencies and commitments
Preferred stock without par value - unissued
Common shares without par value - outstanding 58,522,676
shares in 1996 and 62,951,288 shares in 1995 .............. 78,534 83,254
Retained earnings ............................................ 744,310 762,747
Other shareholders' equity ................................... (3,468) 2,982
----------- ----------
Total shareholders' equity ............................ 819,376 848,983
----------- ----------
TOTAL .......................................... $ 1,402,115 $1,492,020
=========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
THE LUBRIZOL CORPORATION 24
<PAGE> 10
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31
-------------------------------------------
(In Thousands of Dollars) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED FROM (USED FOR):
OPERATING ACTIVITIES:
Net income ............................................... $ 169,802 $ 151,615 $ 175,575
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization ....................... 80,964 74,247 65,934
Deferred income taxes ............................... 23,074 16,899 19,797
Provision for asset impairment ...................... 9,489
Gain on investments ................................. (53,280) (38,459) (41,235)
Change in current assets and liabilities, net of
acquisitions and dispositions:
Receivables ..................................... 9,834 (386) (20,682)
Inventories ..................................... 46,658 (7,885) (3,150)
Accounts payable and accrued expenses ........... (38,693) (3,768) (17,745)
Other current assets ............................ (1,610) (175) (12,921)
Change in noncurrent liabilities ...................... (1,317) (2,486) 3,246
Other items - net ..................................... (4,430) (11,729) (11,982)
--------- --------- ---------
Total operating activities ................. 231,002 187,362 156,837
INVESTING ACTIVITIES:
Proceeds from sale of investments ........................ 149,603 40,160 43,582
Capital expenditures ..................................... (94,297) (189,259) (160,527)
Acquisitions and investments in nonconsolidated companies (27,309) (3,521) (1,734)
Other - net .............................................. 4,357 3,654 1,488
--------- --------- ---------
Total investing activities ................. 32,354 (148,966) (117,191)
FINANCING ACTIVITIES:
Short-term borrowing (repayment) ......................... (52,890) (18,676) 38,359
Long-term borrowing ...................................... 28,425 100,064 56,741
Long-term repayment ...................................... (19,141) (2,746) (2,370)
Dividends paid ........................................... (59,033) (59,414) (58,588)
Common shares purchased, net of options exercised ........ (133,926) (64,792) (64,372)
--------- --------- ---------
Total financing activities ................. (236,565) (45,564) (30,230)
Effect of exchange rate changes on cash .................. (2,297) 1,368 2,743
--------- --------- ---------
Net increase (decrease) in cash and short-term
investments ............................................ 24,494 (5,800) 12,159
Cash and short-term investments at the beginning of year . 30,579 36,379 24,220
--------- --------- ---------
Cash and short-term investments at the end of year ....... $ 55,073 $ 30,579 $ 36,379
========= ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
25 THE LUBRIZOL CORPORATION
<PAGE> 11
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Shareholders' Equity
-------------------------------------------
Number of Other
Shares Common Retained Shareholders'
Outstanding Shares Earnings Equity
- --------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 ....................... 66,590,028 $ 80,830 $ 683,269 $(31,863)
Net income 1994 .................................. 175,575
Cash dividends ................................... (58,588)
Change in unrealized gain on marketable
securities .................................... 23,169
Translation adjustment for 1994 .................. 22,141
Common shares - Treasury:
Shares purchased .............................. (2,007,721) (2,528) (65,723)
Shares issued upon exercise of stock options .. 208,210 3,879
Other ......................................... 54,043 1,878
---------- -------- --------- --------
BALANCE, DECEMBER 31, 1994 ....................... 64,844,560 84,059 734,533 13,447
Net income 1995 .................................. 151,615
Cash dividends ................................... (59,414)
Change in unrealized gain on marketable
securities ..................................... (23,169)
Translation adjustment for 1995 .................. 12,704
Common shares - Treasury:
Shares purchased .............................. (1,982,969) (2,604) (63,987)
Shares issued upon exercise of stock options .. 89,697 1,799
---------- -------- --------- --------
BALANCE, DECEMBER 31, 1995 ....................... 62,951,288 83,254 762,747 2,982
Net income 1996 .................................. 169,802
Cash dividends ................................... (59,033)
Translation adjustment for 1996 .................. (6,450)
Common shares - Treasury:
Shares purchased .............................. (4,496,427) (5,982) (129,206)
Shares issued upon exercise of stock options .. 67,815 1,262
---------- -------- --------- --------
BALANCE, DECEMER 31, 1996 ....................... 58,522,676 $ 78,534 $ 744,310 $ (3,468)
========== ======== ========= ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
THE LUBRIZOL CORPORATION 26
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS
(In Thousands of Dollars Unless Otherwise Indicated)
NOTE 1 - NATURE OF OPERATIONS
The Lubrizol Corporation is a full-service supplier of performance chemicals and
products to diverse markets worldwide. These specialty chemical products are
created through the application of advanced chemical and mechanical technologies
to enhance the performance, quality and value of the products in which they are
used. The company develops, produces and sells specialty additive systems for
gasoline and diesel engine lubricating oils, automatic transmission fluids, gear
oils, marine and tractor lubricants, fuel products and industrial fluids. The
company also supplies coatings additives, refinery and oil field chemicals,
specialty monomers, process chemicals, synthetic refrigerant compressor
lubricants, fluid metering devices and particulate emission trap devices.
The company's sales and receivables are concentrated in the oil and chemical
industries. The company's additive customers consist primarily of oil refiners
and independent oil blenders and are located in more than 100 countries.
Approximately 40% of the company's sales are made to customers in North America,
33% in Europe and 27% in Asia-Pacific, Middle East and Latin America. The ten
largest customers, most of which are international oil companies and a number of
which are groups of affiliated entities, comprised approximately 44% of
consolidated sales in 1996 and 1995 and 45% in 1994. Although the largest
single customer in each year accounted for 10% of sales in 1996 and 1995 and 9%
in 1994, these customers are made up of a number of separate entities that the
company believes make independent purchasing decisions.
NOTE 2 - ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts of
The Lubrizol Corporation and its majority-owned subsidiaries. For
nonconsolidated companies (affiliates), the equity method of accounting is used
when ownership, unless temporary, exceeds 20% and when the company has the
ability to exercise significant influence over the policies of the investee (see
Note 4).
ESTIMATES - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions pending completion of related events. These estimates and
assumptions affect the amounts reported at the date of the financial statements
for assets, liabilities, revenues and expenses and the disclosure of
contingencies. Actual results could differ from those estimates.
