-----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, Pj3p71skE7qkOm6pguoWM8KvDG0mWVYZICytLj/MZBFi0aUKryCw7AuMghCtskbN UbV62ajDhS4a1kTwK0U7iw== 0000950152-99-002310.txt : 19990325 0000950152-99-002310.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950152-99-002310 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUBRIZOL CORP CENTRAL INDEX KEY: 0000060751 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 340367600 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05263 FILM NUMBER: 99571355 BUSINESS ADDRESS: STREET 1: 29400 LAKELAND BLVD CITY: WICKLIFFE STATE: OH ZIP: 44092 BUSINESS PHONE: 2169434200 MAIL ADDRESS: STREET 1: 29400 LAKELAND BLVD CITY: WICKLIFFE STATE: OH ZIP: 44092 10-K405 1 THE LUBRIZOL CORPORATION 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from ..... to ..... Commission file number 1-5263 THE LUBRIZOL CORPORATION (Exact name of registrant as specified in its charter) OHIO 34-0367600 (State of incorporation) (I.R.S. Employer Identification No.) 29400 Lakeland Boulevard Wickliffe, Ohio 44092-2298 (Address of principal executive officers, including zip code) Registrant's telephone number, including area code: (440) 943-4200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------------------- ------------------------ Common Shares without par value New York Stock Exchange Common Share purchase rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value (on basis of closing sale price) of voting stock held by nonaffiliates as of March 5, 1999 $1,058,178,345 Number of the registrant's Common Shares, without par value, outstanding as of March 5, 1999 55,548,676 Documents Incorporated By Reference ----------------------------------- Portions of the registrant's 1998 Annual Report to its shareholders (Incorporated into Part I and II of this Form 10-K) Portions of the registrant's Proxy Statement dated March 17, 1999 (Incorporated into Part III of this Form 10-K) -1- 2 PART I ------ ITEM 1. BUSINESS The Lubrizol Corporation was organized under the laws of Ohio in 1928. The company began business as a compounder of special-purpose lubricants, and in the early 1930's was among the first to commence research in the field of lubricant additives. Today, the company is a full-service supplier of performance chemicals to diverse markets worldwide. The company develops, produces and sells specialty additive packages used in transportation and industrial finished lubricants. The company's products are created through the application of advanced chemical and mechanical technologies to enhance the performance, quality and value of the customer products in which they are used. The company groups its product lines into two operating segments: chemicals for transportation and chemicals for industry. PRINCIPAL PRODUCTS. Chemicals for transportation is comprised of additives for lubricating engine oils, such as those used in gasoline, diesel, marine and stationary gas engines; additives for driveline oils, such as automatic transmission fluids, gear oils and tractor lubricants; and additives for fuel products and refinery and oil field chemicals. In addition, the company sells additive components to its larger customers and viscosity improvers within its lubricant and fuel additives product lines. Chemicals for industry includes industrial additives, such as additives for hydraulic fluids, metalworking fluids, and compressor lubricants; performance chemicals, such as additives for coatings and inks and process chemicals; and performance systems, comprised principally of fluid metering devices and particulate emission trap devices. Revenues within the chemicals for transportation segment comprised 84%, 86% and 86% of consolidated revenues in 1998, 1997 and 1996, respectively. Additives for lubricating engine oils comprised 49%, 51% and 50% of consolidated revenues in 1998, 1997 and 1996, respectively. Additives for driveline oils comprised 24%, 24% and 25% of consolidated revenues for these same respective periods. Further financial information for the company's operating segments is contained in Note 13 to the Financial Statements, which is included in the company's 1998 Annual Report to its shareholder's and is incorporated herein by reference. Additives improve the lubricants and fuels used in cars, trucks, buses, off-highway equipment, marine engines and industrial applications. In lubricants, additives enable oil to withstand a broader range of temperatures, limit the buildup of sludge and varnish deposits, reduce wear, inhibit the formation of foam, rust and corrosion, and retard oxidation. In fuels, additives help maintain efficient operation of the fuel delivery system, help control deposits and corrosion, improve combustion and assist in preventing decomposition during storage. Due to the variety of oil properties and applications, a number of different chemicals are used to formulate the company's products. Each additive combination is designed to fit the characteristics of the customer's base oil and the level of performance specified. Engine oils for passenger cars contain a combination of chemical additives which usually includes one or more detergents, dispersants, oxidation inhibitors and wear inhibitors, pour point depressants and viscosity improvers. Other chemical combinations are used in specialty additive systems for heavy duty engine oils used by trucks and off-highway equipment and in formulations for gear oils, automatic transmission fluids, industrial oils, metalworking fluids, and gasoline, diesel and residual fuels. -2- 3 The company's performance systems products principally involve products used in emission controls, such as catalyst, exhaust and filter systems and precision metering devices used in blending and additive injection operations. COMPETITION. The company's chemicals for transportation segment and chemicals for industry segment are highly competitive in terms of price, technology development, product performance and customer service. The company's principal competitors within its chemicals for transportation segment, both in the United States and overseas, are three major petroleum companies, and one chemical company. Two of the major petroleum companies, which previously participated in the lubricant additive industry through separate divisions, have combined their efforts by forming a separate joint venture company that began commercial operations in 1999. The petroleum companies produce lubricant and fuel additives for their own use, and also sell additives to others. These competing petroleum companies are also customers of the company and may also sell base oil to the company. Excluding viscosity improvers, the company believes, based on volume sold, that it is the largest supplier to the petroleum industry of performance additive packages for lubricants. CUSTOMERS. In the United States, the company markets its chemicals for transportation and chemicals for industry products through its own sales organization. The company's additive customers consist primarily of oil refiners and independent oil blenders and are located in more than 100 countries. In 1998, approximately 40% of the company's consolidated sales were made to customers in North America, 32% to customers in Europe and 28% to customers in Asia-Pacific, the Middle East and Latin America. Mobil Corporation and its affiliates ("Mobil") is the company's largest customer within its chemicals for transportation segment. Revenues from Mobil comprised 9% of consolidated sales in 1998 and comprised 10% of consolidated sales in both 1997 and 1996. The company's ten largest customers, most of which are international oil companies and a number of which are groups of affiliated entities, accounted for approximately 42% of consolidated sales in 1998. The loss of one or more of these customers could have a material adverse effect on the company's business. The company's chemicals for industry segment is not materially dependent on a single customer or on a few customers. Raw Materials. The company utilizes a broad variety of chemical raw materials in the manufacture of its additives and uses oil in processing and blending additives. These materials are obtainable from several sources, and for the most part are derived from petroleum. Unstable political and economic conditions in the Middle East have, in the past, caused and may continue to cause the cost of raw materials to fluctuate significantly; however, the availability of raw materials to the company has not been significantly affected when these conditions occurred. The company expects raw materials to be available in adequate quantities during 1999. Research, Testing And Development. The company has historically emphasized research and has developed a large percentage of the additives it manufactures and sells. Technological developments in the design of engines and other automotive equipment, combined with rising demands for environmental protection and fuel economy, require increasingly sophisticated chemical additives to meet industry performance standards. The frequency of changes in industry performance standards compresses time cycles for new product development and affects the company's technical spending patterns. -3- 4 Consolidated research and development expenditures were $78.3 million in 1998, $88.4 million in 1997 and $93.4 million in 1996. These amounts were equivalent to 4.8%, 5.3% and 5.8% of the respective revenues for such years. These amounts include expenditures for the performance evaluation of additive developments in engines and other types of mechanical equipment as well as expenditures for the development of specialty chemicals for industrial applications. In addition, $72.7 million, $58.2 million and $67.6 million was spent in 1998, 1997 and 1996, respectively, for technical service (testing) activities, principally for evaluation in mechanical equipment of specific lubricant formulations designed for the needs of petroleum industry customers throughout the world. Research, testing and development expenditures by operating segment were as follows (in thousands of dollars):
1998 1997 1996 ---- ---- ---- Research and development expenditures: Chemicals for transportation $67,018 $76,259 $79,301 Chemicals for industry 11,265 12,185 14,135 ------- ------- ------- Total $78,283 $88,444 $93,436 ======= ======= ======= Testing expenditures: Chemicals for transportation $64,641 $51,260 $60,723 Chemicals for industry 8,056 6,974 6,819 ------- ------- ------- Total $72,697 $58,234 $67,542 ======= ======= =======
The company has two research facilities at Wickliffe, Ohio, one of which is principally for lubricant additive research and the other for research in the field of other specialty chemicals. The company also maintains a mechanical testing laboratory at Wickliffe, equipped with a variety of gasoline and diesel engines and other mechanical equipment to evaluate the performance of additives for lubricants and fuels. The company has similar mechanical testing laboratories in England and Japan and, in addition, makes extensive use of independent contract research firms. Extensive field testing is also conducted through various arrangements with fleet operators and others. Liaison offices in Detroit, Michigan; Hazelwood, England; Hamburg, Germany; Tokyo, Japan; and Paris, France, maintain close contact with the principal automotive and equipment manufacturers of the world and keep the company abreast of the performance requirements for its products in the face of changing technologies. These liaison activities also serve as contacts for cooperative development and evaluation of products for future applications. Contacts with the automotive and equipment industry are important so the company may have the necessary direction and lead time to develop products for use in engines, transmissions, gear sets, and other areas of equipment that require lubricants of advanced design. Patents. The company owns a variety of United States and foreign patents relating to lubricant and fuel additives, lubricants, chemical compositions and processes, and protective coating materials and processes. While such domestic and foreign patents expire from time to time, the company continues to apply for and obtain patent protection on an ongoing basis. Although the company believes that, in the aggregate, its patents constitute an important asset, it does not regard its business as being materially dependent upon any single patent or any group of related patents. The company has filed claims against Exxon Corporation and its affiliates ("Exxon") relating to various commercial matters, including alleged infringements by Exxon of certain of the company's patents. These suits are pending in the United States (in Ohio) and Canada and are at various stages. In the suit in Canada, the company is alleging infringement of a patent that corresponds to a United States patent admitted as valid by Exxon in a settlement in 1988. A determination of liability has been made by the Canadian courts against Exxon in favor of the company, and the case has been returned to -4- 5 the trial court for an assessment of damages, but no date has been set for a determination of such damages. Further information regarding litigation with Exxon is contained in Note 17 to the Financial Statements, which is included in the company's 1998 Annual Report to its shareholders. Environmental Matters. The company is subject to federal, state and local laws and regulations designed to protect the environment and limit manufacturing wastes and emissions. The company believes that as a general matter its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and the consequent financial liability to the company. Compliance with the environmental laws and regulations requires continuing management effort and expenditures by the company. The company believes that the cost of complying with environmental laws and regulations, including capital expenditures, will not have a material affect on the earnings, liquidity or competitive position of the company. The company is engaged in the handling, manufacture, use, transportation and disposal of substances that are classified as hazardous or toxic by one or more regulatory agencies. The company believes that its handling, manufacture, use, transportation and disposal of such substances generally have been in accord with environmental laws and regulations. Among other environmental laws, the company is subject to the federal "Superfund" law, under which the company has been designated as a "potentially responsible party" that may be liable for cleanup costs associated with various waste sites, some of which are on the U.S. Environmental Protection Agency Superfund priority list. The company's experience, consistent with what it believes to be the experience of others in similar cases, is that Superfund site liability tends to be apportioned among parties based upon contribution of materials to the Superfund site. Accordingly, the company measures its liability and carries out its financial reporting responsibilities with respect to Superfund sites based upon this standard, even though Superfund site liability is technically joint and several in nature. The company views the expense of remedial cleanup as a part of its product cost, and accrues for estimated environmental liabilities with charges to cost of sales. The company considers its environmental accrual to be adequate to provide for its portion of costs for all known environmental matters, including Superfund sites. Based upon consideration of currently available information, the company believes liabilities for environmental matters will not have a material adverse affect on the company's financial position, operating results or liquidity. General - ------- Employees. At December 31, 1998, the company and its wholly-owned subsidiaries had 4,324 employees of which approximately 60% were in the U.S. International Operations. Financial information with respect to domestic and foreign operations is contained in Note 13 to the Financial Statements which is included in the company's 1998 Annual Report to its shareholders and is incorporated herein by reference. The company supplies its additive customers abroad through export from the United States and from overseas manufacturing plants. Sales and technical service offices are maintained in more than 30 countries outside the United States. As a result, the company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations, exchange controls and currency fluctuations. The company believes risks related to its foreign operations are mitigated due to the political and economic stability of the countries in which its largest foreign operations are located. -5- 6 While changes in the U.S. dollar value of foreign currencies will affect earnings from time to time, the longer-term economic effect of these changes should not be significant given the company's net asset exposure and currency mix, including its use of U.S. dollar based pricing in certain countries, relative to its revenues and expenses. The company's consolidated net income will generally benefit as foreign currencies increase in value compared to the U.S. dollar and will generally decline as foreign currencies decrease in value. ITEM 2. PROPERTIES The general offices of the company are located in Wickliffe, Ohio. The company has various leases for general office space primarily located in Houston, Texas; and London, England. The company owns three additive manufacturing plants in the United States; one located in the Cleveland, Ohio area, at Painesville, and two near Houston, Texas, at Deer Park and Bayport. Outside the United States, the company owns additive manufacturing/blending plants in Australia, Brazil, Canada, England, France (three locations), Japan, South Africa and Singapore. All of these plants, other than Singapore, are owned in fee. In Singapore, the company owns the plant but leases the land on which the plant is located. The company owns in fee research, development and testing facilities in Wickliffe, Ohio; Hazelwood, England; and Atsugi, Japan. The company also owns in fee a facility in Midland, Michigan, at which air and refrigeration compressor lubricants are developed and marketed; manufacturing plants in Countryside, Illinois; Mountaintop, Pennsylvania; and Germany that manufacture performance chemical additives for the coatings industry and specialty additives for the metalworking fluid and industrial lubricant markets; a manufacturing plant in Atlanta, Georgia, that manufactures fluid metering devices; manufacturing plants in Newmarket and London, Ontario, Canada, and Reno, Nevada, that manufacture particulate emission control devices; and a manufacturing plant in Fareham, Hampshire, England, that manufactures additive injection equipment. Additive manufacturing/blending plants in India, Saudi Arabia, and China are owned and operated by joint venture companies licensed by Lubrizol. Lubrizol's ownership of each of these companies ranges from 40% to 50%. The company has entered into long-term contracts for its exclusive use of major marine terminal facilities at the Port of Houston, Texas. In addition, Lubrizol has leases for storage facilities in Australia, Chile, Denmark, Ecuador, England, Finland, France, Holland, Singapore, Spain, South Africa, Sweden, and Turkey; Los Angeles, California; St. Paul, Minnesota; Bayonne, New Jersey; and Tacoma, Washington. In some cases, the ownership or leasing of such facilities is through certain of its subsidiaries or affiliates. The company maintains a capital expenditure program to support its operations and believes its facilities are adequate for its present operations and for the foreseeable future. -6- 7 ITEM 3. LEGAL PROCEEDINGS The company is a party in a case brought by Exxon Corporation and its affiliates, Exxon Chemical Patents, Inc. and Exxon Research & Engineering Company, in the Southern District of Texas, Houston Division, on September 19, 1989. The plaintiffs alleged that the company willfully infringed an Exxon patent pertaining to an oil soluble copper additive component and requested monetary damages and injunctive relief. On June 24, 1996, the U.S. Supreme Court denied Exxon's request to review a September 1995 decision of the United States Court of Appeals for the Federal Circuit in Washington, D.C., regarding this case. The Court of Appeals' decision overturned a December 1992 jury verdict that the company had infringed an Exxon patent and entered judgment in favor of the company as a matter of law. The ruling of the Court of Appeals also vacated an injunction and a significant monetary judgment against the company. The Supreme Court decision finalized the Court of Appeals' judgment. Notwithstanding the Supreme Court decision, Exxon filed a motion in the original trial court seeking a new trial in order to assert an allegedly different theory of infringement under the same patent. The motion was denied by the trial judge on the ground that he lacked the authority to consider any request for a new trial in view of the reversal of the prior trial verdict by the Appellate Court. Acting upon an appeal by Exxon, the Court of Appeals in Washington, D.C., without deciding the merits of whether Exxon was entitled to a second trial, ruled that the trial court does have the authority to consider Exxon's motion and remanded the issue to the trial court. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the vote of the security holders during the three months ended December 31, 1998. -7- 8 EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth the name, age, recent business experience and certain other information relative to each person who is an executive officer of the company as of March 1, 1999. Name Business Experience ---- ------------------- W. G. Bares Mr. Bares, age 57, became Chairman of the Board on April 22, 1996, and Chief Executive Officer on January 1, 1996. He has been President since 1982. From 1987 through 1995, he was also Chief Operating Officer. R. A. Andreas Mr. Andreas, age 54, has been Vice President since June 1990. He is responsible for Special Projects. From June 1990 to April 1998, he was also Chief Financial Officer. J. W. Bauer Mr. Bauer, age 45, has been Vice President and General Counsel since April 1992. C. P. Cooley Mr. Cooley, age 43, joined the company and became Vice President, Treasurer and Chief Financial Officer in April 1998. In June 1998 he also became responsible for Corporate Strategic Planning. Prior to joining the company, he was Assistant Treasurer - Corporate Finance at Atlantic Richfield Company. S. A. Di Biase Dr. Di Biase, age 46, has been Vice President since September 1993. He is responsible for Research and Development. G. R. Hill Dr. Hill, age 57, has been Senior Vice President since 1988. He has been responsible for Business Development since October 1993. From 1996 to June 1998 he was also responsible for Corporate Strategic Planning. J. E. Hodge Mr. Hodge, age 56, has been Vice President since September 1993. He is responsible for Operations. K. H. Hopping Mr. Hopping, age 52, has been Vice President and Secretary of the Corporation since April 1991. S. F. Kirk Mr. Kirk, age 49, has been Vice President since September 1993. On January 1, 1999, he became responsible for Sales and Marketing. From April 1996 to January 1, 1999, he was responsible for Sales. From 1993 to April 1996, he was responsible for Segment Management. Y. Le Couedic Mr. Le Couedic, age 51, has been Vice President since September 1993. He is responsible for Management Information Systems. G. P. Lieb Mr. Lieb, age 46, has been Controller - Accounting and Financial Reporting since November 1993, and was named Principal Accounting Officer in January 1994. -8- 9 Name Business Experience ---- ------------------- M. W. Meister Mr. Meister, age 44, has been Vice President since April 1993, and was named Chief Ethics Officer in April 1998. He is responsible for Human Resources. L. M. Reynolds Ms. Reynolds, age 38, was named Assistant Secretary in April 1995, and has been Counsel since February 1991. R. D. Robins Dr. Robins, age 56, became Vice President in April 1996. Since January 1, 1999, he has been responsible for Performance Systems functions. From April 1996 to January 1999, he was responsible for Segment Management. From October 1993 to April 1996 he was Passenger Car Segment Manager. J. A. Thomas Mr. Thomas, age 60, has been Vice President since April 1994. In 1996, he became responsible for managing Corporate Strategies in the Asia Pacific Region. From April 1994 through April 1996, he was responsible for Corporate Planning and Development. From December 1990 to April 1994, he was General Manager-Sales for Asia Pacific, Latin America and the Middle East. All executive officers serve at the pleasure of the Board. -9- 10 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common shares of the company are listed on the New York Stock Exchange under the symbol LZ. The number of shareholders of record of common shares was 5,615 as of March 5, 1999. Information relating to the recent price and dividend history of the company's common shares follows:
Common Share Price History -------------------------- Dividends 1998 1997 Per Common Share ---- ---- ---------------- High Low High Low 1998 1997 ---- --- ---- --- ---- ---- 1st quarter $40 3/16 $33 1/4 $36 $30 1/2 $ .26 $ .25 2nd quarter 38 3/4 30 1/4 42 1/8 30 3/8 .26 .25 3rd quarter 32 3/8 22 3/8 44 7/8 41 15/16 .26 25 4th quarter 29 9/16 23 1/2 46 15/16 34 7/8 .26 .26 ----- ----- $1.04 $1.01 ===== =====
On December 9, 1998, the company issued 89,806 of its common shares to two individuals in connection with an acquisition of a company owned by them. The shares were valued at $2,389,970. Securities issued in this transaction were exempt from registration under the Securities Act of 1933 by virtue of Section 4(2) of such Act. ITEM 6. SELECTED FINANCIAL DATA. The summary of selected financial data for each of the last five years included in the Historical Summary contained on pages 38 and 39 of the company's 1998 Annual Report to its shareholders is incorporated herein by reference. Other income (charges) for 1998 includes a litigation settlement gain of $16.2 million and special charges of $23.3 million for the first phase of the company's cost reduction program and of $13.6 million for the write-off of purchased technology under development resulting from the acquisition of Adibis. Other income (charges) for 1996, 1995 and 1994 includes $53.3 million, $38.5 million and $41.2 million, respectively, for gains on sale of investments. Total debt reported in the Historical Summary includes the following amounts classified as long-term at December 31: $390.4 in 1998, $182.2 in 1997, $157.6 million in 1996, $194.4 million in 1995 and $114.2 million in 1994. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Management's Discussion and Analysis of Financial Condition and Results of Operations, including the company's cautionary statement for "safe harbor" purposes under the Private Securities Litigation Reform Act of 1995, contained on pages 10 through 19, inclusive, of the company's 1998 Annual Report to its shareholders is incorporated herein by reference. -10- 11 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information appearing under the caption "Quantitative and Qualitative Disclosures about Market Risk" contained on page 19 of the company's 1998 Annual Report to its shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements of the company and its subsidiaries, together with the independent auditors' report relating thereto, contained on pages 20 through 37, inclusive, of the company's 1998 Annual Report to its shareholders, and the Quarterly Financial Data (Unaudited) contained on page 37 of such 1998 Annual Report, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information contained under the heading "Election of Directors" on pages 2 to 6, inclusive, of the company's Proxy Statement dated March 17, 1999, is incorporated herein by reference. Information relative to executive officers of the company is contained under "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The information relating to executive compensation contained under the headings "Committees and Compensation of the Board of Directors" on pages 6 and 7, "Executive Compensation" on pages 10 through 12, inclusive, and under "Employee and Executive Officer Benefit Plans - Pension Plans" and "- Executive Agreements" on pages 17 through 19, inclusive, of the company's Proxy Statement dated March 17, 1999, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information relating to security ownership set forth under the heading "Security Ownership of Directors, Executive Officers and Certain Beneficial Owners" on pages 8 and 9 of the company's Proxy Statement dated March 17, 1999, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information contained in footnote (1) under the heading "Security Ownership of Directors, Executive Officers and Certain Beneficial Owners - Five Percent Beneficial Owners" on page 9 of the company's Proxy Statement dated March 17, 1999, is incorporated herein by reference. -11- 12 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Annual Report: 1. The following consolidated financial statements of The Lubrizol Corporation and its subsidiaries, together with the independent auditors' report relating thereto, contained on pages 20 through 37, inclusive, of Lubrizol's 1998 Annual Report to its shareholders and incorporated herein by reference: Independent Auditors' Report Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 Consolidated Balance Sheets at December 31, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Notes to Financial Statements Quarterly Financial Data (Unaudited) 2. Schedules No financial statement schedules are required to be filed as part of this Annual Report. 3. Exhibits (3)(a) Amended Articles of Incorporation of The Lubrizol Corporation, as adopted September 23, 1991. (Reference is made to Exhibit (3)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (3)(b) Regulations of The Lubrizol Corporation, as amended effective April 27, 1992. (Reference is made to Exhibit (3)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (4)(a) Amendment to Article Fourth of Amended Articles of Incorporation. (Reference is made to Exhibits (3)(a) and (4)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibits are incorporated herein by reference.) (4)(b) Indenture dated as of November 25, 1998, between The Lubrizol Corporation and The First National Bank of Chicago as Trustee. -12- 13 The company agrees, upon request, to furnish to the Securities and Exchange Commission a copy of any instrument authorizing long-term debt that does not authorize debt in excess of 10% of the total assets of the company and its subsidiaries on a consolidated basis. (4)(c) Rights Agreement between The Lubrizol Corporation and American Stock Transfer & Trust Company dated as of October 13, 1997. (Reference is made to Exhibit 4.l to The Lubrizol Corporation's Registration Statement on Form 8-A dated October 1, 1997, which Exhibit is incorporated herein by reference.) (10)(a)* The Lubrizol Corporation 1985 Employee Stock Option Plan, as amended. (10)(b)* The Lubrizol Corporation Amended Deferred Compensation Plan for Directors. (Reference is made to Exhibit (10)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, which Exhibit is incorporated herein by reference.) (10)(c)* Form of Employment Agreement between The Lubrizol Corporation and certain of its senior executive officers. (Reference is made to Exhibit (10)(e) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (10)(d)* The Lubrizol Corporation Excess Defined Benefit Plan, as amended. (Reference is made to Exhibit (10)(d) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, which Exhibit is incorporated herein by reference.) (10)(e)* The Lubrizol Corporation Excess Defined Contribution Plan, as amended. (Reference is made to Exhibit (10)(e) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, which Exhibit is incorporated herein by reference.) (10)(f)* The Lubrizol Corporation Performance Pay Plan (formerly Variable Award Plan), as amended. (10)(g)* The Lubrizol Corporation Executive Death Benefit Plan, as amended. (Reference is made to Exhibit (10)(g) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, which Exhibit is incorporated herein by reference.) (10)(h)* The Lubrizol Corporation 1991 Stock Incentive Plan, as amended. (Reference is made to Exhibit (10)(h) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1996, which Exhibit is incorporated herein by reference.) -13- 14 (10)(i)* The Lubrizol Corporation Deferred Stock Compensation Plan for Outside Directors, as amended. (Reference is made to Exhibit (10)(i) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, which Exhibit is incorporated herein by reference.) (10)(j)* The Lubrizol Corporation Officers' Supplemental Retirement Plan, as amended. (10)(k)* The Lubrizol Corporation Deferred Compensation Plan for Officers, as amended. (Reference is made to Exhibit (10)(k) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, which Exhibit is incorporated herein by reference.) (10)(l)* The Lubrizol Corporation Executive Council Deferred Compensation Plan, as amended. (12) Computation of Ratio of Earnings to Fixed Charges. (13) The following portions of The Lubrizol Corporation 1998 Annual Report to its shareholders: Pages 10-19 Management's Discussion and Analysis of Financial Condition and Results of Operations Page 20 Independent Auditors' Report Page 21 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 Page 22 Consolidated Balance Sheets at December 31, 1998 and 1997 Page 23 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Page 24 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Pages 25-37 Notes to Financial Statements Page 37 Quarterly Financial Data (Unaudited) Pages 38-39 Historical Summary (21) List of Subsidiaries of The Lubrizol Corporation (23) Consent of Independent Auditors (27) Financial Data Schedule for the year ended December 31, 1998 *Indicates management contract or compensatory plan or arrangement. -14- 15 (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended December 31, 1998. -15- 16 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on March 22, 1999, on its behalf by the undersigned, thereunto duly authorized. THE LUBRIZOL CORPORATION BY /s/ W. G. Bares ------------------------------------------ W. G. Bares, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 22, 1999, by the following persons on behalf of the Registrant and in the capacities indicated. /s/ W. G. Bares Chairman of the Board, President and Chief - --------------------------- Executive Officer W. G. Bares (Principal Executive Officer) /s/ C. P. Cooley Vice President, Treasurer and Chief - --------------------------- Financial Officer C. P. Cooley (Principal Financial Officer) /s/ G. P. Lieb Controller, Accounting and Financial - --------------------------- Reporting G. P. Lieb (Principal Accounting Officer) /s/ Edward F. Bell Director - --------------------------- Edward F. Bell /s/ L. E. Coleman Director - --------------------------- L. E. Coleman /s/ Peggy G. Elliott Director - --------------------------- Peggy G. Elliott /s/ Forest J. Farmer, Sr. Director - --------------------------- Forest J. Farmer, Sr. /s/ Gordon D. Harnett Director - --------------------------- Gordon D. Harnett /s/ Victoria F. Haynes Director - --------------------------- Victoria F. Haynes /s/ David H. Hoag Director - --------------------------- David H. Hoag /s/ William P. Madar Director - --------------------------- William P. Madar /s/ Ronald A. Mitsch Director - --------------------------- Ronald A. Mitsch /s/ M. Thomas Moore Director - --------------------------- M. Thomas Moore 17 EXHIBIT INDEX ------------- Exhibits (3)(a) Amended Articles of Incorporation of The Lubrizol Corporation, as adopted September 23, 1991. (Reference is made to Exhibit (3)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (3)(b) Regulations of The Lubrizol Corporation, as amended effective April 27, 1992. (Reference is made to Exhibit (3)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) (4)(a) Amendment to Article Fourth of Amended Articles of Incorporation. (Reference is made to Exhibits (3)(a) and (4)(a) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibits are incorporated herein by reference.) (4)(b) Indenture dated as of November 25, 1998, between The Lubrizol Corporation and The First National Bank of Chicago as Trustee. The company agrees, upon request, to furnish to the Securities and Exchange Commission a copy of any instrument authorizing long-term debt that does not authorize debt in excess of 10% of the total assets of the company and its subsidiaries on a consolidated basis. (4)(c) Rights Agreement between The Lubrizol Corporation and American Stock Transfer & Trust Company dated as of October 13, 1997. (Reference is made to Exhibit 4.l to The Lubrizol Corporation's Registration Statement on Form 8-A dated October 1, 1997, which Exhibit is incorporated herein by reference.) (10)(a)* The Lubrizol Corporation 1985 Employee Stock Option Plan, as amended. (10)(b)* The Lubrizol Corporation Amended Deferred Compensation Plan for Directors. (Reference is made to Exhibit (10)(b) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1994, which Exhibit is incorporated herein by reference.) (10)(c)* Form of Employment Agreement between The Lubrizol Corporation and certain of its senior executive officers. (Reference is made to Exhibit (10)(e) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1993, which Exhibit is incorporated herein by reference.) 18 (10)(d)* The Lubrizol Corporation Excess Defined Benefit Plan, as amended. (Reference is made to Exhibit (10)(d) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, which Exhibit is incorporated herein by reference.) (10)(e)* The Lubrizol Corporation Excess Defined Contribution Plan, as amended. (Reference is made to Exhibit (10)(e) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, which Exhibit is incorporated herein by reference.) (10)(f)* The Lubrizol Corporation Performance Pay Plan (formerly Variable Award Plan), as amended. (10)(g)* The Lubrizol Corporation Executive Death Benefit Plan, as amended. (Reference is made to Exhibit (10)(g) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, which Exhibit is incorporated herein by reference.) (10)(h)* The Lubrizol Corporation 1991 Stock Incentive Plan, as amended. (Reference is made to Exhibit (10)(h) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1996, which Exhibit is incorporated herein by reference.) (10)(i)* The Lubrizol Corporation Deferred Stock Compensation Plan for Outside Directors, as amended. (Reference is made to Exhibit (10)(i) to The Lubrizol Corporation's Annual Report on Form 10-K for the year ended December 31, 1995, which Exhibit is incorporated herein by reference.) (10)(j)* The Lubrizol Corporation Officers' Supplemental Retirement Plan, as amended. (10)(k)* The Lubrizol Corporation Deferred Compensation Plan for Officers, as amended. (Reference is made to Exhibit (10)(k) to The Lubrizol Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997, which Exhibit is incorporated herein by reference.) (10)(l)* The Lubrizol Corporation Executive Council Deferred Compensation Plan, as amended. (12) Computation of Ratio of Earnings to Fixed Charges. (13) The following portions of The Lubrizol Corporation 1998 Annual Report to its shareholders: Pages 10-19 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Page 20 Independent Auditors' Report Page 21 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 Page 22 Consolidated Balance Sheets at December 31, 1998 and 1997 Page 23 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Page 24 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Pages 25-37 Notes to Financial Statements Page 37 Quarterly Financial Data (Unaudited) Pages 38-39 Historical Summary (21) List of Subsidiaries of The Lubrizol Corporation (23) Consent of Independent Auditors (27) Financial Data Schedule for the year ended December 31, 1998 *Indicates management contract or compensatory plan or arrangement. EX-4.B 2 EXHIBIT 4(B) 1 Exhibit 4(b) =============================================================================== THE LUBRIZOL CORPORATION And The First National Bank of Chicago, Trustee Indenture Dated as of November 25, 1998 =============================================================================== 2 CROSS REFERENCE SHEET(1) ------------------ Between Provisions of Trust Indenture Act of 1939 and Indenture to be dated as of November 25, 1998 between THE LUBRIZOL CORPORATION and The First National Bank of Chicago, Trustee:
