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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PVpD2a7P5VYpRUYO4V6YIQDJoDtMUqUGZXlIYEpm0L75BgP1dZxscfAGCFBWvegm brwi8jVAT9wspxRW4hwe5Q== 0000950152-01-001575.txt : 20010328 0000950152-01-001575.hdr.sgml : 20010328 ACCESSION NUMBER: 0000950152-01-001575 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUBRIZOL CORP CENTRAL INDEX KEY: 0000060751 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 340367600 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05263 FILM NUMBER: 1579787 BUSINESS ADDRESS: STREET 1: 29400 LAKELAND BLVD CITY: WICKLIFFE STATE: OH ZIP: 44092 BUSINESS PHONE: 2169434200 MAIL ADDRESS: STREET 1: 29400 LAKELAND BLVD CITY: WICKLIFFE STATE: OH ZIP: 44092 10-K405 1 l86837ae10-k405.txt LUBRIZOL FORM 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 [ ] 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. [X] Aggregate market value (on basis of closing sale price) of voting stock held by nonaffiliates as of March 2, 2001 $1,634,057,451 Number of the registrant's Common Shares, without par value, outstanding as of March 2, 2001 51,274,353 Documents Incorporated by Reference ----------------------------------- Portions of the registrant's 2000 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 14, 2001 (Incorporated into Part III of this Form 10-K) -1- 2 PART I ------ 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 global fluid technology company concentrating on high-performance chemicals, systems and services for industry and transportation. 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 and reduce the environmental impact 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; 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 82%, 83% and 84% of consolidated revenues in 2000, 1999 and 1998, respectively. Additives for lubricating engine oils comprised 53%, 53% and 52% of consolidated revenues in 2000, 1999 and 1998, respectively. Additives for driveline oils comprised 23%, 23% 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 2000 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. -2- 3 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 Infineum, a joint venture involving two major petroleum companies (Shell Oil Company and Exxon Mobil Corporation); Chevron Oronite Company, a subsidiary of Chevron Corporation, a major petroleum company; and one chemical company (Ethyl Corporation). The petroleum companies either directly or indirectly produce lubricant and fuel additives for their own use and also sell additives to others. These 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 2000, approximately 43% of the company's consolidated sales were made to customers in North America, 30% to customers in Europe and the Middle East and 27% 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 48% of consolidated sales in 2000. The loss of one or more of these customers could have a material adverse effect on the company's business. Exxon Mobil Corporation, together with its affiliates, has been the company's largest customer within its chemicals for transportation segment during the past two years, comprising 11% of consolidated sales in 2000 and 12% in 1999. 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. Sales to Mobil Corporation comprised 9% of consolidated sales in 1998. 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 2001. 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. -3- 4 Consolidated research and development expenditures were $86.4 million in 2000 and $78.3 million in 1999 and 1998. These amounts were equivalent to 4.9%, 4.4% and 4.7% of the respective revenues for such years. These amounts include expenditures for the performance evaluation of additive developments in engines and other types of mechanical equipment as well as expenditures for the development of specialty chemicals for industrial applications. In addition, $64.4 million, $67.7 million and $72.7 million was spent in 2000, 1999 and 1998, 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):

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 October 12, 2000, the company reached a settlement of all pending patent litigation with Imperial Oil Limited, a Canadian affiliate of Exxon Mobil Corporation. Further information regarding litigation with Exxon is contained in Note 16 to the Financial Statements, which is included in the company's 2000 Annual Report to its shareholders, and is incorporated herein by reference. -4- 5 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 were $2.6 million in 2000, which represented 3.0% of 2000 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 such remedial cleanups 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 such known environmental liabilities. 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, 2000, the company and its subsidiaries had 4,390 employees of which approximately 54% 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 2000 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 and market risk related to changes in interest rates and foreign currency exchange rates. The company believes the political and economic risks related to its foreign operations are mitigated due to the stability of the countries in which its largest foreign operations are located. While changes in the U.S. dollar value of foreign currencies will affect earnings from time to time, the longer-term economic effect of these changes should not be significant given the company's net asset exposure, currency mix and use of U.S. dollar-based pricing in certain countries. 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. -5- 6 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 Anaheim, California; Houston, Texas; Naperville, Illinois; Wilmington, Delaware; Southfield, Michigan; and London, England. The company leases office and laboratory space in Spartanburg, South Carolina. 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; a manufacturing plant in Fareham, Hampshire, England, that manufactures additive injection equipment; and a manufacturing plant in Fountain Inn, South Carolina, that manufactures antifoam and defoaming agents to the coatings, inks, textile, food and metalworking industries. The company leases space in Countryside, Illinois, at which specialty chemical additives for the coatings and specialty metalworking fluid and industrial lubricant markets are manufactured. 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 49% to 50.05%. 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, 2000. -6- 7 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, 2001. Name Business Experience ---- ------------------- W. G. Bares Mr. Bares, age 59, became Chairman of the Board on April 22, 1996, and Chief Executive Officer on January 1, 1996. He has been President since 1982. J. R. Ahern Mr. Ahern, age 54, 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 47, has been Vice President and General Counsel since April 1992. D. W. Bogus Mr. Bogus, age 53, joined the company and became Vice President in May, 2000. Prior to joining the company, he was with PPG Industries, Inc., where he was Vice President of Governmental Affairs from May 1999 to February 2000, Vice President-Packaging Coatings from October 1998 to May 1999, Vice President-Industrial Coatings from September 1996 to October 1998, and Vice President of Specialty Coatings from January 1991 to September 1996. C. P. Cooley Mr. Cooley, age 45, 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 48, has been Vice President since September 1993. He is responsible for Research and Development. J. L. Hambrick Mr. Hambrick, age 46, was elected Vice President responsible for managing corporate strategies in the Asia Pacific region in May, 2000. From October 1998 to April 2000 he was global business manager - engine oils. From January 1994 to September 1998 he was FSU and China business development manager. G. R. Hill Dr. Hill, age 59, 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 58, has been Vice President since September 1993. He is responsible for Operations. K. H. Hopping Mr. Hopping, age 54, has been Vice President and Secretary of the Corporation since April 1991. -7- 8 Name Business Experience - ---- ------------------- S. F. Kirk Mr. Kirk, age 51, 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 53, has been Vice President since September 1993. He is responsible for Management Information Systems. G. P. Lieb Mr. Lieb, age 48, 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. M. W. Meister Mr. Meister, age 46, 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 40, was named Assistant Secretary in April 1995, and has been Counsel since February 1991. R. D. Robins Dr. Robins, age 58, 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. All executive officers serve at the pleasure of the Board. -8- 9 PART II ------- 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 4,628 as of March 2, 2001. Information relating to the recent price and dividend history of the company's common shares follows:

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 2000 Annual Report to its shareholders is incorporated herein by reference. Other income for 2000 includes a litigation settlement gain of $19.4 million and credits of $4.5 million for adjustments to the second program of the company's cost reduction initiative. Other income (charges) for 1999 includes litigation settlement gains of $17.6 million and special charges of $19.6 million for the second program of the company's cost reduction initiative and adjustments to the first program of the company's cost reduction initiative. Other income (charges) for 1998 includes litigation settlement gain of $16.2 million and special charges of $23.3 million for the first program of the company's cost reduction initiative 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 includes $53.3 million for gain on sale of investments. Total debt reported in the Historical Summary includes the following amounts classified as long-term at December 31: $378.8 in 2000, $365.4 in 1999, $390.4 million in 1998, $182.2 million in 1997 and $157.6 million in 1996. 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 2000 Annual Report to its shareholders is incorporated herein by reference. 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 -9- 10 company's 2000 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 2000 Annual Report to its shareholders, and the Quarterly Financial Data (Unaudited) contained on page 41 of such 2000 Annual Report, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III -------- 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 14, 2001, 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 9, "Executive Compensation Summary Compensation Table" and "- Stock Incentive Plans" on pages 12 through 14, inclusive, and under "Employee and Executive Officer Benefit Plans - Pension Plans" and "- Executive Agreements" on pages 17 through 20, inclusive, of the company's Proxy Statement dated March 14, 2001, 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 10 and 11 of the company's Proxy Statement dated March 14, 2001, 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 11 of the company's Proxy Statement dated March 14, 2001, is incorporated herein by reference. -10- 11 PART IV ------- 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 2000 Annual Report to its shareholders, and incorporated herein by reference: Independent Auditors' Report Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 Consolidated Balance Sheets at December 31, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 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. (Reference is made to Exhibit (3)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (3)(b) Regulations of The Lubrizol Corporation, as amended effective April 27, 1992. (Reference is made to Exhibit (3)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (4)(a) Amendment to Article Fourth of Amended Articles of Incorporation. (Reference is made to Exhibit (4)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (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, -11- 12 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. (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 March 31, 2000, which Exhibit is incorporated herein by reference.) (10)(c)* Form of Employment Agreement between The Lubrizol Corporation and certain of its senior executive officers. (Reference is made to Exhibit (10)(c) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, which Exhibit is incorporated herein by reference.) (10)(d)* The Lubrizol Corporation Excess Defined Benefit Plan, as amended. (Reference is made to Exhibit (10)(d) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, 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, 2000, which Exhibit is incorporated herein by reference.) (10)(f)* The Lubrizol Corporation Performance Pay 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. (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 March 31, 2000, which Exhibit is incorporated herein by reference.) -12- 13 (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 March 31, 2000, which Exhibit is incorporated herein by reference.) (10)(j)* The Lubrizol Corporation Officers' Supplemental Retirement Plan, as amended. (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 March 31, 2000, 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 March 31, 2000, which Exhibit is incorporated herein by reference.) (12) Computation of Ratio of Earnings to Fixed Charges. (13) The following portions of The Lubrizol Corporation 2000 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, 2000, 1999 and 1998 Page 26 Consolidated Balance Sheets at December 31, 2000 and 1999 Page 27 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Page 28 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 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 *Indicates management contract or compensatory plan or arrangement. -13- 14 (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended December 31, 2000. -14- 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 26, 2001, 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 26, 2001, 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 16 EXHIBIT INDEX ------------- Exhibits (3)(a) Amended Articles of Incorporation of The Lubrizol Corporation, as adopted September 23, 1991. (Reference is made to Exhibit (3)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (3)(b) Regulations of The Lubrizol Corporation, as amended effective April 27, 1992. (Reference is made to Exhibit (3)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (4)(a) Amendment to Article Fourth of Amended Articles of Incorporation. (Reference is made to Exhibit (4)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1999, which Exhibit is incorporated herein by reference.) (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. (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 March 31, 2000, which Exhibit is incorporated herein by reference.) (10)(c)* Form of Employment Agreement between The Lubrizol Corporation and certain of its senior executive officers. (Reference is made to Exhibit (10)(c) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000, which Exhibit is incorporated herein by reference.) 17 (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, 2000, 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, 2000, which Exhibit is incorporated herein by reference.) (10)(f)* The Lubrizol Corporation Performance Pay 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. (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 March 31, 2000, 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 March 31, 2000, which Exhibit is incorporated herein by reference.) (10)(j)* The Lubrizol Corporation Officers' Supplemental Retirement Plan, as amended. (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 March 31, 2000, 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 March 31, 2000, which Exhibit is incorporated herein by reference.) (12) Computation of Ratio of Earnings to Fixed Charges. 18 (13) The following portions of The Lubrizol Corporation 2000 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, 2000, 1999 and 1998 Page 26 Consolidated Balance Sheets at December 31, 2000 and 1999 Page 27 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Page 28 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 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 *Indicates management contract or compensatory plan or arrangement. EX-10.A 2 l86837aex10-a.txt EXHIBIT 10(A) 1 Exhibit (10)(a) The Lubrizol Corporation 1985 Employee Stock Option Plan (As Amended) 1. PURPOSE OF PLAN. The purpose of this Plan is to advance the interests of The Lubrizol Corporation (hereinafter called the "Corporation") and its subsidiaries by providing a means whereby employees of the Corporation and its subsidiaries may be given an opportunity to purchase Common Shares (hereinafter called "shares") of the Corporation under options and stock appreciation rights granted under the Plan, to the end that the Corporation may retain present personnel upon whose judgment, initiative and efforts the successful conduct of the business of the Corporation largely depends, and may attract new personnel. Some of the options granted under this Plan may be options which are intended to qualify as "incentive stock options" under Section 422A of the Internal Revenue Code of 1954, as amended (the "Code"), or any successor provision and are hereinafter sometimes called "incentive stock options". 2. SHARES SUBJECT TO THE PLAN. The aggregate number of shares of the Corporation for which options may be granted under this Plan shall be 1,500,000; provided, however, that whatever number of said shares shall remain reserved for issuance pursuant to this Plan at the time of any stock split, stock dividend or other change in the Corporation's capitalization shall be appropriately and proportionately adjusted to reflect such stock dividend, stock split or other change in capitalization. Shares issued pursuant to the exercise of options granted hereunder shall be made available from authorized but unissued shares of the Corporation or shares held by the Corporation as treasury shares. Any shares for which an option is granted hereunder that are released from such option for any reason other than the exercise of stock appreciation rights granted hereunder shall become available for other options to be granted under this Plan. 3. ADMINISTRATION OF THE PLAN. This Plan shall be administered under the supervision of a committee (hereinafter called the "Committee") composed of not less than three directors of the Corporation appointed by the Board of Directors. The members of the Committee shall not be eligible, and shall not have been eligible for a period of at least one year period to their appointment, to participate in this Plan or any other plan of the Corporation or any affiliate (as defined under the Securities Exchange Act of 1934) of the Corporation entitling the participants therein to acquire stock, stock options or stock appreciation rights of the Corporation or any affiliate of the Corporation. Members of the Committee shall serve at the pleasure of the Board of Directors, and may resign by written notice filed with the Chairman of the Board of the Secretary of the Corporation. A vacancy in the membership of the Committee shall be filled by the appointment of a successor member by the Board of Directors. Until such vacancy is filled, the remaining members shall constitute a quorum and the action at any meeting of a majority of the entire Committee, or an action unanimously approved in writing, shall constitute action of the Committee. Subject to the express provisions of this Plan, the Committee shall have conclusive authority to construe and interpret the Plan, any stock option agreement entered into hereunder, and any stock appreciation right granted hereunder and to establish, amend, and rescind rules and regulations for the administration of this Plan and shall have such additional authority as the Board of Directors may from time to time determine to be necessary or desirable. 2 4. GRANTING OF OPTIONS. The Committee from time to time shall designate from among the full-time employees of the Corporation and its subsidiaries those employees to whom options to purchase shares shall be granted under this Plan, the type of option to be granted and the number of shares which shall be subject to each option so granted. The Committee shall direct an appropriate officer of the Corporation to execute and deliver Option Agreements to employees reflecting the grant of options. All actions of the Committee under this Paragraph shall be conclusive; provided, however, that the aggregate fair market value (determined as of the date the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under this Plan or any other plan of the Corporation or any of its subsidiaries) may not exceed $100,000. Any incentive stock option that is granted to any employee who is, at the time the option is granted, deemed for purposes of Section 422A of the Code, or any successor provision, to own shares of the Corporation possessing more than ten percent (10%) of the total combined voting power of all classes of shares of the Corporation or of a parent or subsidiary of the Corporation, shall have an option price that is at least 110 percent (110%) of the fair market value of the shares and shall not be exercisable after the expiration of 5 years from the date it is granted. 5. GRANTING OF STOCK APPRECIATION RIGHTS. The Committee shall have the discretion to grant to optionees stock appreciation rights in connection with options to purchase shares on such terms and conditions as it deems appropriate. The Committee shall direct an appropriate officer of the Corporation to execute and deliver a Grant of Stock Appreciation Rights to optionees reflecting the grant of stock appreciation rights. A stock appreciation right will allow an optionee to surrender an option or portion thereof and to receive payment from the Corporation in an amount equal to the excess of the aggregate fair market value of the shares with respect to which options are surrendered over the aggregate option price of such shares. A stock appreciation right shall be exercisable no sooner than six months after it is granted and thereafter at any time prior to its stated expiration date, but only to the extent the related stock option right may be exercised. Payment shall be made in shares, cash or a combination of shares and cash, as provided in the Grant of Stock Appreciation Rights. Shares as to which any option is so surrendered shall not be available for future option grants hereunder. The Committee may grant stock appreciation rights concurrently with the grant of an option or, in the case of an option which is not an incentive stock option, with respect to an outstanding option. 6. OPTION PERIOD. No option granted under this Plan may be exercised later than ten years from the date of grant. 7. OPTION PRICE. The option price shall be fixed by the Committee and set forth in the Option Agreement, which price in no case shall be less than the per share fair market value of the outstanding shares of the Corporation on the date that the option is granted, as determined by the Committee. The Committee may fix such option price in terms of a formula and authorize one or more officers of the Corporation to compute the price in accordance with that formula. Payment of the option price may be made in cash, shares, or a combination of cash and shares, as provided in the Option Agreement in effect from time to time. The date on which the Committee approved the granting of an option shall be deemed the date on which the option is granted. 3 8. OPTION AGREEMENT. The Option Agreement pursuant to which option rights are granted to an employee shall be in the applicable form (consistent with this Plan) from time to time approved by the Committee and shall be signed on behalf of the Corporation by the Chairman of the Board, the President or any Vice President of the Corporation, other than the employee who is a party thereto. The Option Agreement shall set forth the number of shares which are subject to the option to purchase, the type of option granted, the option price to be paid upon exercise, the manner in which the option is to be exercised and the option price is to be paid, and the option period, and may include such other terms not inconsistent with this Plan as are from time to time approved by the Committee. 9. GRANT OF STOCK APPRECIATION RIGHTS. The Grant of Stock Appreciation Rights pursuant to which stock appreciation rights are granted shall be in the applicable form (consistent with this Plan) from time to time approved by the Committee and shall be signed on behalf of the Corporation by the Chairman of the Board, the President or any Vice President of the Corporation, other than the employee to whom the grant is made. The Grant of Stock Appreciation Rights shall set forth the option or options to which the grant relates, the manner in which exercise and payment shall be made and the period during which the stock appreciation rights are exercisable, and may include such other terms not inconsistent with this Plan as are from time to time approved by the Committee. 10. TRANSFERABILITY. No option or stock appreciation right shall be transferable by the optionee except by will or the laws of descent and distribution, and options and stock appreciation rights may be exercised during the employee's lifetime only by him or his guardian or legal representative. 11. AMENDMENT AND TERMINATION OF THE PLAN. The Corporation by action of its Board of Directors, reserves the right to amend, modify or terminate at any time this Plan, or, by action of the Committee with the consent of the optionee, to amend, modify or terminate any outstanding Option Agreement or Grant of Stock Appreciation Rights, except that the Corporation may not, without further shareholder approval, increase the total number of shares as to which options may be granted under this Plan (except increases attributable to the adjustments authorized in Paragraph 2 hereof), change the employees or class of employees eligible to receive options or materially increase the benefits accruing to participants under this Plan. Moreover, no action may be taken by the Corporation which will impair the validity of any option or stock appreciation right then outstanding, or which will prevent the options issued and stock appreciation rights granted pursuant to this Plan from meeting the requirements for exemption from Section 16(b) of the Securities Exchange Act of 1934, or subsequent comparable statute, as set forth in Rule 16b-3 under said Act or subsequent comparable rule, or which will prevent any incentive stock option issued or to be issued under this Plan from being an "incentive stock option" under Section 422A of the Code, or any successor provision. 12. SUBSIDIARY. The term "subsidiary" as used herein shall mean any corporation in an unbroken chain of corporations beginning with the Corporation and ending with the employer corporation if, at the time of the granting of the option, each of the corporations other than the employer corporation owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 4 13. EFFECTIVE DATE OF PLAN. The Plan shall be effective upon adoption of the Plan by the Board of Directors of the Corporation. The Plan shall be submitted to the shareholders of the Corporation for approval within one year after its adoption by the Board of Directors, and if the Plan shall not be approved by the shareholder within said period, the Plan shall be void and of no effect. Any options granted under the Plan prior to the date of approval by the shareholders shall be void if such shareholders' approval is not obtained. 14. EXPIRATION OF PLAN. Options may be granted under this Plan at any time prior to January 27, 2005, on which date the Plan shall expire but without affecting any options then outstanding; provided, however, that, from and after January 27, 1995, no Incentive Stock Options shall be granted under the Plan. EX-10.G 3 l86837aex10-g.txt EXHIBIT 10(G) 1 Exhibit (10)(g) THE LUBRIZOL CORPORATION EXECUTIVE DEATH BENEFIT PLAN (As Amended) The Lubrizol Executive Death Benefit Plan (hereinafter referred to as the "Plan") shall provide death benefits to the designated beneficiaries of certain executives of The Lubrizol Corporation (hereinafter referred to as the "Corporation") in accordance with the provisions hereinafter set forth. Section 1. ELIGIBILITY. Participation in the Plan shall be limited to those executives of the Corporation who are designated by the Organization and Compensation Committee of the Board of Directors of the Corporation (hereinafter referred to as the "Committee") to participate in the Plan; who complete a physical examination to the satisfaction of the Corporation as soon as reasonably possible after being so designated; and who waive participation and benefits in the basic term-life insurance coverage sponsored by the Corporation or any of its affiliates, in a form satisfactory to the Corporation. Any executive so designated shall be listed in Appendix A attached hereto and shall hereinafter be referred to as a "Participant". Section 2. BENEFITS. Effective July 25, 1994, upon the death of a Participant, a death benefit shall be made to the Participant's Beneficiary (as defined in Section 5) equal to a percentage of the Participant's bi-weekly salary multiplied by 26, plus quarterly pay, including any such bi-weekly salary or quarterly pay which is deferred under The Lubrizol Corporation Deferred Compensation Plan for Officers (hereinafter referred to as "Covered Pay") rounded to the nearest $1,000.00. Covered Pay for the Participants designated by the Board to participate in the Plan shall have the meaning as described in Appendix A, attached hereto. The Committee will periodically review the Plan and may, at its discretion, change the level of Covered Pay for any Participant. A death benefit shall be calculated in accordance with Paragraph (a) or (b) below, whichever is applicable. (a) The amount of the death benefit payable with respect to a Participant, who at the time of his death, (i) is employed by the Corporation, or (ii) has retired under the normal retirement provisions of a qualified defined benefit plan maintained by the Corporation, shall be as follows: Age of Participant at Death Death Benefit ------------------ ------------- Less than age 70 250% of Covered Pay At least age 70, but less than age 75 150% of Covered Pay Age 75 and over 100% of Covered Pay (b) The amount of the death benefit payable with respect to a Participant who (i) has retired under the early retirement provisions of a qualified 2 defined benefit plan maintained by the Corporation, or (ii) has voluntarily terminated his employment with the Corporation but has not obtained competitive employment with another employer, shall be as follows: Years after Early Retirement or Voluntary Termination Death Benefit --------------------- ------------- 0 through 5 250% of Covered Pay 6 through 10 150% of Covered Pay 11 or more 100% of Covered Pay Section 3. FUNDING. The obligation of the Corporation to pay benefits provided hereunder shall be satisfied by the Corporation out of its general funds. In order to provide a source of payment for its obligations under the Plan, the Corporation will cause a trust fund to be maintained and/or arrange for insurance contracts. Subject to the provisions of the trust agreement governing any such trust fund or the insurance contract, the obligation of the Corporation under the Plan to provide a benefit shall nonetheless constitute the unsecured promise of the Corporation to make payments as provided herein, and no person shall have any interest in, or a lien or prior claim upon, any property of the Corporation. Section 4. PAYMENT OF BENEFITS. Payment of any death benefit under the Plan shall be made to the decreased Participant's beneficiary in a single lump sum as soon as practicable after the Participant's death. Section 5. BENEFICIARIES. A Participant may designate any person or person as a beneficiary (hereinafter referred to as a "Beneficiary") to receive payment of the death benefit provided under the Plan. Such designation shall be made in writing in the form prescribed by the plan administrator and shall become effective only when filed by the Participant with the Corporation. A Participant may change or revoke his Beneficiary designation at any time by completing and filing with the Corporation a new Beneficiary designation. If at the time of the Participant's death there is no Beneficiary designation on file with the Corporation, or the Beneficiary does not survive to the date of distribution, the death benefit provided hereunder shall be paid to the Participant's estate. Section 6. PLAN ADMINISTRATOR. The Corporation shall be the administrator of the Plan. The plan administrator shall perform all ministerial functions with respect to the Plan. The plan administrator shall employ such advisors or agents as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The plan administrator shall have full power and authority to interpret and construe the Plan and shall determine all questions arising in the administration, interpretation, and application of the Plan. Any such determination shall be conclusive and binding on all persons. Section 7. REDUCTION OR TERMINATION OF BENEFITS. The Committee reserves the right to reduce or eliminate the benefit of any Participant who is dismissed for cause, or who voluntarily terminates employment to obtain competitive employment. 2 3 For Plan purposes, "Cause" means (i) willful violation of a Corporation policy, or (ii) willful misconduct or gross negligence in the performance of duties, as determined by the Corporation in good faith consistently, if applicable, with its existing personnel practices. For Plan purposes, "Competitive employment" shall include employment with any employer (firm, business, or individual) engaged in selling or furnishing any product similar to that available from the Corporation at the time of termination of employment with the Corporation. Section 8. EMPLOYMENT. This Plan shall not constitute a contract of employment. Section 9. SEVERABILITY. In the event any provision of the Plan is deemed invalid, such provision shall be deemed to be severed from the Plan, and the remainder of the Plan shall continue in full force and effect. Section 10. GOVERNING LAW. The provisions of the Plan shall be construed and enforced in accordance with the laws of the State of Ohio. Section 11. EFFECTIVE DATE. The Plan is effective as of June 1, 1990. 3 4 THE LUBRIZOL CORPORATION EXECUTIVE DEATH BENEFIT PLAN APPENDIX A February 26, 2001 PARTICIPANT COVERED PAY ----------- ----------- 1. W. G. Bares March 1, 2001 Covered Pay 2. G. R. Hill March 1, 2001 Covered Pay 3. J. E. Hodge March 1, 2001 Covered Pay 4. R. A. Andreas January 1, 1996 Covered Pay 5. R. Y. K. Hsu January 1, 1993 Covered Pay 6. W. D. Manning January 1, 1993 Covered Pay 7. R. J. Senz January 1, 1993 Covered Pay 8. W. T. Beargie June 1, 1990 Covered Pay 9. P. L. Krug June 1, 1990 Covered Pay 10. J. A. Studebaker June 1, 1990 Covered Pay 4 EX-10.J 4 l86837aex10-j.txt EXHIBIT 10(J) 1 Exhibit (10)(j) THE LUBRIZOL CORPORATION OFFICERS' SUPPLEMENTAL RETIREMENT PLAN (As Amended 2/27/01) The Lubrizol Corporation hereby establishes, effective as of January 1, 1993, The Lubrizol Corporation Officers' Supplemental Retirement Plan (the "Plan") for the purpose of providing deferred compensation benefits to a select group of management or highly compensated employees. Section 1. DEFINITIONS. For the purposes hereof, the following words and phrases shall have the meanings indicated, unless a different meaning is plainly required by the context: (a) BENEFICIARY. The term "Beneficiary" shall mean a person who is designated by a Participant to receive benefits payable upon his death pursuant to the provisions of Section 6. (b) CODE. The term "Code" shall mean the Internal Revenue Code as amended from time to time. Reference to a section of the Code shall include such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. (c) COMPANY. The term "Company" shall mean The Lubrizol Corporation, an Ohio corporation, its corporate successors and the surviving corporation resulting from any merger of The Lubrizol Corporation with any other corporation or corporations. (d) CREDITED SERVICE. The term "Credited Service" shall mean a Participant's years of service with the Company equal to the number of full and fractional years of service (to the nearest twelfth of a year) beginning on the date the Participant first performed an hour of service for the Company and ending on the date he is no longer employed by the Company. (e) FINAL AVERAGE PAY. Effective, January 1, 1997, the term "Final Average Pay" shall mean the aggregated amount of Basic Compensation (as that term is defined in the Lubrizol Pension Plan modified to add cash (but not shares), if any, which the Participant has elected to defer under The Lubrizol Corporation Deferred Compensation Plan for Officers (which was adopted effective July 25, 1994) or under The Lubrizol Corporation Executive Council Deferred Compensation Plan (which was adopted effective January 1, 1997), received by the Participant during the three consecutive calendar years during which such Participant received the greatest aggregate amount of Basic Compensation, as defined above, within the most recent ten years of employment, divided by 36. 2 (f) LUBRIZOL PENSION PLAN. The term "Lubrizol Pension Plan" shall mean The Lubrizol Corporation Pension Plan as the same shall be in effect on the date of a Participant's retirement, death, or other termination of employment. (g) NORMAL RETIREMENT DATE. The term "Normal Retirement Date" shall mean the first day of the month following the date on which a Participant attains age sixty-five (65). (h) PARTICIPANT. The term "Participant" shall mean the Chief Executive Officer, the Chief Operating Officer and any other officer of the Company who is designated by the Board of Directors of the Company and the Chief Executive Officer to participate in the Plan, and who has not waived participation in the Plan. (i) PLAN. The term "Plan" shall mean a deferred compensation plan set forth herein, together with all amendments hereto, which Plan shall be called "The Lubrizol Corporation Officers' Supplemental Retirement Plan." (j) CHANGE IN CONTROL. Effective February 26, 2001, the term "Change in Control" shall mean the occurrence of any of the following events: (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 holder of the 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 ("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 percent or more of the combined 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 Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change of control of the Company has or may have occurred or will or 3 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 the 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 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(j)(iii) or 1(j)(iv) hereof, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company, a "Change in Control" shall not be deemed to have occurred for purposes of this Trust Agreement solely because (i) the Company , (ii) an entity in which the Company directly or indirectly beneficially owns 50 percent or more of the voting securities, 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 percent or otherwise, or because the Company reports that a change in control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. Section 2. VESTING. Effective February 26, 2001, a Participant who is the Chief Executive Officer or Chief Operating officer of the Company shall be 100 percent vested in his accrued supplemental retirement benefit hereunder. All other Participants shall become 100 percent vested in his accrued supplemental retirement benefit upon the earliest of the following events: his reaching age 62; his death; his becoming disabled and receiving benefits pursuant to the Company's long-term disability plan; or a Change of Control. Section 3. NORMAL RETIREMENT BENEFIT. Each Participant who retires from employment with the Company on or after his Normal Retirement Date shall receive, subject to the provisions of Sections 6 and 7, a monthly supplemental retirement benefit which shall be equal to two percent (2%) of his Final Average Pay multiplied by his Credited Service (up to 30 years) offset by the following amounts: (a) Benefits payable to the Participant under the Lubrizol Pension Plan; (b) Benefits payable to the Participant under The Lubrizol Corporation Employees' Stock Purchase and Savings Plan, including benefits attributable to Matching Contributions, but excluding benefits attributable to CODA Contributions, Supplemental Contributions, Rollover Contributions or Transferred Contributions, as defined thereunder; 4 (c) Benefits payable to the Participant under The Lubrizol Corporation Employees' Profit-Sharing Plan; (d) Benefits payable to the Participant under The Lubrizol Corporation Excess Defined Contribution Plan; (e) Benefits payable to the Participant under The Lubrizol Corporation Excess Defined Benefit Plan; (f) The Participant's Social Security benefits; (g) Any other employer-provided benefits not specifically excluded herein which are payable to the Participant pursuant to any qualified or nonqualified retirement plan maintained by the Company. Such offsets shall be determined using the actuarial factors provided in the Lubrizol Pension Plan. Section 4. EARLY RETIREMENT ELIGIBILITY AND DETERMINATION OF BENEFIT. Effective February 26, 2001, each Participant who retires from employment with the Company at or after age 55, but prior to his Normal Retirement Date, shall receive a percentage of his vested supplemental retirement benefit determined under Section 3, in accordance with the early retirement schedule provided in the Lubrizol Pension Plan. Section 5. TERMINATION OF EMPLOYMENT. Effective February 26, 2001, if a Participant terminates employment prior to age 55, he shall receive the actuarial equivalent of his vested supplemental retirement benefit determined under Section 3 in a single lump-sum payment; such actuarial equivalent of which shall be calculated using the same actuarial factors and interest rates used in the Lubrizol Pension Plan as in effect on the date the Participant terminates employment in accordance with this Section 5. Section 6. PAYMENT TO PARTICIPANT. (Effective November 27, 1995) (a) Each Participant who retires in accordance with Sections 3 or 4 shall receive payment of his supplemental pension benefit under the Plan determined as of his date of retirement in the standard form of benefit of a monthly retirement benefit commencing within 30 days following retirement and payable to such Participant for his lifetime following such retirement, with the continuance to his Beneficiary of such amount after his death for the remainder, if any, of the 120-month term that commenced with the date as of which the first payment of such monthly benefit is made, and with any such monthly benefits remaining unpaid upon the death of the survivor of the Participant and his Beneficiary to be made to the estate of such survivor. (b) Participants may instead elect within a 60 day period commencing 90 days prior to retirement to receive the actuarial equivalent of the standard form of benefit determined under paragraph a, on the date of retirement, in accordance with any one of the following options: 5 (i) a single lump-sum payment payable within 30 days following retirement; (ii) effective October 1, 2000, a single lump-sum payment payable within 30 days following the end of the calendar year in which the Participant retires. Interest on the lump-sum deferral shall accrue and be paid with the lump-sum; such interest to be computed at the applicable interest rate, as defined in Section 417(e)(3)(A)(ii)(II) of the Code, in effect on the date of retirement; (iii) a reduced monthly retirement benefit commencing within 30 days following retirement and payable to such Participant for his lifetime following his retirement, with the continuance of a monthly benefit equal to fifty percent (50%) of such reduced amount after his death to his Beneficiary during the lifetime of the Beneficiary, provided that such Beneficiary is living at the time of such Participant's retirement and survives him; (iv) a reduced monthly retirement benefit commencing within 30 days following retirement and payable to such Participant for his lifetime following his retirement, with the continuance of a monthly benefit equal to one hundred percent (100%) of such reduced amount after his death to his Beneficiary during the lifetime of the Beneficiary, provided such Beneficiary is living at the time of such Participant's retirement and survives him. (v) annual installments of up to ten payments, the first of which shall be paid within 30 days following retirement, and subsequent installments of which shall be paid on the anniversary date of the payment of the first installment. Such installments shall be determined by dividing the commuted lump-sum equivalent of the supplemental retirement benefit (determined in the same manner as under the Lubrizol Pension Plan) by the number of installments to be paid and adjusting for interest based on the interest rate used to determine the commuted lump-sum payment. Installments after the first installment shall include such interest which accrues during the 12-month period occurring since the date the prior installment was paid. Notwithstanding the foregoing provisions of the Plan to the contrary, if the present actuarial value of any retirement benefit or survivor benefit under the Plan to any person, determined as described above, is less than $25,000, such benefit shall be paid in a single lump-sum payment to such person within 30 days following retirement. Section 7. PAYMENT IN THE EVENT OF DEATH PRIOR TO COMMENCEMENT OF DISTRIBUTION. Effective February 26, 2001, if a Participant dies prior to commencement of benefits under the Plan, his surviving spouse, if any, shall be eligible for a survivor benefit which is equal to one-half of the reduced monthly benefit the Participant would have received under the Plan if the Participant was 100 percent vested in his accrued supplemental retirement benefit, had terminated employment on the day before his death and had elected to receive his benefit hereunder in the form of a 50 percent joint and survivor annuity. In 6 making the determinations and reductions required in this Section 7, the Company shall apply the assumptions then in use under the Lubrizol Pension Plan. For purposes hereof, a surviving spouse shall only be eligible for a benefit under this Section 7, if such spouse had been married to the deceased Participant for at least one year as of the date of the Participant's death. Section 8. ACTUARIAL FACTORS. All actuarial assumptions and factors used in this Plan shall be the same as those used in the Lubrizol Pension Plan. Section 9. FUNDING. The obligation of the Company to pay benefits provided hereunder shall be unfunded and unsecured and such benefits shall be paid by the Company out of its general funds. In order to provide a source of payment for its obligations under the Plan, the Company may cause a trust fund to be maintained and/or arrange for insurance contracts. Subject to the provisions of the trust agreement governing any such trust fund or the insurance contract, the obligation of the Company under the Plan to provide a Participant with a benefit shall nonetheless constitute the unsecured promise of the Company to make payments as provided herein, and no person shall have any interest in, or a lien or prior claim upon, any property of the Company. Section 10. PLAN ADMINISTRATOR. The Company shall be the plan administrator of the Plan. The plan administrator shall perform all ministerial functions with respect to the Plan. Further, the plan administrator shall have full power and authority to interpret and construe the Plan and shall determine all questions arising in the administration, interpretation, and application of the Plan. Any such determination shall be conclusive and binding on all persons. The plan administrator shall employ such advisors or agents as it may deem necessary or advisable to assist it in carrying out its duties hereunder. Section 11. NOT A CONTRACT OF CONTINUING EMPLOYMENT. Nothing herein contained shall be construed as a commitment or agreement on the part of the Participant to continue his employment with the Company, and nothing herein contained shall be construed as a commitment or agreement on the part of the Company to continue the employment or the annual rate of compensation of the Participant for any period, and the Participant shall remain subject to discharge to the same extent as if this Plan had never been put into effect. Section 12. RIGHT OF AMENDMENT AND TERMINATION. Effective October 1, 1994, the Company reserves the right to amend or terminate the Plan in whole or in part at any time and to suspend operation of the Plan, in whole or in part, at any time, by resolution or written action of its Board of Directors or by action of a committee to which such authority has been delegated by the Board of Directors; provided, however, that no amendment shall result in the forfeiture or reduction of the interest of any Participant or person claiming under or through any one or more of them pursuant to the Plan. Any amendment of the Plan shall be in writing and signed by authorized individuals. Section 13. TERMINATION AND DISTRIBUTION OF ACCRUED BENEFITS. The Plan may be terminated at any time by the Company, and in that event the amount of the accrued benefits as of the date of such termination shall remain an obligation of the Company and shall be payable as if the Plan had not been terminated. 7 Section 14. CONSTRUCTION. Where necessary or appropriate to the meaning hereof, the singular shall be deemed to include the plural, the plural to include the singular, the masculine to include the feminine, and the feminine to include the masculine. Section 15. SEVERABILITY. In the event any provision of the Plan is deemed invalid, such provision shall be deemed to be severed from the Plan, and the remainder of the Plan shall continue to be in full force and effect. Section 16. GOVERNING LAW. Except as otherwise provided, the provisions of the Plan shall be construed and enforced in accordance with the laws of the State of Ohio. EX-12 5 l86837aex12.txt EXHIBIT 12 1 EXHIBIT 12 THE LUBRIZOL CORPORATION AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (all amounts except ratios are shown in thousands)