CASH EQUIVALENTS - The company generally invests its excess cash in short-term
investments with various banks and financial institutions. Short-term
investments are cash equivalents as they are part of the cash management
activities of the company and are comprised primarily of investments having
maturities when purchased of three months or less.
INVENTORIES - Inventories are stated at cost which is not in excess of market.
Cost of inventories is determined by the last-in, first-out (LIFO) method in the
United States and on the first-in, first-out (FIFO) method elsewhere.
DEPRECIATION AND AMORTIZATION - Accelerated depreciation methods are used in
computing depreciation on certain machinery and equipment which comprise
approximately 30% of the depreciable assets. The remaining assets are
depreciated using the straight-line method. The estimated useful lives are 10 to
40 years for buildings and land improvements and range from 3 to 20 years for
machinery and equipment. Amortization of intangible and other assets is on a
straight-line method over periods ranging from 5 to 25 years.
RESEARCH, TESTING AND DEVELOPMENT - Research, testing and development costs are
expensed when incurred. Research and development expenses, excluding testing,
were $93.4 million, $104.9 million and $90.7 million in 1996, 1995 and 1994,
respectively.
FOREIGN CURRENCY TRANSLATION - The assets and liabilities of non-U.S.
subsidiaries are translated into U.S. dollars at exchange rates in effect at the
balance sheet date. Operating results are translated at weighted average
exchange rates in effect during the period. Net unrealized translation gains
(losses) are recorded as a component of other shareholders' equity and totaled
$(3,468), $2,982 and $(9,722) at December 31, 1996, 1995 and 1994, respectively.
27 THE LUBRIZOL CORPORATION
<PAGE> 13
PER SHARE AMOUNTS - Net income per share has been computed by dividing net
income by the average number of common shares outstanding during the period. Net
income per share has not been adjusted for the effect of stock options as the
dilution effect would be less than 3% in any year.
NOTE 3 - INVENTORIES
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Finished products .......................... $ 88,176 $102,628
Products in process ........................ 77,910 96,061
Raw materials .............................. 66,590 89,267
Supplies and engine test parts ............. 19,229 22,583
-------- --------
$251,905 $310,539
======== ========
</TABLE>
Inventories on the LIFO method were 25% and 26% of consolidated inventories at
December 31, 1996 and 1995, respectively. The current replacement cost of these
inventories exceeded the LIFO cost at December 31, 1996 and 1995, by $49.1
million and $51.0 million, respectively. During 1996, the company sold its
specialty vegetable oil assets (see Note 8), which had inventories at December
31, 1995, of $29.6 million.
NOTE 4 - INVESTMENTS IN
NONCONSOLIDATED COMPANIES
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Investments carried at equity .............. $ 22,551 $ 60,029
Investments available-for-sale ............. 6,234
Investments carried at cost ................ 1,036 40,626
-------- --------
$ 29,821 $100,655
======== ========
</TABLE>
During 1996, the company sold its investment in Mycogen Corporation, including
its remaining interest in Agrigenetics, Inc. (AGI), a joint venture between the
company and Mycogen (see Note 8). At December 31, 1995, Mycogen-related
investments had book values of $40.3 million carried at equity and $31.5 million
carried at cost.
The company holds investments in securities of certain publicly traded
companies. At December 31, 1996, these investments were classified as
available-for-sale and their market values approximated their costs. At December
31, 1995, these investments were accounted for on the cost basis due to
restrictions placed on such securities.
NOTE 5 - SHORT-TERM AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Long-term debt consists of:
7.25% debentures, due 2025 ................. $ 100,000 $ 100,000
Debt supported by long-term
banking arrangements:
Commercial paper at weighted
average rates of approximately 6% ..... 56,625
6.5% Marine terminal refunding
revenue bonds, due 2000 ............... 18,375 18,375
Term loans:
Yen denominated, at 2.8% to 5.8%,
due 1997-2002 ......................... 26,232 21,508
Deutsche mark denominated,
at 6.8% due 1996 ...................... 16,748
Deutsche mark denominated,
at 4.9% due 1999 ...................... 16,884
Other (4.3% in 1996 and 7.1% in 1995) ...... 403 1,365
--------- ---------
161,894 214,621
Less current portion ....................... (4,266) (20,198)
--------- ---------
$ 157,628 $ 194,423
========= =========
Short-term debt consists of:
Commercial paper at weighted
average rates of approximately 6% ....... $ 34,200 $ 17,375
Other short-term debt at weighted
average rates of 3.3% and 2.1% .......... 2,405 15,112
Current portion of long-term debt .......... 4,266 20,198
--------- ---------
$ 40,871 $ 52,685
========= =========
</TABLE>
In June 1995, the company publicly issued debentures in the aggregate principal
amount of $100 million. These debentures are unsecured, senior obligations of
the company that mature on June 15, 2025, and bear interest at an annualized
rate of 7.25% payable semi-annually on June 15 and December 15 of each year. The
debentures are not redeemable prior to maturity and are not subject to any
sinking fund requirements.
Commercial paper debt is due within one year. The company has credit facilities,
which were unused at December 31, 1996, aggregating $95 million, including $75
million in committed revolving credit agreements which would permit the company
to borrow at or below the U.S. prime rate. These facilities permit the company
to refinance for a period beyond one year the amount due under the Marine
Terminal Refunding Revenue Bonds, whose bondholders have the right to put the
bonds back to the company, and up to $56.6 million of commercial paper
borrowings. Accordingly, the portion of this debt expected to remain outstanding
throughout the following year is classified as long-term at each balance sheet
date.
THE LUBRIZOL CORPORATION 28
<PAGE> 14
Amounts due on long-term debt are $4.3 million in 1997, $12.4 million in 1998,
$22.0 million in 1999, $20.9 million in 2000, $1.5 million in 2001 and $100.8
million thereafter.
The company has an interest rate swap agreement that effectively converts
variable rate interest payable on $18.4 million of Marine Terminal Refunding
Revenue Bonds due July 1, 2000, to a fixed rate of 6.5%. In addition, during
1995, the company entered into 10-year interest rate swap agreements, which
expire in March 2005, that exchange variable rate interest obligations on $50
million notional principal amount for a fixed payment obligation of 7.6% (see
Note 15).
Interest paid, net of amounts capitalized, amounted to $10.4 million, $9.8
million and $3.0 million during 1996, 1995 and 1994, respectively. The company
capitalizes interest on qualifying capital projects. The amount of interest
capitalized during 1996, 1995 and 1994 amounted to $3.0 million, $4.3 million
and $3.8 million, respectively.