Section of the Act Section of Indenture - ------------------ -------------------- 310(a) (1) and (2).................................... 6.9 310(a) (3) and (4).................................... Inapplicable 310(b)................................................ 6.8 and 6.10(a), (b) and (d) 310(c)................................................ Inapplicable 311(a)................................................ 6.13(a) and (c) (1) and (2) 311(b)................................................ 6.13(b) 311(c)................................................ Inapplicable 312(a)................................................ 4.1 and 4.2(a) 312(b)................................................ 4.2(a) and (b) (i) and (ii) 312(c)................................................ 4.2(c) 313(a)................................................ 4.4(a) (i), (ii), (iii) (iv), (v) and (vi) 313(b) (1)............................................ Inapplicable 313(b) (2)............................................ 4.4 313(c)................................................ 4.4 313(d)................................................ 4.4 314(a)................................................ 4.3 314(b)................................................ Inapplicable 314(c) (1) and (2).................................... 11.5 314(c) (3)............................................ Inapplicable 314(d)................................................ Inapplicable 314(e)................................................ 11.5 314(f)................................................ Inapplicable 315(a), (c) and (d)................................... 6.1 315(b)................................................ 5.11 315(e)................................................ 5.12 316(a) (1)............................................ 5.9 316(a) (2)............................................ Not required 316(a) (last sentence)................................ 7.4 316(b)................................................ 5.7 316(c)................................................ 7.2 317(a)................................................ 5.2 317(b)................................................ 3.4(a) and (b) 318(a)................................................ 11.7
- ------------------------------ (1) This Cross Reference Sheet is not part of the Indenture. 3 TABLE OF CONTENTS ----------------
PAGE ---- PARTIES...........................................................................................................1 RECITALS Authorization of Indenture...............................................................................1 Compliance with Legal Requirements.......................................................................1 Purpose of and Consideration for Indenture...............................................................1
ARTICLE ONE DEFINITIONS SECTION 1.1 Certain Terms Defined............................................................................1 Attributable Debt................................................................................2 Authenticating Agent.............................................................................2 Authorized Newspaper.............................................................................2 Board of Directors...............................................................................2 Board Resolution.................................................................................2 Business Day.....................................................................................2 Commission.......................................................................................2 Composite Rate...................................................................................3 Consolidated Net Tangible Assets.................................................................3 Corporate Trust Office...........................................................................3 Coupon...........................................................................................3 covenant defeasance..............................................................................3 Debt.............................................................................................3 Depositary.......................................................................................3 Dollar...........................................................................................4 ECU..............................................................................................4 Event of Default.................................................................................4 Exempted Debt....................................................................................4 Foreign Currency.................................................................................4 Holder, Holder of Securities, Securityholder.....................................................4 Indenture........................................................................................4 Interest.........................................................................................4 Issuer...........................................................................................4 Issuer Order.....................................................................................4 Judgment Currency................................................................................4 Mortgage.........................................................................................4
i 4 Net Rental Payments..............................................................................5 Officer's Certificate............................................................................5 Opinion of Counsel...............................................................................5 original issue date..............................................................................5 Original Issue Discount Security.................................................................5 Outstanding......................................................................................5 Periodic Offering................................................................................6 Person...........................................................................................6 principal........................................................................................6 Principal Manufacturing Property.................................................................6 record date......................................................................................6 Registered Global Security.......................................................................6 Registered Security..............................................................................6 Required Currency................................................................................6 Responsible Officer..............................................................................6 Restricted Subsidiary............................................................................7 Security or Securities...........................................................................7 Subsidiary.......................................................................................7 Trust Indenture Act of 1939......................................................................7 Trustee..........................................................................................7 Unregistered Security............................................................................7 U.S. Government Obligations......................................................................7 Yield to Maturity................................................................................7
ARTICLE TWO SECURITIES SECTION 2.1 Forms Generally..................................................................................7 SECTION 2.2 Form of Trustee's Certificate of Authentication..................................................8 SECTION 2.3 Amount Unlimited; Issuable in Series.............................................................8 SECTION 2.4 Authentication and Delivery of Securities.......................................................11 SECTION 2.5 Execution of Securities.........................................................................13 SECTION 2.6 Certificate of Authentication...................................................................14 SECTION 2.7 Denomination and Date of Securities; Payments of Interest.......................................14 SECTION 2.8 Registration, Transfer and Exchange.............................................................15 SECTION 2.9 Mutilated, Defaced, Destroyed, Lost and Stolen Securities.......................................18 SECTION 2.10 Cancellation of Securities; Destruction Thereof.................................................19 SECTION 2.11 Temporary Securities............................................................................19
ARTICLE THREE COVENANTS OF THE ISSUER SECTION 3.1 Payment of Principal and Interest...............................................................20
ii 5 SECTION 3.2 Offices for Payments, etc.......................................................................20 SECTION 3.3 Appointment to Fill a Vacancy in Office of Trustee..............................................21 SECTION 3.4 Paying Agents...................................................................................21 SECTION 3.5 Written Statement to Trustee....................................................................22 SECTION 3.6 Negative Pledge; Limitation on Sale and Leaseback Transactions..................................22 SECTION 3.7 Luxembourg Publications.........................................................................25
ARTICLE FOUR SECURITYHOLDERS LISTS AND REPORTS BY THE ISSUER AND THE TRUSTEE SECTION 4.1 Issuer to Furnish Trustee Information as to Names and Addresses of Securityholders..................................................................25 SECTION 4.2 Preservation and Disclosure of Securityholders Lists............................................26 SECTION 4.3 Reports by the Issuer...........................................................................26 SECTION 4.4 Reports by the Trustee..........................................................................26
ARTICLE FIVE REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 5.1 Event of Default Defined; Acceleration of Maturity; Waiver of Default...........................26 SECTION 5.2 Collection of Indebtedness by Trustee; Trustee May Prove Debt...................................28 SECTION 5.3 Application of Proceeds.........................................................................30 SECTION 5.4 Suits for Enforcement...........................................................................31 SECTION 5.5 Restoration of Rights on Abandonment of Proceedings.............................................31 SECTION 5.6 Limitations on Suits by Securityholders.........................................................32 SECTION 5.7 Unconditional Right of Securityholders to Institute Certain Suits...............................32 SECTION 5.8 Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default.........................32 SECTION 5.9 Control by Holders of Securities................................................................33 SECTION 5.10 Waiver of Past Defaults.........................................................................33 SECTION 5.11 Trustee to Give Notice of Default, But May Withhold in Certain Circumstances....................34 SECTION 5.12 Right of Court to Require Filing of Undertaking to Pay Costs....................................34
ARTICLE SIX CONCERNING THE TRUSTEE SECTION 6.1 Duties and Responsibilities of the Trustee; During Default; Prior to Default....................34
iii 6 SECTION 6.2 Certain Rights of the Trustee...................................................................36 SECTION 6.3 Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof...............................................................37 SECTION 6.4 Trustee and Agents May Hold Securities or Coupons; Collections, etc.............................37 SECTION 6.5 Moneys Held by Trustee..........................................................................37 SECTION 6.6 Compensation and Indemnification of Trustee and Its Prior Claim.................................37 SECTION 6.7 Right of Trustee to Rely on Officer's Certificate, etc..........................................38 SECTION 6.8 Indentures Not Creating Potential Conflicting Interests for the Trustee.........................38 SECTION 6.9 Persons Eligible for Appointment as Trustee.....................................................38 SECTION 6.10 Resignation and Removal; Appointment of Successor Trustee.......................................38 SECTION 6.11 Acceptance of Appointment by Successor Trustee..................................................40 SECTION 6.12 Merger, Conversion, Consolidation or Succession to Business of Trustee..........................41 SECTION 6.13 Preferential Collection of Claims Against the Issuer............................................41 SECTION 6.14 Appointment of Authenticating Agent.............................................................41
ARTICLE SEVEN CONCERNING THE SECURITYHOLDERS SECTION 7.1 Evidence of Action Taken by Securityholders.....................................................42 SECTION 7.2 Proof of Execution of Instruments and of Holding of Securities..................................43 SECTION 7.3 Holders to be Treated as Owners.................................................................44 SECTION 7.4 Securities Owned by Issuer Deemed Not Outstanding...............................................44 SECTION 7.5 Right of Revocation of Action Taken.............................................................44
ARTICLE EIGHT SUPPLEMENTAL INDENTURES SECTION 8.1 Supplemental Indentures Without Consent of Securityholders......................................45 SECTION 8.2 Supplemental Indentures With Consent of Securityholders.........................................46 SECTION 8.3 Effect of Supplemental Indenture................................................................47 SECTION 8.4 Documents to Be Given to Trustee................................................................48 SECTION 8.5 Notation on Securities in Respect of Supplemental Indentures....................................48
ARTICLE NINE CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 9.1 Covenant Not to Merge, Consolidate, Sell or Convey Property Except Under Certain Conditions...............................................................48
iv 7 SECTION 9.2 Successor Corporation Substituted...............................................................48 SECTION 9.3 Opinion of Counsel Delivered to Trustee.........................................................49
ARTICLE TEN SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS SECTION 10.1 Satisfaction and Discharge of Indenture.........................................................49 SECTION 10.2 Application by Trustee of Funds Deposited for Payment of Securities.............................53 SECTION 10.3 Repayment of Moneys Held by Paying Agent........................................................53 SECTION 10.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two Years.......................53 SECTION 10.5 Indemnity for U.S. Government Obligations.......................................................54
ARTICLE ELEVEN MISCELLANEOUS PROVISIONS SECTION 11.1 Incorporators, Shareholders, Officers and Directors of Issuer Exempt from Individual Liability.....................................................................54 SECTION 11.2 Provisions of Indenture for the Sole Benefit of Parties and Holders of Securities and Coupons........................................................................54 SECTION 11.3 Successors and Assigns of Issuer Bound by Indenture.............................................54 SECTION 11.4 Notices and Demands on Issuer, Trustee and Holders of Securities and Coupons...................................................................................54 SECTION 11.5 Officer's Certificates and Opinions of Counsel; Statements to Be Contained Therein.............................................................................55 SECTION 11.6 Payments Due on Saturdays, Sundays and Holidays.................................................56 SECTION 11.7 Conflict of Any Provision of Indenture with Trust Indenture Act of 1939.........................56 SECTION 11.8 New York Law to Govern..........................................................................56 SECTION 11.9 Counterparts....................................................................................56 SECTION 11.10 Effect of Headings............................................................................56 SECTION 11.11 Securities in a Foreign Currency or in ECU....................................................57 SECTION 11.12 Judgment Currency.............................................................................57
ARTICLE TWELVE REDEMPTION OF SECURITIES AND SINKING FUNDS SECTION 12.1 Applicability of Article......................................................................58
v 8 SECTION 12.2 Notice of Redemption; Partial Redemptions.....................................................58 SECTION 12.3 Payment of Securities Called for Redemption...................................................59 SECTION 12.4 Exclusion of Certain Securities from Eligibility for Selection for Redemption..............................................................................60 SECTION 12.5 Mandatory and Optional Sinking Funds..........................................................60 TESTIMONIUM.........................................................................................................63 SIGNATURES..........................................................................................................63
vi 9 THIS INDENTURE, dated as of November 25, 1998 between THE LUBRIZOL CORPORATION, an Ohio corporation (the "Issuer"), and The First National Bank of Chicago, as trustee (the "Trustee"), W I T N E S S E T H: WHEREAS, the Issuer has duly authorized the issue from time to time of its unsecured debentures, notes or other evidences of indebtedness to be issued in one or more series (the "Securities") up to such principal amount or amounts as may from time to time be authorized in accordance with the terms of this Indenture; WHEREAS, the Issuer has duly authorized the execution and delivery of this Indenture to provide, among other things, for the authentication, delivery and administration of the Securities; and WHEREAS, all things necessary to make this Indenture a valid indenture and agreement according to its terms have been done; NOW, THEREFORE: In consideration of the premises and the purchases of the Securities by the holders thereof, the Issuer and the Trustee mutually covenant and agree for the equal and proportionate benefit of the respective holders from time to time of the Securities and of the coupons, if any, appertaining thereto as follows: ARTICLE ONE DEFINITIONS ----------- SECTION 1.1 CERTAIN TERMS DEFINED. The following terms (except as otherwise expressly provided herein, in any indenture supplemental thereto or, as to any Security, in such Security or unless the context otherwise clearly requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section. All other terms used in this Indenture that are defined in the Trust Indenture Act of 1939 or the definitions of which in the Securities Act of 1933 are referred to in the Trust Indenture Act of 1939, including terms defined therein by reference to the Securities Act of 1933 (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles, and the term "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means such accounting principles as are generally accepted in the United States at the time of any computation. The words "HEREIN," "HEREOF" and "HEREUNDER" and other words of similar import refer to this Indenture as a whole 1 10 and not to any particular Article, Section or other subdivision. The terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular. "ATTRIBUTABLE DEBT" means, as to any particular lease under which any Person is at the time liable, at any date as of which the amount thereof is to be determined, the total net amount of rent required to be paid by such Person under such lease during the remaining term thereof, discounted from the respective due dates thereof to such date at the Composite Rate. The net amount of rent required to be paid under any such lease for any such period shall be the aggregate amount of the rent payable by the lessee with respect to such period after excluding amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water rates, contingent rents (such as those based on sales) and similar charges. In the case of any lease which is terminable by the lessee upon the payment of a penalty, such net amount shall also include the amount of such penalty, but no rent shall be considered as required to be paid under such lease subsequent to the first date upon which it may be so terminated. "AUTHENTICATING AGENT" shall have the meaning set forth in Section 6.14. "AUTHORIZED NEWSPAPER" means a newspaper (which, in the case of The City of New York, will, if practicable, be The Wall Street Journal (Eastern Edition), in the case of the United Kingdom, will, if practicable, be the Financial Times (London Edition) and, in the case of Luxembourg, will, if practicable, be the Luxemburger Wort) published in an official language of the country of publication customarily published at least once a day for at least five days in each calendar week and of general circulation in The City of New York, the United Kingdom or in Luxembourg, as applicable. If it shall be impractical in the opinion of the Trustee to make any publication of any notice required hereby in an Authorized Newspaper, any publication or other notice in lieu thereof which is made or given with the approval of the Trustee shall constitute a sufficient publication of such notice. "BOARD OF DIRECTORS" means either the Board of Directors of the Issuer or any committee or other designees of such Board duly authorized to act on its behalf. "BOARD RESOLUTION" means a copy of one or more resolutions, certified by the secretary or an assistant secretary of the Issuer to have been duly adopted or consented to by the Board of Directors and to be in full force and effect, and delivered to the Trustee. "BUSINESS DAY" means, with respect to any Security, a day that in the city (or in any of the cities, if more than one) in which amounts are payable, as specified in the form of such Security, is not a day on which banking institutions are authorized or required by law or regulation to close. "COMMISSION" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or if at any time after the execution and delivery of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date. 2 11 "COMPOSITE RATE" means, at any time, the rate of interest, per annum, compounded semiannually, equal to the sum of the rates of interest borne by the Securities of each series (as specified on the face of the Securities of each series, PROVIDED, that, in the case of the Securities with variable rates of interest, the interest rate to be used in calculating the Composite Rate shall be the interest rate applicable to such Securities at the beginning of the year in which the Composite Rate is being determined and, PROVIDED, further, that, in the case of Original Issue Discount Securities, the interest rate to be used in calculating the Composite Rate shall be a rate equal to the yield to maturity on such Securities, calculated at the time of issuance of such Securities) multiplied, in the case of each series of Securities, by the percentage of the aggregate principal amount of the Securities of all series Outstanding represented by the Outstanding Securities of such series. For the purposes of this calculation, the aggregate principal amount of Outstanding Securities that are denominated in a foreign currency shall be calculated in the manner set forth in Section 11.11, and the aggregate principal amount of Original Issue Discount Securities shall be the aggregate amount then payable upon the declaration of acceleration of the maturity thereof pursuant to Section 5.1. "CONSOLIDATED NET TANGIBLE ASSETS" shall mean, at any date, the total assets appearing on the audited annual consolidated balance sheet of the Issuer and its consolidated Subsidiaries for the Issuer's most recently completed fiscal year, prepared in accordance with generally accepted accounting principles less (a) all current liabilities shown on such balance sheet and (b) Intangible Assets. "Intangible Assets" means the value (net of applicable reserves), as shown on or reflected in such balance sheet, of: (i) all trade names, trademarks, licenses, patents, copyrights and goodwill; (ii) organizational or development costs; (iii) deferred charges (other than prepaid items such as insurance, taxes, interest, commissions, rents and similar items and tangible assets being amortized); and (iv) unamortized debt discount and expense, less premium. "CORPORATE TRUST OFFICE" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date as of which this Indenture is dated, located in One First National Plaza, Suite 0126, Chicago, Illinois 60670-0126, Attention: Corporate Trust Services Division, except that for purposes of Section 3.2, such term shall mean the office or agency of the Trustee in the Borough of Manhattan, The City of New York, which office, at the date as of which this Indenture is dated is located at 14 Wall Street, Eighth Floor, 10005. "COUPON" means any interest coupon appertaining to a Security. "COVENANT DEFEASANCE" shall have the meaning set forth in Section 10.1(C). "DEBT" of any Person shall mean any debt for money borrowed which is issued, assumed, incurred or guaranteed in any manner by such Person. "DEPOSITARY" means, with respect to the Securities of any series issuable or issued in the form of one or more Registered Global Securities, the Person designated as Depositary by the Issuer pursuant to Section 2.3 until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Depositary" shall mean or include each Person who is then a Depositary hereunder, and if at any time there is more than one such 3 12 Person, "Depositary" as used with respect to the Securities of any such series shall mean the Depositary with respect to the Registered Global Securities of that series. "DOLLAR" means the coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. "ECU" means the European Currency Unit as defined and revised from time to time by the Council of European Communities. "EVENT OF DEFAULT" means any event or condition specified as such in Section 5.1. "EXEMPTED DEBT" shall mean the sum of (a) Debt of the Issuer and its Subsidiaries incurred after the date as of which this Indenture is dated and secured by liens created, assumed or permitted to exist pursuant to Section 3.6(b) and (b) Attributable Debt of the Issuer and its Subsidiaries in respect of all sale and leaseback transactions entered into pursuant to Section 3.6(d). "FOREIGN CURRENCY" means a currency issued by the government of a country other than the United States. "HOLDER", "HOLDER OF SECURITIES", "SECURITYHOLDER" or other similar terms mean (a) in the case of any Registered Security, the person in whose name such Security is registered in the security register kept by the Issuer for that purpose in accordance with the terms hereof, and (b) in the case of any Unregistered Security, the bearer of such Security, or any Coupon appertaining thereto, as the case may be. "INDENTURE" means this instrument as originally executed and delivered or, if amended or supplemented as herein provided, as so amended or supplemented or both, and shall include the forms and terms of particular series of Securities established as contemplated hereunder. "INTEREST" means, when used with respect to non-interest bearing Securities, interest payable after maturity. "ISSUER" means The Lubrizol Corporation, an Ohio corporation and, subject to Article Nine, its successors and assigns. "ISSUER ORDER" means a written statement, request or order of the Issuer signed in its name by the chairman of the Board of Directors, the chief executive officer, the president, the chief financial officer, the treasurer, the controller or any other officer designated by the Board of Directors or any of the foregoing officers of the Issuer. "JUDGMENT CURRENCY" shall have the meaning set forth in Section 11.12. "MORTGAGE" shall have the meaning set forth in Section 3.6. 4 13 "NET RENTAL PAYMENTS" under any lease for any period shall mean the sum of monies and other payments required to be paid by the lessee under such lease as rent thereunder, not including, by way of example, amounts payable by the lessee for maintenance and repairs, financing services, insurance, taxes, assessments and similar charges and for contingent rents (such as those based on sales). "OFFICER'S CERTIFICATE" means a certificate signed by the chairman of the Board of Directors, the chief executive officer, the president, the chief financial officer, the treasurer, the controller or any other officer designated by the Board of Directors or any of the foregoing officers of the Issuer and delivered to the Trustee. Each such certificate shall comply with Section 314 of the Trust Indenture Act of 1939 and include the statements provided for in Section 11.5. "OPINION OF COUNSEL" means an opinion in writing signed by the General Counsel of the Issuer or by such other legal counsel who may be an employee of or counsel to the Issuer and who shall be satisfactory to the Trustee. Each such opinion shall comply with Section 314 of the Trust Indenture Act of 1939 and include the statements provided for in Section 11.5. "ORIGINAL ISSUE DATE" of any Security (or portion thereof) means the earlier of (a) the date of such Security or (b) the date of any Security (or portion thereof) for which such Security was issued (directly or indirectly) on registration of transfer, exchange or substitution. "ORIGINAL ISSUE DISCOUNT SECURITY" means any Security that provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof pursuant to Section 5.1. "OUTSTANDING," when used with reference to Securities, shall, subject to the provisions of Section 7.4, mean, as of any particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except (a) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (b) Securities, or portions thereof, for the payment or redemption of which moneys or U.S. Government Obligations (as provided for in Section 10.1) in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Issuer) or shall have been set aside, segregated and held in trust by the Issuer for the Holders of such Securities (if the Issuer shall act as its own paying agent), PROVIDED that if such Securities, or portions thereof, are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as herein provided, or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities which shall have been paid or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.9 (except with respect to any such Security as to which proof satisfactory to the Trustee is presented that such Security is held by a person in whose hands such Security is a legal, valid and binding obligation of the Issuer). 