-----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, EvWoD0bga0THngpTq0WP5mD39aWPc1s59h3Uniyk4Shsk2mgg+kDSEL8TNTnmT5t 3R2mTqg2VQOBBbF6Q/qKlQ== 0000950152-02-008213.txt : 20021112 0000950152-02-008213.hdr.sgml : 20021111 20021112083539 ACCESSION NUMBER: 0000950152-02-008213 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021112 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05263 FILM NUMBER: 02815197 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-Q 1 l96659ae10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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 or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 29400 Lakeland Boulevard Wickliffe, Ohio 44092-2298 (Address of principal executive offices) (Zip Code) (440) 943-4200 (Registrant's telephone number, including area code) 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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Number of the registrant's common shares, without par value, outstanding, as of October 31, 2002: 51,449,360. PART I. FINANCIAL INFORMATION Item 1 Financial Statements THE LUBRIZOL CORPORATION CONSOLIDATED BALANCE SHEETS
September 30 December 31 (In Thousands of Dollars) 2002 2001 - ------------------------- ----------- ----------- ASSETS Cash and short-term investments ............................................ $ 249,555 $ 189,095 Receivables ................................................................ 303,189 279,013 Inventories: Finished products ........................................................ 148,139 124,503 Products in process ...................................................... 60,657 48,859 Raw materials ............................................................ 70,606 64,504 Supplies and engine test parts ........................................... 18,797 16,744 ----------- ----------- 298,199 254,610 ----------- ----------- Other current assets ....................................................... 38,948 34,006 ----------- ----------- Total current assets ................................... 889,891 756,724 Property and equipment - net ............................................... 668,471 644,281 Goodwill and intangible assets - net ....................................... 201,364 166,558 Investments in nonconsolidated companies ................................... 7,043 30,915 Other assets ............................................................... 55,155 63,841 ----------- ----------- TOTAL ............................................. $ 1,821,924 $ 1,662,319 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt and current portion of long-term debt ...................... $ 16,284 $ 9,120 Accounts payable ........................................................... 136,309 129,833 Accrued expenses and other current liabilities ............................. 141,791 120,261 ----------- ----------- Total current liabilities .............................. 294,384 259,214 ----------- ----------- Long-term debt ............................................................. 393,954 388,111 Postretirement health care obligation ...................................... 98,042 97,878 Noncurrent liabilities ..................................................... 62,479 55,140 Deferred income taxes ...................................................... 57,997 56,207 ----------- ----------- Total liabilities ...................................... 906,856 856,550 ----------- ----------- Minority interest in consolidated companies ................................ 54,513 32,577 Contingencies and commitments Shareholders' equity: Preferred stock without par value - authorized and unissued: Serial Preferred Stock - 2,000,000 shares Serial Preference Shares - 25,000,000 shares Common shares without par value: Authorized 120,000,000 shares Outstanding - 51,449,160 shares as of September 30, 2002 after deducting 34,746,734 treasury shares, 51,152,107 shares as of December 31, 2001 after deducting 35,043,787 treasury shares ...................... 118,607 109,692 Retained earnings ........................................................ 816,225 763,312 Accumulated other comprehensive loss ..................................... (74,277) (99,812) ----------- ----------- Total shareholders' equity ............................. 860,555 773,192 ----------- ----------- TOTAL ............................................. $ 1,821,924 $ 1,662,319 =========== ===========
Amounts shown are unaudited. 2 THE LUBRIZOL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Third Quarter Period Nine Month Period Ended September 30 Ended September 30 -------------------------- -------------------------- (In Thousands Except Per Share Data) 2002 2001 2002 2001 - ------------------------------------ ---- ---- ---- ---- Net sales ................................... $ 509,427 $ 461,109 $ 1,483,645 $ 1,400,828 Royalties and other revenues ................ 876 1,317 2,554 4,031 ----------- ----------- ----------- ----------- Total revenues .................... 510,303 462,426 1,486,199 1,404,859 Cost of sales ............................... 358,850 332,887 1,051,830 1,017,571 Selling and administrative expenses ......... 49,530 42,602 146,700 131,402 Research, testing and development expenses .. 42,774 42,467 124,674 119,828 ----------- ----------- ----------- ----------- Total cost and expenses ........... 451,154 417,956 1,323,204 1,268,801 Other expense - net ......................... (3,042) (5,726) (7,084) (13,520) Interest income ............................. 1,796 1,282 5,005 4,614 Interest expense ............................ (5,791) (5,746) (16,941) (18,479) ----------- ----------- ----------- ----------- Income before income taxes and cumulative effect of change in accounting principle ... 52,112 34,280 143,975 108,673 Provision for income taxes .................. 15,634 11,483 43,193 35,355 ----------- ----------- ----------- ----------- Income before cumulative effect of change in accounting principle ....................... 36,478 22,797 100,782 73,318 Cumulative effect of change in accounting principle .................................. -- -- (7,785) -- ----------- ----------- ----------- ----------- Net income .................................. $ 36,478 $ 22,797 $ 92,997 $ 73,318 =========== =========== =========== =========== Net income per share: Income before cumulative effect of change in accounting principle ................... $ 0.71 $ 0.45 $ 1.96 $ 1.43 Cumulative effect of change in accounting principle ................................. -- -- (0.15) -- ----------- ----------- ----------- ----------- Net income per share ........................ $ 0.71 $ 0.45 $ 1.81 $ 1.43 =========== =========== =========== =========== Diluted net income per share: Income before cumulative effect of change in accounting principle ................... $ 0.71 $ 0.44 $ 1.95 $ 1.42 Cumulative effect of change in accounting principle ................................. -- -- (0.15) -- ----------- ----------- ----------- ----------- Net income per share, diluted ............... $ 0.71 $ 0.44 $ 1.80 $ 1.42 =========== =========== =========== =========== Dividends per share ......................... $ 0.26 $ 0.26 $ 0.78 $ 0.78 =========== =========== =========== =========== Weighted average common shares outstanding .. 51,569 51,121 51,475 51,202 =========== =========== =========== ===========
Amounts shown are unaudited. 3 THE LUBRIZOL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Month Period Ended September 30 ---------------------- (In Thousands of Dollars) 2002 2001 - ------------------------- ---- ---- Cash provided from (used for): Operating activities: Net income ............................................ $ 92,997 $ 73,318 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization ..................... 70,898 74,084 Deferred income taxes ............................. (616) 3,174 Cumulative effect of change in accounting principle 7,785 -- Change in current assets and liabilities: Receivables ..................................... 7,452 (34,774) Inventories ..................................... (13,930) (6,289) Accounts payable and accrued expenses ........... 4,712 19,791 Other current assets ............................ (3,215) 3,051 Other items - net ................................. 7,069 10,685 --------- --------- Total operating activities .................. 173,152 143,040 Investing activities: Capital expenditures ................................ (45,976) (48,365) Acquisitions and investments in nonconsolidated companies ......................................... (69,438) (14,989) Other - net ......................................... 2,882 (1,335) --------- --------- Total investing activities .................. (112,532) (64,689) Financing activities: Net short-term borrowings,(repayments) .............. 6,715 (2,824) Long-term repayments ................................ (1,654) (2,044) Dividends paid ...................................... (40,043) (39,927) Proceeds from termination of interest rate swaps .... 18,134 -- Common shares purchased ............................. -- (30,039) Stock options exercised ............................. 8,203 21,410 --------- --------- Total financing activities .................. (8,645) (53,424) Effect of exchange rate changes on cash ............... 8,485 (2,199) --------- --------- Net increase in cash and short-term investments ....... 60,460 22,728 Cash and short-term investments at beginning of period 189,095 145,937 --------- --------- Cash and short-term investments at end of period ...... $ 249,555 $ 168,665 ========= =========
Amounts shown are unaudited. 4 THE LUBRIZOL CORPORATION Notes to Consolidated Financial Statements Amounts in thousands (except per share data) September 30, 2002 1. The accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of September 30, 2002 and December 31, 2001, and the results of operations and cash flows for the applicable periods ended September 30, 2002 and 2001. 2. Net income per share is computed by dividing net income by average common shares outstanding during the period, including contingently issuable shares. Net income per diluted share includes the dilutive effect resulting from outstanding stock options and stock awards. Per share amounts are computed as follows:
Third Quarter Ended Nine Month Period Ended September 30 September 30 -------------------- ------------------------- 2002 2001 2002 2001 ------- ------- -------- ------- Numerator: Net income before cumulative effect of change in accounting principle $36,478 $22,797 $100,782 $73,318 Cumulative effect of change in accounting principle -- -- (7,785) -- ------- ------- -------- ------- Net income available to common shareholders $36,478 $22,797 $ 92,997 $73,318 ======= ======= ======== ======= Denominator: Weighted average common shares outstanding 51,569 51,121 51,475 51,202 Dilutive effect of stock options and awards 172 439 323 290 ------- ------- -------- ------- Denominator for net income per share, diluted 51,741 51,560 51,798 51,492 ======= ======= ======== ======= Net Income Per Share: Net income before cumulative effect of change in accounting principle $ 0.71 $ 0.45 $ 1.96 $ 1.43 Cumulative effect of change in accounting principle -- -- (0.15) -- ------- ------- -------- ------- Net income per share $ 0.71 $ 0.45 $ 1.81 $ 1.43 ======= ======= ======== ======= Diluted Net Income Per Share: Net income before cumulative effect of change in accounting principle $ 0.71 $ 0.44 $ 1.95 $ 1.42 Cumulative effect of change in accounting principle -- -- (0.15) -- ------- ------- -------- ------- Net income per share, diluted $ 0.71 $ 0.44 $ 1.80 $ 1.42 ======= ======= ======== =======
5 THE LUBRIZOL CORPORATION Notes to Consolidated Financial Statements Amounts in thousands (except per share data) September 30, 2002 Weighted average shares issuable upon the exercise of stock options which were excluded from the diluted earnings per share calculations because they were antidilutive for the three- and nine-month periods ended September 30, 2002 were 3.7 million and 1.9 million, respectively, and for the three- and nine-month periods ended September 30, 2001 were 1.2 million and 1.9 million, respectively. 3. Total comprehensive income for the three- and nine-month periods ended September 30, 2002 and 2001 is comprised as follows:
Third Quarter Period Nine Month Period Ended September 30 Ended September 30 --------------------------- --------------------------- 2002 2001 2002 2001 -------- -------- --------- --------- Net income $ 36,478 $ 22,797 $ 92,997 $ 73,318 Foreign currency translation adjustment 767 14,692 26,492 (5,652) Cumulative effect of accounting change -- -- -- (1,314) Unrealized gains (losses) interest rate swaps (836) (1,327) (957) (1,683) --------- --------- --------- --------- Total comprehensive income $ 36,409 $ 36,162 $ 118,532 $ 64,669 ========= ========= ========= =========
4. Beginning in 2002, the company reorganized its product lines into four principal operating segments: fluid technologies for transportation, fluid technologies for industry, advanced fluid systems and emulsified products. Accordingly, the segment information for prior years has been restated to conform to the current operating structure. Fluid technologies for transportation (FTT) is comprised of additives for lubricating engine oils, such as 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, this segment sells additive components and viscosity improvers within its lubricant and fuel additives product lines. The company's fluid technologies for transportation product lines are generally produced in shared company manufacturing facilities and sold largely to a common customer base. Fluid technologies for industry (FTI) includes industrial additives, such as additives for hydraulic, grease and metalworking fluids and compressor lubricants; and performance chemicals, such as additives for coatings and inks, defoamers and process chemicals. The advanced fluid systems and emulsified products operating segments do not constitute reportable business segments. The results of these two operating segments have been aggregated into the all other segment. Advanced fluid systems is comprised of fluid metering devices, particulate emission trap devices, and FluiPak(TM) sensor systems, and emulsified products is comprised of PuriNOx(TM) low-emissions diesel fuel. The company evaluates performance and allocates resources based on segment contribution income, defined as 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, and excess production capacity costs in arriving at segment operating profit before tax. 6 THE LUBRIZOL CORPORATION Notes to Consolidated Financial Statements Amounts in thousands (except per share data) September 30, 2002 The following table presents a summary of the company's reportable segments for the three- and nine-month periods ended September 30, 2002 and 2001 based on the current reporting structure.