NOTE 6 - OTHER BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
Receivables: 1996 1995
-------- --------
<S> <C> <C>
Customers ........................ $213,308 $221,557
Affiliates ....................... 6,582 9,993
Other ............................ 18,511 23,827
-------- --------
$238,401 $255,377
======== ========
</TABLE>
Receivables are net of allowance for doubtful accounts of $1.2 million in 1996
and $2.2 million in 1995. During 1996, the company sold its specialty vegetable
oil business which had receivables of $12.4 million at December 31, 1995 (see
Note 8).
<TABLE>
<CAPTION>
Property and Equipment: 1996 1995
---------- ----------
<S> <C> <C>
Land and improvements .................. $ 105,071 $ 101,457
Buildings and improvements ............. 274,420 264,580
Machinery and equipment ................ 1,081,850 1,002,678
Construction in progress ............... 67,846 109,049
---------- ----------
$1,529,187 $1,477,764
========== ==========
</TABLE>
In late 1996, the company began a multi-year project to implement a computer
system to support its global information processing and access needs. Direct
internal and external costs subsequent to the preliminary stage of this project
are being capitalized as property and equipment. Capitalized costs will be
amortized over the estimated useful life beginning when each site installation
or module is complete and ready for its intended use. Other capitalized
software, previously reported within Other Assets (cost of $30.7 million and
accumulated amortization of $14.6 million at December 31, 1995), has been
reclassified to conform with the current presentation.
Depreciation and amortization of property and equipment, including software, was
$78.7 million in 1996, $71.8 million in 1995 and $63.9 million in 1994.
<TABLE>
<CAPTION>
Other Assets: 1996 1995
------- -------
<S> <C> <C>
Goodwill and other intangibles ............. $46,585 $29,793
Deferred income taxes ...................... 4,149 9,928
Other ...................................... 29,147 18,984
------- -------
$79,881 $58,705
======= =======
</TABLE>
On December 11, 1996, the company purchased CPI Engineering Services, Inc. (CPI)
for cash of $24.6 million. CPI develops, formulates and markets lubricants
primarily for the air compressor and refrigeration markets. Goodwill of $16.0
million was recognized related to this acquisition and will be amortized on a
straight-line basis over 15 years. CPI's operating results are not material to
the company's consolidated financial statements.
Accumulated amortization of intangible and other assets was $12.2 million and
$9.9 million at December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Accounts Payable: 1996 1995
-------- --------
<S> <C> <C>
Trade .............................. $ 99,593 $118,639
Affiliates ......................... 83 6,481
-------- --------
$ 99,676 $125,120
======== ========
Income Taxes and
Other Current Liabilities: 1996 1995
-------- --------
Employee compensation .................... $ 35,463 $ 33,256
Income taxes ............................. 12,914 10,707
Taxes other than income .................. 10,893 13,912
Other .................................... 27,293 29,911
-------- --------
$ 86,563 $ 87,786
======== ========
Noncurrent Liabilities: 1996 1995
-------- --------
Employee benefits .................... $ 33,239 $ 33,998
Other ................................ 14,045 19,225
-------- --------
$ 47,284 $ 53,223
======== ========
</TABLE>
NOTE 7 - SHAREHOLDERS' EQUITY
The company has 147 million authorized shares consisting of 2 million shares of
Serial Preferred Stock, 25 million shares of Serial Preference Shares and 120
million Common Shares, each of which is without par value. The outstanding
Common Shares shown on the balance sheets exclude Common Shares held in treasury
of 27,673,218 and 23,244,606 at December 31, 1996 and 1995, respectively.
29 THE LUBRIZOL CORPORATION
<PAGE> 15
The company has a shareholder rights plan under which one right to buy one-half
Common Share has been distributed for each Common Share held. The rights may
become exercisable under certain circumstances involving actual or potential
acquisitions of 20% or more of the Common Shares by a person or affiliated
persons who acquire such stock without complying with the requirements of the
company's articles of incorporation. The rights would entitle shareholders,
other than such person or affiliated persons, to purchase Common Shares of the
company or of certain acquiring persons at 50% of then current market value. At
the option of the directors, the rights may be exchanged for Common Shares, and
may be redeemed in cash, securities or other consideration. The rights will
expire in 1997 unless earlier redeemed.
NOTE 8 - GAIN ON INVESTMENTS
During 1996, the company completed the divestiture of its former agribusiness
assets through the sale of its investments in Mycogen Corporation and AGI, and
the sale of substantially all the assets of SVO Specialty Products, Inc. (SVO),
a wholly-owned subsidiary. In January 1996, the company exchanged its remaining
interest in AGI and all of its Mycogen Series A Preferred Stock into Mycogen
Common Stock. In February 1996, the sale of the company's interest in Mycogen
was completed, and the company realized cash proceeds of $126.2 million and
recognized a pretax gain of $49.3 million, after transaction and other related
costs.
In January 1996, the company sold certain rights to its SVO oil seed technology
to Mycogen and recognized a pretax gain of $8.0 million. Cash proceeds were
collected of $2.0 million in January 1996 and $2.5 million in January 1997 with
$3.5 million due in January 1998. In September 1996, the company sold the assets
of SVO, excluding a seed crushing plant, for cash of $20.8 million. Net of a
$5.9 million provision to reduce the seed crushing plant to its estimated net
realizable value, no gain or loss has been recognized on this sale. SVO revenues
were $33.4 million in 1996 compared with $44.0 million in 1995. SVO operations
were not material to the company's financial position or results of operations.
The company recognized pretax gains on the transactions described above of $57.3
million, after transaction costs and other related expenses of $4.9 million.
Losses on other investment activity reduced the gain on investments to $53.3
million. On an after-tax basis these gains contributed $.57 per average share
outstanding for the year 1996.
During the first half of 1995, the company sold all of its remaining shares of
Genentech Inc. common stock and received proceeds of $40.2 million, generating
gross realized gains of $38.5 million. Sales of Genentech common stock generated
proceeds of $43.6 million and gross realized gains of $41.2 million in 1994. On
an after-tax basis these gains contributed $.39 per share in 1995 and $.41 per
share in 1994. The company determined the gross realized gains using the average
cost method. The investment in Genentech was reported at fair value in the
company's balance sheets, until sold, as investments available-for-sale, with
changes in unrealized gains recorded in other shareholders' equity.
NOTE 9 - OTHER INCOME
Other income - net consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- ------
<S> <C> <C> <C>
Equity earnings (losses)
of nonconsolidated
companies .................... $ 4,350 $(2,081) $2,972
Gain on donations of
Genentech stock .............. 13,967
Donations of Genentech
stock to The Lubrizol
Foundation ................... (14,581)
Gain on investee
stock issuance ............... 4,530
Other - net ..................... 1,662 4,701 4,974
-------- ------- ------
$ 6,012 $ 7,150 $7,332
======== ======= ======
</TABLE>
Included above are equity losses from Mycogen of $5.4 million and $.1 million in
1995 and 1994, respectively, and in both of 1995 and 1994, preferred dividend
income of $1.5 million. Gains on investee stock issuance represents a noncash
gain, from the increase in the value of the company's ownership interest in the
net assets of Mycogen, due to Mycogen's issuance of new shares in 1995 at a
price in excess of the company's carrying value per share. (See Note 8).
