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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, 1999
[ ] 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: (440) 943-4200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------------------- ----------------------
Common Shares without par value New York Stock Exchange
Common 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
--- ---
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. [ ]
Aggregate market value (on basis of closing sale price) of voting stock
held by nonaffiliates as of March 10, 2000 $1,327,201,977
Number of the registrant's Common Shares, without par value,
outstanding as of March 10, 2000 54,175,929
Documents Incorporated by Reference
-----------------------------------
Portions of the registrant's 1999 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 22, 2000
(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 fluid technology
company concentrating on high performance chemicals, systems and services to
diverse markets worldwide. The company develops, produces and sells specialty
additive packages and related equipment used in transportation and industrial
finished lubricants. The company's 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
groups its product lines into two operating segments: chemicals for
transportation and chemicals for industry.
PRINCIPAL PRODUCTS. Chemicals for transportation is comprised
of additives for lubricating engine oils, such as those used in gasoline,
diesel, marine and stationary gas engines, and additive components to its larger
customers; additives for driveline oils, such as automatic transmission fluids,
gear oils and tractor lubricants; and additives for fuel products and refinery
and oil field chemicals. In addition, the company sells additive components and
viscosity improvers within its lubricant and fuel additives product lines.
Chemicals for industry includes industrial additives, such as additives for
hydraulic fluids, metalworking fluids and compressor lubricants; performance
chemicals, such as additives for coatings and inks and process chemicals; and
performance systems, comprised principally of fluid metering devices and
particulate emission trap devices.
Revenues within the chemicals for transportation segment
comprised 83%, 84% and 86% of consolidated revenues in 1999, 1998 and 1997,
respectively. Additives for lubricating engine oils comprised 53%, 52% and 55%
of consolidated revenues in 1999, 1998 and 1997, respectively. Additives for
driveline oils comprised 23%, 24% and 24% of consolidated revenues for these
same respective periods. Further financial information for the company's
operating segments is contained in Note 12 to the Financial Statements, which is
included in the company's 1999 Annual Report to its shareholders and is
incorporated herein by reference.
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.
Due to the variety of oil properties and applications, 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.
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The company's performance systems products principally involve
products used in emission controls, such as catalyst, exhaust and filter systems
and precision metering devices used in blending and additive injection
operations.
COMPETITION. The company's chemicals for transportation
segment and chemicals for industry segment are highly competitive in terms of
price, technology development, product performance and customer service. The
company's principal competitors within its chemicals for transportation segment,
both in the United States and overseas, are three major petroleum companies, and
one chemical company. Two of the major petroleum companies, which previously
participated in the lubricant additive industry through separate divisions, have
combined their efforts by forming a separate joint venture company that began
commercial operations in 1999. The petroleum companies produce lubricant and
fuel additives for their own use, and also sell additives to others. These
competing petroleum companies are also customers of the company and may also
sell base oil to the company. The company believes, based on volume sold, that
it is the largest supplier to the petroleum industry of performance additive
packages for lubricants.
CUSTOMERS. In the United States, the company markets its
chemicals for transportation and chemicals for industry 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. In 1999, approximately 42% of the company's consolidated sales were
made to customers in North America, 33% to customers in Europe and the Middle
East and 25% to customers in Asia-Pacific and Latin America. 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 46% of
consolidated sales in 1999. The loss of one or more of these customers could
have a material adverse effect on the company's business. Mobil Corporation,
together with its affiliates, has been the company's largest customer within its
chemicals for transportation segment during the past three years, comprising 12%
of consolidated sales in 1999, 9% in 1998 and 10% in 1997. Mobil Corporation and
Exxon Corporation completed a merger during the latter part of 1999, and the
1999 percentage includes sales to Mobil, Exxon and their affiliates prior to the
merger as well as sales to the combined entity, Exxon Mobil Corporation,
following the consummation of the merger. The company's chemicals for industry
segment is not materially dependent on a single customer or on a few customers.
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. 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 2000.
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 affects the company's technical spending
patterns.
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Consolidated research and development expenditures were $78.3
million in 1999 and 1998, and $88.4 million in 1997. These amounts were
equivalent to 4.5%, 4.8% and 5.3% 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, $67.7 million, $72.7 million and $58.2 million was
spent in 1999, 1998 and 1997, respectively, for technical service (testing)
activities, principally for evaluation in mechanical equipment of specific
lubricant formulations designed for the needs of petroleum industry customers
throughout the world.
Research, testing and development expenditures by operating
segment were as follows (in thousands of dollars):
1999 1998 1997
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Research and development expenditures:
Chemicals for transportation $66,268 $67,018 $76,259
Chemicals for industry 11,984 11,265 12,185
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Total $78,252 $78,283 $88,444
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Testing expenditures:
Chemicals for transportation $58,978 $64,641 $51,260
Chemicals for industry 8,697 8,056 6,974
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Total $67,675 $72,697 $58,234
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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 that 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 a variety of United States and
foreign patents relating to lubricant and fuel additives, lubricants, chemical
compositions and processes, and protective coating materials and processes.
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 previously filed claims against Exxon Corporation
and its affiliates ("Exxon") relating to various commercial matters, including
alleged infringements by Exxon of certain of the company's patents. On March 31,
1999, the company and Exxon Corporation reached a settlement of all pending
intellectual property litigation between the two companies and their affiliates,
except for litigation pending in Canada. In the suit in Canada, the company is
alleging infringement of a patent that corresponds to a United States patent
admitted as valid by Exxon in a settlement in 1988. A
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determination of liability has been made by the Canadian courts against Exxon in
favor of the company, and the case has been returned to the trial court for an
assessment of damages, but no date has been set for a determination of such
damages. Further information regarding litigation with Exxon is contained in
Note 16 to the Financial Statements, which is included in the company's 1999
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 $3 million in 1999, which
represented 4.6% of 1999 capital expenditures. The company 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. The company 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, the company believes
liabilities for environmental matters will not have a material adverse affect on
the company's financial position, operating results or liquidity.
EMPLOYEES. At December 31, 1999, the company and its
wholly-owned subsidiaries had 4,074 employees of which approximately 61% were in
the U.S.
INTERNATIONAL OPERATIONS. Financial information with respect
to domestic and foreign operations is contained in Note 12 to the Financial
Statements which is included in the company's 1999 Annual Report to its
shareholders and is incorporated herein by reference.
The company supplies its additive customers abroad through
export from the United States and from overseas manufacturing plants. 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 and economic 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.
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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 and
currency mix, including its use of U.S. dollar based pricing in certain
countries relative to its revenues and expenses. 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; manufacturing
plants in Countryside, Illinois; Mountaintop, Pennsylvania; and Germany that
manufacture performance specialty chemical additives for the coatings and
specialty metalworking fluid and industrial lubricant markets; a manufacturing
plant in Atlanta, Georgia, that manufactures fluid metering devices;
manufacturing plants in Newmarket and London, Ontario, Canada, and Reno, Nevada,
that manufacture particulate emission control devices; and a manufacturing plant
in Fareham, Hampshire, England, that manufactures additive injection equipment.
Additive manufacturing/blending plants in India, Saudi Arabia,
and China are owned and operated by joint venture companies licensed by
Lubrizol. Lubrizol's ownership of each of these companies ranges from 40% to
50%.
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,
Denmark, Ecuador, England, Finland, France, Holland, Singapore, Spain, South
Africa, Sweden and Turkey; 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.
The company maintains a capital expenditure program to support
its operations and believes its facilities are adequate for its present
operations and for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The company and its subsidiaries are not defendants in any
material pending legal proceeding other than ordinary routine litigation
incidental to the business.
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, 1999.
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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, 2000.
Name Business Experience
---- -------------------
W. G. Bares Mr. Bares, age 58, 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.
J. R. Ahern Mr. Ahern, age 53, has been Controller - Accounting and
Financial Reporting and Principal Accounting Officer
since April 26, 1999. From 1993 to April 1999 he was
Controller - Operations.
J. W. Bauer Mr. Bauer, age 46, has been Vice President and General
Counsel since April 1992.
C. P. Cooley Mr. Cooley, age 44, joined the company and became Vice
President, Treasurer and Chief Financial Officer in
April 1998. In June 1998 he also became responsible for
Corporate Strategic Planning. Prior to joining the
company, he was Assistant Treasurer - Corporate Finance
at Atlantic Richfield Company.
S. A. Di Biase Dr. Di Biase, age 47, has been Vice President since
September 1993. He is responsible for Research and
Development.
G. R. Hill Dr. Hill, age 58, has been Senior Vice President since
1988. He has been responsible for Business Development
since October 1993. From 1996 to June 1998 he was also
responsible for Corporate Strategic Planning.
J. E. Hodge Mr. Hodge, age 57, has been Vice President since
September 1993. He is responsible for Operations.
K. H. Hopping Mr. Hopping, age 53, has been Vice President and
Secretary of the Corporation since April 1991.
S. F. Kirk Mr. Kirk, age 50, has been Vice President since
September 1993. On January 1, 1999, he became
responsible for Sales and Marketing. From April 1996 to
January 1, 1999, he was responsible for Sales. From
1993 to April 1996, he was responsible for Segment
Management.
Y. Le Couedic Mr. Le Couedic, age 52, has been Vice President since
September 1993. He is responsible for Management
Information Systems.
G. P. Lieb Mr. Lieb, age 47, has been Controller - Commercial
Analysis and Support since April 26, 1999. From 1993 to
April 1999 he was Controller - Accounting and Financial
Reporting. From 1994 to April 1999 he was also
Principal Accounting Officer.
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Name Business Experience
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M. W. Meister Mr. Meister, age 45, has been Vice President since
April 1993, and was named Chief Ethics Officer in April
1998. He is responsible for Human Resources.
L. M. Reynolds Ms. Reynolds, age 39, was named Assistant Secretary in
April 1995, and has been Counsel since February 1991.
R. D. Robins Dr. Robins, age 57, became Vice President in April
1996. Since January 1, 1999, he has been responsible
for Performance Systems functions. From April 1996 to
January 1999, he was responsible for Segment
Management. From October 1993 to April 1996 he was
Passenger Car Segment Manager.
J. A. Thomas Mr. Thomas, age 61, 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.
All executive officers serve at the pleasure of the Board.
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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 4,992 as of March 10, 2000.
Information relating to the recent price and dividend history
of the company's common shares follows:
Common Share Price History
-------------------------- Dividends
1999 1998 Per Common Share
---- ---- ----------------
HIGH LOW HIGH LOW 1999 1998
---- --- ---- --- ---- ----
1st quarter $26 7/8 $18 $40 3/16 $33 1/4 $ .26 $ .26
2nd quarter 30 3/4 21 3/8 38 3/4 30 1/4 .26 .26
3rd quarter 29 11/16 24 3/8 32 3/8 22 3/8 .26 26
4th quarter 31 3/8 23 29 9/16 23 1/2 .26 .26
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$1.04 $1.04
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On May 1, 1999, the company issued 5,462 common shares in private placement
transactions exempt from registration under the Securities Act of 1933 pursuant
to Section 4(2) of that Act. The company issued the shares to former directors
pursuant to deferred compensation plans for directors.
On April 22, 1999, the company issued 1,306 common shares in a transaction
exempt from registration under the Securities Act of 1933 pursuant to Regulation
S. The common shares were issued pursuant to an employee benefit plan to an
employee of a wholly-owned UK subsidiary of the company.
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 42 and 43 of
the company's 1999 Annual Report to its shareholders is incorporated herein by
reference. Other income (charges) for 1999 includes litigation settlement gains
of $17.6 million and special charges of $19.6 million for the second phase of
the company's cost reduction program and adjustments to the first phase of the
company's cost reduction program. Other income (charges) for 1998 includes
litigation settlement gain of $16.2 million and special charges of $23.3 million
for the first phase of the company's cost reduction program and of $13.6 million
for the write-off of purchased technology under development resulting from the
acquisition of Adibis. Other income (charges) for 1996 and 1995 includes $53.3
million and $38.5 million, respectively, for gains on sale of investments.
Total debt reported in the Historical Summary includes the
following amounts classified as long-term at December 31: $365.4 in 1999, $390.4
in 1998, $182.2 million in 1997, $157.6 million in 1996 and $194.4 million in
1995.
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 14 through 23, inclusive, of the company's 1999 Annual
Report to its shareholders is incorporated herein by reference.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information appearing under the caption "Quantitative and
Qualitative Disclosures about Market Risk" contained on page 23 of the company's
1999 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 24 through 41, inclusive, of the company's 1999 Annual Report
to its shareholders, and the Quarterly Financial Data (Unaudited) contained on
page 41 of such 1999 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 3 to 7, inclusive, of the company's Proxy Statement dated
March 22, 2000, is incorporated herein by reference. Information relative to
executive officers of the company is contained under "Executive Officers of the
Registrant" in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation contained
under the headings "Director Compensation" on page 8, "Executive Compensation
- -Summary Compensation Table" and "- Stock Incentive Plans" on pages 11 through
13, 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 22, 2000, is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership set forth under
the heading "Share Ownership of Directors, Executive Officers and Large
Beneficial Owners" on pages 9 and 10 of the company's Proxy Statement dated
March 22, 2000, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in footnote (1) under the heading
"Share Ownership of Directors, Executive Officers and Large Beneficial Owners -
Five Percent Beneficial Owners" on page 10 of the company's Proxy Statement
dated March 22, 2000, is incorporated herein by reference.
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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 24 through 41, inclusive, of Lubrizol's
1999 Annual Report to its shareholders and
incorporated herein by reference:
Independent Auditors' Report
Consolidated Statements of Income for the years
ended December 31, 1999, 1998 and 1997
Consolidated Balance Sheets at December 31, 1999
and 1998
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1999, 1998 and
1997
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.
3. Exhibits
(3)(a) Amended Articles of Incorporation of The
Lubrizol Corporation, as adopted September
23, 1991.
(3)(b) Regulations of The Lubrizol Corporation, as
amended effective April 27, 1992.
(4)(a) Amendment to Article Fourth of Amended
Articles of Incorporation.
(4)(b) Indenture dated as of November 25, 1998,
between The Lubrizol Corporation and The
First National Bank of Chicago as Trustee.
(Reference is made to Exhibit (4)(b) to The
Lubrizol Corporation's Annual Report on
Form 10-K for the year ended December 31,
1998, which Exhibit is incorporated herein
by reference). The company agrees, upon
request, to furnish to the Securities and
Exchange Commission a copy of any
instrument authorizing long-term debt that
does not authorize debt in excess of 10% of
the total assets of the company and its
subsidiaries on a consolidated basis.
(4)(c) Amended and Restated Rights Agreement
between The Lubrizol Corporation and
American Stock Transfer &
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Trust Company dated as of July 26, 1999.
(Reference is made to Exhibit 4.l to The
Lubrizol Corporation's Registration
Statement on Form 8-A/A dated August 17,
1999, which Exhibit is incorporated herein
by reference.)
(10)(a)* The Lubrizol Corporation 1985 Employee
Stock Option Plan, as amended. (Reference
is made to Exhibit (10)(a) to The Lubrizol
Corporation's Annual Report on Form 10-K
for the year ended December 31, 1998, 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 Quarterly Report on Form 10-Q
for the quarterly period ended September
30, 1999, which Exhibit is incorporated
herein by reference.)
(10)(c)* Form of Employment Agreement between The
Lubrizol Corporation and certain of its
senior executive officers.
(10)(d)* The Lubrizol Corporation Excess Defined
Benefit Plan, as amended. (Reference is
made to Exhibit (10)(d) to The Lubrizol
Corporation's Quarterly Report on Form 10-Q
for the quarterly period ended September
30, 1997, 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 Quarterly Report on Form 10-Q
for the quarterly period ended September
30, 1997, which Exhibit is incorporated
herein by reference.)
(10)(f)* The Lubrizol Corporation Performance Pay
Plan (formerly Variable Award Plan), as
amended. (Reference is made to Exhibit
(10)(f) to The Lubrizol Corporation's
Annual Report on Form 10-K for the year
ended December 31, 1998, which Exhibit is
incorporated herein by reference.)
(10)(g)* The Lubrizol Corporation Executive Death
Benefit Plan, as amended. (Reference is
made to Exhibit (10)(g) to The Lubrizol
Corporation's Quarterly Report on Form 10-Q
for the quarterly period ended September
30, 1997, which Exhibit is incorporated
herein by reference.)
(10)(h)* The Lubrizol Corporation 1991 Stock
Incentive Plan, as amended. (Reference is
made to Exhibit (10)(h) to The Lubrizol
Corporation's Quarterly Report on Form 10-Q
for the quarterly period ended September
30, 1999, which Exhibit is incorporated
herein by reference.)
(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
Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999,
which Exhibit is incorporated herein by
reference.)
-12-
<PAGE> 13
(10)(j)* The Lubrizol Corporation Officers'
Supplemental Retirement 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,
1998, 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)(k) to
The Lubrizol Corporation's Quarterly Report
on Form 10-Q for the quarterly period ended
September 30, 1999, which Exhibit is
incorporated herein by reference.)
(10)(l)* The Lubrizol Corporation Executive Council
Deferred Compensation Plan, as amended.
(Reference is made to Exhibit (10)(l) to
The Lubrizol Corporation's Quarterly Report
on Form 10-Q for the quarterly period ended
September 30, 1999, which Exhibit is
incorporated herein by reference.)
(12) Computation of Ratio of Earnings to Fixed
Charges.
(13) The following portions of The Lubrizol
Corporation 1999 Annual Report to its
shareholders:
Pages 14-23 Management's Discussion and
Analysis of Financial
Condition and Results of
Operations
Page 24 Independent Auditors' Report
Page 25 Consolidated Statements of
Income for the years ended
December 31, 1999, 1998 and
1997
Page 26 Consolidated Balance Sheets
at December 31, 1999 and 1998
Page 27 Consolidated Statements of
Cash Flows for the years
ended December 31, 1999, 1998
and 1997
Page 28 Consolidated Statements of
Shareholders' Equity for the
years ended December 31,
1999, 1998 and 1997
Pages 29-41 Notes to Financial Statements
Page 41 Quarterly Financial Data
(Unaudited)
Pages 42-43 Historical Summary
(21) List of Subsidiaries of The Lubrizol
Corporation
(23) Consent of Independent Auditors
(27) Financial Data Schedule for the year ended
December 31, 1999
*Indicates management contract or compensatory plan or arrangement.
-13-
<PAGE> 14
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months
ended December 31, 1999.
-14-
<PAGE> 15
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 27, 2000, 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 27, 2000, by the following
persons on behalf of the Registrant and in the capacities indicated.
/s/W. G. Bares Chairman of the Board, President and Chief
- ------------------------------- Executive Officer
W. G. Bares (Principal Executive Officer)
/s/C. P. Cooley Vice President, Treasurer and Chief
- ------------------------------- Financial Officer
C. P. Cooley (Principal Financial Officer)
/s/J. R. Ahern Controller, Accounting and Financial
- ------------------------------- Reporting
J. R. Ahern (Principal Accounting Officer)
/s/Jerald A. Blumberg Director
- -------------------------------
Jerald A. Blumberg
/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/William P. Madar Director
- -------------------------------
William P. Madar
/s/Ronald A. Mitsch Director
- -------------------------------
Ronald A. Mitsch
/s/M. Thomas Moore Director
- -------------------------------
M. Thomas Moore
/s/Daniel E Somers Director
- -------------------------------
Daniel E. Somers
<PAGE> 16
EXHIBIT INDEX
-------------
Exhibits
(3)(a) Amended Articles of Incorporation of The
Lubrizol Corporation, as adopted September 23,
1991.
(3)(b) Regulations of The Lubrizol Corporation, as
amended effective April 27, 1992.
(4)(a) Amendment to Article Fourth of Amended Articles
of Incorporation.
(4)(b) Indenture dated as of November 25, 1998, between
The Lubrizol Corporation and The First National
Bank of Chicago as Trustee. (Reference is made
to Exhibit (4)(b) to The Lubrizol Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1998, which Exhibit is incorporated
herein by reference).
The company agrees, upon request, to furnish to
the Securities and Exchange Commission a copy of
any instrument authorizing long-term debt that
does not authorize debt in excess of 10% of the
total assets of the company and its subsidiaries
on a consolidated basis.
(4)(c) Amended and Restated Rights Agreement between
The Lubrizol Corporation and American Stock
Transfer & Trust Company dated as of July 26,
1999. (Reference is made to Exhibit 4.l to The
Lubrizol Corporation's Registration Statement on
Form 8-A/A dated August 17, 1999, which Exhibit
is incorporated herein by reference.)
(10)(a)* The Lubrizol Corporation 1985 Employee Stock
Option Plan, as amended. (Reference is made to
Exhibit (10)(a) to The Lubrizol Corporation's
Annual Report on Form 10-K for the year ended
December 31, 1998, 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 Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999,
which Exhibit is incorporated herein by
reference.)
(10)(c)* Form of Employment Agreement between The
Lubrizol Corporation and certain of its senior
executive officers.
(10)(d)* The Lubrizol Corporation Excess Defined Benefit
Plan, as amended. (Reference is made to Exhibit
(10)(d) to The Lubrizol Corporation's Quarterly
Report on Form 10-Q for the quarterly period
ended September 30, 1997, which Exhibit is
incorporated herein by reference.)
<PAGE> 17
(10)(e)* The Lubrizol Corporation Excess Defined
Contribution Plan, as amended. (Reference is
made to Exhibit (10)(e) to The Lubrizol
Corporation's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1997,
which Exhibit is incorporated herein by
reference.)
(10)(f)* The Lubrizol Corporation Performance Pay Plan
(formerly Variable Award Plan), as amended.
(Reference is made to Exhibit (10)(f) to The
Lubrizol Corporation's Annual Report on Form
10-K for the year ended December 31, 1998, which
Exhibit is incorporated herein by reference.)
(10)(g)* The Lubrizol Corporation Executive Death Benefit
Plan, as amended. (Reference is made to Exhibit
(10)(g) to The Lubrizol Corporation's Quarterly
Report on Form 10-Q for the quarterly period
ended September 30, 1997, which Exhibit is
incorporated herein by reference.)
(10)(h)* The Lubrizol Corporation 1991 Stock Incentive
Plan, as amended. (Reference is made to Exhibit
(10)(h) to The Lubrizol Corporation's Quarterly
Report on Form 10-Q for the quarterly period
ended September 30, 1999, which Exhibit is
incorporated herein by reference.)
(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 Quarterly Report
on Form 10-Q for the quarterly period ended
September 30, 1999, which Exhibit is
incorporated herein by reference.)
(10)(j)* The Lubrizol Corporation Officers' Supplemental
Retirement 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, 1998, 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)(k) to The Lubrizol
Corporation's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1999,
which Exhibit is incorporated herein by
reference.)
(10)(l)* The Lubrizol Corporation Executive Council
Deferred Compensation Plan, as amended.
(Reference is made to Exhibit (10)(l) to The
Lubrizol Corporation's Quarterly Report on Form
10-Q for the quarterly period ended September
30, 1999, which Exhibit is incorporated herein
by reference.)
(12) Computation of Ratio of Earnings to Fixed
Charges.
<PAGE> 18
(13) The following portions of The Lubrizol
Corporation 1998 Annual Report to its
shareholders:
Pages 14-23 Management's Discussion and Analysis
of Financial Condition and Results
of Operations
Page 24 Independent Auditors' Report
Page 25 Consolidated Statements of Income
for the years ended December 31,
1999, 1998 and 1997
Page 26 Consolidated Balance Sheets at
December 31, 1999 and 1998
Page 27 Consolidated Statements of Cash
Flows for the years ended December
31, 1999, 1998 and 1997
Page 28 Consolidated Statements of
Shareholders' Equity for the years
ended December 31, 1999, 1998 and
1997
Pages 29-41 Notes to Financial Statements
Page 41 Quarterly Financial Data (Unaudited)
Pages 42-43 Historical Summary
(21) List of Subsidiaries of The Lubrizol Corporation
(23) Consent of Independent Auditors
(27) Financial Data Schedule for the year ended
December 31, 1999
*Indicates management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT (3)(a)
CERTIFICATE OF ADOPTION
OF
AMENDED ARTICLES OF INCORPORATION
OF
THE LUBRIZOL CORPORATION
L. E. Coleman, Chairman of the Board of Directors, and K. H. Hopping,
Vice President and Secretary, of The Lubrizol Corporation, an Ohio corporation
(the "Corporation") with its principal place of business located in Wickliffe,
Ohio, do hereby certify that a meeting of the Board of Directors of the
Corporation was duly called and held on September 23, 1991, at which meeting a
quorum of the directors of the Corporation was present, and that by the
affirmative vote of the majority of such directors the following resolution was
adopted for the purpose of consolidating the existing Amended Articles of
Incorporation and the amendments to the existing Amended Articles of
Incorporation that previously have been adopted by the shareholders of the
Corporation and filed with the Secretary of State of Ohio (such consolidation
being permitted by Section 1701.72(B) of the Ohio Revised Code):
RESOLVED, that the Amended Articles of Incorporation attached hereto as
Exhibit A be, and they hereby are, adopted to supersede the existing
Amended Articles of Incorporation of the Corporation.
IN WITNESS WHEREOF, L. E. Coleman, Chairman of the Board of Directors,
and K. H. Hopping, Vice President and Secretary, of The Lubrizol Corporation,
acting for and on behalf of the Corporation, have hereunto subscribed their
names this 23rd day of September, 1991.
/s/ [L. E. Coleman]
L. E. Coleman Chairman of the Board
/s/ [K. H. Hopping]
K. H. Hopping Vice President and Secretary
<PAGE> 2
Exhibit A
AMENDED ARTICLES OF INCORPORATION
OF
THE LUBRIZOL CORPORATION
FIRST: The name of the Corporation is The Lubrizol Corporation.
SECOND: The place in the State of Ohio where its principal office is
located is Wickliffe, Lake County.
THIRD: The purposes of the Corporation are as follows:
To manufacture, produce, process, buy, sell, develop, acquire,
distribute and otherwise deal in chemicals, chemical products and
compositions, including lubricants, fuels and additives for lubricants
and fuels, and to do all things necessary or incidental thereto.
To invest in high technology companies and in companies with
substantial growth possibilities and to acquire such companies.
To engage in any other lawful act or activity for which
corporations may be formed under Section 1701.01 to 1701.98, inclusive,
of the Revised Code of Ohio, as now in effect or hereafter amended.
FOURTH: The authorized number of shares of the Corporation is
147,000,000, consisting of 2,000,000 shares of serial preferred stock without
par value designated Serial Preferred Stock ("Serial Preferred Stock");
25,000,000 shares of serial preferred stock without par value designated Serial
Preference Shares ("Serial Preference Shares"); and 120,000,000 common shares
without par value ("Common Shares").
No holder of any class of shares of the Corporation shall, as such
holder, have any preemptive or preferential right to purchase or subscribe to
any shares of any class of stock of the Corporation, whether now or hereafter
authorized, whether unissued or in treasury, or to purchase any obligations
convertible into shares of any class of stock of the Corporation, which at any
time may be proposed to be issued by the Corporation or subjected to rights or
options to purchase granted by the Corporation.
No holder of shares of the Corporation shall be entitled to vote
cumulatively in the election of Directors of the Corporation.
The shares of such classes shall have the following express terms:
DIVISION A
EXPRESS TERMS OF THE SERIAL PREFERRED STOCK
Section 1. The Serial Preferred Stock may be issued from time to time
in one or more series. All shares of Serial Preferred Stock shall be of equal
rank and shall be identical, except in respect of the matters that may be fixed
by the Board of Directors as hereinafter provided, and each share of each series
shall be identical with all other shares of such series, except as to the date
from which dividends are cumulative. Subject to the provisions of Sections 2 to
8, both inclusive, of this Division, which provisions shall apply to all Serial
Preferred Stock, the Board of Directors hereby is authorized to cause such
shares to be issued in one or more series and with respect to each such series
prior to the issuance thereof to fix:
(a) The designation of the series, which may be by
distinguishing number, letter or title;
<PAGE> 3
(b) The number of shares of the series, which number the Board
of Directors may (except where otherwise provided in the creation of
the series) increase or decrease (but not below the number of shares
thereof then outstanding);
(c) The annual dividend rate of the series;
(d) The dates at which dividends, if declared, shall be
payable, and the dates from which dividends shall be cumulative;
(e) The redemption rights and price or prices, if any, for
shares of the series;
(f) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series;
(g) The amounts payable on shares of the series in the event
of any voluntary or involuntary liquidation, dissolution, or winding up
of the affairs of the Corporation;
(h) Whether the shares of the series shall be convertible into
Common Shares, and, if so, the conversion price or prices, any
adjustments thereof, and all other terms and conditions upon which such
conversion may be made; and
(i) Restrictions (in addition to those set forth in Sections
6(b) and 6(c) of this Division) on the issuance of shares of the same
series or of any other class or series;
provided, however, that the aggregate amount which the holders of Serial
Preferred Stock at any time outstanding shall be entitled to receive upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation shall not exceed $50,000,000, plus accrued and unpaid dividends.
The Board of Directors is authorized to adopt from time to time
amendments to the Articles of Incorporation fixing, with respect to each such
series, the matters described in clauses (a) to (i), both inclusive, of this
Section 1.
Section 2. The holders of Serial Preferred Stock of each series, in
preference to the holders of Common Shares and of any other class of shares
ranking junior to the Serial Preferred Stock, shall be entitled to receive out
of any funds legally available and when and as declared by the Board of
Directors, dividends in cash at the rate for such series fixed in accordance
with the provisions of Section 1 of this Division, and no more, payable
quarterly on the dates fixed for such series. Such dividends shall be
cumulative, in the case of shares of each particular series, from and after the
date or dates fixed with respect to such series. No dividends may be paid upon
or declared or set apart for any of the Serial Preferred Stock for any quarterly
dividend period unless at the same time a like proportionate dividend for the
same quarterly dividend period, ratably in proportion to the respective annual
dividend rates fixed therefor, shall be paid upon or declared or set apart for
all Serial Preferred Stock of all series then issued and outstanding and
entitled to receive such dividend.
Section 3. In no event so long as any Serial Preferred Stock shall be
outstanding shall any dividends, except a dividend payable in Common Shares or
other shares ranking junior to the Serial Preferred Stock, be paid or declared
or any distribution be made except as aforesaid on the Common Shares or any
other shares ranking junior to the Serial Preferred Stock, nor shall any Common
Shares or any other shares ranking junior to the Serial Preferred Stock be
purchased, retired or otherwise acquired by the Corporation(except out of the
proceeds of the sale of Common Shares or other shares ranking junior to the
Serial Preferred Stock received by the Corporation subsequent to January 1,
1969):
(a) Unless all accrued and unpaid dividends on Serial
Preferred Stock, including the full dividends for the current quarterly
dividend period, shall have been declared and paid or a sum sufficient
for payment thereof set apart; and
<PAGE> 4
(b) Unless there shall be no arrearages with respect to the
redemption of Serial Preferred Stock of any series from any sinking
fund provided for shares of such series in accordance with the
provisions of Section 1 of this Division.