EX-13 6 l86837aex13.htm EXHIBIT 13 ex13

Exhibit 13

THE LUBRIZOL CORPORATION

MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Lubrizol Corporation is a global fluid technology company concentrating on high-performance chemicals, systems and services for industry and transportation. 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 in order to enhance the performance, quality and value and reduce the environmental impact 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 82% of our consolidated revenues and 85% of segment pre-tax operating profit in 2000. This discussion and analysis of our financial condition and results of operations generally is focused on Lubrizol 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.

We believe that the global growth rate for transportation lubricant additives is approximately 1% per year. Additionally, due to changing industry market forces, such as improved engine design and longer drain intervals, we do not expect this annual growth rate to exceed 1% in the near future. To respond to this challenge, we are focusing on developing and investing in new fluid technology applications that will expand the markets in which we participate. Acquisitions and internal investment in research and development will be key to this effort.

We have completed the cost reduction programs initiated in November 1998 to reduce costs and improve our operating structure. The first program, which was completed by the end of 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 annual savings of approximately $28 million related to this first program. The second program, which was completed annual savings of $20 million related to this second program, of which approximately $7 million was achieved in 2000. These actions are discussed under the caption “Cost Reduction Programs and Related Special Charges” and in Note 15 to the financial statements.


96	$	1,629.2




97	$	1,706.9




98	$	1,650.2




99	$	1,780.3




00	$	1,775.8

2000 RESULTS OF OPERATIONS

In 2000, our results reflected the challenging economic and competitive conditions within our industry. We experienced significant increases in raw material costs that we did not fully recover despite a series of product price increases, and we were unfavorably affected by the stronger U.S. dollar. These factors caused our gross profit and gross profit percentage to decline. Although we benefited from lower operating expenses, unusual items and a lower effective tax rate, 2000 earnings were lower than the prior year’s earnings.

Our consolidated revenues for 2000 were $1.78 billion, which was a decrease of $4.5 million, or less than 1%, from 1999 revenues. Excluding acquisitions, the decrease was $26.9 million, or 2%. The revenue decrease was attributable to a reduction in our shipment volume, which decreased 1% from the prior year (2% excluding acquisitions). Higher product selling prices in 2000 were completely offset by product and regional mix effects and a significant negative impact from the stronger U.S. dollar. Chemicals for transportation revenues decreased $16.7 million, or 1%, compared with 1999 primarily due to a decrease in shipment volume. Chemicals for industry revenues increased $12.2 million, or 4%, over 1999 primarily due to an acquisition that offset some business losses in our industrial product group, and stronger volume in our compressor lubricant business.

Changes in our shipment volume vary in different geographical areas. The percentage changes in our 2000 shipment volume by geographical area, as compared with 1999, are:


	Increase
	(Decrease)





North America		(4	%)




Europe, Middle East		(3	%)




Asia-Pacific		9	%




Latin America		9	%

We believe 1999 results benefited from advance customer purchases in late 1999 related to “Year 2000” concerns and an announced price increase. The weakness in North America also reflected the timing of some passenger car business shifting from late 2000 into the first quarter of 2001 and a decline in driveline factory-fill volumes resulting from automobile and diesel truck production slowdowns. We

THE LUBRIZOL CORPORATION

lost some business at smaller accounts in Europe due to recent price increases. The favorable comparisons in Asia-Pacific and Latin America primarily were due to business gains mostly related to our new heavy-duty diesel platform and sales by our new subsidiaries in China.