NOTE 10 - INCOME TAXES
The provision for income taxes is based upon income before tax for financial
reporting purposes. Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the tax bases
of assets and liabilities and their carrying values for financial reporting
purposes. In estimating future tax consequences, the company considers
anticipated future events, except changes in tax laws or rates, which are
recognized when enacted.
Income before income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
United States ............ $196,390 $136,801 $163,508
Foreign .................. 54,218 88,773 87,951
-------- -------- --------
Total .................... $250,608 $225,574 $251,459
======== ======== ========
</TABLE>
THE LUBRIZOL CORPORATION 30
<PAGE> 16
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current:
United States ............ $39,688 $28,294 $28,698
Foreign .................. 18,044 28,766 27,389
------- ------- -------
57,732 57,060 56,087
------- ------- -------
Deferred:
United States ............ 16,842 8,334 12,605
Foreign .................. 6,232 8,565 7,192
------- ------- -------
23,074 16,899 19,797
------- ------- -------
Total .................... $80,806 $73,959 $75,884
======= ======= =======
</TABLE>
Foreign taxes include withholding taxes. The United States tax provision
includes the U.S. tax on foreign income distributed to the company. U.S. and
foreign income tax rate changes occurring during the periods presented did not
have a material effect on the company's provision for income taxes. The
differences between the provision for income taxes at the U.S. statutory rate
and the tax shown in the consolidated statements of income are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Tax at statutory rate of 35% ...... $ 87,713 $ 78,951 $ 88,011
Foreign sales
corporation earnings ........... (3,477) (4,389) (3,885)
Equity income ..................... (1,324) (856) (812)
Contribution of
appreciated property ........... (5,050)
Other - net ....................... (2,106) 253 (2,380)
-------- -------- --------
Provision for income taxes ........ $ 80,806 $ 73,959 $ 75,884
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31 are as
follows:
<TABLE>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued compensation and benefits ......... $ 39,522 $ 40,792
Intercompany profit in inventory .......... 13,107 13,285
Net operating losses carried forward ...... 13,131 9,084
Equity investments and partnerships ....... 3,864
Other ..................................... 4,949 10,148
-------- --------
Total gross deferred tax assets .............. 70,709 77,173
Less valuation allowance ..................... (4,239) (3,565)
-------- --------
Net deferred tax assets ...................... 66,470 73,608
-------- --------
Deferred tax liabilities:
Depreciation and
other basis differences ................. 75,869 58,472
Undistributed foreign equity income ....... 4,672 4,458
Inventory basis differences ............... 3,920 3,557
Equity investments and partnerships ....... 1,271
Other ..................................... 2,533 4,001
-------- --------
Total gross deferred tax liabilities ......... 88,265 70,488
-------- --------
Net deferred tax assets (liabilities) ........ $(21,795) $ 3,120
======== ========
</TABLE>
At December 31, 1996, certain foreign subsidiaries have net operating loss
carryforwards of $32.6 million for income tax purposes, of which $10.6 million
expires in years 1998 through 2003 and $22.0 million has no expiration. After
evaluating tax planning strategies and historical and projected profitability, a
valuation allowance has been recognized to reduce the deferred tax assets
related to those carryforwards to the amount expected to be realized. The net
change in the total valuation allowance for the years ended December 31, 1996
and 1995, was an increase of $.7 million and an increase of $3.6 million,
respectively.
U.S. income taxes or foreign withholding taxes are not provided on undistributed
earnings of foreign subsidiaries, which are considered to be indefinitely
reinvested in the operations of such subsidiaries. The amount of such earnings
was approximately $346.6 million at December 31, 1996. Determination of the net
amount of unrecognized U.S. income tax with respect to these earnings is not
practicable.
Income taxes paid during 1996, 1995 and 1994 amounted to $55.0 million, $56.9
million and $70.9 million, respectively.
NOTE 11 - PENSION AND PROFIT SHARING PLANS
The company has retirement plans, including noncontributory defined benefit
pension plans and a profit sharing plan, covering most employees in the United
States and at non-U.S. subsidiaries. Pension benefits are based on years of
service and the employee's compensation. The company's funding policy in the
United States is to contribute amounts to satisfy the Internal Revenue Service
funding standards and elsewhere to fund amounts in accordance with local
regulations. Several defined benefit plans are unfunded. Plan assets are
invested principally in marketable equity securities and fixed income
instruments.
Expense for all retirement plans was $19.6 million in 1996, $20.7 million in
1995 and $24.1 million in 1994, including profit sharing contributions in the
U.S. of $5.1 million in 1996, $4.4 million in 1995 and $5.7 million in 1994.
Net periodic pension cost of defined benefit plans consists of:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Service cost - benefits
earned during period ............. $ 11,097 $10,089 $ 11,454
Interest cost on projected
benefit obligation ............... 17,690 17,804 16,769
Actual return on plan assets......... (33,585) (47,965) 1,510
Net amortization
and deferral ..................... 14,229 31,833 (14,695)
-------- ------- --------
Net periodic pension cost ........... $ 9,431 $11,761 $ 15,038
======== ======= ========
</TABLE>
31 THE LUBRIZOL CORPORATION
<PAGE> 17
The weighted average assumptions used at December 31 were:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Discount rate for
determining funded status ............ 7.5% 7.3% 8.2%
Compensation increase ................... 4.5% 4.8% 5.2%
Return on plan assets ................... 8.9% 8.8% 8.6%
</TABLE>
The funded status of such defined benefit pension plans and the amounts
recognized in the consolidated balance sheets at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ ----------------------
Assets Accum. Assets Accum.