5 14 In determining whether the Holders of the requisite principal amount of Outstanding Securities of any or all series have given any request, demand, authorization, direction, notice, consent or waiver hereunder, the principal amount of an Original Issue Discount Security that shall be deemed to be Outstanding for such purposes shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the maturity thereof pursuant to Section 5.1. "PERIODIC OFFERING" means an offering of Securities of a series from time to time, the specific terms of which Securities, including, without limitation, the rate or rates of interest, if any, thereon, the stated maturity or maturities thereof and the redemption provisions, if any, with respect thereto, are to be determined by the Issuer or its agents upon the issuance of such Securities. "PERSON" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "PRINCIPAL" whenever used with reference to the Securities or any Security or any portion thereof, shall be deemed to include "and premium, if any." "PRINCIPAL MANUFACTURING PROPERTY" shall mean any manufacturing plant or any testing or research and development facility of the Issuer or a Subsidiary unless, in the reasonable opinion of the Board of Directors, such plant or facility is not of material importance to the total business conducted by the Issuer and its consolidated Subsidiaries. "RECORD DATE" shall have the meaning set forth in Section 2.7. "REGISTERED GLOBAL SECURITY" means a Security evidencing all or part of a series of Registered Securities, issued to the Depositary for such series in accordance with Section 2.4, and bearing the legend prescribed in Section 2.4. "REGISTERED SECURITY" means any Security registered on the Security register of the Issuer. "REQUIRED CURRENCY" shall have the meaning set forth in Section 11.12. "RESPONSIBLE OFFICER" when used with respect to the Trustee means the chairman of the Board of Directors, any vice chairman of the board of directors, the chairman of the trust committee, the chairman of the executive committee, any vice chairman of the executive committee, the president, any vice president (whether or not designated by numbers or words added before or after the title "vice president"), the cashier, the secretary, the treasurer, any trust officer, any assistant trust officer, any assistant vice president, any assistant cashier, any assistant secretary, any assistant treasurer, or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. 6 15 "RESTRICTED SUBSIDIARY" shall mean any Subsidiary which owns or is the lessee of any Principal Manufacturing Property or is otherwise designated by the Board of Directors as a Restricted Subsidiary. "SECURITY" or "SECURITIES" (except as otherwise provided in Section 6.8) has the meaning stated in the first recital of this Indenture, or, as the case may be, Securities that have been authenticated and delivered under this Indenture. "SUBSIDIARY" means any corporation, partnership or other entity of which at the time of determination the Issuer owns or controls directly or indirectly more than 50% of the shares of voting stock or equivalent interest. "TRUST INDENTURE ACT OF 1939" (except as otherwise required by applicable law or as provided in Sections 8.1 and 8.2) means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was originally executed. "TRUSTEE" means the Person identified as "Trustee" in the first paragraph hereof and, subject to the provisions of Article Six, shall also include any successor trustee. "Trustee" shall also mean or include each Person who is then a trustee hereunder and if at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series shall mean the trustee with respect to the Securities of such series. "UNREGISTERED SECURITY" means any Security other than a Registered Security. "U.S. GOVERNMENT OBLIGATIONS" shall have the meaning set forth in Section 10.1(A). "YIELD TO MATURITY" means the yield to maturity on a series of Securities, calculated at the time of issuance of such series, or, if applicable, at the most recent redetermination of interest on such series, and calculated in accordance with accepted financial practice. ARTICLE TWO SECURITIES ---------- SECTION 2.1 FORMS GENERALLY. The Securities of each series and the Coupons, if any, to be attached thereto shall be substantially in such form (not inconsistent with this Indenture) as shall be established by or pursuant to one or more Board Resolutions (as set forth in a Board Resolution or, to the extent established pursuant to rather than set forth in a Board Resolution, an Officer's Certificate detailing such establishment) or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have imprinted or otherwise reproduced thereon such legend or legends or endorsements, not inconsistent with the provisions of this Indenture, as may be required to comply with any law or with any rules or 7 16 regulations pursuant thereto, or with any rules of any securities exchange or to conform to general usage, all as may be determined by the officers executing such Securities and Coupons, if any, as evidenced by their execution of such Securities and Coupons. The definitive Securities and Coupons, if any, shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities and Coupons, if any, as evidenced by their execution of such Securities and Coupons, if any. SECTION 2.2 FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION. The Trustee's certificate of authentication on all Securities shall be in substantially the following form: "This is one of the Securities referred to in the within-mentioned Indenture. , ------------------------------------- as Trustee By ------------------------------------ Authorized Officer" If at any time there shall be an Authenticating Agent appointed with respect to any series of Securities, then the Trustee's Certificate of Authentication to be borne by the Securities of each such series shall be substantially as follows: "This is one of the Securities referred to in the within-mentioned Indenture. , ------------------------------------- as Trustee By ------------------------------------ Authorized Officer" SECTION 2.3 AMOUNT UNLIMITED; ISSUABLE IN SERIES. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series and each such series shall rank equally and pari passu with all other unsecured and unsubordinated debt of the Issuer. There shall be established in or pursuant to one or more Board Resolutions (and to the extent established pursuant to rather than set forth in a Board Resolution, in an Officer's Certificate detailing such establishment) or established in one or more indentures supplemental hereto, prior to the initial issuance of Securities of a series, (1) the designation of the Securities of the series, which shall distinguish the Securities of the series from the Securities of all other series; 8 17 (2) any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 2.8, 2.9, 2.11, 8.5 or 12.3); (3) if other than Dollars, the coin or currency in which the Securities of that series are denominated (including, but not limited to, any Foreign Currency or ECU); (4) the date or dates on which the principal of the Securities of the series is payable; (5) the rate or rates at which the Securities of the series shall bear interest, if any, the date or dates from which such interest shall accrue, on which such interest shall be payable and (in the case of Registered Securities) on which a record shall be taken for the determination of Holders to whom interest is payable and/or the method by which such rate or rates or date or dates shall be determined; (6) the place or places where the principal of and any interest on Securities of the series shall be payable (if other than as provided in Section 3.2); (7) the right, if any, of the Issuer to redeem Securities of the series, in whole or in part, at its option and the period or periods within which, the price or prices at which and any terms and conditions upon which Securities of the series may be so redeemed, pursuant to any sinking fund or otherwise; (8) the obligation, if any, of the Issuer to redeem, purchase or repay Securities of the series pursuant to any mandatory redemption, sinking fund or analogous provisions or at the option of a Holder thereof and the price or prices at which and the period or periods within which and any terms and conditions upon which Securities of the series shall be redeemed, purchased or repaid, in whole or in part, pursuant to such obligation; (9) if other than denominations of $1,000 and any integral multiple thereof in the case of Registered Securities, or $1,000 and $5,000 in the case of Unregistered Securities, the denominations in which Securities of the series shall be issuable; (10) if other than the principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration of the maturity thereof; (11) if other than the coin or currency in which the Securities of that series are denominated, the coin or currency in which payment of the principal of or interest on the Securities of such series shall be payable; (12) if the principal of or interest on the Securities of such series are to be payable, at the election of the Issuer or a Holder thereof, in a coin or currency other than that in which the Securities are denominated, the period or periods within which, and the terms and conditions upon which, such election may be made; 9 18 (13) if the amount of payments of principal of and interest on the Securities of the series may be determined with reference to an index based on a coin or currency other than that in which the Securities of the series are denominated, the manner in which such amounts shall be determined; (14) whether the Securities of the series will be issuable as Registered Securities (and if so, whether such Securities will be issuable as Registered Global Securities) or Unregistered Securities (with or without Coupons), or any combination of the foregoing, any restrictions applicable to the offer, sale or delivery of Unregistered Securities or the payment of interest thereon and, if other than as provided in Section 2.8, the terms upon which Unregistered Securities of any series may be exchanged for Registered Securities of such series and vice versa; (15) whether and under what circumstances the Issuer will pay additional amounts on the Securities of the series held by a person who is not a U.S. person in respect of any tax, assessment or governmental charge withheld or deducted and, if so, whether the Issuer will have the option to redeem such Securities rather than pay such additional amounts; (16) if the Securities of such series are to be issuable in definitive form (whether upon original issue or upon exchange of a temporary Security of such series) only upon receipt of certain certificates or other documents or satisfaction of other conditions, the form and terms of such certificates, documents or conditions; (17) any trustees, depositaries, authenticating or paying agents, transfer agents or registrars or any other agents with respect to the Securities of such series; (18) any other events of default or covenants with respect to the Securities of such series; (19) whether the Securities of the series shall be issued in the form of one or more Registered Global Securities and, in such case, the Depositary for such Registered Global Security or Securities; and (20) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture). All Securities of any one series and Coupons, if any, appertaining thereto, shall be substantially identical, except in the case of Registered Securities as to denomination and except as may otherwise be provided by or pursuant to the Board Resolution or Officer's Certificate referred to above or as set forth in any such indenture supplemental hereto. All Securities of any one series need not be issued at the same time and may be issued from time to time, consistent with the terms of this Indenture, if so provided by or pursuant to such Board Resolution, such Officer's Certificate or in any such indenture supplemental hereto. 10 19 SECTION 2.4 AUTHENTICATION AND DELIVERY OF SECURITIES. The Issuer may deliver Securities of any series having attached thereto appropriate Coupons, if any, executed by the Issuer to the Trustee for authentication together with the applicable documents referred to below in this Section, and the Trustee shall thereupon authenticate and deliver such Securities to or upon the order of the Issuer (contained in the Issuer Order referred to below in this Section) or pursuant to such procedures acceptable to the Trustee and to such recipients as may be specified from time to time by an Issuer Order. The maturity date, original issue date, interest rate and any other terms of the Securities of such series and Coupons, if any, appertaining thereto shall be determined by or pursuant to such Issuer Order and procedures. If provided for in such procedures, such Issuer Order may authorize authentication and delivery pursuant to oral instructions from the Issuer or its duly authorized agent, which instructions shall be promptly confirmed in writing. In authenticating such Securities and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive (in the case of subparagraphs 2, 3 and 4 below only at or before the time of the first request of the Issuer to the Trustee to authenticate Securities of such series) and (subject to Section 6.1) shall be fully protected in relying upon, unless and until such documents have been superseded or revoked: (1) an Issuer Order requesting such authentication and setting forth delivery instructions if the Securities and Coupons, if any, are not to be delivered to the Issuer, provided that, with respect to Securities of a series subject to a Periodic Offering, (a) such Issuer Order may be delivered by the Issuer to the Trustee prior to the delivery to the Trustee of such Securities for authentication and delivery, (b) the Trustee shall authenticate and deliver Securities of such series for original issue from time to time, in an aggregate principal amount not exceeding the aggregate principal amount established for such series, pursuant to an Issuer Order or pursuant to procedures acceptable to the Trustee as may be specified from time to time by an Issuer Order, (c) the maturity date or dates, original issue date or dates, interest rate or rates and any other terms of Securities of such series shall be determined by an Issuer Order or pursuant to such procedures and (d) if provided for in such procedures, such Issuer Order may authorize authentication and delivery pursuant to oral or electronic instructions from the Issuer or its duly authorized agent or agents, which oral instructions shall be promptly confirmed in writing; (2) any Board Resolution, Officer's Certificate and/or executed supplemental indenture referred to in Sections 2.1 and 2.3 by or pursuant to which the forms and terms of the Securities and Coupons, if any, were established; (3) an Officer's Certificate setting forth the form or forms and terms of the Securities and Coupons, if any, stating that the form or forms and terms of the Securities and Coupons, if any, have been established pursuant to Sections 2.1 and 2.3 and comply with this Indenture, and covering such other matters as the Trustee may reasonably request; and (4) At the option of the Issuer, either Opinions of Counsel, or letters addressed to the Trustee permitting it to rely on Opinions of Counsel, substantially to the effect that: 11 20 (a) the forms of the Securities and Coupons, if any, have been duly authorized and established in conformity with the provisions of this Indenture; (b) in the case of an underwritten offering, the terms of the Securities have been duly authorized and established in conformity with the provisions of this Indenture, and, in the case of an offering that is not underwritten, certain terms of the Securities have been established pursuant to a Board Resolution, an Officer's Certificate or a supplemental indenture in accordance with this Indenture, and when such other terms as are to be established pursuant to procedures set forth in an Issuer Order shall have been established, all such terms will have been duly authorized by the Issuer and will have been established in conformity with the provisions of this Indenture; (c) when the Securities and Coupons, if any, have been executed by the Issuer and authenticated by the Trustee in accordance with the provisions of this Indenture and delivered to and duly paid for by the purchasers thereof, they will have been duly issued under this Indenture and will be valid and legally binding obligations of the Issuer, enforceable in accordance with their respective terms, and will be entitled to the benefits of this Indenture; and (d) the execution and delivery by the Issuer of, and the performance by the Issuer of its obligations under, the Securities and Coupons, if any, will not contravene any provision of applicable law or the articles of incorporation or regulations of the Issuer or any agreement or other instrument binding upon the Issuer or any of its Subsidiaries that is material to the Issuer and its Subsidiaries, considered as one enterprise, or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Issuer or any Subsidiary, and no consent, approval or authorization of any governmental body or agency is required for the performance by the Issuer of its obligations under the Securities and Coupons, if any, except such as are specified and have been obtained and such as may be required by the securities or blue sky laws of the various states in connection with the offer and sale of the Securities and Coupons, if any. In rendering such opinions, such counsel may qualify any opinions as to enforceability by stating that such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium and other similar laws affecting the rights and remedies of creditors and is subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Such counsel may rely, as to all matters governed by the laws of jurisdictions other than the State of New York and the State of Ohio and the Federal law of the United States, upon the opinions of other counsel (copies of which shall be furnished to, and which counsel shall be reasonably satisfactory to, the Trustee) in which case the opinion shall state that such counsel believes he and the Trustee are entitled so to rely. Such counsel may also state that, insofar as such opinion involves factual matters, he has relied, to the extent he deems proper, upon certificates of officers of the Issuer and its Subsidiaries and certificates of public officials. 12 21 The Trustee shall have the right to decline to authenticate and deliver any Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken by the Issuer or if the Trustee in good faith by its board of directors or board of trustees, executive committee, or a trust committee of directors or trustees or Responsible Officers shall determine that such action would expose the Trustee to personal liability to existing Holders or would affect the Trustee's own rights, duties or immunities under the Securities, this Indenture or otherwise. If the Issuer shall establish pursuant to Section 2.3 that the Securities of a series are to be issued in the form of one or more Registered Global Securities, then the Issuer shall execute and the Trustee shall, in accordance with this Section and the Issuer Order with respect to such series, authenticate and deliver one or more Registered Global Securities that (i) shall represent and shall be denominated in an amount equal to the aggregate principal amount of all of the Securities of such series to be represented by such Registered Global Security or Securities, (ii) shall be registered in the name of the Depositary for such Registered Global Security or Securities or the nominee of such Depositary, (iii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions and (iv) shall bear a legend substantially to the following effect: "Unless this certificate is presented by an authorized representative of a Depositary to the Issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of the nominee of such Depositary or such other name as requested by an authorized representative of such Depositary and any payment is made to the nominee of such Depositary, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, the nominee, has an interest herein." Each Depositary designated pursuant to Section 2.3 must, at the time of its designation and at all times while it serves as Depositary, be a clearing agency registered under the Securities Exchange Act of 1934 and any other applicable statute or regulation. SECTION 2.5 EXECUTION OF SECURITIES. The Securities and, if applicable, each Coupon appertaining thereto shall be signed on behalf of the Issuer by any two of the chairman of its Board of Directors or its chief executive officer or its president or its chief financial officer or its treasurer or its controller or any other officer designated by the Board of Directors, under its corporate seal (except in the case of Coupons) which may, but need not, be attested. Such signatures may be the manual or facsimile signatures of the present or any future such officers. The seal of the Issuer may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Securities. Typographical and other minor errors or defects in any such reproduction of the seal or any such signature shall not affect the validity or enforceability of any Security that has been duly authenticated and delivered by the Trustee. In case any officer of the Issuer who shall have signed any of the Securities or Coupons, if any, shall cease to be such officer before the Security or coupon so signed (or the Security to which the Coupon so signed appertains) shall be authenticated and delivered by the Trustee or disposed of by the Issuer, such Security or Coupon nevertheless may be authenticated and delivered or disposed of as though the person who signed such Security or Coupon had not ceased to be such officer of the Issuer; and any Security or Coupon may be signed on behalf of the Issuer by such persons as, at the actual date of the execution of such Security or Coupon, 13 22 shall be the proper officers of the Issuer, although at the date of the execution and delivery of this Indenture any such person was not such an officer. SECTION 2.6 CERTIFICATE OF AUTHENTICATION. Only such Securities as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed by the Trustee by the manual signature of one of its authorized officers, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. No Coupon shall be entitled to the benefits of this Indenture or shall be valid and obligatory for any purpose until the certificate of authentication on the Security to which such Coupon appertains shall have been duly executed by the Trustee. The execution of such certificate by the Trustee upon any Security executed by the Issuer shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the Holder is entitled to the benefits of this Indenture. SECTION 2.7 DENOMINATION AND DATE OF SECURITIES; PAYMENTS OF INTEREST. The Securities of each series shall be issuable as Registered Securities or Unregistered Securities in denominations established as contemplated by Section 2.3 or, with respect to the Registered Securities of any series, if not so established, in denominations of $1,000 and any integral multiple thereof. If denominations of Unregistered Securities of any series are not so established, such Securities shall be issuable in denominations of $1,000 and $5,000. The Securities of each series shall be numbered, lettered or otherwise distinguished in such manner or in accordance with such plan as the officers of the Issuer executing the same may determine with the approval of the Trustee, as evidenced by the execution and authentication thereof. Each Registered Security shall be dated the date of its authentication. Each Unregistered Security shall be dated as provided in the resolution or resolutions of the Board of Directors of the Issuer referred to in Section 2.3. The Securities of each series shall bear interest, if any, from the date, and such interest shall be payable on the dates, established as contemplated by Section 2.3. Unless otherwise provided in the Registered Securities of any series, the person in whose name any Registered Security of any series is registered at the close of business on any record date applicable to a particular series with respect to any interest payment date for such series shall be entitled to receive the interest, if any, payable on such interest payment date notwithstanding any transfer or exchange of such Registered Security subsequent to the record date and prior to such interest payment date, except if and to the extent the Issuer shall default in the payment of the interest due on such interest payment date for such series, in which case such defaulted interest shall be paid to the persons in whose names Outstanding Registered Securities for such series are registered at the close of business on a subsequent record date (which shall be not less than five Business Days prior to the date of payment of such defaulted interest) established by notice given by mail by or on behalf of the Issuer to the Holders of Registered Securities not less than 15 days preceding such subsequent record date. The term "record date" as used with respect to any interest payment date (except a date for payment of defaulted interest) for the Securities of any series shall mean the date specified as such in the terms of the Registered Securities of such series established as contemplated by Section 2.3, or, if no such date is so established, if such interest payment date is the first day of a calendar month, the fifteenth day of the next preceding calendar month or, if such interest payment date is the 14 23 fifteenth day of a calendar month, the first day of such calendar month, whether or not such record date is a Business Day. SECTION 2.8 REGISTRATION, TRANSFER AND EXCHANGE. The Issuer will keep at each office or agency to be maintained for the purpose as provided in Section 3.2 for each series of Securities a register or registers in which, subject to such reasonable regulations as it may prescribe, it will provide for the registration of Registered Securities of such series and the registration of transfer of Registered Securities of such series. Such register shall be in written form in the English language or in any other form capable of being converted into such form within a reasonable time. At all reasonable times such register or registers shall be open for inspection by the Trustee. Upon due presentation for registration of transfer of any Registered Security of any series at any such office or agency to be maintained for the purpose as provided in Section 3.2, the Issuer shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Registered Security or Registered Securities of the same series, maturity date, interest rate and original issue date in authorized denominations for a like aggregate principal amount. Unregistered Securities (except for any temporary global Unregistered Securities) and Coupons (except for Coupons attached to any temporary global Unregistered Securities) shall be transferable by delivery. At the option of the Holder thereof, Registered Securities of any series (other than a Registered Global Security, except as set forth below) may be exchanged for a Registered Security or Registered Securities of such series having authorized denominations and an equal aggregate principal amount, upon surrender of such Registered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2 and upon payment, if the Issuer shall so require, of the charges hereinafter provided. If the Securities of any series are issued in both registered and unregistered form, except as otherwise specified pursuant to Section 2.3, at the option of the Holder thereof, Unregistered Securities of any series may be exchanged for Registered Securities of such series having other authorized denominations and an equal aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. At the option of the Holder thereof, if Unregistered Securities of any series, maturity date, interest rate and original issue date are issued in more than one authorized denomination, except as otherwise specified pursuant to Section 2.3, such Unregistered Securities may be exchanged for Unregistered Securities of such series having authorized denominations and an equal aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2 or as specified pursuant to Section 2.3, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. Unless otherwise specified pursuant to Section 2.3(14), Registered Securities of any series may not be 15 24 exchanged for Unregistered Securities of such series. Whenever any Securities are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities and Coupons surrendered upon any exchange or transfer provided for in this Indenture shall be promptly cancelled and disposed of by the Trustee and the Trustee will deliver a certificate of disposition thereof to the Issuer. All Registered Securities presented for registration of transfer, exchange, redemption or payment shall (if so required by the Issuer or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuer and the Trustee duly executed by the Holder or his attorney duly authorized in writing. The Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchange or registration of transfer of Securities. No service charge shall be made for any such transaction. The Issuer shall not be required to exchange or register a transfer of (a) any Securities of any series for a period of 15 days next preceding the first mailing of notice of redemption of Securities of such series to be redeemed or (b) any Securities selected, called or being called for redemption, in whole or in part, except, in the case of any Security to be redeemed in part, the portion thereof not so to be redeemed. Notwithstanding any other provision of this Section 2.8, unless and until it is exchanged in whole or in part for Securities in definitive registered form, a Registered Global Security representing all or a portion of the Securities of a series may not be transferred except as a whole by the Depositary for such series to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary for such series or a nominee of such successor Depositary. If at any time the Depositary for any Registered Securities of a series represented by one or more Registered Global Securities notifies the Issuer that it is unwilling or unable to continue as Depositary for such Registered Securities or if at any time the Depositary for such Registered Securities shall no longer be eligible under Section 2.4, the Issuer shall appoint a successor Depositary eligible under Section 2.4 with respect to such Registered Securities. If a successor Depositary eligible under Section 2.4 for such Registered Securities is not appointed by the Issuer within 90 days after the Issuer receives such notice or becomes aware of such ineligibility, the Issuer's election pursuant to Section 2.3 that such Registered securities be represented by one or more Registered Global Securities shall no longer be effective and the Issuer will execute, and the Trustee, upon receipt of an Officer's Certificate for the authentication and delivery of definitive Securities of such series, will authenticate and deliver, Securities of such series in definitive registered form without coupons, in any authorized denominations, in an aggregate principal amount equal to the principal amount of the Registered Global Security or Securities representing such Registered Securities in exchange for such Registered Global Security or Securities. 