Cost of sales for 2000, including acquisitions, increased 4% from 1999, reflecting higher average raw material cost partially offset by lower manufacturing cost. The prices we paid for raw materials increased every quarter throughout 2000 due to the impact of higher crude oil costs on petrochemical prices, and as a result, our average raw material cost increased 9% compared with 1999. We implemented three price increases in 2000, but they did not fully recover the higher raw material costs. We currently are implementing a fourth price increase, which was announced in November 2000. Our average raw material cost also was further affected in early 2001 by increases in natural gas prices. We believe raw material costs will begin to trend downward in 2001 but are uncertain as to the timing and amount of any decreases. Manufacturing costs, which are included in cost of sales, decreased 6% (8% excluding acquisitions) in 2000 compared with 1999. Approximately two-thirds of this decrease was due to the favorable impact of currency. Manufacturing savings also resulted from the full integration of our Adibis business, which we purchased in 1998, and the cost reduction program at our Painesville plant.


96	$	509.5




97	$	545.6




98	$	481.2




99	$	548.6




00	$	493.1

Gross profit (net sales less cost of sales) decreased $55.5 million, or 10%, in 2000 compared with 1999 ($62.0 million, or 11%, excluding acquisitions). The decrease primarily was due to the impact of higher raw material costs partially offset by product price increases and lower manufacturing costs. Additionally, approximately $18 million of the decrease in gross profit was due to the impact of unfavorable changes in currency exchange rates. In calculating gross profit at the operating segment level we exclude excess production capacity from product costs (see Note 12 to the financial statements). On that basis, chemicals for transportation gross profit decreased $59.4 million, or 12%, in 2000 compared with 1999 due to the same factors noted above. Chemicals for industry gross profit increased $1.2 million, or 1%, in 2000 compared with 1999. Excluding the Alox acquisition, this gross profit decreased $4.9 million, or 4%, primarily due to business losses in our industrial products group.

The gross profit percentage (gross profit divided by net sales) decreased to 27.8% for 2000 as compared with 30.9% for 1999 due to the reasons explained above. In 2000 we have included shipping fees in revenues and shipping costs in cost of sales. In prior years these items were netted in cost of sales. Prior year amounts have been reclassified to reflect this change (see Note 2 to the financial statements). The gross profit percentages for chemicals for transportation and chemicals for industry were 28.7% and 36.4%, respectively, compared with 32.4% and 37.4% in 1999.

Selling and administrative expenses decreased $13.3 million, or 7%, in 2000 compared with 1999 ($14.4 million, or 8%, excluding acquisitions) due to lower variable compensation costs, lower implementation costs for our enterprise-wide management information system, lower legal expenses, and favorable currency effects.


96	$	161.0




97	$	146.7




98	$	151.0




99	$	145.9




00	$	150.8

Research, testing and development expenses (technology expenses) increased $4.9 million, or 3%, in 2000 compared with 1999. 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 Lubrizol-owned facilities and 20% is incurred at third-party testing facilities. Our technology expenses were favorably affected in the first half of the year because of lower activity at third-party testing facilities in the first quarter of the year, resulting in part from an industry delay in finalizing specifications for the U.S. passenger car motor oil technical standard GF-3. Once these specification issues were resolved, we began related testing in the third quarter of 2000, which resulted in technology costs being 12% higher in the second half than in the first half of 2000. We believe technical spending will increase by about 6% in 2001 due to testing related to the GF-3 standard and additional spending on technical programs in targeted growth areas.

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 $47.1 million for 2000 compared with 1999.

THE LUBRIZOL CORPORATION

During 2000, we recorded adjustments relating to our Painesville cost reduction program to reduce the special charge accrual by $4.5 million ($2.9 million after-tax or $.05 per share). These adjustments to the special charge are discussed under the caption “Cost Reduction Programs and Related Special Charges” below and in Note 15 to the financial statements.

On October 12, 2000 we reached a settlement of pending patent litigation with Imperial Oil Limited (Imperial), a Canadian affiliate of Exxon Mobil Corporation. Under the settlement agreement, Imperial paid us $25 million in October 2000. After deducting related expenses, this settlement increased pre-tax income by $19.4 million ($12.0 million after-tax, or $.23 per share). We also entered into a ten-year agreement for the supply of an incremental $490 million (Canadian dollars) of product to Imperial. Further information regarding our litigation with Exxon Mobil Corporation is contained in Note 16 to the financial statements.

The change in other income (expense) unfavorably affected 2000 pre-tax income by $7.4 million compared with 1999. The change primarily resulted from lower equity earnings of affiliated companies and losses on miscellaneous sales of assets.

Net interest expense decreased $3.6 million in 2000 compared with 1999 principally because of lower interest rates due to interest rate swap agreements entered into in the first half of 2000.

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. During 2000, the U.S. dollar strengthened against most other currencies, especially the euro and British pound sterling, and the change in currency exchange rates had an unfavorable effect on net income per share of $.21 for the year as compared with exchange rates in effect during 1999.

As a result of the factors discussed above, income before income taxes decreased by $25.0 million, or 13%, as compared with 1999. After excluding from both years the special charges and credits and the gains from litigation settlements, income before income taxes decreased by $50.8 million, or 26%, compared with 1999. Segment operating profit before tax, which excludes interest expense, decreased $51.1 million, or 27%, for chemicals for transportation, and decreased $3.3 million, or 12%, for chemicals for industry, as compared with 1999.

The effective tax rate on 2000 income, before litigation gains and special charges and credits, decreased to 29.6% as compared with 36.5% in 1999. This decrease, which increased 2000 earnings before these items by $.19 per share, was primarily due to the U.S. tax benefit from charitable contributions of technology to an educational institution, the favorable impact of statutory tax rate changes for certain of our foreign subsidiaries and an increase in the U.S. Foreign Sales Corporation tax benefit on export sales. The overall effective tax rate for 2000 including the special charge adjustments and the litigation gain was 30.7%.

Net income in 2000 was $118.0 million, or $2.22 per share. In 1999, net income was $123.0 million, or $2.25 per share. After excluding from 2000 and 1999 the special charges and credits and the gains from litigation settlements, net income in 2000 was $103.1 million, as compared with $125.3 million in 1999, a decrease of 18%. On this same basis, 2000 net income per share was $1.94, a decrease of 16% from the $2.30 per share earned in 1999.

COST REDUCTION PROGRAMS AND RELATED SPECIAL CHARGES

We initiated a series of steps in 1998 to reduce costs and improve our worldwide operating structure and executed these steps in two programs over a two-year period, completing the process at December 31, 2000. The first program, 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 program.

We recorded a special charge of $23.3 million in the fourth quarter of 1998 for the cost directly associated with this first 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

THE LUBRIZOL CORPORATION

$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, 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 $.4 million, $14.7 million and $5.0 million in 2000, 1999 and 1998, respectively, related to this program. We are achieving approximately $28 million of savings per year related to this program.

The second program of our cost reduction initiative, which began in the third quarter of 1999, involved primarily the downsizing of our Painesville, Ohio manufacturing plant and was completed at December 31, 2000. This resulted in the additional reduction of approximately 5% of our workforce, or 187 employees, and the shutdown of 20 of Painesville’s 36 production systems. 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 in the third quarter of 1999 relating to this second program. In the second quarter of 2000, we recorded a pre-tax adjustment of $2.6 million ($1.7 million after-tax or $.03 per share) to reduce the amount of the special charge. The cost of workforce reductions at Painesville was less than originally anticipated because of an increase in the planned number of employees due to the assumption of Alox production, retention of a waste incineration process and higher than expected throughput. We also eliminated a number of positions without severance pay cost through the transfer of employees to other facilities outside of Painesville. In the fourth quarter of 2000, we recorded a pre-tax adjustment of $1.9 million ($1.2 million after-tax or $.02 per share) to further reduce the amount of the special charge due to lower than anticipated equipment dismantling costs ($1.5 million) and lower workforce reduction costs ($.4 million) because additional employees transferred to other Lubrizol locations. As adjusted, employee severance costs were $5.5 million of the charge and other exit costs were $10.8 million, including $7.4 million related to asset impairment for component production units to be taken out of service. We spent approximately $.9 million and $1.3 million in 2000 and 1999, respectively, related to this program. Additionally, we have spent approximately $6.8 million of capital to transfer a portion of the Painesville capacity to our Texas facilities. We estimate annual savings of $20 million related to the second program, of which approximately $7 million was achieved in 2000.

1999 RESULTS OF OPERATIONS

In 1999, we achieved record consolidated revenues of $1.78 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 1998 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 $87.6 million, or 6%, over 1998. Approximately two-thirds of the increase was due to our 1998 acquisition of Adibis. Chemicals for industry revenues increased $42.5 million, or 16%, 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 with 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 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.

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 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 resulted in an average increase of 4% to 4.5%. We began to see the impact on revenues in the first quarter of 2000, and the full impact was felt by the end of the second quarter. Manufacturing costs, included in cost of sales, increased 7% (3% excluding acquisitions) in 1999 compared with 1998.

THE LUBRIZOL CORPORATION

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. Chemicals for transportation gross profit increased $53.6 million, or 13%, and chemicals for industry gross profit increased $13.7 million, or 14%. 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 30.9% for 1999 as compared with 29.2% 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 32.4% and 37.4%, respectively, compared with 30.6% and 38.3% 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 offset by higher variable pay and costs associated with “Year 2000” compliance activities.

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%. During 1999, approximately 80% of our technology cost was incurred in company-owned facilities and 20% was 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 new U.S. passenger car motor oil technical standard, GF-3, 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.

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 programs of our cost reduction initiative. These special charges are discussed under the caption “Cost Reduction Programs and Related Special Charges” above 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 that was 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, 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.

Net 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.

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 with 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

THE LUBRIZOL CORPORATION

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 with 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 with $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% from the $1.55 per share earned in 1998.

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 $1.65 billion decreased $56.7 million, or 3%, as compared with the then-record 1997 annual revenues of $1.71 billion. The primary factors causing the decline in revenues from 1997 were lower average selling prices and lower pre-acquisition volume, which more than offset 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.

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 29.2% for 1998 as compared with 32.1% 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 27.0% 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 that were expected to become effective during 2000.

In the fourth quarter of 1998, we recorded special charges aggregating $36.9 million. These special charges related to the first program of our cost reduction initiative, 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.

Net interest expense increased $7.0 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.

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.

RETURN ON AVERAGE SHAREHOLDERS’ EQUITY

Return on average shareholders’ equity was 15% in 2000, 16% in 1999 and 9% in 1998 (13%, 16% and 11%, respectively, excluding litigation gains and special charges and credits).


96	16	%




97	19	%




98	11	%




99	16	%




00	13	%

WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES

Our cash flows for the years 1998 through 2000 are presented in the consolidated statements of cash flows. Cash provided from operating activities decreased by $62.9 million or 22% compared with 1999, to a total of $226.2 million. This decrease was primarily due to lower earnings after excluding litigation gains and special charges and credits, and a $2 million increase in working capital items in 2000 compared with a $50 million reduction in working capital items in 1999.

Capital expenditures in 2000 were $85.8 million compared with $64.9 million in 1999. Approximately one-third of the increase over the prior year was due to capital spent to transfer capacity from our Painesville to our Texas facilities as part of our cost reduction program. The remaining increase was primarily due to increased spending in 2000 on manufacturing projects. We estimate capital expenditures for 2001 will be $90 million to $95 million.


96	$	231.0




97	$	234.4




98	$	155.2




99	$	289.0




00	$	226.1

We spent $35.7 million on two acquisitions in 2000. We purchased certain production assets and working capital of Alox Corporation, a supplier of additives for corrosion prevention in metalworking products, and we acquired an additional 10% interest in our India joint venture, increasing our ownership interest to 50%. We also made an investment of $5.0 million in a joint venture with GE Transportation Systems to develop and market products and services to manage critical diesel engine fluids to optimize service intervals and improve fuel consumption and fueling processes. We made one acquisition in 1999 for $1.9 million.

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 for potential acquisitions. 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 1999, repurchasing approximately 140,000 shares for $4.2 million. We continued our share repurchase program in 2000 and repurchased approximately 3,232,000 shares for $76.0 million during the year. Our net debt to capitalization ratio was 28% at December 31, 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.


	Equity		Total Debt

96	$	819.4	$	198.5




97	$	815.4	$	220.3




98	$	769.1	$	429.3




99	$	790.1	$	403.0




00	$	752.3	$	395.9

Our net borrowings during 1998 totaled $201.7 million. These borrowings were primarily used to finance $155 million of cash expended for acquisitions, most of which occurred in the third quarter, and our share repurchase program. Due to our strong cash flow and lack of acquisitions in 1999, we were able to reduce our borrowings during 1999 by $27.9 million.

THE LUBRIZOL CORPORATION

We were able to further reduce our borrowings by $6.5 million in 2000.

Our financial position remains strong with a ratio of current assets to current liabilities of 2.6:1 at December 31, 2000 compared with 2.5:1 at December 31, 1999. Effective July 1, 1999, we decreased our committed revolving credit facilities from $300 million to $150 million. These facilities, which were unused at December 31, 2000, 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.