Exceed Benefits Exceed Benefits
Accum. Exceed Accum. Exceed
Benefits Assets Benefits Assets
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Fair value of
plan assets ........... $ 264,949 $ 6,431 $ 234,819 $ 6,328
Projected benefit
obligation ............ (217,173) (31,448) (211,709) (31,724)
--------- -------- --------- --------
Plan assets in
excess of
(less than)
projected benefit
obligation ............ 47,776 (25,017) 23,110 (25,396)
Unrecognized
net transition
obligation
(asset) ............... (11,833) 3,882 (13,206) 4,513
Unrecognized
net loss (gain) ....... (28,162) 845 (7,508) (611)
Unrecognized
prior service
cost .................. 10,091 2,689 14,208 3,210
Minimum liability
adjustment ............ (1,699) (906)
--------- -------- --------- --------
Accrued pension
asset (liability) ..... $ 17,872 $(19,300) $ 16,604 $(19,190)
========= ======== ========= ========
Accumulated
benefit
obligation ............ $ 155,071 $ 24,702 $ 152,714 $ 23,928
========= ======== ========= ========
Vested benefits .......... $ 149,318 $ 20,442 $ 146,672 $ 20,170
========= ======== ========= ========
</TABLE>
NOTE 12 - POSTRETIREMENT HEALTH CARE
The company provides certain postretirement benefits other than pensions,
primarily health care, for retired employees. Currently, substantially all of
the company's full-time employees in the U.S. become eligible for these benefits
after attaining specified years of service and age 55 at retirement.
Participants contribute a portion of the cost of such benefits. The company's
postretirement health care plans are not funded.
The status of the U.S. health care plans at December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Accumulated postretirement
benefit obligations:
Retirees ..................................... $ 29,794 $ 27,915
Fully eligible active plan participants ...... 14,385 16,104
Other active plan participants ............... 19,776 20,004
-------- ---------
Total accumulated postretirement
benefit obligation ........................ 63,955 64,023
Unrecognized net (loss) gain ................. 652 (3,503)
Unrecognized net reduction in
prior service costs ....................... 37,056 40,274
-------- ---------
Accrued postretirement
health care costs ......................... $101,663 $ 100,794
======== =========
</TABLE>
The amount of unrecognized net reduction in prior service costs results from
plan amendments in 1994 that changed eligibility requirements and certain cost
sharing provisions of the plan and, in 1995, that incorporated assumptions
within the health care plan regarding participation in Medicare Risk HMO plans.
These reductions in prior service costs do not immediately reduce the accrued
postretirement liability, but are amortized as a reduction of expense over the
participant's average future service period to full eligibility (remaining
amortization period at December 31, 1996, of approximately 12 years).
THE LUBRIZOL CORPORATION 32
<PAGE> 18
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.0% in 1996 (9.75% in 1995), with
subsequent annual decrements of .75% to an ultimate trend rate of 5%. A
one-percentage-point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation by
approximately 11% and the aggregate of the service and interest cost components
of net postretirement health care cost by approximately 13%. A discount rate of
7.5% was used in determining the accumulated postretirement benefit obligation
at December 31, 1996 and 1995.
Net postretirement benefit cost consists of the following components for the
company's U.S. plans:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost - benefits
earned during the year ....... $ 1,501 $ 1,361 $ 2,916
Interest cost on accumu-
lated postretirement
benefit obligation ........... 4,817 6,066 7,131
Amortization of
unrecognized net gains ....... (3,218) (1,766)
------- ------- -------
Net postretirement
health care cost ............. $ 3,100 $ 5,661 $10,047
======= ======= =======
</TABLE>
The company also provides postretirement health care benefits at several of its
international locations. Accumulated benefits and net postretirement health care
costs for these locations were not significant.
NOTE 13 - LEASES
The company has commitments under operating leases primarily for office space,
terminal facilities, land, railroad tank cars and various office equipment.
Rental expense was $16.9 million in 1996, $19.5 million in 1995 and $19.3
million in 1994. Future minimum rental commitments under operating leases having
initial or remaining non-cancelable lease terms exceeding one year are $11.0
million in 1997, $7.6 million in 1998, $4.7 million in 1999, $4.1 million in
2000, $3.7 million in 2001 and $26.1 million thereafter.
NOTE 14 - OPERATIONS IN GEOGRAPHIC AREAS
Financial data by geographic area, based on the location of the subsidiary which
shipped and billed the product, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues from customers:
United States ......... $ 711,781 $ 722,879 $ 707,103
Europe ................ 480,250 533,920 512,279
Far East .............. 229,659 225,773 215,632
Other ................. 175,872 181,022 163,980
----------- ----------- -----------
1,597,562 1,663,594 1,598,994
Intercompany transfers:
United States ......... 318,492 319,671 296,693
Europe ................ 26,364 37,556 28,835
Far East .............. 182 301 360
Other ................. 22,507 30,905 27,717
----------- ----------- -----------
367,545 388,433 353,605
----------- ----------- -----------
Gross revenues ........... 1,965,107 2,052,027 1,952,599
Less: Intercompany
transfers ............. (367,545) (388,433) (353,605)
----------- ----------- -----------
Consolidated revenues .... $ 1,597,562 $ 1,663,594 $ 1,598,994
=========== =========== ===========
Operating profit:
United States ......... $ 162,090 $ 138,398 $ 145,971
Europe ................ 27,746 51,172 49,783
Far East .............. 9,078 9,731 15,486
Other ................. 13,178 17,476 14,251
Eliminations .......... (671) (2,555) (2,249)
----------- ----------- -----------
211,421 214,222 223,242
General corporate
expenses .............. (16,864) (19,156) (21,212)
Provision for asset
impairment ............ (9,489)
Gain on investments ...... 53,280 38,459 41,235
Other income - net ....... 6,012 7,150 7,332
Interest - net ........... (3,241) (5,612) 862
----------- ----------- -----------
Income before
income taxes .......... $ 250,608 $ 225,574 $ 251,459
=========== =========== ===========
Identifiable assets:
United States ......... $ 796,154 $ 804,045 $ 731,651
Europe ................ 400,639 395,053 337,457
Far East .............. 151,015 154,992 157,344
Other ................. 91,768 82,708 74,768
Eliminations .......... (114,546) (82,310) (81,640)
----------- ----------- -----------
1,325,030 1,354,488 1,219,580
Corporate assets ......... 77,085 137,532 174,784
----------- ----------- -----------
Total assets ............. $ 1,402,115 $ 1,492,020 $ 1,394,364
=========== =========== ===========
</TABLE>
33 THE LUBRIZOL CORPORATION
<PAGE> 19
NOTES:
A. Intercompany transfers are made at prices comparable to normal unaffiliated
customer sales for similar products.
B. Affiliated companies are not allocated to geographic segments.
C. Corporate assets consist of short-term investments and investments in
affiliated companies.
Export sales from the United States to customers, primarily in Latin America and
Asia in 1996 and 1995 and also in the Middle East for 1994, were $144 million,
$138 million and $139 million, respectively.
Net assets of non-U.S. subsidiaries at December 31, 1996 and 1995, were $487
million and $446 million, respectively. Net income of these subsidiaries was $29
million in 1996, $52 million in 1995 and $55 million in 1994; and dividends
received from the subsidiaries were $18 million, $7 million and $8 million,
respectively.