16 25 The Issuer may at any time and in its sole discretion determine that the Registered Securities of any series issued in the form of one or more Registered Global Securities shall no longer be represented by a Registered Global Security or Securities. In such event the Issuer will execute, and the Trustee, upon receipt of an Officer's Certificate for the authentication and delivery of definitive Securities of such series, will authenticate and deliver, Securities of such series in definitive registered form without coupons, in any authorized denominations, in an aggregate principal amount equal to the principal amount of the Registered Global Security or Securities representing such Registered Securities, in exchange for such Registered Global Security or Securities. If specified by the Issuer pursuant to Section 2.3 with respect to Securities represented by a Registered Global Security, the Depositary for such Registered Global Security may surrender such Registered Global Security in exchange in whole or in part for Securities of the same series in definitive registered form on such terms as are acceptable to the Issuer and such Depositary. Thereupon, the Issuer shall execute, and the Trustee shall authenticate and deliver, without service charge, (i) to the Person specified by such Depositary a new Registered Security or Securities of the same series, of any authorized denominations as requested by such Person, in an aggregate principal amount equal to and in exchange for such Person's beneficial interest in the Registered Global Security; and (ii) to such Depositary a new Registered Global Security in a denomination equal to the difference, if any, between the principal amount of the surrendered Registered Global Security and the aggregate principal amount of Registered Securities authenticated and delivered pursuant to clause (i) above. Upon the exchange of a Registered Global Security for Securities in definitive registered form without coupons, in authorized denominations, such Registered Global Security shall be cancelled by the Trustee or an agent of the Issuer or the Trustee. Securities in definitive registered form without coupons issued in exchange for a Registered Global Security pursuant to this Section 2.8 shall be registered in such names and in such authorized denominations as the Depositary for such Registered Global Security, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee or an agent of the Issuer or the Trustee. The Trustee or such agent shall deliver such Securities to or as directed by the Persons in whose names such Securities are so registered. All Securities issued upon any transfer or exchange of Securities shall be valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange. Notwithstanding anything herein or in the terms of any series of Securities to the contrary, none of the Issuer, the Trustee or any agent of the Issuer or the Trustee (any of which, other than the Issuer, shall rely on an Officer's Certificate and an Opinion of Counsel) shall be required to exchange any Unregistered Security for a Registered Security if such exchange would result in adverse Federal income tax consequences to the Issuer (such as, for example, the inability of the Issuer to deduct from its income, as computed for Federal income tax purposes, 17 26 the interest payable on the Unregistered Securities) under then applicable United States Federal income tax laws. SECTION 2.9 MUTILATED, DEFACED, DESTROYED, LOST AND STOLEN SECURITIES. In case any temporary or definitive Security or any Coupon appertaining to any Security shall become mutilated, defaced or be destroyed, lost or stolen, the Issuer in its discretion may execute, and upon the written request of any officer of the Issuer, the Trustee shall authenticate and deliver a new Security of the same series, maturity date, interest rate and original issue date, bearing a number or other distinguishing symbol not contemporaneously outstanding, in exchange and substitution for the mutilated or defaced Security, or in lieu of and in substitution for the Security so destroyed, lost or stolen with Coupons corresponding to the Coupons appertaining to the Securities so mutilated, defaced, destroyed, lost or stolen, or in exchange or substitution for the Security to which such mutilated, defaced, destroyed, lost or stolen Coupon appertained, with Coupons appertaining thereto corresponding to the Coupons so mutilated, defaced, destroyed, lost or stolen. In every case the applicant for a substitute Security or Coupon shall furnish to the Issuer and to the Trustee and any agent of the Issuer or the Trustee such security or indemnity as may be required by them to indemnify and defend and to save each of them harmless and, in every case of destruction, loss or theft, evidence to their satisfaction of the destruction, loss or theft of such Security or Coupon and of the ownership thereof and in the case of mutilation or defacement shall surrender the Security and related Coupons to the Trustee or such agent. Upon the issuance of any substitute Security or Coupon, the Issuer may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) or its agent connected therewith. In case any Security or Coupon which has matured or is about to mature or has been called for redemption in full shall become mutilated or defaced or be destroyed, lost or stolen, the Issuer may instead of issuing a substitute Security, pay or authorize the payment of the same or the relevant Coupon (without surrender thereof except in the case of a mutilated or defaced Security or Coupon), if the applicant for such payment shall furnish to the Issuer and to the Trustee and any agent of the Issuer or the Trustee such security or indemnity as any of them may require to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Issuer and the Trustee and any agent of the Issuer or the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security or Coupon and of the ownership thereof. Every substitute Security or Coupon of any series issued pursuant to the provisions of this Section by virtue of the fact that any such Security or Coupon is destroyed, lost or stolen shall constitute an additional contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Security or Coupon shall be at any time enforceable by anyone and shall be entitled to all the benefits of (but shall be subject to all the limitations of rights set forth in) this Indenture equally and proportionately with any and all other Securities or Coupons of such series duly authenticated and delivered hereunder. All Securities and Coupons shall be held and owned upon the express condition that, to the extent permitted by law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, defaced, destroyed, lost or stolen Securities and Coupons and shall preclude any and all other rights or remedies 18 27 notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.10 CANCELLATION OF SECURITIES; DESTRUCTION THEREOF. All Securities and Coupons surrendered for payment, redemption, registration of transfer or exchange, or for credit against any payment in respect of a sinking or analogous fund, if surrendered to the Issuer or any agent of the Issuer or the Trustee or any agent of the Trustee, shall be delivered to the Trustee or its agent for cancellation or, if surrendered to the Trustee, shall be cancelled by it; and no Securities or Coupons shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee or its agent shall dispose of cancelled Securities and Coupons held by it and deliver a certificate of disposition to the Issuer. If the Issuer or its agent shall acquire any of the Securities or Coupons, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities or Coupons unless and until the same are delivered to the Trustee or its agent for cancellation. SECTION 2.11 TEMPORARY SECURITIES. Pending the preparation of definitive Securities for any series, the Issuer may execute and the Trustee shall authenticate and deliver temporary Securities for such series (printed, lithographed, typewritten or otherwise reproduced, in each case in form satisfactory to the Trustee). Temporary Securities of any series shall be issuable as Registered Securities without Coupons, or as Unregistered Securities with or without Coupons attached thereto, of any authorized denomination, and substantially in the form of the definitive Securities of such series but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be determined by the Issuer with the concurrence of the Trustee as evidenced by the execution and authentication thereof. Temporary Securities may contain such references to any provisions of this Indenture as may be appropriate. Every temporary Security shall be executed by the Issuer and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definite Securities. Without reasonable delay the Issuer shall execute and shall furnish definitive Securities of such series and thereupon temporary Registered Securities of such series may be surrendered in exchange therefor without charge at each office or agency to be maintained by the Issuer for that purpose pursuant to Section 3.2 and, in the case of Unregistered Securities, at any agency maintained by the Issuer for such purpose as specified pursuant to Section 2.3, and the Trustee shall authenticate and deliver in exchange for such temporary Securities of such series an equal aggregate principal amount of definitive Securities of the same series having authorized denominations and, in the case of Unregistered Securities, having attached thereto any appropriate Coupons. Until so exchanged, the temporary Securities of any series shall be entitled to the same benefits under this Indenture as definitive Securities of such series, unless otherwise established pursuant to Section 2.3. The provisions of this Section are subject to any restrictions or limitations on the issue and delivery of temporary Unregistered Securities of any series that may be established pursuant to Section 2.3 (including any provision that Unregistered Securities of such series initially be issued in the form of a single global Unregistered Security to be delivered to a depositary or agency located outside the United States and the procedures pursuant to which definitive or global Unregistered Securities of such series would be issued in exchange for such temporary global Unregistered Security). 19 28 ARTICLE THREE COVENANTS OF THE ISSUER ----------------------- SECTION 3.1 PAYMENT OF PRINCIPAL AND INTEREST. The Issuer covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay or cause to be paid the principal of, and interest on, each of the Securities of such series (together with any additional amounts payable pursuant to the terms of such Securities) at the place or places, at the respective times and in the manner provided in such Securities and in the Coupons, if any, appertaining thereto and in this Indenture. The interest on Securities with Coupons attached (together with any additional amounts payable pursuant to the terms of such Securities) shall be payable only upon presentation and surrender of the several Coupons for such interest installments as are evidenced thereby as they severally mature. If any temporary Unregistered Security provides that interest thereon may be paid while such Security is in temporary form, the interest on any such temporary Unregistered Security (together with any additional amounts payable pursuant to the terms of such Security) shall be paid, as to the installments of interest evidenced by Coupons attached thereto, if any, only upon presentation and surrender thereof, and, as to the other installments of interest, if any, only upon presentation of such Securities for notation thereon of the payment of such interest, in each case subject to any restrictions that may be established pursuant to Section 2.3. The interest on Registered Securities (together with any additional amounts payable pursuant to the terms of such Securities) shall be payable only to or upon the written order of the Holders thereof and, at the option of the Issuer, may be paid by wire transfer or by mailing checks for such interest payable to or upon the written order of such Holders at their last addresses as they appear on the registry books of the Issuer, unless otherwise provided in such Securities. SECTION 3.2 OFFICES FOR PAYMENTS, ETC. So long as any Registered Securities are authorized for issuance pursuant to this Indenture or are outstanding hereunder, the Issuer will maintain in the Borough of Manhattan, The City of New York, an office or agency where the Registered Securities of each series may be presented for payment, where the Securities of each series may be presented for exchange as is provided in this Indenture and, if applicable, pursuant to Section 2.3 and where the Registered Securities of each series may be presented for registration of transfer as in this Indenture provided. The Issuer will maintain one or more offices or agencies in a city or cities located outside the United States (including any city in which such an agency is required to be maintained under the rules of any stock exchange on which the Securities of such series are listed) where the Unregistered Securities, if any, of each series and Coupons, if any, appertaining thereto may be presented for payment. No payment on any Unregistered Security or Coupon will be made upon presentation of such Unregistered Security or Coupon at an agency of the Issuer within the United States nor will any payment be made by transfer to an account in, or by mail to an address in, the United States unless pursuant to applicable United States laws and regulations then in effect such payment can be made without adverse tax consequences to the Issuer. Notwithstanding the foregoing, payments in Dollars of Unregistered Securities of any series and Coupons appertaining thereto which are payable in Dollars may be made at an agency of the Issuer maintained in the Borough of Manhattan, The City of New York if such payment in Dollars at each agency maintained by the Issuer outside the United States for payment on such 20 29 Unregistered Securities is illegal or effectively precluded by exchange controls or other similar restrictions. The Issuer will maintain in the Borough of Manhattan, The City of New York, an office or agency where notices and demands to or upon the Issuer in respect of the Securities of any series, the Coupons appertaining thereto or this Indenture may be served. The Issuer will give to the Trustee written notice of the location of each such office or agency and of any change of location thereof. In case the Issuer shall fail to maintain any agency required by this Section to be located in the Borough of Manhattan, The City of New York, or shall fail to give such notice of the location or of any change in the location of any of the above agencies, presentations and demands may be made and notices may be served at the Corporate Trust Office of the Trustee. The Issuer may from time to time designate one or more additional offices or agencies where the Securities of a series and any Coupons appertaining thereto may be presented for payment, where the Securities of that series may be presented for exchange as provided in this Indenture and pursuant to Section 2.3 and where the Registered Securities of that series may be presented for registration of transfer as in this Indenture provided, and the Issuer may from time to time rescind any such designation, as the Issuer may deem desirable or expedient; PROVIDED, HOWEVER, that no such designation or rescission shall in any manner relieve the Issuer of its obligation to maintain the agencies provided for in this Section. The Issuer will give to the Trustee prompt written notice of any such designation or rescission thereof. SECTION 3.3 APPOINTMENT TO FILL A VACANCY IN OFFICE OF TRUSTEE. The Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.10, a Trustee, so that there shall at all times be a Trustee with respect to each series of Securities hereunder. SECTION 3.4 PAYING AGENTS. Whenever the Issuer shall appoint a paying agent other than the Trustee with respect to the Securities of any series, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section, (a) that it will hold all sums received by it as such agent for the payment of the principal of or interest on the Securities of such series (whether such sums have been paid to it by the Issuer or by any other obligor on the Securities of such series) in trust for the benefit of the Holders of the Securities of such series, or Coupons appertaining thereto, if any, or of the Trustee, (b) that it will give the Trustee notice of any failure by the Issuer (or by any other obligor on the Securities of such series) to make any payment of the principal of or interest on the Securities of such series when the same shall be due and payable, and (c) that it will pay any such sums so held in trust by it to the Trustee upon the Trustee's written request at any time during the continuance of the failure referred to in clause (b) above. 21 30 The Issuer will, on or prior to each due date of the principal of or interest on the Securities of such series, deposit with the paying agent a sum sufficient to pay such principal or interest so becoming due, and (unless such paying agent is the Trustee) the Issuer will promptly notify the Trustee of any failure to take such action. If the Issuer shall act as its own paying agent with respect to the Securities of any series, it will, on or before each due date of the principal of or interest on the Securities of such series, set aside, segregate and hold in trust for the benefit of the Holders of the Securities of such series or the Coupons appertaining thereto a sum sufficient to pay such principal or interest so becoming due. The Issuer will promptly notify the Trustee of any failure to take such action. Anything in this Section to the contrary notwithstanding, but subject to Section 10.1, the Issuer may at any time, for the purpose of obtaining a satisfaction and discharge with respect to one or more or all series of Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust for any such series by the Issuer or any paying agent hereunder, as required by this Section, such sums to be held by the Trustee upon the trusts herein contained. Anything in this Section to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section is subject to the provisions of Sections 10.3 and 10.4. SECTION 3.5 WRITTEN STATEMENT TO TRUSTEE. The Issuer will furnish to the Trustee on or before April 30 in each year (beginning with April 30, 1999) a brief certificate (which need not comply with Section 11.5) from the principal executive, financial or accounting officer of the Issuer stating that in the course of the performance by the signer of his duties as an officer of the Issuer he would normally have knowledge of any default or non-compliance by the Issuer in the performance of any covenants or conditions contained in this Indenture, stating whether or not he has knowledge of any such default or non-compliance and, if so, specifying each such default or non-compliance of which the signer has knowledge and the nature thereof. SECTION 3.6 NEGATIVE PLEDGE; LIMITATION ON SALE AND LEASEBACK TRANSACTIONS (a) The Issuer will not issue, assume, incur or guarantee, and will not permit any Restricted Subsidiary to issue, assume, incur or guarantee, any Debt secured by any mortgage, pledge, lien or other encumbrance (any such mortgage, pledge, lien and other encumbrance being hereinafter called a "Mortgage"), upon any Principal Manufacturing Property of the Issuer or any Restricted Subsidiary, or upon shares of capital stock or Debt of any Restricted Subsidiary (whether such Principal Manufacturing Property or shares of stock are now owned or hereafter acquired or such Debt is now existing or hereafter incurred or assumed) without in any such case effectively providing, concurrently with the issuance or assumption of such Debt, that the Securities (together with, if the Issuer shall so determine, any other Debt of the Issuer or such Restricted Subsidiary ranking equally with the Securities and then existing or thereafter created) shall be secured equally and ratably with such Debt; PROVIDED, HOWEVER, that the foregoing restrictions shall not apply to: 22 31 (i) (A) the creation of Mortgages on any Principal Manufacturing Property (including any improvements on an existing property, as to which the Mortgage may include such underlying real property as the Issuer may deem necessary for such improvement and unnecessary for the operation of any theretofore existing Principal Manufacturing Property on adjoining real property) hereafter acquired by the Issuer or a Restricted Subsidiary prior to, at the time of, or within 120 days after the latest of the acquisition, completion of construction or commencement of commercial operation of such property, to secure or provide for the payment of financing of all or any part of the purchase price thereof or construction of fixed improvements thereon, or (B) in addition to assumptions in transactions contemplated by subparagraph (ii) below, the assumption of any Mortgage upon any Principal Manufacturing Property hereafter acquired existing at the time of such acquisitions, or the acquisition of any Principal Manufacturing Property subject to any Mortgage without the assumption thereof; PROVIDED that (x) with respect to (A) and (B) above, the aggregate principal amount of Debt secured by any such Mortgage so issued, assumed or existing shall not exceed 100% of the cost of such Principal Manufacturing Property to the corporation acquiring the same or of the fair value thereof (as determined by resolution adopted by the Board of Directors) at the time of such acquisition, whichever is less, (y) with respect to (A) and (B) above, in the case of any such acquisition, construction or improvement the Mortgage shall not apply to any property theretofore owned by the Issuer or a Restricted Subsidiary, other than, in the case of any such construction or improvement, any theretofore unimproved real property on which the property so constructed, or the improvement, is located (which unimproved real property may at the option of the Issuer be segregated by legal description from other real property of the Issuer appurtenant to such Principal Manufacturing Property and subjected to the Mortgage related to such construction or improvement) and (z) with respect to (B) above, such Mortgage was not created in contemplation of such acquisition; (ii) the assumption of any Mortgages on any Principal Manufacturing Property of a corporation which is merged into or consolidated with the Issuer or a Restricted Subsidiary or substantially all of the assets of which are acquired by the Issuer or a Restricted Subsidiary; PROVIDED that such Mortgages were not created in contemplation of such merger, consolidation or acquisition; (iii) Mortgages on any Principal Manufacturing Property of the Issuer or a Restricted Subsidiary in favor of the United States of America or any State thereof, or any department, agency or instrumentality or political subdivision of the United States of America or any State thereof, or in favor of any other country, or any political subdivision thereof, to secure partial, progress, advance or other payments pursuant to any contract or statute or to secure any Debt incurred or guaranteed for the purpose of financing all or any part of the cost of acquiring, constructing or improving the property subject to such Mortgages (including Mortgages incurred in connection with financings of the type contemplated by Section 103 of the Internal Revenue Code, maritime financings under Title XI of the United States Code or similar financings); 23 32 (iv) Mortgages securing Debt of a Restricted Subsidiary owing to the Issuer or another Restricted Subsidiary; and (v) any extension, renewal or replacement (or successive extensions, renewals or replacements) in whole or in part, of any Mortgage referred to in the foregoing clauses (i) through (iv); PROVIDED, HOWEVER, that the principal amount of Debt so secured thereby shall not exceed the principal amount of Debt so secured at the time of such extension, renewal or replacement, and that such extension, renewal or replacement shall be limited to all or a part of the property which secured the Mortgage so extended, renewed or replaced (plus improvements and construction on such property). (b) Notwithstanding the provisions of subsection (a) of this Section, the Issuer or any one or more Restricted Subsidiaries may issue or assume Debt secured by a Mortgage on a Principal Manufacturing Property in addition to those permitted by subsection (a) of this Section and renew, extend or replace such Mortgages; PROVIDED that at the time of such creation, assumption, renewal, extension or replacement, and after giving effect thereto, Exempted Debt does not exceed 15% of Consolidated Net Tangible Assets. (c) The Issuer will not, nor will it permit any Restricted Subsidiary to, enter into any arrangement with any Person providing for the leasing by the Issuer or any Restricted Subsidiary of any Principal Manufacturing Property, whether such Principal Manufacturing Property is now owned or hereafter acquired (except for temporary leases for a term, including renewals at the option of the lessee, of not more than three years and except for leases between the Issuer and a Restricted Subsidiary or between Restricted Subsidiaries), which property has been or is to be sold or transferred by the Issuer or such Restricted Subsidiary to such Person with the intention of taking back a lease on such property (a "sale and leaseback transaction") unless the net proceeds of such sale or transfer shall be at least equal to the fair value of such property as determined by resolution adopted by the Board of Directors and either: (i) the Issuer or such Restricted Subsidiary would be entitled, pursuant to the provisions of subsection (a) of this Section, to issue or assume Debt secured by a Mortgage on such property at least equal in amount to the Attributable Debt in respect of such sale and leaseback transaction without equally and ratably securing the Securities; or (ii) since the date hereof and within a period commencing twelve months prior to the consummation of such sale and leaseback transaction and ending twelve months after the consummation of such sale and leaseback transaction the Issuer or such Restricted Subsidiary, as the case may be, has expended or will expend, or a combination of both, for facilities comprising all or a part of a Principal Manufacturing Property an amount equal to (A) the net proceeds of such sale and leaseback transaction and the Issuer elects to designate such amount as a credit against such sale and leaseback transaction or (B) a part 24 33 of the net proceeds of such sale and leaseback transaction and the Issuer elects to designate such amount as a credit against such sale and leaseback transaction and applies an amount equal to the remainder of the net proceeds as provided in clause (iii) hereof; or (iii) such sale and leaseback transaction does not come within the exceptions provided in clause (i) hereof and the Issuer does not make the election permitted by clause (ii) hereof or makes such election only as to part of such net proceeds, in either which event the Issuer will, within 120 days after such sale and leaseback transaction, apply an amount equal to the Attributable Debt in respect of such sale and leaseback transaction (less an amount equal to the amount, if any, elected under clause (ii) hereof) to the retirement (other than any mandatory retirement or by way of payment at maturity) of Debt with a maturity of greater than one year of the Issuer or any Restricted Subsidiary (other than Debt of the Issuer to any Restricted Subsidiary or of any Restricted Subsidiary to the Issuer or another Restricted Subsidiary). (d) Notwithstanding the provisions of paragraph (c) of this Section, the Issuer and any Restricted Subsidiary may enter into sale and leaseback transactions in addition to those permitted by paragraph (c) of this Section and without any obligation to make expenditures for facilities comprising a part or all of a Principal Manufacturing Property or to retire any Debt, provided that at the time of entering into such sale and leaseback transaction and after giving effect thereto, Exempted Debt does not exceed 10% of Consolidated Net Tangible Assets. SECTION 3.7 LUXEMBOURG PUBLICATIONS. In the event of the publication of any notice pursuant to Section 5.11, 6.8, 6.10(a), 6.11, 8.2, 10.4, 12.2 or 12.5, the party making such publication in the Borough of Manhattan, The City of New York and London shall also, to the extent that notice is required to be given to Holders of Securities of any series by applicable Luxembourg law or stock exchange regulation, as evidenced by an Officer's Certificate delivered to such party, make a similar publication in Luxembourg. ARTICLE FOUR SECURITYHOLDERS LISTS AND REPORTS BY THE ISSUER AND THE TRUSTEE ---------------------- SECTION 4.1 ISSUER TO FURNISH TRUSTEE INFORMATION AS TO NAMES AND ADDRESSES OF SECURITYHOLDERS. If and so long as the Trustee shall not be the Security registrar for the Securities of any series, the Issuer and any other obligor on the Securities will furnish or cause to be furnished to the Trustee a list in such form as the Trustee may reasonably require of the names and addresses of the Holders of the Registered Securities of such series pursuant to Section 312 of the Trust Indenture Act of 1939 (a) semi-annually not more than 15 days after each record date for the payment of interest on such Registered Securities, as hereinabove specified, as of such record date and on dates to be determined pursuant to Section 2.3 for non-interest bearing Registered Securities in each year, and (b) at such other times as the Trustee may request in 25 34 writing, within thirty days after receipt by the Issuer of any such request as of a date not more than 15 days prior to the time such information is furnished. SECTION 4.2 PRESERVATION AND DISCLOSURE OF SECURITYHOLDERS LISTS. This Section intentionally left blank. SECTION 4.3 REPORTS BY THE ISSUER. The Issuer covenants to file with the Trustee, within 30 days after the Issuer is required to file the same with the Commission, copies of the annual reports and of the information, documents, and other reports that the Issuer may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 or pursuant to Section 314 of the Trust Indenture Act of 1939. SECTION 4.4 REPORTS BY THE TRUSTEE. Any Trustee's report required under Section 313(a) of the Trust Indenture Act of 1939 shall be transmitted on or before January 15 in each year beginning January 15, 1999, as provided in section 313(c) of the Trust Indenture Act of 1939, so long as any Securities are Outstanding hereunder, and shall be dated as of a date convenient to the Trustee no more than 60 days prior thereto. ARTICLE FIVE REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT ------------------- SECTION 5.1 EVENT OF DEFAULT DEFINED; ACCELERATION OF MATURITY; WAIVER OF DEFAULT. "Event of Default" with respect to Securities of any series wherever used herein, means each one of the following events which shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any installment of interest upon any of the Securities of such series as and when the same shall become due and payable, and continuance of such default for a period of 30 days; or (b) default in the payment of all or any part of the principal of any of the Securities of such series as and when the same shall become due and payable either at maturity, upon any redemption, by declaration or otherwise; or (c) failure on the part of the Issuer duly to observe or perform any other of the covenants or agreements on the part of the Issuer in the Securities of such series (other than a covenant or warranty in respect of the Securities of such series a default in the performance or breach of which is elsewhere in this Section specifically dealt with) or in this Indenture contained for a period of 60 days after the date on which written notice specifying such failure, stating that such notice is a "Notice of Default" hereunder and demanding that the Issuer remedy the same, shall have been given by registered or 26 35 certified mail, return receipt requested, to the Issuer by the Trustee, or to the Issuer and the Trustee by the holders of at least 25% in aggregate principal amount of the Outstanding Securities of all series affected thereby; or (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Issuer in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Issuer or for any substantial part of its property or ordering the winding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (e) the Issuer shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Issuer or for any substantial part of its property, or make any general assignment for the benefit of creditors; or (f) any other Event of Default provided in the supplemental indenture under which such series of Securities is issued or in the form of Security for such series. If an Event of Default described in clauses (a), (b), (c) or (f) (if the Event of Default under clause (c) or (f), as the case may be, is with respect to less than all series of Securities then Outstanding) occurs and is continuing, then, and in each and every such case, except for any series of Securities the principal of which shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount of the Securities of each such affected series then Outstanding hereunder (each series voting as a separate class) by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if the Securities of any such affected series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) of all Securities of all such affected series, and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. If an Event of Default described in clause (c) or (f) (if the Event of Default under clause (c) or (f), as the case may be, is with respect to all series of Securities then Outstanding), (d) or (e) occurs and is continuing, then and in each and every such case, unless the principal of all the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount of all the Securities then Outstanding hereunder (treated as one class), by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if any Securities are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms thereof) of all the Securities then Outstanding, and interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal (or, if the Securities are Original Issue Discount Securities, such portion of the 27 36 principal as may be specified in the terms thereof) of the Securities of any series (or of all the Securities, as the case may be) shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Issuer shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities of such series (or of all the Securities, as the case may be) and the principal of any and all Securities of each such series (or of all the Securities, as the case may be) which shall have become due otherwise than by acceleration (with interest upon such principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of each such series (or at the respective rates of interest or Yields to Maturity of all the Securities, as the case may be) to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, its agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and if any and all Events of Default under the Indenture, other than the non-payment of the principal of Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case the Holders of a majority in aggregate principal amount of all the Securities of each such series, or of all the Securities, as the case may be, in each case with each series voting as a separate class, then Outstanding, by written notice to the Issuer and to the Trustee, may waive all defaults with respect to each such series (or with respect to all the Securities, as the case may be) and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. For all purposes under this Indenture, if a portion of the principal of any Original Issue Discount Securities shall have been accelerated and declared due and payable pursuant to the provisions hereof, then, from and after such declaration, unless such declaration has been rescinded and annulled, the principal amount of such Original Issue Discount Securities shall be deemed, for all purposes hereunder, to be such portion of the principal thereof as shall be due and payable as a result of such acceleration, and payment of such portion of the principal thereof as shall be due and payable as a result of such acceleration, together with interest, if any, thereon and all other amounts owing thereunder, shall constitute payment in full of such Original Issue Discount Securities. SECTION 5.2 COLLECTION OF INDEBTEDNESS BY TRUSTEE; TRUSTEE MAY PROVE DEBT. The Issuer covenants that (a) in case default shall be made in the payment of any installment of interest on any of the Securities of any series when such interest shall have become due and payable, and such default shall have continued for a period of 30 days or (b) in case default shall be made in the payment of all or any part of the principal of any of the Securities of any series when the same shall have become due and payable, whether upon maturity of the Securities of such series or upon any redemption or by declaration or otherwise -- then upon demand of the Trustee, the Issuer will pay to the Trustee for the benefit of the Holders of the Securities of such series the whole amount that then shall have become due and payable on all Securities of such series, and such Coupons, for principal or interest, as the case may be (with interest to the date of such payment upon the overdue principal and, to the extent that payment of such interest is 28 37 enforceable under applicable law, on overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series); and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and any expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of its negligence or bad faith. Until such demand is made by the Trustee, the Issuer may pay the principal of and interest on the Securities of any series to the registered holders, whether or not the Securities of such Series be overdue. In case the Issuer shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree, and may enforce any such judgment or final decree against the Issuer or other obligor upon the Securities and collect in the manner provided by law out of the property of the Issuer or other obligor upon the Securities, wherever situated, the moneys adjudged or decreed to be payable. In case there shall be pending proceedings relative to the Issuer or any other obligor upon the Securities under Title 11 of the United States Code or any other applicable Federal or state bankruptcy, insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Issuer or its property or such other obligor, or in case of any other comparable judicial proceedings relative to the Issuer or other obligor upon the Securities, or to the creditors or property of the Issuer or such other obligor, the Trustee, irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section, shall be entitled and empowered, by intervention in such proceedings or otherwise: (a) to file and prove a claim or claims for the whole amount of principal and interest (or, if the Securities of any series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) owing and unpaid in respect of the Securities of any series, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith) and of the Securityholders allowed in any judicial proceedings relative to the Issuer or other obligor upon the Securities, or to the creditors or property of the Issuer or such other obligor, (b) unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Securities of any series in any election of a trustee or a standby trustee 29 38 in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and (c) to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute all amounts received with respect to the claims of the Securityholders and of the Trustee on their behalf; and any trustee, receiver, or liquidator, custodian or other similar official is hereby authorized by each of the Securityholders to make payments to the Trustee, and, in the event that the Trustee shall consent to the making of payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities of any series or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar person. All rights of action and of asserting claims under this Indenture, or under any of the Securities of any series or Coupons appertaining to such Securities, may be enforced by the Trustee without the possession of any of the Securities of such series or Coupons appertaining to such Securities or the production thereof on any trial or other proceedings relative thereto, and any such action or proceedings instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements and compensation of the Trustee, each predecessor Trustee and their respective agents and attorneys, shall be for the ratable benefit of the Holders of the Securities or Coupons appertaining to such Securities in respect of which such action was taken. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the Holders of the Securities or Coupons appertaining to such Securities in respect to which such action was taken, and it shall not be necessary to make any Holders of such Securities or Coupons appertaining to such Securities parties to any such proceedings. SECTION 5.3 APPLICATION OF PROCEEDS. Any moneys collected by the Trustee pursuant to this Article in respect of any series shall be applied in the following order at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of principal or interest, upon presentation of the several Securities and Coupons appertaining to such Securities in respect of which monies have been collected and stamping (or otherwise noting) thereon the payment, or issuing Securities of such series in reduced principal amounts in exchange for the presented Securities of like series if only partially paid, or upon surrender thereof if fully paid: 30 39 FIRST: To the payment of costs and expenses applicable to such series in respect of which monies have been collected, including reasonable compensation to the Trustee and each predecessor Trustee and their respective agents and attorneys and of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith; SECOND: In case the principal of the Securities of such series in respect of which moneys have been collected shall not have become and be then due and payable, to the payment of interest on the Securities of such series in default in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in such Securities, such payments to be made ratably to the persons entitled thereto, without discrimination or preference; THIRD: In case the principal of the Securities of such series in respect of which moneys have been collected shall have become and shall be then due and payable, to the payment of the whole amount then owing and unpaid upon all the Securities of such series for principal and interest, with interest upon the overdue principal, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series; and in case such moneys shall be insufficient to pay in full the whole amount so due and unpaid upon the Securities of such series, then to the payment of such principal and interest or Yield to Maturity, without preference or priority of principal over interest or Yield to Maturity, or of interest or Yield to Maturity over principal, or of any installment of interest over any other installment of interest, or of any Security of such series over any other Security of such series, ratably to the aggregate of such principal and accrued and unpaid interest or Yield to Maturity; and FOURTH: To the payment of the remainder, if any, to the Issuer or any other person lawfully entitled thereto. SECTION 5.4 SUITS FOR ENFORCEMENT. In case an Event of Default has occurred, has not been waived and is continuing, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. SECTION 5.5 RESTORATION OF RIGHTS ON ABANDONMENT OF PROCEEDINGS. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Trustee, then and in every such case the Issuer and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of 31 40 the Issuer, the Trustee and the Securityholders shall continue as though no such proceedings had been taken. SECTION 5.6 LIMITATIONS ON SUITS BY SECURITYHOLDERS. No Holder of any Security of any series or of any Coupon appertaining thereto shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture, or for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder, unless such Holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the Holders of not less than 25% in aggregate principal amount of the Securities of each affected series then Outstanding (each series treated as a separate class) shall have made written request upon the Trustee to institute such action or proceedings in its own name as trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 5.9; it being understood and intended, and being expressly covenanted by the taker and Holder of every Security or Coupon with every other taker and Holder and the Trustee, that no one or more Holders of Securities of any series or Coupons appertaining to such Securities shall have any right in any manner whatever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other such Holder of Securities or Coupons appertaining to such Securities, or to obtain or seek to obtain priority over or preference to any other such Holder or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders of Securities of the applicable series and Coupons appertaining to such Securities. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. SECTION 5.7 UNCONDITIONAL RIGHT OF SECURITYHOLDERS TO INSTITUTE CERTAIN SUITS. Notwithstanding any other provision in this Indenture and any provision of any Security, the right of any Holder of any Security or Coupon to receive payment of the principal of and interest on such Security or Coupon on or after the respective due dates expressed in such Security or Coupon, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 5.8 POWERS AND REMEDIES CUMULATIVE; DELAY OR OMISSION NOT WAIVER OF DEFAULT. Except as provided in Section 5.6, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders of Securities or Coupons is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 32 41 No delay or omission of the Trustee or of any Holder of Securities or Coupons to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; and, subject to Section 5.6, every power and remedy given by this Indenture or by law to the Trustee or to the Holders of Securities or Coupons may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Holders of Securities or Coupons. SECTION 5.9 CONTROL BY HOLDERS OF SECURITIES. The Holders of a majority in aggregate principal amount of the Securities of each series affected (with each such series voting as a separate class) at the time Outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to the Securities of such series by this Indenture; PROVIDED that such direction shall not be otherwise than in accordance with law and the provisions of this Indenture and PROVIDED FURTHER that (subject to the provisions of Section 6.1) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, shall determine that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by its board of directors, the executive committee, or a trust committee of directors or Responsible Officers of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability or if the Trustee in good faith shall so determine that the actions or forbearances specified in or pursuant to such direction would be unduly prejudicial to the interests of Holders of the Securities of all series so affected not joining in the giving of said direction, it being understood that (subject to Section 6.1) the Trustee shall have no duty to ascertain whether or not such actions or forbearances are unduly prejudicial to such Holders. Nothing in this Indenture shall impair the right of the Trustee in its discretion to take any action deemed proper by the Trustee and which is not inconsistent with such direction or directions by Securityholders. SECTION 5.10 WAIVER OF PAST DEFAULTS. Prior to the acceleration of the maturity of any Securities as provided in Section 5.1, the Holders of a majority in aggregate principal amount of the Securities of all series at the time Outstanding with respect to which an Event of Default shall have occurred and be continuing (each series voting as a separate class) may on behalf of the Holders of all such Securities waive any past default or Event of Default described in Section 5.1 and its consequences, except a default in respect of a covenant or provision hereof which cannot be modified or amended without the consent of the Holder of each Security affected. In the case of any such waiver, the Issuer, the Trustee and the Holders of all such Securities shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. Upon any such waiver, such default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of Default arising therefrom shall be deemed to have been cured, and not to have occurred for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. 33 42 SECTION 5.11 TRUSTEE TO GIVE NOTICE OF DEFAULT, BUT MAY WITHHOLD IN CERTAIN CIRCUMSTANCES. The Trustee shall, within ninety days after the occurrence of a default with respect to the Securities of any series, give notice of all defaults with respect to that series known to the Trustee (i) if any Unregistered Securities of that series are then Outstanding, to the Holders thereof, by publication at least once in an Authorized Newspaper in the Borough of Manhattan, The City of New York and at least once in an Authorized Newspaper in London (and, if required by Section 3.7, at least once in an Authorized Newspaper in Luxembourg) and (ii) to all Holders of Securities of such series in the manner and to the extent provided in Section 11.4, unless in each case such defaults shall have been cured before the mailing or publication of such notice (the term "defaults" for the purpose of this Section being hereby defined to mean any event or condition which is, or with notice or lapse of time or both would become, an Event of Default); PROVIDED that, except in the case of default in the payment of the principal of or interest on any of the Securities of such series, or in the payment of any sinking fund installment on such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors or trustees and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders of such series. SECTION 5.12 RIGHT OF COURT TO REQUIRE FILING OF UNDERTAKING TO PAY COSTS. All parties to this Indenture agree, and each Holder of any Security or Coupon by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder or group of Securityholders of any series holding in the aggregate more than 10% in aggregate principal amount of the Securities of such series, or, in the case of any suit relating to or arising under clause (c) or (f) of Section 5.1 (if the suit relates to Securities of more than one but less than all series), 10% in aggregate principal amount of each series of Securities then Outstanding and affected thereby, or in the case of any suit relating to or arising under clause (c) or (f) (if the suit under clause (c) or (f) relates to each series of the Securities then Outstanding), (d) or (e) of Section 5.1, 10% in aggregate principal amount of each series of Securities then Outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of or interest on any Security on or after the due date expressed in such Security or any date fixed for redemption. ARTICLE SIX CONCERNING THE TRUSTEE ---------------------- SECTION 6.1 DUTIES AND RESPONSIBILITIES OF THE TRUSTEE; DURING DEFAULT; PRIOR TO DEFAULT. With respect to the Holders of any series of Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Securities of a particular series and after the curing or waiving of all Events of Default which may have occurred with respect to 34 43 such series, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Securities of a series has occurred (which has not been cured or waived) the Trustee shall exercise with respect to such series of Securities such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (a) prior to the occurrence of an Event of Default with respect to the Securities of any series and after the curing or waiving of all such Events of Default with respect to such series which may have occurred: (i) the duties and obligations of the Trustee with respect to the Securities of any series shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such statements, certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders pursuant to Section 5.9 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there shall be reasonable ground for believing that the repayment of such funds or adequate indemnity against such liability is not reasonably assured to it. 35 44 The provisions of this Section 6.1 are in furtherance of and subject to Section 315 of the Trust Indenture Act of 1939. SECTION 6.2 CERTAIN RIGHTS OF THE TRUSTEE. In furtherance of and subject to the Trust Indenture Act of 1939, and subject to Section 6.1: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, Officer's Certificate or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, note, coupon, security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Issuer mentioned herein shall be sufficiently evidenced by an Officer's Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the secretary or an assistant secretary of the Issuer; (c) the Trustee may consult with counsel and any written advice or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in reliance thereon in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the trusts or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; (f) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, appraisal, bond, debenture, note, coupon, security, or other paper or document unless requested in writing so to do by the Holders of a majority in aggregate principal amount of the Securities of all series affected then Outstanding; PROVIDED that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a condition to proceeding; the reasonable expenses of every such investigation shall be paid by the Issuer or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Issuer upon demand; and 36 45 (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys not regularly in its employ and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder. SECTION 6.3 TRUSTEE NOT RESPONSIBLE FOR RECITALS, DISPOSITION OF SECURITIES OR APPLICATION OF PROCEEDS THEREOF. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Issuer, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Securities or Coupons. The Trustee shall not be accountable for the use or application by the Issuer of any of the Securities or of the proceeds thereof. SECTION 6.4 TRUSTEE AND AGENTS MAY HOLD SECURITIES OR COUPONS; COLLECTIONS, ETC. The Trustee or any agent of the Issuer or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities or Coupons with the same rights it would have if it were not the Trustee or such agent and may otherwise deal with the Issuer and receive, collect, hold and retain collections from the Issuer with the same rights it would have if it were not the Trustee or such agent. SECTION 6.5 MONEYS HELD BY TRUSTEE. Subject to the provisions of Section 10.4 hereof, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by mandatory provisions of law. Neither the Trustee nor any agent of the Issuer or the Trustee shall be under any liability for interest on any moneys received by it hereunder. SECTION 6.6 COMPENSATION AND INDEMNIFICATION OF TRUSTEE AND ITS PRIOR CLAIM. The Issuer covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) and the Issuer covenants and agrees to pay or reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of it in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. Any such payments and reimbursements not made in a timely fashion shall be made with interest at the Trustee's corporate base rate. The Issuer also covenants to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including the costs and expenses of defending itself against or investigating any claim of liability in the premises. The obligations of the Issuer under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. Such additional 37 46 indebtedness shall be a senior claim to that of the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the Holders of particular Securities or Coupons, and the Securities are hereby subordinated to such senior claim. SECTION 6.7 RIGHT OF TRUSTEE TO RELY ON OFFICER'S CERTIFICATE, ETC. Subject to Sections 6.1 and 6.2, whenever in the administration of the trusts of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officer's Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.8 INDENTURES NOT CREATING POTENTIAL CONFLICTING INTERESTS FOR THE TRUSTEE. This Section intentionally left blank. SECTION 6.9 PERSONS ELIGIBLE FOR APPOINTMENT AS TRUSTEE. The Trustee for each series of Securities hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or of any State or the District of Columbia having a combined capital and surplus of at least $5,000,000, and which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by Federal, State or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. The provisions of this Section 6.9 are in furtherance of and subject to Section 310(a) of the Trust Indenture Act of 1939. SECTION 6.10 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR TRUSTEE. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign with respect to one or more or all series of Securities by giving written notice of resignation to the Issuer and (i) if any Unregistered Securities of a series affected are then Outstanding, by giving notice of such resignation to the Holders thereof, by publication at least once in an Authorized Newspaper in the Borough of Manhattan, The City of New York, and at least once in an Authorized Newspaper in London (and, if required by Section 3.7, at least once in an Authorized Newspaper in Luxembourg), (ii) if any Unregistered Securities of a series affected are then Outstanding, by mailing notice of such resignation to the Holders thereof whose names and addresses have been furnished to the Trustee, at such addresses as were so furnished to the Trustee and (iii) by mailing notice of such resignation to the Holders of then Outstanding Registered Securities of each series affected at their addresses as they shall appear on the registry 38 47 books. Upon receiving such notice of resignation, the Issuer shall promptly appoint a successor trustee or trustees with respect to the applicable series by written instrument in duplicate, executed by authority of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee or trustees. If no successor trustee shall have been so appointed with respect to any series and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder who has been a bona fide Holder of a Security or Securities of the applicable series for at least six months may, subject to the provisions of Section 5.12, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (i) the Trustee shall fail to comply with the provisions of Section 310(b) of the Trust Indenture Act of 1939 with respect to any series of Securities after written request therefor by the Issuer or by any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months; or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.9 and Section 310(a) of the Trust Indenture Act of 1939 and shall fail to resign after written request therefor by the Issuer or by any Securityholder; or (iii) the Trustee shall become incapable of acting with respect to any series of Securities, or shall be adjudged a bankrupt or insolvent, or a receiver or liquidator of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Issuer may remove the Trustee with respect to the applicable series of Securities and appoint a successor trustee for such series by written instrument, in duplicate, executed by order of the Board of Directors of the Issuer, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 315(e) of the Trust Indenture Act of 1939, any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months may on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee with respect to such series. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The Holders of a majority in aggregate principal amount of the Securities of each series at the time outstanding may at any item remove the Trustee with respect to Securities of 39 48 such series and appoint a successor trustee with respect to the Securities of such series by delivering to the Trustee so removed, to the successor trustee so appointed and to the Issuer the evidence provided for in Section 7.1 of the action in that regard taken by the Securityholders. (d) Any resignation or removal of the Trustee with respect to any series and any appointment of a successor trustee with respect to such series pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11. SECTION 6.11 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR TRUSTEE. Any successor trustee appointed as provided in Section 6.10 shall execute and deliver to the Issuer and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee with respect to all or any applicable series shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, duties and obligations with respect to such series of its predecessor hereunder, with like effect as if originally named as trustee for such series hereunder; but, nevertheless, on the written request of the Issuer or of the successor trustee, upon payment of its charges then unpaid, the trustee ceasing to act shall, subject to Section 10.4, pay over to the successor trustee all moneys at the time held by it hereunder and shall execute and deliver an instrument transferring to such successor trustee all such rights, powers, duties and obligations. Upon request of any such successor trustee, the Issuer shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.6. If a successor trustee is appointed with respect to the Securities of one or more (but not all) series, the Issuer, the predecessor Trustee and each successor trustee with respect to the Securities of any applicable series shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the predecessor Trustee with respect to the Securities of any series as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such trustees co-trustees of the same trust and that each such trustee shall be trustee of a trust or trusts under separate indentures. No successor trustee with respect to any series of Securities shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor trustee shall be qualified under Section 310(b) of the Trust Indenture Act of 1939 and eligible under the provisions of Section 6.9. Upon acceptance of appointment by any successor trustee as provided in this Section 6.11, the Issuer shall give notice thereof (a) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof, by publication of such notice at least once in an Authorized Newspaper in the Borough of Manhattan, The City of New York and at least 40 49 once in an Authorized Newspaper in London (and, if required by Section 3.7, at least once in an Authorized Newspaper in London (and, if required by Section 3.7, at least once in an Authorized Newspaper in Luxembourg), (b) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof whose names and addresses have been furnished to the Trustee, by mailing such notice to such Holders at such addressees as were so furnished to the Trustee (and the Trustee shall make such information available to the Issuer for such purpose) and (c) to the Holders of Registered Securities of each series affected, by mailing such notice to such Holders at their addresses as they shall appear on the registry books. If the acceptance of appointment is substantially contemporaneous with the resignation, then the notice called for by the preceding sentence may be combined with the notice called for by Section 6.10. If the Issuer fails to give such notice within ten days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be given at the expense of the Issuer. SECTION 6.12 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS OF TRUSTEE. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to the corporate trustee business of the Trustee, shall be the successor of the Trustee hereunder, PROVIDED that such corporation shall be qualified under Section 310(b) of the Trust Indenture Act of 1939 and eligible under the provisions of Section 6.9, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities of any series shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities of any series shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities of such series or in this Indenture provided that the certificate of the Trustee shall have; PROVIDED, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities of any series in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13 PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE ISSUER. This Section intentionally left blank. SECTION 6.14 APPOINTMENT OF AUTHENTICATING AGENT. As long as any Securities of a series remain Outstanding, the Trustee may, by an instrument in writing, appoint with the approval of the Issuer an authenticating agent (the "Authenticating Agent") which shall be authorized to act on behalf of the Trustee to authenticate Securities, including Securities issued upon exchange, registration of transfer, partial redemption or pursuant to Section 2.9. Securities of each such series authenticated by such Authenticating Agent shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee. Whenever reference is made in this Indenture to the authentication and delivery of 41 50 Securities of any series by the Trustee or to the Trustee's Certificate of Authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent for such series and a Certificate of Authentication executed on behalf of the Trustee by such Authenticating Agent. Such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States of America or of any State, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $5,000,000 (determined as provided in Section 6.9 with respect to the Trustee) and subject to supervision or examination by Federal or State authority. Any corporation into which any Authenticating Agent may be merged or converted, or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which any Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency business of any Authenticating Agent, shall continue to be the Authenticating Agent with respect to all series of Securities for which it served as Authenticating Agent without the execution or filing of any paper or any further act on the part of the Trustee or such Authenticating Agent. Any Authenticating Agent may at any time, and if it shall cease to be eligible shall, resign by giving written notice of resignation to the Trustee and to the Issuer. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.14 with respect to one or more series of Securities, the Trustee shall upon receipt of an Issuer Order appoint a successor Authenticating Agent and the Issuer shall provide notice of such appointment to all Holders of Securities of such series in the manner and to the extent provided in Section 11.4. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent. The Issuer agrees to pay to the Authenticating Agent for such series from time to time reasonable compensation. The Authenticating Agent for the Securities of any series shall have no responsibility or liability for any action taken by it as such at the direction of the Trustee. Sections 6.2, 6.3, 6.4, 6.6, 6.9 and 7.3 shall be applicable to any Authenticating Agent. ARTICLE SEVEN CONCERNING THE SECURITYHOLDERS ------------------------------ SECTION 7.1 EVIDENCE OF ACTION TAKEN BY SECURITYHOLDERS. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by a specified percentage in principal amount of the Securityholders of any or all series may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such specified percentage of Securityholders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee. Proof of execution of any instrument or of a writing appointing any such agent 42 51 shall be sufficient for any purpose of this Indenture and (subject to Sections 6.1 and 6.2) conclusive in favor of the Trustee and the Issuer, if made in the manner provided in this Article. SECTION 7.2 PROOF OF EXECUTION OF INSTRUMENTS AND OF HOLDING OF SECURITIES. Subject to Sections 6.1 and 6.2, the execution of any instrument by a Securityholder or his agent or proxy may be proved in the following manner: (a) The fact and date of the execution by any Holder of any instrument may be proved by the certificate of any notary public or other officer of any jurisdiction authorized to take acknowledgments of deeds or administer oaths that the person executing such instruments acknowledged to him the execution thereof, or by an affidavit of a witness to such execution sworn to before any such notary or other such officer. Where such execution is by or on behalf of any legal entity other than an individual, such certificate or affidavit shall also constitute sufficient proof of the authority of the person executing the same. The fact of the holding by any Holder of an Unregistered Security of any series, and the identifying number of such Security and the date of his holding the same, may be proved by the production of such Security or by a certificate executed by any trust company, bank, banker or recognized securities dealer wherever situated satisfactory to the Trustee, if such certificate shall be deemed by the Trustee to be satisfactory. Each such certificate shall be dated and shall state that on the date thereof a Security of such series bearing a specified identifying number was deposited with or exhibited to such trust company, bank, banker or recognized securities dealer by the person named in such certificate. Any such certificate may be issued in respect of one or more Unregistered Securities of one or more series specified therein. The holding by the person named in any such certificate of any Unregistered Securities of any series specified therein shall be presumed to continue for a period of one year from the date of such certificate unless at the time of any determination of such holding (1) another certificate bearing a later date issued in respect of the same Securities shall be produced, or (2) the Security of such series specified in such certificate shall be produced by some other person, or (3) the Security of such series specified in such certificate shall have ceased to be Outstanding. Subject to Sections 6.1 and 6.2, the fact and date of the execution of any such instrument and the amount and numbers of Securities of any series held by the person so executing such instrument and the amount and numbers of any Security or Securities for such series may also be proven in accordance with such reasonable rules and regulations as may be prescribed by the Trustee for such series or in any other manner which the Trustee for such series may deem sufficient. (b) In the case of Registered Securities, the ownership of such Securities shall be proved by the Security register or by a certificate of the Security registrar. The Issuer may set a record date for purposes of determining the identity of Holders of Registered Securities of any series entitled to vote or consent to any action referred to in Section 7.1, which record date may be set at any time or from time to time by notice to the Trustee, for any date or dates (in the case of any adjournment or reconsideration) not more than 60 days nor less than five days prior to the proposed date of such vote or consent, and thereafter, notwithstanding any other provisions hereof, with respect to Registered Securities of any series, 43 52 only Holders of Registered Securities of such series of record on such record date shall be entitled to so vote or give such consent or revoke such vote or consent. SECTION 7.3 HOLDERS TO BE TREATED AS OWNERS. The Issuer, the Trustee and any agent of the Issuer or the Trustee may deem and treat the person in whose name any Security shall be registered upon the Security register for such series as the absolute owner of such Security (whether or not such Security shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of and, subject to the provisions of this Indenture, interest on such Security and for all other purposes; and neither the Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. The Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the Holder of any Unregistered Security and the Holder of any Coupon as the absolute owner of such Unregistered Security or Coupon (whether or not such Unregistered Security or Coupon shall be overdue) for the purpose of receiving payment thereof or on account thereof and for all other purposes and neither the Issuer, the Trustee, nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. All such payments so made to any such person, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Unregistered Security or Coupon. SECTION 7.4 SECURITIES OWNED BY ISSUER DEEMED NOT OUTSTANDING. In determining whether the Holders of the requisite aggregate principal amount of Outstanding Securities of any or all series have concurred in any direction, consent or waiver under this Indenture, Securities which are owned by the Issuer or any other obligor on the Securities with respect to which such determination is being made or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities with respect to which such determination is being made shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver only Securities which the Trustee knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Issuer or any other obligor upon the Securities or any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities. In case of a dispute as to such right, the advice of counsel shall be full protection in respect of any decision made by the Trustee in accordance with such advice. Upon request of the Trustee, the Issuer shall furnish to the Trustee promptly an Officer's Certificate listing and identifying all Securities, if any, known by the Issuer to be owned or held by or for the account of any of the above-described persons; and, subject to Sections 6.1 and 6.2, the Trustee shall be entitled to accept such Officer's Certificate as conclusive evidence of the facts therein set forth and of the fact that all Securities not listed therein are Outstanding for the purpose of any such determination. SECTION 7.5 RIGHT OF REVOCATION OF ACTION TAKEN. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.1, of the taking of any action by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, 44 53 as the case may be, specified in this Indenture in connection with such action, any Holder of a Security the serial number of which is shown by the evidence to be included among the serial numbers of the Securities the Holders of which have consented to such action may, by filing written notice at the Corporate Trust Office and upon proof of holding as provided in this Article, revoke such action so far as concerns such Security. Except as aforesaid any such action taken by the Holder of any Security shall be conclusive and binding upon such Holder and upon all future Holders and owners of such Security and of any Securities issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon any such Security. Any action taken by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action shall be conclusively binding upon the Issuer, the Trustee and the Holders of all the Securities affected by such action. ARTICLE EIGHT SUPPLEMENTAL INDENTURES ----------------------- SECTION 8.1 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF SECURITYHOLDERS. The Issuer, when authorized by a resolution of its Board of Directors (which resolution may provide general terms or parameters for such action and may provide that the specific terms of such action may be determined in accordance with or pursuant to an Issuer Order), and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (a) to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Securities of one or more series any property or assets; (b) to evidence the succession of another corporation to the Issuer, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Issuer pursuant to Article Nine; (c) to add to the covenants of the Issuer such further covenants, restrictions, conditions or provisions as the Issuer and the Trustee shall consider to be for the protection of the Holders of Securities or Coupons, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; PROVIDED, that in respect of any such additional covenant, restriction, condition or provision such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such an Event of Default or may limit the remedies available to the Trustee upon such an Event of Default or may limit the right of the Holders of a majority in aggregate principal amount of the Securities of such series to waive such an Event of Default; 45 54 (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make any other provisions as the Issuer may deem necessary or desirable, PROVIDED that no such action shall adversely affect the interests of the Holders of the Securities or Coupons; (e) to establish the forms or terms of Securities of any series or of the Coupons appertaining to such Securities as permitted by Sections 2.1 and 2.3; and (f) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one trustee, pursuant to the requirements of Section 6.11. The Trustee is hereby authorized to join with the Issuer in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer, assignment, mortgage or pledge of any property thereunder, but the Trustee shall not be obligated to enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed without the consent of the Holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 8.2. SECTION 8.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF SECURITYHOLDERS. With the consent (evidenced as provided in Article Seven) of the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding of all series affected by such supplemental indenture (each such series voting as a separate class), the Issuer, when authorized by a resolution of its Board of Directors (which resolution may provide general terms or parameters for such action and may provide that the specific terms of such action may be determined in accordance with or pursuant to an Issuer Order), and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of the Securities of each such series or of the Coupons appertaining to such Securities; PROVIDED, that no such supplemental indenture shall (a) extend the final maturity of any Security, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof, or make the principal thereof (including any amount in respect of original issue discount), or interest thereon payable in any coin or currency other than that provided in the Securities and Coupons or in accordance with the terms thereof, or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof pursuant to Section 5.1 or the amount thereof provable in bankruptcy pursuant to Section 5.2, or alter the provisions of Section 11.11 or 11.12 or impair or affect the right of any Securityholder to institute suit for the payment thereof or, if the Securities provide therefor, any right of repayment 46 55 at the option of the Securityholder, in each case without the consent of the Holder of each Security so affected, or (b) reduce the aforesaid percentage of Securities of any series, the consent of the Holders of which is required for any such supplemental indenture, without the consent of the Holders of each Security so affected. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of Holders of Securities of such series, or of Coupons appertaining to such Securities, with respect to such covenant or provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series or of the Coupons appertaining to such Securities. Upon the request of the Issuer, accompanied by a copy of a resolution of the Board of Directors (which resolution may provide general terms or parameters for such action and may provide that the specific terms of such action may be determined in accordance with or pursuant to an Issuer Order) certified by the secretary or an assistant secretary of the Issuer authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of the Holders of the Securities as aforesaid and other documents, if any, required by Section 7.1, the Trustee shall join with the Issuer in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Issuer and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall give notice thereof (i) to the Holders of then Outstanding Registered Securities of each series affected thereby, by mailing a notice thereof by first-class mail to such Holders at their addresses as they shall appear on the Security register, (ii) if any unregistered Securities of a series affected thereby are then Outstanding, to the Holders thereof whose names and addresses have been furnished to the Trustee, by mailing a notice thereof by first-class mail to such Holders at such addresses as were so furnished to the Trustee and (iii) if any Unregistered Securities of a series affected thereby are then Outstanding, to all Holders thereof, by publication of a notice thereof at least once in an Authorized Newspaper in the Borough of Manhattan, The City of New York and at least once in an Authorized Newspaper in London (and, if required by Section 3.7, at least once in an Authorized Newspaper in Luxembourg), and in each case such notice shall set forth in general terms the substance of such supplemental indenture. Any failure of the Issuer to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 8.3 EFFECT OF SUPPLEMENTAL INDENTURE. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Issuer and the 47 56 Holders of Securities of each series affected thereby shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 8.4 DOCUMENTS TO BE GIVEN TO TRUSTEE. The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Officer's Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article 8 complies with the applicable provisions of this Indenture. SECTION 8.5 NOTATION ON SECURITIES IN RESPECT OF SUPPLEMENTAL INDENTURES. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article may bear a notation in form approved by the Trustee for such series as to any matter provided for by such supplemental indenture or as to any action taken by Securityholders. If the Issuer or the Trustee shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Issuer, authenticated by the Trustee and delivered in exchange for the Securities of such series then Outstanding. ARTICLE NINE CONSOLIDATION, MERGER, SALE OR CONVEYANCE ----------------------------------------- SECTION 9.1 COVENANT NOT TO MERGE, CONSOLIDATE, SELL OR CONVEY PROPERTY EXCEPT UNDER CERTAIN CONDITIONS. The Issuer covenants that it will not merge or consolidate with any other Person or sell, lease or convey all or substantially all of its assets to any other Person, unless (i) either the Issuer shall be the continuing corporation, or the successor corporation or the Person which acquires by sale, lease or conveyance substantially all the assets of the Issuer (if other than the Issuer) shall be a corporation organized under the laws of the United States of America or any State thereof or the District of Columbia and shall expressly assume the due and punctual payment of the principal of and interest on all the Securities and Coupons, if any, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Issuer, by supplemental indenture satisfactory to the Trustee, executed and delivered to the Trustee by such corporation, and (ii) the Issuer, such Person or such successor corporation, as the case may be, shall not, immediately after such merger or consolidation, or such sale, lease or conveyance, be in default in the performance of any such covenant or condition. SECTION 9.2 SUCCESSOR CORPORATION SUBSTITUTED. In case of any such consolidation, merger, sale, lease or conveyance, and following such an assumption by the successor corporation, such successor corporation shall succeed to and be substituted for the Issuer, with the same effect as if it had been named herein; PROVIDED that, in the case of the sale of all or substantially all the assets of the Issuer, the corporation so succeeding shall not be so 48 57 substituted unless the succeeding corporation acquires such assets in their entirety or virtually in their entirety from the Issuer (or from any successor corporation that shall have previously been substituted for the Issuer in the manner described herein). Such successor corporation may cause to be signed, and may issue either in its own name or in the name of the Issuer prior to such succession any or all of the Securities issuable hereunder which together with any Coupons appertaining thereto theretofore shall not have been signed by the Issuer and delivered to the Trustee; and, upon the order of such successor corporation, instead of the Issuer, and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities together with any Coupons appertaining thereto which previously shall have been signed and delivered by the officers of the Issuer to the Trustee for authentication, and any Securities which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All of the Securities so issued together with any Coupons appertaining thereto shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale, lease or conveyance such changes in phrasing and form (but not in substance) may be made in the Securities and Coupons thereafter to be issued as may be appropriate. In the event of any such sale or conveyance (other than a conveyance by way of lease) the Issuer or any successor corporation which shall theretofore have become such in the manner described in this Article shall be discharged from all obligations and covenants under this Indenture and the Securities and may be liquidated and dissolved. SECTION 9.3 OPINION OF COUNSEL DELIVERED TO TRUSTEE. The Trustee, subject to the provisions of Sections 6.1 and 6.2, may receive an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, lease or conveyance, and any such assumption, and any such liquidation or dissolution, complies with the applicable provisions of this Indenture. ARTICLE TEN SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS ---------------- SECTION 10.1 SATISFACTION AND DISCHARGE OF INDENTURE. (A) If at any time (a) the Issuer shall have paid or caused to be paid the principal of and interest on all the Securities of any series Outstanding hereunder and all unmatured Coupons appertaining thereto (other than Securities of such series and Coupons appertaining thereto which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.9) as and when the same shall have become due and payable, or (b) the Issuer shall have delivered to the Trustee for cancellation all Securities of any series theretofore authenticated and all unmatured Coupons appertaining thereto (other than any Securities of such series and Coupons appertaining thereto which shall have been destroyed, lost or stolen and which shall have been replaced or paid as 49 58 provided in Section 2.9) or (c) in the case of any series of Securities where the exact amount (including the currency of payment) of principal of and interest due on which can be determined at the time of making the deposit referred to in clause (ii) below, (i) all the Securities of such series and all unmatured Coupons appertaining thereto not theretofore delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and (ii) the Issuer shall have irrevocably deposited or caused to be deposited with the Trustee as trust funds the entire amount in cash (other than moneys repaid by the Trustee or any paying agent to the Issuer in accordance with Section 10.4) or, in the case of any series of Securities the payments on which may only be made in Dollars, obligations issued or guaranteed as to principal and interest by the United States or by a Person controlled or supervised by and acting as an instrumentality of the government of the United States pursuant to authority granted by the Congress of the United States ("U.S. Government Obligations"), maturing as to principal and interest at such times and in such amounts as will insure the availability of cash, or a combination thereof, sufficient in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay (A) the principal and interest on all Securities of such series and Coupons appertaining thereto on each date that such principal or interest is due and payable and (B) any mandatory sinking fund payments on the dates on which such payments are due and payable in accordance with the terms of the Indenture and the Securities of such series; and if, in any such case, the Issuer shall also pay or cause to be paid all other sums payable hereunder by the Issuer, then this Indenture shall cease to be of further effect (except as to (i) rights of registration of transfer and exchange of Securities of such Series and of Coupons appertaining thereto and the Issuer's right of optional redemption, if any, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of holders of Securities and Coupons appertaining thereto to receive payments of principal thereof and interest thereon, upon the original stated due dates therefor (but not upon acceleration), and remaining rights of the Holders to receive mandatory sinking fund payments, if any, (iv) the rights, obligations, duties and immunities of the Trustee hereunder, (v) the rights of the Holders of Securities of such series and Coupons appertaining thereto as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them, and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, on demand of the Issuer accompanied by an Officer's Certificate and an Opinion of Counsel and at the cost and expense of the Issuer, shall execute proper instruments acknowledging such satisfaction of and discharging this Indenture; PROVIDED, that the rights of Holders of the Securities and Coupons to receive amounts in respect of principal of and interest on the Securities and Coupons held by them shall not be delayed longer than required by then-applicable mandatory rules or policies of any securities exchange upon which the Securities are listed. The Issuer agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the securities of such series. (B) The following provisions shall apply to the Securities of each series unless specifically otherwise provided in a Board Resolution, Officer's Certificate or indenture supplemental hereto provided pursuant to Section 2.3. In addition to discharge of the Indenture pursuant to the next preceding paragraph, in the case of any series of Securities the exact amounts (including the currency of payment) of principal of and interest due on which can be 50 59 determined at the time of making the deposit referred to in clause (a) below, the Issuer shall be deemed to have paid and discharged the entire indebtedness on all the Securities of such a series and the Coupons appertaining thereto on the 91st day after the date of the deposit referred to in subparagraph (a) below, and the provisions of this Indenture with respect to the Securities of such series and Coupons appertaining thereto shall no longer be in effect (except as to (i) rights of registration of transfer and exchange of Securities of such series and of Coupons appertaining thereto and the Issuer's right of optional redemption, if any, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of Holders of Securities and Coupons appertaining thereto to receive payments of principal thereof and interest thereon, upon the original stated due dates therefor (but not upon acceleration), and remaining rights of the Holders to receive mandatory sinking fund payments, if any, (iv) the rights, obligations, duties and immunities of the Trustee hereunder, (v) the rights of the Holders of Securities of such series and Coupons appertaining thereto as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, at the expense of the Issuer, shall at the Issuer's request, execute proper instruments acknowledging the same, if (a) with reference to this provision the Issuer has irrevocably deposited or caused to be irrevocably deposited with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of such series and Coupons appertaining thereto (i) cash in an amount, or (ii) in the case of any series of Securities the payments on which may only be made in Dollars, U.S. Government Obligations, maturing as to principal and interest at such times and in such amounts as will insure the availability of cash or (iii) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay (A) the principal and interest on all Securities of such series and Coupons appertaining thereto on each date that such principal or interest is due and payable and (B) any mandatory sinking fund payments on the dates on which such payments are due and payable in accordance with the terms of the Indenture and the Securities of such series; (b) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Issuer is a party or by which it is bound; (c) the Issuer has delivered to the Trustee an Opinion of Counsel based on the fact that (x) the Issuer has received from, or there has been published by, the Internal Revenue Service a ruling or (y) since the date hereof, there has been a change in the applicable Federal income tax law, in either case to the effect that, and such opinion shall confirm that, the Holders of the Securities of such series and Coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred; and 51 60 (d) the Issuer has delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the defeasance contemplated by this provision have been complied with. (C) The Issuer shall be released from its obligations under Sections 3.6 and 9.1 with respect to the Securities of any Series, and any Coupons appertaining thereto, Outstanding on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"). For this purpose, such covenant defeasance means that, with respect to the Outstanding Securities of any Series, the Issuer may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in such Section, whether directly or indirectly by reason of any reference elsewhere herein to such Section or by reason of any reference in such Section to any other provision herein or in any other document and such omission to comply shall not constitute an Event of Default under Section 5.1, but the remainder of this Indenture and such Securities and Coupons shall be unaffected thereby. The following shall be the conditions to application of this subsection C of this Section 10.1: (a) The Issuer has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Securities of such series and coupons appertaining thereto, (i) cash in an amount, or (ii) in the case of any series of Securities the payments on which may only be made in Dollars, U.S. Government Obligations maturing as to principal and interest at such times and in such amounts as will insure the availability of cash or (iii) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay (A) the principal and interest on all Securities of such series and Coupons appertaining thereto and (B) any mandatory sinking fund payments on the day on which such payments are due and payable in accordance with the terms of the Indenture and the Securities of such series. (b) No Event of Default or event which with notice or lapse of time or both would become an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit or, insofar as subsections 5.1(d) and (e) are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (c) Such covenant defeasance shall not cause the Trustee to have a conflicting interest as defined in Section 6.8 and for purposes of the Trust Indenture Act of 1939 with respect to any securities of the Issuer. (d) Such covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Issuer is a party or by which it is bound. 52 61 (e) Such covenant defeasance shall not cause any Securities then listed on any registered national securities exchange under the Securities Exchange Act of 1934, as amended, to be delisted. (f) The Issuer shall have delivered to the Trustee an Officer's Certificate and Opinion of Counsel to the effect that the Holders of the Securities of such series and Coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred. (g) The Issuer shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the covenant defeasance contemplated by this provision have been complied with. SECTION 10.2 APPLICATION BY TRUSTEE OF FUNDS DEPOSITED FOR PAYMENT OF SECURITIES. Subject to Section 10.4, all moneys deposited with the Trustee (or other trustee) pursuant to Section 10.1 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Issuer acting as its own paying agent), to the Holders of the particular Securities of such series and of Coupons appertaining thereto for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest; but such money need not be segregated from other funds except to the extent required by law. SECTION 10.3 REPAYMENT OF MONEYS HELD BY PAYING AGENT. In connection with the satisfaction and discharge of this Indenture with respect to Securities of any series, all moneys then held by any paying agent under the provisions of this Indenture with respect to such series of Securities shall, upon demand of the Issuer, be repaid to it or paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 10.4 RETURN OF MONEYS HELD BY TRUSTEE AND PAYING AGENT UNCLAIMED FOR TWO YEARS. Any moneys deposited with or paid to the Trustee or any paying agent for the payment of the principal of or interest on any Security of any series or Coupons attached thereto and not applied but remaining unclaimed for two years after the date upon which such principal or interest shall have become due and payable, shall, upon the written request of the Issuer and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Issuer by the Trustee for such series or such paying agent, and the Holder of the Securities of such series and of any Coupons appertaining thereto shall, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Issuer for any payment which such Holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such moneys shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such paying agent, before being required to make any such repayment with respect to moneys deposited with it for any payment (a) in respect of Registered Securities of any series, shall at the expense of the Issuer, mail by first-class mail to Holders of such Securities at their addresses as they shall appear on the Security register, and (b) in respect of Unregistered Securities of any series, shall at the expense 53 62 of the Issuer cause to be published once, in an Authorized Newspaper in the Borough of Manhattan, The City of New York and once in an Authorized Newspaper in London (and if required by Section 3.7, once in an Authorized Newspaper in Luxembourg), notice, that such moneys remain and that, after a date specified therein, which shall not be less than thirty days from the date of such mailing or publication, any unclaimed balance of such money then remaining will be repaid to the Issuer. SECTION 10.5 INDEMNITY FOR U.S. GOVERNMENT OBLIGATIONS. The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 10.1 or the principal or interest received in respect of such obligations. ARTICLE ELEVEN MISCELLANEOUS PROVISIONS ------------------------ SECTION 11.1 INCORPORATORS, SHAREHOLDERS, OFFICERS AND DIRECTORS OF ISSUER EXEMPT FROM INDIVIDUAL LIABILITY. No recourse under or upon any obligation, covenant or agreement contained in this Indenture, or in any Security, or because of any indebtedness evidenced thereby, shall be had against any incorporator, as such or against any past, present or future shareholder, officer or director, as such, of the Issuer or of any successor, either directly or through the Issuer or any successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities and the Coupons appertaining thereto by the Holders thereof and as part of the consideration for the issue of the Securities and the Coupons appertaining thereto. SECTION 11.2 PROVISIONS OF INDENTURE FOR THE SOLE BENEFIT OF PARTIES AND HOLDERS OF SECURITIES AND COUPONS. Nothing in this Indenture, in the Securities or in the Coupons appertaining thereto, expressed or implied, shall give or be construed to give to any person, firm or corporation, other than the parties hereto and their successors and the Holders of the Securities or Coupons, if any, any legal or equitable right, remedy or claim under this Indenture or under any covenant or provision herein contained, all such covenants and provisions being for the sole benefit of the parties hereto and their successors and of the Holders of the Securities or Coupons, if any. SECTION 11.3 SUCCESSORS AND ASSIGNS OF ISSUER BOUND BY INDENTURE. All the covenants, stipulations, promises and agreements in this Indenture contained by or in behalf of the Issuer shall bind its successors and assigns, whether so expressed or not. SECTION 11.4 NOTICES AND DEMANDS ON ISSUER, TRUSTEE AND HOLDERS OF SECURITIES AND COUPONS. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities or Coupons to or on the Issuer may be given or served by being deposited postage prepaid, first-class mail (except as otherwise specifically provided herein) addressed (until another address of the Issuer is filed by the Issuer with the Trustee) to THE LUBRIZOL 54 63 CORPORATION, 29400 Lakeland Boulevard, Wickliffe, Ohio 44092, Attention: Chief Financial Officer. Any notice, direction, request or demand by the Issuer or any Holder of Securities or Coupons to or upon the Trustee shall be deemed to have been sufficiently given or served by being deposited postage prepaid, first-class mail (except as otherwise specifically provided herein) addressed (until another address of the Trustee is filed by the Trustee with the Issuer) to One First National Plaza, Suite 0126, Chicago, Illinois 60670-0216, Attention: Corporate Trust Services Division. Where this Indenture provides for notice to Holders of Registered Securities, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder entitled thereto, at his last address as it appears in the Security register. In any case where notice to such Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of or irregularities in regular mail service, it shall be impracticable to mail notice to the Issuer when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be reasonably satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. SECTION 11.5 OFFICER'S CERTIFICATES AND OPINIONS OF COUNSEL; STATEMENTS TO BE CONTAINED THEREIN. Upon any application or demand by the Issuer to the Trustee to take any action under any of the provisions of this Indenture, the Issuer shall furnish to the Trustee an Officer's Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition, (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based, (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Any certificate, statement or opinion of an officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by 55 64 counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of counsel may be based, insofar as it relates to factual matters, information with respect to which is in the possession of the Issuer, upon the certificate, statement or opinion of or representations by an officer or officers of the Issuer, unless such counsel knows that the certificate, statement or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of an officer of the Issuer or of counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants in the employ of the Issuer, unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate or opinion of any independent firm of public accountants filed with and directed to the Trustee shall contain a statement that such firm is independent. SECTION 11.6 PAYMENTS DUE ON SATURDAYS, SUNDAYS AND HOLIDAYS. If the date of maturity of interest on or principal of the Securities of any series or any Coupons appertaining thereto or the date fixed for redemption or repayment of any such Security or Coupon shall not be a Business Day, then payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. SECTION 11.7 CONFLICT OF ANY PROVISION OF INDENTURE WITH TRUST INDENTURE ACT OF 1939. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by, or with another provision (an "incorporated provision") included in this Indenture by operation of, Sections 310 to 318, inclusive, of the Trust Indenture Act of 1939, such imposed duties or incorporated provision shall control. SECTION 11.8 NEW YORK LAW TO GOVERN. This Indenture and each Security and Coupon shall be deemed to be a contract under the internal laws of the State of New York, and for all purposes shall be construed in accordance with the internal laws of such State, without regard to conflicts of law principles thereof and except as may otherwise be required by mandatory provisions of law. SECTION 11.9 COUNTERPARTS. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. SECTION 11.10 EFFECT OF HEADINGS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. 56 65 SECTION 11.11 SECURITIES IN A FOREIGN CURRENCY OR IN ECU. Unless otherwise specified in an Officer's Certificate delivered pursuant to Section 2.3 of this Indenture with respect to a particular series of Securities, whenever for purposes of this Indenture any action may be taken by the Holders of a specified percentage in aggregate principal amount of Securities of all series or all series affected by a particular action at the time Outstanding and, at such time, there are Outstanding Securities of any series which are denominated in a coin or currency other than Dollars (including ECUs), then the principal amount of Securities of such series which shall be deemed to be Outstanding for the purpose of taking such action shall be that amount of Dollars that could be obtained for such amount at the Market Exchange Rate. For purposes of this Section 11.11, Market Exchange Rate shall mean the noon Dollar buying rate in New York City for cable transfers of that currency as published by the Federal Reserve Bank of New York; PROVIDED, HOWEVER, in the case of ECUs, Market Exchange Rate shall mean the rate of exchange determined by the Commission of the European Communities (or any successor thereto) as published in the Official Journal of the European Communities (such publication or any successor publication, the "Journal"). If such Market Exchange Rate is not available for any reason with respect to such currency, the Trustee shall use, in its sole discretion and without liability on its part, such quotation of the Federal Reserve Bank of New York or, in the case of ECUs, the rate of exchange as published in the Journal, as of the most recent available date, or quotations or, in the case of ECUs, rates of exchange from one or more major banks in The City of New York or in the country of issue of the currency in question, which for purposes of the ECU shall be Brussels, Belgium, or such other quotations or, in the case of ECU, rates of exchange as the Trustee shall deem appropriate. The provisions of this paragraph shall apply in determining the equivalent principal amount in respect of Securities of a series denominated in a currency other than Dollars in connection with any action taken by Holders of Securities pursuant to the terms of this Indenture. All decisions and determinations of the Trustee regarding the Market Exchange Rate or any alternative determination provided for in the preceding paragraph shall be in its sole discretion and shall, in the absence of manifest error, be conclusive to the extent permitted by law for all purposes and irrevocably binding upon the Issuer and all Holders. SECTION 11.12 JUDGMENT CURRENCY. The Issuer agrees, to the fullest extent that it may effectively do so under applicable law, that (a) if for the purpose of obtaining judgment in any court it is necessary to convert the sum due in respect of the principal of or interest on the Securities of any series (the "Required Currency") into a currency in which a judgment will be rendered (the "Judgment Currency"), the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Trustee could purchase in The City of New York the Required Currency with the Judgment Currency on the day on which final unappealable judgment is entered, unless such day is not a New York Banking Day, then, to the extent permitted by applicable law, the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Trustee could purchase in The City of New York the Required Currency with the Judgment Currency on the New York Banking Day preceding the day on which final unappealable judgment is entered and (b) its obligations under this Indenture to make payments in the Required Currency (i) shall not be discharged or satisfied by any tender, or any recovery pursuant to any judgment (whether or not entered in accordance with subsection (a)), in any currency other than the Required Currency, except to the extent that such tender or 57 66 recovery shall result in the actual receipt, by the payee, of the full amount of the Required Currency expressed to be payable in respect of such payments, (ii) shall be enforceable as an alternative or additional cause of action for the purpose of recovering in the Required Currency the amount, if any, by which such actual receipt shall fall short of the full amount of the Required Currency so expressed to be payable and (iii) shall not be affected by judgment being obtained for any other sum due under this Indenture. For purposes of the foregoing, "New York Banking Day" means any day except a Saturday, Sunday or a legal holiday in The City of New York or a day on which banking institutions in The City of New York are authorized or required by law or executive order to close. ARTICLE TWELVE REDEMPTION OF SECURITIES AND SINKING FUNDS ------------------------------------------ SECTION 12.1 APPLICABILITY OF ARTICLE. The provisions of this Article shall be applicable to the Securities of any series which are redeemable before their maturity or to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 2.3 for Securities of such series. SECTION 12.2 NOTICE OF REDEMPTION; PARTIAL REDEMPTIONS. Notice of redemption to the Holders of Registered Securities of any series to be redeemed as a whole or in part at the option of the Issuer shall be given by mailing notice of such redemption by first-class mail, postage prepaid, at least 30 days and not more than 60 days prior to the date fixed for redemption to such Holders of Securities of such series at their last addresses as they shall appear upon the registry books. Notice of redemption to the Holders of Unregistered Securities to be redeemed as a whole or in part, whose names and addresses have been furnished to the Trustee, shall be given by mailing notice of such redemption, by first-class mail, postage prepaid, at least 30 days and not more than 60 prior to the date fixed for redemption, to such Holders at such addresses as were so furnished to the Trustee (and, in the case of any such notice given by the Issuer, the Trustee shall make such information available to the Issuer for such purpose). Notice of redemption to all other Holders of Unregistered Securities shall be published in an Authorized Newspaper in the Borough of Manhattan, The City of New York and in an Authorized Newspaper in London (and, if required by Section 3.7, in an Authorized Newspaper in Luxembourg), in each case, once in each of three successive calendar weeks, the first publication to be not less than 30 nor more than 60 days prior to the date fixed for redemption. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives the notice. Failure to give notice by mail, or any defect in the notice to the Holder of any Security of a series designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security of such series. The notice of redemption to each such Holder shall specify, the principal amount of each Security of such series held by such Holder to be redeemed, the date fixed for redemption, the redemption price, the place or places of payment, that payment will be made upon presentation and surrender of such Securities and, in the case of Securities with Coupons attached thereto, of all Coupons appertaining thereto maturing after the date fixed for 58 67 redemption, that such redemption is pursuant to the mandatory or optional sinking fund, or both, if such be the case, that interest accrued to the date fixed for redemption will be paid as specified in such notice and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. In case any Security of a series is to be redeemed in part only the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities of such series in principal amount equal to the unredeemed portion thereof will be issued. The notice of redemption of Securities of any series to be redeemed at the option of the Issuer shall be given by the Issuer or, at the Issuer's request, by the Trustee in the name and at the expense of the Issuer. On or before the redemption date specified in the notice of redemption given as provided in this Section, the Issuer will deposit with the Trustee or with one or more paying agents (or, if the Issuer is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 3.4) an amount of money sufficient to redeem on the redemption date all the Securities of such series so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. The Issuer will deliver to the Trustee at least 70 days prior to the date fixed for redemption an Officer's Certificate stating the aggregate principal amount of Securities to be redeemed. In case of a redemption at the election of the Issuer prior to the expiration of any restriction on such redemption, the Issuer shall deliver to the Trustee, prior to the giving of any notice of redemption to Holders pursuant to this Section, an Officer's Certificate stating that such restriction has been complied with. If less than all the Securities of a series are to be redeemed, the Trustee shall select, in such manner as it shall deem appropriate and fair, Securities of such Series to be redeemed in whole or in part. Securities may be redeemed in part in multiples equal to the minimum authorized denomination for Securities of such series or any multiple thereof. The Trustee shall promptly notify the Issuer in writing of the Securities of such series selected for redemption and, in the case of any Securities of such series selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities of any series shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. SECTION 12.3 PAYMENT OF SECURITIES CALLED FOR REDEMPTION. If notice of redemption has been given as above provided, the Securities or portions of Securities specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said date (unless the Issuer shall default in the payment of such Securities at the redemption price, together with interest accrued to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue, and the unmatured Coupons, if any, appertaining thereto shall be void, and, except as provided in Sections 6.5 and 10.4, such Securities shall cease from and after the date fixed for redemption to be entitled to any benefit or security under this Indenture, and the Holders thereof shall have no right in respect of such Securities except the right to receive the redemption price thereof and unpaid interest to the date 59 68 fixed for redemption. On presentation and surrender of such Securities at a place of payment specified in said notice, together with all Coupons, if any, appertaining thereto maturing after the date fixed for redemption, said Securities or the specified portions thereof shall be paid and redeemed by the Issuer at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption; PROVIDED that payment of interest becoming due on or prior to the date fixed for redemption shall be payable in the case of Securities with Coupons attached thereto, to the Holders of the Coupons for such interest upon surrender thereof, and in the case of Registered Securities, to the Holders of such Registered Securities registered as such on the relevant record date subject to the terms and provisions of Sections 2.3 and 2.7 hereof. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate of interest or Yield to Maturity (in the case of an Original Issue Discount Security) borne by such Security. If any Security with Coupons attached thereto is surrendered for redemption and is not accompanied by all appurtenant Coupons maturing after the date fixed for redemption, the surrender of such missing Coupon or Coupons may be waived by the Issuer and the Trustee, if there be furnished to each of them such security or indemnity as they may require to save each of them harmless. Upon presentation of any Security redeemed in part only, the Issuer shall execute and the Trustee shall authenticate and deliver to or on the order of the Holder thereof, at the expense of the Issuer, a new Security or Securities of such series, of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented. SECTION 12.4 EXCLUSION OF CERTAIN SECURITIES FROM ELIGIBILITY FOR SELECTION FOR REDEMPTION. Securities shall be excluded from eligibility for selection for redemption if they are identified by registration and certificate number in an Officer's Certificate delivered to the Trustee at least 40 days prior to the last date on which notice of redemption may be given as being owned of record and beneficially by, and not pledged or hypothecated by either (a) the Issuer or (b) an entity specifically identified in such written statement as directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer. SECTION 12.5 MANDATORY AND OPTIONAL SINKING FUNDS. The minimum amount of any sinking fund payment provided for by the terms of the Securities of any series is herein referred to as a "mandatory sinking fund payment," and any payment in excess of such minimum amount provided for by the terms of the Securities of any series is herein referred to as an "optional sinking fund payment." The date on which a sinking fund payment is to be made is herein referred to as the "sinking fund payment date." In lieu of making all or any part of any mandatory sinking fund payment with respect to any series of Securities in cash, the Issuer may at its option (a) deliver to the Trustee Securities of such series theretofore purchased or otherwise acquired (except upon redemption pursuant to the mandatory sinking fund) by the Issuer or receive credit for Securities of such series (not previously so credited) theretofore purchased or otherwise acquired (except as aforesaid) by the Issuer and delivered to the Trustee for cancellation pursuant to Section 2.10, (b) 60 69 receive credit for optional sinking fund payments (not previously so credited) made pursuant to this Section, or (c) receive credit for Securities of such series (not previously so credited) redeemed by the Issuer through any optional redemption provision contained in the terms of such series. Securities so delivered or credited shall be received or credited by the Trustee at the sinking fund redemption price specified in such Securities. On or before the 60th day next preceding each sinking fund payment date for any series, the Issuer will deliver to the Trustee an Officer's Certificate (which need not contain the statements required by Section 11.5) (a) specifying the portion of the mandatory sinking fund payment to be satisfied by payment of cash and the portion to be satisfied by credit of Securities of such series and the basis for such credit, (b) stating that none of the Securities of such series has theretofore been so credited, (c) stating that no defaults in the payment of interest or Events of Default with respect to such series have occurred (which have not been waived or cured) and are continuing and (d) stating whether or not the Issuer intends to exercise its right to make an optional sinking fund payment with respect to such series and, if so, specifying the amount of such optional sinking fund payment which the Issuer intends to pay on or before the next succeeding sinking fund payment date. Any Securities of such series to be credited and required to be delivered to the Trustee in order for the Issuer to be entitled to credit therefor as aforesaid which have not theretofore been delivered to the Trustee shall be delivered for cancellation pursuant to Section 2.10 to the Trustee with such Officer's Certificate (or reasonably promptly thereafter if acceptable to the Trustee). Such Officer's Certificate shall be irrevocable and upon its receipt by the Trustee the Issuer shall become unconditionally obligated to make all the cash payments or payments therein referred to, if any, on or before the next succeeding sinking fund payment date. Failure of the Issuer, on or before any such 60th day, to deliver such Officer's Certificate and Securities specified in this paragraph, if any, shall not constitute a default but shall constitute, on and as of such date, the irrevocable election of the Issuer (i) that the mandatory sinking fund payment for such series due on the next succeeding sinking fund payment date shall be paid entirely in cash without the option to deliver or credit Securities of such series in respect thereof and (ii) that the Issuer will make no optional sinking fund payment with respect to such series as provided in this Section. If the sinking fund payment or payments (mandatory or optional or both) to be made in cash on the next succeeding sinking fund payment date plus any unused balance of any preceding sinking fund payments made in cash shall exceed $50,000 (or the equivalent thereof in any Foreign Currency or ECU) or a lesser sum in Dollars (or the equivalent thereof in any Foreign Currency or ECU) if the Issuer shall so request with respect to the Securities of any particular series, such cash shall be applied on the next succeeding sinking fund payment date to the redemption of Securities of such series at the sinking fund redemption price together with accrued interest to the date fixed for redemption. If such amount shall be $50,000 (or the equivalent thereof in any Foreign Currency or ECU) or less and the Issuer makes no such request then it shall be carried over until a sum in excess of $50,000 (or the equivalent thereof in any Foreign Currency or ECU) is available. The Trustee shall select, in the manner provided in Section 12.2, for redemption on such sinking fund payment date a sufficient principal amount of Securities of such series to absorb said cash, as nearly as may be, and shall (if requested in writing by the Issuer) inform the Issuer of the serial numbers of the Securities of such series (or portions thereof) so selected. Securities shall be excluded from eligibility for redemption under this Section if they are identified by registration and certificate number in an Officer's Certificate 61 70 delivered to the Trustee at least 60 days prior to the sinking fund payment date as being owned of record and beneficially by, and not pledged or hypothecated by either (a) the Issuer or (b) an entity specifically identified in such Officer's Certificate as directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer. The Trustee, in the name and at the expense of the Issuer (or the Issuer, if it shall so request the Trustee in writing) shall cause notice of redemption of the Securities of such series to be given in substantially the manner provided in Section 12.2 (and with the effect provided in Section 12.3) for the redemption of Securities of such series in part at the option of the Issuer. The amount of any sinking fund payments not so applied or allocated to the redemption of Securities of such series shall be added to the next cash sinking fund payment for such series and, together with such payment, shall be applied in accordance with the provisions of this Section. Any and all sinking fund moneys held on the stated maturity date of the Securities of any particular series (or earlier, if such maturity is accelerated), which are not held for the payment or redemption of particular Securities of such series shall be applied, together with other moneys, if necessary, sufficient for the purpose, to the payment of the principal of, and interest on, the Securities of such series at maturity. On or before each sinking fund payment date, the Issuer shall pay to the Trustee in cash or shall otherwise provide for the payment of all interest accrued to the date fixed for redemption on Securities to be redeemed on the next following sinking fund payment date. The Trustee shall not redeem or cause to be redeemed any Securities of a series with sinking fund moneys or give any notice of redemption of Securities for such series by operation of the sinking fund during the continuance of a default in payment of interest on such Securities or of any Event of Default except that, where the giving of notice of redemption of any Securities shall theretofore have been made, the Trustee shall redeem or cause to be redeemed such Securities, provided that it shall have received from the Issuer a sum sufficient for such redemption. Except as aforesaid, any moneys in the sinking fund for such series at the time when any such default or Event of Default shall occur, and any moneys thereafter paid into the sinking fund, shall, during the continuance of such default or Event of Default, be deemed to have been collected under Article Five and held for the payment of all such Securities. In case such Event of Default shall have been waived as provided in Section 5.10 or the default cured on or before the sixtieth day preceding the sinking fund payment date in any year, such moneys shall thereafter be applied on the next succeeding sinking fund payment date in accordance with this Section to the redemption of such Securities. 62 71 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed all as of November 25, 1998. THE LUBRIZOL CORPORATION By /s/ W.G. Bares ------------------------------------------- Name: W.G. Bares Title: Chairman, President and Chief Executive Officer By /s/ C.P. Cooley ------------------------------------------- Name: Charles P. Cooley Title: Vice President, Treasurer and Chief Financial Officer THE FIRST NATIONAL BANK OF CHICAGO, TRUSTEE By /s/ Janice Ott Rotunno ------------------------------------------- Name: Janice Ott Rotunno Title: Vice President 63 72 STATE OF OHIO ) ) SS: COUNTY OF LAKE ) Before me, a notary public, in and for said county, personally appeared W.G. Bares and Charles P. Cooley, known to me to be the persons who, as Chairman, President and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer, respectively, of The Lubrizol Corporation, the corporation which executed the foregoing instrument, signed the same, and acknowledged to me that they did so sign said instrument in the name and on behalf of said corporation, as such officers, respectively; that the same is their free act and deed as such officers, respectively, and the free and corporate act and deed of said corporation; and that they were duly authorized thereunto by its board of directors. In testimony whereof, I have hereunto subscribed my name, and affixed my official seal, at Wickliffe, Ohio, this 23rd day of November, 1998. /s/ Leslie M. Reynolds --------------------------------- Notary Public [Notarial Seal] 64 73 STATE OF ILLINOIS ) ) SS.: COUNTY OF COOK ) On this 25th of November, 1998 before me personally came Janice Ott Rotunno, to me personally known, who, being by me duly sworn, did depose and say that she resides at 1155 Sterling Avenue, Palentine, Illinois; that she is a Vice President of The First National Bank of Chicago, one of the corporations described in and which executed the above instrument; and that she signed her name thereto by authority of the Board of Directors of said corporation. /s/ Darla R. Coulson ---------------------------- Notary Public [Notarial Seal] EX-10.A 3 EXHIBIT 10(A) 1 Exhibit (10)(a) The Lubrizol Corporation 1985 Employee Stock Option Plan (As Amended) 1. PURPOSE OF PLAN. The purpose of this Plan is to advance the interests of The Lubrizol Corporation (hereinafter called the "Corporation") and its subsidiaries by providing a means whereby employees of the Corporation and its subsidiaries may be given an opportunity to purchase Common Shares (hereinafter called "shares") of the Corporation under options and stock appreciation rights granted under the Plan, to the end that the Corporation may retain present personnel upon whose judgment, initiative and efforts the successful conduct of the business of the Corporation largely depends, and may attract new personnel. Some of the options granted under this Plan may be options which are intended to qualify as "incentive stock options" under Section 422A of the Internal Revenue Code of 1954, as amended (the "Code"), or any successor provision and are hereinafter sometimes called "incentive stock options". 2. SHARES SUBJECT TO THE PLAN. The aggregate number of shares of the Corporation for which options may be granted under this Plan shall be 1,500,000; provided, however, that whatever number of said shares shall remain reserved for issuance pursuant to this Plan at the time of any stock split, stock dividend or other change in the Corporation's capitalization shall be appropriately and proportionately adjusted to reflect such stock dividend, stock split or other change in capitalization. Shares issued pursuant to the exercise of options granted hereunder shall be made available from authorized but unissued shares of the Corporation or shares held by the Corporation as treasury shares. Any shares for which an option is granted hereunder that are released from such option for any reason other than the exercise of stock appreciation rights granted hereunder shall become available for other options to be granted under this Plan. 3. ADMINISTRATION OF THE PLAN. This Plan shall be administered under the supervision of a committee (hereinafter called the "Committee") composed of not less than three directors of the Corporation appointed by the Board of Directors. The members of the Committee shall not be eligible, and shall not have been eligible for a period of at least one year period to their appointment, to participate in this Plan or any other plan of the Corporation or any affiliate (as defined under the Securities Exchange Act of 1934) of the Corporation entitling the participants therein to acquire stock, stock options or stock appreciation rights of the Corporation or any affiliate of the Corporation. Members of the Committee shall serve at the pleasure of the Board of Directors, and may resign by written notice filed with the Chairman of the Board of the Secretary of the Corporation. A vacancy in the membership of the Committee shall be filled by the appointment of a successor member by the Board of Directors. Until such vacancy is filled, the remaining members shall constitute a quorum and the action at any meeting of a majority of the entire Committee, or an action unanimously approved in writing, shall constitute action of the Committee. Subject to the express provisions of this Plan, the Committee shall have conclusive authority to construe and interpret the Plan, any stock option agreement entered into hereunder, and any stock appreciation right granted hereunder and to establish, amend, and rescind rules and regulations for the administration of this Plan and shall have such additional authority as the Board of Directors may from time to time determine to be necessary or desirable. 2 4. GRANTING OF OPTIONS. The Committee from time to time shall designate from among the full-time employees of the Corporation and its subsidiaries those employees to whom options to purchase shares shall be granted under this Plan, the type of option to be granted and the number of shares which shall be subject to each option so granted. The Committee shall direct an appropriate officer of the Corporation to execute and deliver Option Agreements to employees reflecting the grant of options. All actions of the Committee under this Paragraph shall be conclusive; provided, however, that the aggregate fair market value (determined as of the date the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by any individual during any calendar year (under this Plan or any other plan of the Corporation or any of its subsidiaries) may not exceed $100,000. Any incentive stock option that is granted to any employee who is, at the time the option is granted, deemed for purposes of Section 422A of the Code, or any successor provision, to own shares of the Corporation possessing more than ten percent (10%) of the total combined voting power of all classes of shares of the Corporation or of a parent or subsidiary of the Corporation, shall have an option price that is at least 110 percent (110%) of the fair market value of the shares and shall not be exercisable after the expiration of 5 years from the date it is granted. 5. GRANTING OF STOCK APPRECIATION RIGHTS. The Committee shall have the discretion to grant to optionees stock appreciation rights in connection with options to purchase shares on such terms and conditions as it deems appropriate. The Committee shall direct an appropriate officer of the Corporation to execute and deliver a Grant of Stock Appreciation Rights to optionees reflecting the grant of stock appreciation rights. A stock appreciation right will allow an optionee to surrender an option or portion thereof and to receive payment from the Corporation in an amount equal to the excess of the aggregate fair market value of the shares with respect to which options are surrendered over the aggregate option price of such shares. A stock appreciation right shall be exercisable no sooner than six months after it is granted and thereafter at any time prior to its stated expiration date, but only to the extent the related stock option right may be exercised. Payment shall be made in shares, cash or a combination of shares and cash, as provided in the Grant of Stock Appreciation Rights. Shares as to which any option is so surrendered shall not be available for future option grants hereunder. The Committee may grant stock appreciation rights concurrently with the grant of an option or, in the case of an option which is not an incentive stock option, with respect to an outstanding option. 6. OPTION PERIOD. No option granted under this Plan may be exercised later than ten years from the date of grant. 7. OPTION PRICE. The option price shall be fixed by the Committee and set forth in the Option Agreement, which price in no case shall be less than the per share fair market value of the outstanding shares of the Corporation on the date that the option is granted, as determined by the Committee. The Committee may fix such option price in terms of a formula and authorize one or more officers of the Corporation to compute the price in accordance with that formula. Payment of the option price may be made in cash, shares, or a combination of cash and shares, as provided in the Option Agreement in effect from time to time. The date on which the Committee approved the granting of an option shall be deemed the date on which the option is granted. 3 8. OPTION AGREEMENT. The Option Agreement pursuant to which option rights are granted to an employee shall be in the applicable form (consistent with this Plan) from time to time approved by the Committee and shall be signed on behalf of the Corporation by the Chairman of the Board, the President or any Vice President of the Corporation, other than the employee who is a party thereto. The Option Agreement shall set forth the number of shares which are subject to the option to purchase, the type of option granted, the option price to be paid upon exercise, the manner in which the option is to be exercised and the option price is to be paid, and the option period, and may include such other terms not inconsistent with this Plan as are from time to time approved by the Committee. 9. GRANT OF STOCK APPRECIATION RIGHTS. The Grant of Stock Appreciation Rights pursuant to which stock appreciation rights are granted shall be in the applicable form (consistent with this Plan) from time to time approved by the Committee and shall be signed on behalf of the Corporation by the Chairman of the Board, the President or any Vice President of the Corporation, other than the employee to whom the grant is made. The Grant of Stock Appreciation Rights shall set forth the option or options to which the grant relates, the manner in which exercise and payment shall be made and the period during which the stock appreciation rights are exercisable, and may include such other terms not inconsistent with this Plan as are from time to time approved by the Committee. 10. TRANSFERABILITY. No option or stock appreciation right shall be transferable by the optionee except by will or the laws of descent and distribution, and options and stock appreciation rights may be exercised during the employee's lifetime only by him or his guardian or legal representative. 11. AMENDMENT AND TERMINATION OF THE PLAN. The Corporation by action of its Board of Directors, reserves the right to amend, modify or terminate at any time this Plan, or, by action of the Committee with the consent of the optionee, to amend, modify or terminate any outstanding Option Agreement or Grant of Stock Appreciation Rights, except that the Corporation may not, without further shareholder approval, increase the total number of shares as to which options may be granted under this Plan (except increases attributable to the adjustments authorized in Paragraph 2 hereof), change the employees or class of employees eligible to receive options or materially increase the benefits accruing to participants under this Plan. Moreover, no action may be taken by the Corporation which will impair the validity of any option or stock appreciation right then outstanding, or which will prevent the options issued and stock appreciation rights granted pursuant to this Plan from meeting the requirements for exemption from Section 16(b) of the Securities Exchange Act of 1934, or subsequent comparable statute, as set forth in Rule 16b-3 under said Act or subsequent comparable rule, or which will prevent any incentive stock option issued or to be issued under this Plan from being an "incentive stock option" under Section 422A of the Code, or any successor provision. 12. SUBSIDIARY. The term "subsidiary" as used herein shall mean any corporation in an unbroken chain of corporations beginning with the Corporation and ending with the employer corporation if, at the time of the granting of the option, each of the corporations other than the employer corporation owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 4 13. EFFECTIVE DATE OF PLAN. The Plan shall be effective upon adoption of the Plan by the Board of Directors of the Corporation. The Plan shall be submitted to the shareholders of the Corporation for approval within one year after its adoption by the Board of Directors, and if the Plan shall not be approved by the shareholder within said period, the Plan shall be void and of no effect. Any options granted under the Plan prior to the date of approval by the shareholders shall be void if such shareholders' approval is not obtained. 14. EXPIRATION OF PLAN. Options may be granted under this Plan at any time prior to January 27, 2000, on which date the Plan shall expire but without affecting any options then outstanding; provided, however, that, from and after January 27, 1985, no Incentive Stock Options shall be granted under the Plan. EX-10.F 4 EXHIBIT 10(F) 1 Exhibit (10)(f) THE LUBRIZOL CORPORATION PERFORMANCE PAY PLAN (Formerly Variable Award Plan) (As Amended) INTRODUCTION The Lubrizol Corporation (hereinafter referred to as the "Corporation") hereby amends, effective as of January 1, 1998, The Lubrizol Corporation Performance Pay Plan (formerly The Lubrizol Corporation Variable Award Plan) (hereinafter referred to as the "Plan") in order to provide an award for employees which reflects the pursuit of superior performance, increased customer satisfaction and enhancement of shareholder value. Awards for participating employees under the Plan shall depend upon corporate performance measures as determined by the Committee for the Plan Year. Except as otherwise provided, the Plan shall be administered by the Organization and Compensation Committee (hereinafter referred to as the "Committee") of the Board of Directors of the Corporation. The Committee shall have conclusive authority to construe and interpret the Plan and any agreements entered into under the Plan and to establish, amend, and rescind rules and regulations for its administration. The Committee shall also have any additional authority as the Board may from time to time determine to be necessary or desirable. ARTICLE I DEFINITIONS 1.01 DEFINITIONS. The following terms shall have the indicated meanings for purposes of the Plan: (a) "Board" shall mean the Board of Directors of the Corporation. (b) "Chief Executive Officer" shall mean the chief executive officer of the Corporation. (c) "Committee" shall mean the Organization and Compensation Committee of the Board, or other designated committee of the Board, consisting of persons who are not Employees or Foreign Employees. (d) "Corporation" shall mean The Lubrizol Corporation, a corporation organized under the laws of the State of Ohio. (e) "Director" shall mean a member of the Board. (f) '"Employee" shall mean any person other than an Officer, who is employed for a wage or salary by the Corporation or a domestic Subsidiary. (g) "Foreign Employee" shall mean any person who is employed for a wage or salary by an international Subsidiary of the Corporation. 1 2 (h) "Foreign Participant" shall mean any Foreign Employee who has been selected by the Committee pursuant to Article VI of the Plan, and who has not for any reason become ineligible to participate in the Plan. (i) "Individual Award" shall mean the amount paid (or to be paid) to a Participant or Foreign Participant, as the case may be, by the Corporation pursuant to the Plan. (j) "Individual Performance Shares" shall have the definition, and shall be determined, as set forth in Section 3.02 herein. (k) "Officer shall mean an employee of the Corporation or a Subsidiary who is a member of the Executive Council of the Corporation. (l) "Participant" shall mean all Officers, and any Employee who has been selected by the Committee pursuant to Article II herein to participate in the Plan, and have not for any reason become ineligible to participate in the Plan. (m) "Pay" shall be determined at the time of calculating the Individual Performance Shares and shall be determined for each Participant as follows: (i) Add 1.0 to the decimal rate that applies in computing his quarterly pay; (ii) Multiply his current bi-weekly base pay by the sum determined in (ii); and (iii) Multiply the product determined in (ii) by 26. (n) "Plan" shall mean The Lubrizol Corporation Performance Pay Plan (formerly The Lubrizol Corporation Variable Award Plan), effective January 1, 1990, as amended effective January 1, 1996, as further amended effective January 1, 1997, and as further amended effective January 1, 1999, as herein set forth. (o) "Plan Year" shall mean each twelve-month period commencing January 1 and ending December 31. (p) "Subsidiary" shall mean any corporation, foreign or domestic, that is wholly or partially (but not less than 50%) owned directly or indirectly by the Corporation. 1.02 CONSTRUCTION. Where necessary or appropriate to the meaning of a word, the singular shall be deemed to include the plural, the plural to include the singular, the masculine to include the feminine, and the feminine to include the masculine. ARTICLE II ELIGIBILITY AND PARTICIPATION 2.01 ELIGIBILITY. All Employees and Officers shall be eligible to participate in the Plan. . 2.02 PARTICIPATION. All Officers shall participate in the Plan. In addition, the Committee shall determine which Employees shall participate in the Plan for each Plan Year. The Committee may also determine which Employees hired during the Plan Year shall participate in the Plan for such Plan Year. The Committee's selection of Participants shall be after considering recommendations presented to it by the Chief Executive Officer. 2 3 ARTICLE III INDIVIDUAL PERFORMANCE SHARES 3.01 IN GENERAL. At the time the Committee selects Participants for any Plan Year, the Committee shall, after consideration of the recommendations of the Chief Executive Officer, establish, for each Plan Year, Individual Performance Shares for each Participant. 3.02 CALCULATION OF INDIVIDUAL PERFORMANCE SHARES. Individual Performance Shares shall be calculated in the following manner: (a) The Pay of each Participant shall be multiplied by a designated percentage which shall take into account the Participant's position in the Corporation. Such designated percentage shall be determined by the Committee. (b) The product for each Participant, determined pursuant to the calculation in paragraph (a) above, shall be divided by the sum of all such amounts produced for all Participants calculated in accordance with paragraph (a) above. (c) The quotient determined for each Participant, calculated pursuant to paragraph (b) above, shall be multiplied by 100 and rounded, up or down, to the nearer whole number to produce the number of each Participant's Individual Performance Shares. Individual Performance Shares may be either increased or decreased, at any time, or from time to time, during a Plan Year, for any Participant at the sole discretion of the Committee in order to reflect any change in the individual contribution under the formula set forth in this Section 3.02. ARTICLE IV DETERMINATION OF FUND 4.01 FUND. A fund shall be accrued on a monthly basis during each Plan Year, based upon a fixed percentage of the Corporation's monthly consolidated net income during such Plan Year (the "Fund"), as established by the Committee, which percentage may be increased or decreased at any time, and from time to time, prior to the end of the Plan Year at the discretion of the Committee. The Fund shall consist of bookkeeping accruals on the books of the Corporation and no cash or other property shall be set aside by the Corporation for these purposes. 4.02 POST-PLAN YEAR FUND ADJUSTMENT. At the beginning of each Plan Year, corporate initiatives for the Plan Year will be categorized into corporate performance measures and shall be presented to the Committee by the Chief Executive Officer. In January following the Plan Year, the Chief Executive Officer shall evaluate the outcome of the performance measures for the Plan Year just concluded and shall present his evaluation to the Committee which the Committee may, at its discretion, increase or decrease the amount of the Fund. ARTICLE V INDIVIDUAL AWARDS 3 4 5.01 ALLOCATION. Each Participant's Individual Award for a Plan Year shall be calculated in January following the close of the Plan Year and shall be an amount determined as follows: (a) Divide the total Fund, as finally approved by the Committee, by the total Individual Performance Shares of all Participants; (b) For each Participant, multiply the amount determined in paragraph (a) by such Participant's Individual Performance Shares; and (c) The product determined in paragraph (b) shall be the tentative amount of the Participant's Individual Award which may be increased or decreased in the sole discretion of the Committee. The Committee may also in its sole and unrestricted discretion determine Individual Awards for Participants who were hired during the Plan Year. No Participant shall have any vested interest in, or be entitled to, any Individual Award unless and until payment is authorized by the Committee. 