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 and fuel 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 and political uncertainty within the Asia-Pacific and Latin American regions;

• the lubricant additive demand in developing regions such as China and India, which geographic areas are an announced focus of our activities;

• technology developments that affect longer-term trends for lubricant additives, such as improved equipment design, fuel economy, longer oil drain intervals, alternative fuel powered engines and emission system compatibility;

• the extent to which we are successful in expanding our business in new and existing fluid technology markets incorporating chemicals, systems and services for industry and transportation;

• our success at continuing to develop proprietary technology to meet or exceed new industry performance standards and individual customer and original equipment manufacturers’ 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;

• our ability to continue to reduce complexities and conversion costs and modify our cost structure to maintain and enhance our competitiveness;

• our success in strengthening relationships and growing business with our largest customers, and retaining the business of these customers over extended time periods;

• our ability to identify, complete and integrate acquisitions for profitable growth;

• the potential negative impact on product pricing and volume demand from the consolidation of finished lubricant marketers;

• the degree of competition resulting from lubricant additive industry over-capacity;

• the cost, availability and quality of raw materials, including petroleum-based products;

• the cost and availability of energy, including natural gas and electricity;

• 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 extent to which we achieve market acceptance of our PuriNOx^TM low emission, water blend fuel product;

• significant changes in government regulations affecting environmental compliance.

THE LUBRIZOL CORPORATION

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 earnings 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 $22.4 million, cash flows of $1.2 million and income before tax of $1.2 million in 2000 and $19.9 million, $.5 million and $.5 million in 1999, respectively.

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 $7.8 million, cash flows of $16.4 million and income before tax of $5.3 million in 2000 and $4.5 million, $10.5 million and $3.4 million in 1999, respectively.

THE LUBRIZOL CORPORATION


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, 2000 and 1999, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.

Cleveland, Ohio

February 1, 2001

THE LUBRIZOL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME


	Year Ended December 31

(In Thousands of Dollars Except Per Share Data)	2000			1999			1998

Net sales	$	1,771,317		$	1,775,867		$	1,646,819




Royalties and other revenues		4,463			4,462			3,361

Total revenues		1,775,780			1,780,329			1,650,180




Cost of sales		1,278,187			1,227,271			1,165,588




Selling and administrative expenses		167,999			181,292			179,759




Research, testing and development expenses		150,805			145,927			150,980

Total cost and expenses		1,596,991			1,554,490			1,496,327




Special (charges) credits		4,484			(19,569	)		(36,892	)




Gain from litigation settlements		19,395			17,626			16,201




Other income (expense) – net		(14,062	)		(6,704	)		(1,152	)




Interest income		8,611			7,854			5,780




Interest expense		(26,869	)		(29,696	)		(18,976	)

Income before income taxes		170,348			195,350			118,814




Provision for income taxes		52,339			72,358			47,614

Net income	$	118,009		$	122,992		$	71,200

Net income per share	$	2.22		$	2.25		$	1.27

Net income per share, diluted	$	2.22		$	2.25		$	1.27

Dividends per share	$	1.04		$	1.04		$	1.04

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

THE LUBRIZOL CORPORATION

CONSOLIDATED BALANCE SHEETS


			December 31

(In Thousands of Dollars)			2000			1999

ASSETS




Cash and short-term investments			$	145,937		$	185,465




Receivables				290,556			301,256




Inventories				260,133			258,149




Other current assets				31,282			35,572

	Total current assets			727,908			780,442

Property and equipment – at cost				1,641,046			1,598,264




Less accumulated depreciation				963,804			927,752

	Property and equipment – net			677,242			670,512

Goodwill and intangible assets – net				170,593			149,779




Investments in non-consolidated companies				34,247			30,441




Other assets				49,500			51,180

		TOTAL	$	1,659,490		$	1,682,354

LIABILITIES AND SHAREHOLDERS’ EQUITY




Short-term debt and current portion of long-term debt			$	17,152		$	37,584




Accounts payable				141,574			138,841




Accrued expenses and other current liabilities				123,520			134,875

	Total current liabilities			282,246			311,300

Long-term debt				378,783			365,372




Postretirement health care obligation				100,275			108,717




Noncurrent liabilities				52,821			45,054




Deferred income taxes				60,614			61,787

	Total liabilities			874,739			892,230

Minority interest in consolidated companies				32,470




Contingencies and commitments




Preferred stock without par value – unissued




Common shares without par value – outstanding 51,307,688 shares in 2000 and 54,477,292 shares in 1999				82,128			85,984




Retained earnings				750,779			758,090




Accumulated other comprehensive loss				(80,626	)		(53,950	)

	Total shareholders’ equity			752,281			790,124

		TOTAL	$	1,659,490		$	1,682,354

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

THE LUBRIZOL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS


				Year Ended December 31

(In Thousands of Dollars)				2000			1999			1998

CASH PROVIDED FROM (USED FOR):




OPERATING ACTIVITIES:




Net income				$	118,009		$	122,992		$	71,200




Adjustments to reconcile net income to cash provided by operating activities:




Depreciation and amortization					100,834			99,720			88,047




	Deferred income taxes				7,799			1,312			5,732




	Special charges (credits)				(4,484	)		19,569			36,892




	Change in current assets and liabilities net of acquisitions:




		Receivables			542			(10,749	)		3,870




		Inventories			(6,124	)		13,500			9,839




		Accounts payable, accrued expenses and other current liabilities			2,981			28,408			(41,749	)




		Other current assets			582			19,052			(17,012	)

					(2,019	)		50,211			(45,052	)




	Change in noncurrent liabilities				1,250			370			5,357




	Other items – net				4,775			(5,153	)		(6,985	)

			Total operating activities		226,164			289,021			155,191




INVESTING ACTIVITIES:




Capital expenditures					(85,757	)		(64,872	)		(93,421	)




Acquisitions and investments in nonconsolidated companies					(41,476	)		(1,923	)		(155,418	)




Proceeds from sale of investments											3,500




Other – net					1,997			2,246			749

			Total investing activities		(125,236	)		(64,549	)		(244,590	)




FINANCING ACTIVITIES:




Short-term borrowing (repayment)					4,099			(8,404	)		4,175




Long-term borrowing					18,428			5,000			203,059




Long-term repayment					(29,015	)		(24,447	)		(5,515	)




Debt issuance costs					(351	)					(10,523	)




Dividends paid					(55,370	)		(56,757	)		(58,256	)




Common shares purchased, net of options exercised					(74,647	)		(2,625	)		(76,542	)

			Total financing activities		(136,856	)		(87,233	)		56,398




Effect of exchange rate changes on cash					(3,600	)		(5,413	)		136

Net increase (decrease) in cash and short-term investments					(39,528	)		131,826			(32,865	)




Cash and short-term investments at the beginning of year					185,465			53,639			86,504

Cash and short-term investments at the end of year				$	145,937		$	185,465		$	53,639

The accompanying notes to financial statements are an integral part of these statements

THE LUBRIZOL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


					Shareholders' Equity

											Accumulated
		Number of									Other
		Shares			Common			Retained			Comprehensive
(Dollars in Thousands)		Outstanding			Shares			Earnings			Income (Loss)			Total

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

Comprehensive income:




	Net income 2000								118,009						118,009




	Other comprehensive loss											(26,676	)		(26,676	)

Comprehensive income															91,333




Cash dividends									(54,529	)					(54,529	)




Common shares – treasury:




	Shares purchased		(3,232,096	)		(5,166	)		(70,791	)					(75,957	)




	Shares issued upon exercise of stock options		62,492			1,310									1,310

BALANCE, DECEMBER 31, 2000			51,307,688		$	82,128		$	750,779		$	(80,626	)	$	752,281

*Represents five dividends declared, of which four were paid in 1999.

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

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 industry and transportation. 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 and reduce the environmental impact 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. Chemicals for transportation comprise approximately 82% of the company’s consolidated revenues and 85% of segment pre-tax operating profit in 2000. 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 50% or greater and the company has effective management control. 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 $32.7 million and $29.7 million at December 31, 2000 and 1999, respectively. Investments carried at cost were $1.5 million and $.7 million at December 31, 2000 and December 31, 1999, respectively.

ESTIMATES – The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 invests its excess cash in short-term investments with various banks and financial institutions. Short-term investments are cash equivalents, as they are part of the cash management activities of the company and are comprised of investments having maturities of three months or fewer 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 of America 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 18% and 21% in 2000 and 1999, respectively, 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 goodwill 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 $86.4 million in 2000 and $78.3 million in 1999 and 1998.

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 $7.3 million and $7.4 million at December 31, 2000 and 1999, respectively. Of these amounts, $1.0 million was included in other current liabilities at December 31, 2000 and 1999.

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

THE LUBRIZOL CORPORATION

NOTES CONTINUED

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 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 – Revenues are recognized at the time of shipment of products to customers, or at the time of transfer of title if later, with appropriate provision for uncollectible accounts.

In September 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs, which became effective for the company in the fourth quarter of 2000. EITF 00-10 provides that all amounts billed to a customer in a sale transaction related to shipping and handling should be reported as revenue. The company had previously netted freight revenues against freight expenses in cost of sales. Prior-year net sales and cost of sales have been reclassified to conform to current period presentation. This change has no effect on the dollar amount of the company’s gross profit or net income.

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:


		2000		1999		1998

Numerator:




	Net income	$	118,009	$	122,992	$	71,200

Denominator:




	Weighted average common shares outstanding		53,116		54,577		55,939




	Dilutive effect of stock options and awards		104		139		183

Denominator for net income per share, diluted			53,220		54,716		56,122

Net income per share		$	2.22	$	2.25	$	1.27

Net income per share, diluted		$	2.22	$	2.25	$	1.27

NOTE 3 – INVENTORIES


	2000		1999

Finished products	$	124,755	$	118,135




Products in process		56,908		56,855




Raw materials		61,706		66,102




Supplies and engine test parts		16,764		17,057

	$	260,133	$	258,149

Inventories on the LIFO method were 22% and 28% of consolidated inventories at December 31, 2000 and 1999, respectively. The current replacement cost of these inventories exceeded the LIFO cost at December 31, 2000 and 1999, by $54.5 million and $42.7 million, respectively. During 2000, some inventory quantities were reduced resulting in a liquidation of certain LIFO inventory quantities carried at lower costs in prior years as compared with costs at December 31, 2000. The effect of this liquidation increased income before income taxes by $1.4 million.

NOTE 4 – SHORT-TERM AND LONG-TERM DEBT


		2000			1999

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 6.5% and 6.6%		50,000			50,000




	Marine terminal refunding revenue bonds, at 4.9% due 2018 and 6.5% due 2000		18,375			18,375




Term loans:




	Dollar denominated, at 5.0% due 2000					4,160




	Yen denominated, at 1.6% to 2.8%, due 2001 – 2003		13,253			19,766




	French franc denominated, at 3.5% to 5.0%, due 2001 – 2010		458			495

			382,086			392,796




Less current portion			(3,303	)		(27,424	)

		$	378,783		$	365,372

Short-term debt consists of:




Commercial paper at weighted average rate of 6.5%		$	1,300




Other short-term debt at weighted average rates of 3.6% and 2.6%			12,549		$	10,160




Current portion of long-term debt			3,303			27,424

		$	17,152		$	37,584

In May 2000, the company borrowed $18,375,000 through the issuance of marine terminal refunding revenue bonds, the proceeds of which were used to repay previously issued marine terminal refunding revenue bonds. The bonds have a stated maturity of July 1, 2018, and bear interest at a variable rate which will be determined weekly by the remarketing

THE LUBRIZOL CORPORATION

agent (the interest rate at December 31, 2000, was 4.9%). The bonds may be put to the company by the bondholders at each weekly interest reset date; however, the company expects that these bonds would then be remarketed.

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, 2008, and bear interest at 5.875% per annum, payable semi-annually 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 has debentures outstanding in 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.

The company has committed revolving credit facilities of $150 million. These credit facilities expire on June 30, 2003, subject to annual extension provisions. These facilities, which were unused at December 31, 2000 and 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, that 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 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 $3.3 million in 2001, $1.3 million in 2002, $58.7 million in 2003, $.05 million in 2004, $.04 million in 2005 and $318.7 million thereafter.

The company 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%. In the first half of 2000, the company also entered into interest rate swap agreements which effectively converts the interest on $100 million of outstanding 5.875% notes due 2008 to a variable rate of three-month LIBOR less 159.125 basis points (see Note 13).

Interest paid, net of amounts capitalized, amounted to $26.9 million, $28.8 million and $18.3 million during 2000, 1999 and 1998, respectively. The company capitalizes interest on qualifying capital projects. The amount of interest capitalized during 2000, 1999 and 1998 amounted to $.2 million, $.1 million and $1.2 million, respectively.

NOTE 5 – OTHER BALANCE SHEET INFORMATION


Receivables:		2000		1999

	Customers	$	261,881	$	273,054




	Affiliates		6,408		9,013




	Other		22,267		19,189

		$	290,556	$	301,256

Receivables are net of allowance for doubtful accounts of $5.7 million in 2000 and $4.1 million in 1999.


Property and Equipment – at cost:		2000		1999

	Land and improvements	$	106,009	$	105,984




	Buildings and improvements		311,683		305,505




	Machinery and equipment		1,174,254		1,145,936




	Construction in progress		49,100		40,839

		$	1,641,046	$	1,598,264

Depreciation and amortization of property and equipment was $88.0 million in 2000, $88.3 million in 1999 and $79.7 million in 1998.


Goodwill and Intangible Assets – net:		2000		1999

	Goodwill	$	185,021	$	151,492




	Intangible assets		34,543		34,411





			219,564		185,903




	Less accumulated amortization		48,971		36,124

		$	170,593	$	149,779


Accrued Expenses and Other Current Liabilities:		2000		1999

	Employee compensation	$	39,888	$	48,441




	Income taxes		34,403		25,890




	Taxes other than income		18,109		22,081




	Special charges and acquisition assimilation costs		1,886		11,526




	Dividend payable		13,340		14,181




	Other		15,894		12,756

		$	123,520	$	134,875


Noncurrent Liabilities:		2000		1999

	Employee benefits	$	39,250	$	30,000




	Other		13,571		15,054





		$	52,821	$	45,054

THE LUBRIZOL CORPORATION

NOTES CONTINUED

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 34,888,206 and 31,718,602 at December 31, 2000 and 1999, respectively.