Section 4.
(a) Subject to the express terms of each series and to the
provisions of Section 6(b)(iii) of this Division A, the Corporation may
from time to time redeem all or any part of the Serial Preferred Stock
of any series at the time outstanding, (i) at the option of the Board
of Directors at the applicable redemption price for such series fixed
in accordance with the provisions of Section 1 of this Division, or
(ii) in fulfillment of the requirements of any sinking fund provided
for shares of such series at the applicable sinking fund redemption
price, fixed in accordance with the provisions of Section 1 of this
Division, together in each case with accrued and unpaid dividends to
the redemption date.
(b) Notice of every such redemption shall be mailed, postage
prepaid, to the holders of record of the Serial Preferred Stock to be
redeemed at their respective addresses then appearing on the books of
the Corporation, not less than thirty (30) days nor more than sixty
(60) days prior to the date fixed for such redemption. At any time
after notice has been given as above provided, the Corporation may
deposit the aggregate redemption price of the shares of Serial
Preferred Stock to be redeemed with any bank or trust company in
Cleveland, Ohio, or New York, New York, having capital and surplus of
not less than Twenty-Five Million Dollars ($25,000,000), named in such
notice, directed to be paid to the respective holders of the shares of
Serial Preferred Stock so to be redeemed in amounts equal to the
redemption price of all shares of Serial Preferred Stock so to be
redeemed, on surrender of the stock certificate or certificates held by
such holders, and upon the making of such deposit such holders shall
cease to be shareholders with respect to such shares, and after such
notice shall have been given and such deposit shall have been made such
holders shall have no interest in or claim against the Corporation with
respect to such shares except only to receive such money from such bank
or trust company without interest or the right to exercise, before the
redemption date, any unexpired privileges of conversion. In case less
than all of the outstanding shares of Serial Preferred Stock are to be
redeemed, the Corporation shall select by lot the shares so to be
redeemed in such manner as shall be prescribed by its Board of
Directors.
If the holders of shares of Serial Preferred Stock which have
been called for redemption shall not within ten years after such
deposit, claim the amount deposited for the redemption thereof, any
such bank or trust company shall, upon demand, pay over to the
Corporation such unclaimed amounts and thereupon such bank or trust
company and the Corporation shall be relieved of all responsibility in
respect thereof and to such holders.
(c) Any shares of Serial Preferred Stock which are redeemed by
the Corporation pursuant to the provisions of this Section 4 and any
shares of Serial Preferred Stock which are purchased and delivered in
satisfaction of any sinking fund requirements provided for shares of
such series and any shares of Serial Preferred Stock which are
converted in accordance with the express terms thereof, shall be
cancelled, and not reissued. Any shares of Serial Preferred Stock
otherwise acquired by the Corporation shall resume the status of
authorized and unissued shares of Serial Preferred Stock without serial
designation.
Section 5.
(a) The holders of Serial Preferred Stock of any series shall,
in case of voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Corporation, be entitled to receive in full
out of the assets of the Corporation, including its capital, before any
amount shall be paid or distributed among the holders of the Common
Shares or any other shares ranking junior to the Serial Preferred
Stock, the amounts fixed with respect to shares of such series in
accordance with Section 1 of this Division plus an amount equal to all
dividends accrued and
<PAGE> 5
unpaid thereon to the date of payment of the amount due pursuant to
such liquidation, dissolution or winding up of the affairs of the
Corporation. In case the net assets of the Corporation legally
available therefor are insufficient to permit the payment upon all
outstanding shares of Serial Preferred Stock of the full preferential
amount to which they are respectively entitled, then such net assets
shall be distributed ratably upon outstanding shares of Serial
Preferred Stock in proportion to the full preferential amount to which
each such share is entitled.
After payment to holders of Serial Preferred Stock of the full
preferential amounts as aforesaid, holders of Serial Preferred Stock as
such shall have no right or claim to any of the remaining assets of the
Corporation.
(b) The merger or consolidation of the Corporation into or
with any other corporation, or the merger of any other corporation into
it, or the sale, lease or conveyance of all or substantially all the
property or business of the Corporation, shall not be deemed to be a
dissolution, liquidation or winding up for the purposes of this Section
5.
Section 6.
(a) The holders of Serial Preferred Stock shall be entitled to
one vote for each share of such stock upon all matters presented to the
shareholders; and, except as otherwise provided herein or required
bylaw, the holders of Serial Preferred Stock and the holders of Common
Shares shall vote together as one class on all matters.
If, and so often as, the Corporation shall be in default in
the payment of six (6) full quarterly dividends (whether or not
consecutive) on any series of Serial Preferred Stock at the time
outstanding, whether or not earned or declared, the holders of Serial
Preferred Stock of all series, voting separately as a class and in
addition to all other rights to vote for directors, shall be entitled
to elect as herein provided, two members of the Board of Directors of
the Corporation; provided, however, that the holders of shares of
Serial Preferred Stock shall not have or exercise such special class
voting rights except at meetings of the shareholders for the election
of directors at which the holders of not less than thirty-five percent
(35%) of the outstanding shares of Serial Preferred Stock of all series
then outstanding are present in person or by proxy; and provided
further that the special class voting rights provided for herein when
the same shall have become vested shall remain so vested until all
accrued and unpaid dividends on the Serial Preferred Stock of all
series then outstanding shall have been paid, whereupon the holders of
Serial Preferred Stock shall be divested of their special class voting
rights in respect of subsequent elections of directors, subject to the
revesting of such special class voting rights in the event hereinabove
specified in this paragraph.
In the event of default entitling the holders of Serial
Preferred Stock to elect two directors as above specified, a special
meeting of the shareholders for the purpose of electing such directors
shall be called by the Secretary of the Corporation upon written
request of, or may be called by, the holders of record of at least ten
percent (10%) of the shares of Serial Preferred Stock of all series at
the time outstanding, and notice thereof shall be given in the same
manner as that required for the annual meeting of shareholders;
provided, however, that the Corporation shall not be required to call
such special meeting if the annual meeting of shareholders shall be
held within one hundred twenty (120) days after the date of receipt of
the foregoing written request from the holders of Serial Preferred
Stock. At any meeting at which the holders of Serial Preferred Stock
shall be entitled to elect directors, the holders of thirty-five
percent (35%) of the then outstanding shares of Serial Preferred Stock
of all series present in person or by proxy, shall be sufficient to
constitute a quorum, and the vote of the holders of a majority of such
shares so present at any such meeting at which there shall be such a
quorum shall be sufficient to elect the members of the Board of
Directors which the holders of Serial Preferred Stock are entitled to
elect as hereinabove provided. The two directors who may be elected by
the holders of Serial Preferred Stock pursuant to the foregoing
provisions shall be in addition to any other directors then in office
or proposed to be elected otherwise then pursuant to such provisions,
and nothing
<PAGE> 6
in such provisions shall prevent any change otherwise permitted in the
total number of directors of the Corporation or require the resignation
of any director elected otherwise than pursuant to such provisions.
Notwithstanding any classification of the other directors of the
Corporation, the two directors elected by the holders of Serial
Preferred Stock shall be elected annually for terms expiring at the
next succeeding annual meeting of shareholders.
(b) The affirmative vote of the holders of at least two-thirds
of the shares of Serial Preferred Stock at the time outstanding, given
in person or by proxy at a meeting called for the purpose at which the
holders of Serial Preferred Stock shall vote separately as a class
shall be necessary to effect anyone or more of the following (but so
far as the holders of Serial Preferred Stock are concerned, such action
may be effected with such vote):
(i) Any amendment, alteration or repeal of any of the
provisions of the Articles of Incorporation or of the
Regulations of the Corporation which affects adversely the
voting powers, rights or preferences of the holders of Serial
Preferred Stock; provided, however, that, for the purpose of
this clause (i) only, neither the amendment of the Articles of
Incorporation so as to authorize or create, or to increase the
authorized or outstanding amount of Serial Preferred Stock or
of any shares of any class ranking on a parity with or junior
to the Serial Preferred Stock, nor the amendment of the
provisions of the Regulations so as to increase the number of
directors of the Corporation shall be deemed to affect
adversely the voting powers, rights or preferences of the
holders of Serial Preferred Stock; and provided further, that
if such amendment, alteration or repeal affects adversely the
rights or preferences of one or more but not all series of
Serial Preferred Stock at the time outstanding only the
affirmative vote of the holders of at least two-thirds of the
number of the shares at the time outstanding of the series so
affected shall be required;
(ii) The authorization or creation of, or the
increase in the authorized amount of, any shares of any class,
or any security convertible into shares of any class, ranking
prior to the Serial Preferred Stock; or
(iii) The purchase or redemption (for sinking fund
purposes or otherwise) of less than all of the Serial
Preferred Stock then outstanding except in accordance with a
stock purchase offer made to all holders of record of Serial
Preferred Stock, unless all dividends upon all Serial
Preferred Stock then outstanding for all previous quarterly
dividend periods shall have been declared and paid or funds
therefor set apart and all accrued sinking fund obligations
applicable thereto shall have been complied with.
(c) The affirmative vote of the holders of at least a majority
of the shares of Serial Preferred Stock at the time outstanding, given
in person or by proxy at a meeting called for the purpose at which the
holders of Serial Preferred Stock shall vote separately as a class,
shall be necessary to effect any one or more of the following (but so
far as the holders of Serial Preferred Stock are concerned, such action
may be effected with such vote):
(i) The sale, lease or conveyance by the Corporation
of all or substantially all of its property or business, or
its consolidation with or merger into any other corporation
unless the corporation resulting from such consolidation or
merger will have after such consolidation or merger no class
of shares either authorized or outstanding ranking prior to or
on a parity with the Serial Preferred Stock except the same
number of shares ranking prior to or on a parity with the
Serial Preferred Stock and having the same rights and
preferences as the shares of the Corporation authorized and
outstanding immediately preceding such consolidation or
merger, and each holder of Serial Preferred Stock immediately
preceding such consolidation or merger shall receive the same
number of shares, with the same rights and preferences, of the
resulting corporation; or
<PAGE> 7
(ii) The authorization of any shares ranking on a
parity with the Serial Preferred Stock or an increase in the
authorized number of shares of Serial Preferred Stock.
Section 7. The holders of Serial Preferred Stock shall have no
preemptive right to purchase or have offered to them for purchase any shares or
other securities of the Corporation, whether now or hereafter authorized.
Section 8. For the purpose of this Division A:
Whenever reference is made to shares "ranking prior to the Serial
Preferred Stock" or "on a parity with the Serial Preferred Stock," such
reference shall mean and include all shares of the Corporation in respect of
which the rights of the holders thereof as to the payment of dividends or as to
distributions in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, are given
preference over, or rank on an equality with (as the case may be) the rights of
the holders of Serial Preferred Stock; and whenever reference is made to shares
"ranking junior to the Serial Preferred Stock," such reference shall mean and
include all shares of the Corporation in respect of which the rights of holders
thereof as to payment of dividends and as to distributions in the event of a
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Corporation, are junior and subordinate to the rights of the holders of
Serial Preferred Stock.
DIVISION B
EXPRESS TERMS OF THE COMMON SHARES
The Common Shares shall be subject to the express terms of (i) the
Serial Preferred Stock and any series thereof and (ii) the Serial Preference
Shares and any series thereof. Each Common Share shall be equal to every other
Common Share and the holders thereof shall be entitled to one vote for each
share of such stock on all questions presented to the shareholders.
DIVISION C
EXPRESS TERMS OF THE SERIAL PREFERRED STOCK, SERIES A
Section 1. Designation and Amount. The shares of such series shall be
designated as "Serial Preferred Stock, Series A" ("Series A Stock") and the
number of shares constituting such series shall be 2,000,000. No shares of
Series A Stock may be issued except upon the exercise of a Right, as defined in,
and pursuant to the terms of, the Special Rights Agreement, dated as of October
31, 1988 (as from time to time amended or supplemented in accordance with the
terms thereof, the "Rights Agreement"), between the Corporation and National
City Bank.
Section 2. Dividends and Distributions.
(A) Except as provided in this Section 2, the holders of shares of
Series A Stock shall not be entitled to receive dividends or other distributions
with respect to any shares of Series A Stock.
(B) From and after the date on which shares of Series A Stock are
issued and outstanding (the "Dividend Accrual Commencement Date"), the holders
of issued and outstanding shares of Series A Stock, in preference to the holders
of Common Shares and of any other capital stock of the Corporation which ranks
junior to the Serial Preferred Stock in respect of dividends or distributions of
assets on liquidation of the Corporation (all of which classes, other than the
Serial Preferred Stock, are hereinafter embraced in the term "Junior Stock"),
shall be entitled to receive as and when declared by the Directors out of the
assets of the Corporation which are bylaw available for the payment of
dividends, cumulative cash dividends, payable quarterly on the last days of
March, June, September and December, and accruing from the applicable Dividend
Accrual Commencement Date, at, but not exceeding, the rate per share per annum
equal to the Dividend Rate (as hereinafter defined). For purposes of this
Division C, the "Dividend Rate" shall be equal to 8% of the Cash Redemption
Amount (as defined in Section 5(A) of this Division C) as of the last day of the
calendar month immediately preceding the applicable dividend payment date.
<PAGE> 8
Section 3. Redemption.
(A) From and after (but not before) the Earliest Redemption Date (as
defined in Section 5(C) of this Division C), the Series A Stock may be redeemed
in whole or in part, at any time or from time to time, at the option of the
Corporation, for a cash redemption price per share equal to the sum of (x) the
then-applicable Cash Redemption Amount plus$1.00 and (y) an amount equal to the
sum of all dividends accrued to the date fixed for redemption and remaining
unpaid, whether or not declared, together with any applicable Deferred Payment
Entitlement (as defined in Section 5(D) of this Division C).
(B) So long as any shares of Series A Stock shall be outstanding, but
subject to Section 3(E) of this Division C, the Corporation shall, as a sinking
fund applicable to the Series A Stock, commencing on the date two years after
the first date on which any shares of Series A Stock are issued, and annually
thereafter, redeem, for a cash redemption price per share equal to the sum of
(x) the then-applicable Cash Redemption Amount plus $1.00 and (y) an amount
equal to the sum of all dividends accrued to such date and remaining unpaid,
whether or not declared, together with any applicable Deferred Payment
Entitlement, a number of shares of Series A Stock equal to 25% of the greatest
number of shares of Series A Stock at any time outstanding. The Corporation
shall be permitted to satisfy in whole or in part the requirements of this
Section 3(B) with respect to any year by applying in whole or in part as a
credit in reduction of the obligation of the Corporation to make redemptions for
the sinking fund in such year shares of Series A Stock purchased by the
Corporation and shares of Series A Stock redeemed otherwise than for the sinking
fund. Shares purchased by the Corporation for application as a credit as
provided above may be purchased in such manner as the Directors may determine
from time to time, subject to the restrictions on such purchases set forth
elsewhere herein or arising under applicable law.
(C) On the date five years after the first date on which any shares of
Series A Stock are issued, but subject to Section 3(E) of this Division C, the
Corporation shall redeem all shares of Series A Stock remaining outstanding for
a cash redemption price per share equal to the sum of (x) the then-applicable
Cash Redemption Amount plus $1.00 and (y) an amount equal to the sum of all
dividends accrued to such date and remaining unpaid, whether or not declared,
together with any applicable Deferred Payment Entitlement.
(D) Notwithstanding anything contained in this Division C to the
contrary, but subject to Section 3(E) of this Division C, at the option of any
holder of Series A Stock, upon written notice given by such holder at any time
during the 30-calendar day period following the date on which the last notice
was mailed pursuant to the next sentence of this Section 3(D) the Corporation
shall, prior to the filing of a certificate of dissolution or such other
instrument as may then be prescribed by applicable law to effect the dissolution
of the Corporation, redeem all shares of Series A Stock outstanding as to which
such holder shall have made such election for a cash redemption price per share
equal to the sum of (x) the then-applicable Cash Redemption Amount plus $1.00
and (y) an amount equal to the sum of all dividends accrued to such date and
remaining unpaid, whether or not declared, together with any applicable Deferred
Payment Entitlement. The Corporation shall give notice to all holders of Series
A Stock no fewer than 45-calendar days prior to making any filing referred to in
the immediately preceding sentence, which notice will be so given by first class
United States mail and publication in The Wall Street Journal and any other
nationally recognized publication the Corporation may elect, accompanied by an
appropriate form of election and such other information as may be required to
permit an informed election.
(E) In addition to the limitations that may apply under applicable Ohio
law, the Corporation shall be required to redeem any shares of Series A Stock
under Sections 3(B), 3(C)or 3(D) of this Division C only to the extent that,
after giving effect to such redemption, the consolidated retained earnings of
the Corporation and the corporations with which it is consolidated for financial
reporting purposes are greater than zero. For purposes of the foregoing
sentence, consolidated retained earnings shall mean the sum of (1) the
consolidated retained earnings as of September 30, 1988 of the Corporation and
the corporations with which it was then consolidated for financial reporting
purposes and (2) the consolidated retained earnings accumulated subsequent to
September 30, 1988 of the Corporation and the corporations with which it is
consolidated for financial reporting purposes determined in accordance with
generally accepted
<PAGE> 9
accounting principles as in effect as of such date (except as otherwise provided
in this sentence) and after giving effect to dividends or other distributions
on, and redemptions and other purchases of, Serial Preferred Stock, but without
giving effect to dividends or other distributions on, or redemptions or other
purchases of, any Junior Stock, or to any transfers from retained earnings to
additional capital or capital stock accounts, and including as a credit to
retained earnings, in all events (and notwithstanding any contrary treatment for
financial reporting purposes or otherwise), the amount of the Recovery then
collected. If the Corporation is not required to redeem shares of Series A Stock
in the manner otherwise provided herein by virtue of the first sentence of this
Section 3(E), or if a legal or contractual restriction prevents the Corporation
form effecting the redemption of any shares of Series A Stock then outstanding
in the manner otherwise provided herein, then (x) to the extent required and not
restricted, payment of redemption amounts shall be made daily on a pro rata
basis or in such other manner as the Directors of the Corporation may determine
in good faith to be fair to the holders of Series A Stock, (y) in the case of
any such legal or contractual restriction, the Corporation shall use its best
efforts to remove such restriction as soon as possible, and (z)the Corporation
shall give notice to each holder of shares of Series A Stock of any such
restriction and the efforts by the Corporation to remove it. Postponement of
payment of redemption amounts shall not in any way diminish or restrict the
right or the holders of shares of Series A Stock to have their shares redeemed
as provided in this Section 3. If amounts payable to retire shares of Serial
Preferred Stock are not paid in full in the case of all series for which a
sinking fund has been fixed, the number of shares to be retired for the sinking
fund of each such series shall be in proportion to the respective amounts that
would be payable if all such amounts were paid in full.
Section 4. Liquidation Rights.
(A) The provisions of Section 7(F) of this Division C will apply to any
voluntary to involuntary dissolution, liquidation or winding up of the affairs
of the Corporation and will not be limited or otherwise affected by this Section
4.
(B) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation (all of which are
hereinafter embraced in the word "liquidation") occurring on or after the
Earliest Redemption Date, the holders of Series A Stock who do not exercise
their rights pursuant to Section 3(D) of this Division C, shall be entitled to
receive, subject to the limitations, if any, then applicable in such event
pursuant to Division A, from the assets of the Corporation available for
distribution to the shareholders, all amounts (including without limitation any
Deferred Payment Entitlement) which they would be entitled to receive if on the
date of such liquidation the shares of Series A Stock held by them had been
redeemed at the option of the Corporation in accordance with the provisions of
Section 3(A) of this Division C. In the event of any liquidation occurring prior
to the Earliest Redemption Date, all rights of the Corporation in respect of the
Covered Cases and any portion of the Recovery (as defined in Section 5(A) of
this Division C) theretofore collected by the Corporation, and such additional
funds or assets as may be required, shall be placed in trust for the benefit of
the holders of the Series A Stock (and the holders of any other class of capital
stock of the Corporation to the extent hereinafter provided) upon such terms so
that (1) the holders of Series A Stock shall be entitled to receive, from the
assets of the Corporation available for distribution to shareholders, units of
beneficial interest in such trust which shall as nearly as practicable entitle
them to receive, per share of Series A Stock held, a fractional undivided
interest in the proceeds of the Recovery equal to the Per Share Allocation
Factor, plus $1.00, and (2) the holders of the other classes of capital stock of
the Corporation shall be entitled to receive out of such assets available for
distribution units of beneficial interest in such trust which shall as nearly as
practicable entitle them to receive any balance of the proceeds of the Recovery
in accordance with their respective rights upon liquidation. In the event of any
liquidation, the holders of the Serial Preferred Stock of the respective series
shall be entitled to be paid in full the respective amounts fixed for such
series before any distribution or payment or setting apart for payment shall be
made to or for the holders of the Common Shares or any other Junior Stock. After
such payments shall have been in full to the holders of the Serial Preferred
Stock, the remaining assets and funds of the Corporation shall be distributed
among the holders of the Junior Stock of the Corporation according to their
respective rights. In the event that the assets of the Corporation are not
sufficient to make the payments required to be made to the holders of the Serial
Preferred Stock in full, such assets
<PAGE> 10
shall be distributed to the holders of the Serial Preferred Stock of the
respective series pro rata in proportion to the respective amounts fixed for
such series.
Section 5. Amount Payable on Redemption or Liquidation.
(A) For purposes of this Division C, the following terms shall have the
meanings indicated:
(1) "Adjusted Value" of any "Assigned Value Assets" shall
mean, initially, the value assigned thereto as provided in Section 5(B)
of this Division C, and, in the event any such Assigned Value Assets
shall be sold for cash within two years of the Corporation's receipt
thereof, shall mean, thereafter and in lieu of the value initially
assigned, the cash proceeds of the sale, increased by the amount of any
revenues derived by the Corporation from, and decreased by any costs
and expenses incurred by the Corporation after receipt of such Assigned
Value Assets in respect of, such Assigned Value Assets during the
period prior to such sale.
(2) "Assigned Value Assets" shall mean any assets collected as
a part of the Recovery to which a value has been assigned as provided
in Section 5(B) of this Division C and shall also include the proceeds
of any sale or other disposition thereof.
(3) "Cash Redemption Amount" shall mean, at anytime of
determination on or after the Dividend Accrual Commencement Date, the
product obtained by multiplying(a) the sum of (i) the amount of the
Recovery which shall have been collected in the form of cash and (ii)
the Adjusted Value of any Assigned Value Assets, less (iii) all amounts
which shall have been paid by the Corporation as dividends on, in
redemption of, or for the repurchase (in accordance with the provisions
of Section 3(B) of this Division C) of, shares of Series A Stock, and
all dividends which shall have accrued but not been paid (whether or
not declared),on shares of Series A Stock by (b) the Per Share
Allocation Factor.
(4) "Covered Cases" shall mean, collectively, the civil
actions captioned The Lubrizol Corporation, an Ohio corporation vs.
Exxon Corporation, a New Jersey corporation, in the United States
District Court for the Southern District of Texas (Civil Action Nos.
H-84-1627 and H-85-2450), and in the United States District Court for
the Northern District of Ohio (Civil Action Nos. C84-1064 and
C85-3135), and all civil actions, whether in or before a state, federal
or foreign court or other authority, designated either specifically or
generically, as Covered Cases by majority vote of the Directors of the
Corporation prior to the first date on which shares of Series A Stock
are issued, and all the right, title and interest of the Corporation in
and under all such actions, and in and under all actions, suits or
proceedings determined by majority vote of the Directors of the
Corporation, prior to the first date on which shares of Series A Stock
are issued, to be directly related thereto or to have arisen therefrom,
and to all claims asserted therein (whether asserted in such actions or
any action to enforce any judgment or order therein or otherwise).
(5) "Deferred Payment Entitlement" shall have the meaning
referred to in Section 5(D) of this Division C.
(6) "Recovery" shall mean the collective total amount which
the Corporation (or its successors and assigns to the extent permitted
hereby) shall collect, whether in cash or other assets and whether
collected in one of more payments or transactions, on account of
favorable judgments in the Covered Cases or settlement in respect
thereof, less the sum of (a) an amount equal the product of (i) such
collective total amount and (ii) the Corporation's effective income tax
rate disclosed by the Corporation in the notes to the financial
statements of the Corporation last published and furnished to
shareholders immediately prior to the first issuance of any shares of
Series A Stock and (b) any amount which the Corporation (or its
successors and assigns to the extent permitted hereby) shall collect in
respect of any interest assigned by the Corporation as a Deferred
Payment Entitlement.
<PAGE> 11
(7) "Per Share Allocation Factor" shall mean, at any time of
determination, the fraction which results from dividing 1 by the sum of
(a) the total number of shares of Series A Stock then outstanding and
(b) the total number of shares of Series A Stock then subject to
issuance upon the proper exercise of outstanding Rights.
(B) If and whenever the Corporation shall receive any proceeds of the
Recovery in a form other than cash, there shall be assigned to such assets an
amount equal to the fair market value thereof as determined in good faith by the
Directors, unless the Directors of the Corporation shall determine that it is
not possible to assign a fair market value to such assets with a reasonable
level of confidence. The Directors of the Corporation shall make such
determination at the time such assets are collected or, if it is determined as
aforesaid that it is not possible to assign a fair market value thereto with a
reasonable level of confidence, at the first opportunity thereafter when it is
possible to make such a determination in good faith. The assets to which a value
has been assigned in accordance with this Section 5(B) are referred to therein
as "Assigned Value Assets" and the value so assigned shall be the initial
Adjusted Value of such assets. If a fair market value cannot reasonably be
assigned to any assets, the Corporation shall use its best efforts to dispose of
such assets as promptly as practicable, subject to the judgment of the Directors
as to the best interests of the holders of Series A Stock. Pending such
disposition the Corporation shall keep accurate records relating to such assets.
(C) The "Earliest Redemption Date" shall mean the first date on which
the Corporation shall have collected, in respect of any of the Covered Cases, in
the form of cash and/or assets constituting Assigned Value Assets, aggregate
proceeds of the Recovery having a value (based on the amount of cash to received
together with the Adjusted Value of any Assigned Value Assets) in excess of
$50,000,000.
(D) Whenever the Corporation shall redeem any shares of Series A Stock
when either (1) the prospect remains that additional amounts will be collected
in respect of the Covered Cases or (2) any portion of the Recovery then
collected consists of assets other than cash or Assigned Value Assets, the
Corporation shall, in connection with such redemption, assign to the holder of
each share of Series A Stock then being redeemed an undivided fractional
interest equal to the Per Share Allocation Factor then in effect in all the
Corporation's right, title and interest in (x) such additional amounts as maybe
collected in respect of the Covered Cases as provided in the foregoing clause
(1) and/or the proceeds thereof and (y) the proceeds of the sale or other
disposition of any assets other than cash or Assigned Value Assets plus the
revenues derived by the Corporation therefrom. The form and manner of assignment
shall be as determined by the Directors of the Corporation so as to best convey
to the holders of the shares of Series A Stock being redeemed the benefits
contemplated hereby; provided, however, that such holders shall not by reason of
the assignment of the Corporation's interest in the foregoing proceeds have any
right to control the prosecution of the Covered Cases, the collection of any
amounts recoverable thereunder of the operation or disposition of the aforesaid
assets, and provided, further, that the Corporation may provide that the
interests as assigned shall be non-transferable. The interest assigned in
accordance with this Section 5(D) in respect of any share of Series A Stock
being redeemed is referred to herein as a "Deferred Payment Entitlement" in
respect of such share.
Section 6. Voting Rights. The voting rights relating to the Serial
Preferred Stock set forth in Section 6 of Division A of Article Fourth are
applicable to the Series A Stock. Except as so provided, and except as required
by applicable law, the holders of shares of Series A Stock shall have no voting
rights with respect to any action by the Corporation or its shareholders by
virtue of being a holder of shares of Series A Stock.
Section 7. Limitations.
(A) So long as any shares of Series A Stock are outstanding, no shares
of any series of Serial Preferred Stock or other capital stock of the
Corporation other than Common Shares having the express terms applicable to
Common Shares on the Share Acquisition Date (as defined in Section 8(B) of this
Division C) or the Series A Stock, and no shares of Series A Stock not issuable
pursuant to and in accordance with the Rights Agreement, may be issued by the
Corporation.
<PAGE> 12
(B) So long as any shares of Series A Stock are outstanding, the
Corporation shall not invest any portion of the proceeds of the Recovery (other
than any non-cash assets collected as a part thereof) in other than "Permitted
Investments." For purposes of this Section 7(C), "Permitted Investments" shall
include the following obligations and securities:
(a) United States Treasury bonds, notes and bills;
(b) certificates of deposit issued by major commercial banks;
(c) Eurodollar time deposits placed with major commercial
banks;
(d) corporate bonds, debentures and notes (none of which shall
be convertible into any equity security) rated A or better by Moody's
Investors Services and by Standard & Poor's Corporation;
(e) non-convertible preferred stock rated A or better by
Moody's Investors Services and by Standard & Poor's Corporation; and
(f) commercial paper rated Prime-2 or better by Moody's
Investors Services and A-1 or better by Standard & Poor's Corporation.
In no event shall any portion of the proceeds of the Recovery be invested in any
obligation or other security of a Prohibited Transferee.
(C) So long as any shares of Series A Stock are outstanding, the
Corporation shall not settle or otherwise compromise the Covered Cases, direct
counsel to make any change in the strategy for conducting the Covered Cases,
fail to pay any costs or expenses of conducting the Covered Cases which might
diminish the likelihood of a favorable result therein or otherwise adversely
affect the conduct of the Covered Cases, except, in each case, with the approval
of the Directors of the Corporation.
(D) So long as any shares of Series A Stock are outstanding, the
Corporation shall not sell, assign or otherwise transfer the Covered Cases or
any interest therein unless the Directors of the Corporation shall have
previously determined in good faith that the proceeds to be realized thereby are
fair to the holders of the Series A Stock.