NOTE 15 - FINANCIAL INSTRUMENTS
The company has various financial instruments, including cash and short-term
investments, investments in nonconsolidated companies, foreign currency forward
contracts, interest rate swaps and short- and long-term debt. The company has
determined the estimated fair value of these financial instruments by using
available market information and generally accepted valuation methodologies. The
use of different market assumptions or estimation methodologies could have a
material effect on the estimated fair value amounts. The company believes the
carrying values of financial instruments approximate their fair values, except
for certain interest rate swap agreements discussed below. The company uses
derivative financial instruments only to manage well-defined foreign currency
and interest rate risks. The company does not use derivative financial
instruments for trading purposes.
The company is exposed to the effect of changes in foreign currency rates on its
earnings and cash flow as a result of doing business internationally. In
addition to working capital management, pricing and sourcing, the company
selectively uses foreign currency forward contracts to lessen the potential
effect of currency changes. Such contracts are generally in connection with
transactions with maturities of up to one year. The maximum amount of foreign
currency forward contracts outstanding at any one time was $41.2 million in 1996
and $16.6 million in 1995. At December 31, 1996, the company had short-term
forward contracts to sell currencies at various dates during 1997 for $7.3
million. Realized and unrealized gains or losses on these contracts are recorded
in the statement of income, or in the case of transactions designated as hedges
of net foreign investments, in the cumulative translation adjustment account in
other shareholders' equity. Additionally, foreign currency forward contract
gains and losses on certain future transactions may be deferred until the future
transaction is recorded. Deferred currency gains on foreign exchange contracts
at December 31, 1996, were not material.
The company is exposed to market risk from changes in interest rates. The
company's policy is to manage interest rate cost using a mix of fixed and
variable rate debt. To manage this mix in a cost efficient manner, the company
enters into interest rate swaps, in which the company agrees to exchange, at
specified intervals, the difference between fixed and variable interest amounts
calculated by reference to an agreed upon notional principal amount. The company
has entered into interest rate swap agreements to convert variable rate debt to
fixed rates (see Note 5). Interest payments receivable and payable under the
terms of the interest rate swap agreements are accrued over the period to which
the payment relates and the net difference is treated as an adjustment of
interest expense related to the underlying liability. Changes in the underlying
market value of the remaining swap payments are generally not recognized in
income, unless the underlying liability being hedged is extinguished or
partially extinguished to a level less than the notional amount of the interest
rate swaps. The company would pay approximately $4.2 million if it had
terminated these interest rate swap agreements at December 31, 1996, and in 1996
recognized $1.1 million of this loss as a charge against income.
NOTE 16 - STOCK COMPENSATION PLANS
The 1991 Stock Incentive Plan provides for granting of options to buy Common
Shares intended either to qualify as "incentive stock options" under the
Internal Revenue Code or "non-statutory stock options" not intended to so
qualify, up to an amount equal to one percent of the outstanding Common Shares
at the beginning of any year, plus any unused amount from prior years. Under the
1991 Plan, options generally become exercisable 50% one year after grant, 75%
after two years, 100% after three years, and expire up to ten years after grant.
"Reload options," which are options to purchase additional shares if a grantee
uses already-owned shares to pay for an option exercise, are granted
automatically under the 1991 Plan and may be granted in the discretion of the
administering committee under the 1985 Employee Stock Option Plan. The 1991 Plan
generally supersedes the 1985 Plan, although options outstanding under the 1985
Plan remain exercisable until the expiration dates. The option price under both
plans is the fair market value of the shares on the date of grant. Both plans
permit or permitted the granting of stock appreciation rights in connection with
the grant of options, and the 1991
THE LUBRIZOL CORPORATION 34
<PAGE> 20
Plan also permits the grant of restricted and unrestricted shares. In addition,
the 1991 Plan provides to each outside director of the company an automatic
annual grant of an option to purchase 2,000 Common Shares, with terms generally
comparable to employee stock options.
The company accounts for its stock option plans using the intrinsic-value
accounting method (measured as the difference between the option exercise price
and the market value of the stock at date of grant) under APB Opinion 25 and
related interpretations. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans in the accompanying financial
statements as all option exercise prices were equal with market price on the
date of grant. The Financial Accounting Standards Board issued SFAS 123 -
Accounting for Stock-Based Compensation, which was effective for 1996. SFAS 123
encourages the fair-value based method of accounting for stock compensation
plans under which the value of stock options is estimated at the date of grant
using valuation formulas, but permits the continuance of intrinsic-value
accounting. If the fair value method to measure compensation cost had been used,
the company's net income would have been reduced by $2.0 million and $1.7
million in 1996 and 1995, respectively with a corresponding reduction in
earnings per share of $.03 for each year.
Disclosures under the fair value method are estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for grants
in 1996 and 1995, respectively:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
1985 Plan:
Risk free interest rate ................... 7.0% 7.1%
Dividend yield ............................ 3.4% 3.4%
Volatility ................................ 23% 23%
Expected life (years) ..................... 6.6 8.6
1991 Plan:
Risk free interest rate ................... 6.6% 7.0%
Dividend yield ............................ 3.4% 3.4%
Volatility ................................ 23% 23%
Expected life (years) ..................... 8.5 8.2
</TABLE>
Information regarding these option plans is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- -------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding,
January 1 ......... 2,958,416 $ 30.70 2,583,721 $ 29.28
Granted .............. 497,566 29.96 528,210 35.12
Exercised ............ (99,427) 18.25 (148,887) 21.57
Forfeited ............ (108,442) 31.86 (4,628) 34.56
--------- ---------
Outstanding,
December 31 ....... 3,248,113 $ 30.93 2,958,416 $ 30.70
========= =========
Options
exercisable,
December 31 ....... 2,574,762 $ 30.57 1,975,878 $ 28.77
Weighted-average
fair value of
options granted
during the year ... $ 8.05 $ 10.05
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1996:
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$13 - $19 ............. 148,134 3.0 Years $16.00 148,134 $16.00
19 - 25 .............. 127,477 2.4 21.80 127,477 21.80
25 - 31 .............. 1,380,466 5.5 28.68 975,742 28.14
31 - 38 .............. 1,592,036 5.1 34.99 1,323,409 34.83
--------- ---------
3,248,113 5.1 30.93 2,574,762 30.57
========= =========
</TABLE>
35 THE LUBRIZOL CORPORATION
<PAGE> 21
NOTE 17 - SPECIAL CHARGE AND PROVISION
FOR ASSET IMPAIRMENT
In 1993, the company recorded an $86.3 million special charge related to its
manufacturing rationalization and organizational realignment initiatives. It was
originally estimated that these initiatives would take approximately three years
to fully implement and would reduce the number of the company's production units
by up to one-third and the number of employees by approximately 5%. Originally,
30% of the special charge was for employee reductions; 55% was for asset
writedowns primarily related to manufacturing assets and Agribusiness
investments; and 15% was for tank cleaning and dismantling, lease exit costs and
other transitional costs.