Third Quarter Period Nine Month Period Ended September 30 Ended September 30 ----------------------------- ------------------------------ 2002 2001 2002 2001 ---------- ---------- ----------- ---------- Revenues from external customers: FTT $ 400,892 $ 381,943 $1,188,032 $1,158,247 FTI 102,472 75,196 279,181 229,232 All other 6,939 5,287 18,986 17,380 ---------- ---------- ---------- ---------- Total revenues $ 510,303 $ 462,426 $1,486,199 $1,404,859 ========== ========== ========== ========== Segment contribution income(loss): FTT $ 84,663 $ 72,837 $ 243,784 $ 215,846 FTI 18,773 11,868 53,146 36,044 All other (2,336) (3,682) (7,264) (12,040) ---------- ---------- ---------- ---------- Total segment contribution income $ 101,100 $ 81,023 $ 289,666 $ 239,850 ========== ========== ========== ========== Segment operating profit(loss) before tax: FTT $ 45,178 $ 35,639 $ 126,895 $ 112,099 FTI 13,366 7,413 36,727 23,396 All other (2,437) (4,308) (7,711) (12,957) ---------- ---------- ---------- ---------- Total segment operating profit before tax 56,107 38,744 155,911 122,538 Interest expense - net (3,995) (4,464) (11,936) (13,865) ---------- ---------- ---------- --------- Consolidated income before tax and cumulative effect of an accounting change $ 52,112 $ 34,280 $ 143,975 $ 108,673 ========== ========== ========== ========== Segment total assets: FTT $1,125,351 $1,142,885 FTI 303,169 214,508 All other 23,007 30,708 ---------- ---------- Total segment assets $1,451,527 $1,388,101 Corporate assets 370,397 319,648 ---------- ---------- Total consolidated assets $1,821,924 $1,707,749 ========== ==========
7 THE LUBRIZOL CORPORATION Notes to Consolidated Financial Statements Amounts in thousands (except per share data) September 30, 2002 5. Effective January 1, 2002, the company began accounting for the investment in its India joint venture, Lubrizol India Private Limited, through consolidation because an amendment to the joint venture agreement gave the company control as of that date. The company has ownership of 50% of the voting shares. The amended joint venture agreement grants the company the authority to appoint three of Lubrizol India's six board directors and the unilateral and perpetual ability to appoint its managing director. Further, the amended joint venture agreement delegates to the managing director the authority to make all significant decisions to run the day-to-day business of Lubrizol India. The company had previously accounted for its investment under the equity method of accounting because the company's joint venture partner held certain substantive participating rights, which were eliminated with the amendment to the joint venture agreement. The change to consolidate Lubrizol India had the effect of increasing revenues and total cost and expenses by $13.1 million and $8.9 million, respectively, for the three month period ended September 30, 2002 and by $38.6 million and $31.2 million, respectively, for the nine month period ended September 30, 2002. The change had no impact on net income. 6. Effective January 1, 2002, the company adopted Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets." Under SFAS 142, goodwill and other intangibles determined to have indefinite lives will no longer be amortized but will be tested for impairment upon adoption and at least annually thereafter. In connection with adopting SFAS 142, the company also reassessed the useful lives and the classification of its intangible assets. The major components of the identifiable intangible assets are technology, land use rights, non-compete agreements, distributor networks, trademarks and patents. Excluding the unpatented technology and non-amortized trademarks, which are indefinite and will not be amortized, the intangible assets will continue to be amortized over the lives of the agreements, which range between five and forty years. The following table shows the components of identifiable intangible assets as of September 30, 2002 and December 31, 2001.
As of September 30, 2002 As of December 31, 2001 ------------------------------- --------------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization -------- ------------ -------- ------------ Amortized intangible assets: Technology $30,095 $14,827 $30,095 $12,973 Land use rights 6,990 329 6,990 202 Non-compete agreements 5,511 1,147 711 682 Distributors network 3,000 71 -- -- Trademarks 2,211 653 2,211 378 Other 2,736 496 1,784 287 ------- ------- ------- ------- Total amortized intangible assets 50,543 17,523 41,791 14,522 Non-amortized trademarks 7,021 5 21 5 ------- ------- ------- ------- Total $57,564 $17,528 $41,812 $14,527 ======= ======= ======= =======
8 THE LUBRIZOL CORPORATION Notes to Consolidated Financial Statements Amounts in thousands (except per share data) September 30, 2002 Amortization expense for intangible assets for the three- and nine-month periods ended September 30, 2002 was $1.2 million and $3.0 million, respectively, and for the three- and nine-month periods ended September 30, 2001 was $3.5 million and $10.6 million, respectively. The company is currently in the process of finalizing the allocation of the purchase price for the Chemron Corporation and Kabo Unlimited, Inc. acquisitions, so it is possible the amount of amortization or the estimated purchase price allocation may change. Amortization expense for the full year 2002 is estimated to be in the range of $4.0 to $4.5 million. Excluding the impact of further acquisitions, estimated annual intangible amortization expense for each of the next four years should approximate $4.3 million per year. SFAS 142 provides for a six month period from the date of adoption for the company to perform an assessment of potential impairment of goodwill. Any impairment identified upon adoption is to be recognized as a cumulative effect of a change in accounting principle effective as of January 1, 2002. Goodwill is tested for impairment at the reporting unit level. The company has determined the reporting units will be the same as its four operating segments, since the component businesses have similar economic characteristics and can thus be combined under the aggregation rules. The company determined the carrying value of each operating segment by assigning the company's assets and liabilities to them, including existing goodwill, as of January 1, 2002. The company then determined the implied fair value of each operating segment by using a combination of discounted cash flow analysis and terminal value calculations. The fair value of each operating segment was compared to its carrying value to determine if there was an indication of impairment. This evaluation indicated that goodwill recorded in the advanced fluid systems operating segment was impaired as of January 1, 2002. The economic conditions at the time of impairment testing, including declining revenues, reduced the estimated future expected performance of this operating segment, which includes the small equipment businesses the company acquired in fluid metering and particulate traps. Accordingly, the company recognized a transitional impairment charge of $7.8 million retroactive to January 1, 2002 in the all other reporting segment, which includes advanced fluid systems. This is a non-cash charge and was recorded as a cumulative effect of a change in accounting principle on the Consolidated Statement of Income for the nine month period ended September 30, 2002. There was no tax benefit associated with this charge. SFAS 142 also requires goodwill to be tested annually and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting segment below its carrying amount. The company has elected to perform its annual tests for potential goodwill impairment as of October 1st of each year. Subsequent impairment losses, if any, will be reflected in income from continuing operations. The carrying amount of goodwill by reporting segment is as follows:
FTT FTI All Other Total --------- --------- --------- --------- Balance, December 31, 2001 $ 42,755 $ 88,850 $ 7,668 $ 139,273 Goodwill acquired -- 27,338 -- 27,338 Transitional impairment charge -- -- (7,785) (7,785) Translation & other adjustments 1,373 1,012 117 2,502 --------- --------- --------- --------- Balance, September 30, 2002 $ 44,128 $ 117,200 $ -- $ 161,328 ========= ========= ========= =========
9 THE LUBRIZOL CORPORATION Notes to Consolidated Financial Statements Amounts in thousands (except per share data) September 30, 2002 In accordance with SFAS 142, the company discontinued the amortization of goodwill and certain trademarks effective January 1, 2002. The following table reconciles the company's net income and earnings per share for the three- and nine-month periods ended September 30, 2002 and 2001. The prior year results have been adjusted to exclude goodwill amortization expense. Current period results include an adjustment for the cumulative effect of a change in accounting principle for the transitional impairment loss under SFAS 142 and are presented for comparative purposes.