(E) So long as any shares of Series A Stock are outstanding, the
Corporation shall not (i) consolidate with, (ii) merge with or into, (iii) sell
or transfer to, in one or more transactions, assets or earning power aggregating
more than 50% of the assets or earning power of the Company and its
subsidiaries, taken as a whole, any Prohibited Transferee or any Affiliate or
Associate thereof (as such terms are defined in Section 8(B) of this Division
C), or (iv) liquidate, dissolve or otherwise wind-up the affairs of the
Corporation, if at the time of, after or as a result of such consolidation,
merger, sale, liquidation, dissolution or winding up there would be any charter
or regulation provisions, including without limitation any provisions of the
Corporation's Amended Articles of Incorporation or Regulations, as from time to
time amended, of any rights, options, warrants or other instruments or
securities outstanding or agreements in effect or any other actions taken, which
would eliminate or otherwise diminish the benefits intended to be afforded by
the Rights of the Series A Stock, without proper provision being made for the
redemption of the Series A Stock in accordance with Section 7(E) of this
Division C.
Section 8. Contributions and Transfer.
(A) The Series A Stock shall not be transferable to or by a Prohibited
Transferee and any attempt to transfer shares of Series A Stock to or by a
Prohibited Transferee shall be null and void. The Corporation reserves the right
to require (or to cause any transfer agent of the Corporation to require) any
Person who submits a share of Series A Stock for transfer on the transfer books
of the Corporation or for redemption pursuant to Section 3 hereof to establish
to the satisfaction of the Corporation that such Person did not acquire such
shares of Series A Stock while or from a Prohibited Transferee.
<PAGE> 13
(B) As used in this Division C, the term "Prohibited Transferee" shall
mean, at the time any determination is to be made, (1) any Person other than the
Corporation or any Related Person (as such terms are hereinafter defined), who
or which, together with all Affiliates and Associates (as such terms are defined
in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended, and in effect on the date of first issuance of any
shares of Series a Stock (the "Exchange Act")) of such Person, shall be the
beneficial owner of 20% or more of the Common Shares then outstanding or (2) any
Person (other than the Corporation or any Related Person) who or which, together
with all Affiliates or Associates of such Person (A) commences or announces its
intention to commence a tender or exchange offer the consummation of which would
result in beneficial ownership by such Person of 20% or more of the Common
Shares then outstanding, or announces its intention otherwise to purchase or
acquire (b) 20% or more of the Common Shares then outstanding. The term "Person"
shall mean any individual, firm, corporation, partnership or other entity, and
shall include any successor (by merger or otherwise) of such entity. The term
"Related Person" shall mean (x) any subsidiary of the Corporation, (y) any
employee benefit or stock ownership plan of the Corporation or any entity
holding Common Shares for or pursuant to the terms of any such plan, or (z) any
Person who acquires Common Shares from the Corporation or any other Related
Person in one or a series of related transactions, each of which is approved by
a majority of the Directors of the Corporation; provided, however, that if any
Person who becomes a Related Person solely by virtue of subsection (z) above, or
any Affiliate or Associate of such Person, subsequently becomes the beneficial
owner of any additional Common Shares in a transaction or transactions not
approved by a majority of the Directors of the Corporation, such Person shall no
longer be deemed a "Related Person" with respect to all Common Shares of which
it, or any of its Affiliates or Associates, is the beneficial owner. The term
"Distribution Date" shall mean the close of business on the fifteenth calendar
day (or such other date as any be specified by a majority vote of the Directors
then in office) after the Share Acquisition Date. The term "Share Acquisition
Date" shall mean the first date of public announcement by the Corporation or a
Prohibited Transferee (by press release, filing made with the Securities and
Exchange Commission or otherwise) that a Prohibited Transferee has become such.
For the purposes of this Division C, a Person shall be deemed the "Beneficial
Owner" of and shall be deemed "beneficially to own" any securities: (i) which
such Person or any of such Person's Affiliates or Associates, directly or
indirectly, has the right to acquire (whether such right is exercisable
immediately or only after the passage of time or the occurrence or nonoccurrence
of an event) pursuant to any agreement, arrangement or understanding (whether or
not in writing), or upon the exercise of conversion rights, exchange rights,
other rights (other than the Other Rights), warrants, options or otherwise;
provided, however, that a Person shall not be deemed the Beneficial Owner of, or
beneficially to own, securities tendered pursuant to a tender or exchange offer
made by or on behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or exchange;
or (ii) which such Person or any of such Person's Affiliates or Associates,
directly or indirectly, has the right or power to vote or dispose of, or to
direct the vote or disposition of, including pursuant to any agreement,
arrangement or understanding (whether or not in writing); or (iii) which any
other Person is the beneficial Owner if such other Person or any of the
Affiliates or Associates of such other Person has any agreement, arrangement or
understanding (whether or not in writing) with the first Person or the
Affiliates or Associates of the first Person with respect to acquiring, holding,
voting or disposing of any securities of the Company; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or beneficially to own, any
security (A) if such Personal has a right to vote such security pursuant to an
agreement, arrangement or understanding(whether or not in writing) which (i)
arises solely from a revocable proxy given to such Person in response to a
public proxy or consent solicitation made pursuant to, and in accordance with,
the applicable rules and regulations of the Exchange Act and (2) is not also
then reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report), or (B) if such beneficial ownership arises solely as a result
of such Person's status as a "clearing agency," as defined in Section 3(a)(23)
of the Exchange Act; and provided, further, however, that nothing in this
paragraph shall cause a Person engaged in business as an underwriter of
securities to be the Beneficial Owner of any securities acquired through such
Person's participation in good faith in an underwriting syndicate pursuant to an
agreement to which the Company is a party until the expiration of 40-calendar
days after the date of such acquisition. The term "Rights" shall mean the rights
to purchase shares of Series A Stock issued pursuant to the terms of the Rights
Agreement. The term "Other Rights" shall mean the rights to purchase Common
Shares of the
<PAGE> 14
Corporation issued pursuant to the terms of the Rights Agreement, dated October
6, 1987, as from time to time amended or supplemented, between the Corporation
and National City Bank.
DIVISION D
EXPRESS TERMS OF THE SERIAL PREFERENCE SHARES
Section 1. Serial Preference Shares may be issued from time to time in
one or more series. Subject to the provisions of this Division D, which apply to
all Serial Preference Shares, the Directors are hereby authorized to adopt
amendments to the Articles of Incorporation in respect of any unissued or
treasury Serial Preference Shares and thereby fix or change any or all of the
express terms of such Serial Preference Shares as from time to time may be
permitted or required by law, including without limitation the following:
(i) The division of such shares into series and the
designation and authorized number of shares of each series;
(ii) The dividend or distribution rate;
(iii) The dates of payment of dividends or distributions and
the dates from which they are cumulative;
(iv) Liquidation price;
(v) Redemption rights and price;
(vi) Sinking fund requirements;
(vii) Conversion rights; and
(viii) Restrictions on the issuance of shares of any class or
series.
Section 2. The holders of Serial Preference Shares shall be entitled to
one vote for each Serial Preference Share held by them upon all matters
presented to the shareholders and, except as required by law, the holders of
Serial Preference Shares and the holders of Common Shares (and the holders of
all other shares of voting stock of the Corporation that vote together as a
class with the holders of Common Shares) shall vote together as one class on all
matters.
Section 3. (a) The holders of Serial Preference Shares shall be
entitled to receive dividends, when and as declared by the Directors, out of the
assets of the Corporation which are by law available for the payment of
dividends at the rate per share per annum as shall have been fixed by the
Directors pursuant to Section 1 of this Division D.
(b) No dividends (other than a dividend payable in Common Shares) or
other distributions shall be paid or declared on any Common Shares or any other
shares ranking junior to the Serial Preference Shares (such Common Shares and
other shares ranking junior to the Serial Preference Shares being hereinafter
referred to as "Junior Shares"), nor shall any Junior Shares be purchased,
retired or otherwise acquired by the Corporation, unless:
(i) all accrued and unpaid dividends on all series of Serial
Preference Shares, including the full dividends for the current period,
shall have been declared and paid or provision shall have been made for
such payment; and
(ii) there shall be no arrearages with respect to the
redemption or sinking fund obligations, if any, of the Corporation for
any series of Serial Preference Shares.
<PAGE> 15
Section 4. In the event of a voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Corporation, before any payment
shall be made to the holders of Junior Shares, the holders of the Serial
Preference Shares shall be entitled to be paid from the assets available
therefor the liquidation price fixed by the Directors pursuant to Section 1 of
this Division D and all accrued and unpaid dividends on the Serial Preference
Shares.
Section 5. All Serial Preference Shares shall be shares "ranking junior
to the Serial Preferred Stock" as such phrase is defined in Division A, Section
8 of the Articles of Incorporation.
FIFTH: Except as otherwise provided in these Articles of Incorporation
or in the Regulations, the holders of a majority of the outstanding shares are
authorized to take any action which, but for this provision, would require the
vote or other action of the holders of more than a majority of such shares.
SIXTH: Except as otherwise provided in these Articles of Incorporation,
the Corporation, by its Board of Directors, may purchase issued shares, to the
extent permitted by law.
SEVENTH:
Section 1. In addition to any affirmative vote required by law or these
Articles of Incorporation, any Related Party Transaction shall require the
affirmative vote of not less than both a majority of the Corporation's
outstanding Voting Stock and a majority of the portion of the Corporation's
outstanding Voting Stock excluding the Voting Stock owned by the Related Party
involved in the Related Party Transaction.
Section 2. The provisions of Section 1 of this Article Seventh shall
not be applicable to Related Party Transactions in which (a) the aggregate
amount of the cash and the fair market value of consideration other than cash
received per share by holders of shares of each class or series of Voting Stock
of the Corporation who receive cash or other consideration in the Related Party
Transaction is not less than the highest per share price (with appropriate
adjustments for recapitalizations and for stock splits, stock dividends, and
like distributions) paid by the Related Party in acquiring any of its holdings
of each class of series of such Voting Stock, and (b) the form of consideration
received by holders of shares of each class or series of such Voting Stock is
cash or the same form used by the Related Party to acquire the largest
percentage of each class or series of such Voting Stock owned by the Related
Party.
Section 3. The provisions of Section 1 of this Article Seventh shall
not be applicable if the Continuing Directors of the Corporation by a majority
vote have expressly approved the Related Party Transaction.
Section 4. For the purpose of this Article Seventh:
(a) The term "Related Party Transaction" shall mean (i) any
merger or consolidation of the Corporation or a Subsidiary with a
Related Party, irrespective of which party, if either, is the surviving
party, (ii) any sale, purchase, lease, exchange, transfer, or other
transaction (or series of transactions) between the Corporation or a
Subsidiary and a Related Party involving the acquisition or disposition
of assets for consideration of $10,000,000 or more in value (except for
transactions in the ordinary course of business), (iii) the issuance or
transfer of any securities of the Corporation or of a Subsidiary to a
Related Party (other than an issuance or transfer of securities which
is effected on a pro rata basis to all shareholders of the
Corporation), (iv) any reclassification of securities of the
Corporation (including any reverse stock split) or any recapitalization
or other transaction involving the Corporation or its Subsidiaries that
would have the effect of increasing the voting power of a Related
Party, except for any mandatory redemption required by the terms of
outstanding securities, and (v) the adoption of any plan or proposal
for the liquidation or dissolution of the Corporation in favor of which
a Related Party votes its Voting Stock.
<PAGE> 16
(b) The term "Related Party" shall mean (i) any individual,
corporation, partnership, or other person, group or entity which,
together with its Affiliates and Associates, is the beneficial owner of
ten percent (10%) or more but less than ninety percent (90%) of the
Voting Stock of the Corporation or (ii) any such Affiliate or
Associate.
(c) A person shall be a "beneficial owner" of any shares of
Voting Stock:
(i) Which such person or any of its Affiliates or
Associates beneficially owns, directly or indirectly; or
(ii) Which such person or any of its Affiliates or
Associates has (a) the right to acquire (whether such right is
exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (b) the right to vote
pursuant to any agreement, arrangement or understanding; or
(iii) Which are beneficially owned, directly or
indirectly, by any other person with which such person or any
of its Affiliates or Associates has any agreement, arrangement
or understanding for the purpose of acquiring, holding, voting
or disposing of any shares of Voting Stock.
(d) The terms "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Securities Act of 1934, as in effect on
January 1,1985 (or any subsequent provisions replacing such Act, Rules
or Regulations).
(e) The term "consideration other than cash" as used in
Section 2(a) of this Article Seventh shall include, without limitation,
Voting Stock of the Corporation retained by its existing shareholders
in the event of a merger or consolidation with a Related Party in which
the Corporation is the surviving corporation.
(f) The term "Subsidiary" shall mean any Affiliate of the
Corporation more than fifty percent (50%) of the outstanding securities
of which representing the right, other than as affected by events of
default, to vote for the election of directors is owned by the
Corporation or by another Subsidiary (or both).
(g) The term "Voting Stock" shall mean all securities of the
Corporation entitled to vote generally in the election of directors.
(h) The term "Continuing Director" shall mean a director who
either (i) was a member of the Board of Directors of the Corporation
immediately prior to the time that the Related Party involved in a
Related Party Transaction became a Related Party, or (ii) was
designated (before his or her initial election as a director) as a
Continuing Director by a majority of the then Continuing Directors.
Section 5. A majority of the Continuing Directors shall have the power
and duty to determine conclusively for the purposes of this Article Seventh, on
the basis of information known to them, (a) whether a person is a Related Party,
(b) whether a person is an Affiliate or Associate of another, (c) whether a
transaction between the Corporation or a Subsidiary and a Related Party involves
the acquisition or disposition of assets for consideration of $10,000,000 or
more in value, (d) the fair market value of consideration other than cash
received by holders of Voting Stock in a Related Party Transaction, and (e) such
other matters with respect to which a determination or interpretation is
required under this Article Seventh.
Section 6. Nothing contained in this Article Seventh shall be construed
to relieve any related Party from any fiduciary obligation imposed by law.
<PAGE> 17
Section 7. Notwithstanding any other provisions of these Articles of
Incorporation or the Regulations of the Corporation or any provision of law
which might otherwise permit a lesser vote, but in addition to any affirmative
vote of the holders of any particular class or series of stock required by law
or these Articles of Incorporation, the affirmative vote of the holders of at
least sixty-six and two-thirds percent (66-2/3%) of the Corporation's Voting
Stock, voting as a single class, shall be required to alter, amend or adopt any
provision inconsistent with or repeal this Article Seventh.
EIGHTH:
Section 1. Any direct or indirect purchase or other acquisition by the
Corporation of any shares of Voting Stock from any Selling Shareholder who has
beneficially owned any of such shares of Voting Stock for less than two years
prior to the date of such purchase or other acquisition, or any agreement in
respect thereof, shall, except as expressly provided in Section 2 of this
Article Eighth, require the affirmative vote of the holders of not less than a
majority of the shares of Voting Stock represented in person or by proxy at a
meeting at which a quorum is present, excluding Voting Stock beneficially owned
by such Selling Shareholder, voting together as a single class. Such affirmative
vote shall be required notwithstanding the fact that no vote may be required, or
that a lesser percentage may be specified by law, or in any agreement with any
national securities exchange or otherwise.
Section 2. The provisions of Section 1 of this Article Eighth shall not
be applicable (a) to any purchase or other acquisition by the Corporation from a
Selling Shareholder of shares of Voting Stock owned by said Selling Shareholder
which purchase or acquisition is made as part of a tender or exchange offer by
the Corporation to purchase Voting Stock of the same class or series made on the
same terms to all holders of such Voting Stock and complying with the applicable
requirements of the Securities Exchange Act of 1934 and the rules and
regulations thereunder (or any subsequent provisions replacing such Act, rules
or regulations), or (b) to the purchase from any Selling Shareholder of shares
of Voting Stock by the Corporation at a price not in excess of the Fair Value
thereof, and any such purchase or acquisition shall require only such
affirmative vote, if any, as is required by law and any other provisions of
these Articles of Incorporation or otherwise.
Section 3. For the purpose of this Article Eighth:
(a) "Selling Shareholder" shall mean any individual, firm,
partnership, corporation or other person, group or entity (other than
the Corporation or any corporation of which a majority of its voting
stock is owned, directly or indirectly, by the Corporation) who or
which:
(i) is the beneficial owner of more than five percent
(5%) of the class or series of Voting Stock to be acquired; or
(ii) is an Affiliate of the Corporation and at any
time within the two-year period immediately prior to the date
in question was the beneficial owner of more than five percent
(5%) of the class or series of Voting Stock to be acquired; or
(iii) is an assignee or has otherwise succeeded to
any shares of the class or series of Voting Stock to be
acquired which were at any time within the two-year period
immediately prior to the date in question beneficially owned
by a Selling Shareholder, if such assignment or succession
shall have occurred in the course of a transaction or series
of transactions not involving a public offering within the
meaning of the Securities Act of 1933.
(b) "Affiliate" or "Associate" shall have the respective
meanings ascribed to such terms in Rule12b-2 of the General Rules and
Regulations under the Securities Act of 1934, as in effect on January
1,1985 (or any subsequent provisions replacing such Act, Rules or
Regulations).
(c) A person shall be a "beneficial owner" of any shares of
Voting Stock:
<PAGE> 18
(i) Which such person or any of its Affiliates or
Associates beneficially owns, directly or indirectly; or
(ii) Which such person or any of its Affiliates or
Associates has (a) the right to acquire (whether such right is
exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (b) the right to vote
pursuant to any agreement, arrangement or understanding; or
(iii) Which are beneficially owned, directly or
indirectly, by any other person with which such person or any
of its Affiliates or Associates has any agreement, arrangement
or understanding for the purpose of acquiring, holding, voting
or disposing of any shares of Voting Stock.
(d) For the purpose of determining whether a person is a
Selling Shareholder pursuant to paragraph (a) of this Section 3, the
number of shares of Voting Stock deemed to be outstanding shall include
shares deemed owned through application of paragraph (c) of this
Section 3, but shall not include any other shares of Voting Stock which
may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or
options, or otherwise.
(e) "Voting Stock" shall mean all securities of the
Corporation entitled to vote generally in the election of directors.
(f) "Fair Value" shall mean the highest closing sale price of
such Voting Stock during the thirty-day period immediately preceding
the date in question, on the Composite Tape for New York Stock
Exchange-Listed Stocks, or, if such Voting Stock is not quoted on the
Composite Tape, on the New York Stock Exchange, or, if such Voting
Stock is not listed on such Exchange, on the principal United States
securities exchange registered under the Securities Exchange Act of
1934 on which such Voting Stock is listed, or, if such Voting Stock is
not listed on any such exchange, the highest closing bid quotation with
respect to such Voting Stock, during the thirty-day period immediately
preceding the date in question, on the National Association of
Securities Dealers, Inc. Automated Quotations System or any system then
in use, or if no such quotations are available, the Fair Value on the
date in question of such Voting Stock shall be as determined by a
majority of the Board of Directors of the Corporation in good faith.
Section 4. A majority of the Board of Directors shall have the power
and duty to determine conclusively for the purposes of this Article Eighth, on
the basis of information known to them, (a) whether a person is a Selling
Shareholder, (b) the Fair Value of Voting Stock owned by a Selling Shareholder,
and (c) such other matters with respect to which a determination or
interpretation is required under this Article Eighth.
NINTH: No person shall make a Control Share Acquisition without first
obtaining the prior authorization of the Corporation's shareholders at a special
meeting of shareholders called by the Board of Directors in accordance with this
Article Ninth.
Section 1. PROCEDURE. Any Person who proposes to make a Control Share
Acquisition shall deliver a notice ("Notice") to the Corporation at its
principal place of business that sets forth all of the following information:
(A) The identity of the Person who is giving the Notice;
(B) A Statement that the Notice is given pursuant to this
Article Ninth.
<PAGE> 19
(C) The number and class of shares of the Corporation owned,
directly or indirectly, by the Person who gives the Notice;
(D) The range of voting power (as specified in Section
6(B)(1)) under which the proposed Control Share Acquisition would, if
consummated, fall;
(E) A description in reasonable detail of the terms of the
proposed Control Share Acquisition; and
(F) Representatives, supported by reasonable information, that
the proposed Control Share Acquisition would be consummated if
shareholder approval is obtained and, if consummated, would not be
contrary to law and that the Person who is giving the Notice has the
financial capacity to make the proposed Control Share Acquisition.
Section 2. CALL OF SPECIAL MEETING OF SHAREHOLDERS. The Board of
Directors of the Corporation shall, within ten (10) days after receipt by the
Corporation of a Notice that complies with Section 1, call a special meeting of
shareholders to be held not later than fifty (50) days after receipt of the
Notice by the Corporation, unless the Person who delivered the Notice agrees to
a later date, to consider the proposed Control Share Acquisition; provided that
the Board of Directors shall have no obligation to call such a meeting if they
make a determination with ten (10) days after receipt of the Notice that the
proposed Control Share Acquisition could not be consummated for financial or
legal reasons.
The Board of Directors may adjourn such special meeting of shareholders
if prior to such meeting the Corporation has received a Notice from any other
Person and the Board of Directors has determined that the Control Share
Acquisition proposed by such other Person, or a merger, consolidation or sale of
assets of the Corporation, should be presented to shareholders at an adjourned
meeting or at a special meeting held at a later date.
For purposes of making a determination that a special meeting of
shareholders should not be allowed pursuant to this Section 2, no such
determination shall be deemed void or voidable with respect to the Corporation
merely because one or more of its directors or officers who participated in
deliberations regarding such determination may be deemed to be other than
disinterested, if in any such case the material facts of the relationship giving
rise to a basis for self-interest are known to the directors and the directors,
in good faith reasonably justified by the facts, make such determination by the
affirmative vote of a majority of the disinterested directors, even though the
disinterested directors constitute less than a quorum. For purposes of this
paragraph, "disinterested directors" shall mean directors whose material
contacts with the Corporation are limited principally to activities as a
director or shareholder. Persons who have substantial, recurring business or
professional contacts with the Corporation shall not be deemed to be
"disinterested directors" for purposes of this provision. A director shall not
be deemed to be other than a "disinterested director" merely because he would no
longer be a director if the proposed Control Share Acquisition were approved and
consummated.
Section 3. NOTICE OF SPECIAL MEETING. The Corporation shall, as
promptly as practicable, give notice of the special meeting of shareholders
called pursuant to Section 2 to all shareholders of record as of the record date
set for such meeting. Such notice shall include or be accompanied by a copy of
the Notice and by a statement of the Corporation, authorized by the Board of
Directors, of its position or recommendation, or that it is taking no position
or making no recommendation, with respect to the proposed Control Share
Acquisition.
Section 4. REQUIREMENTS FOR APPROVAL. The Person who delivered the
Notice may make the proposed Control Share Acquisition if both of the following
occur:
(A) The Shareholders of the Corporation authorize such
acquisition at the special meeting of shareholders called pursuant to
Section 2, at which meeting a quorum is present, by the affirmative
vote of a majority of the Voting Stock represented at such meeting in
person or by proxy and by a majority of the portion of such Voting
Stock represented at such meeting in person
<PAGE> 20
or by proxy excluding the votes of Interested Shares. A quorum shall be
deemed to be present at such special meeting if at least a majority of
the issued and outstanding Voting Stock, and a majority of such Voting
Stock excluding Interested Shares, are represented at such meeting in
person or by proxy.
(B) Such acquisition is consummated, in accordance with the
terms so authorized, not later than three hundred sixty (360) days
following shareholder authorization of the Control Share Acquisition.
Section 5. VIOLATIONS OF RESTRICTION. Any Voting Stock issued or
transferred to any Person in violation of this Article Ninth shall hereinafter
be called "Excess Shares." In the event that any Person acquires Excess Shares,
then, in addition to any other remedies which the Corporation may have at law or
in equity as a result of such acquisition, the Corporation shall have the right
to redeem, or to deny voting rights or other shareholder rights appurtenant to
such Excess Shares. The Corporation additionally shall have the right to regard
the Person who holds Excess Shares as having acted as an agent on behalf of the
Corporation in acquiring the Excess Shares and to hold such Excess Shares on
behalf of the Corporation. As the equivalent of treasury securities for such
purposes, the Excess Shares shall not be entitled to any voting rights, shall
not be considered to be outstanding for quorum or voting purposes, and the
Person who holds Excess Shares shall not be entitled to receive dividends,
interest or any other distribution with respect to the Excess Shares. Any Person
who receives dividends, interest or any other distribution with respect to
Excess Shares shall hold the same as agent for the Corporation and, following a
permitted transfer, for the transferee thereof. Notwithstanding the foregoing,
any Person who holds Excess Shares may transfer the same (together with any
distributions thereon) to any Person who, following such transfer, would not own
shares in violation of this Article Ninth. Upon such permitted transfer, the
Corporation shall pay or distribute to the transferee any distributions on the
Excess Shares not previously paid or distributed.
Section 6. DEFINITIONS. As used in this Article Ninth:
(A) "Person" includes, without limitation, an individual, a
corporation (whether nonprofit or for profit), a partnership, an
unincorporated society or association, and two or more persons having a
joint or common interest.
(B)(1) "Control Share Acquisition" means the acquisition,
directly or indirectly, by any Person, of shares of the Corporation
that, when added to all other shares of the Corporation in respect of
which such Person, directly or indirectly, may exercise or direct the
exercise of voting power as provided in this Section 6(B)(1), would
entitle such Person, immediately after such acquisition, directly or
indirectly, to exercise or direct the exercise of voting power of the
Corporation in the election of directors within any of the following
ranges of such voting power:
(a) One-fifth or more but less than one-third of such
voting power;
(b) One-third or more but less than a majority of
such voting power; or
(c) A majority or more of such voting power.
A bank, broker, nominee, trustee, or other Person who acquires
shares in the ordinary course of business for the benefit of others in
good faith and not for the purpose of circumventing this Article Ninth
shall, however, be deemed to have voting power only of shares in
respect of which such Person would be able to exercise or direct the
exercise of votes at a special meeting of shareholders called pursuant
to Section 2of this Article Ninth without further instruction from
others. For purposes of this Article Ninth, the acquisition of
securities immediately convertible into shares of the Corporation with
voting power in the election of directors shall be treated as an
acquisition of such shares.
<PAGE> 21
(2) The acquisition of any shares of the Corporation does not
constitute a Control Share Acquisition for the purposes of this Article
Ninth if the acquisition is consummated in any of the following
circumstances:
(a) By underwriters in good faith and not for the
purpose of circumventing this Article Ninth in connection with
an offering to the public of securities of the Corporation;
(b) By bequest or inheritance, by operation of law
upon the death of any individual, or by any other transfer
without valuable consideration, including a gift that is made
in good faith and not for the purpose of circumventing this
Article Ninth;
(c) Pursuant to the satisfaction of a pledge or other
security interest created in good faith and not for the
purpose of circumventing this Article Ninth;
(d) Pursuant to a merger, consolidation, combination
or majority share acquisition adopted or authorized by
shareholder vote in compliance with the provisions of Article
Seventh of these Articles of Incorporation and Section 1701.78
or 1701.83 of the Ohio Revised Code if the Corporation is the
surviving or new corporation in the merger or consolidation or
is the acquiring corporation in the combination or majority
share acquisition;
(e) Under such circumstances that the acquisition
does not result in the Person acquiring shares of the
Corporation being entitled, immediately thereafter and for the
first time, directly or indirectly, to exercise or direct the
exercise of voting power of the Corporation in the election of
directors within the range of one-fifth or more but less than
one-third of such voting power, or within any of the ranges of
voting power specified in Section 6(B)(1)(a), (b) or (c) which
is higher than the range of voting power applicable to such
Person immediately prior to such acquisition;
(f) Prior to [date of the Merger]; or
(g) Pursuant to a contract existing prior to [date of
the Merger].
The acquisition by any Person of shares of the Corporation in
a manner described under this Section 6(B)(2) shall be deemed to be a
Control Share Acquisition authorized pursuant to this Article Ninth
within the range of voting power specified in Section 6(B)(1)(a), (b)
or (c) that such Person is entitled to exercise after such acquisition,
provided that, in the case of an acquisition in a manner described
under Section 6(B)(2)(b) or (c), the transferor of shares to such
Person had previously obtained any authorization of shareholders
required under this Article Ninth in connection with such transferor's
acquisition of shares of the Corporation.
(3) The acquisition of shares of the Corporation in good faith
and not for the purpose of circumventing this Article Ninth from any
Person whose Control Share Acquisition had previously been authorized
by shareholders in compliance with this Article Ninth, or from any
Person whose previous acquisition of shares would have constituted a
Control Share Acquisition but for Section 6(B)(2), does not constitute
a Control Share Acquisition for the purpose of this Article Ninth
unless such acquisition entitles any Person, directly or indirectly,
alone or with others, to exercise or direct the exercise of voting
power of the Corporation in the election of directors in excess of the
range of such voting power authorized pursuant to this Article Ninth,
or deemed to be so authorized under Section 6(B)(2).
(C) "Interested Shares" means Voting Stock with respect to
which any of the following persons may exercise or direct the exercise
of the voting power:
(1) any Person whose Notice prompted the calling of a
special meeting of shareholders pursuant to Section 2;
<PAGE> 22
(2) any officer of the Corporation elected or
appointed by the directors of the Corporation; and
(3) any employee of the Corporation who is also a
director of the Corporation.
(D) "Voting Stock" means all securities of the Corporation
entitled to vote generally in the election of directors, and, for
purposes of Section 5 of this Article Ninth, shall mean securities of
the Corporation immediately convertible into securities entitled to
vote generally in the election of directors.
Section 7. PROXIES. No proxy appointed for or in connection with the
Shareholder authorization of a Control Share Acquisition pursuant to this
Article Ninth is valid if it provides that it is irrevocable. No such proxy is
valid unless it is sought, appointed, and received both:
(A) In accordance with all applicable requirements of law; and
(B) Separate and apart from the sale or purchase, contract or
tender for sale or purchase, or request or invitation for tender for
sale or purchase, of shares of the Corporation.
Section 8. REVOCABILITY OF PROXIES. Proxies appointed for or in
connection with the shareholder authorization of a Control Share Acquisition
pursuant to this Article Ninth shall be revocable at all times prior to the
obtaining of such shareholder authorization, whether or not coupled with an
interest.
Section 9. AMENDMENTS. Notwithstanding any other provisions of these
Articles of Incorporation or the Regulations of the Corporation or any provision
of law that might otherwise permit a lesser vote, but in addition to any
affirmative vote of the holders of any particular class or series of stock
required by law, the Articles of Incorporation or the Regulations of the
Corporation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the Voting Stock, voting as a single class,
shall be required to alter, amend or repeal this Article Ninth or adopt any
provisions in the Articles of Incorporation or Regulations of the Corporation
which are inconsistent with the provisions of this Article Ninth.