As of December 31, 1996, the company has substantially completed its planned
activities under the special charge initiatives, including reducing the number
of production units by approximately 30%, with three remaining units to be
removed in 1997 and reducing its worldwide employment by approximately 9%, or
over 400 employees, through early retirements, separations and attrition.
Although there was no change in the aggregate amount of the special charge,
certain components have been revised as actual costs to implement became known.
Asset write-offs decreased due to lower than originally estimated net book
values of the assets removed from service. Costs for employee reductions were
greater than originally estimated due to more employee separations. Through
completion, approximately 45% of the special charge relates to employee
separations; 40% to asset writedowns and 15% to other areas. Cash outlays
related to the special charge were approximately $9 million in 1996, $14 million
in 1995, $18 million in 1994 and $4 million in 1993. At December 31, 1996, there
is approximately $9 million remaining in the special charge accrual, of which $7
million will require disbursement of cash in 1997.
Implementation of these initiatives has resulted in continued cost savings from
a reduced number of employees, lower operating costs and fewer manufacturing
units used to produce intermediate products.
During the fourth quarter of 1995, the company recorded a provision of $9.5
million for the write-down of assets. This charge is primarily related to an
intermediate processing unit that became permanently impaired due to product
formulation changes caused by a new industry-wide specification.
NOTE 18 - LITIGATION
On June 24, 1996, the U.S. Supreme Court denied Exxon's request to review the
September 1995 decision of the United States Court of Appeals for the Federal
Circuit in Washington, D.C. The Court of Appeals' decision overturned a December
1992 jury verdict, in Houston, Texas, that the company had infringed an Exxon
patent and vacated a $129 million judgment against the company. The decision of
the Supreme Court terminates, with finality, the prior judgment against the
company. Notwithstanding the Supreme Court decision, Exxon filed a motion for
another trial under the patent on an allegedly different theory of infringement,
which motion was denied by the trial judge following the Supreme Court ruling.
However, Exxon has pursued an appeal of the denial of this motion for another
trial, which appeal is pending.
The company has prevailed in a separate case brought in Canada against Exxon's
Canadian affiliate, Imperial Oil, Ltd., for infringement of the company's patent
pertaining to dispersant, the largest additive component used in motor oils. A
1990 trial court verdict in favor of the company regarding the issue of
liability was upheld by the Federal Court of Appeals of Canada in December 1992,
and in October 1993, the Supreme Court of Canada dismissed Imperial Oil's appeal
of the Court of Appeals' decision. The case has returned to the trial court for
an assessment of compensation damages but no date has been set for a
determination. In October 1994, the trial court judge awarded $15 million
(Canadian) to the company for special penalty damages, plus attorneys' fees, for
Imperial Oil's disregard of an earlier injunction for the manufacture or sale of
the dispersant which is the subject of this case. In April 1996, the Federal
Court of Appeals of Canada vacated the award of special penalty damages and
concluded that any penalty damage determination should be made after the
compensation damages for patent infringement have been determined by the lower
court. A reasonable estimation of the company's potential recovery for
compensation and penalty damages cannot be made at this time and no amount has
been recorded in the company's financial statements.
In November 1996, a patent trial court in London declared a Lubrizol United
Kingdom patent invalid, which patent is the subject of litigation with Exxon in
that country. The company will appeal this decision and believes it should
succeed on appeal. Although the trial court decision does not involve any damage
payments, the court awarded Exxon its attorneys' fees in the case, as is
customary under U.K. practice. The amount of such fees has not yet been
determined, but are not expected to be material to the company. The company has
not recorded any amount for payment to Exxon for its attorneys' fees pending the
outcome of its appeal.
THE LUBRIZOL CORPORATION 36
<PAGE> 22
<TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
<CAPTION>
Three Months Ended
------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars Except Per Share Data)
1996
<S> <C> <C> <C> <C>
Net sales .......................................... $405,412 $420,531 $392,114 $374,820
Gross profit ....................................... 131,817 132,007 124,931 120,728
Gain on investments (net of tax) ................... 34,632
Net income ......................................... 71,236 38,070 31,733 28,763
Net income per share ............................... $ 1.14 $ .63 $ .53 $ .49
1995
Net sales .......................................... $414,931 $436,774 $412,428 $393,688
Gross profit ....................................... 137,375 148,865 129,985 116,210
Gain on investments (net of tax) ................... 8,519 16,479
Net income ......................................... 49,102 61,251 27,942 13,320
Net income per share ............................... $ .76 $ .96 $ .44 $ .21
</TABLE>
In September 1996, the company sold its specialty vegetable oil business, which
reduced net sales by $5.9 million and $10.5 million for the third and fourth
quarters of 1996 compared with 1995, respectively. The impact on gross profit,
net income or income per share was insignificant. See Note 8 for discussion of
gain on investments.
In the fourth quarter of 1995, the company recognized a provision for asset
impairment which decreased net income by $6.2 million ($.10 per share).
37 THE LUBRIZOL CORPORATION
<PAGE> 23
<TABLE>
HISTORICAL SUMMARY
<CAPTION>
(In Millions, Except Shareholders, Employees and Per Share Data) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
<S> <C> <C> <C>
Revenues ............................................................ $ 1,597.6 $ 1,663.6 $ 1,599.0
Total cost and expenses ............................................. 1,403.0 1,468.5 1,397.0
Other income (charges) .............................................. 56.1 30.5 49.4
Net income .......................................................... 169.8 151.6 175.6
- Before unusual items and accounting changes .................... 135.2 132.8 148.8
Net income per share ................................................ 2.80 2.37 2.67
- Before unusual items and accounting changes .................... 2.23 2.08 2.26
FINANCIAL RATIOS:
Gross profit percentage ............................................. 32.0 32.1 32.7
Percent of revenues:
Selling and administrative expenses .............................. 9.9 9.8 10.0
Research and testing expenses .................................... 10.1 10.8 10.3
Return on average shareholders' equity (%) .......................... 20.4 18.0 22.5
- Before unusual items and accounting changes (%) ................ 16.2 15.8 19.0
Debt to capitalization (%) .......................................... 19.5 22.5 16.8
Current ratio ....................................................... 2.6 2.4 2.5
OTHER INFORMATION:
Dividends declared per share ........................................ $ .97 $ .93 $ .89
Average common shares outstanding ................................... 60.7 63.8 65.7
Capital expenditures ................................................ $ 94.3 $ 189.3 $ 160.5
Depreciation expense ................................................ 78.7 71.8 63.9
At Year End:
Total assets ..................................................... $ 1,402.1 $ 1,492.0 $ 1,394.4
Total debt ....................................................... 198.5 247.1 167.9
Total shareholders' equity ....................................... 819.4 849.0 832.0
Shareholders' equity per share ................................... 14.00 13.48 12.83
Common share price ............................................... 31.00 27.75 33.88
Number of shareholders ........................................... 5,764 6,304 6,494
Number of employees .............................................. 4,358 4,601 4,520
</TABLE>
All share and per share data have been restated to reflect the 2-for-1 stock
split effected on August 31, 1992.