Third Quarter Period Nine Month Period Ended September 30 Ended September 30 --------------------------------- ---------------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Reported net income $ 36,478 $ 22,797 $ 92,997 $ 73,318 Add Goodwill & trademark amortization, net of tax -- 1,834 -- 5,567 Cumulative effect of a change in accounting principle -- -- 7,785 -- ----------- ----------- ----------- ----------- Pro forma adjusted net income $ 36,478 $ 24,631 $ 100,782 $ 78,885 =========== =========== =========== =========== Reported net income per share $ 0.71 $ 0.45 $ 1.81 $ 1.43 Add: Goodwill & trademark amortization, net of tax -- 0.04 -- 0.11 Cumulative effect of a change in accounting principle -- -- 0.15 -- ----------- ----------- ----------- ----------- Pro forma adjusted net income per share $ 0.71 $ 0.49 $ 1.96 $ 1.54 =========== =========== =========== =========== Reported net income per share, diluted $ 0.71 $ 0.44 $ 1.80 $ 1.42 Add: Goodwill & trademark amortization, net of tax -- 0.04 -- 0.11 Cumulative effect of a change in accounting principle -- -- 0.15 -- ----------- ----------- ----------- ----------- Pro forma adjusted net income per share, diluted $ 0.71 $ 0.48 $ 1.95 $ 1.53 =========== =========== =========== ===========
10 THE LUBRIZOL CORPORATION Notes to Consolidated Financial Statements Amounts in thousands (except per share data) September 30, 2002 7. In June 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligations," which will become effective for the company on January 1, 2003. This statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. Asset retirement obligation refers to an obligation associated with the retirement of a tangible long-lived asset. The amount recorded as a liability will be capitalized by increasing the carrying amount of the related long-lived asset. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss. The company has not determined the impact, if any, that SFAS 143 will have on its consolidated financial position or results of operations. 8. On July 24, 2002, the company terminated its interest rate swap agreements expiring December 2008, which converted fixed rate interest on $100 million of 5.875% debentures to a variable rate. Gains and losses on terminations of interest rate swap agreements designated as fair value hedges are deferred as an adjustment to the carrying amount of the outstanding obligation and amortized as an adjustment to interest expense related to the obligation over the remaining term of the original contract life of the terminated swap agreement. In the event of early extinguishment of the outstanding obligation, any unamortized gain or loss from the swaps would be recognized in the consolidated statement of operations at the time of such extinguishment. In terminating the swaps, the company received cash of $18.1 million, which will be amortized as a reduction of interest expense through December 1, 2008, the due date of the underlying debt. The company recorded a $17.3 million unrealized gain, net of accrued interest, on the termination of the interest rate swaps as an increase in the underlying long-term debt. The carrying value of the unrealized gain at September 30, 2002 is $16.8 million. 11 THE LUBRIZOL CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS We achieved record consolidated revenues in the third quarter of 2002, primarily due to higher shipment volume from the consolidation of Lubrizol India Private Limited and the favorable impact of acquisitions of Chemron Corporation and Kabo Unlimited, Inc. Lower average raw material cost combined with lower per-unit manufacturing cost (manufacturing costs per metric ton sold), as well as an increase in ongoing volume, resulted in higher gross profit margin in the third quarter of 2002 compared with the same period in 2001. The increased margin, elimination of goodwill amortization and a lower effective tax rate, partially offset by increased STAR (selling, testing, administrative and research) expenses resulted in increased net income in the third quarter of 2002 compared with the same period in 2001. We group our product lines into three reportable segments: fluid technologies for transportation, fluid technologies for industry and all other, which is comprised of advanced fluid systems and emulsified products. Fluid technologies for transportation comprised approximately 80% of our consolidated revenues and 81% of our segment pre-tax operating profits for the first nine months of 2002. This discussion and analysis of our financial condition and results of operations is primarily focused on the company as a whole, since we believe this provides the most appropriate understanding of our business. See Note 4 to the financial statements for additional financial disclosures by reporting segment. Our consolidated revenues increased $47.9 million, or 10%, in the third quarter of 2002 compared with the same period in 2001 and increased $81.3 million, or 6%, in the first nine months of 2002 compared with 2001. The increase in the third quarter of 2002 compared with the same period in 2001 was due to 13% higher volume (3% higher volume excluding acquisitions and the consolidation of Lubrizol India), partially offset by a 3% decrease in average selling price. The increase for the first nine months of 2002 compared with the same period in 2001 was due to 10% higher volume (3% excluding acquisitions and the consolidation of Lubrizol India), partially offset by a 4% decline in average selling price. Excluding acquisitions and the consolidation of Lubrizol India, revenues increased $16.9 million, or 4%, in the third quarter of 2002 and $6.9 million, or 1%, in the first nine months of 2002 compared with the same periods in 2001. Fluid technologies for transportation revenues increased $18.9 million, or 5%, in the third quarter of 2002 and increased $29.8 million, or 3%, in the first nine months of 2002, compared with the same periods in 2001. The increases in both the third quarter and the first nine months of 2002 were primarily due to the consolidation of Lubrizol India, as well as an increase in ongoing shipment volume, partially offset by lower average selling price. Fluid technologies for industry revenues increased $27.3 million, or 36%, in the third quarter of 2002 and $49.9 million, or 22%, in the first nine months of 2002 compared with the same periods in 2001. The increases in revenues for this segment were primarily due to the Chemron and Kabo acquisitions, along with growth in the other businesses in this segment. The organic growth in this segment is due to strengthening markets compared with a year ago, particularly in coatings and inks and metalworking, as well as the introduction of new products in both of these areas. The revenues of the all other segment increased $1.7 million, or 31%, in the third quarter of 2002 and $1.6 million, or 9%, in the first nine months of 2002, compared with the same periods in 2001. 12 THE LUBRIZOL CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Changes in our shipment volume vary by geographic area. The following table shows our third quarter 2002 and first nine months of 2002 shipment volume by geographic area as well as the corresponding changes compared with same periods in 2001.
3rd Quarter Year-to-date 2002 Increase 2002 Increase Volume (Decrease) Volume (Decrease) ------ ---------- ------ ---------- North America 47% 26% 46% 19% Europe, Middle East 29% 4% 29% 6% Asia-Pacific 18% 5% 19% 7% Latin America 6% (3%) 6% (9%) --- --- Total 100% 13% 100% 10%
The increases in North America and Europe were due to the strengthening of our business with major fluid technologies for transportation customer accounts for engine oils and specialty driveline additives, the strengthening of our fluid technologies for industry markets, including coatings and inks and metalworking and the acquisitions of Chemron and Kabo. Excluding these acquisitions, North American shipment volume increased 10% in the third quarter and 8% in the first nine months of 2002. We believe that the North American growth rate for fluid technologies for transportation lubricant additives will return to lower, historical levels in 2003. Asia-Pacific volume, excluding the consolidation of Lubrizol India, decreased 10% in the third quarter and 8% in the first nine months of 2002. The decline in ongoing Asian volume was primarily the result of business lost in Japan in mid-2001 and the weak business environment and competitive intensity in Asia. Latin America, our smallest zone, experienced volume declines as the result of economic conditions, timing of orders and some business losses after the first quarter of 2001 due to price increases. In 2003, we anticipate that our volume will be affected by the loss of a portion of our business with a customer as a result of an oil industry merger. However, we believe this company will continue to be among our top ten customers during 2003. Our average selling price decreased 3% in the third quarter of 2002 and 4% for the first nine months of 2002, compared with the same periods in 2001. In the third quarter of 2002, the combination of price and product mix declined 5% from the third quarter of 2001, partially offset by 2% favorable currency effects, due mainly to the weakening of the dollar against the euro and the yen. Approximately half of the decline of price and product mix is a result of the Chemron acquisition made in April of this year, due to its lower priced product mix. In the first nine months of 2002, the combination of price and product mix declined 4% and there were minimal currency effects. Sequentially, third quarter 2002 average selling price was 1% higher than the second quarter of 2002, due to 2% favorable currency impact partially offset by a 1% decline in the combination of price and product mix. The Chemron acquisition also contributed to the sequential decrease in average selling price. Royalties and other revenues decreased $.4 million, or 34%, in the third quarter of 2002 and decreased $1.5 million, or 37%, in the first nine months of 2002, compared with the same periods in 2001. The decrease was primarily due to the consolidation of Lubrizol India, effective January 1, 2002, as royalties from India are eliminated when reporting consolidated results. 13 THE LUBRIZOL CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Our cost of sales for the third quarter of 2002 increased $26.0 million, or 8% ($2.0 million, or 1%, excluding acquisitions and the consolidation of Lubrizol India), compared with the third quarter of 2001. In the first nine months of 2002, our cost of sales increased $34.3 million, or 3% (decreased $25.9 million, or 3%, excluding acquisitions and the consolidation of Lubrizol India), compared with the first nine months of 2001. The increases for the quarter and the first nine months were due to higher shipment levels and higher manufacturing costs, partially offset by a decrease in average raw material cost. Average raw material cost decreased 4% in the third quarter of 2002, compared with the same period in 2001, due to a 5% decline in the combination of raw material prices and product mix, partially offset by 1% unfavorable currency effects. Average raw material cost decreased 7% in the first nine months of 2002, compared with the same period in 2001, due to the combination of lower material prices and product mix changes. Manufacturing costs were 10% higher for the 2002 third quarter and 5% higher for the first nine months of 2002, compared to the same periods in 2001. The increase in manufacturing costs for the third quarter was due to higher volume, unfavorable currency effects and higher salary compensation costs, consisting of variable pay, salaries and employee benefit costs, partially offset by lower utility and environmental expenses. The increase in manufacturing costs for the first nine months was due to higher volume and higher compensation costs, partially offset by lower utility and environmental expenses. Excluding acquisitions and the consolidation of Lubrizol India, manufacturing costs increased $2.0 million, or 2%, in the third quarter and decreased $3.0 million, or 1%, in the first nine months of 2002 compared with the same periods in 2001. Even though total manufacturing costs were up, unit manufacturing cost was down 4% for the third quarter of 2002 and down 5% for the first nine months of 2002, compared with the same periods of 2001, primarily due to productivity improvements, lower utility costs and