Section 10. LEGEND ON SHARE CERTIFICATES. Each certificate representing
shares of the Corporation's capital stock shall contain the following legend:
Transfer of the shares represented by this Certificate is
subject to the provisions of Article Ninth of the Corporation's
Articles of Incorporation as the same may be in effect from time to
time. Upon written request delivered to the Secretary of the
Corporation at its principal place of business, the Corporation will
mail to the holder of this Certificate a copy of such provisions
without charge within five (5) days after receipt of written request
therefor. By accepting this Certificate the holder hereof acknowledges
that it is accepting same subject to the provisions of said Article
Ninth as the same may be in effect from time to time and covenants with
the Corporation and each shareholder thereof from time to time to
comply with the provisions of said Article Ninth as the same may be in
effect from time to time.
TENTH: The provisions of Section 1701.831 of the Ohio Revised Code, as
amended from time to time, or any successor provision or provisions to said
Section, shall not apply with respect to any particular Control Share
Acquisition, as such is defined in said Section, regarding this Corporation so
long as Article Ninth of these Articles of Incorporation, as such Articles of
Incorporation may be amended from time to time, remains an Article of these
Articles of Incorporation and remains substantially in full force and effect,
disregarding any renumbering of such Article Ninth resulting from any amendment
of these Articles of Incorporation.
<PAGE> 23
ELEVENTH: These Amended Articles of Incorporation supersede the
existing Amended Articles of Incorporation of the Corporation.
<PAGE> 1
EXHIBIT (3)(b)
REGULATIONS
OF
THE LUBRIZOL CORPORATION
MEETINGS OF SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of the shareholders of the Company
shall be held at the principal office of the Company, or at such other place
within or without the State of Ohio as the directors may determine, on the
fourth Monday of April of each year, if not a legal holiday, or, if a legal
holiday, then on the next succeeding business day. The directors shall be
elected thereat and such other business transacted as may be specified in the
notice of the meeting.
Section 2. Special Meetings. Special meetings of the shareholders may be called
at any time by the Chairman of the Board, the Vice Chairman of the Board, the
President, or by a majority of the directors acting with or without a meeting,
or by shareholders holding fifty percent (50%) or more of the outstanding shares
entitled to vote thereat. Such meetings may be held within or without the State
of Ohio at such time and place as may be specified in the notice thereof.
Section 3. Notice of Meetings. Written or printed notice of every annual or
special meeting of the shareholders stating the time and place and the purposes
thereof shall be given to each shareholder entitled to vote thereat and to each
shareholder entitled to notice as provided by law, by mailing the same to his
last address appearing on the records of the Company at least seven days before
any such meeting. Any shareholder may waive any notice required to be given by
law or under these Regulations, and by attendance at any meeting, shall be
deemed to have waived notice thereof.
Section 4. Persons Becoming Entitled by Operation of Law of Transfer. Every
person who, by operation of law transfer, or any other means whatsoever, shall
become entitled to any shares, shall be bound by every notice in respect of such
share or shares which previously to the entering of his name and address on the
records of the Company shall have been duly given to the person from whom he
derives his title to such shares.
Section 5. Quorum and Adjournments. Except as may be otherwise required by law
or by the Articles of Incorporation, the holders of shares entitling them to
exercise a majority of the voting power of the Company shall constitute a quorum
to hold a shareholders meeting; provided, however, that at any meeting, whether
a quorum is present or otherwise, the holders of a majority of the voting shares
represented thereat may adjourn from time to time without notice other than by
announcement at such meeting.
Section 6. Business to be Conducted at Meetings. At any meeting of shareholders,
only such business shall be conducted as shall have been properly brought before
the meeting. To be properly brought before a meeting of shareholders, business
must be specified in the notice of meeting (or any supplement thereto) given by
or at the direction of the Directors, otherwise properly brought before the
meeting by or at the direction of the directors or otherwise properly brought
before the meeting by a shareholder. For business to be properly brought before
a meeting of shareholders by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the Company. To be timely,
a shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Company not less than sixty (60) days nor
more than ninety (90) days prior to the meeting; provided, however, that in the
event that less than seventy-five (75) days' notice or prior public disclosure
of the date of the meeting is given or made to the shareholders, notice by the
shareholder to be timely must be so received not later than the close of
business on the fifteenth (15th) day following the earlier of the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. A shareholder's notice to the Secretary shall set forth as to each matter
the shareholder proposes to bring before the meeting (i) a brief description of
the business desired to be brought before the meeting and the reasons for
conducting such business at the meeting; (ii) the name and record address of the
shareholder proposing such business;
<PAGE> 2
(iii) the class and number of shares of the Company which are beneficially owned
by such shareholder; and (iv) any material interest of such shareholder in such
business.
Notwithstanding anything in the Regulations of the Company to the
contrary, no business shall be conducted at a meeting of shareholders except in
accordance with the procedures set forth in this Section 6. The Chairman of the
meeting of shareholders may, if the facts warrant determine and declare to the
meeting that business was not properly brought before the meeting in accordance
with the provisions of this Section 6, and if he should so determine, any such
business shall not be transacted.
DIRECTORS
Section 7. Number. The number of directors may be determined by the
vote of the holders of a majority of the shares of the Company entitled to vote
for the election of directors that are represented at any annual meeting or
special meeting called for the purpose of electing directors or by resolution
adopted by affirmative vote of a majority of the directors then in office,
provided that the number of directors shall in no event be fewer than nine (9)
nor more than thirteen (13). When so fixed, such number shall continue to be the
authorized number of directors until changed by the shareholders or directors by
vote as aforesaid.
Section 8. Nominations. Only persons who are nominated in accordance
with the following procedures shall be eligible for election as directors.
Nominations of persons for election as directors of the Company may be made at a
meeting of shareholders by or at the direction of the directors, by any
nominating committee or person appointed by the directors, or by any shareholder
of the Company entitled to vote for the election of directors who complies with
the notice procedures set forth in this Section 8. Nominations by shareholders
shall be made pursuant to timely notice in writing to the Secretary of the
Company. To be timely, a shareholder's notice shall be delivered to or mailed
and received at the principal executive offices of the Company not less than
sixty (60) days nor more than ninety (90) days prior to the meeting; provided,
however, that in the event that less than seventy-five (75) days' notice or
prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so received not
later than the close of business on the fifteenth (15th) day following the
earlier of the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such shareholder's notice shall set forth: (a)
as to each person who is not an incumbent director whom the shareholder proposes
to nominate for election as a director, (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of the Company which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Regulation 14A under the Securities Exchange
Act of 1934 (or any comparable successor rule or regulation under such Act);and
(b) as to the shareholder giving the notice (i) the name and record address of
such shareholder, and (ii) the class and number of shares of the Company which
are beneficially owned by such shareholder. Such notice shall be accompanied by
the written consent of each proposed nominee to serve as a director of the
Company, if elected. No person shall be eligible for election as a director of
the Company unless nominated in accordance with the procedures set forth in this
Section 8.
The Chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
provisions of this Section 8, and if he should so determine the defective
nomination shall be disregarded.
Section 9. Classification, Election and Term of Office of Directors.
The directors shall be divided into three classes, as nearly equal in number as
possible. At the 1985 Annual Meeting of Shareholders, one class of directors
shall be elected for a one-year term, one class for a two-year term and one
class for a three-year term. At each succeeding annual meeting of shareholders,
successors to the class of directors whose term expires in that year will be
elected for a three-year term. At such time as the shareholders or directors fix
or change the total number of directors comprising the Board of directors, they
shall also fix, or determine the adjustment to be made to, the number of
directors comprising the three classes of directors, provided, however, that no
reduction in the number of directors shall of itself
<PAGE> 3
result in the removal of or shorten the term of any incumbent director. In the
case of any increase in the number of directors of any class, any additional
directors elected to such class shall hold office for a term which shall
coincide with the term of such class. A director shall hold office until the
annual meeting for the year in which his term expires and until his successor
shall be elected and shall qualify, subject, however, to prior death,
resignation, or removal from office. Election of directors shall be by ballot
whenever requested by any person entitled to vote at the meeting, but unless so
requested, such election may be conducted in any way approved at such meeting.
Section 10. Removal. Except as otherwise provided by law, all the
directors, or all the directors of a particular class, or any individual
director, may be removed from office without assigning any cause, by the
affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the
shares of the Company present in person or represented by proxy and entitled to
vote in respect thereof, at an annual meeting or at any special meeting duly
called for such purpose.
Section 11. Vacancies. Whenever any vacancy shall occur among the
directors, the remaining directors shall constitute the directors of the Company
until such vacancy is filled or until the number of directors is changed as
above provided. The remaining directors; though less than a majority of the
whole authorized number of directors, may, by a vote of a majority of their
number, fill any vacancy for a term ending with the next annual meeting or until
a successor is elected and qualified.
Section 12. Quorum. A majority of the directors in office at the time
shall constitute a quorum - provided that any meeting duly called, whether a
quorum be present or otherwise, may, by note of a majority of the directors
present adjourn from time to time and place to place within or without the State
of Ohio without notice other than by announcement at the meeting. At any meeting
of the directors at which a quorum is present, all questions and business shall
be determined by the affirmative vote of not less than a majority of the
directors present.
Section 13. Organization Meeting. Immediately after each annual meeting
of the shareholders at which directors are elected, or each special meeting held
in lieu thereof, the newly elected directors, if a quorum thereof be present,
shall hold an organization meeting at the same place or at such other time and
place as may be fixed by the shareholders at such meeting, for the purpose of
electing officers and transacting any other business. Notice of such meeting
need not be given. If for any reason such organization meeting is not held at
such time, a special meeting for such purpose shall be held as soon thereafter
as practicable.
Section 14. Regular Meetings. Regular meetings of the directors may be
held at such times and places within or without the State of Ohio as may be
provided for in by-laws or resolutions adopted by the directors and upon such
notice, if any, shall be so provided for.
Section 15. Special Meetings. Special meetings of the directors may be
held at any time within or without the State of Ohio upon call by the Chairman
of the Board, the Vice Chairman of the Board, the President, or any two
directors. Notice of each such meeting shall be given to each director by letter
or telegram or in person not less than forty-eight (48) hours prior to such
meeting; provided, however, that such notice shall be deemed to have been waived
by the directors attending such meeting, and may be waived in writing or by
telegram by any director either before or after such meeting. Unless otherwise
indicated in the notice thereof, any business may be transacted at any
organization, regular or special meeting.
Section 16. Compensation. The directors are authorized to fix a
reasonable salary for directors or a reasonable fee for attendance at any
meeting of the directors, the Executive Committee, or other committees elected
under Section 18 hereof, or any combination of salary and attendance fee,
provided that no compensation as director shall be paid to any director who is a
full-time employee of the Company. In addition to such compensation provided for
directors, they shall be reimbursed for any expenses incurred by them in
traveling to and from such meetings.
EXECUTIVE COMMITTEE AND OTHER COMMITTEES
<PAGE> 4
Section 17. Membership and Organization. (a) The directors, at any
time, may elect from their number an Executive Committee which shall consist of
not less than three members, each of whom shall hold office during the pleasure
of the directors and may be removed at any time, with or without cause by note
thereof.
(b) Vacancies occurring in the Committee may be filled by the
directors.
(c) The Committee shall appoint one of its own number as Chairman who
shall preside at all meetings and may also appoint a Secretary (who need not be
a member of the Committee) who shall keep its records and who shall hold office
during the pleasure of the Committee.
Section 18. Meetings. (a) Meeting of the Committee may be held upon
notice of the time and place thereof at any place within or without the State of
Ohio and until otherwise ordered by the Committee shall be held at any time and
place at the call of the Chairman or any two members thereof.
(b) A majority of the members of the Committee shall be necessary for
the transaction of any business and at any meeting the Committee may exercise
any or all of its powers and any business which shall come before any meeting
maybe transacted thereat, provided a majority of the Committee is present, but
in every case the affirmative vote of a majority of all of the members of the
Committee shall be necessary to any action by it taken.
Section 19. Powers. Except as its powers, duties and functions may be
limited or prescribed by the directors, during the intervals between the
meetings of the directors, the Committee shall possess and may exercise all the
powers of the directors in the management and control of the business of the
Company; provided that the Committee shall not be empowered to
declare-dividends, elect officers, nor to fill vacancies among the directors of
Executive Committee. All actions of the Committee shall be reported to the
directors at their meeting next succeeding such action and shall be subject to
revision or alteration by the directors provided that no rights of any third
person shall be affected thereby.
Section 20. Other Committees. The directors may elect other committees
from among the directors in addition to or in lieu of an Executive Committee and
give to them any of the powers which under the foregoing provisions could be
vested in an Executive Committee. Sections 15 and 16 shall be applicable to such
other committees.
OFFICERS
Section 21. Officers Designated. The directors at their organization
meeting or at a special meeting held in lieu thereof, shall elect a President, a
Secretary, a Treasurer and, in their discretion, a Chairman of the Board, a Vice
Chairman of the Board, one or more Vice Presidents, an Assistant Secretary or
Secretaries, an Assistant Treasurer or Treasurers, and such other officers as
the directors may see fit. The President, the Chairman of the Board and the Vice
Chairman of the Board shall be, but the other officers may, but need not be,
chosen from among the directors. Any two or more of such offices other than that
of President and Vice President, or Secretary and Assistant Secretary or
Treasurer and Assistant Treasurer, may be held by the same person, but no
officer shall execute, acknowledge or verify any instrument in more than one
capacity.
Section 22. Tenure of Office. The officers of the Company shall hold
office until the next organization meeting of the directors and until their
successors are chosen and qualified, except in case of resignation, death or
removal. The directors may remove any officer at any time with or without cause
by a majority vote of the directors in office at the time. A vacancy, however
created, in any office may be filled by election by the directors.
Section 23. Chairman of the Board and President. The Chairman of the
Board shall preside at meetings of shareholders and at meetings of directors.
The President shall, in the absence of the Chairman of the Board, preside at
meetings of the shareholders and in the absence of the Chairman of
<PAGE> 5
the Board and of the Vice Chairman of the Board shall also preside at meetings
of the directors. The directors shall designate either the Chairman of the Board
or the President as chief executive officer of the Company. The chief executive
officer of the Company shall have general supervision over its property,
business and affairs, and perform all the duties usually incident to such
office, subject to the directions of the directors. He may execute all
authorized deeds, mortgages, bonds, contracts and other obligations, in the name
of the Company, and shall have such other powers and duties as may be prescribed
by the directors. During such time as the President or Chairman of the Board, as
the case may be, is not the chief executive officer, he shall have such
authority and perform such duties as the directors may determine. In case of the
absence or disability of the chief executive officer or when circumstances
prevent the chief executive officer from acting, the President (if the Chairman
of the Board is the chief executive officer) or the Chairman of the Board (if
the President is the chief executive officer) shall perform the duties of the
chief executive officer.
Section 24. Vice Chairman of the Board. The Vice Chairman of the Board,
if any, shall, in the absence of the Chairman of the Board, preside at meetings
of the directors and shall have such other powers and duties as may be
prescribed by the directors.
Section 25. Vice Presidents. The Vice Presidents shall have such powers
and duties as may be prescribed by the directors or as may be delegated by the
chief executive officer. Incase of the absence or disability of the Chairman of
the Board and the President or when circumstances prevent them from acting, the
Vice Presidents, in the order designated by the directors, shall perform the
duties of the chief executive officer, and in such case, the power of the Vice
Presidents to execute all authorized deeds, mortgages, bonds, contracts and
other obligations, in the name of the Company shall be coordinate with like
powers of the chief executive officer and any such instrument so executed by
such Vice Presidents shall be as valid and binding as though executed by the
chief executive officer. In case the chief executive officer and such Vice
Presidents are absent or unable to perform their duties, the directors may
appoint a President pro tempore.
Section 26. Secretary. The Secretary shall keep the minutes of all
meetings of the shareholders and the directors. He shall keep such records as
may be required by the directors, shall have charge of the seal of the Company
and shall give all notices of shareholders and directors meetings required by
law or by these Regulations, or otherwise, and shall have such other powers and
duties as may be prescribed by the directors.
Section 27. Treasurer. The Treasurer shall receive and have in charge
all money, bills, notes, bonds, stocks in other corporations and similar
property belonging to the Company, and shall do with the same as shall be
ordered by the directors. He shall keep accurate financial accounts, and hold
the same open for inspection and examination of the directors. On the expiration
of this term of office, he shall turn over to his successor, or the directors,
all property, books, papers and money of the Company in his hands. He shall have
such other powers and duties as may be prescribed by the directors.
Section 28. Other Officers. The Assistant Secretaries, Assistant
Treasurers, if any, and any other officers that the directors may elect, shall
have such powers and duties as the directors may prescribe.
Section 29. Delegation of Duties. The directors are authorized to
delegate the duties of any officers to any other officer and generally to
control the action of the officers and to require the performance of duties in
addition to those mentioned herein.
Section 30. Compensation. The directors are authorized to determine or
to provide the method of determining the compensation of all officers.
Section 31. Bond. Any officer or employee, if required by the
directors, shall give bond in such sum and with such security as the directors
may require for the faithful performance of his duties.
<PAGE> 6
Section 32. Signing Checks and Other Instruments. The directors are
authorized to determine or provide the method of determining how checks, notes,
bills of exchange and similar instruments shall be signed, countersigned or
endorsed.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
Section 33. Indemnification. The Company shall indemnify any director
or officer and any former director or officer of the Company and any such
director or officer who is or has served at the request of the Company as a
director, officer or trustee of another corporation, partnership, joint venture,
trust or other enterprise (and his heirs, executors and administrators) against
expenses, including attorney's fees, judgments, fines and amounts paid in
settlement, actually and reasonably incurred by him by reason of the fact that
he is or was such director, officer or trustee in connection with any
threatened, pending or completed action, suitor proceeding, whether civil,
criminal, administrative or investigative to the full extent permitted by
applicable law. The indemnification provided for herein shall not be deemed to
restrict the right of the Company (i) to indemnify employees, agents and others
to the extent not prohibited by such law, (ii) to purchase and maintain
insurance or furnish similar protection on behalf of or for any person who is or
was a director, officer, employee or agent of the Company, or any person who is
or was serving at the request of the Company as a director, officer, trustee,
employee or agent of another corporation, joint venture, partnership, trust or
other enterprise against any liability asserted against him or incurred by him
in any such capacity or arising out of his status as such and (iii) to enter
into agreements with persons of the class identified in clause (ii) above
indemnifying them against any and all liabilities (or such lesser
indemnification as may be provided in such agreements) asserted against or
incurred by them in such capacities.
CORPORATE SEAL
Section 34. The corporate seal of this Company shall be circular in
form and contain the name of the Company.
PROVISIONS IN ARTICLES OF INCORPORATION
Section 35. These Regulations are at all times subject to the
provisions of the Articles of Incorporation of the Company (including in such
term whenever used in these Regulations all amendments to the Articles of
Incorporation in force at the time) and in case of any conflict, the provisions
in the Articles of Incorporation shall govern.
AMENDMENTS
Section 36. Amendments. (a) These Regulations may be altered, changed
or amended in any respect or superseded by new Regulations, in whole or in part,
by the affirmative vote of the holders of a majority of the shares of the
Company present in person or by proxy and entitled to vote thereon, at an annual
or special meeting duly called for such purpose.
(b) Notwithstanding the provisions of Section 36(a) hereof and
notwithstanding the fact that a lesser percentage may be specified by law or in
any agreement with any national securities exchange or any other provision of
these Regulations, the amendment, alteration, change or repeal of, or adoption
of any provisions inconsistent with, Sections 7, 9 or 10 of these Regulations
shall require the affirmative vote, at an annual or special meeting duly called
for such purpose, of the holders of shares representing at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of the Company, unless such
amendment, alteration, change, repeal or adoption has been recommended by at
least two-thirds of the Board of Directors of the Company then in office, in
which event the provisions of Section 36(a) hereof shall apply.
<PAGE> 1
EXHIBIT (4)(a)
CERTIFICATE OF AMENDMENT TO
AMENDED ARTICLES OF INCORPORATION
of
THE LUBRIZOL CORPORATION
L. E. Coleman, Chairman and Chief Executive Officer and K. H. Hopping,
Secretary, of The Lubrizol Corporation, an Ohio corporation (the "Corporation"),
DO HEREBY CERTIFY THAT:
Pursuant to the authority conferred upon the Directors by the Amended
Articles of Incorporation of the Corporation, the Directors at a meeting duly
called and held on October 28, 1991,at which a quorum was present and acting
throughout, adopted the following resolution to amend the Amended Articles of
Incorporation of the Corporation pursuant to Section 1701.70(B)(1) of the Ohio
Revised Code to amend the terms of a series of the Corporation's Serial
Preferred Stock designated as Serial Preferred Stock, Series A:
RESOLVED, that in accordance with the Special Rights Plan Amendment and
pursuant to the authority vested in the Directors of this Corporation
in accordance with the provisions of its Amended Articles of
Incorporation (the "Articles"), Section 7(A) of Division C of Article
Fourth of the Articles be and hereby is amended to read in its entirety
as follows:
(A) So long as any shares of Series A Stock are outstanding,
no shares of any series of Serial Preferred Stock or other capital
stock of the Corporation may be issued by the Corporation except for
(i) Common Shares having the express terms applicable to Common Shares
on the Share Acquisition Date (as defined in Section 8(B) of this
Division C), (ii) shares of capital stock which are Junior Stock (as
that term is defined in Section 2(B) of this Division C), and (iii)
shares of Series A Stock issuable pursuant to and in accordance with
the Rights Agreement.
IN WITNESS WHEREOF L. E. Coleman, Chairman and Chief Executive Officer,
and K. H. Hopping, Secretary, of The Lubrizol Corporation, acting for and on
behalf of the Corporation, have hereunto subscribed their names this 28th day of
October, 1991.
/s/ L. E. Coleman /s/ K. H. Hopping
L. E. Coleman, Chairman & CEO K. H. Hopping, Secretary
<PAGE> 1
EXHIBIT (10)(c)
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") dated as of by and between
The Lubrizol Corporation, an Ohio corporation (the "Company"), and (the
"Executive");
WITNESSETH:
WHEREAS, the Executive is a senior executive of the Company and has
made and is expected to continue to make major contributions to the
profitability, growth and financial strength of the Company;
WHEREAS, the Company recognizes that, as is the case for most publicly
held companies, the possibility of a Change in Control (as that term is
hereafter defined) exists;
WHEREAS, the Company desires to assure itself of both present and
future continuity of management in the event of a Change in Control and desires
to establish certain minimum compensation rights of its key senior executive
officers, including the Executive, applicable in the event of a Change in
Control;
WHEREAS, the Company wishes to ensure that its senior executives are
not practically disabled from discharging their duties upon a Change in Control;
WHEREAS, this Agreement is not intended to alter materially the
compensation and benefits which the Executive could reasonably expect to receive
from the Company absent a Change in Control and, accordingly, although effective
and binding as of the date hereof, this Agreement shall become operative only
upon the occurrence of a Change in Control; and
WHEREAS, the Executive is willing to render services to the Company on
the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Operation of Agreement: (a) This Agreement shall be effective and binding
immediately upon its execution, but, anything in this Agreement to the contrary
notwithstanding, this Agreement shall not be operative unless and until there
shall have occurred a Change in Control. For purposes of this Agreement, a
"Change in Control" shall have occurred if at anytime during the Term (as that
term is hereafter defined) any of the following events shall occur:
(i) 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 (as that term is hereafter
defined) of the Company immediately prior to such transaction;
(ii) The Company sells all or substantially all of its assets to any
other corporation or other legal person, 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;
(iii) 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
13d-3 or any successor rule or regulation promulgated under the
Exchange Act) of securities representing 20% or more of the combined
<PAGE> 2
voting power of the then-outstanding securities entitled to vote
generally in the election of directors of the Company ("Voting Stock");
(iv) 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
(v) 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 clause (v), 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 1(a)(iii)or 1(a)(iv) hereof,
unless otherwise determined in a specific case by majority vote of the Board of
Directors of the Company (the "Board"), a "Change in Control" shall not be
deemed to have occurred for purposes of this Agreement solely because(i) the
Company, (ii) an entity in which the Company directly or indirectly beneficially
owns 50% or more of the voting securities (a "Subsidiary"), or (iii) any
Company-sponsored employee stock ownership plan or any other employee benefit
plan of the Company, 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 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.
(b) Upon the occurrence of a Change in Control at anytime during the Term, this
Agreement shall become immediately operative.
(c) The period during which this Agreement shall be in effect (the "Term") shall
commence as of the date hereof and shall expire as of the later of (i) the close
of business on and (ii) the expiration of the Period of Employment (as that term
is hereinafter defined); provided, however, that (A) commencing on January 1,
and each January 1 thereafter, the term of this Agreement shall automatically be
extended for an additional year unless, not later than September 30 of the
immediately preceding year, the Company or the Executive shall have given notice
that it or he, as the case may be, does not wish to have the Term extended and
(B) subject to Section 10 hereof, if, prior to a Change in Control, the
Executive ceases for any reason to be an employee of the Company and any
Subsidiary, thereupon the Term shall be deemed to have expired and this
Agreement shall immediately terminate and be of no further effect.
2. Employment; Period of Employment: (a) Subject to the terms and conditions of
this Agreement, upon the occurrence of a Change in Control, the Company shall
continue the Executive in its employ and the Executive shall remain in the
employ of the Company and/or a Subsidiary, as the case maybe, for the period set
forth in Section 2(b) hereof (the "Period of Employment"), in the position and
with substantially the same duties and responsibilities that he had immediately
prior to the Change in Control, or to which the Company and the Executive may
hereafter mutually agree in writing. Throughout the Period of Employment, the
Executive shall devote substantially all of his time during normal business
hours(subject to vacations, sick leave and other absences in accordance with the
policies of the Company as in effect for senior executives immediately prior to
the Change in Control)to the business and affairs of the Company, but nothing in
this Agreement shall preclude the Executive from devoting reasonable periods of
time during normal business hours to (i) serving as a director, trustee or
member of or participant in any organization or business so long as such
activity would not constitute Competitive Activity (as that term is
<PAGE> 3
hereafter defined) if conducted by the Executive after the Executive's
Termination Date (as that term is hereafter defined), (ii)engaging in charitable
and community activities, or (iii)managing his personal investments.
(b) The Period of Employment shall commence on the date of an occurrence of a
Change in Control and, subject only to the provisions of Section 4 hereof, shall
continue until the earliest of (i) the expiration of the third anniversary of
the occurrence of the Change in Control, (ii) the Executive's death, or (iii)
the Executive's attainment of age 65; provided, however, that commencing on each
anniversary of the Change of Control, the Period of Employment shall
automatically be extended for an additional year unless, not later than 90
calendar days prior to such anniversary date, either the Company or the
Executive shall have given written notice to the other that the Period of
Employment shall not be so extended.
3. Compensation During Period of Employment:(a) Upon the occurrence of a Change
in Control, the Executive shall receive during the Period of Employment (i)
annual base salary at a rate not less than the Executive's annual fixed or base
compensation (payable monthly or otherwise as in effect for senior executives of
the Company immediately prior to the occurrence of a Change in Control) or such
higher rate as maybe determined from time to time by the Board or the
Compensation Committee thereof (which base salary at such rate is herein
referred to as "Base Pay") and (ii) an annual amount equal to not less than the
highest aggregate annual bonus, incentive or other payments of cash compensation
in addition to the amounts referred to in clause (i) above made or to be made in
regard to services rendered in any calendar year during the three calendar years
immediately preceding the year in which the Change in Control occurred pursuant
to any bonus, incentive, profit-sharing, performance, discretionary pay or
similar agreement, policy, plan, program or arrangement (whether or not funded)
of the Company or any successor thereto providing benefits at least as great as
the benefits payable thereunder prior to a Change in Control ("Incentive
Pay");provided, however, that (A) with the prior written consent of the
Executive, nothing herein shall preclude a change in the mix between Base Pay
and Incentive Pay so long as that the aggregate cash compensation received by
the Executive in anyone calendar year is not reduced in connection therewith or
as a result thereof, (B) in no event shall any increase in the Executive's
aggregate cash compensation or any portion thereof in any way diminish any other
obligation of the Company under this Agreement, and (C) no duplicate payment
hereunder will be made in respect of any amount actually paid to the Executive
pursuant to any such agreement, policy, plan, program or arrangement.
(b) For his service pursuant to Section 2(a) hereof, during the Period of
Employment the Executive shall be a full participant in, and shall be entitled
to the perquisites, benefits and service credit for benefits as provided under,
any and all employee retirement income and welfare benefit policies, plans,
programs or arrangements in which senior executives of the Company participate,
including without limitation any stock option, stock purchase, stock
appreciation, savings, pension, supplemental executive reimbursement and other
employee benefit policies, plans, programs or arrangements that may now exist or
any equivalent successor policies, plans, programs or arrangements that may be
adopted hereafter by the Company providing perquisites, benefits and service
credit for benefits at least as great as are payable thereunder prior to a
Change in Control (collectively, "Employee Benefits"); provided, however, that
except as expressly provided in, and subject to the terms of, Section 3(a)
hereof, the Executive's rights thereunder shall be governed by the terms thereof
and shall not be enlarged hereunder or otherwise affected hereby. If and to the
extent such perquisites, benefits or service credit for benefits are not payable
or provided under any such policy, plan, program or arrangement as a result of
the amendment or termination thereof, then the Company shall itself pay or
provide therefor. Nothing in this Agreement shall preclude improvement or
enhancement of any such Employee Benefits, provided that no such improvement
shall in any way diminish any other obligation of the Company under this
Agreement.
4. Termination Following a Change in Control:(a) In the event of the occurrence
of a Change in Control, the Executive's employment may be terminated by the
Company during the Period of Employment and the Executive shall not be entitled
to the benefits provided by Sections 5 and 6 hereof only upon the occurrence of
one or more of the following events:
(i) The Executive's death;
<PAGE> 4
(ii) If the Executive shall become permanently disabled within the
meaning of, and begins actually to receive disability benefits pursuant to, the
long-term disability plan in effect for senior executives of the Company
immediately prior to the Change in Control; or
(iii) "Cause", which for purposes of this Agreement shall mean that,
prior to any termination pursuant to Section 4(b) hereof, the Executive
shall have committed:
(A) an intentional act of fraud, embezzlement or theft in
connection with his duties or in the course of his employment
with the Company and/or any Subsidiary;
(B) intentional wrongful damage to property of the Company
and/or any Subsidiary;
(C) intentional wrongful disclosure of secret processes or
confidential information of the Company and/or any Subsidiary;
or
(D) intentional wrongful engagement in any Competitive
Activity;
and any such act shall have been materially harmful to the Company. For
purposes of this Agreement, no act, or failure to act, on the part of
the Executive shall be deemed "intentional" if it was due primarily to
an error in judgment or negligence, but shall be deemed "intentional"
only if done, or omitted to be done, by the Executive not in good faith
and without reasonable belief that his action or omission was in the
best interest of the Company. Notwithstanding the foregoing, the
Executive shall not be deemed to have been terminated for "Cause"
hereunder unless and until there shall have been delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters of the Board then in office at a
meeting of the Board called and held for such purpose (after reasonable
notice to the Executive and an opportunity for the Executive, together
with his counsel, to be heard before the Board), finding that, in the
good faith opinion of the Board, the Executive had committed an act set
forth above in Section 4(a)(iii) and specifying the particulars thereof
in detail. Nothing herein shall limit the right of the Executive or his
beneficiaries to contest the validity or propriety of any such
determination.