THE LUBRIZOL CORPORATION 38
<PAGE> 24
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987 1986
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$1,525.5 $1,552.2 $1,476.3 $1,452.7 $1,227.9 $1,125.7 $1,022.3 $ 985.2
1,362.2 1,390.5 1,308.7 1,288.4 1,109.7 1,009.9 916.4 875.7
(43.6) 15.4 10.5 106.9 19.5 69.9 23.3 19.2
45.6 124.6 123.7 190.0 94.0 140.0 81.3 78.2
113.5 124.6 123.7 133.5 94.0 88.4 73.7 78.2
.67 1.81 1.79 2.67 1.26 1.81 1.03 .99
1.67 1.81 1.79 1.87 1.26 1.14 .94 .99
32.0 31.7 32.4 30.3 29.2 29.9 29.6 28.8
10.4 11.7 11.7 10.9 10.8 10.5 10.8 10.3
11.2 10.0 9.8 8.5 9.2 9.6 9.1 8.1
5.9 15.4 16.2 27.2 14.2 21.8 13.6 14.3
14.6 15.4 16.2 18.0 14.2 13.7 12.0 14.3
8.7 5.6 7.9 8.3 8.5 8.4 10.1 9.0
2.5 2.9 2.7 2.7 3.0 3.1 3.0 2.8
$ .85 $ .81 $ .77 $ .73 $ .69 $ .65 $ .61 $ .59
67.7 69.0 69.3 71.1 74.7 77.4 79.1 79.4
$ 127.9 $ 95.8 $ 82.4 $ 77.4 $ 64.7 $ 54.6 $ 42.0 $ 40.5
59.6 58.4 54.6 54.0 48.7 46.6 47.2 42.6
$1,182.6 $1,127.1 $1,171.7 $1,114.6 $ 960.2 $ 970.7 $ 939.4 $ 877.9
69.6 48.4 67.8 66.6 61.2 60.8 69.7 56.9
732.2 819.4 794.5 736.2 663.3 664.3 621.6 572.7
11.00 11.97 11.51 10.61 8.96 8.74 7.98 7.21
34.13 27.25 28.25 23.63 18.75 17.75 16.44 15.75
6,616 6,822 6,767 6,692 7,370 7,782 8,335 9,240
4,613 4,609 5,299 5,169 5,030 4,781 4,817 4,802
</TABLE>
39 THE LUBRIZOL CORPORATION
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 21
THE LUBRIZOL CORPORATION
% OF STATE/COUNTRY
PRINCIPAL SUBSIDIARIES OWNERSHIP OF INCORPORATION
<S> <C> <C>
Lubrizol do Brasil Aditivos, Ltda. 100% Brazil
Lubrizol Canada Limited 100% Canada
Lubrizol de Chile Limitada 100% Chile
Lubrizol China, Inc. 100% Ohio
Lubrizol Espanola, S.A. 100% Spain
Lubrizol France S.A. 99.995% France
Lubrizol Gesellschaft m.b.H. 100% Austria
Lubrizol G.m.b.H. 100% Germany
Lubrizol International Inc. 100% Cayman Islands
Lubrizol International Management
Corporation 100% Nevada
Lubrizol Italiana, S.p.A. 100% Italy
Lubrizol Japan Limited 100% Japan
Lubrizol Limited 100% United Kingdom
Lubrizol de Mexico, S. de R.L. 100% Mexico
Lubrizol de Mexico Comercial S. de R.L.
de C.V. 100% Mexico
Lubrizol Overseas Trading Corporation 100% Delaware
Lubrizol Scandinavia AB 100% Sweden
Lubrizol Servicios Tecnicos S. de R.L. 100% Mexico
Lubrizol South Africa (Pty.) Limited 100% South Africa
Lubrizol Southeast Asia (Pte.) Ltd. 100% Singapore
Lubrizol de Venezuela C.A. 99.9% Venezuela
Anedco Inc. 100% Nevada
CPI Engineering Services, Inc. 100% Michigan
Engine Control Systems, Ltd. 100% Canada
Gate City Equipment Company, Inc. 100% Georgia
Langer & Company G.m.b.H. 100% Germany
AFFILIATES
Industrias Lubrizol S.A. de C.V. 40% Mexico
Lanzhou Lubrizol - Lanlian Additive
Co., Ltd. 50.05% China
Lubrizol India Limited 40% India
Lubrizol Transarabian Company Limited 49% Saudi Arabia
Solub Limited 40% Russia
Tianjin Lubrizol - Lanlian Additive
Co., Ltd. 50.05% China
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
THE LUBRIZOL CORPORATION
We consent to the incorporation by reference in Registration Statement
No. 2-99983 on Form S-8, in Registration Statement No. 33-61091 on Form S-8 and
in Registration Statement No. 33-42211 on Form S-8 of our report dated February
4, 1997, incorporated by reference in this Annual Report on Form 10-K of The
Lubrizol Corporation for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
- ------------------------------
DELOITTE & TOUCHE LLP
Cleveland, Ohio
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME
</LEGEND>
<CIK> 0000060751
<NAME> THE LUBRIZOL CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1.0
<CASH> 55,073
<SECURITIES> 0
<RECEIVABLES> 214,501
<ALLOWANCES> 1,193
<INVENTORY> 251,905
<CURRENT-ASSETS> 585,099
<PP&E> 1,529,187
<DEPRECIATION> 821,873
<TOTAL-ASSETS> 1,402,115
<CURRENT-LIABILITIES> 227,110
<BONDS> 157,628
<COMMON> 78,534
0
0
<OTHER-SE> 740,842
<TOTAL-LIABILITY-AND-EQUITY> 1,402,115
<SALES> 1,592,877
<TOTAL-REVENUES> 1,597,562
<CGS> 1,083,394
<TOTAL-COSTS> 1,083,394
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 117
<INTEREST-EXPENSE> 10,955
<INCOME-PRETAX> 250,608
<INCOME-TAX> 80,806
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 169,802
<EPS-PRIMARY> 2.80
<EPS-DILUTED> 2.79
</TABLE>