increased volume. Sequentially, average raw material cost in the third quarter of 2002 increased 1% from the second quarter of 2002 and was even with the first quarter of 2002. We believe raw material prices will increase further in the fourth quarter as a result of five sequential base-oil increases that occurred between the end of April 2002 and the middle of October 2002, along with increases in other raw materials that have been announced. Base oil prices have increased 24 percent over the last six months. Approximately half of our global sales are costed on a first-in-first-out (FIFO) basis, which produces a lag before raw material price changes are reflected in our average raw material cost in the income statement. To recover the rapidly rising oil and petrochemical feedstock costs that are impacting our business, we recently announced an additive price increase in our fluid technologies for transportation segment to take effect over the next few months. Gross profit (net sales less cost of sales) increased $22.4 million, or 17%, in the third quarter of 2002 and increased $48.6 million, or 13% in the first nine months of 2002, compared with the same periods in 2001. Excluding acquisitions and the consolidation of Lubrizol India, gross profit increased $14.7 million, or 11%, in the third quarter of 2002 and increased $32.5 million, or 8%, in the first nine months of 2002, compared with the same periods in 2001. The increases were because the effect of higher volume and lower raw material costs more than offset the increased manufacturing costs and lower selling prices. Fluid technologies for transportation gross profit increased $15.2 million, or 14%, for the third quarter of 2002 and $36.7 million, or 11%, for the first nine months of 2002 compared with the same periods in 2001 for the same reasons 14 THE LUBRIZOL CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations previously described. Fluid technologies for industry gross profit increased $7.3 million, or 27%, in the third quarter of 2002 and $14.6 million, or 18%, for the first nine months of 2002 compared with the same periods in 2001 for the same reasons previously described. The all other segment gross profit increased $.9 million, or 91%, for the third quarter of 2002 and $1.2 million, or 34%, for the first nine months of 2002 compared with the same periods of 2001. The increases in the all other segment were primarily due to higher volume and lower total material costs. In calculating gross profit at the reporting segment level for internal management reporting, we exclude excess production capacity from product costs. Our gross profit percentage (gross profit divided by net sales) was 29.6% in the third quarter of 2002 (as compared with 27.8% in the 2001 third quarter) and 29.1% in the first nine months of 2002 (as compared with 27.4% in the same period of 2001) for the reasons stated above. Excluding the impact of the consolidation of Lubrizol India and acquisitions, our gross profit percentage was 29.9% in the third quarter of 2002 and 29.5% in the first nine months of 2002. Sequentially, the gross profit percentage increased slightly from 28.7% in the second quarter of 2002. Selling and administrative expenses increased $6.9 million, or 16%, for the third quarter of 2002 and increased $15.3 million, or 12%, in the first nine months of 2002 compared with the same periods in 2001. Excluding acquisitions and the consolidation of Lubrizol India, selling and administrative expenses increased $5.7 million or 13% for the third quarter of 2002 and increased $12.2 million, or 9%, in the first nine months of 2002 compared with the same periods in 2001. Excluding acquisitions and the consolidation of Lubrizol India, the increases for both the third quarter and first nine months of 2002 were primarily due to higher salary compensation costs, consisting of variable pay, salaries and employee benefit costs for existing businesses and incremental staffing and other costs associated with our strategy to expand into new markets. In addition, the first quarter of 2002 included a $2.0 million accrual for a contract claim related to an employee offsite personal injury. Our research, testing and development expenses (technology expenses) increased $.3 million, or less than 1%, for the third quarter of 2002 and increased $4.8 million, or 4%,in the first nine months of 2002 compared with the same periods in 2001. Excluding acquisitions and the consolidation of Lubrizol India, technology expenses decreased $.1 million in the third quarter of 2002 and increased $4.4 million, or 4%, in the first nine months of 2002, compared with the same periods in 2001. Technology expenses were higher in the third quarter and the first nine months of 2002, primarily as a result of three engine oil programs. The first program pertains to the upcoming U.S. passenger car motor oil technical standard, GF-4. This new standard was originally slated for commercial introduction in the third quarter of 2003, but has been delayed one year to late 2004. Even though the GF-4 program introduction has been delayed, we continued our work on the program during the third quarter. The second program pertains to the European program for reduced emission targets for both diesel and passenger car applications (Euro IV), slated for official introduction in 2005. The third program pertains to the next U.S. diesel engine oil specification, PC-9. Even though this new specification was formally introduced in the third quarter of 2002, we began testing customer-specific versions of North American PC-9 diesel additives that are designed to be compatible with part-synthetic base stocks. 15 THE LUBRIZOL CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations The change in other income (expense) favorably affected pre-tax income by $2.7 million in the third quarter of 2002 and by $6.4 million in the first nine months of 2002, compared with the same periods in 2001. Beginning in 2002, this line item no longer includes amortization of goodwill or equity income from Lubrizol India. Goodwill amortization expense was approximately $1.8 million in the third quarter of 2001 and $5.6 million for the first nine months of 2001. Equity income for Lubrizol India was $.9 million in the third quarter of 2001 and $2.0 million for the first nine months of 2001. The remaining variance was primarily due to lower levels of foreign exchange and joint venture losses, partially offset by an increase in the minority interest in our consolidated joint ventures. Interest income increased $.5 million in the third quarter of 2002 and $.4 million in the first nine months of 2002, compared with the same periods in 2001. The increases were primarily due to higher level of cash investments in 2002, partially offset by lower interest rates. Interest expense in the third quarter was about even with the same period in 2001 and decreased $1.5 million in the first nine months of 2002, compared with the same period in 2001, due to lower interest rates. As a result of the above factors, our income before income taxes and before the cumulative effect of an accounting change increased 52% to $52.1 million in the third quarter of 2002 and increased 32% to $144.0 million for the first nine months of 2002, compared with the same periods in 2001. Segment operating profit before tax, which excludes interest expense and the cumulative effect of an accounting change, increased for fluid technologies for transportation by $9.5 million, or 27%, for the 2002 third quarter and increased $14.8 million, or 13%, for the first nine months of 2002, compared with the same periods in 2001. The year-to-date increase was due to higher revenues and lower raw material costs, partially offset by higher manufacturing and technical expenses. Segment operating profit before tax for fluid technologies for industry increased $6.0 million, or 80%, in the third quarter of 2002 and $13.3 million, or 57%, in the first nine months of 2002, compared with the corresponding periods in 2001. These increases were due to higher revenues and the accounting change for goodwill amortization. The elimination of goodwill amortization, effective January 1, 2002, benefited this segment by approximately $1.4 million for the third quarter of 2002 and by $4.8 million for the first nine months of 2002. Segment operating loss before tax for the all other segment decreased $1.9 million, or 43%, in the third quarter of 2002 and $5.2 million, or 40%, in the first nine months of 2002, compared with the same periods in 2001. These decreases were primarily due to increased revenues, lower levels of equity losses and the elimination of goodwill amortization in 2002. We had an effective tax rate of 30.0% for both the third quarter and first nine months of 2002, compared with 33.5% and 32.5% for the corresponding periods in 2001. The lower effective tax rate in 2002 was primarily due to the U.S. tax benefit from a charitable contribution of technology made in 2002 that did not occur in 2001, along with the elimination of book goodwill amortization pursuant to the new accounting standard. We expect our effective tax rate for 2003 will be higher than the 2002 rate, due to the absence of the 2002 donation of technology to a non-profit organization. 16 THE LUBRIZOL CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations The changes in currency exchange rates were favorable during the third quarter of 2002 and slightly unfavorable during the first nine months of 2002 compared with the same periods in 2001. As a result of the factors described above, net income increased $13.7 million, or 60%, for the third quarter of 2002 and net income before the cumulative effect of an accounting change increased $27.4 million, or 37%, for the first nine months of 2002, compared with the same periods in 2001. Net income per share was $.71 for the third quarter and net income per share, before the cumulative effect of an accounting change, was $1.96 for the first nine months of 2002, compared with $.45 and $1.43 for the corresponding periods in 2001. In the second quarter of 2002, we completed the impairment analysis required for Statement of Financial Accounting Standards 142 (SFAS 142), "Goodwill and Other Intangible Assets," which we adopted on January 1, 2002. Goodwill was tested for impairment by comparing the fair value of each operating segment to its carrying value as of January 1, 2002. There was no impairment either in the fluid technologies for transportation or the fluid technologies for industry operating segments. However, for the advanced fluid systems operating segment, which is included in the all other reporting segment, we recorded an impairment of $7.8 million, thus eliminating all the goodwill for the all other reporting segment. The charge was recorded as a cumulative effect of an accounting change in 2002. After adjusting net income for the cumulative effect of an accounting change, net income for the first nine months of 2002 increased $19.7 million, or 27%, compared with the first nine months of 2001. Net income per share was $1.81 for the first nine months of 2002, compared with $1.43 for the same period in 2001. WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES Cash provided from operating activities was $173.2 million for the first nine months of 2002 as compared with $143.0 million for the same period of 2001. The increase of $30.1 million in 2002 was primarily due to higher earnings and a $13.2 million favorable change in working capital items (current assets and liabilities) because of continued strong receivable management, partially offset by higher inventory levels and the timing of payment of current liabilities. The higher inventory levels were primarily due to the consolidation of Lubrizol India, which did not effect cash flow. Our capital expenditures in the first nine months of 2002 were $46.0 million, compared with $48.4 million for same period in 2001. The slower spending pattern in 2002 reflects timing of projects. We estimate capital spending for the full year 2002 to be in the range of $65 million to $70 million, compared with actual spending in 2001 of $66.3 million. We completed an acquisition in each of the first and second quarters of 2002 for a total of $69 million. In the first quarter, we purchased Kabo Unlimited, Inc., which specializes in the development, manufacture and sale of antifoam and defoaming agents to the food, fermentation, mining and wastewater industries. Kabo's product lines expand the defoamer offering and capabilities of our fluid technologies for industry segment. In the second quarter of 2002, we purchased Chemron Corporation, which formulates, produces and supplies specialty surfactants used in personal care products, industrial cleaners and a wide range of other consumer and industrial products. The acquisition extends Lubrizol's 17 THE LUBRIZOL CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations existing surfactants business into growth markets where it had not previously competed. During 2001, the annual revenues of Kabo and Chemron were approximately $14 million and $55 million, respectively. In the fourth quarter of 2002, we completed two acquisitions in our fluid technologies for industry segment for approximately $18 million. In October 2002, we acquired Dock Resins, which develops, manufactures and sells proprietary polymers including acrylic, methacrylic, alkyd, and polyester resins to customers in the paint and coatings, printing ink, laminating, adhesives and sealants, and grease markets. In October 2002, we also acquired Intermountain Specialties Inc., more commonly known in the defoamer industry as Brose Chemical Company. Brose's product lines complement our integrated foam control business and will be manufactured in our Kabo foam control facility. Annual revenues for Dock and Brose are approximately $17 million in the aggregate. Our net debt to capitalization ratio at September 30, 2002 was 18%, compared with 23% at December 31, 2001. 