The company has a shareholder rights plan under which one right to buy one-half common share has been distributed for each common share held. The rights may become exercisable under certain circumstances involving actual or potential acquisitions of 20% or more of the common shares by a person or affiliated persons who acquire such stock without complying with the requirements of the company’s articles of incorporation. The rights would entitle shareholders, other than such person or affiliated persons, to purchase common shares of the company or of certain acquiring persons at 50% of then current market value. At the option of the directors, the rights may be exchanged for common shares, and may be redeemed in cash, securities or other consideration. The rights will expire in 2007 unless redeemed earlier.

Accumulated other comprehensive income (loss) shown in the consolidated statements of shareholders’ equity at December 31, 2000, 1999 and 1998 is comprised of the following:


	2000			1999			1998

Foreign currency translation adjustments	$	(26,543	)	$	(27,923	)	$	14,840




Pension plan minimum liability		(738	)		(838	)




Income tax benefit		605			338			38

	$	(26,676	)	$	(28,423	)	$	14,878

NOTE 7 – OTHER INCOME (EXPENSE) – NET


	2000			1999			1998

Equity earnings of nonconsolidated companies	$	1,483		$	5,735		$	2,602




Amortization of goodwill and intangible assets		(12,847	)		(11,430	)		(7,512	)




Currency exchange/transaction loss		(1,528	)		(3,108	)		(1,260	)




Other – net		(1,170	)		2,099			5,018

	$	(14,062	)	$	(6,704	)	$	(1,152	)

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:


	2000		1999		1998

United States	$	94,016	$	113,904	$	78,305




Foreign		76,332		81,446		40,509

Total	$	170,348	$	195,350	$	118,814

The provision for income taxes consists of the following:


	2000		1999			1998

Current:




United States	$	14,679	$	46,983		$	16,649




Foreign		29,861		24,063			25,233

		44,540		71,046			41,882

Deferred:




United States		6,613		(3,467	)		3,385




Foreign		1,186		4,779			2,347

		7,799		1,312			5,732

Total	$	52,339	$	72,358		$	47,614

The United States tax provision includes the U.S. tax on foreign income distributed to the company. The 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:


	2000			1999			1998

Tax at statutory rate of 35%	$	59,622		$	68,373		$	41,585




State and local taxes		1,081			2,815			2,261




Foreign sales corporation earnings		(4,767	)		(1,923	)		(3,152	)




Technology donation		(6,027	)




Foreign deferred tax valuation allowance		(974	)		(3,904	)		4,878




Other foreign tax differences		3,388			3,954			5,995




Other – net		16			3,043			(3,953	)

Provision for income taxes	$	52,339		$	72,358		$	47,614

THE LUBRIZOL CORPORATION

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31 are as follows:


		2000			1999

Deferred tax assets:




	Accrued compensation and benefits	$	46,489		$	48,858




	Intercompany profit in inventory		11,163			11,322




	Net operating losses carried forward		7,687			12,305




	Other		7,613			8,665

Total gross deferred tax assets			72,952			81,150




Less valuation allowance			(4,179	)		(5,153	)

Net deferred tax assets			68,773			75,997

Deferred tax liabilities:




	Depreciation and other basis differences		95,049			99,938




	Undistributed foreign equity income		6,662			5,566




	Inventory basis differences		2,227			1,497




	Other		5,954			3,977

Total gross deferred tax liabilities			109,892			110,978

Net deferred tax liabilities		$	41,119		$	34,981

At December 31, 2000, certain foreign subsidiaries have net operating loss carryforwards of $25.6 million for income tax purposes, of which $.2 million expire in years 2001 through 2010 and $25.4 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, 2000, 1999 and 1998, was a decrease of $1.0 million, a decrease of $3.9 million and an increase of $4.9 million, respectively.

U.S. income taxes and 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 $426.0 million at December 31, 2000. Determination of the net amount of unrecognized U.S. income tax with respect to these earnings is not practicable.

Income taxes paid during 2000, 1999 and 1998 amounted to $36.4 million, $59.1 million and $52.0 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:


	2000			1999			1998

Service cost – benefits earned during period	$	10,379		$	11,843		$	11,142




Interest cost on projected benefit obligation		17,972			17,589			17,519




Expected return on plan assets		(25,809	)		(25,873	)		(23,818	)




Amortization of prior service costs		2,124			1,771			1,718




Amortization of initial net asset		(1,106	)		(1,264	)		(753	)




Recognized net actuarial (gain) loss		(2,370	)		507			(381	)




Settlement gain					(5,474	)

Net periodic pension cost	$	1,190		$	(901	)	$	5,427

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 $7.9 million in 2000, $9.0 million in 1999 and $8.1 million in 1998.

As discussed in Note 15, the company initiated a cost reduction program and recognized special termination benefits of $11.6 million in 1999, comprised of $3.1 million and $8.5 million included in the special charges recognized in the first and third quarters of 1999, respectively. The $8.5 million of special termination benefits includes $3.2 million and $1.5 million of special termination benefits that were recognized as part of the U.S. pension benefit obligation in 2000 and 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 recognized special termination benefits of $18.3 million in 1998, which were included in the special charge recognized in the fourth quarter of 1998.

THE LUBRIZOL CORPORATION

NOTES CONTINUED

Net non-pension postretirement benefit cost consists of:


	2000			1999			1998

Service cost – benefits earned during period	$	1,326		$	1,468		$	1,250




Interest cost on accumulated benefit obligation		5,387			4,728			4,415




Amortization of prior service costs		(3,173	)		(3,218	)		(3,218	)




Recognized net actuarial (gain) loss		7			23			(252	)

Net non-pension postretirement benefits cost	$	3,547		$	3,001		$	2,195

The change in benefit obligation and plan assets for 2000 and 1999 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:


			Pension Plans						Other Benefits

			2000			1999			2000			1999

Change in benefit obligation:




Benefit obligation at beginning of year			$	264,877		$	297,483		$	71,500		$	72,047




	Service cost			10,379			11,843			1,326			1,468




	Interest cost			17,972			17,589			5,387			4,728




	Plan participants’ contributions			114			48




	Actuarial (gain) loss			961			(23,048	)		426			(4,281	)




	Currency exchange rate change			(9,165	)		(1,104	)		(96	)		49




	Amendments			21,368			647			504




	Acquisitions			2,110




	Curtailments						(632	)




	Settlements						(3,325	)




	Special termination benefits			3,226			1,691




	Other						857




	Benefits paid			(17,007	)		(37,172	)		(4,388	)		(2,511	)

Benefit obligation at end of year				294,835			264,877			74,659			71,500

Change in plan assets:




	Fair value of plan assets at beginning of year			324,534			300,573




		Actual return on plan assets		13,427			54,984




		Acquisition		3,130




		Employer contributions		4,255			6,510			4,388			2,511




		Plan participants’ contributions		114			48




		Currency exchange rate change		(8,818	)		(1,003	)




		Other					594




		Benefits paid		(17,007	)		(37,172	)		(4,388	)		(2,511	)

	Fair value of plan assets at end of year			319,635			324,534

Plan assets greater (less) than the benefit obligation				24,800			59,657			(74,659	)		(71,500	)




	Unrecognized net loss (gain)			(37,419	)		(52,315	)		(5,083	)		(5,521	)




	Unrecognized net transition obligation (asset)			(1,839	)		(3,853	)




	Unrecognized prior service cost			26,509			8,472			(23,725	)		(27,402	)

Net amount recognized			$	12,051		$	11,961		$	(103,467	)	$	(104,423	)

Amount recognized in the statement of financial position consists of:




	Prepaid benefit cost		$	25,031		$	26,027




	Accrued benefit liability			(16,365	)		(16,211	)	$	(103,467	)	$	(104,423	)




	Accumulated other comprehensive income			1,576			838




	Intangible asset			1,809			1,307

Net amount recognized			$	12,051		$	11,961		$	(103,467	)	$	(104,423	)

THE LUBRIZOL CORPORATION


		Pension Plans						Other Benefits

		2000			1999			2000			1999

The weighted average assumptions as of December 31:




	Discount rate for determining funded status		7.00	%		6.91	%		7.69	%		7.70	%




	Expected return on plan assets		8.55	%		8.60	%




	Rate of compensation increase		3.93	%		3.94	%

The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $30.0 million and $9.4 million, respectively, as of December 31, 2000 and $29.8 million and $10.2 million, respectively, as of December 31, 1999. The accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $23.2 million and $7.9 million, respectively, as of December 31, 2000 and $23.7 million, and $9.5 million, respectively, as of December 31, 1999.

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, 2000, was 5.99%, (6.73% at December 31, 1999), 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 plans. 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, 2000:


	One-Percentage-Point

	Increase		Decrease

Effect on postretirement benefit obligation	$	13,328	$	(10,288	)




Effect on total service and interest cost components	$	1,338	$	(1,023	)

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 $16.2 million in 2000, $18.5 million in 1999 and $18.7 million in 1998. Future minimum rental commitments under operating leases having initial or remaining noncancelable lease terms exceeding one year are $11.1 million in 2001, $7.2 million in 2002, $4.9 million in 2003, $3.9 million in 2004, $3.5 million in 2005 and $15.6 million thereafter.

NOTE 11 – ACQUISITIONS

In 2000, the company acquired certain assets of a metalworking additive company with 1999 revenues of approximately $20 million; acquired an additional 10% interest in its India joint venture, bringing the ownership interest up to 50%; and invested in a joint venture with GE Transportation Systems relating to products and services for diesel engine fluids. The company’s aggregate investment in these acquisitions was approximately $41 million.

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 1998; 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 goodwill and intangible assets. During 1997, the annual revenues of Carroll were approximately $30 million and of Adibis were approximately $150 million.

THE LUBRIZOL CORPORATION

NOTES CONTINUED

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 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 $.5 million in 2000. Approximately $.4 million remains as an accrued liability at December 31, 2000. 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 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; 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:


		2000		1999		1998

Chemicals for transportation:




	Revenues from external customers	$	1,461,949	$	1,478,672	$	1,391,045




	Equity earnings (loss)		3,094		5,340		2,434




	Goodwill and intangibles amortization		5,199		5,012		2,964




	Segment contribution income		275,689		342,555		274,246




	Operating profit before tax		140,553		191,654		130,149




	Segment total assets		1,132,782		1,116,680		1,191,175




	Capital expenditures		78,887		58,123		90,369




	Depreciation		81,769		82,129		74,023

THE LUBRIZOL CORPORATION


			2000			1999			1998

Chemicals for industry:




	Revenues from external customers		$	313,831		$	301,657		$	259,135




	Equity earnings (loss)			(1,611	)		395			168




	Goodwill and intangibles amortization			7,648			6,418			5,414




	Segment contribution income			42,103			48,548			39,847




	Operating profit before tax			24,174			27,481			22,552




	Segment total assets			249,782			247,779			256,905




	Capital expenditures			6,870			6,749			3,052




	Depreciation			6,218			6,161			5,646




Reconciliation to consolidated income before tax:




	Segment operating profit before tax		$	164,727		$	219,135		$	152,701




	Gain from litigation settlements			19,395			17,626			16,201




	Special (charges) credits			4,484			(19,569	)		(36,892	)




	Interest expense – net			(18,258	)		(21,842	)		(13,196	)

	Consolidated income before tax		$	170,348		$	195,350		$	118,814

Revenues from external customers by product group:




	Engine oil additives		$	936,924		$	939,179		$	866,266




	Driveline oil additives			400,469			413,400			390,006




	Fuel additives and refinery oil additives			90,380			105,024			79,584




	Additive components			34,176			21,069			55,189

		Chemicals for transportation		1,461,949			1,478,672			1,391,045

	Industrial additives			173,592			158,542			150,662




	Performance chemicals			112,444			108,956			85,123




	Performance systems			27,795			34,159			23,350

		Chemicals for industry		313,831			301,657			259,135

Total revenues from external customers			$	1,775,780		$	1,780,329		$	1,650,180

In order to conform prior-year amounts to current-year classifications, prior-year amounts have been restated to reflect the change in the way the company reports shipping revenues (see Note 2), to reflect reclassifications of products between chemicals for transportation and chemicals for industry operating segments and to reflect the exclusion for internal management reporting purposes, effective January 1, 2000, of excess production capacity from product costs (this change in reporting excess production capacity had no effect on segment operating profit before tax.)

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:


	2000		1999		1998

United States	$	692,720	$	684,037	$	616,940




Other North American		66,478		60,994		50,929




Europe, Middle East		533,049		583,475		561,625




Asia-Pacific		347,658		324,349		270,722




Latin America		135,875		127,474		149,964

Total revenues from external customers	$	1,775,780	$	1,780,329	$	1,650,180

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 48% of consolidated sales in 2000, 46% of consolidated sales in 1999 and 42% of consolidated sales in 1998. The company’s largest single customer, including its affiliated entities, predominantly within chemicals for transportation segment, accounted for revenues of $185.3 million in 2000 and $214.4 million in 1999 and less than 10% in 1998.

The table below presents a reconciliation of segment total assets to consolidated total assets for the years ended December 31:


	2000		1999		1998

Total segment assets	$	1,382,564	$	1,364,459	$	1,448,080




Corporate assets		276,926		317,895		195,157

Total consolidated assets	$	1,659,490	$	1,682,354	$	1,643,237

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:


	2000		1999

United States	$	535,909	$	519,050




France		77,806		91,413




England		114,174		124,138




All other		119,946		85,690

Total long-lived assets	$	847,835	$	820,291

THE LUBRIZOL CORPORATION

NOTES CONTINUED

Net income of non-U.S. subsidiaries was $45 million in 2000, $53 million in 1999 and $13 million in 1998; and dividends received from these subsidiaries were $31 million, $22 million and $15 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, 2000, approximates $387.5 million compared with the carrying value of $395.9 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. The maximum amount of foreign currency forward contracts outstanding at any one time was $24.3 million in 2000, $18.9 million in 1999 and $65.0 million in 1998. At December 31, 2000, the company had short-term forward contracts to sell currencies at various dates during 2001 for $7.3 million. Realized and unrealized gains or losses on these contracts are recorded in the statement of income, or in the case of transactions designated as hedges of net foreign investments, in the 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, 2000.