(b) In the event of the occurrence of a Change in Control, this Agreement may be
terminated by the Executive during the Period of Employment with the right to
severance compensation as provided in Sections 5 and 6 hereof upon the
occurrence of one or more of the following events (regardless of whether any
other reason, other than Cause as hereinabove provided, for such termination
exists or has occurred, including without limitation other employment):
(i) Any termination by the Company of the employment of the Executive
prior to the date upon which the Executive shall have attained age 65,
which termination shall be for any reason other than for Cause or as a
result of the death of the Executive or by reason of the Executive's
disability and the actual receipt of disability benefits in accordance
with Section 4(a)(ii) hereof; or
(ii) Termination by the Executive of his employment with the Company
and any Subsidiary within three years after the Change in Control upon
the occurrence of any of the following events:
(A) Failure to elect or reelect or otherwise to maintain the
Executive in the office or the position, or a substantially
equivalent office or position, of or with the Company and/or a
Subsidiary, as the case may be, which the Executive held
immediately prior to a Change in Control, or the removal of
the Executive as a Director of the Company (or any successor
thereto) if the Executive shall have been a Director of the
Company immediately prior to the Change in Control;
(B) A significant adverse change in the nature or scope of the
authorities, powers, functions, responsibilities or duties
attached to the position with the Company and any Subsidiary
which the Executive held immediately prior to the Change in
Control, a
<PAGE> 5
reduction in the aggregate of the Executive's Base Pay and
Incentive Pay received from the Company and any Subsidiary, or
the termination or denial of the Executive's rights to
Employee Benefits as herein provided, any of which is not
remedied within 10 calendar days after receipt by the Company
of written notice from the Executive of such change, reduction
or termination, as the case may be;
(C) A determination by the Executive made in good faith that
as a result of a Change in Control and a change in
circumstances thereafter significantly affecting his position,
including without limitation a change in the scope of the
business or other activities for which he was responsible
immediately prior to a Change in Control, he has been rendered
substantially unable to carry out, has been substantially
hindered in the performance of, or has suffered a substantial
reduction in, any of the authorities, powers, functions,
responsibilities or duties attached to the position held by
the Executive immediately prior to the Change in Control,
which situation is not remedied within 10 calendar days after
written notice to the Company from the Executive of such
determination;
(D) The liquidation, dissolution, merger, consolidation or
reorganization of the Company or transfer of all or a
significant portion of its business and/or assets, unless the
successor or successors (by liquidation, merger,
consolidation, reorganization or otherwise) to which all or a
significant portion of its business and/or assets have been
transferred (directly or by operation of law) shall have
assumed all duties and obligations of the Company under this
Agreement pursuant to Section 12 hereof;
(E) The Company shall relocate its principal executive
offices, or require the Executive to have his principal
location of work changed, to any location which is in excess
of 25 miles from the location thereof immediately prior to the
Change of Control or to travel away from his office in the
course of discharging his responsibilities or duties hereunder
significantly more (in terms of either consecutive days or
aggregate days in any calendar year) than was required of him
prior to the Change of Control without, in either case, his
prior written consent; or
(F) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the
Company or any successor thereto.
(c) A termination by the Company pursuant to Section 4(a) hereof or by the
Executive pursuant to Section 4(b) hereof shall not affect any rights which the
Executive may have pursuant to any agreement, policy, plan, program or
arrangement of the Company providing Employee Benefits (except as provided in
Section 5(a)(ii) hereof), which rights shall be governed by the terms thereof.
If this Agreement or the employment of the Executive is terminated under
circumstances in which the Executive is not entitled to any payments under
Sections 3, 5 or 6 hereof, the Executive shall have no further obligation or
liability to the Company hereunder with respect to his prior or any future
employment by the Company.
5. Severance Compensation: (a) If, following the occurrence of a Change in
Control, the Company shall terminate the Executive's employment during the
Period of Employment other than pursuant to Section 4(a) hereof, or if the
Executive shall terminate his employment pursuant to Section 4(b) hereof, the
Company shall continue to provide the following benefits and shall further pay
to the Executive the following amounts within five business days after the date
(the "Termination Date") that the Executive's employment is terminated (the
effective date of which shall be the date of termination, or such other date
that may be specified by the Executive if the termination is pursuant to Section
4(b) hereof):
(i) In lieu of any further payments to the Executive for periods
subsequent to the Termination Date, but without affecting the rights of
the Executive referred to in Section 5(b) hereof, a lump sum payment
(the "Severance Payment") in an amount equal to the present value
(using a discount rate required to be utilized for purposes of
computations under Section 280G of the Code or any successor provision
thereto, or if no such rate is so required to be used, a rate
<PAGE> 6
equal to the then-applicable interest rate prescribed by the Pension
Benefit Guarantee Corporation for benefit valuations in connection with
non-multiemployer pension plan terminations assuming the immediate
commencement of benefit payments (the "Discount Rate")) of the sum of
(A) the aggregate Base Pay (at the highest rate in effect for any
period prior to the Termination Date) for each remaining year or
partial year of the Period of Employment which the Executive would have
received had such termination or breach not occurred, plus (B) the
aggregate Incentive Pay (determined in accordance with the standards
set forth in Section 3(a)(ii) hereof), which the Executive would have
received pursuant to this Agreement or any agreement, policy, plan,
program or arrangement referred to therein during the remainder of the
Period of Employment had his employment continued for the remainder of
the Period of Employment (in which event the Executive will no longer
be entitled to Incentive Pay under any such agreement, policy, plan,
program or arrangement except for Incentive Pay to which he was
entitled for service prior to the Termination Date).
(ii) For the remainder of the Period of Employment, the Company shall
arrange to provide the Executive with Employee Benefits that are
welfare benefits, but not stock option, stock purchase, stock
appreciation, or similar compensatory benefits, substantially similar
to those which the Executive was receiving or entitled to receive
immediately prior to the Termination Date (and if and to the extent
that such benefits shall not or cannot be paid or provided under any
policy, plan, program or arrangement of the Company or any Subsidiary,
as the case may be, then the Company shall itself pay or provide for
the payment to the Executive, his dependents and beneficiaries, such
Employee Benefits). Without otherwise limiting the purposes or effect
of Section 7 hereof, Employee Benefits otherwise receivable by the
Executive pursuant to the first sentence of this Section 5(a)(ii) shall
be reduced to the extent comparable welfare benefits are actually
received by the Executive from another employer during such period
following the Executive's Termination Date, and any such benefits
actually received by the Executive shall be reported by the Executive
to the Company. Notwithstanding the foregoing, the remainder of the
Period of Employment shall be considered service with the Company for
the purpose of determining service credits and benefits due and payable
to the Executive under the Company's retirement income, supplemental
executive retirement and other benefit plans of the Company applicable
to the Executive or his beneficiaries immediately prior to the
Termination Date.
(b) Upon written notice given by the Executive to the Company prior to the
occurrence of a Change in Control, the Executive, at his sole option, without
reduction to reflect the present value of such amounts as aforesaid, may elect
to have all or any of the Severance Payment payable pursuant to Section 5(a)(i)
hereof paid to him on a quarterly or monthly basis during the remainder of the
Period of Employment.
(c) There shall be no right of set-off or counterclaim in respect of any claim,
debt or obligation against any payment to or benefit for the Executive provided
for in this Agreement, except as expressly provided in Section 5(a)(ii) hereof.
(d) Without limiting the rights of the Executive at law or in equity, if the
Company fails to make any payment required to be made hereunder on a timely
basis, the Company shall pay interest on the amount thereof at an annualized
rate of interest equal to the then-applicable Discount Rate.
(e) Notwithstanding any other provision hereof, the parties' respective rights
and obligations under this Section 5 will survive any termination or expiration
of this Agreement or the termination of the Executive's employment for any
reason whatsoever.
6. Certain Additional Payments by the Company: (a) Anything in this Agreement to
the contrary notwithstanding, in the event that this Agreement shall become
operative and it shall be determined (as hereafter provided) that any payment or
distribution by the Company or any of its affiliates to or for the benefit of
the Executive, whether paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise pursuant to or by reason of any
other agreement, policy, plan, program or arrangement, including without
limitation any stock option, stock appreciation right or similar right, or the
lapse or termination of any restriction on or the vesting or exercisability of
any of the foregoing
<PAGE> 7
(individually and collectively a "Payment"), would be subject to the excise tax
imposed by Section 4999 of the Code(or any successor provision thereto) by
reason of being considered "contingent on a change in ownership or control" of
the Company, within the meaning of Section 280G of the Code (or any successor
provision thereto), or any interest or penalties with respect to such excise tax
(such excise tax, together with any such interest and penalties, being hereafter
collectively referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment or payments(individually and
collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in an amount
such that, after payment by the Executive of all taxes (including any interest
or penalties imposed with respect to such taxes), including any Excise Tax
imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payment.
(b) Subject to the Provisions of Section 6(e) hereof, all determinations
required to be made under this Section 6, including whether an Excise Tax is
payable by the Executive and the amount of such Excise Tax and whether a
Gross-Up Payment is required to be paid by the Company to the Executive and the
amount of such Gross-Up Payment, if any, shall be made by a nationally
recognized accounting firm (the "Accounting Firm") selected by the Executive in
his sole discretion. The Executive shall direct the Accounting Firm to submit
its determination and detailed supporting calculations to both the Company and
the Executive within 30 calendar days after the Termination Date, if applicable,
and any such other time or times as may be requested by the Company or the
Executive. If the Accounting Firm determines that any Excise Tax is payable by
the Executive, the Company shall pay the required Gross-Up Payment to the
Executive within five business days after receipt of such determination and
calculations with respect to any Payment to the Executive. The federal tax
returns filed by the Executive shall be prepared and filed on a consistent basis
with the determination of the Accounting Firm with respect to the Excise Tax
payable by the Executive. If the Accounting Firm determines that no Excise Tax
is payable by the Executive, it shall, at the same time as it makes such
determination, furnish the Company and the Executive an opinion that the
Executive has substantial authority not to report any Excise Tax on his federal
income tax return. As a result of the uncertainty in the application of Section
4999 of the Code (or any successor provision thereto) at the time of any
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made (an
"Underpayment"), consistent with the calculations required to be made hereunder.
In the event that the Company exhausts or fails to pursue its remedies pursuant
to Section 6(e) hereof and the Executive thereafter is required to make a
payment of any Excise Tax, the Executive shall direct the Accounting Firm to
determine the amount of the Underpayment that has occurred and to submit its
determination and detailed supporting calculations to both the Company and the
Executive as promptly as possible. Any such Underpayment shall be promptly paid
by the Company to, or for the benefit of, the Executive within five business
days after receipt of such determination and calculations.
(c) The Company and the Executive shall each provide the Accounting Firm access
to and copies of any books, records and documents in the possession of the
Company or the Executive, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determinations and calculations
contemplated by Section 6(b)hereof.
(d) The fees and expenses of the Accounting Firm for its services in connection
with the determinations and calculations contemplated by Section 6(b) hereof
shall be borne by the Company. If such fees and expenses are initially paid by
the Executive, the Company shall reimburse the Executive the full amount of such
fees and expenses within five business days after receipt from the Executive of
a statement therefor and reasonable evidence of his payment thereof.
(e) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of a Gross-Up Payment. Such notification shall be given as promptly as
practicable but no later than 10 business days after the Executive actually
receives notice of such claim and the Executive shall further apprise the
Company of the nature of such claim and the date on which such claim is
requested to be paid (in each case, to the extent known by the Executive). The
Executive shall not pay such claim prior to the earlier of (i) the expiration of
the 30-calendar-day period following the date on which he gives such notice to
the Company and (ii) the date
<PAGE> 8
that any payment of amount with respect to such claim is due. If the Company
notifies the Executive in writing prior to the expiration of such period that it
desires to contest such claim, the Executive shall:
(i) provide the Company with any written records or documents in his
possession relating to such claim reasonably requested by the Company;
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including without limitation accepting legal representation with
respect to such claim by an attorney competent in respect of the
subject matter and reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order effectively to
contest such claim; and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties)incurred in connection with such
contest and shall indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
Section 6(e), the Company shall control all proceedings taken in connection with
the contest of any claim contemplated by this Section 6(e) and, at its sole
option, may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
(provided, however, that the Executive may participate therein at his own cost
and expense) and may, at its option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay the tax claimed and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax, including interest or
penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested claim
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(f) If, after the receipt by the Executive of an amount advanced by the Company
pursuant to Section 6(e) hereof, the Executive receives any refund with respect
to such claim, the Executive shall (subject to the Company's complying with the
requirements of Section 6(e) hereof) promptly pay to the Company the amount of
such refund (together with any interest paid or credited thereon after any taxes
applicable thereto).If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Section 6(e) hereof, a determination is made that the
Executive shall not be entitled to any refund with respect to such claim and the
Company does not notify the Executive in writing of its intent to contest such
denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of any such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the Company to
the Executive pursuant to this Section 6.
7. No Mitigation Obligation: The Company hereby acknowledges that it will be
difficult, and may be impossible, for the Executive to find reasonably
comparable employment following the Termination Date and that the noncompetition
covenant contained in Section 8 hereof will further limit the employment
opportunities for the Executive. In addition, the Company acknowledges that its
severance pay plans applicable in general to its salaried employees do not
provide for mitigation, offset or reduction of any severance payment received
thereunder. Accordingly, the parties hereto expressly agree that the
<PAGE> 9
payment of the severance compensation by the Company to the Executive in
accordance with the terms of this Agreement will be liquidated damages, and that
the Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, nor
shall any profits, income, earnings or other benefits from any source whatsoever
create any mitigation, offset, reduction or any other obligation on the part of
the Executive hereunder or otherwise, except as expressly provided in Section
5(a)(ii) hereof.
8. Competitive Activity: During a period ending one year following the
Termination Date, if the Executive shall have received or shall be receiving
benefits under Section 5 hereof and, if applicable, Section 6 hereof, the
Executive shall not, without the prior written consent of the Company, which
consent shall not be unreasonably withheld, engage in any Competitive Activity.
For purposes of this Agreement, the term "Competitive Activity" shall mean the
Executive's participation, without the written consent of an officer of the
Company, in the management of any business enterprise if such enterprise engages
in substantial and direct competition with the Company and such enterprise's
sales of any product or service competitive with any product or service of the
Company amounted to 25% of such enterprise's net sales for its most recently
completed fiscal year and if the Company's net sales of said product or service
amounted to 25% of the Company's net sales for its most recently completed
fiscal year. "Competitive Activity" shall not include (i) the mere ownership of
securities in any such enterprise and exercise of rights appurtenant thereto or
(ii) participation in management of any such enterprise other than in connection
with the competitive operations of such enterprise.
9. Legal Fees and Expenses: (a) It is the intent of the Company that the
Executive not be required to incur legal fees and the related expenses
associated with the enforcement or defense of his rights under this Agreement by
litigation or other legal action because the cost and expense thereof would
substantially detract from the benefits intended to be extended to the Executive
hereunder. Accordingly, if it should appear to the Executive that the Company
has failed to comply with any of its obligations under this Agreement or in the
event that the Company or any other person takes or threatens to take any action
to declare this Agreement void or unenforceable, or institutes any litigation or
other action or proceeding designed to deny, or to recover from, the Executive
the benefits provided or intended to be provided to the Executive hereunder, the
Company irrevocably authorizes the Executive from time to time to retain counsel
of his choice, at the expense of the Company as hereafter provided, to represent
the Executive in connection with the initiation or defense of any litigation or
other legal action, whether by or against the Company or any Director, officer,
stockholder or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Executive's
entering into an attorney-client relationship with such counsel, and in that
connection the Company and the Executive agree that a confidential relationship
shall exist between the Executive and such counsel. Without respect to whether
the Executive prevails, in whole or in part, in connection with any of the
foregoing, the Company shall pay or cause to be paid and shall be solely
responsible for any and all attorneys' and related fees and expenses incurred by
the Executive in connection with any of the foregoing.
(b) Without limiting the generality or effect of Section 9(a) hereof, in order
to ensure the benefits intended to be provided to the Executive under Section
9(a) hereof, the Company will promptly use its best efforts to secure an
irrevocable standby letter of credit (the "Letter of Credit"), issued by
National City Bank or another bank having combined capital and surplus in excess
of $500 million (the "Bank") for the benefit of the Executive and certain other
of the officers of the Company and providing that the fees and expenses of
counsel selected from time to time by the Executive pursuant to this Section 9
shall be paid, or reimbursed to the Executive if paid by the Executive, on a
regular, periodic basis upon presentation by the Executive to the Bank of a
statement or statements prepared by such counsel in accordance with its
customary practices. The Company shall pay all amounts and take all action
necessary to maintain the Letter of Credit during the Period of Employment and
for two years thereafter and if, notwithstanding the Company's complete
discharge of such obligations, such Letter of Credit shall be terminated or not
renewed, the Company shall obtain a replacement irrevocable clean letter of
credit drawn upon a commercial bank selected by the Company and reasonably
acceptable to the Executive, upon substantially the same terms and conditions as
contained in the Letter of Credit, or any similar
<PAGE> 10
arrangement which, in any case, assures the Executive the benefits of this
Agreement without incurring any cost or expense in connection therewith.
(c) Notwithstanding any other provision hereof, the parties' respective rights
and obligations under this Section 9 will survive any termination or expiration
of this Agreement or the termination of the Executive's employment for any
reason whatsoever.
10. Employment Rights: Nothing expressed or implied in this Agreement shall
create any right or duty on the part of the Company or the Executive to have the
Executive remain in the employment of the Company prior to any Change in
Control; provided, however, that any termination of employment of the Executive
or the removal of the Executive from his office or position in the Company or
any Subsidiary following the commencement of any discussion with a third person
that ultimately results in a Change in Control shall be deemed to be a
termination or removal of the Executive after a Change in Control for purposes
of this Agreement.
11. Withholding of Taxes: The Company may withhold from any amounts payable
under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling.
12. Successors and Binding Agreement: (a) The Company shall require any
successor (whether direct or indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all of the business and/or
assets of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent the Company would be required to perform if no
such succession had taken place. This Agreement shall be binding upon and inure
to the benefit of the Company and any successor to the Company, including
without limitation any persons acquiring directly or indirectly all or
substantially all of the business and/or assets of the Company whether by
purchase, merger, consolidation, reorganization or otherwise (and such successor
shall thereafter be deemed the "Company" for the purposes of this Agreement),
but shall not otherwise be assignable, transferable or delegable by the Company.
(b) This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees and/or legatees.
(c) This Agreement is personal in nature and neither of the parties hereto
shall, without the consent of the other, assign, transfer or delegate this
Agreement or any rights or obligations hereunder except as expressly provided in
Sections 12(a) and 12(b) hereof. Without limiting the generality of the
foregoing, the Executive's right to receive payments hereunder shall not be
assignable, transferable or delegable, whether by pledge, creation of a security
interest or otherwise, other than by a transfer by his will or by the laws of
descent and distribution and, in the event of any attempted assignment or
transfer contrary to this Section 12(c), the Company shall have no liability to
pay any amount so attempted to be assigned, transferred or delegated.
(d) The Company and the Executive recognize that each party will have no
adequate remedy at law for breach by the other of any of the agreements
contained herein and, in the event of any such breach, the Company and the
Executive hereby agree and consent that the other shall be entitled to a decree
of specific performance, mandamus or other appropriate remedy to enforce
performance of this Agreement.
13. Notice: For all purposes of this Agreement, all communications including
without limitation notices, consents, requests or approvals, provided for herein
shall be in writing and shall be deemed to have been duly given when delivered
or five business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed to the
Company (to the attention of the Secretary of the Company) at its principal
executive office and to the Executive at his principal residence, or to such
other address as any party may have furnished to the other in writing and in
accordance herewith, except that notices of change of address shall be effective
only upon receipt.
<PAGE> 11
14. Governing Law: The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of Ohio, without
giving effect to the principles of conflict of laws of such State.
15. Validity: If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid, unenforceable
or otherwise illegal, the remainder of this Agreement and the application of
such provision to any other person or circumstances shall not be affected, and
the provision so held to be invalid, unenforceable or otherwise illegal shall be
reformed to the extent (and only to the extent) necessary to make it
enforceable, valid and legal.
16. Miscellaneous: No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party hereto at any
time of any breach by the other party hereto or compliance with any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
expressed or implied with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement.
17. Counterparts: This Agreement may be executed in one or more counterparts,
each of which shall be deemed to bean original but all of which together will
constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
EXECUTIVE THE LUBRIZOL CORPORATION
By:
<PAGE> 1
EXHIBIT 12
THE LUBRIZOL CORPORATION AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(all amounts except ratios are shown in thousands)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pretax income $ 195,350 $ 118,814 $ 231,147 $ 250,608 $ 225,574
Deduct earnings of less
than 50% owned affiliates
(net of distributed
earnings) included in
pretax income (3,195) (1,470) (3,018) (48) (1,384)
Add losses of less than 50%
owned affiliates included
in pretax income 18 888 66 56 1,808
Add fixed charges net of
capitalized interest 29,696 18,976 10,803 10,955 10,376
Add previously capitalized
interest amortized during
period 1,446 1,191 1,118 968 1,096
--------- --------- --------- --------- ---------
"Earnings" $ 223,315 $ 138,399 $ 240,116 $ 262,539 $ 237,470
========= ========= ========= ========= =========
Gross interest expense
including capitalized
interest ("Fixed Charges") 28,953 $ 20,743 $ 13,194 $ 14,010 $ 14,693
Ratio of earnings to
fixed charges 13.0 6.67 18.2 18.7 16.2
Special Adjustments:
- --------------------
"Earnings" $ 223,315 $ 138,399 $ 240,116 $ 262,539 $ 237,470
Plus asset impairment
and special charges 19,569 36,892 9,489
Less gains on investments and
litigation settlements (17,626) (16,201) (53,280) (38,459)
--------- --------- --------- --------- ---------
Adjusted "Earnings" $ 225,258 $ 159,090 $ 240,116 $ 209,259 $ 208,500
========= ========= ========= ========= =========
Ratio of adjusted earnings
to fixed charges 12.9 7.67 18.2 14.9 14.2
</TABLE>
<PAGE> 1
The Lubrizol Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Lubrizol Corporation is a fluid technology company concentrating on high
performance chemicals, systems and services for transportation and industry. We
develop, produce and sell specialty additive packages and related equipment used
in transportation and industrial finished lubricants. We create our products
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. We group our product lines into two operating segments: chemicals
for transportation and chemicals for industry. Chemicals for transportation
comprised approximately 83% of our consolidated revenues and 87% of segment
pre-tax operating profit in 1999. This discussion and analysis of our financial
condition and results of operations is generally focused on the company as a
whole since we believe this provides the most appropriate understanding of our
business. Note 12 to the financial statements contains a further description of
the nature of our operations, the product lines within each of the operating
segments and related financial disclosures.
In 1999, we continued to pursue our strategies to expand into new market areas,
grow revenues and improve cost structure. We believe that the global growth rate
for lubricant additives is approximately 1% per year. Due to changing industry
market forces, such as improved engine design and longer drain intervals, we
do not expect the annual growth rate to exceed 1% in the future. However,
our 1999 shipment volume increased by 9% over 1998 due to acquisitions made
during 1998, improvement in the economies in the Asia-Pacific region and new
business in North America.
We also have continued implementation of various short- and long-term
initiatives relating to our cost structure, such as consolidation of component
production and simplification of product lines, to enhance further our
competitiveness and market leadership position. In response to market and
industry conditions, we began an initiative in November 1998 to reduce costs and
improve our worldwide operating structure. The first phase of this initiative,
which was completed by December 31, 1999, included the reorganization of our
commercial structure, changes in work processes using our new globally
integrated management information system, the shutdown of some production units
and the consolidation of some facilities and offices. We achieved savings of
approximately $24 million in 1999 related to the first phase of this initiative.
A second phase, which was announced in the third quarter of 1999, involves
primarily the downsizing of our Painesville, Ohio manufacturing facility. These
actions are discussed under the caption "Cost Reduction Program and Related
Special Charges" and in Note 15 to the financial statements.
Acquisitions are an important part of our strategy to strengthen our business
position and expand into new markets, even though only a small acquisition was
made during 1999. We continue to actively pursue acquisitions during 2000, with
particular focus on our chemicals for industry business.
[Bar graph of REVENUES (millions)]
95 96 97 98 99
1999 RESULTS OF OPERATIONS
IN 1999, we achieved record consolidated revenues of $1.75 billion, which
represented an increase of $130.1 million, or 8% (3% excluding acquisitions) as
compared with 1998. The primary factor causing the increase in revenues from the
prior year was a 9% increase in our shipment volume (5% excluding acquisitions).
Our average selling price declined 2% as compared with 1998, all of which was
due to lower product pricing and changing product mix. Chemicals for
transportation revenues increased $87.7 million, or 6%, over 1998. Approximately
two-thirds of the increase was due to our 1998 acquisition of Adibis. Chemicals
for industry revenues increased $42.4 million, or 17%, over 1998. Approximately
one-half of the increase was due to acquisitions, primarily our acquisition of
Carroll Scientific, Inc.
The increase in 1999 shipment volume, excluding acquisitions, was attributable
to North America and Asia-Pacific. Shipment volume to North American customers
increased 13% primarily due to new business awarded at the end of 1998 and in
1999. Shipments to Asia-Pacific customers in 1999, excluding acquisitions,
increased 14% compared to 1998 primarily due to the economic improvement in the
region. Shipments to European and Latin American customers in 1999, excluding
acquisitions, decreased 4% and 10% respectively, due primarily to sluggish
economies with some business loss. We believe consolidated 1999 results
benefited from some advance buying in late 1999 related to Year 2000 concerns,
and customer purchases in advance of an announced price increase. A number of
the factors that contributed to the strong volume growth in 1999 may not be
present in 2000, and we believe that volume in 2000 (excluding acquisitions) is
likely to be approximately the same as 1999.
Cost of sales for 1999, including acquisitions, increased 5% reflecting higher
shipment levels partially offset by lower average raw material cost compared
with 1998. On a sequential basis, we experienced a 4% increase in average raw
material cost during the third quarter and an additional 2% increase
14
<PAGE> 2
The Lubrizol Corporation
during the fourth quarter, as a result of higher crude oil pricing and its
downstream effect. In November 1999, we announced a global price increase
ranging from 3% to 7% depending on the product group, to recover the increasing
raw material cost. The price increase, which was effective December 15, 1999,
was successful and we believe it will result in an average increase of 4% to
4.5% when fully implemented. We began to see the impact on revenues in the first
quarter of 2000 and anticipate the full impact will be felt by the end of the
second quarter. We continue to experience material cost increases in the first
quarter of 2000, and further price increases will be necessary to enable us to
maintain our margins. Manufacturing costs, included in cost of sales, increased
7% (3% excluding acquisitions) in 1999 compared to 1998.
[Bar graph of GROSS PROFIT (millions)]
95 96 97 98 99
Gross profit (net sales less cost of sales) increased $67.4 million, or 14%,
in 1999 compared with 1998. Excluding acquisitions, gross profit increased $50.3
million, or 10%, in 1999 compared with 1998. Most of the increase was due to
higher volume and the impact of lower average raw material cost partially offset
by lower average selling price. Additionally, $10 million of the increased gross
profit was due to the impact on cost of sales of favorable changes in currency
exchange rates. Of the total gross profit increase, $54.1 million was
attributable to chemicals for transportation and $13.3 million was attributable
to chemicals for industry. This represented a 14% increase for each operating
segment. Acquisitions accounted for one-fourth of the chemicals for
transportation increase and one-half of the chemicals for industry increase, and
the remainder was due to the factors noted above.
The gross profit percentage (gross profit divided by net sales) improved to
31.5% for 1999 as compared with 29.8% for 1998 for the same reasons as discussed
above. In addition, the 1998 gross profit percentage was unusually low as
explained in the discussion of 1998 results of operations. The gross profit
percentages for chemicals for transportation and chemicals for industry were
30.6% and 35.4%, respectively, compared to 28.6% and 36.1% in 1998.
Selling and administrative expenses increased by $1.5 million, or 1%, in 1999
compared with 1998. Excluding acquisitions, selling and administrative expenses
decreased $4.4 million, or 2%, in 1999 due to lower legal expenses, efficiencies
from the integration of Adibis, lower pension costs, reduced spending on our
global enterprise-wide management information system and favorable currency
effects. These factors were partially off-set by higher variable pay and costs
associated with "Year 2000" compliance activities.
[Bar graph of RESEARCH TESTING & DEVELOPMENT (millions)]
95 96 97 98 99
Research, testing and development expenses (technology expenses) decreased $5.1
million, or 3%, in 1999 compared with 1998. Excluding acquisitions, technology
expenses decreased $8.3 million, or 6%. Product standards change periodically to
meet new emissions, efficiency, durability and other performance factors as
engine and transmission designs are improved by equipment manufacturers. These
changes influence the timing and amount of technology expense. Approximately 80%
of our technology cost is incurred in company-owned facilities and 20% is
incurred at third-party testing facilities. The reduction in technology expenses
was achieved, in part, by reduced spending in 1999 for engine tests conducted at
third party facilities. In addition, an industry delay in the effective date of
the proposed new U.S. passenger car motor oil technical standard, GF-3, has
resulted in a deferral of related testing activities. This delay, along with
savings generated from the first phase of our cost reduction program implemented
in late 1998, also contributed to lower technical expenses in 1999 compared with
1998. We believe technical spending will increase by about 5% in 2000 because of
the anticipated GF-3 testing requirements.
Primarily as a result of the factors previously discussed, consolidated
revenues increased $72.0 million more than the increase in total costs and
expenses in 1999.