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 and excluding unrealized gains and losses on derivative instruments designated as fair value hedges of fixed rate debt. Capitalization is shareholders' equity plus net debt. Debt as a percent of capitalization, without adjusting for cash, was 31% at September 30, 2002, compared with 33% at December 31, 2001. On July 24, 2002 we terminated our interest rate swap agreements, which had converted the fixed interest rate on $100 million of 5.875% debentures to a variable rate. In terminating the swaps, we received cash of $18.1 million, which will be amortized as a reduction of interest expense through December 1, 2008, the due date of the underlying debt. We recorded a $17.3 million unrealized gain, net of accrued interest, on the termination of the interest rate swaps as an increase in the underlying long-term debt. The carrying value of the unrealized gain at September 30, 2002 is $16.8 million. Our share repurchase program has been suspended in the near term as we are holding our financial resources in reserve for future acquisitions. Primarily as a result of these activities and the payment of dividends, our balance of cash and short-term investments increased $60.5 million at September 30, 2002 compared with December 31, 2001. Our financial position remains strong with a ratio of current assets to current liabilities of 3.0 to 1 at September 30, 2002, which is slightly higher than the ratio at December 31, 2001 of 2.9 to 1. Effective July 16, 2002, we renewed $175 million of committed revolving credit facilities which mature July 15, 2003. On October 31, 2002, we terminated $50 million of committed credit facilities that would have matured on June 30, 2003. We also have $350 million of other existing facilities that mature on July 17, 2006. As a result, we have total available committed credit facilities of $525 million, which allow us to borrow at or below the U.S. prime rate. We believe our existing credit facilities, internally generated funds and ability to obtain additional financing, if desired, will be sufficient to meet our future capital needs, including acquisitions to expand into new and existing fluid technology markets. 18 THE LUBRIZOL CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. These 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. These 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 quarterly 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; - - 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; - - 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 overall economic uncertainty and weak business environment within the global economy; - - 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 ability to identify, complete and integrate acquisitions for profitable growth; - - 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, including those with affiliated lubricant additive companies, and retaining the business of our largest customers over extended time periods; 19 THE LUBRIZOL CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - - 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 risks 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. 20 THE LUBRIZOL CORPORATION Item 3. Quantitative and Qualitative Disclosures About Market Risk We operate manufacturing and blending facilities, laboratories and offices around the world and utilize fixed and variable 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. 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 our exposure to changes in foreign currency exchange rates is to reduce volatility on our 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. 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 had a favorable/unfavorable impact on fair values of $13.6 million, cash flows of $.2 million and income before tax of $.2 million as of September 30, 2002 and $20.2 million, $1.0 million and $1.0 million as of December 31, 2001. A quantitative and qualitative discussion about our market risk is contained on page 23 of our 2001 Annual Report to our shareholders. Other than the termination of our interest rate swaps agreements, there have been no material changes in the market risks faced by us since December 31, 2001. Item 4. Controls and Procedures Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-14c). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the evaluation date, our disclosure controls and procedures are effective in timely alerting them to material information relating to the company and its consolidated subsidiaries required to be included in our periodic SEC filings. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 21 THE LUBRIZOL CORPORATION Part II. Other Information Item 2. Changes in Securities and Use of Proceeds (c) On September 5, 2002, we issued 1,500 common shares in a private placement transaction exempt from registration under the Securities Act of 1933 pursuant to section 4(2) of that Act. We issued the shares to a consultant as partial payment for services rendered in accordance with a consulting contract. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: (10)(d)* The Lubrizol Corporation Excess Defined Benefit Plan, as amended 9/23/02. (10)(e)* The Lubrizol Corporation Excess Defined Contribution Plan, as amended 9/23/02. (10)(j)* The Lubrizol Corporation Officers' Supplemental Retirement Plan, as amended 9/23/02. * Indicates management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: During the quarter ended September 30, 2002, we filed a Current Report on Form 8-K dated August 2, 2002, reporting under "Item 5 - Other Events" our filing with the Securities and Exchange Commission sworn statements by the Chief Executive Officer and Chief Financial Officer pursuant to Section 21(a) of the Securities Exchange Act of 1934. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE LUBRIZOL CORPORATION /s/John R. Ahern ------------------------------------ John R. Ahern Chief Accounting Officer and Duly Authorized Signatory of The Lubrizol Corporation Date: November 12, 2002 22 THE LUBRIZOL CORPORATION Part II. Other Information CERTIFICATIONS I, William G. Bares, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Lubrizol Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ William G. Bares - -------------------------- William G. Bares Chief Executive Officer November 11, 2002 23 THE LUBRIZOL CORPORATION Part II. Other Information CERTIFICATIONS I, Charles P. Cooley, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Lubrizol Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Charles P. Cooley - -------------------------------- Charles P. Cooley Chief Financial Officer November 11, 2002 24 THE LUBRIZOL CORPORATION Certification of Chief Executive Officer and Chief Financial Officer of The Lubrizol Corporation Pursuant to 18 U.S.C. Section 1350 I certify that, to the best of my knowledge and belief, the Quarterly Report on Form 10-Q of The Lubrizol Corporation for the period ending September 30, 2002: (1) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of The Lubrizol Corporation. /s/ William G. Bares - ------------------------------- William G. Bares Chief Executive Officer November 11, 2002 I certify that, to the best of my knowledge and belief, the Quarterly Report on Form 10-Q of The Lubrizol Corporation for the period ending September 30, 2002: (1) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of The Lubrizol Corporation. /s/ Charles P. Cooley - --------------------------- Charles P. Cooley Chief Financial Officer November 11, 2002 25 EX-10.D 3 l96659aexv10wd.txt EXCESS DEFINED BENEFIT PLAN Exhibit (10)(d) THE LUBRIZOL CORPORATION EXCESS DEFINED BENEFIT PLAN (As Amended 9/23/02) The Lubrizol Corporation hereby establishes, effective as of January 1, 1986, The Lubrizol Corporation Excess Defined Benefit Plan (the "Plan") for the purpose of providing supplemental benefits to certain employees, as permitted by Section 3(36) of the Employee Retirement Income Security Act of l974. ARTICLE I DEFINITIONS AND CONSTRUCTION 1.1 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) 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. (b) 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, and any subsidiaries of The Lubrizol Corporation which adopt the Plan. (c) LUBRIZOL PENSION PLAN. The term "Lubrizol Pension Plan" shall mean The Lubrizol Corporation Revised Pension Plan as the same shall be in effect on the date of a Participant's retirement, death, or other termination of employment. (d) PARTICIPANT. Effective June 22, 1992, the term "Participant" shall mean any person employed by the Company who is listed on Appendix A attached hereto, or who is designated by the Board of Directors as an officer for the purposes of Section 16 of the Securities Exchange Act of 1934, or whose benefits under the Lubrizol Pension Plan are limited by the application of Section 401(a)(17) of the Internal Revenue Code of 1986, as amended. (e) PLAN. The term "Plan" shall mean the excess defined benefit pension plan as set forth herein, together with all amendments hereto, which Plan shall be called "The Lubrizol Corporation Excess Defined Benefit Plan." (f) TRUST. The term "Trust" shall mean The Lubrizol Corporation Excess Defined Benefit Plan Trust established pursuant to the Trust Agreement. (g) TRUST AGREEMENT. The term "Trust Agreement" shall mean The Lubrizol Corporation Excess Defined Benefit Plan Trust Agreement. 1.2. ADDITIONAL DEFINITIONS. All other words and phrases used herein shall have the meanings given them in the Lubrizol Pension Plan, unless a different meaning is clearly required by the context. ARTICLE II SUPPLEMENTAL PENSION BENEFIT 2.1 ELIGIBILITY. Effective January 1, 1997, A Participant who retires, dies, or otherwise terminates his employment with the Company and its subsidiaries and (a) whose benefits under the Lubrizol Pension Plan are limited by the provisions of Section 401(a)(17) or 415 of the Code, (b) who either was a Participant on January 1, 1989 or had attained age 55 on January 1, 1989, and thereafter became a Participant, and whose benefits under the Lubrizol Pension Plan are curtailed due to the revision of the pension benefit formula, effective as of January 1, 1989, to comply with the requirements of the Tax Reform Act of 1986, as amended, (c) who participated in The Lubrizol Corporation Deferred Compensation Plan for Officers (which was adopted effective July 25, 1994), or (d) who participated in The Lubrizol Corporation Executive Council Deferred Compensation Plan (which was adopted effective January 1, 1997) shall be eligible for a supplemental pension benefit determined in accordance with the provisions of Section 2.2. 