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 interest rate swap agreements to convert variable rate debt debt to fixed rates and, in 2000, entered into additional swap agreements to convert fixed rate debt to variable rate debt (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. No market value loss amounts were accrued in 2000, 1999 or 1998. The company would have received approximately $5.6 million, including accrued interest of $.1 million, if it had terminated these interest rate swap agreements at December 31, 2000.

Effective January 1, 2001, the company adopted Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS133), as amended. SFAS 133 requires the company to recognize all derivatives on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. Derivatives that are not hedges must be adjusted to fair value through income. Depending upon the nature of the hedge, changes in fair value of the derivative are either offset against the change in fair value of assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in value is immediately recognized in earnings.

The adoption of SFAS133 did not have a material cumulative effect on net income as of January 1, 2001, but did result in a $2 million reduction, on a pre-tax basis, of other comprehensive income.

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 to be “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. During 2000, the 1991 plan was amended to provide that new reload grants on or after March 27, 2000, will be discretionary and will no longer be

THE LUBRIZOL CORPORATION

granted for the excercise of a reload using shares. The 1991 Plan generally supersedes the 1985 Plan, although options outstanding under the 1985 Plan remain exercisable until their 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 for stock options 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 2,500 common shares in 2000 and 2,000 common shares in 1999 and 1998, with terms generally comparable to employee stock options.

Under the 1991 Stock Incentive Plan, the company has granted to certain executive officers 4,500, none, 3,000 and 65,000 performance share stock awards in 2000, 1999, 1998 and 1997, respectively. 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 on March 24, 2003, 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 $28.06 per share (for 3,000 awards) and $25.38 per share (for 1,500 awards) in 2000, $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 $.1 million in 2000 and $.8 million in 1999 and 1998. At December 31, 2000, 65,500 performance share stock awards were outstanding.

Accounting principles generally accepted in the United States of America 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 company 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 $3.5 million in 2000, $2.5 million in 1999 and $1.6 million in 1998 with a corresponding reduction in net income per share of $.07 in 2000, $.05 in 1999 and $.03 in 1998.

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:


		2000			1999			1998

1985 Plan:




	Risk-free interest rate					6.5	%		4.6	%




	Dividend yield					3.4	%		4.0	%




	Volatility					23	%		21	%




	Expected life (years)					.5			2.8




1991 Plan:




	Risk-free interest rate		6.0	%		6.4	%		4.7	%




	Dividend yield		4.0	%		3.4	%		4.0	%




	Volatility		27	%		24	%		23	%




	Expected life (years)		9.8			9.9			9.5

The fair value per share of the performance share stock awards granted in 2000 were $28.06 for 3,000 awards, and $25.38 for 1,500 awards, using the following assumptions: risk-free interest rate of 6.49%; volatility of 27%; and an expected life of three years. There was no performance share award activity for 1999. The fair value per share of the performance share stock awards granted in 1998 was $33.94, using the following assumptions: risk-free interest rate of 4.58%; volatility of 21%; 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:


	Shares			Weighted- Average Exercise Price

Outstanding, January 1, 2000		3,968,742		$	31.06




Granted		816,136			28.02




Exercised		(77,898	)		20.41




Forfeited		(82,845	)		32.08

Outstanding, December 31, 2000		4,624,135		$	30.68

Options exercisable, December 31, 2000		3,415,820		$	31.87

Weighted-average fair value of options granted during the year				$	7.49

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

THE LUBRIZOL CORPORATION

NOTES CONTINUED

The following table summarizes information about stock options outstanding, excluding the performance share stock awards, at December 31, 2000:


	Options Outstanding						Options Exercisable

	Number		Weighted-Average		Weighted-		Number
Range of	Outstanding		Remaining		Average		Exercisable		Weighted-Average
Exercise Prices	at 12/31/00		Contractual Life		Exercise Price		at 12/31/00		Exercise Price

$19 - $25		547,597		7.6 Years		21.41		297,422		21.47




25 - 31		2,047,631		5.6		28.48		1,173,881		28.75




31 - 38		1,974,381		3.6		35.28		1,891,491		35.17




38 - 45		54,526		1.0		41.57		53,026		41.66

		4,624,135		4.9	$	30.68		3,415,820	$	31.87

NOTE 15 – SPECIAL CHARGES

The company initiated a series of steps to reduce costs and improve its worldwide operating structure and has been executing these steps in two programs over a period of approximately two years. The first program, 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 was 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 program.

In the fourth quarter of 1998, the company recognized special charges of $36.9 million comprised of $23.3 million related to this first 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 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 (see below) related to the second 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 program principally to reflect a gain related to the settlement of pension obligations for workforce reductions (see Note 9). After-tax, this adjustment increased net income by $2.5 million or $.05 per share.

As adjusted, the first 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 taken out of service. Cash expenditures of approximately $.4 million were made in 2000, $14.7 million in 1999 and $5.0 million in 1998 related to the cost reduction program.

The second program began in the third quarter of 1999 and involved primarily the downsizing of the company’s Painesville, Ohio, manufacturing plant. This resulted in the additional reduction of approximately 5% of the company’s workforce, or 187 employees, and the shutdown of 20 of Painesville’s 36 production systems. Approximately 23% of the workforce reduction and shutdown of 12 of the production systems occurred during 1999. The remainder of the workforce reduction and production system shutdowns was completed in 2000.

In the second quarter of 2000, the company recorded an adjustment of $2.6 million to reduce the amount of the special charge related to the second program, principally because the cost of workforce reductions at the company’s Painesville facility was less than originally anticipated. After-tax this adjustment increased net income by $1.7 million or $.03 per share. In the fourth quarter of 2000, the company recorded a pre-tax adjustment of $1.9 million ($1.2 million after-tax or $.02 per share), to further reduce the amount of the special charge due to lower than anticipated equipment dismantling costs ($1.5 million) and lower workforce reduction costs ($.4 million).

As adjusted, the second program included workforce reduction cost estimated at $5.5 million and other exit costs estimated at $10.8 million, including $7.4 million related to asset impairments for production units to be taken out of service. Cash expenditures of approximately $.9 million and $1.3 million were made in 2000 and 1999, respectively, related to the second cost reduction program. Additionally, $3.2 million and $1.5 million of special termination benefits were recognized as part of the U.S. pension benefit obligation in 2000 and 1999, respectively (see Note 9). Approximately $1.9 million remains as an accrued liability at December 31, 2000. This accrual represents severance, health care and outplacement payments that will be made in 2001 relating to employees separated prior to December 31, 2000 ($1.2 million) and additional costs that will be incurred in 2001 to complete the dismantling of assets that were taken out of service as of December 31, 2000 ($.7 million).

THE LUBRIZOL CORPORATION

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 October 12, 2000, the company reached a settlement of all pending patent litigation with Imperial Oil Limited (Imperial), a Canadian affiliate of Exxon Mobil Corporation. Under the settlement agreement, Lubrizol received cash of $25.0 million in October 2000. After deducting related expenses, this settlement increased pre-tax income by $19.4 million in 2000.

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 that was 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.

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 is party to lawsuits, threatened lawsuits, and other claims arising out of the normal course of business. Management is of the opinion that any liabilities that may result are adequately covered by insurance, or to the extent not covered by insurance, are adequately accrued for at December 31, 2000, or would not be significant in relation to the Company’s financial position at December 31, 2000, or its results of operations for the year then ended.

QUARTERLY FINANCIAL DATA (UNAUDITED)


	Three Months Ended

	March 31		June 30		Sept. 30		Dec. 31

	(In Thousands of Dollars Except Per Share Data)
2000




Net sales	$	444,008	$	448,979	$	432,442	$	445,888




Gross profit		127,326		129,848		121,624		114,332




Net income		30,105		31,712		23,255		32,937




Net income per share		$.55		$.59		$.44		$.64




Net income per share, diluted		$.55		$.59		$.44		$.63




1999




Net sales	$	454,710	$	440,839	$	440,383	$	439,935




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

Effective in the fourth quarter of 2000, the company began including shipping fees in revenues and shipping costs in cost of sales, and in prior periods these items were netted in cost of sales. Prior quarter amounts have been reclassified to reflect this change (see Note 2 to the financial statements).

In the second quarter of 2000, the company recorded a pre-tax adjustment of $2.6 million ($.03 per share) to reduce the amount of the special charge to reflect a lower cost of workforce reductions than was anticipated.

In the fourth quarter of 2000, the company recorded a pre-tax adjustment of $1.9 million ($.02 per share) to further reduce the amount of the special charge due to lower than anticipated equipment dismantling costs ($1.5 million) and lower workforce reduction costs ($.4 million) because additional employees transferred to other company locations.

In the fourth quarter of 2000, the company recorded a pre-tax gain from litigation settlement of $19.4 million ($.23 per share).

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 per 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 workforce reductions under its cost reduction program.

In the fourth quarter of 1999, the company recorded a pre-tax gain from litigation settlement of $3.1 million ($.04 per share).

THE LUBRIZOL CORPORATION

HISTORICAL SUMMARY

(In Millions, Except Shareholders, Employees

and Per Share Data) 2000 1999 1998 1997

OPERATING RESULTS:

Revenues $ 1,775.8 $ 1,780.3 $ 1,650.2 $ 1,706.9

Total cost and expenses 1,597.0 1,554.5 1,496.3 1,474.6

Other income (charges) (8.4 ) (30.5 ) (35.0 ) (1.1 )

Net income 118.0 123.0 71.2 154.9

– Before unusual items and accounting changes 103.1 125.3 86.5 154.9

Net income per share 2.22 2.25 1.27 2.68

– Before unusual items and accounting changes 1.94 2.30 1.55 2.68

FINANCIAL RATIOS:

Gross profit percentage 27.8 30.9 29.2 32.1

Percent of revenues:

Selling and administrative expenses 9.5 10.2 10.9 10.0

Research and testing expenses 8.5 8.2 9.1 8.6

Return on average shareholders’ equity (%) 15.3 15.8 9.0 19.0

– Before unusual items and accounting changes (%) 13.4 16.1 10.9 19.0

Debt to capitalization (%) 34.5 33.8 35.8 21.3

Current ratio 2.6 2.5 2.5 2.5

OTHER INFORMATION:

Dividends declared per share $1.04 $1.04 $1.04 $1.01

Average common shares outstanding 53.1 54.6 55.9 57.8

Capital expenditures $85.8 $64.9 $93.4 $100.7

Depreciation expense 88.0 88.3 79.7 82.7

At Year End:

Total assets $ 1,659.5 $ 1,682.4 $ 1,643.2 $ 1,462.3

Total debt 395.9 403.0 429.3 220.3

Total shareholders’ equity 752.3 790.1 769.1 815.4

Shareholders’ equity per share 14.66 14.50 14.10 14.31

Common share price 25.75 30.88 25.69 36.88

Number of shareholders 4,681 5,126 5,609 5,661

Number of employees 4,390 4,074 4,324 4,291

The number of employees at December 31, 2000 includes 460 employees at the company’s new subsidiaries in China. In 2000 the company began reporting shipping fees and shipping costs gross in net sales and cost of sales, respectively. The company had previously netted shipping fees against shipping costs in cost of sales. This change has no effect on the dollar amount of the company’s gross profit or net income. Revenues, total cost and expenses, and gross profit percentage for 1996-1999 have been reclassified to conform with current period classification.

THE LUBRIZOL CORPORATION

(In Millions, Except Shareholders, Employees

and Per Share Data) 1996 1995 1994 1993 1992 1991 1990

OPERATING RESULTS:

Revenues $ 1,629.2 $ 1,663.6 $ 1,599.0 $ 1,525.5 $ 1,552.2 $ 1,476.3 $ 1,452.7

Total cost and expenses 1,434.6 1,478.0 1,397.0 1,362.2 1,390.5 1,308.7 1,288.4

Other income (charges) 56.1 40.0 49.4 (43.6 ) 15.4 10.5 106.9

Net income 169.8 151.6 175.6 45.6 124.6 123.7 190.0

– Before unusual items and accounting changes 135.2 126.6 148.8 113.5 124.6 123.7 133.5

Net income per share 2.80 2.37 2.67 .67 1.81 1.79 2.67

– Before unusual items and accounting changes 2.23 1.98 2.26 1.67 1.81 1.79 1.87

FINANCIAL RATIOS:

Gross profit percentage 31.4 31.5 32.7 32.0 31.7 32.4 30.3

Percent of revenues:

Selling and administrative expenses 9.7 9.8 10.0 10.4 11.7 11.7 10.9

Research and testing expenses 9.9 10.8 10.3 11.2 10.0 9.8 8.5

Return on average shareholders’ equity (%) 20.4 18.0 22.5 5.9 15.4 16.2 27.2

– Before unusual items and accounting changes (%) 16.2 15.1 19.0 14.6 15.4 16.2 18.0

Debt to capitalization (%) 19.5 22.5 16.8 8.7 5.6 7.9 8.3

Current ratio 2.6 2.4 2.5 2.5 2.9 2.7 2.7

OTHER INFORMATION:

Dividends declared per share $.97 $.93 $.89 $.85 $.81 $.77 $.73

Average common shares outstanding 60.7 63.8 65.7 67.7 69.0 69.3 71.1

Capital expenditures $94.3 $189.3 $160.5 $127.9 $95.8 $82.4 $77.4

Depreciation expense 78.7 71.8 63.9 59.6 58.4 54.6 54.0

At Year End:

Total assets $ 1,402.1 $ 1,492.0 $ 1,394.4 $ 1,182.6 $ 1,127.1 $ 1,171.7 $ 1,114.6