We recorded special charges for the year of $19.6 million ($13.2 million
after-tax or $.24 per share) relating to both phases of our cost reduction
program. These special charges are discussed under the caption "Cost Reduction
Program and Related Special Charges" below and in Note 15 to the financial
statements.
On March 31, 1999 Lubrizol and Exxon Corporation reached a settlement of all
pending intellectual property litigation between the two companies and their
affiliates, except for litigation pending in Canada. Under the settlement
agreement, Exxon paid us cash of $16.8 million in April 1999. After deducting
related expenses, this settlement increased 1999 pre-tax income by $14.5 million
($9.0 million after-tax or $.16 per share). Further information regarding our
litigation with Exxon is contained in Note 16 to the financial statements.
Additionally,
15
<PAGE> 3
The Lubrizol Corporation
we recorded a pre-tax gain of $3.1 million ($1.9 million after-tax or $.04 per
share) in the fourth quarter for the settlement of litigation unrelated to
Exxon.
The change in other income (expense) unfavorably affected 1999 pre-tax income by
$5.6 million compared with 1998. The change resulted primarily from higher
goodwill amortization related to acquisitions made in the second half of 1998,
and higher currency translation and transaction losses, principally in Brazil,
partially offset by higher equity earnings of affiliated companies.
Interest expense increased $8.6 million in 1999 compared with 1998, principally
because of higher borrowings necessitated by the acquisitions made during the
second half of 1998 and 1998 share repurchases.
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 our net asset exposure, currency mix and use of U.S.
dollar-based pricing in certain countries. As the U.S. dollar strengthens or
weakens against other international currencies in which we transact business,
our financial results will be affected. Changes in currency exchange rates
during 1999 had a favorable effect on net income per share of $.07 for the year
as compared to exchange rates in effect during 1998. This was primarily a result
of the weakening of the U.S. dollar against the Japanese yen, partially offset
by a strengthening of the U.S. dollar against the pound sterling and other
currencies.
As a result of the factors discussed above, income before income taxes increased
by $76.5 million, or 64%, over 1998. After excluding from both years the special
charges and the gains from litigation settlements, income before income taxes
increased by $57.8 million, or 41%, over 1998. Segment operating profit before
tax, which excludes interest expense, increased $61.5 million, or 47%, for
chemicals for transportation, and increased $4.9 million, or 22%, for chemicals
for industry, as compared to 1998.
The effective tax rate on 1999 income, before litigation gains and special
charges, decreased to 36.5% as compared with 38.0% in 1998. This decrease, which
increased 1999 earnings before these items by $.05 per share, was primarily due
to improvement in the profitability of certain foreign subsidiaries with loss
carryforwards, a reduction in the amount of non-deductible translation losses at
certain foreign subsidiaries, and a significant increase in pre-tax profit which
diluted the effect of non-deductible items.
Net income in 1999 was $123.0 million, or $2.25 per share. In 1998, net income
was $71.2 million, or $1.27 per share. After excluding from 1999 and 1998 the
special charges and the gains from litigation settlements, net income in 1999
was $125.3 million, as compared to $86.5 million in 1998, an increase of 45%. On
this same basis, 1999 net income per share was $2.30, an increase of 48% over
the $1.55 per share earned in 1998.
COST REDUCTION PROGRAM AND RELATED
SPECIAL CHARGES
We initiated a series of steps in 1998 to reduce costs and improve our worldwide
operating structure and are executing these steps in two phases over a period
approximating two years. The first phase, which began in the fourth quarter of
1998, resulted in the reduction of approximately 7% of our workforce, or 300
employees, at both domestic and international locations. Approximately 55% of
this reduction occurred by December 31, 1998, a further 35% occurred in the
first quarter of 1999 and the remainder was substantially completed by the end
of the third quarter of 1999. Of the 300 employees, approximately 40% were in
the manufacturing area and 60% were in the selling, administrative, research and
testing areas. In addition, we permanently removed seven component production
units from service during this first phase.
We recorded a special charge of $23.3 million in the fourth quarter of 1998 for
the cost directly associated with this first phase of the cost reduction
program. In the first quarter of 1999, we recognized additional expense of $3.1
million ($2.9 million after-tax or $.05 per share) to reflect a greater amount
for separation benefits, principally in Japan. In the fourth quarter of 1999, an
adjustment was made to reduce the special charge by $4.3 million ($2.5 million
after-tax or $.05 per share) to reflect the settlement gain recorded as a result
of settling employee pension obligations and other accrual adjustments. As
adjusted, first phase employee severance costs approximated $20.0 million of the
total charge of $22.1 million and other exit costs approximated $2.1 million,
virtually all of which related to asset impairments for component production
units taken out of service. We spent approximately $5.0 million and $14.7
million in 1998 and 1999, respectively, related to this phase of the cost
reduction program. We estimate annualized savings of $28 million, of which
approximately $24 million was achieved in 1999.
The second phase of our cost reduction program, which began in the third quarter
of 1999, involves primarily the downsizing of our Painesville, Ohio
manufacturing plant. This will result in the additional reduction of
approximately 5% of our work-
16
<PAGE> 4
The Lubrizol Corporation
force, or 200 employees, and the shutdown of 23 of Painesville's 36 production
systems. Through December 31, 1999, we have shut down 12 of the 23 targeted
production systems and have completed approximately 22% of the anticipated
workforce reduction. We expect the remainder of the system shut downs and
workforce reduction to occur by the end of 2000. After restructuring, the
Painesville plant will continue to operate as a producer of small volume
specialized intermediates and as a blender of certain additive packages.
We recorded a special charge of $20.8 million ($12.9 million after-tax or $.24
per share) in the third quarter of 1999 relating to this second phase of our
cost reduction program. Employee severance costs are $8.5 million of the charge
and other exit costs are $12.3 million, including $8.9 million related to asset
impairment for component production units to be taken out of service. We spent
approximately $1.3 million in 1999 related to this phase of the cost reduction
program, and we expect to spend $10.6 million in 2000. Additionally, we will
spend approximately $8 million of capital to transfer a portion of the
Painesville capacity to our Deer Park, Texas plant. We expect to achieve annual
savings of $20 million following completion of these actions in the latter part
of 2000.
1998 RESULTS OF OPERATIONS
IN 1998, the continuing weak business environment of the lubricant additives
industry and poor economic conditions in Asia-Pacific and Latin America
negatively impacted the financial results for the year, particularly during the
second half of the year. Despite acquisitions contributing 5% to consolidated
revenues during 1998, annual revenues declined 3% as compared with 1997. Lower
average selling prices combined with relatively level material costs compressed
profit margins. In addition, higher interest expense and a higher effective tax
rate each contributed to 1998 earnings being significantly lower than 1997
earnings.
Consolidated revenues for 1998 of $1.62 billion decreased $55.9 million, or 3%,
as compared with the then-record 1997 annual revenues of $1.67 billion. The
primary factors causing the decline in revenues from 1997 were lower average
selling prices and lower pre-acquisition volume, which more than off-set the
year-over-year incremental revenues from acquisitions. Excluding acquisitions,
sales volume declined by 4% for 1998 and by 10% for the second half of 1998 as
compared with the comparable 1997 periods. The 1998 average selling price
declined 5% as compared with 1997, of which 75% was due to lower product pricing
and changing product mix and 25% was due to currency. The year-over-year
increase in revenues from acquisitions was $81.2 million, of which $38.0 million
pertained to chemicals for transportation and $43.2 million pertained to
chemicals for industry.
The slowing of lubricant additive demand in virtually all geographic areas
during 1998 and the economic conditions in Asia-Pacific caused difficult
comparisons against 1997, a year in which we achieved record revenues and sales
volume. Although sales volume in 1998 was flat with 1997, excluding
acquisitions, sales volume declined 4%. On this same basis, sales volume to
customers in North America during 1998 was level with 1997, but declined 7% to
international customers. For the 1998 second half compared with the same period
of 1997, sales volume (excluding acquisitions) decreased 3% to customers in
North America and decreased 15% to international customers.
The economic difficulties in the Asia-Pacific region had an accelerating,
unfavorable effect on our 1998 results. Products shipped to customers in
Asia-Pacific are manufactured primarily in production facilities in the United
States and comprised approximately 16% and 19% of our revenues in 1998 and 1997,
respectively. Sales volume to customers in Asia-Pacific during the first half of
1998 declined by only 1% as compared with the first half of 1997, but declined
by 21% in the 1998 second half as compared with the 1997 second half. Lower
sales volume into Asia-Pacific was the primary reason that overall sales volume
declined in 1998. Asia-Pacific revenues declined by $53 million, or 17%, for the
year 1998 and by $40 million, or 24%, for the second half of 1998 as compared
with the respective 1997 periods. Some forward buying during the second half of
1997 by customers in Asia-Pacific in a reaction to worsening economic conditions
exacerbated the comparison with 1998.
Cost of sales for the full year 1998, including acquisitions, increased only 1%
over 1997 as sales volume, average material unit costs and manufacturing costs
remained relatively constant between the comparable periods. Average material
unit costs declined less than 1% from 1997. Our manufacturing costs do not
fluctuate significantly with changes in production volume. The effects of our
ongoing manufacturing rationalization program and other cost management
initiatives helped keep manufacturing costs level as compared with the prior
year, despite a $12.2 million increase from acquisitions.
17
<PAGE> 5
The Lubrizol Corporation
Gross profit (net sales less cost of sales) decreased $64.4 million, or 12%, in
1998 compared with 1997. Excluding acquisitions, gross profit declined $82.3
million, or 15%, in 1998 compared with 1997. Gross profit decreased $30.2
million, or 11%, ($35.3 million, or 13%, excluding acquisitions) in the first
half of 1998 and decreased $34.2 million, or 13%, ($47.0 million, or 18%,
excluding acquisitions) in the second half of 1998 compared with the same 1997
periods. The decrease in gross profit for each of the respective periods was
primarily due to the decline in selling prices and, in the second half of 1998,
also due to the lower sales volume. The $17.9 million increase in gross profit
contributed from acquisitions made in 1998 was partially offset by unfavorable
currency effects of $7.4 million.
The gross profit percentage (gross profit divided by net sales) was 29.8% for
1998 as compared with 32.7% for 1997. This decrease in gross profit percentage
was attributable to the lower average selling price as well as the unfavorable
effect on per unit manufacturing costs resulting from lower production levels,
particularly in the fourth quarter of 1998. In addition, the gross profit
percentage of 27.6% in the fourth quarter of 1998 reflected a $4.3 million
inventory write down primarily due to a change in a customer product
specification.
Selling and administrative expenses increased by $8.5 million, or 5%, in 1998
compared with 1997. Excluding acquisitions, selling and administrative expenses
were $1.5 million, or 1%, lower compared with 1997. Selling and administrative
expenses in 1998 reflected increased spending of $11.3 million related to the
implementation of the new enterprise-wide, management information system, but
this was more than offset by lower variable pay expense, lower litigation
expense and other cost reductions.
Research, testing and development expenses (technology expenses) increased $4.3
million, or 3%, in 1998 compared with 1997. Excluding acquisitions, technology
expenses declined $1.9 million, or 1%, from 1997. During 1998, approximately 80%
of our technology cost was incurred in company-owned facilities and 20% was
incurred at third-party testing facilities. Testing expenses incurred at third
party testing facilities increased $5.5 million in 1998 over 1997 primarily due
to a new performance specification for heavy-duty engine oils. Our technology
expense in 1998, as well as in 1997, included costs related to new performance
specifications for heavy-duty engine oils, which were introduced into the market
in late 1998, and new performance specifications for passenger car engine oils
expected to become effective during 2000.
Primarily as a result of the factors previously discussed, the change in
revenues together with the change in total costs and expenses unfavorably
affected our pre-tax profits by $78.4 million for the full year 1998 and by
$45.3 million for the second half of 1998 as compared with respective 1997
periods.
In the fourth quarter of 1998, we recorded special charges aggregating $36.9
million. These special charges related to the first phase of our cost reduction
program, which amounted to $23.3 million, and the write-off of $13.6 million of
purchased technology under development originating from the Adibis acquisition.
After-tax, these special charges reduced 1998 net income by $25.8 million, or
$.47 per share.
On April 23, 1998, we reached a settlement with Exxon Corporation of a lawsuit
pending in federal court in Ohio and we received cash of $19 million from Exxon.
The pre-tax gain from this litigation settlement, net of related expenses, was
$16.2 million. After-tax, the litigation settlement increased net income by
$10.5 million, or $.19 per share. Further information regarding our litigation
with Exxon is contained in Note 16 to the financial statements.
The change in other income (expense) unfavorably affected 1998 pre-tax income by
$6.3 million compared with 1997. This change mostly occurred during the second
half of the year and resulted primarily from higher goodwill amortization,
higher currency exchange transaction losses and lower equity earnings from joint
venture companies.
Interest expense increased $8.2 million in 1998 compared with 1997, reflecting
significantly higher borrowings that were incurred primarily to finance
acquisitions during the year.
As the U.S. dollar strengthens or weakens against other international currencies
in which we transact business, our financial results will be affected. During
1998, the U.S. dollar strengthened and the change in currency exchange rates had
an unfavorable effect on net income per share of $.07 for the year 1998 as
compared with exchange rates in effect during 1997.
As a result of the factors discussed above, income before income taxes decreased
by $112.3 million for the full year 1998 and by $93.8 million for the second
half of 1998 as compared with the respective periods of 1997. Excluding from
1998 the litigation gain and special charges, income before income taxes
decreased by $91.6 million, or 40%, for the full year 1998 and by $56.9 million
for the second half of 1998 as compared with the respective periods of 1997.
18
<PAGE> 6
The Lubrizol Corporation
The 1998 effective tax rate on income, before the litigation gain and special
charges, increased to 38% as compared with 33% in 1997. This increase, which
lowered 1998 earnings before these items by $.12 per share, was primarily a
result of lower 1998 operating earnings and increased non-tax deductible 1998
translation losses incurred by our foreign subsidiaries using a U.S. dollar
functional currency. Other reasons for the change in the effective tax rate
included shifts in earnings among the various countries in which we operate and
the tax benefits recognized during the second half of 1997 resulting from
favorable tax law changes enacted by France, the United States and the United
Kingdom. Taking into account the litigation gain and the fourth quarter special
charges, the overall effective tax rate for 1998 was 40%.
Net income in 1998 was $71.2 million, or $1.27 per share. In 1997, net income
was $154.9 million, or $2.68 per share. After excluding from 1998 the litigation
gain and the special charges, net income in 1998 was $86.5 million, a decrease
of 44% from 1997. On this same basis, 1998 net income per share was $1.55, a
decline of 42% from the $2.68 per share earned in 1997.
1997 RESULTS OF OPERATIONS
IN 1997, we made significant progress with each of our strategies to grow our
business, improve our cost structure and build our franchise. During 1997,
revenues increased 5% as product shipments increased 17% over 1996 and our
market share grew. We continued our focus to improve our cost structure as
operating expenses were flat versus 1996, even with significantly higher
production throughput. Net income per share in 1997 increased 20%, after
excluding from 1996 the gain on investments. This record performance was
achieved despite the unfavorable effect on earnings of the stronger U.S. dollar.
In 1997, we had then-record revenues of $1.67 billion, an increase of $76.2
million over 1996. Increased revenues resulted from a 17% increase in specialty
chemical shipment volumes (contributing a 15% increase in consolidated
revenues), partially offset by a 10% decline in the average selling price.
Although the average selling price stabilized during the second half of the
year, the full-year decline for 1997 was attributable approximately 50% to
changing product mix, 30% to unfavorable currency effects and 20% to lower
product pricing. The unfavorable product mix effect resulted from volume gains
in product lines having lower than the overall average selling price. On
balance, our acquisition/divestiture activity did not significantly affect 1997
annual revenues as recent acquisitions offset a prior year disposition. However,
acquisitions contributed one-fourth, or $11.4 million, of the 13% increase in
consolidated revenues for the fourth quarter of 1997 compared with the fourth
quarter of 1996.
A primary strategy in 1997 was to grow our business. We had success building
global and regional alliances with targeted customers and continued actively
pursuing additional strategic relationships with finished lubricant suppliers.
As compared with 1996, sales volume increased throughout the year. Higher sales
volumes were realized in all geographic zones and across a broad customer base.
In 1997, sales volume increased 14% to North American customers and 18% to
international customers, primarily in Asia-Pacific, Western Europe and Latin
America. The growth in sales volume was derived principally from market share
gains within established markets rather than overall industry growth.
Cost of sales reflected the higher sales volume as well as lower average raw
material costs and level manufacturing costs. Compared with the respective prior
year periods, average material costs, including favorable currency effects and
the impact of less expensive product mix, were 10% lower in the first half of
1997, 6% lower in the second half of 1997 and 8% lower for the year. Our
manufacturing costs do not fluctuate significantly with changes in production
volume. The effects of our ongoing manufacturing rationalization program and
other cost management initiatives have improved manufacturing efficiency as we
are operating fewer manufacturing units at higher capacity levels. Manufacturing
costs, aided by currency effects, were flat in 1997 compared with 1996, even
though production activity was significantly higher in 1997 and we resumed pay
increases following the salary freeze in effect during 1996.
Gross profit increased $36.2 million, or 7%, in 1997 compared with 1996. This
improvement in gross profit amount was after unfavorable currency effects of
$20.0 million, which occurred evenly over the four quarters.
Acquisition/divestiture activity contributed $13.0 million to the increase in
gross profit for 1997. Gross profit improved to 32.7% of sales in 1997 compared
with 32.0% in 1996 as manufacturing efficiencies, lower material costs and the
effect of acquisition/divestiture activities more than offset the effect of
lower average selling price. Gross profit was 31.4% during the second half of
1997 due to sequentially lower average selling price, higher material costs and
the effect of asset impairment losses of $4.4 million principally in the fourth
quarter.
19
<PAGE> 7
The Lubrizol Corporation
Selling and administrative expenses increased $12.6 million, or 8%, in 1997
compared with 1996. These expenses, which were higher in the second half of the
year compared with the first half, increased primarily due to higher
patent-related litigation expenses, the effect of acquisitions, incremental
expenses related to the implementation of the new enterprise-wide management
information system and increased variable compensation as a result of higher
earnings.
During 1997, research, testing and development expense (technology expense)
decreased $14.3 million, or 9%, from 1996. The lower spending level in 1997 was
due to the timing of testing programs particularly within the engine oil and
gear oil product lines, greater internalization of testing activity that reduced
outside testing requirements and workforce reductions. Our technology expense in
1997 included some costs related to new performance specifications for
heavy-duty engine oils which became effective during 1998 and new performance
specifications for passenger car engine oils expected to become effective during
2000.
As discussed in Note 15 to the financial statements, in 1997, we provided $9.4
million for the impairment of long-lived assets. These charges related to a
shutdown of an intermediate manufacturing system and the write-off of certain
computer equipment and legacy software systems that were disposed of due to the
computer equipment standardization project and the new enterprise-wide
management information system being implemented.
Primarily as a result of these factors, consolidated revenues increased $37.7
million more than the increase in total costs and expenses in 1997.
Interest income in 1997 was lower than in 1996 as proceeds from the 1996 sale of
investments were temporarily invested in interest-bearing instruments until used
in our share repurchase program. Interest expense in 1997 was level with 1996.
The average daily balance of total debt outstanding during 1997 was $195 million
as compared with $188 million in 1996.
We conduct a significant amount of business outside of the United States and are
subject to certain related risks including currency fluctuations. The U.S.
dollar continued to strengthen during 1997, causing an unfavorable effect on net
income of approximately $10.0 million, or $.17 per share.
As a result of the factors discussed above and after excluding from 1996 the
gain on investments, income before income taxes increased 17%, or $33.8 million,
from 1996. We adjusted our tax provision in the third quarter of 1997 to reflect
a legislated increase in the statutory tax rate applicable to our earnings in
France, where we have significant operations. This adjustment resulted in an
effective tax rate of 33.0% for the full year 1997 as compared with 31.5% in
1996, after excluding the 1996 gain on investments on which a 35% tax rate
applied. The higher effective tax rate reduced net income by $3.5 million, or
$.06 per share in 1997.
Net income in 1997 was $154.9 million, or $2.68 per share. In 1996, net income
was $169.8 million, or $2.80 per share, which included investment gains. After
excluding from 1996 the non-recurring gains, net income in 1997 was 15% higher
than the $135.2 million for 1996. On this same basis, net income per share was
20% higher than the $2.23 per share for 1996, reflecting our share repurchase
program.
[Bar graph RETURN ON EQUITY (percent)
(Before investment gains, litigation gains
and special charges.)]
95 96 97 98 99
RETURN ON AVERAGE SHAREHOLDERS' EQUITY
Return on average shareholders' equity was 16% in 1999 (also 16% excluding the
litigation gains and special charges), 9% in 1998 (11% excluding the litigation
gain and the special charge) and 19% in 1997.
WORKING CAPITAL, LIQUIDITY
AND CAPITAL RESOURCES
Our cash flows for the years 1997 through 1999 are presented in the consolidated
statements of cash flows. We had strong cash flow in 1999, as cash provided from
operating activities increased by $133.8 million, or 86%, over 1998, to a total
of $289.0 million. This increase was primarily due to higher earnings, and a $52
million reduction in working capital in 1999 compared to $45 million growth in
working capital in 1998. The reduction in working capital resulted from
implementation of an initiative to reduce inventory, collection of a $15 million
income tax refund receivable and an increase in current liabilities.
We have been engaged in a multi-year project to implement a global
enterprise-wide management information system and standardize the computer
equipment among all of our major facilities. This project supports our strategy
to improve our cost structure by reducing complexity and increasing efficiency
and was a critical component in our "Year 2000" compliance plan for our business
information systems. This system provides internal access to company information
so that resources are shared and processes are standardized and integrated
world-
20
<PAGE> 8
The Lubrizol Corporation
wide. We implemented the new enterprise-wide management information system in
the United States during April 1998 and in Europe during April 1999, and we
anticipate completing implementation in Singapore and Australia in April 2000.
[Bar graph showing CASH PROVIDED FROM
OPERATING ACTIVITIES (millions)]
95 96 97 98 99
Capital expenditures in 1999 were $64.9 million compared with $93.4 million in
1998. The reduction in capital spending was due to decreased expenditures
related to our multi-year project to implement the enterprise-wide management
information system ($7.6 million in 1999 as compared to $17.6 million in 1998)
and lower spending on manufacturing projects. We estimate capital expenditures
for 2000 will be approximately $80 million.
We made one acquisition in 1999 for $1.9 million. In 1998, we made six
acquisitions for cash of $155.4 million and one acquisition for 89,806 of our
common shares valued at $2.4 million. These acquisitions were in the areas of
lubricant additives, metalworking additives and coating additives and broaden
our base in performance chemicals.
We maintained an active share repurchase program for a number of years, but
suspended repurchases at the end of 1998 because net debt as a percent of
capitalization had reached our target level of 35% and we wanted to preserve
cash and borrowing capacity to fund potential acquisitions. During 1998, we
repurchased approximately 2.6 million common shares, or 4.6% of our common
shares outstanding at the beginning of 1998, for $80 million. Because of our
strong cash flow in 1999 and the completion of only one small acquisition during
the year, our net debt as a percent of capitalization decreased to 25% at
year-end. As a result, we resumed share repurchases late in the year. We
repurchased approximately 140,000 common shares for $4.2 million in 1999, and we
anticipate spending an aggregate of $20 million for share repurchases through
the end of the first quarter of 2000. Net debt is the total of short and
long-term debt, reduced by cash and short-term investments in excess of an
assumed operating cash level of $40 million. Capitalization is shareholders'
equity plus net debt.
The increase in cash flow from operating activities and the minimal amount of
share repurchases and acquisition activity enabled us to reduce our borrowings
by $27.9 million during 1999 and to increase our cash and short-term equivalents
by $131.8 million.
[Bar graph showing CAPITALIZATION (millions)]
95 96 97 98 99
Our net borrowings during 1998 totaled $201.7 million. These borrowings were
used primarily to finance $155 million of cash expended for acquisitions, most
of which occurred in the third quarter, and our share repurchase program. As
discussed in Note 4 to the financial statements, we replaced a significant
portion of outstanding commercial paper borrowings by issuing $200 million of
long-term debt in November 1998. We incurred debt issuance costs of $10.5
million in 1998, including a $6.5 million loss related to a hedge against
changes in interest rates relative to the anticipated issuance of this debt.
Debt increased during 1997 primarily to finance several acquisitions and the
increase in working capital.
Our financial position remains strong with a ratio of current assets to current
liabilities of 2.5:1 at both December 31, 1999 and 1998. Effective July 1, 1998,
we increased our committed revolving credit facilities from $75 million to $300
million. One-half of the aggregate amount of these facilities expired on June
30, 1999, and the remainder expires on June 30, 2003. We did not renew the $150
million in facilities that expired on June 30, 1999, because the November 1998
issuance of $200 million in long-term notes reduced our expected financing
requirements. The remaining $150 million in facilities, which were unused at
December 31, 1999, permit us to borrow at or below the U.S. prime rate. We
believe that our existing credit facilities, internally generated funds and
ability to obtain additional financing, if desired, will be sufficient to meet
our future capital needs.
21
<PAGE> 9
The Lubrizol Corporation
YEAR 2000 MATTERS
We developed a global Year 2000 strategy covering each of our facilities
designed to minimize Year 2000 disruptions to our computer-based systems,
including business information systems and process control, testing and
laboratory equipment and embedded systems. Our Year 2000 compliance strategy
incorporated the conversion of most of our business information systems from
mainframe systems to compliant, client/server systems. Much of this conversion
was part of our implementation of our global enterprise-wide management
information system. We have not incurred any adverse impact on our operations
because of Year 2000 factors, including any inability or difficulty of our
suppliers or customers to operate in the Year 2000. We do not anticipate any
adverse impact on our 2000 financial results due to Year 2000 issues.
Through December 31, 1999, we had spent approximately $76.6 million related to
the implementation of our global enterprise-wide management information system,
of which approximately $53.6 million was capitalized and $23.0 million expensed.
We estimate additional costs in 2000 of approximately $1.5 million to continue
implementing this system. In addition, we spent approximately $6.3 million for
Year 2000 remedial activities not addressed by the global enterprise-wide
management information system, including $4.3 million in 1999.
CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
This 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 Lubrizol, contain 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 our operations and business environment,
all of which are difficult to predict and many of which are beyond our control.
Such uncertainties and factors could cause our actual results to differ
materially from those matters expressed in or implied by such forward-looking
statements.
We believe that the following factors, among others, could affect our future
performance and cause our actual results to differ materially from those
expressed or implied by forward-looking statements made in this annual report:
- - the overall demand for lubricant additives on a worldwide basis, which has a
slow growth rate in mature markets such as North America and Europe;
- - the effect on our business resulting from economic uncertainty within the
Asia-Pacific and Latin American regions;
- - the lubricant additive demand in developing regions such as China and India,
geographic areas which are an announced focus of our activities;
- - technology developments that affect longer-term trends for lubricant
additives, such as: improved engine design, fuel economy, longer oil drain
intervals, alternative fuel powered engines and emission system compatibility;
- - our 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 our technology costs, the product life cycles and the
relative quantity of additives required for new specifications;
- - the rate of progress in continuing to reduce complexities and conversion costs
and in modifying our cost structure to maintain and enhance our
competitiveness;
- - our success in strengthening and retaining relationships with lubricant
additive customers, growing sales at targeted accounts, and expanding
geographically;
- - the extent to which we are successful in expanding beyond our core chemicals
for transportation businesses and into new areas for our chemicals for
industry businesses;
- - our ability to identify, complete and integrate acquisitions for profitable
growth;
- - 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
and finished lubricant marketers;
22
<PAGE> 10
The Lubrizol Corporation
- - the relative degree of competitive and customer price pressure on 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 our reported
results from international operations, together with non-currency risks of
investing in and conducting significant operations in foreign countries,
including those relating to political, social, economic and regulatory
factors;
- - the ability to achieve and timing of cost efficiencies resulting from the new
enterprise-wide management information system;
- - changes in significant government regulations affecting environmental
compliance.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Lubrizol operates manufacturing and blending facilities, laboratories and
offices around the world and utilizes fixed and floating rate debt to finance
our global operations. As a result, we are subject to business risks inherent in
non-U.S. activities, including political and economic uncertainty, import and
export limitations and market risk related to changes in interest rates and
foreign currency exchange rates. We believe the political and economic risks
related to our foreign operations are mitigated due to the stability of the
countries in which our largest foreign operations are located.
In the normal course of business, we use derivative financial instruments
including interest rate swaps and foreign currency forward exchange contracts to
manage our market risks. Additional information regarding our financial
instruments is contained in Notes 4 and 13 to the financial statements. Our
objective in managing our exposure to changes in interest rates is to limit the
impact of such changes on earnings and cash flow and to lower our overall
borrowing costs. Our objective in managing the exposure to changes in foreign
currency exchange rates is to reduce volatility on earnings and cash flow
associated with such changes. Our principal currency exposures are in the major
European currencies, the Japanese yen and certain Latin American currencies. We
do not hold derivatives for trading purposes.
We measure our market risk, related to our holdings of financial instruments
based on changes in interest rates and foreign currency rates utilizing a
sensitivity analysis. The sensitivity analysis measures the potential loss in
fair values, cash flows and income before tax based on a hypothetical 10% change
(increase and decrease) in interest and currency exchange rates. We used current
market rates on our debt and derivative portfolio to perform the sensitivity
analysis. Certain items such as lease contracts, insurance contracts and
obligations for pension and other post-retirement benefits were not included in
the analysis.
Our primary interest rate exposures relate to our cash and short-term
investments, fixed and variable rate debt and interest rate swaps. The
calculation of potential loss in fair values is based on an immediate change in
the net present values of our interest rate-sensitive exposures resulting from a
10% change in interest rates. The potential loss in cash flows and income before
tax is based on the change in the net interest income/ expense over a one-year
period due to an immediate 10% change in rates. A hypothetical 10% change in
interest rates would have a favorable/unfavorable impact on fair values of $19.9
million, cash flows of $.5 million and income before tax of $.5 million.
Our primary currency rate exposures are to foreign denominated debt,
intercompany debt, cash and short-term investments and foreign currency forward
exchange contracts. The calculation of potential loss in fair values is based on
an immediate change in the U.S. dollar equivalent balances of our currency
exposures due to a 10% shift in exchange rates. The potential loss in cash flows
and income before tax is based on the change in cash flow and income before tax
over a one-year period resulting from an immediate 10% change in currency
exchange rates. A hypothetical 10% change in currency exchange rates would have
a favorable/unfavorable impact on fair values of $4.5 million, cash flows of
$10.5 million and income before tax of $3.4 million.