2.2 AMOUNT. Effective January 1, 1997, subject to the provisions of Article III, the monthly supplemental pension benefit payable to an eligible Participant shall be an amount which when added to the monthly pension payable to such Participant under the Lubrizol Pension Plan (prior to any reduction applicable to an optional method of payment) equals the monthly pension benefit which would have been payable under the Lubrizol Pension Plan (prior to any reduction applicable to an optional method of payment and adjusted for any amount payable under The Lubrizol Corporation Excess Defined Contribution Plan which is attributable to The Lubrizol Corporation Employees' Profit-Sharing Plan and which would have affected the benefit that the Participant would have received under the Lubrizol Pension Plan had it been payable from The Lubrizol Corporation Employees' Profit-Sharing Plan) if the limitations of Section 401(a)(17) and 415 of the Code were not in effect and, (if he is a Participant described in Section 2.1(ii)), his benefits had not been curtailed due to the revision of the Lubrizol Pension Plan effective as of January 1989, to comply with the provisions of the Tax Reform Act of 1986, as amended, and, (if he is a Participant described in Section 2.1(iii)), if he did not participate in The Lubrizol Corporation Deferred Compensation Plan for Officers (which was adopted effective July 25, 1994) or in The Lubrizol Corporation Executive Council Deferred Compensation Plan (which was adopted effective January 1, 1997). 2.3 PAYMENT. The terms of payment of the supplemental pension benefit shall be identical to those specified in the Lubrizol Pension Plan for the type of benefit the Participant receives under the Lubrizol Pension Plan. 2.4 VESTING. Each Participant as of December 31, 1993, shall be 100 percent vested in his supplemental pension benefit determined in accordance with the provisions of Section 2.2. Each new Participant after December 31, 1993, shall be vested in his supplemental pension benefit under this Plan as determined in accordance with the vesting provisions of the Lubrizol Pension Plan. ARTICLE III PAYMENT OF BENEFITS 3.1 PAYMENT TO PARTICIPANT. (Effective November 27, 1995) (a) Each Participant who terminates employment with the Company and its related corporations shall receive payment of his supplemental pension benefit under the Plan determined as of his date of termination of employment in the standard form of benefit of a monthly retirement benefit commencing within 30 days following employment termination and payable to such Participant for his lifetime following such employment termination, 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 employment termination to receive the actuarial equivalent of the standard form of benefit determined under paragraph (a), on the date of employment termination, in accordance with any one of the following options: (i) for Participants hired prior to February 1, 1984, a single lump-sum payment payable within 30 days following employment termination; (ii) effective October 1, 2000, for Participants hired prior to February 1, 1984, a single lump-sum payment payable within 30 days following the end of the calendar year in which the Participant's employment terminated. 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 the employment termination. (iii) a reduced monthly retirement benefit commencing within 30 days following employment termination and payable to such Participant for his lifetime following such employment termination, with the continuance of a monthly benefit equal to fifty percent (50%) of such reduced amount after his death to the Participant's Beneficiary during the lifetime of the Beneficiary, provided that such Beneficiary is living at the time of such Participant's employment termination and survives such Participant; (iv) a reduced monthly retirement benefit commencing within 30 days following employment termination and payable to such Participant during his lifetime following his termination, with the continuance of a monthly benefit equal to one hundred percent (100%) of such reduced amount after his death to the Participant's Beneficiary during the lifetime of the Beneficiary, provided such Beneficiary is living at the time of such Participant's termination and survives such Participant. Such optional forms of payment described above shall be calculated using the same actuarial factors and interest rates used under The Lubrizol Corporation Pension Plan (or its successor) as in effect on the date of employment termination; provided, however, that for any person who was a Participant as of December 31, 1993, who elects to have his supplemental pension benefit paid in a single lump-sum payment, the interest rate used to discount the portion of the Participant's supplemental pension benefit which represents his accrued benefit as of December 31, 1993, shall be the arithmetic average of the 7-day compound yield rates for the six full calendar months prior to the month of termination as published in Donoghue's Tax-Free MONEY FUND AVERAGE which is reported weekly in BARRON'S; provided further that such rate with respect to any month shall be the rate reported in the first issue of BARRON'S published during such month. 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 employment termination. 3.2 PAYMENT IN THE EVENT OF DEATH PRIOR TO COMMENCEMENT OF DISTRIBUTION. 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 had retired on the day before his death and had elected to receive his benefit under the Lubrizol Pension Plan in a 50 percent joint and survivor annuity form. In making the determinations and reductions required in this Section 3.2, 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 3.2, if such spouse had been married to the deceased Participant for at least one year as of the date of the Participant's death. 3.3 SPECIAL FORM OF BENEFIT FOR E. VICTOR LUOMA. Notwithstanding the first sentence of Section 3.1, E. Victor Luoma may elect prior to his retirement or other termination of employment to receive payment of his supplemental pension benefit under the Plan in the form of a single sum amount, determined and payable in accordance with the second and third sentences of Section 3.1. 3.4 LUMP SUM FORM OF BENEFIT FOR ROGER Y. K. HSU. Effective January 1, 1996, notwithstanding the provisions of Section 3.1(b), Roger Y. K. Hsu shall receive payment of his supplemental pension benefit under the Plan in the form of a single sum amount. ARTICLE IV ADMINISTRATION (Effective 9/23/02) 4.1 AUTHORITY OF THE COMPANY. The Company shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making, or causing the Trust to make, any required supplemental benefit payments. The Company shall have all such powers as may be necessary to carry out the provisions of the Plan, including the power to determine all questions relating to eligibility for and the amount of any supplemental pension benefit and all questions pertaining to claims for benefits and procedures for claim review; to resolve all other questions arising under the Plan, including any questions of construction; and to take such further action as the Company shall deem advisable in the administration of the Plan. The Company may delegate any of its powers, authorities, or responsibilities for the operation and administration of the Plan to any person or committee so designated in writing by it and may employ such attorneys, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Company hereunder shall be final and binding upon all interested parties. 4.2 CLAIMS REVIEW PROCEDURE. The Company shall notify the person who files a claim for benefits (hereinafter referred to as the "Claimant") of the Plan's adverse benefit determination within a reasonable period of time, but not later than 90 days after the receipt of the claim by the Plan, unless the Company determines that special circumstances require an extension of time for processing the claim. If the Company determines that special circumstances require an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan expects to render the benefit determination. Whenever the Company decides for whatever reason to deny, whether in whole or in part, a claim for benefits filed by any Claimant, the Company shall transmit to the Claimant a written notice of the Company's decision, which shall be written in a manner calculated to be understood by the Claimant and contain a statement of the specific reasons for the denial of the claim, reference to the specific Plan provisions on which the determination was based, a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary, a description of the Plan's review procedures and the time limits applicable to such procedures, include a statement of the Claimant's right to bring civil action under Section 502(a) ERISA following an adverse benefit determination on review. Within 60 days of the date on which the Claimant receives such notice, he or his authorized representative may request that the claim denial be reviewed by filing with the Company a written request therefor, which request shall contain the following information: (a) the date on which the Claimant's request was filed with the Company; provided, however, that the date on which the Claimant's request for review was in fact filed with the Company shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (a); (b) the specific portions of the denial of his claim which the Claimant requests the Company to review; (c) a statement by the Claimant setting forth the basis upon which he believes the Company should reverse the Company's previous denial of his claim for benefits and accept his claim as made; and (d) any written comments, documents, records and other information which the Claimant desires the Company to examine in its consideration of his position as stated pursuant to paragraph (c). Claimant shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant's claim for benefits. The review of the claim will take into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. Within no later than 60 days of the date determined pursuant to paragraph (a) of this Section 4.2, the Company shall notify Claimant of the Plan's benefit determination, unless the Company determines that special circumstances require an extension of time for processing the claim. If the Company determines that an extension of time for processing is required, written notice of the extension will be furnished to the Claimant prior to the termination of the initial 60-day period. In no event shall such extension exceed a period of 60 days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan expects to render the determination on review. The Company shall provide the Claimant with a written notification of the Plan's benefit determination on review, written in a manner calculated to be understood by the Claimant, including the reasons and Plan provisions upon which its decision was based, a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claimant's claim for benefits, and a statement of the Claimant's right to bring an action under Section 502(a) of ERISA. ARTICLE V AMENDMENT AND TERMINATION 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. ARTICLE VI MISCELLANEOUS 6.1 NON-ALIENATION OF RETIREMENT RIGHTS OR BENEFITS. No Participant shall encumber or dispose of his right to receive any payments hereunder, which payments or the right thereto are expressly declared to be non-assignable and non-transferable. If a Participant attempts to assign, transfer, alienate or encumber his right to receive any payment hereunder or permits the same to be subject to alienation, garnishment, attachment. execution, or levy of any kind, then thereafter during the life of such Participant, and also during any period in which any Participant is incapable in the judgment of the Company of attending to his financial affairs, any payments which the Company is required to make hereunder may be made, in the discretion of the Company, directly to such Participant or to any other person for his use or benefit or that of his dependents, if any, including any person furnishing goods or services to or for his use or benefit or the use or benefit of his dependents, if any. Each such payment may be made without the intervention of a guardian, the receipt of the payee shall constitute a complete acquittance to the Company with respect thereto, and the Company shall have no responsibility for the proper allocation thereof. 6.2 PLAN NON-CONTRACTUAL. Nothing herein contained shall be construed as a commitment or agreement on the part of any person employed by the Company to continue his employment with the Company, and nothing herein contained shall be construed as a commitment on the part of the Company to continue the employment or the annual rate of compensation of any such person for any period, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been established. 