Total debt 198.5 247.1 167.9 69.6 48.4 67.8 66.6

Total shareholders’ equity 819.4 849.0 832.0 732.2 819.4 794.5 736.2

Shareholders’ equity per share 14.00 13.48 12.83 11.00 11.97 11.51 10.61

Common share price 31.00 27.75 33.88 34.13 27.25 28.25 23.63

Number of shareholders 5,764 6,304 6,494 6,616 6,822 6,767 6,692

Number of employees 4,358 4,601 4,520 4,613 4,609 5,299 5,169

43 EX-21 7 l86837aex21.txt EXHIBIT 21 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 GmbH 100% Germany Lubrizol Espanola, S.A. 100% Spain Lubrizol Europe B.V. 100% The Netherlands Lubrizol France S.A.R.L. 100% France Lubrizol Gesellschaft m.b.H. 100% Austria Lubrizol GmbH 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 Performance Systems Inc. 100% Georgia Lubrizol Performance Systems Limited 100% United Kingdom 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 Carroll Scientific, Inc. 100% Illinois CPI Engineering Services, Inc. 100% Michigan Gateway Additive Company 100% Nevada ROSS Chem, Inc. 100% South Carolina Lanzhou Lubrizol - Lanlian Additive Co., Ltd. 50.05% China Tianjin Lubrizol - Lanlian Additive Co., Ltd. 50.05% China AFFILIATES Industrias Lubrizol, S.A. de C.V. 40% Mexico Lubrizol India Limited 50% India Lubrizol Transarabian Company Limited 49% Saudi Arabia EX-23 8 l86837aex23.txt EXHIBIT 23 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, in Registration Statement No. 33-42211 on Form S-8 and in Registration Statement No. 333-42338 of our report dated February 1, 2001, incorporated by reference in this Annual Report on Form 10-K of The Lubrizol Corporation for the year ended December 31, 2000. /s/Deloitte & Touche LLP - ------------------------------- DELOITTE & TOUCHE LLP Cleveland, Ohio March 26, 2001 GRAPHIC 9 l86837al8683701.jpg begin 775 l8683701.jpg M_]C_X``02D9)1@`!`0$`8`!@``#__@`<4V]F='=A$L13W=LM/5HU9H MD1R/:F6DGK3SGGQS<*RAU'5*F2'3\9I:#LL\M'+_`!4PBW/?[C9/:*?POQ8Z M-8#`VVEQ3=*)M73W-R1N5433F5%V+EYC08?H+U1SS.NM7X]CFHC$\8KLES]9 M[5;BGS>6[\US'^,Y3YKP,?C:HN-!/3U%)63112-5CFL>J(CD_P!47^Q;P]<% MKUBMD<[?S;LS7],SR;F2NI;G(B1*B.TYE3?_\`X7K/:\1TUTAEKZ_QM,W2TV>.5V?V M5RV9>?(]JM=WK+&WVF:\LJ)REIP9O&M;54-NIWTL\D+G39*K'9*J9*9FS8FK MZ>Z0/K*R66G<[1D21RJB(NS/\!39FJGO07.U4V[G>1A51,1$_FVT7HJKJIRZ/0#`8 M4N]QJ[_##45LTL:M=FU[U5%V*:3%U5/26)\U-,^*1)&II,7)=\RJM335%+"C MM%-=N;D1T6P9G!-=55U%4OJJB29S9$1%>[/),B=C2Z5]%>(HJ6KEA8M.CE:Q MRHBKI.V_V$6IFON$]IIBU%W+Z-N#"TENQ764D53%B[#*+4S&G$I1-4QE.2335WHS`#S-N%(ZO6A;.Q: MEK=)8T7:B?\`SB/,GLS$=7I``>@`````````````#^'GH[A27!CWTD[948[1 M=H\2C)YG&>3T@`/0``````````````````````````+:G$7\082K[M=Y*R":G;&]K41'N M2I:F3H_Y4;YD)OA#_P"[OS?V%/#5HNUFTZ>IFIY:5VU$8]RN8[U9IO*,56"K MOFJZK)"SQ.GI>-W+;MV(F1N;;!44UN@AJI?&SL9D]^DKM)?O7:9&'">)*:)(H+ MLR*--YC*B1J)^"(6]IMUQ7%=N M,_I,/5@"AR94U[DWU2)BY?BO^13QM_U9Q:FGLW.>S2W\OY4VFYL%#<*"A?%LNOCH&*JOCUB1VEL7B5,C;=F*L_K M#1V>FJWEG3.?\/SX0."J;I_VJ9FKMZNPS07%C=C5?#)E_P`RJU?[JGZ&VQ19 MJF]T4,-,^)CF2:2K(JHF62IQ(I_+?87189=:*QT;G.1R*YF:HBJN:+M1-[8> M47(IHCE[=L57+M7T^F7\L%=*];A'12/=G+%3I"_V7+DOZ*AU"%%=;(T1,U6% M$3_RF'W`W7TBC_\`.[Y3>P1K%3QQNR56,1JY>I#R]53,1%+WL=NY%54UQEGD M_]"U@QR)B6GS7+-KT3_RJ:O&[D3#KD5"9W5SJNUU3(M)VFC'J MK58OJ5#SR82Q!<'-2ON+',;O:-3_`EX^X3;Q%8S69$T4XDR1,D-U"US((VO=I/:U$>:Y&,CPMB>*-L<5X:QC4R:UM3 M(B(GJ3(NX>MUTM\794XT,E66:]X<8M7#4+XA%3.6"1 M94JH)DAJ$31723-KTXL_,I(7">(IX6TD]QC6G;EDU9G.;^"9&=NJ(B/\O1J[ M1;JJKF8H^OE,3[K&$K]/>*>6.J1%F@RS>B9::+G_`'V&A)=BL<-CI711O622 M146214RSRWMGF*A'KFF:I[O1.LQ7%N(KZO-B9Z?7]WC3$%TBQ+*V2I9./(V]Z MWDC11?S\^N?\_P#C[S7*L;CJGMZ3JE,^-56/),E7029*N3O]$/O+9*E^+H;NCXO$1L5JM55T_Y53>RRX_.?"[6.YU&((KK0 M2TK5B8C4297;^WB1/681-.<I[*.&\/IZF.YOI'*]FC%XC2V;%SSS3[B/ M:K+B2STKJ>EGMRL<]7KIJ]5SR1/-ZC"(CNS&?U9U55=^FJ(G+ZOOC.Y5EMHZ M9]'.L+GR*CE1$7-,O6?;%5XJ;9!3P4625%4]6MJ6-(I4BJ(':4;UWO6B_HGZ&5,T?XY_JQ MKB[/?[OZ9?*/;+47"[6RKA?$V M.CD1ST7FUS3C M(IIO315%6>?T>;#59+4MF1UVBKXT7-GV-&1J?_DG_P`^\BMT1EG5/ED\JBONT1,?7/\`AM``1G1````````````````` M`````````````````````````````````````````````_FBW2TM%-+++/+; MD?T``````'__T>S```````````?QK6M3)J(B9Y[$/Z`````````````````` M```````````````````````````````````````````````````````````` M````````````````#__2[,```````````/#>KQ1V"SU-UKW.;3TS-)^BF:KM MR1$3SJJHGXF#L?A7J[Q?V0IARJ2V3+'&V:%/&OB>_:CGY;$:J*U%FV84JYK=!1SUUPA5J2,R6..-7)I)FY4V[%SV(OWGYNWA*K:2X4]GM MM@=775:-M54QK4)''"BL1RIFJ;[@6@1= M:Q5R-:.M9>[C6L5[@6@1=:Q5R-:.M9>[C6L5[@6@1=:Q5R-:.M9> M[C6L5[@6@1=:Q5R-:.M9>[C6L5[@6@1=:Q5R-:.M9>[C6L5[ M@6@1=:Q5R-:.M9>[GSFN.)*=B/GM=DB:JY(K[Q(U,_QISR9B(SD7@9OR]>?1 M?1Y2T@,]%>;[-(D<5#89'KO-;>GJJ_ MAJY]]:Q5R-:.M9>[F5-5-49TSF\R6@1=:Q5R-:.M9>[C6L5RT6 M=S7)FBI=I514^'/[K6*N1K1UK+W[@6@1=:Q5R-:.M9>[C6L5[@8WPL6>NOMRP]:Z*VU$U/-5Z=9-#`YS&)FQB*]R) MDGV5=O\`$ACL9VV]7+&%Y?><*XGH,+80FK+;+5MMD[WU-+2Q(Y\;5> MUS45&[ZZ+515XN,]\V&\0XVO-^Q0^USVYKJ!]/;J:I30ED56:&\N]FU7;5V? 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•		the overall demand for lubricant and fuel 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 and political uncertainty within the Asia-Pacific and Latin American regions;

•		the lubricant additive demand in developing regions such as China and India, which geographic areas are an announced focus of our activities;

•		technology developments that affect longer-term trends for lubricant additives, such as improved equipment design, fuel economy, longer oil drain intervals, alternative fuel powered engines and emission system compatibility;

•		the extent to which we are successful in expanding our business in new and existing fluid technology markets incorporating chemicals, systems and services for industry and transportation;

•		our success at continuing to develop proprietary technology to meet or exceed new industry performance standards and individual customer and original equipment manufacturers’ 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;

•		our ability to continue to reduce complexities and conversion costs and modify our cost structure to maintain and enhance our competitiveness;

•		our success in strengthening relationships and growing business with our largest customers, and retaining the business of these customers over extended time periods;

•		our ability to identify, complete and integrate acquisitions for profitable growth;

•		the potential negative impact on product pricing and volume demand from the consolidation of finished lubricant marketers;

•		the degree of competition resulting from lubricant additive industry over-capacity;

•		the cost, availability and quality of raw materials, including petroleum-based products;

•		the cost and availability of energy, including natural gas and electricity;

•		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 extent to which we achieve market acceptance of our PuriNOx^TM low emission, water blend fuel product;

•		significant changes in government regulations affecting environmental compliance.


(In Millions, Except Shareholders, Employees
and Per Share Data)			2000			1999			1998			1997

OPERATING RESULTS:




Revenues			$	1,775.8		$	1,780.3		$	1,650.2		$	1,706.9




Total cost and expenses				1,597.0			1,554.5			1,496.3			1,474.6




Other income (charges)				(8.4	)		(30.5	)		(35.0	)		(1.1	)




Net income				118.0			123.0			71.2			154.9




		– Before unusual items and accounting changes		103.1			125.3			86.5			154.9




Net income per share				2.22			2.25			1.27			2.68




		– Before unusual items and accounting changes		1.94			2.30			1.55			2.68




FINANCIAL RATIOS:




Gross profit percentage				27.8			30.9			29.2			32.1




Percent of revenues:




	Selling and administrative expenses			9.5			10.2			10.9			10.0




	Research and testing expenses			8.5			8.2			9.1			8.6




Return on average shareholders’ equity (%)				15.3			15.8			9.0			19.0




		– Before unusual items and accounting changes (%)		13.4			16.1			10.9			19.0




Debt to capitalization (%)				34.5			33.8			35.8			21.3




Current ratio				2.6			2.5			2.5			2.5




OTHER INFORMATION:




Dividends declared per share				$1.04			$1.04			$1.04			$1.01




Average common shares outstanding				53.1			54.6			55.9			57.8




Capital expenditures				$85.8			$64.9			$93.4			$100.7




Depreciation expense				88.0			88.3			79.7			82.7




At Year End:




	Total assets		$	1,659.5		$	1,682.4		$	1,643.2		$	1,462.3




	Total debt			395.9			403.0			429.3			220.3




	Total shareholders’ equity			752.3			790.1			769.1			815.4




	Shareholders’ equity per share			14.66			14.50			14.10			14.31




	Common share price			25.75			30.88			25.69			36.88




	Number of shareholders			4,681			5,126			5,609			5,661




	Number of employees			4,390			4,074			4,324			4,291


(In Millions, Except Shareholders, Employees
and Per Share Data)			1996		1995		1994		1993			1992		1991		1990

OPERATING RESULTS:




Revenues			$	1,629.2	$	1,663.6	$	1,599.0	$	1,525.5		$	1,552.2	$	1,476.3	$	1,452.7




Total cost and expenses				1,434.6		1,478.0		1,397.0		1,362.2			1,390.5		1,308.7		1,288.4




Other income (charges)				56.1		40.0		49.4		(43.6	)		15.4		10.5		106.9




Net income				169.8		151.6		175.6		45.6			124.6		123.7		190.0




		– Before unusual items and accounting changes		135.2		126.6		148.8		113.5			124.6		123.7		133.5




Net income per share				2.80		2.37		2.67		.67			1.81		1.79		2.67




		– Before unusual items and accounting changes		2.23		1.98		2.26		1.67			1.81		1.79		1.87




FINANCIAL RATIOS:




Gross profit percentage				31.4		31.5		32.7		32.0			31.7		32.4		30.3




Percent of revenues:




	Selling and administrative expenses			9.7		9.8		10.0		10.4			11.7		11.7		10.9




	Research and testing expenses			9.9		10.8		10.3		11.2			10.0		9.8		8.5




Return on average shareholders’ equity (%)				20.4		18.0		22.5		5.9			15.4		16.2		27.2




		– Before unusual items and accounting changes (%)		16.2		15.1		19.0		14.6			15.4		16.2		18.0




Debt to capitalization (%)				19.5		22.5		16.8		8.7			5.6		7.9		8.3




Current ratio				2.6		2.4		2.5		2.5			2.9		2.7		2.7




OTHER INFORMATION:




Dividends declared per share				$.97		$.93		$.89		$.85			$.81		$.77		$.73




Average common shares outstanding				60.7		63.8		65.7		67.7			69.0		69.3		71.1




Capital expenditures				$94.3		$189.3		$160.5		$127.9			$95.8		$82.4		$77.4




Depreciation expense				78.7		71.8		63.9		59.6			58.4		54.6		54.0




At Year End:




	Total assets		$	1,402.1	$	1,492.0	$	1,394.4	$	1,182.6		$	1,127.1	$	1,171.7	$	1,114.6




	Total debt			198.5		247.1		167.9		69.6			48.4		67.8		66.6




	Total shareholders’ equity			819.4		849.0		832.0		732.2			819.4		794.5		736.2




	Shareholders’ equity per share			14.00		13.48		12.83		11.00			11.97		11.51		10.61




	Common share price			31.00		27.75		33.88		34.13			27.25		28.25		23.63




	Number of shareholders			5,764		6,304		6,494		6,616			6,822		6,767		6,692




	Number of employees			4,358		4,601		4,520		4,613			4,609		5,299		5,169