23
<PAGE> 11
The Lubrizol Corporation
Deloitte &
Touche LLP [Logo]
- -----------
INDEPENDENT AUDITORS' REPORT
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, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Corporation'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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
February 3, 2000
24
<PAGE> 12
The Lubrizol Corporation
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
(In Thousands of Dollars Except Per Share Data) 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ................................ $ 1,743,541 $ 1,614,558 $ 1,669,251
Royalties and other revenues ............. 4,462 3,361 4,531
----------- ----------- -----------
Total revenues ..................... 1,748,003 1,617,919 1,673,782
Cost of sales ............................ 1,194,945 1,133,327 1,123,602
Selling and administrative expenses ...... 181,292 179,759 171,244
Research, testing and development expenses 145,927 150,980 146,678
----------- ----------- -----------
Total cost and expenses ............ 1,522,164 1,464,066 1,441,524
Special charges .......................... (19,569) (36,892)
Gain from litigation settlements ......... 17,626 16,201
Other income (expense)-net ............... (6,704) (1,152) 5,104
Interest income .......................... 7,854 5,780 4,588
Interest expense ......................... (29,696) (18,976) (10,803)
----------- ----------- -----------
Income before income taxes ............... 195,350 118,814 231,147
Provision for income taxes ............... 72,358 47,614 76,278
----------- ----------- -----------
Net income ............................... $ 122,992 $ 71,200 $ 154,869
=========== =========== ===========
Net income per share ..................... $ 2.25 $ 1.27 $ 2.68
=========== =========== ===========
Net income per share, diluted ............ $ 2.25 $ 1.27 $ 2.66
=========== =========== ===========
Dividends per share ...................... $ 1.04 $ 1.04 $ 1.01
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
25
<PAGE> 13
The Lubrizol
CORPORATION CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------------
(In Thousands of Dollars) 1999 1998
- ------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and short-term investments ........................................... $ 185,465 $ 53,639
Receivables ............................................................... 301,256 301,644
Inventories ............................................................... 258,149 277,612
Other current assets ...................................................... 35,572 54,575
----------- -----------
Total current assets ................................................. 780,442 687,470
----------- -----------
Property and equipment - at cost .......................................... 1,598,264 1,608,500
Less accumulated depreciation ............................................. 927,752 889,650
----------- -----------
Property and equipment - net ............................................. 670,512 718,850
----------- -----------
Goodwill and intangible assets - net ...................................... 149,779 166,957
Investments in non-consolidated companies ................................. 30,441 26,490
Other assets .............................................................. 51,180 43,470
----------- -----------
TOTAL ............................................................ $ 1,682,354 $ 1,643,237
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt and current portion of long-term debt ..................... $ 37,584 $ 38,926
Accounts payable .......................................................... 138,841 112,832
Accrued expenses and other current liabilities ............................ 134,875 118,270
----------- -----------
Total current liabilities ............................................ 311,300 270,028
----------- -----------
Long-term debt ............................................................ 365,372 390,394
Postretirement health care obligation ..................................... 108,717 106,641
Noncurrent liabilities .................................................... 45,054 48,950
Deferred income taxes ..................................................... 61,787 58,106
----------- -----------
Total liabilities .................................................... 892,230 874,119
----------- -----------
Contingencies and commitments
Preferred stock without par value - unissued
Common shares without par value - outstanding 54,477,292 shares in 1999 and
54,548,110 shares in 1998 .............................................. 85,984 84,651
Retained earnings ......................................................... 758,090 709,994
Accumulated other comprehensive loss ...................................... (53,950) (25,527)
----------- -----------
Total shareholders' equity ........................................... 790,124 769,118
----------- -----------
TOTAL ............................................................ $ 1,682,354 $ 1,643,237
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
26
<PAGE> 14
The Lubrizol Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
(In Thousands of Dollars) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED FROM (USED FOR):
OPERATING ACTIVITIES:
Net income .................................................................. $ 122,992 $ 71,200 $ 154,869
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization .......................................... 99,720 88,047 87,217
Deferred income taxes .................................................. 1,312 5,732 8,585
Special charges and asset impairments .................................. 19,569 36,892 9,360
Change in current assets and liabilities net
of acquisitions and dispositions:
Receivables ........................................................ (10,749) 3,870 (47,313)
Inventories ........................................................ 13,500 9,839 (16,919)
Accounts payable, accrued expenses and other current liabilities ... 28,408 (41,749) 46,524
Other current assets ............................................... 19,052 (17,012) 4,101
Change in noncurrent liabilities ....................................... 370 5,357 (169)
Other items - net ...................................................... (5,153) (6,985) (11,889)
--------- --------- ---------
Total operating activities .................................... 289,021 155,191 234,366
INVESTING ACTIVITIES:
Proceeds from sale of investments ........................................... 3,500 12,117
Capital expenditures ........................................................ (64,872) (93,421) (100,700)
Acquisitions and investments in nonconsolidated companies ................... (1,923) (155,418) (23,636)
Other - net ................................................................. 2,246 749 5,164
--------- --------- ---------
Total investing activities .................................... (64,549) (244,590) (107,055)
FINANCING ACTIVITIES:
Short-term borrowing (repayment) ............................................ (8,404) 4,175 26,772
Long-term borrowing ......................................................... 5,000 203,059 5,572
Long-term repayment ......................................................... (24,447) (5,515) (4,159)
Debt issuance costs ......................................................... (10,523)
Dividends paid .............................................................. (56,757) (58,256) (58,469)
Common shares purchased, net of options exercised ........................... (2,625) (76,542) (63,391)
--------- --------- ---------
Total financing activities .................................... (87,233) 56,398 (93,675)
Effect of exchange rate changes on cash ..................................... (5,413) 136 (2,205)
--------- --------- ---------
Net increase (decrease) in cash and short-term investments .................. 131,826 (32,865) 31,431
Cash and short-term investments at the beginning of year .................... 53,639 86,504 55,073
--------- --------- ---------
Cash and short-term investments at the end of year .......................... $ 185,465 $ 53,639 $ 86,504
========= ========= =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
27
<PAGE> 15
The Lubrizol Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shareholders' Equity
------------------------------------------------------------
Number of Accumulated Other
Shares Common Retained Comprehensive
(Dollars in Thousands) Outstanding Shares Earnings Income (Loss) Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ...................... 58,522,676 $ 78,534 $ 744,310 $ (3,468) $ 819,376
-----------
Comprehensive income:
Net income 1997 ............................ 154,869 154,869
Other comprehensive loss ................... (36,937) (36,937)
-----------
Comprehensive income ............................ 117,932
Cash dividends .................................. (58,469) (58,469)
Common shares - treasury:
Shares purchased ........................... (1,812,841) (2,538) (67,526) (70,064)
Shares issued upon exercise of stock options 257,059 6,673 6,673
---------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 ...................... 56,966,894 82,669 773,184 (40,405) 815,448
-----------
Comprehensive income:
Net income 1998 ............................ 71,200 71,200
Other comprehensive income ................. 14,878 14,878
-----------
Comprehensive income ............................ 86,078
Cash dividends .................................. (58,256) (58,256)
Common shares issued for subsidiary acquisition . 89,806 2,390 2,390
Common shares - treasury:
Shares purchased ........................... (2,621,173) (3,944) (76,134) (80,078)
Shares issued upon exercise of stock options 112,583 3,536 3,536
---------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 ...................... 54,548,110 84,651 709,994 (25,527) 769,118
-----------
Comprehensive Income:
Net income 1999 ............................ 122,992 122,992
Other comprehensive loss ................... (28,423) (28,423)
-----------
Comprehensive income ............................ 94,569
Cash dividends .................................. (70,938)* (70,938)
Common shares - treasury:
Shares purchased ........................... (139,600) (220) (3,958) (4,178)
Shares issued upon exercise of stock options 68,782 1,553 1,553
---------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 ...................... 54,477,292 $ 85,984 $ 758,090 $ (53,950) $ 790,124
========== =========== =========== =========== ===========
</TABLE>
* Includes dividends declared and unpaid at December 31, 1999.
The accompanying notes to financial statements are an integral part of these
statements.
28
<PAGE> 16
The Lubrizol Corporation
NOTES TO FINANCIAL STATEMENTS
(In Thousands of Dollars Unless Otherwise Indicated)
NOTE 1 - NATURE OF OPERATIONS
The Lubrizol Corporation is a fluid technology company concentrating on high
performance chemicals, systems and services for transportation and industry.
The company develops, produces and sells specialty additive packages and related
equipment used in transportation and industrial finished lubricants. The
company's 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 groups its product lines into two
operating segments: chemicals for transportation and chemicals for industry.
Chemicals for transportation comprise approximately 83% of the company's
consolidated revenues and 87% of segment pre-tax operating profit in 1999,
respectively. Refer to Note 12 for a further description of the nature of the
company's operations, the product lines within chemicals for transportation and
chemicals for industry and related financial disclosures.
NOTE 2 - ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts of
The Lubrizol Corporation and its subsidiaries where ownership is greater than
50% and the company has effective controlling financial interest. 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. The
book value of investments carried at equity was $29.7 million and $25.8 million
at December 31, 1999 and 1998, respectively. Investments carried at cost were
$.7 million at December 31, 1999 and 1998.
ESTIMATES - The preparation of consolidated 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 consolidated
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 any of 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 of three months or less when purchased.
INVENTORIES - Inventories are stated at the lower of cost or market value. Cost
of inventories is determined by either first-in, first-out (FIFO) method or
moving average method, except in the United States for chemical inventories,
which are primarily valued using the last-in, first-out (LIFO) method.
PROPERTY AND EQUIPMENT - Property and equipment are carried at cost. Repair
and maintenance costs are charged against income while renewals and betterments
are capitalized as additions to the related assets. Costs incurred for computer
software developed or obtained for internal use are capitalized for application
development activities and immediately expensed for preliminary project
activities or post-implementation activities. Accelerated depreciation methods
are used in computing depreciation on certain machinery and equipment, which
comprise approximately 21% 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.
GOODWILL AND INTANGIBLE ASSETS - Intangibles resulting from business
acquisitions including costs in excess of net assets of businesses acquired
(goodwill), purchased technology and trademarks are being amortized on a
straight-line method over periods ranging from 5 to 25 years. The recoverability
of good-will and intangible assets is evaluated at the business unit level by
analysis of operating results and consideration of other significant events or
changes in the business environment. If a business unit has operating losses and
based upon projections there is a likelihood that such operating losses will
continue, the company will evaluate whether impairment exists on the basis of
undiscounted expected future cash flows from operations before interest for the
remaining amortization period.
RESEARCH, TESTING AND DEVELOPMENT - Research, testing and development costs are
expensed as incurred. Research and development expenses, excluding testing, were
$78.3 million in 1999 and 1998, and $88.4 million in 1997.
ENVIRONMENTAL LIABILITIES - The company accrues for expenses associated with
environmental remediation obligations when such expenses are probable and
reasonably estimable. Such accruals are adjusted as further information develops
or circumstances change. Costs of future expenditures for environmental
remediation obligations are not discounted to their present value. The Company's
environmental reserves totaled $7.4 million and $7.9 million at December 31,
1999 and 1998, respectively. Of these amounts, $1.0 million was included in
other current liabilities at December 31, 1999 and 1998.
FOREIGN CURRENCY TRANSLATION - The assets and liabilities of certain of the
company's international subsidiaries are translated into U.S. dollars at
exchange rates in effect at the balance sheet date, and revenues and expenses
are translated at weighted average exchange rates in effect during the period.
Unrealized translation adjustments are recorded as a component of other
comprehensive income in shareholders' equity, except for subsidiaries for which
the functional currency is the
29
<PAGE> 17
The Lubrizol Corporation
NOTES CONTINUED
U.S. dollar, where translation adjustments are realized in income. Transaction
gains or losses that arise from exchange rate changes on transactions
denominated in a currency other than the functional currency, except those
transactions that function as a hedge of an identifiable foreign currency
commitment or as a hedge of a foreign currency investment, are included in
income as incurred.
SHARE REPURCHASES - The company utilizes the par value method of accounting for
its treasury shares. Under this method, the cost to reacquire shares in excess
of paid-in capital related to those shares is charged against retained earnings.
REVENUE RECOGNITION - Substantially all revenues are recognized at the time of
shipment of products to customers with appropriate provision for uncollectible
accounts.
PER SHARE AMOUNTS - Net income per share is computed by dividing net income by
average common shares outstanding during the period. Net income per diluted
share includes the dilution effect resulting from outstanding stock options and
stock awards. Per share amounts are computed as follows:
1999 1998 1997
-------- -------- --------
Numerator:
Net income available to
common shareholders ............. $122,992 $ 71,200 $154,869
======== ======== ========
Denominator:
Weighted average common
shares outstanding .............. 54,577 55,939 57,843
Dilutive effect of stock
options and awards .............. 139 183 386
-------- -------- --------
Denominator for net income
per share, diluted ................. 54,716 56,122 58,229
======== ======== ========
Net income per share ................. $ 2.25 $ 1.27 $ 2.68
======== ======== ========
Net income per share,
diluted ............................ $ 2.25 $ 1.27 $ 2.66
======== ======== ========
ACCOUNTING FOR DERIVATIVE INSTRUMENTS - In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Standards (SFAS)133,
"Accounting for Derivative Instruments and Hedging Activities," which was to
become effective for the company no later than January 1, 2000. In June 1999,
the FASB delayed the required effective date for SFAS 133, which delayed the
required effective date for the company until January 1, 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that all derivatives be measured at fair
value and recognized as either assets or liabilities in the balance sheet. The
accounting for changes in the fair value of a derivative (that is, gains or
losses) depends on the intended use of the derivative and its resulting hedge
designation. 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 currently
evaluating the requirements of SFAS 133 but has not yet determined the impact on
its financial position and results of operations when adopted.
NOTE 3 - INVENTORIES
1999 1998
-------- --------
Finished products ........................ $118,135 $112,060
Products in process ...................... 56,855 66,485
Raw materials ............................ 66,102 80,134
Supplies and engine test parts ........... 17,057 18,933
-------- --------
$258,149 $277,612
======== ========
Inventories on the LIFO method were 28% and 27% of consolidated inventories at
December 31, 1999 and 1998, respectively. The current replacement cost of these
inventories exceeded the LIFO cost at December 31, 1999 and 1998, by $42.7
million and $41.1 million, respectively.
NOTE 4 - SHORT-TERM AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Long-term debt consists of:
5.875% notes, due 2008 ................................. $ 200,000 $ 200,000
7.25% debentures, due 2025 ............................. 100,000 100,000
Debt supported by long-term
banking arrangements:
Commercial paper at weighted
average rates of 6.6% and 5.6% .................... 50,000 50,000
6.5% Marine terminal refunding
revenue bonds, due 2000 ........................... 18,375 18,375
Term loans:
Dollar denominated,
at 5.0% due 2000 .................................. 4,160 4,204
Yen denominated, at 1.6% to 2.8%,
due 2000-2003 ..................................... 19,766 18,656
Deutsche mark denominated,
4.1% to 6.0% ...................................... 19,648
French franc denominated, at 3.5%
to 5.0%, due 2000-2008 ............................ 495 645
--------- ---------
392,796 411,528
Less current portion ................................... (27,424) (21,134)
--------- ---------
$ 365,372 $ 390,394
========= =========
Short-term debt consists of:
Commercial paper at weighted
average rate of 5.6% .............................. $ 5,300
Other short-term debt at weighted
average rates of 2.6% and 2.8% .................... $ 10,160 12,492
Current portion of long-term debt ...................... 27,424 21,134
--------- ---------
$ 37,584 $ 38,926
========= =========
</TABLE>
In November 1998, the company issued notes having an aggregate principal amount
of $200 million. The notes are unsecured, senior obligations of the company that
mature on December 1,
30
<PAGE> 18
The Lubrizol Corporation
2008, and bear interest at 5.875% per annum, payable semiannually on June 1 and
December 1 of each year. The notes have no sinking fund requirement but are
redeemable, in whole or in part, at the option of the company. The company
incurred debt issuance costs aggregating $10.5 million, including a loss of $6.5
million related to closed Treasury rate lock agreements originally entered into
as a hedge against changes in interest rates relative to the anticipated
issuance of these notes. Debt issuance costs are deferred and then amortized as
a component of interest expense over the term of the notes. Including debt
issuance costs, these notes have an effective annualized interest rate of 6.6%
to the company.
The company issued debentures in June 1995 having an 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.
Effective July 1, 1999, the company decreased its committed revolving credit
facilities from $300 million to $150 million. These credit facilities expire on
June 30, 2003, subject to annual extension provisions. These facilities, which
were unused at December 31,1999, permit the company to borrow at or below the
U.S. prime rate. These facilities also permit the company to refinance beyond
one year $150 million of debt, which by its terms is due within one year. As
permitted by these and previously existing credit facilities, the company
classified as long-term at each balance sheet date the portion of commercial
paper borrowings expected to remain outstanding throughout the following year
and for December 31, 1998, the amount due under the Marine Terminal Refunding
Revenue Bonds, whose bondholders have the right to put the bonds back to the
company.
Amounts due on long-term debt are $27.4 million in 2000, $3.6 million in 2001,
$1.5 million in 2002, $59.8 million in 2003, $.1 million in 2004 and $300.4
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%. The company also has
interest rate swap agreements, which expire in March 2005, that exchange
variable rate interest obligations on a notional principal amount of $50 million
for a fixed rate of 7.6% (see Note 13).
Interest paid, net of amounts capitalized, amounted to $28.8 million, $18.3
million and $10.9 million during 1999, 1998 and 1997, respectively. The company
capitalizes interest on qualifying capital projects. The amount of interest
capitalized during 1999, 1998 and 1997 amounted to $.1 million, $1.2 million and
$2.1 million, respectively.
NOTE 5 - OTHER BALANCE SHEET INFORMATION
Receivables: 1999 1998
---------- ----------
Customers ............................... $ 273,054 $ 269,264
Affiliates .............................. 9,013 8,976
Other ................................... 19,189 23,404
---------- ----------
$ 301,256 $ 301,644
========== ==========
Receivables are net of allowance for doubtful accounts of $4.1 million in 1999
and $2.2 million in 1998.
Property and Equipment - at cost: 1999 1998
---------- ----------
Land and improvements .................. $ 105,984 $ 107,712
Buildings and improvements ............. 305,505 299,024
Machinery and equipment ................ 1,145,936 1,145,471
Construction in progress ............... 40,839 56,293
---------- ----------
$1,598,264 $1,608,500
========== ==========
Depreciation and amortization of property and equipment was $88.3 million
in 1999, $79.7 million in 1998 and $82.7 million in 1997.
Goodwill and Intangible Assets: 1999 1998
---------- ----------
Goodwill ............................... $ 151,492 $ 157,380
Intangible assets ...................... 34,411 34,271
---------- ----------
185,903 191,651
Less accumulated amortization .......... 36,124 24,694
---------- ----------
$ 149,779 $ 166,957
========== ==========
Accrued Expenses and Other
Current Liabilities: 1999 1998
---------- ----------
Employee compensation .................. $ 48,441 $ 36,094
Income taxes ........................... 25,890 16,910
Taxes other than income ................ 22,081 20,675
Special charges and acquisition
assimilation costs ................... 11,526 18,738
Other .................................. 26,937 25,853
---------- ----------
$ 134,875 $ 118,270
========== ==========
Noncurrent Liabilities: 1999 1998
---------- ----------
Employee benefits ...................... $ 30,000 $ 33,976
Other .................................. 15,054 14,974
---------- ----------
$ 45,054 $ 48,950
========== ==========
NOTE 6 - 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. Common shares
outstanding exclude common shares held in treasury of 31, 718,602 and 31,648,000
at December 31, 1999 and 1998 respectively.
The company has a shareholder rights plan under which one right to buy one-half
common share has been distributed for
31
<PAGE> 19
The Lubrizol Corporation
NOTES CONTINUED
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 2007 unless redeemed earlier.
Accumulated other comprehensive income (loss) shown in the consolidated
statements of shareholders' equity at December 31, 1999, 1998 and 1997 is
comprised of the following, net of tax effects:
1999 1998 1997
-------- -------- --------
Foreign currency translation
adjustments ............................. $(27,923) $ 14,840 $(36,941)
Pension plan minimum
liability ............................... (838)
Income tax benefit ........................ 338 38 4
-------- -------- --------
$(28,423) $ 14,878 $(36,937)
======== ======== ========
NOTE 7 - OTHER INCOME (EXPENSE) - NET
1999 1998 1997
-------- -------- --------
Equity earnings of
nonconsolidated
companies ............................... $ 5,735 $ 2,602 $ 4,804
Amortization of goodwill
and intangible assets ................... (11,430) (7,512) (3,764)
Currency exchange/
transaction gain (loss) ................. (3,108) (1,260) 2,398
Other - net ............................... 2,099 5,018 1,666
-------- -------- --------
$ (6,704) $ (1,152) $ 5,104
======== ======== ========
NOTE 8 - 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:
1999 1998 1997
-------- -------- --------
United States ............................ $113,904 $ 78,305 $154,589
Foreign .................................. 81,446 40,509 76,558
-------- -------- --------
Total .................................... $195,350 $118,814 $231,147
======== ======== ========
The provision for income taxes consists of the following:
1999 1998 1997
-------- -------- --------
Current:
United States ............................ $ 46,983 $ 16,649 $ 35,556
Foreign .................................. 24,063 25,233 32,137
-------- -------- --------
71,046 41,882 67,693
-------- -------- --------
Deferred:
United States ............................ (3,467) 3,385 8,784
Foreign .................................. 4,779 2,347 (199)
-------- -------- --------
1,312 5,732 8,585
-------- -------- --------
Total .................................... $ 72,358 $ 47,614 $ 76,278
======== ======== ========
The United States tax provision includes the U.S. tax on foreign income
distributed to the company. The portion of the tax provision for taxes outside
the United States includes withholding 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:
1999 1998 1997
-------- -------- --------
Tax at statutory rate of 35% .............. $ 68,373 $ 41,585 $ 80,901
State and local taxes ..................... 2,815 2,261 2,683
Foreign sales corporation
earnings ................................ (1,923) (3,152) (4,704)
Equity income ............................. (875) (859) (2,775)
Foreign deferred tax
valuation allowance ..................... (3,904) 4,878 (60)
Other foreign tax differences ............. 3,954 5,995 3,523
Other - net ............................... 3,918 (3,094) (3,290)
-------- -------- --------
Provision for income taxes ................ $ 72,358 $ 47,614 $ 76,278
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at December 31 are as follows:
1998 1997
-------- --------
Deferred tax assets:
Accrued compensation and benefits .................. $ 48,858 $ 48,178
Intercompany profit in inventory ................... 11,322 11,131
Net operating losses carried forward ............... 12,305 18,284
Other .............................................. 8,665 8,574
-------- --------
Total gross deferred tax assets ...................... 81,150 86,167
Less valuation allowance ............................. 5,153 9,057
-------- --------
Net deferred tax assets .............................. 75,997 77,110
-------- --------
Deferred tax liabilities:
Depreciation and other
basis differences ............................... 99,938 101,658
Undistributed foreign equity income ................ 5,566 3,894
Inventory basis differences ........................ 1,497 3,706
Other .............................................. 3,977 2,986
-------- --------
Total gross deferred tax liabilities ................. 110,978 112,244
-------- --------
Net deferred tax liabilities ......................... $(34,981) $(35,134)
======== ========
32
<PAGE> 20
The Lubrizol Corporation
At December 31, 1999, certain foreign subsidiaries have net operating loss
carryforwards of $37.8 million for income tax purposes, of which $5.9 million
expire in years 2000 through 2009 and $31.9 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 31,1999,
1998 and 1997, was a decrease of $3.9 million, an increase of $4.9 million and a
decrease of $.1 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 $411.5 million at December 31, 1999. Determination of the net
amount of unrecognized U.S. income tax with respect to these earnings is not
practicable.
Income taxes paid during 1999, 1998 and 1997 amounted to $59.1 million, $52.0
million and $53.0 million, respectively.
NOTE 9 - PENSION, PROFIT SHARING AND OTHER
POSTRETIREMENT BENEFIT PLANS
The company has noncontributory defined benefit pension plans covering most
employees. Pension benefits under these plans 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 of the company's defined benefit plans are not funded. Plan assets are
invested principally in marketable equity securities and fixed income
instruments.
The company also provides certain non-pension postretirement benefits, primarily
health care and life insurance benefits, for retired employees. 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
non-pension postretirement benefit plans are not funded.
Net periodic pension cost of the company's defined benefit pension plans
consists of:
1999 1998 1997
-------- -------- --------
Service cost - benefits earned
during period ........................... $ 11,843 $ 11,142 $ 10,269
Interest cost on projected
benefit obligation ...................... 17,589 17,519 17,704
Expected return on plan assets ............ (25,873) (23,818) (21,976)
Amortization of prior
service costs ........................... 1,771 1,718 1,827
Amortization of initial net
(asset) obligation ...................... (1,264) (753) (1,295)
Recognized net actuarial
(gain) loss ............................. 507 (381) (127)
Settlement (gain) ......................... (5,474)
-------- -------- --------
Net periodic pension cost ................. $ (901) $ 5,427 $ 6,402
======== ======== ========
The company also has defined contribution plans, principally involving profit
sharing plans and a 401(k) savings plan, covering most employees in the United
States and at certain non-U.S. subsidiaries. Expense for all defined
contribution retirement plans was $9.0 million in 1999, $8.1 million in 1998 and
$9.9 million in 1997.
As discussed in Note 15, the company initiated a cost reduction program and
recognized special termination benefits of $11.6 million in 1999, $3.1 million
and $8.5 million of which were included in the special charges recognized in the
first and third quarters of 1999, respectively. The company also recognized a
settlement gain of $10.0 million in the fourth quarter of 1999 in the United
States, $4.5 million of which was recorded as an adjustment to the special
charge and $5.5 million recorded as a reduction in net periodic pension cost.
The company also recognized special termination benefits of $18.3 million in
1998, which were included in the special charge recognized in the fourth quarter
of 1998.
Net non-pension postretirement benefit cost consists of:
1999 1998 1997
-------- -------- --------
Service cost - benefits earned
during period ........................... $ 1,468 $ 1,250 $ 1,465
Interest cost on accumulated
benefit obligation ...................... 4,728 4,415 4,989
Amortization of prior
service costs ........................... (3,218) (3,218) (3,218)
Recognized net actuarial
(gain) loss ............................. 23 (252)
-------- -------- --------
Net non-pension postretire-
ment benefits cost ...................... $ 3,001 $ 2,195 $ 3,236
======== ======== ========
33
<PAGE> 21
The Lubrizol Corporation
NOTES CONTINUED
The change in benefit obligation, change in plan assets of the company's defined
benefit pension and non-pension postretirement plans and the amounts recognized
in the consolidated balance sheets at December 31 are as follows:
<TABLE>
<CAPTION>
Pension Plans Other Benefits
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ............................. $ 297,483 $ 254,263 $ 72,047 $ 61,460
Service cost ...................................................... 11,843 11,142 1,468 1,250
Interest cost ..................................................... 17,589 17,519 4,728 4,415
Plan participants' contributions .................................. 48
Actuarial (gain) loss ............................................. (23,048) 27,096 (4,281) 8,352
Currency exchange rate change ..................................... (1,104) 2,834 49 (80)
Amendments ........................................................ 647 709
Curtailments ...................................................... (632) (195)
Settlements ....................................................... (3,325)
Special termination benefits ...................................... 1,691 4,684
Other ............................................................. 857
Benefits paid ..................................................... (37,172) (20,569) (2,511) (3,350)
--------- --------- --------- ---------
Benefit obligation at end of year ................................... 264,877 297,483 71,500 72,047
--------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year .................... 300,573 298,130
Actual return on plan assets ................................... 54,984 16,786
Employer contributions ......................................... 6,510 4,719 2,511 3,350
Plan participants' contributions ............................... 48
Currency exchange rate change .................................. (1,003) 896
Other .......................................................... 594
Benefits paid .................................................. (37,172) (19,958) (2,511) (3,350)
--------- --------- --------- ---------
Fair value of plan assets at end of year .......................... 324,534 300,573
--------- --------- --------- ---------
Plan assets greater (less) than the benefit obligation .............. 59,657 3,090 (71,500) (72,047)
Unrecognized net loss (gain) ...................................... (52,315) (7,981) (5,521) (1,225)
Unrecognized net transition obligation (asset) .................... (3,853) (5,571)
Unrecognized prior service cost ................................... 8,472 9,785 (27,402) (30,620)
--------- --------- --------- ---------
Net amount recognized ............................................... $ 11,961 $ (677) $(104,423) $(103,892)
========= ========= ========= =========
Amount recognized in the statement of financial position consists of:
Prepaid benefit cost .............................................. $ 26,027 $ 15,885
Accrued benefit liability ......................................... (16,211) (20,120) $(104,423) $(103,892)
Accumulated other comprehensive income ............................ 838
Intangible asset .................................................. 1,307 3,558
--------- --------- --------- ---------
Net amount recognized ............................................... $ 11,961 $ (677) $(104,423) $(103,892)
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Pension Plans Other Benefits
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
The weighted average assumptions as of December 31:
Discount rate for determining funded status ....................... 6.91% 6.08% 7.70% 6.71%
Expected return on plan assets .................................... 8.60% 9.01%
Rate of compensation increase ..................................... 3.94% 3.78%
</TABLE>
The projected benefit obligation and fair value of plan assets for pension plans
with projected benefit obligations in excess of plan assets were $29.8 million
and $10.2 million, respectively, as of December 31, 1999, and $123.1 million and
$97.2 million, respectively, as of December 31, 1998. The accumulated benefit
obligation and fair value of plan assets for pension plans with accumulated
benefit obligations in excess of plan assets were $23.7 million and $9.5
million, respectively, as of December 31, 1999, and $31.6 million, and $13.9
million, respectively, as of December 31, 1998.
34
<PAGE> 22
The Lubrizol Corporation
The weighted average of the assumed health care cost trend rates used in
measuring the accumulated postretirement benefit obligation for the company's
postretirement benefit plans at December 31, 1999, was 6.73%, (7.45% at December
31, 1998), with subsequent annual decrements to an ultimate trend rate of 5.00%.
The assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in the
assumed health care cost trend rate would have the following effects as of and
for the year ended December 31,1999:
One-Percentage-Point
--------------------
Increase Decrease
-------- --------
Effect on postretirement
benefit obligation ..................... $ 12,129 $ (9,344)
Effect on total service and interest
cost components ........................ $ 1,363 $ (1,028)
NOTE 10 - LEASES
The company has commitments under operating leases primarily for office space,
terminal facilities, land, railroad tank cars and various computer and office
equipment. Rental expense was $18.5 million in 1999, $18.7 million in 1998 and
$13.8 million in 1997. Future minimum rental commitments under operating leases
having initial or remaining noncancelable lease terms exceeding one year are
$13.6 million in 2000, $9.0 million in 2001, $5.0 million in 2002, $3.9 million
in 2003, $3.6 million in 2004 and $13.9 million thereafter.
NOTE 11 - ACQUISITIONS
In 1998, the company completed six acquisitions for cash of $155.4 million and
one acquisition for 89,806 of the company's common shares valued at $2.4
million. These acquisitions were in the company's existing business areas of
lubricant and fuel additives, metalworking additives and coating additives and
broaden the company's base in performance chemicals. These acquisitions were
accounted for using the purchase method of accounting.
The fair value of assets acquired and liabilities assumed in these acquisitions
is as follows:
Inventories .......................................... $ 20,713
Receivables .......................................... 26,424
Property and equipment ............................... 8,502
Other tangible assets ................................ 2,986
Goodwill ............................................. 97,882
Technology and other intangibles ..................... 16,173
Technology under development ......................... 13,598
Accounts payable and other liabilities assumed ....... (28,470)
--------
Fair value of net assets acquired,
less $2,165 of cash received ....................... $157,808
========
These acquisitions were made at various times throughout the year; however, the
two largest acquisitions were Adibis, formerly the lubricants and fuel additives
business of British Petroleum Company P.L.C., which was acquired effective
August 1, 1998, and Carroll Scientific, Inc., (Carroll), which was acquired in
July 1998. Carroll specializes in the development and supply of varnish and
wax-based performance additives to the ink market. The aggregate purchase price
of these two acquisitions was $134 million, of which $111 million was assigned
to good-will and intangible assets. During 1997, the annual revenues of Carroll
were approximately $30 million and of Adibis were approximately $150 million.
The impact of the acquisitions made in 1998 was not material in relation to the
company's results of operations; consequently, pro forma information is not
presented. However, these acquisitions had the following impact on revenues and
expenses for 1998:
Revenues .............................................. $ 71,662
Gross profit .......................................... $ 15,267
Selling and administration expenses ................... $ 7,397
Research, testing and development ..................... $ 5,591
After-tax loss, excluding write-off of technology under
development and interest on acquisition debt ........ $ (1,844)
In the fourth quarter of 1999, the company reduced the purchase price of the
Adibis acquisition by $2.5 million for anticipated reimbursement from the seller
of certain post-acquisition costs incurred by the company.
The company has substantially completed the process of assimilating the Adibis
additives business. The company's assimilation plan included separation of a
number of Adibis employees at an estimated cost of $3.9 million and terminating
certain Adibis contracts for tolling arrangements, office leases and sales
agents at an estimated cost of $2.7 million. Cash expenditures of $5.7 million
were made in 1999 and approximately $.9 million remains as an accrued liability
at December 31, 1999. The cost of these activities was included in the
allocation of the acquisition costs to the net assets acquired.
The company engaged an independent appraiser to provide a basis for allocating
the purchase price of Adibis to the acquired intangible assets for financial
reporting purposes. The appraisal included the determination of the amount to be
assigned to technology under development which, under purchase accounting, is
written off against income in the period of acquisition. Technology under
development comprises ongoing research and development projects that may form
the basis for new products or replacements for existing products. The fair
35
<PAGE> 23
The Lubrizol Corporation
NOTES CONTINUED
value assigned to the Adibis technology under development was determined by the
independent appraiser applying the income approach and a valuation model,
incorporating among other assumptions revenue and expense projections,
probability of success and present value factors. The resulting value allocated
to each of the technology projects under development represents the product of
the present value of debt-free cash flows and the percent of research and
development completed. The fair value of technology under development was
comprised of three projects within engine oil additives aggregating $7.1
million; six projects within fuel additives aggregating $3.4 million; and two
projects within marine diesel additives aggregating $3.1 million. The amount of
the purchase price allocated to technology under development was $13.6 million
and was charged against income in the fourth quarter of 1998 upon completion of
the appraisal.
NOTE 12 - BUSINESS SEGMENTS AND
GEOGRAPHIC REPORTING
The company aggregates its product lines into two principal operating segments:
chemicals for transportation and chemicals for industry. Chemicals for
transportation is comprised of additives for lubricating engine oils, such as
for gasoline, diesel, marine and stationary gas engines and additive components
to its larger customers; additives for driveline oils, such as automatic
transmission fluids, gear oils and tractor lubricants; and additives for fuel
products and refinery and oil field chemicals. In addition, the company sells
additive components and viscosity improvers within its lubricant and fuel
additives product lines. The company's chemicals for transportation product
lines are generally produced in shared manufacturing facilities and sold largely
to a common customer base. Chemicals for industry includes industrial additives,
such as additives for hydraulic fluids, metalworking fluids and compressor
lubricants; performance chemicals, such as additives for coatings and inks and
process chemicals; and performance systems, comprised principally of fluid
metering devices and particulate emission trap devices.
The company's accounting policies for its operating segments are the same as
those described in Note 2. The company evaluates performance and allocates
resources based on segment contribution income, which is revenues less expenses
directly identifiable to the product lines aggregated within each segment. In
addition, the company allocates corporate research, testing, selling and
administrative expenses in arriving at segment operating profit before tax.
The following table presents a summary of the company's reportable segments for
the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Chemicals for transportation:
Revenues from external
customers .......................... $ 1,448,978 $ 1,361,306 $ 1,446,342
Equity earnings ....................... 5,340 2,434 4,540
Goodwill and intangibles
amortization ....................... 5,012 2,964 1,239
Segment contribution
income ............................. 307,411 238,076 322,377
Operating profit before tax ........... 191,654 130,149 213,184
Segment total assets .................. 1,116,680 1,191,175 1,076,153
Capital expenditures .................. 58,123 90,369 98,482
Depreciation .......................... 82,129 74,023 76,134
Chemicals for industry:
Revenues from external
customers .......................... $ 299,025 $ 256,613 $ 227,440
Equity earnings ....................... 395 168 264
Goodwill and intangibles
amortization ....................... 6,418 5,414 3,274
Segment contribution
income ............................. 41,636 33,959 37,302
Operating profit before tax ........... 27,481 22,552 24,178
Segment total assets .................. 247,779 256,905 194,492
Capital expenditures .................. 6,749 3,052 2,218
Depreciation .......................... 6,161 5,646 6,570
Reconciliation to consolidated
income before tax:
Segment operating profit
before tax ......................... $ 219,135 $ 152,701 $ 237,362
Gain from litigation
settlements ........................ 17,626 16,201
Special charges ....................... (19,569) (36,892)
Interest expense - net ................ (21,842) (13,196) (6,215)
----------- ----------- -----------
Consolidated income
before tax ......................... $ 195,350 $ 118,814 $ 231,147
=========== =========== ===========
Revenues from external
customers by product group:
Engine oil additives .................. $ 916,755 $ 844,614 $ 920,971
Driveline oil additives ............... 408,488 384,880 400,154
Fuel additives and refinery
oil additives ...................... 103,271 78,023 69,904
Additive components ................... 20,464 53,789 55,313
----------- ----------- -----------
Chemicals for
transportation ................. 1,448,978 1,361,306 1,446,342
----------- ----------- -----------
Industrial additives .................. 156,996 149,087 133,200
Performance chemicals ................. 108,189 84,478 73,702
Performance systems ................... 33,840 23,048 20,538
----------- ----------- -----------
Chemicals for industry ........... 299,025 256,613 227,440
----------- ----------- -----------
Total revenues from
external customers .................... $ 1,748,003 $ 1,617,919 $ 1,673,782
=========== =========== ===========
</TABLE>
36
<PAGE> 24
The Lubrizol Corporation
Prior-year revenues from external customers by product group within the
chemicals for transportation segment have been restated to reflect a change in
the way the company reports these revenues for internal management reporting.
Revenues are attributable to countries based on the location of the customer.
The United States is the only country where sales to external customers comprise
in excess of 10% of the company's consolidated revenues. Revenues from external
customers by geographic area are as follows:
1999 1998 1997
---------- ---------- ----------
United States ............................ $ 673,579 $ 605,145 $ 602,918
Other North American ..................... 60,775 50,685 53,030
Europe, Middle East ...................... 572,854 551,633 539,654
Asia-Pacific ............................. 314,715 262,341 315,426
Latin America ............................ 126,080 148,115 162,754
---------- ---------- ----------
Total revenues from
external customers ..................... $1,748,003 $1,617,919 $1,673,782
========== ========== ==========
The company's sales and receivables are concentrated in the oil and chemical
industries. The company's lubricant and fuel additive customers consist
primarily of oil refiners and independent oil blenders and are located in more
than 100 countries. The ten largest customers, most of which are international
oil companies and a number of which are groups of affiliated entities, comprised
approximately 46% of consolidated sales in 1999, 42% of consolidated sales
in 1998 and 44% of consolidated sales in 1997. The company's largest single
customer, including its affiliated entities, accounted for revenues of $210.4
million in 1999, predominately within chemicals for transportation segment, less
than 10% in 1998 and revenues of $161.2 million in 1997, predominately within
chemicals for transportation segment.
The table below presents a reconciliation of segment total assets to
consolidated total assets for the years ended December 31:
1999 1998 1997
---------- ---------- ----------
Total segment assets ..................... $1,364,459 $1,448,080 $1,270,645
Corporate assets ......................... 317,895 195,157 191,647
---------- ---------- ----------
Total consolidated assets ................ $1,682,354 $1,643,237 $1,462,292
========== ========== ==========
Segment assets include receivables, inventories and long-lived assets including
goodwill and intangible assets. Corporate assets include cash and short-term
investments, investments accounted for on the cost basis and other current and
noncurrent assets.
The company's principal long-lived assets are located in the following
countries at December 31:
1999 1998
---------- ----------
United States ............................ $ 519,050 $ 554,983
France ................................... 91,413 109,990
England .................................. 124,138 134,127
All other ................................ 85,690 86,707
---------- ----------
Total long-lived assets $ 820,291 $ 885,807
========== ==========
Net income of non-U.S. subsidiaries was $53 million in 1999, $13 million in 1998
and $43 million in 1997; and dividends received from these subsidiaries were $22
million, $15 million and $7 million, respectively.
NOTE 13 - 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 estimated fair value of
the company's debt instruments at December 31, 1999, approximates $375.5 million
compared with the carrying value of $403.0 million. The company believes the
carrying values of its other 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 less than one year.
37
<PAGE> 25
The Lubrizol Corporation
NOTES CONTINUED
The maximum amount of foreign currency forward contracts outstanding at any one
time was $18.9 million in 1999, $65.0 million in 1998 and $58.4 million in 1997.
At December 31, 1999, the company had short-term forward contracts to sell
currencies at various dates during 2000 for $7.5 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 foreign currency translation adjustment account in other
comprehensive income. Additionally, foreign currency forward contract gains and
losses on certain future transactions may be deferred until the future
transaction is recorded. There were no deferred currency losses on foreign
exchange contracts at December 31, 1999.
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
may enter 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 4). 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 recognized in income when the
underlying liability being hedged is extinguished or partially extinguished to a
level less than the notional amount of the interest rate swaps. Consequently,
market value losses of $1.0 million were accrued in 1997 and no amounts were
accrued in 1998 or 1999. The company would have paid approximately $2.4 million,
including accrued interest of $.9 million, if it had terminated these interest
rate swap agreements at December 31, 1999.
NOTE 14 - STOCK COMPENSATION PLANS
The 1991 Stock Incentive Plan provides for granting of restricted and
unrestricted shares and options to buy common shares up to an amount equal to 1%
of the outstanding common shares at the beginning of any year, plus any unused
amount from prior years. Options are intended either to qualify as "incentive
stock options" under the Internal Revenue Code or "non-statutory stock options"
not intended to so qualify.
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 at 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 the 1985 Plan is the fair market value of the shares on the date of grant.
The option price under the 1991 Plan is not less than 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. 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.
Under the 1991 Stock Incentive Plan, the company granted to certain executive
officers 3,000 and 65,000 performance share stock awards in 1998 and 1997,
respectively and none in 1999. Common shares equal to the number of performance
share stock awards granted will be issued if the market price of the company's
common stock reaches $45 per common share for ten consecutive trading days or
after six years from date of grant, whichever occurs first. Under certain
conditions such as retirement, a grantee of performance share stock awards may
be issued a pro-rata number of common shares. The market value of the company's
common shares at date of grant of the performance share stock awards was $38.25
per share in 1998 and $33.75 per share in 1997. The company recognizes
compensation expense related to performance share stock awards ratably over the
estimated period of vesting. Compensation costs recognized for performance share
stock awards were $.8 million in 1999 and 1998, and $.5 million in 1997. At
December 31, 1999, 67,000 performance share stock awards were outstanding.
Generally accepted accounting principles encourage the fair-value based method
of accounting for stock compensation plans, under which the value of stock-based
compensation is estimated at the date of grant using valuation formulas, but
permit the continuance of intrinsic-value accounting. The com-
38
<PAGE> 26
The Lubrizol Corporation
pany accounts for its stock compensation plans using the intrinsic-value
accounting method (measured as the difference between the exercise price and the
market value of the stock at date of grant). If the fair value method to measure
compensation cost for the company's stock compensation plans had been used, the
company's net income would have been reduced by $2.5 million in 1999, $1.6
million in 1998 and $2.6 million in 1997 with a corresponding reduction in net
income per share of $.05 in 1999, $.03 in 1998 and $.05 in 1997.
Disclosures under the fair value method are estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for grants
of stock options in the following years:
1999 1998 1997
---- ---- ----
1985 Plan:
Risk-free interest rate .................. 6.5% 4.6% 5.7%
Dividend yield ........................... 3.4% 4.0% 2.7%
Volatility ............................... 23% 21% 20%
Expected life (years) .................... .5 2.8 3.1
1991 Plan:
Risk-free interest rate .................. 6.4% 4.7% 5.8%
Dividend yield ........................... 3.4% 4.0% 2.7%
Volatility ............................... 24% 23% 22%
Expected life (years) .................... 9.9 9.5 9.9
The fair value per share of the performance share stock awards granted in 1998
and 1997 was $33.94 and $31.80, respectively, using the following assumptions in
1998 and 1997, respectively: risk-free interest rate of 4.58% and 5.7%;
volatility of 21% and 20%; and an expected life of three years. Dividends do not
accumulate on performance share stock awards.
Information regarding these option plans, excluding the performance share
stock awards, follows:
Weighted-
Average
Exercise
Shares Price
--------- -------
Outstanding, January 1, 1999 ................. 3,483,316 $ 32.64
Granted ...................................... 730,516 22.99
Exercised .................................... (79,675) 20.31
Forfeited .................................... (165,415) 33.98
---------
Outstanding, December 31, 1999 ............... 3,968,742 $ 31.06
========= =======
Options exercisable, December 31, 1999 ....... 2,993,380 $ 32.51
========= =======
Weighted-average fair value of
options granted during the year ............ $ 5.87
=======
Outstanding, January 1, 1998 ................. 3,212,157 $ 31.88
Granted ...................................... 410,248 37.69
Exercised .................................... (125,463) 29.38
Forfeited .................................... (13,626) 31.23
---------
Outstanding, December 31, 1998 ............... 3,483,316 $ 32.64
========= =======
Options exercisable, December 31, 1998 ....... 2,842,719 $ 31.97
========= =======
Weighted-average fair value of
options granted during the year ............ $ 7.74
=======
Outstanding, January 1, 1997 ................. 3,248,113 $ 30.93
Granted ...................................... 417,561 35.07
Exercised .................................... (361,179) 25.85
Forfeited .................................... (92,338) 35.88
---------
Outstanding, December 31, 1997 ............... 3,212,157 $ 31.88
========= =======
Options exercisable, December 31,1997 ........ 2,590,556 $ 31.67
========= =======
Weighted-average fair value of
options granted during the year ............ $ 9.37
=======
The following table summarizes information about stock options outstanding,
excluding the performance share stock awards, at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$13 - $19 ................... 52,088 .2 Years $16.66 52,088 $16.66
19 - 25 .................... 553,619 8.9 21.42 25,369 22.94
25 - 31 .................... 1,286,224 4.3 28.68 1,097,224 28.86
31 - 38 .................... 2,016,393 4.8 35.28 1,761,281 35.09
38 - 45 .................... 60,418 1.8 41.63 57,418 41.76
--------- --- ------ --------- ------
3,968,742 5.1 $31.06 2,993,380 $32.51
========= === ====== ========= ======
</TABLE>
39
<PAGE> 27
NOTES CONTINUED
NOTE 15 - SPECIAL CHARGES AND ASSET IMPAIRMENTS
The company initiated a series of steps to reduce costs and improve its
worldwide operating structure and has been executing these steps in two phases
over a period of approximately two years. The first phase, which began in the
fourth quarter of 1998, resulted in the reduction of approximately 7% of the
company's workforce, or 300 employees worldwide. Approximately 55% of this
reduction occurred prior to December 31, 1998, a further 35% occurred in the
first quarter of 1999, and the remainder has been substantially completed by the
third quarter of 1999. Of the 300 employees, approximately 40% were in the
manufacturing area and 60% were in the selling, administrative, research and
testing areas. In addition, the company permanently removed seven component
production units from service during this first phase.
In the fourth quarter of 1998, the company recognized special charges of $36.9
million, comprised of $23.3 million related to the first phase of the company's
cost reduction program and $13.6 million for the write-off of purchased
technology under development resulting from the acquisition of Adibis (see Note
11). After-tax, these charges reduced net income by $25.8 million, or by $.47
per share. These special charges related predominately to the company's
chemicals for transportation segment.
In the first quarter of 1999, the company recognized an additional expense of
$3.1 million, related to the first phase of its cost reduction program to
reflect a greater amount for separation benefits, principally in Japan.
After-tax, this charge reduced net income by $2.9 million or $.05 per share. In
the third quarter of 1999, the company recognized special charges of $20.8
million related to the second phase of the company's cost reduction program.
After-tax, this special charge reduced net income by $12.9 million, or $.24 per
share. In the fourth quarter of 1999, the company recorded an adjustment of $4.3
million to reduce the special charge related to the first phase of the company's
cost reduction program, principally to reflect a gain related to the settlement
of pension obligations for work force reductions in the first phase of the
company's cost reduction program (see Note 9). After-tax, this adjustment
increased net income by $2.5 million or $.05 per share.
As adjusted, the first phase of the company's cost reduction program included
workforce reduction cost estimated at $20.0 million and other exit costs
estimated at $2.1 million, including $2.0 million related to asset impairments
for production units to be taken out of service. Cash expenditures of
approximately $5.0 million were made in 1998, and $14.7 million in 1999 related
to the cost reduction program. Approximately $.4 million remains as an accrued
liability at December 31, 1999, representing payments that will be made in 2000
relating to employees separated prior to December 31, 1999.
The second phase of the company's cost reduction program began in the third
quarter of 1999 and involves primarily the downsizing of the company's
Painesville, Ohio, manufacturing plant. This will result in the additional
reduction of approximately 5% of the company's workforce, or 200 employees, and
the shutdown of 23 of Painesville's 36 production systems. Through December 31,
1999, the company has shut down 12 of the 23 targeted production systems and has
completed approximately 22% of the workforce reduction.
The second phase of the company's cost reduction program included workforce
reduction cost estimated at $8.5 million and other exit costs estimated at $12.3
million, including $8.9 million related to asset impairments for production
units to be taken out of service. Cash expenditures of approximately $1.3
million were made in 1999 related to the cost reduction program. Approximately
$10.6 million remains as an accrued liability at December 31, 1999.
In 1997, the company provided $9.4 million for the impairment of long-lived
assets. This included $6.3 million to reduce the carrying value of certain
computer equipment and software made obsolete prior to expiration of their
original estimated useful lives due to new systems being implemented. Also,
during the fourth quarter the company decided to utilize a toll processor,
beginning in 1998, rather than to produce an intermediate internally. This
decision resulted in the permanent impairment of certain manufacturing
equipment, and a provision of $3.1 million was recorded to reduce the asset
carrying value to its estimated fair value. Fair value was determined by
estimating the present value of future cash flows. These impairment losses are
reflected in the consolidated statements of income for the year ended December
31, 1997, as follows: cost of sales - $4.4 million; research, testing and
development expenses - $.9 million; selling and administrative expenses - $1.8
million and other income (net) - $2.3 million.
NOTE 16 - LITIGATION
The company previously filed claims against Exxon Corporation and/or its
affiliates relating to various commercial matters, including alleged
infringements by Exxon of certain of the company's patents.
On March 31, 1999, the company and Exxon Corporation reached a settlement of all
pending intellectual property litigation between the two companies and their
affiliates, except for litigation pending in Canada. Under the settlement
agreement, Exxon paid the company cash of $16.8 million in April 1999. After
deducting related expenses, this settlement increased pre-tax income by $14.5
million in 1999.
40
<PAGE> 28
On April 23, 1998, the company reached a settlement with Exxon of a lawsuit
pending in federal court in Ohio and received cash of $19.0 million. After
deducting related expenses, this settlement increased pre-tax income by $16.2
million in 1998.
The company has prevailed in a case brought in Canada against Exxon's Canadian
affiliate, Imperial Oil, Ltd., for infringement of the company's patent
pertaining to dispersants, 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 been returned to the trial court
for an assessment of compensation damages, but no date has been set for a
determination of such damages. In October 1994, the trial court judge determined
that Imperial Oil had violated an earlier injunction for the manufacture or sale
of the dispersant that is the subject of this case. The determination of penalty
damages, if any, on account of this violation will be made after the court has
determined the compensation damages for patent infringement. A reasonable
estimation of the company's potential recovery relating to this litigation
cannot be made at this time, and no amounts that may be recovered in the future
have been recorded in the company's financial statements as of December 31,
1999.
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------------------
(In Thousands of Dollars Except Per Share Data)
<S> <C> <C> <C> <C>
1999
Net sales ......................... $ 446,627 $ 433,129 $ 431,978 $ 431,807
Gross profit ...................... 143,453 136,144 136,612 132,387
Net income ........................ 39,094 30,028 20,412 33,458
Net income per share .............. $ .72 $ .55 $ .37 $ .61
Net income per share, diluted ..... $ .72 $ .55 $ .37 $ .61
1998
Net sales ......................... $ 399,900 $ 405,160 $ 403,262 $ 406,236
Gross profit ...................... 122,865 126,143 120,252 111,971
Net income (loss) ................. 29,668 39,963 16,614 (15,045)
Net income (loss)per share ........ $ .52 $ .71 $ .30 $ (.27)
Net income (loss)per share, diluted $ .52 $ .71 $ .30 $ (.27)
</TABLE>
In the first quarter of 1999, the company recorded a pre-tax special charge of
$3.1 million ($.05 per share) to reflect an additional amount for separation
benefits, principally in Japan, under its cost reduction program.
In the first quarter of 1999, the company recorded a pre-tax gain from
litigation settlement of $14.5 million ($.16) share.
In the third quarter of 1999, the company recorded a pre-tax special charge of
$20.8 million ($.24 per share) primarily related to the restructuring of its
Painesville, Ohio, manufacturing plant.
In the fourth quarter of 1999, the company recorded a pre-tax adjustment of $4.3
million ($.05 per share) to reduce the amount of the special charge principally
to reflect a gain related to the settlement of pension obligations for work
force reductions in the first phase of the company's cost reduction program.
In the fourth quarter of 1999, the company recorded a pre-tax gain from
litigation settlement of $3.1 million ($.04) share.
In the second quarter of 1998, the company recorded a pre-tax gain from
litigation settlement of $16.2 million ($.19 per share).
In the fourth quarter of 1998, the company recorded pre-tax special charges of
$23.3 million ($.30 per share) related to a cost reduction program and $13.6
million ($.17 per share) related to the write-off of purchased technology under
development resulting from the company's acquisition of Adibis.
41
<PAGE> 29
The Lubrizol Corporation
HISTORICAL SUMMARY
<TABLE>
<CAPTION>
(In Millions, Except Shareholders, Employees and Per Share Data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
<S> <C> <C> <C>
Revenues ....................................................... $ 1,748.0 $ 1,617.9 $ 1,673.8
Total cost and expenses ........................................ 1,522.2 1,464.1 1,441.5
Other income (charges) ......................................... (30.5) (35.0) (1.1)
Net income ..................................................... 123.0 71.2 154.9
- Before unusual items and accounting changes ................ 125.3 86.5 154.9
Net income per share ........................................... 2.25 1.27 2.68
- Before unusual items and accounting changes ................ 2.30 1.55 2.68
FINANCIAL RATIOS:
Gross profit percentage ........................................ 31.5 29.8 32.7
Percent of revenues:
Selling and administrative expenses .......................... 10.4 11.1 10.2
Research and testing expenses ................................ 8.3 9.3 8.8
Return on average shareholders' equity (%) ..................... 15.8 9.0 19.0
- Before unusual items and accounting changes (%) ............ 16.1 10.9 19.0
Debt to capitalization (%) ..................................... 33.8 35.8 21.3
Current ratio .................................................. 2.5 2.5 2.5
OTHER INFORMATION:
Dividends declared per share ................................... $ 1.04 $ 1.04 $ 1.01
Average common shares outstanding .............................. 54.6 55.9 57.8
Capital expenditures ........................................... $ 64.9 $ 93.4 $ 100.7
Depreciation expense ........................................... 88.3 79.7 82.7
At Year End:
Total assets ................................................. $ 1,682.4 $ 1,643.2 $ 1,462.3
Total debt ................................................... 403.0 429.3 220.3
Total shareholders' equity ................................... 790.1 769.1 815.4
Shareholders' equity per share ............................... 14.50 14.10 14.31
Common share price ........................................... 30.88 25.69 36.88
Number of shareholders ....................................... 5,126 5,609 5,661
Number of employees .......................................... 4,074 4,324 4,291
</TABLE>
42
<PAGE> 30
The Lubrizol Corporation
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,597.6 $ 1,663.6 $ 1,599.0 $ 1,525.5 $ 1,552.2 $ 1,476.3 $ 1,452.7 $ 1,227.9
1,403.0 1,478.0 1,397.0 1,362.2 1,390.5 1,308.7 1,288.4 1,109.7
56.1 40.0 49.4 (43.6) 15.4 10.5 106.9 19.5
169.8 151.6 175.6 45.6 124.6 123.7 190.0 94.0
135.2 126.6 148.8 113.5 124.6 123.7 133.5 94.0
2.80 2.37 2.67 .67 1.81 1.79 2.67 1.26
2.23 1.98 2.26 1.67 1.81 1.79 1.87 1.26
32.0 31.5 32.7 32.0 31.7 32.4 30.3 29.2
9.9 9.8 10.0 10.4 11.7 11.7 10.9 10.8
10.1 10.8 10.3 11.2 10.0 9.8 8.5 9.2
20.4 18.0 22.5 5.9 15.4 16.2 27.2 14.2
16.2 15.1 19.0 14.6 15.4 16.2 18.0 14.2
19.5 22.5 16.8 8.7 5.6 7.9 8.3 8.5
2.6 2.4 2.5 2.5 2.9 2.7 2.7 3.0
$ .97 $ .93 $ .89 $ .85 $ .81 $ .77 $ .73 $ .69
60.7 63.8 65.7 67.7 69.0 69.3 71.1 74.7
$ 94.3 $ 189.3 $ 160.5 $ 127.9 $ 95.8 $ 82.4 $ 77.4 $ 64.7
78.7 71.8 63.9 59.6 58.4 54.6 54.0 48.7
$ 1,402.1 $ 1,492.0 $ 1,394.4 $ 1,182.6 $ 1,127.1 $ 1,171.7 $ 1,114.6 $ 960.2
198.5 247.1 167.9 69.6 48.4 67.8 66.6 61.2
819.4 849.0 832.0 732.2 819.4 794.5 736.2 663.3
14.00 13.48 12.83 11.00 11.97 11.51 10.61 8.96
31.00 27.75 33.88 34.13 27.25 28.25 23.63 18.75
5,764 6,304 6,494 6,616 6,822 6,767 6,692 7,370
4,358 4,601 4,520 4,613 4,609 5,299 5,169 5,030
</TABLE>
43
<PAGE> 1
EXHIBIT 21
THE LUBRIZOL CORPORATION
% OF STATE/COUNTRY
PRINCIPAL SUBSIDIARIES OWNERSHIP OF INCORPORATION
Lubrizol Adibis (UK) Limited 100% United Kingdom
Lubrizol do Brasil Aditivos Ltda. 100% Brazil
Lubrizol Canada Limited 100% Canada
Lubrizol de Chile Limitada 100% Chile
Lubrizol China, Inc. 100% Ohio
Lubrizol Coating Additives G.m.b.H. 100% Germany
Lubrizol Espanola, S.A. 100% Spain
Lubrizol Europe B.V. 100% The Netherlands
Lubrizol France, S.A.R.L. 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 Metalworking Additives
Company, Inc. 100% Nevada
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
Lubrizol Performance Systems Inc. 100% Georgia
Lubrizol Performance Systems Limited 100% United Kingdom
Carroll Scientific, Inc. 100% Illinois
CPI Engineering Services, Inc. 100% Michigan
Gateway Additive Company 100% Nevada
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
Tianjin Lubrizol - Lanlian Additive
Co., Ltd. 50.05% China
<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
3, 2000, incorporated by reference in this Annual Report on Form 10-K of The
Lubrizol Corporation for the year ended December 31, 1999.
/s/Deloitte & Touche LLP
- ----------------------------------
DELOITTE & TOUCHE LLP
Cleveland, Ohio
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000060751
<NAME> THE LUBRIZOL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 185,465
<SECURITIES> 0
<RECEIVABLES> 277,109
<ALLOWANCES> 4,055
<INVENTORY> 258,149
<CURRENT-ASSETS> 780,442
<PP&E> 1,598,264
<DEPRECIATION> 927,752
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<CURRENT-LIABILITIES> 311,300
<BONDS> 365,372
0
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<COMMON> 85,984
<OTHER-SE> 704,140
<TOTAL-LIABILITY-AND-EQUITY> 1,682,354
<SALES> 1,743,541
<TOTAL-REVENUES> 1,748,003
<CGS> 1,194,945
<TOTAL-COSTS> 1,194,945
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,176
<INTEREST-EXPENSE> 29,696
<INCOME-PRETAX> 195,350
<INCOME-TAX> 72,358
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
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<NET-INCOME> 122,992
<EPS-BASIC> 2.25
<EPS-DILUTED> 2.25
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