6.3 TRUST. In order to provide a source of payment for its obligations under the Plan, the Company has established the Trust, the terms of which are governed by the Trust Agreement. 6.4 INTEREST OF A PARTICIPANT. Subject to the provisions of the Trust Agreement, the obligation of the Company under the Plan to provide a Participant with a supplemental pension benefit constitutes 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. 6.5 CONTROLLING STATUS. No Participant shall be eligible for a benefit under the Plan unless such Participant is a Participant on the date of his retirement, death, or other termination of employment. 6.6 CLAIMS OF OTHER PERSONS. The provisions of the Plan shall in no event be construed as giving any person, firm or corporation any legal or equitable right as against the Company, its officers, employees, or directors, except any such rights as are specifically provided for in the plan or are hereafter created in accordance with the terms and provisions of the Plan. 6.7 SEVERABILITY. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom. 6.8 GOVERNING LAW. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio. APPENDIX A TO THE LUBRIZOL CORPORATION EXCESS DEFINED BENEFIT PLAN Participants(1) Effective Date - --------------- -------------- 1. W. G. Bares December 31, 1986 2. G. R. Hill December 31, 1986 3. J. R. Ahern April 1, 1990 4. J. W. Bauer April 27, 1992 5. S. F. Kirk April 26, 1993 6. Y. Le Couedic April 26, 1993 7. J. E. Hodge April 26, 1993 8. M. W. Meister April 26, 1993 9. S. A. Di Biase April 26, 1993 10. G. P. Lieb April 25, 1994 11. L. M. Reynolds April 24, 1995 12. C. P. Cooley April 1, 1998 13. D. W. Bogus April 1, 2000 14. J. L. Hambrick May 1, 2000 15. G. R. Lewis April 23, 2001 16. R. S. Potter September 4, 2001 17. J. Wanstreet April 22, 2002 Former Participants(2) - --------------------- 1. P. L. Krug (R) 2. W. T. Beargie (R) 3. W. D. Manning (R) 4. R. W. Scher (R) 5. J. P. Arzul (D) 6. J. R. Cooper (R) 7. J. I. Rue (R) 8. R. J. Senz (T) 9. E. V. Luoma (R) 10. R. Y. K. Hsu (R) 11. L. E. Coleman (D) 12. J. G. Bulger (R) 13. D. A. Muskat (R) 14. W. R. Jones (R) 15. R. A. Andreas (R) 16. J. A. Thomas (R) 17. K. H. Hopping (R) 18. R. D. Robins (R) - -------- (1) This listing of Participants is limited to those Participants who are also officers for purposes of Section 16 of the Securities Exchange Act of 1934. (2) R = Retired, D = Deceased, T = Terminated. EX-10.E 4 l96659aexv10we.txt EXCESS DEFINED CONTRIBUTION PLAN Exhibit (10)(e) THE LUBRIZOL CORPORATION EXCESS DEFINED CONTRIBUTION PLAN (As Amended 9/23/02) The Lubrizol Corporation hereby establishes, effective as of December 31, 1986, The Lubrizol Corporation Excess Defined Contribution Plan (the "Plan") for the purpose of supplementing the benefits of certain employees, as permitted by Section 3(36) of the Employee Retirement Income Security Act of 1974. ARTICLE I DEFINITIONS 1.1 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 the person or persons who shall be designated by a Participant to receive distribution of such Participant's interest under the Plan in the event such Participant dies before full distribution of his interest. (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. Effective December 30, 1994, 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, and any subsidiaries of The Lubrizol Corporation which adopt the Plan. (d) FUND. The term "Fund" shall mean each separate investment fund established and maintained under the Trust Agreement. (e) LUBRIZOL PROFIT-SHARING PLAN. The term "Lubrizol Profit-Sharing Plan" shall mean The Lubrizol Corporation Employees' Profit-Sharing Plan as the same shall be in effect on the date of a Participant's retirement, death, or other termination of employment. (f) PARTICIPANT. Effective September 30, 1994, The term "Participant" shall mean any person employed by the Company who is listed on Appendix A attached hereto, or who is designated by the Board of Directors as an officer for the purposes of Section 16 of the Securities Exchange Act of 1934, or whose benefits under the Profit-Sharing Plan are limited by the application of Section 401(a)(17) of the Internal Revenue Code of 1986, as amended. (g) PLAN. The term "Plan" shall mean the excess defined contribution retirement plan as set forth herein, together with all amendments hereto, which Plan shall be called "The Lubrizol Corporation Excess Defined Contribution Plan." (h) PLAN YEAR. The term "Plan Year" shall mean the calendar year. (i) SUPPLEMENTAL COMPANY CONTRIBUTIONS. The term "Supplemental Company Contributions" shall mean the contributions made by the Company under the Plan in accordance with the provisions of Section 2.2. (j) TRUST AGREEMENT. The term "Trust Agreement" shall mean The Lubrizol Corporation Excess Defined Contribution Plan Trust Agreement. (k) TRUST ASSETS. The term "Trust Assets" shall mean all property held by the Trustee pursuant to the Trust Agreement. (l) TRUSTEE. The term "Trustee" shall mean the trustee of The Lubrizol Corporation Excess Defined Contribution Trust. (m) VALUATION DATE. The term "Valuation Date" shall mean the last day of each Plan Year and any other date as may be agreed upon by the Company and the Trustee. (n) SEPARATE ACCOUNTS. The term "Separate Accounts" shall mean each account established on behalf of a Participant under the Plan and credited with Supplemental Company Contributions in accordance with the provisions of Section 2.3. (o) LUBRIZOL DEFERRED COMPENSATION PLAN. Effective July 1, 1994, the term "Lubrizol Deferred Compensation Plan" shall mean The Lubrizol Corporation Deferred Compensation Plan for Officers (which was adopted effective July 1, 1994), as shall be in effect on the date of the Participant's retirement, death, or other termination of employment. (p) EXECUTIVE COUNCIL DEFERRED COMPENSATION PLAN. Effective January 1, 1997, the term "Executive Council Deferred Compensation Plan" shall mean The Lubrizol Corporation Executive Council Deferred Compensation Plan, as shall be in effect on the date of the Participant's retirement, death, or other termination of employment. 1.2 ADDITIONAL DEFINITIONS. All other words and phrases used herein shall have the meanings given them in the Lubrizol Profit-Sharing Plan, unless a different meaning is clearly required by the context. ARTICLE II SUPPLEMENTAL CONTRIBUTIONS 2.1 ELIGIBILITY. Effective January 1, 1997, a Participant whose benefits under the Lubrizol Profit-Sharing Plan are limited with respect to any Plan Year by Section 401(a)(17) or 415 of the Code, or who participated in the Lubrizol Deferred Compensation Plan or the Executive Council Deferred Compensation Plan, shall be eligible to have contributions made with respect to him under the Plan in accordance with the provisions of this Article II. 2.2 SUPPLEMENTAL COMPANY CONTRIBUTIONS. Effective January 1, 1997, in the event that Company contributions under the Lubrizol Profit-Sharing Plan with respect to a Participant are limited for any Plan Year due to the provisions of Section 401(a)(17) or 415 of the Code, or due to the Participant's participation in the Lubrizol Deferred Compensation Plan or the Executive Council Deferred Compensation Plan, the amounts by which such contributions are limited shall be credited under the Plan by the Company and shall be designated as Supplemental Company Contributions. 2.3 ALLOCATION OF CONTRIBUTIONS. Effective September 30, 1994, Supplemental Company Contributions shall be allocated among the Separate Accounts of the Participants on whose behalf such contributions are made. 2.4 ADMINISTRATION OF SEPARATE ACCOUNTS. Effective September 30, 1994, each Separate Account to which contributions under Sections 2.2 and 2.3 are credited and allocated shall be credited monthly with the net monthly increase experienced by the General Fund of the Lubrizol Profit-Sharing Plan. ARTICLE III DISTRIBUTION 3.1 VESTING. Each Participant as of December 31, 1993, shall be 100 percent vested in the value of his Separate Accounts. Each new Participant after December 31, 1993, shall be vested in the value of his Separate Accounts under this Plan as determined in accordance with the vesting provisions of the underlying qualified plans. 3.2 DISTRIBUTION. (Effective November 27, 1995) (a) Each Participant who terminates employment with the Company and its related corporations shall receive payment of the balance in his Separate Account in the standard form of payment of a single lump-sum payment payable within 30 days following employment termination; (b) Effective October 1, 2000, Participants may instead elect within a 60-day period commencing 90 days prior to employment termination to receive the balance of his Separate Account in any one of the following payment options: i. a single lump-sum payment payable within 30 days following the calendar year in which the Participant's employment terminated. Interest 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 employment termination. ii. annual installments of up to ten payments, the first of which shall be paid within 30 days of the Participant's employment termination, 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 value of the Participant's Separate Account (determined in the same manner as under the Lubrizol Profit-Sharing Plan by the number of installments to be paid and adjusting for interest based on the applicable interest rate, as defined in Section 417(e)(3)(A)(ii)(II) of the Code, in effect on the date of employment termination. 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 value of the Separate Account is less than $25,000, such benefit shall be paid in a single lump-sum payment to such person within 30 days following employment termination. 3.3 DISTRIBUTION IN THE EVENT OF DEATH. Effective September 30, 1994, in the event of the death of a Participant prior to distribution in full of his interest under the Plan, his Beneficiary shall receive distribution of such interest. In the event of death of a Participant prior to making an election for benefits, such Beneficiary shall receive distribution of such interest as soon as practicable after such Participant's death in the form elected by such Beneficiary pursuant to Section 3.2. The Beneficiary under this Section 3.3 shall be the person designated as the Participant's beneficiary under the Lubrizol Profit-Sharing Plan. If no Beneficiary survives such Participant or if no Beneficiary has been designated by such Participant, the estate of such Participant shall be the Beneficiary and receive distribution thereof. If any Beneficiary dies after becoming entitled to receive distribution hereunder and before such distribution is made in full, and if no other person or persons have been designated to receive the balance of such distribution upon the happening of such contingency, the estate of such deceased Beneficiary shall become the Beneficiary as to such balance. ARTICLE IV ADMINISTRATION (Effective 9/23/02) 4.1 AUTHORITY OF THE COMPANY. The Company shall be responsible for the general administration of the Plan, for carrying out the provisions hereof, and for making, or causing the Trust to make, any required supplemental benefit payments. The Company shall have all such powers as may be necessary to carry out the provisions of the Plan, including the power to determine all questions relating to eligibility for and the amount of any supplemental pension benefit and all questions pertaining to claims for benefits and procedures for claim review; to resolve all other questions arising under the Plan, including any questions of construction; and to take such further action as the Company shall deem advisable in the administration of the Plan. The Company may delegate any of its powers, authorities, or responsibilities for the operation and administration of the Plan to any person or committee so designated in writing by it and may employ such attorneys, agents, and accountants as it may deem necessary or advisable to assist it in carrying out its duties hereunder. The actions taken and the decisions made by the Company hereunder shall be final and binding upon all interested parties. 4.2 CLAIMS REVIEW PROCEDURE. The Company shall notify the person who files a claim for benefits (hereinafter referred to as the "Claimant") of the Plan's adverse benefit determination within a reasonable period of time, but not later than 90 days after the receipt of the claim by the Plan, unless the Company determines that special circumstances require an extension of time for processing the claim. If the Company determines that special circumstances require an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan expects to render the benefit determination. Whenever the Company decides for whatever reason to deny, whether in whole or in part, a claim for benefits filed by any Claimant, the Company shall transmit to the Claimant a written notice of the Company's decision, which shall be written in a manner calculated to be understood by the Claimant and contain a statement of the specific reasons for the denial of the claim, reference to the specific Plan provisions on which the determination was based, a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary, a description of the Plan's review procedures and the time limits applicable to such procedures, include a statement of the Claimant's right to bring civil action under Section 502(a) ERISA following an adverse benefit determination on review. Within 60 days of the date on which the Claimant receives such notice, he or his authorized representative may request that the claim denial be reviewed by filing with the Company a written request therefor, which request shall contain the following information: (a) the date on which the Claimant's request was filed with the Company; provided, however, that the date on which the Claimant's request for review was in fact filed with the Company shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (a); (b) the specific portions of the denial of his claim which the Claimant requests the Company to review; (c) a statement by the Claimant setting forth the basis upon which he believes the Company should reverse the Company's previous denial of his claim for benefits and accept his claim as made; and (d) any written comments, documents, records and other information which the Claimant desires the Company to examine in its consideration of his position as stated pursuant to paragraph (c). Claimant shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant's claim for benefits. The review of the claim will take into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. Within no later than 60 days of the date determined pursuant to paragraph (a) of this Section 4.2, the Company shall notify Claimant of the Plan's benefit determination, unless the Company determines that special circumstances require an extension of time for processing the claim. If the Company determines that an extension of time for processing is required, written notice of the extension will be furnished to the Claimant prior to the termination of the initial 60-day period. In no event shall such extension exceed a period of 60 days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan expects to render the determination on review. The Company shall provide the Claimant with a written notification of the Plan's benefit determination on review, written in a manner calculated to be understood by the Claimant, including the reasons and Plan provisions upon which its decision was based, a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claimant's claim for benefits, and a statement of the Claimant's right to bring an action under Section 502(a) of ERISA. ARTICLE V AMENDMENT AND TERMINATION 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. ARTICLE VI MISCELLANEOUS 6.1 NON-ALIENATION OF RETIREMENT RIGHTS OR BENEFITS. No Participant shall encumber or dispose of his right to receive any payments hereunder, which payments or the right thereto are expressly declared to be non-assignable and non-transferable. If a Participant or Beneficiary attempts to assign, transfer, alienate or encumber his right to receive any payment under the Plan or permits the same to be subject to alienation, garnishment, attachment, execution, or levy of any kind, then thereafter during the life of such Participant or Beneficiary and also during any period in which any Participant or Beneficiary is incapable in the judgment of the Company of attending to his financial affairs, any payments which the Company is required to make hereunder may be made, in the discretion of the Company, directly to such Participant or Beneficiary or to any other person for his use or benefit or that of his dependents, if any, including any person furnishing goods or services to or for his use or benefit or the use or benefit of his dependents, if any. Each such payment may be made without the intervention of a guardian, the receipt of the payee shall constitute a complete acquittance to the Company with respect thereto, and the Company shall have no responsibility for the proper allocation thereof. 6.2 PLAN NON-CONTRACTUAL. Nothing herein contained shall be construed as a commitment or agreement on the part of any person employed by the Company to continue his employment with the Company, and nothing herein contained shall be construed as a commitment on the part of the Company to continue the employment or the annual rate of compensation of any such person for any period, and all Participants shall remain subject to discharge to the same extent as if the Plan had never been established. 6.3 TRUST. In order to provide a source of payment for its obligations under the Plan, the Company has established The Lubrizol Corporation Excess Defined Contribution Plan Trust. 6.4 INTEREST OF A PARTICIPANT. Subject to the provisions of the Trust Agreement, the obligation of the Company under the Plan to provide a Participant or Beneficiary with supplemental retirement benefits merely constitutes 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. 6.5 CONTROLLING STATUS. No Participant shall be eligible for a benefit under the Plan unless such Participant is a Participant on the date of his retirement, death, or other termination of employment. 6.6 CLAIMS OF OTHER PERSONS. The provisions of the Plan shall in no event be construed as giving any person, firm or corporation any legal or equitable right as against the Company, its officers, employees, or directors, except any such rights as are specifically provided for in the Plan or are hereafter created in accordance with the terms and provisions of the Plan. 6.7 SEVERABILITY. The invalidity or unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted herefrom. 6.8 GOVERNING LAW. The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Ohio. APPENDIX A TO THE LUBRIZOL CORPORATION EXCESS DEFINED CONTRIBUTION PLAN Participants(1) Effective Date - --------------- -------------- 1. W. G. Bares December 31, 1986 2. G. R. Hill December 31, 1986 3. J. R. Ahern April 1, 1990 4. J. W. Bauer April 27, 1992 5. S. F. Kirk April 26, 1993 6. Y. Le Couedic April 26, 1993 7. J. E. Hodge April 26, 1993 8. M. W. Meister April 26, 1993 9. S. A. Di Biase April 26, 1993 10. G. P. Lieb April 25, 1994 11. L. M. Reynolds April 24, 1995 12. C. P. Cooley April 1, 1998 13. D. W. Bogus April 1, 2000 14. J. L. Hambrick May 1, 2000 15. G. R. Lewis April 23, 2001 16. R. S. Potter September 4, 2001 17. J. Wanstreet April 22, 2002 Former Participants(2) - --------------------- 1. P. L. Krug (R) 2. W. T. Beargie (R) 3. W. D. Manning (R) 4. R. W. Scher (R) 5. J. P. Arzul (D) 6. J. R. Cooper (R) 7. J. I. Rue (R) 8. R. J. Senz (T) 9. E. V. Luoma (R) 10. R. Y. K. Hsu (R) 11. L. E. Coleman (D) 12. J. G. Bulger (R) 13. D. A. Muskat (R) 14. W. R. Jones (R) 15. R. A. Andreas (R) 16. J. A. Thomas (R) 17. K. H. Hopping (R) 18. R. D. Robins (R) - -------- (1) This listing of Participants is limited to those Participants who are also officers for purposes of Section 16 of the Securities Exchange Act of 1934. (2) R = Retired, D = Deceased, T = Terminated. EX-10.J 5 l96659aexv10wj.txt OFFICERS SUPPLEMENT RETIREMENT PLAN Exhibit (10)(j) THE LUBRIZOL CORPORATION OFFICERS' SUPPLEMENTAL RETIREMENT PLAN (As Amended 9/23/02) 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. (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." Section 2. VESTING. The Participant shall be 100 percent vested in his accrued supplemental retirement benefit hereunder. 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; (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. 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 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. If a Participant terminates employment prior to age 55, he shall receive the actuarial equivalent of his 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: (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. 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 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 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 ADMINISTRATION AND CLAIMS PROCEDURE (Effective 9/23/02) a. 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. b. The Company shall notify the person who files a claim for benefits (hereinafter referred to as the "Claimant") of the Plan's adverse benefit determination within a reasonable period of time, but not later than 90 days after the receipt of the claim by the Plan, unless the Company determines that special circumstances require an extension of time for processing the claim. If the Company determines that special circumstances require an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan expects to render the benefit determination. Whenever the Company decides for whatever reason to deny, whether in whole or in part, a claim for benefits filed by any Claimant, the Company shall transmit to the Claimant a written notice of the Company's decision, which shall be written in a manner calculated to be understood by the Claimant and contain a statement of the specific reasons for the denial of the claim, reference to the specific Plan provisions on which the determination was based, a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary, a description of the Plan's review procedures and the time limits applicable to such procedures, include a statement of the Claimant's right to bring civil action under Section 502(a) ERISA following an adverse benefit determination on review. Within 60 days of the date on which the Claimant receives such notice, he or his authorized representative may request that the claim denial be reviewed by filing with the Company a written request therefor, which request shall contain the following information: (i) the date on which the Claimant's request was filed with the Company; provided, however, that the date on which the Claimant's request for review was in fact filed with the Company shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph (i); (ii) the specific portions of the denial of his claim which the Claimant requests the Company to review; (iii) a statement by the Claimant setting forth the basis upon which he believes the Company should reverse the Company's previous denial of his claim for benefits and accept his claim as made; and (iv) any written comments, documents, records and other information which the Claimant desires the Company to examine in its consideration of his position as stated pursuant to paragraph (iii). Claimant shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the Claimant's claim for benefits. The review of the claim will take into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. Within no later than 60 days of the date determined pursuant to paragraph (i), the Company shall notify Claimant of the Plan's benefit determination, unless the Company determines that special circumstances require an extension of time for processing the claim. If the Company determines that an extension of time for processing is required, written notice of the extension will be furnished to the Claimant prior to the termination of the initial 60-day period. In no event shall such extension exceed a period of 60 days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan expects to render the determination on review. The Company shall provide the Claimant with a written notification of the Plan's benefit determination on review, written in a manner calculated to be understood by the Claimant, including the reasons and Plan provisions upon which its decision was based, a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claimant's claim for benefits, and a statement of the Claimant's right to bring an action under Section 502(a) of ERISA. 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. 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. -----END PRIVACY-ENHANCED MESSAGE-----