5.02 TIME AND METHOD OF PAYMENT OF INDIVIDUAL AWARDS. In the event the Committee determines that a Participant is entitled to an Individual Award, the Corporation shall pay such Individual Award to that Participant as soon after the close of the Plan Year as may be feasible, but in no event later than thirty 30 days after the date that the Corporation releases its public announcement of the Corporation's earnings for such Plan Year. A Participant, who leaves the Corporation's employ after the Plan Year but prior to the payment of an Individual Award, except in the case of retirement under the provisions of a qualified defined benefit plan maintained by the Corporation, disability or death, will not be eligible to receive any payment under this Plan. However, an Individual Award may be made to such a Participant in those instances where recommendation for such a payment has been made by the Chief Executive Officer and approved by the Committee. In the event a Participant dies after the Plan Year but prior to the payment of any Individual Award with respect to the Plan Year, any Individual Award determined to be payable by the Committee shall be paid by the Corporation to the Participant's estate. 5.03 CONDITIONS. Anything contained herein to the contrary notwithstanding, the payment of Individual Awards to Participants with respect to any Plan Year is conditioned upon the availability of adequate corporate profits for the Corporation's fiscal year coinciding with any Plan Year. The determination of whether adequate corporate profits exist shall be made by the Board in its sole and unrestricted judgment and discretion and such determination shall be conclusive and binding. ARTICLE VI AWARDS FOR FOREIGN EMPLOYEES 6.01 PARTICIPATION. The Committee shall determine which Foreign Employees shall participate in the Plan for each Plan Year. The Committee's selection of Foreign Participants shall be made after considering recommendations presented to it by the Chief Executive Officer. 6.02 INDIVIDUAL AWARDS. At the time the Individual Awards are determined for Participants, the Committee shall, in its discretion, after consideration of the recommendations 4 5 of the Chief Executive Officer, establish for each Plan Year Individual Awards for each Foreign Participant. 6.03 PAYMENT OF AWARDS. Individual Awards to each Foreign Participant shall be paid by the international Subsidiary that is the employer of such Foreign Participant at the same time as payment is made to Participants under Section 5.02. All payments shall be converted from the U.S. dollar measurement under the Plan to the currency of the country of the such Subsidiary at the currency exchange rate in effect at the time the Individual Award is determined. All applicable withholding taxes shall be withheld from the distribution and remitted by the international subsidiary to the appropriate taxing authority. 6.04 CONDITIONS. (a) A Foreign Employee who leaves the international Subsidiary's employ after the end of the Plan Year but prior to the payment of an Individual Award, except in the case of retirement in accordance with the customary practice of such Subsidiary, disability or death, will not be eligible to receive any payment under this Plan. However, an Individual Award may be made to such a Foreign Participant in those instances where recommendation for such a payment has been made by the Chief Executive Officer and approved by the Committee. (b) In the event a Foreign Participant dies after the Plan year but prior to the payment of any Individual Award with respect to the Plan Year, any Individual Award determined by the Committee to be payable, shall be paid by the international Subsidiary to the Foreign Participant's estate or in accordance with local laws. ARTICLE VII CHANGE OF CONTROL 7.01 EFFECT OF CHANGE IN CONTROL. In the event a Change in Control of the Corporation (as defined in Section 7.02) occurs prior to final determination by the Committee of the amounts of Individual Awards to be paid under the Plan with respect to any Plan Year, the Committee shall calculate such Individual Awards as soon as practicable after such Change in Control. The Fund from which Individual Awards are to be made shall be based upon accruals by the Corporation up to the time of such Change in Control and Individual Awards shall be calculated in accordance with Sections 5.01 and 6.02 herein. Payment of such Individual Awards shall be made within thirty (30) days of the date on which the determination is made to compute the payments according to the terms of this Section 7.01. 7.02 For all purposes of the Plan, a "Change in Control of the Corporation" shall have occurred if any of the following events shall occur: (a) The Corporation is merged, consolidated or reorganized into or with another corporation or other legal person, and, as a result of such merger, consolidation or reorganization, less than a majority of the combined voting power of the then-outstanding securities of such surviving corporation or person entitled to vote, immediately after such transaction, is held in the aggregate by the holders of Voting Stock (as hereinafter defined) of the Corporation immediately prior to such transaction; 5 6 (b) The Corporation sells all or substantially all of its assets to any other corporation or other legal person, and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person, immediately after such sale, is held in the aggregate by the holders of Voting Stock of the Corporation immediately prior to such sale; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13(d)(3) or any successor rule or regulation promulgated under the Exchange Act) of securities representing 20% or more of the combined voting power of the then-outstanding securities entitled to vote generally in the election of directors of the Corporation ("Voting Stock"); (d) The Corporation files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Corporation has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (e) If during any period of two consecutive years, individuals who, at the beginning of any such period constitute the Directors of the Corporation, cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Corporation's stockholders, of each Director of the Corporation first elected during such period was approved by a vote of at least two-thirds of the Directors of the Corporation then still in office who were Directors of the Corporation at the beginning of any such period. Notwithstanding the foregoing provisions, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Corporation, (ii) an entity in which the Corporation directly or indirectly beneficially owns 50% or more of the voting securities or (iii) any Corporation-sponsored employee stock ownership plan or any other employee benefit plan of the Corporation, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 20% or otherwise, or because the Corporation reports that a change in control of the Corporation has or may have occurred or will or may occur in the future by reason of such beneficial ownership. ARTICLE VIII ADMINISTRATION 8.01 PLAN ADMINISTRATOR. The Committee shall be the Plan administrator. 8.02 DUTIES OF PLAN ADMINISTRATOR. 6 7 (a) The Committee shall administer the Plan in accordance with its terms and shall have all powers necessary to carry out the provisions of the Plan including, but not limited to, the following: (1) Determination of Employees and Foreign Employees who are eligible for Plan participation; (2) Determination of the amount of the Fund to be distributed to Participants and Foreign Participants for each Plan Year; and (3) Determination of each Officer's actual Individual Award. (b) The Committee shall interpret the Plan and shall resolve all questions arising in the administration, interpretation, and application of the Plan. Any such determination of the Committee shall be conclusive and binding on all persons. (c) The Committee shall establish such procedures and keep such records or other data as the Committee in its discretion determines necessary or proper for the administration of the Plan. (d) The Committee may delegate administrative responsibilities to such person or persons as the Committee deems necessary or desirable in connection with the administration of the Plan. ARTICLE IX MISCELLANEOUS 9.01 UNFUNDED PLAN. The Corporation shall be under no obligation to segregate or reserve any funds or other assets for purposes relating to this Plan and no Participant or Foreign Participant shall have any rights whatsoever in or with respect to any funds or assets of the Corporation. 9.02 NON-ALIENATION. Since a Participant or Foreign Participant does not have any rights to any Individual Award under the Plan until the time that payment of such Individual Award is made, no anticipated payment of any Individual Award shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, garnishment or encumbrance of any kind. If a Participant or Foreign Participant attempts to alienate, sell, transfer, assign, pledge or otherwise encumber any such anticipated Individual Award, or if he has filed or will be filing for bankruptcy, the Committee in its discretion may cause such amounts as would otherwise become payable to such Participant or Foreign Participant at such time or times to be paid to or applied for the benefit of such one or more of the following as the Committee in its sole and unrestricted judgment and discretion may designate: the Participant or Foreign Participant, his spouse, child or children, or other dependents. 9.03 UNCLAIMED PAYMENTS. Should the whereabouts of any Participant or Foreign Participant entitled to receive any Individual Award be unknown to the Corporation, and unascertainable after reasonable inquiry by the Corporation, for a period of two years from the date of scheduled payment of the Individual Award, the right of such person to receive payments hereunder shall be terminated, and the amounts which would otherwise have been payable to such person shall be forfeited. 9.04 ACTIONS OR DECISIONS WITH RESPECT TO THE PLAN. Any decision or action of the Corporation, the Board, or the Committee, arising out of or in connection with the administration 7 8 and operation of this Plan, may be made or taken in their sole and unrestricted judgment and discretion, and such decision or action shall be conclusive and binding upon all Participants and Foreign Participants. 9.05 NO EMPLOYMENT RIGHTS. Nothing herein contained shall be construed as a commitment or agreement upon the part of any Participant, Foreign Participant, Employee or Foreign Employee hereunder to continue his employment with the Corporation or a Subsidiary, and nothing herein contained shall be construed as a commitment on the part of the Corporation or any Subsidiary to continue the employment or rate of compensation of any Participant or Foreign Participant hereunder or any Employee or Foreign Employee for any period. 9.06 AMENDMENT OF THE PLAN. The Corporation reserves the right, to be exercised by instruction from the Committee, to modify or amend this Plan at any time. 9.07 DURATION AND TERMINATION OF THE PLAN. The Corporation also reserves the right, to be exercised by action of the Board, to discontinue or terminate the Plan; provided that, and subject to all the provisions of this plan, any termination shall be effective only for all Plan Years following December 31 of the plan Year in which the decision to terminate occurs. EX-10.J 5 EXHIBIT 10(J) 1 Exhibit (10)(j) THE LUBRIZOL CORPORATION OFFICERS' SUPPLEMENTAL RETIREMENT PLAN (As Amended) The Lubrizol Corporation hereby establishes, effective as of January 1, 1993, The Lubrizol Corporation Officers' Supplemental Retirement Plan (the "Plan") for the purpose of providing deferred compensation benefits to a select group of management or highly compensated employees. Section 1. DEFINITIONS. For the purposes hereof, the following words and phrases shall have the meanings indicated, unless a different meaning is plainly required by the context: (a) BENEFICIARY. The term "Beneficiary" shall mean a person who is designated by a Participant to receive benefits payable upon his death pursuant to the provisions of Section 6. (b) CODE. The term "Code" shall mean the Internal Revenue Code as amended from time to time. Reference to a section of the Code shall include such section and any comparable section or sections of any future legislation that amends, supplements, or supersedes such section. (c) COMPANY. The term "Company" shall mean The Lubrizol Corporation, an Ohio corporation, its corporate successors and the surviving corporation resulting from any merger of The Lubrizol Corporation with any other corporation or corporations. (d) CREDITED SERVICE. The term "Credited Service" shall mean a Participant's years of service with the Company equal to the number of full and fractional years of service (to the nearest twelfth of a year) beginning on the date the Participant first performed an hour of service for the Company and ending on the date he is no longer employed by the Company. (e) FINAL AVERAGE PAY. Effective, January 1, 1997, the term "Final Average Pay" shall mean the aggregated amount of Basic Compensation (as that term is defined in the Lubrizol Pension Plan modified to add cash (but not shares), if any, which the Participant has elected to defer under The Lubrizol Corporation Deferred Compensation Plan for Officers (which was adopted effective July 25, 1994) or under The Lubrizol Corporation Executive Council Deferred Compensation Plan (which was adopted effective January 1, 1997), received by the Participant during the three consecutive calendar years during which such Participant received the greatest aggregate amount of Basic Compensation, as defined above, within the most recent ten years of employment, divided by 36. 2 (f) LUBRIZOL PENSION PLAN. The term "Lubrizol Pension Plan" shall mean The Lubrizol Corporation Pension Plan as the same shall be in effect on the date of a Participant's retirement, death, or other termination of employment. (g) NORMAL RETIREMENT DATE. The term "Normal Retirement Date" shall mean the first day of the month following the date on which a Participant attains age sixty-five (65). (h) PARTICIPANT. The term "Participant" shall mean the Chief Executive Officer, the Chief Operating Officer and any other officer of the Company who is designated by the Board of Directors of the Company and the Chief Executive Officer to participate in the Plan, and who has not waived participation in the Plan. (i) PLAN. The term "Plan" shall mean a deferred compensation plan set forth herein, together with all amendments hereto, which Plan shall be called "The Lubrizol Corporation Officers' Supplemental Retirement Plan." 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. 3 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) a single lump-sum payment payable within 30 days following the end of calendar year in which the Participant retired. Interest on the lump-sum deferral shall accrue and be paid with the lump-sum; such interest to be computed at the PBGC interest rate in effect of 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; 4 (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. 5 Section 10. PLAN ADMINISTRATOR. The Company shall be the plan administrator of the Plan. The plan administrator shall perform all ministerial functions with respect to the Plan. Further, the plan administrator shall have full power and authority to interpret and construe the Plan and shall determine all questions arising in the administration, interpretation, and application of the Plan. Any such determination shall be conclusive and binding on all persons. The plan administrator shall employ such advisors or agents as it may deem necessary or advisable to assist it in carrying out its duties hereunder. Section 11. NOT A CONTRACT OF CONTINUING EMPLOYMENT. Nothing herein contained shall be construed as a commitment or agreement on the part of the Participant to continue his employment with the Company, and nothing herein contained shall be construed as a commitment or agreement on the part of the Company to continue the employment or the annual rate of compensation of the Participant for any period, and the Participant shall remain subject to discharge to the same extent as if this Plan had never been put into effect. Section 12. RIGHT OF AMENDMENT AND TERMINATION. Effective October 1, 1994, the Company reserves the right to amend or terminate the Plan in whole or in part at any time and to suspend operation of the Plan, in whole or in part, at any time, by resolution or written action of its Board of Directors or by action of a committee to which such authority has been delegated by the Board of Directors; provided, however, that no amendment shall result in the forfeiture or reduction of the interest of any Participant or person claiming under or through any one or more of them pursuant to the Plan. Any amendment of the Plan shall be in writing and signed by authorized individuals. Section 13. TERMINATION AND DISTRIBUTION OF ACCRUED BENEFITS. The Plan may be terminated at any time by the Company, and in that event the amount of the accrued benefits as of the date of such termination shall remain an obligation of the Company and shall be payable as if the Plan had not been terminated. Section 14. CONSTRUCTION. Where necessary or appropriate to the meaning hereof, the singular shall be deemed to include the plural, the plural to include the singular, the masculine to include the feminine, and the feminine to include the masculine. Section 15. SEVERABILITY. In the event any provision of the Plan is deemed invalid, such provision shall be deemed to be severed from the Plan, and the remainder of the Plan shall continue to be in full force and effect. Section 16. GOVERNING LAW. Except as otherwise provided, the provisions of the Plan shall be construed and enforced in accordance with the laws of the State of Ohio. EX-10.L 6 EXHIBIT 10(L) 1 Exhibit (10)(l) THE LUBRIZOL CORPORATION EXECUTIVE COUNCIL DEFERRED COMPENSATION PLAN As Amended 1. PURPOSE. The purpose of this Executive Council Deferred Compensation Plan (the "Plan") is to permit a member of the Executive Council (sometimes hereinafter referred to as the "Member" or as the "Participant") who is employed by The Lubrizol Corporation (the "Company"), to defer a portion of such Member's compensation as provided in this Plan. 2. ADMINISTRATION. The Plan shall be administered by the Organization and Compensation Committee of the Board of Directors of the Company (the "Committee"). The Committee's interpretation and construction of all provisions of the Plan shall be binding and conclusive upon all Participants and their heirs and/or successors. 3. RIGHT TO DEFER COMPENSATION. (a) A Member may, at any time prior to January 1 of a given calendar year, elect, for one or more future successive calendar years commencing with the calendar year immediately following the election (each a "Participation Year"), to defer under the Plan a pre-selected fixed dollar amount or percentage of such Member's variable compensation, if any (the "deferred compensation"), under The Lubrizol Corporation Performance Pay Plan ("Performance Pay Plan"), which such Participant may thereafter be entitled to receive for services performed during each elected Participation Year. (b) The election under this Section 3 shall take effect on the first day of the first elected Participation Year and such election shall be irrevocable for any elected Participation Year once such Participation Year shall have commenced. (c) Notwithstanding paragraphs (a) and (b), when an individual Member first becomes eligible to participate in the Plan, the newly eligible Member may make the election under this Section 3 to defer the specified compensation for services to be performed subsequent to the date specified in the election and for the remainder of the calendar year in which the election under this Section 3 is made, provided that such election is made within 30 days after the date that the Member is notified of the Member's eligibility. (d) All elections under this Plan shall be made by written notice (on a form provided by the Company) specifying (i) the number of calendar years, one or more, during which the election shall apply, and (ii) the deferred compensation, if any, determined under paragraph (a). (e) A Participant may designate that the election under this Section 3 shall remain in effect until the Participant, on a prospective basis, withdraws the election or changes the amount to be deferred. Any notice of the withdrawal or change in the amount of the election shall be effective on the first day of the calendar year next following the year on which such notice is given; provided that, such notice shall not 1 2 change, alter or terminate the deferral of the Member's participation in the Performance Pay Plan for the year in which such notice of withdrawal or change is given which, except for the deferral, would be payable in the calendar year next following the year in which such notice of withdrawal or change is given. Notwithstanding paragraph (b) and the first sentence of this paragraph (e), any variable compensation earned after the end of the first month in which a Participant under this Plan ceases to be a Member, as defined in Section 1, but continues to be employed by the Company, shall not be deferred, provided however, the balance in the Participant's Stock Deferral Accounts shall continue to be held and administered pursuant to the Plan. (f) All notices by a Participant under the Plan shall be in writing and shall be given to the Company's Vice President, Human Resources. 4. STOCK DEFERRAL ACCOUNTS. (a) At the close of business of the day on which the Performance Pay Plan deferred compensation would have been payable to the Participant in the absence of the election under the Plan to defer payment thereof, there shall be credited to a separate Stock Deferral Account for each Participant full and fractional stock equivalent units ("Units") which shall be established as hereinafter provided and shall be maintained for each Participant on the Company's records. (b) The number of full and fractional Units that shall be credited to a separate Stock Deferral Account for a Participant shall be equal to an amount determined by: (i) Dividing the Participant's deferred compensation for the applicable Participation Year by the average of the closing price for Lubrizol Common Shares ("Shares") on the New York Stock Exchange ("NYSE") composite transactions reporting system ("composite tape") for each of the ten (10) consecutive trading days commencing on the fourth business day following the release of earnings for such Participation Year; and (ii) multiplying the quotient determined in subparagraph (i) by 1.25. (c) To the extent that, at the time Units are credited to a Stock Deferral Account of a Participant, any federal, state or local payroll withholding tax applies (e.g., Medicare withholding tax), the Participant shall be responsible for the payment of such amount to the Company and the Company shall promptly remit such amount to the proper taxing authority. (d) The amount of deferred compensation used in the formula set forth in paragraph (b) shall not constitute a sum due and owing to Participant. Such amount shall be used solely as part of the formula to determine the number of full and fractional Units. (e) As of each dividend record date established by the Company for the payment of cash dividends with respect to its Shares, the Company shall credit each separate Stock Deferral Account of a Participant with an additional number of whole and/or fractional Units equal to: 2 3 (i) the product of (x) the dividend per Share which is payable with respect to such dividend record date, multiplied by (y) the number of whole and fractional Units credited to the separate Stock Deferral Account of the Participant as of such record date; DIVIDED BY (ii) the closing price of a Share on the dividend record date (or if Shares were not traded on that date, on the next preceding day on which Shares were so traded), as reported on the NYSE- composite tape. (f) At no time prior to actual delivery of Shares pursuant to the Plan shall the Company be obligated to purchase or reserve Shares for delivery to any Participant and a Participant shall not be a shareholder or have any of the rights of a shareholder with respect to the Units credited to each separate Stock Deferral Account of a Participant. 5. PAYMENT OF DEFERRED COMPENSATION. (a) All Units credited to a separate Stock Deferral Account of Participant, including dividend equivalents thereon, shall be payable to the Participant at the end of three years from the first date Units were credited to such separate Stock Deferral Account of the Participant under Section 4(a); provided, however, that if a Participant's employment is terminated for any reason other than retirement or death, the Units credited to each separate Stock Deferral Account of a Participant as of the Participant's termination of employment date, including all dividend equivalents thereon, shall be payable to the Participant within 30 days of such termination of employment. (b) All distributions or payments of Units to a Participant shall be made in Shares equal to the number of whole Units credited to the separate Stock Deferral Account(s) of the Participant which become payable in accordance with Section 5(a). Any fractional number of Units shall be paid in cash in lieu of Shares. (c) To the extent that, at the time Shares are distributed to a Participant, any federal, state or local payroll withholding tax applies, the Participant shall be responsible for the payment of such amount to the Company and the Company shall promptly remit such amount to the proper taxing authority. Such payment may be made in cash, in Shares, or in any combination of cash and Shares, at the election of the Participant. All elections must be made in writing and be submitted to the Vice President - Human Resources. If no election is made prior to the first distribution of Shares, the Company shall withhold a sufficient number of Shares to pay the withholding taxes at the highest marginal tax rate in effect for such Participant. In no event shall the withholding be less than the statutory minimum for tax withholding. (d) In the event a Participant dies prior to receiving payment of the entire amount in each separate Stock Deferral Account of the Participant, the unpaid balance shall be paid to such beneficiary as the Participant may have designated in writing to the Vice President, Human Resources, of the Company as the beneficiary to receive any such post-death distribution under the Plan or, in the absence of such written 3 4 designation, to the Participant's legal representative or to the beneficiary designated in the Participant's last will as the one to receive such distributions. Distributions subsequent to the death of a Participant may be made either in accordance with Section 5(a) and (b) or earlier, as determined by the Committee. (e) To the extent the Committee deems necessary, the Shares distributed to a Participant pursuant to Section 5(a) and (b) or 6(a) or to a successor pursuant to Section 5(d) may contain such restrictions on the right of immediate transfer as the Committee may reasonably determine. 6. ACCELERATION OF PAYMENTS. (a) The Committee may accelerate the distribution of part or all of one or more of a Participant's separate Stock Deferral Accounts for reasons of severe financial hardship. For purposes of the Plan, severe financial hardship shall be deemed to exist in the event the Committee determines that a Participant needs a distribution to meet immediate and heavy financial needs resulting from a sudden or unexpected illness or accident of the Participant or a member of the Participant's family, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Participant. A distribution based on financial hardship shall not exceed the amount required to meet the immediate financial need created by the hardship. 7. NON-ASSIGNABILITY. None of the rights or interests in any of the Participant's separate Stock Deferral Accounts shall, at any time prior to actual payment or distribution pursuant to the Plan, be assignable or transferable in whole or in part, either voluntarily or by operation of law or otherwise, and such rights and interest shall not be subject to payment of debts by execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner; provided that, upon the occurrence of any such assignment or transfer or the attempted assignment or transfer, all payments under Section 5 shall be payable in the sole and unrestricted judgment and discretion of the Committee, as to time and amount, and shall be distributable to the person who would have received the payment but for this Section 7 only at such time or times and in such amounts as the Committee, from time to time, and in its sole and unrestricted judgment and discretion, shall determine. Should an event covered by this Section 7 occur prior to the death of a Participant, the balance, if any, in each of the Participant's Stock Deferral Accounts shall, after such death, be thereafter distributed as provided in Section 5(d) subject to the provisions of this Section 7. 8. PLAN TO BE UNFUNDED. The Company shall be under no obligation to segregate or reserve any funds or other assets for purposes relating to the Plan and, except as set forth in this Plan, no Participant shall have any rights whatsoever in or with respect to any funds or other assets held by the Company for purposes of the Plan or otherwise. Each Participant's separate Stock Deferral Accounts maintained for purposes of the Plan merely constitutes a bookkeeping entry on records of the Company, constitutes the unsecured promise and obligation of the Company to make payments as provided herein, and shall not constitute any allocation whatsoever of any cash or other assets of the Company or be deemed to create any trust or special deposit with respect to any of the Company's assets. 4 5 9. MISCELLANEOUS. In the event of any change in the number of outstanding Shares by reason of any stock dividend, stock split up, recapitalization, merger, consolidation, exchange of shares or other similar corporate change, the number of Units credited to each separate Stock Deferral Account of a Participant shall be appropriately adjusted to take into account any such event. 10. AMENDMENT. The Board of Directors of the Company, or the Organization and Compensation Committee, may, from time to time, amend or terminate the Plan, provided that no such amendment or termination of the Plan shall adversely affect any Stock Deferral Account of a Participant as it existed immediately before such amendment or termination or the manner of distribution thereof, unless such Participant shall have consented thereto in writing. Notice of any amendment or termination of the Plan shall be given promptly to all Participants. 11. PLAN IMPLEMENTATION. This Plan is adopted and effective as of the 1st day of January, 1997, and amended effective November 23, 1998. EX-12 7 EXHIBIT 12 1 EXHIBIT 12 THE LUBRIZOL CORPORATION AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (all amounts except ratios are shown in thousands)
1998 1997 1996 1995 1994 ------- ------- ------ ------ ------ Pretax income $118,814 $231,147 $250,608 $225,574 $251,459 Deduct earnings of less than 50% owned affiliates (net of distributed earnings) included in pretax income (1,470) (3,018) (48) (1,384) (871) Add losses of less than 50% owned affiliates included in pretax income 888 66 56 1,808 490 Add fixed charges net of capitalized interest 18,976 10,803 10,955 10,376 3,149 Add previously capitalized interest amortized during period 1,191 1,118 968 1,096 452 -------- -------- -------- -------- --------- "Earnings" $138,399 $240,116 $262,539 $237,470 $254,679 ======== ======== ======== ======== ======== Gross interest expense including capitalized interest ("Fixed Charges") $ 20,743 $ 13,194 $ 14,010 $ 14,693 $ 6,922 Ratio of earnings to fixed charges 6.67 18.2 18.7 16.2 36.8 Special adjustments: - ------------------- "Earnings" $138,399 $240,116 $262,539 $237,470 $254,679 Plus asset impairment and special charges 36,892 9,489 Less gains on investments (16,201) (53,280) (38,459) (41,235) -------- -------- -------- -------- -------- Adjusted "Earnings" $159,090 $240,116 $209,259 $208,500 $213,444 ======== ======== ======== ======== ======== Ratio of adjusted earnings to fixed charges 7.67 18.2 14.9 14.2 30.8
EX-13 8 EXHIBIT 13 1 Exhibit 13 THE LUBRIZOL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Lubrizol Corporation is a full-service supplier of performance chemicals to diverse markets worldwide. The company develops, produces and sells specialty additive packages used in transportation and industrial finished lubricants. The company's products are created through the application of advanced chemical and mechanical technologies to enhance the performance, quality and value of the customer products in which they are used. The company groups its product lines into two operating segments: chemicals for transportation and chemicals for industry. Chemicals for transportation comprised approximately 85% of the company's consolidated revenues and segment pretax operating profit in 1998. This discussion and analysis of the company's financial condition and results of operations is focused upon the company as a whole, rather than the individual segments, since the company believes this provides the most appropriate understanding of its business. Note 13 to the financial statements contains a further description of the nature of the company's operations, the product lines within each of the operating segments and related financial disclosures. Over the past three years, the company has made progress on its strategies to grow its revenues, improve its cost structure and expand into new market areas. During this period, market share has been increased, costs have been lowered, acquisitions to broaden business areas have been completed and, during the fourth quarter of 1998, the company took steps to increase the selling prices of its products. However, these actions have not been sufficient to meet the company's financial objectives given the present conditions within the lubricant additives industry. The global market growth rate for lubricant additives is a significant factor affecting the company's performance. In recent years, as the North American and European markets matured, the global growth rate for lubricant additives began to slow. Asia-Pacific and Latin America were two of the fastest growing markets for lubricant additives. In 1997, before the Asia-Pacific and Latin American economies began to weaken, the company estimated the global growth rate as approximately 1% per year. In 1998, the poor economic environments of Asia-Pacific and Latin America caused the global market growth rate to contract. However, even when these economies strengthen, industry market forces, such as improved engine design and longer drain intervals, suggest that global lubricant additives growth rates in excess of 1% are not likely to return. The effects from these conditions have been declining shipment volumes, industry overcapacity, a very competitive pricing environment, reduced financial returns on the capital invested and increased consolidation among both customers and additive producers. One example of this consolidation among customers and additive producers is the publicly announced pending merger between Exxon Corporation and Mobil Corporation. Each of these companies is an important customer of the company, and Exxon, through a joint venture, is a competitor in the lubricant additive industry. The company currently is not able to predict whether consolidation among customers or additive producers, including the proposed transaction between Exxon and Mobil, would have any material positive or negative effect on the company. The company has been implementing various short- and long-term initiatives relating to its cost structure, such as further consolidation of component production and continuing simplification of its product lines, to further enhance its competitiveness and market leadership position. Also, in response to market and industry conditions, the company initiated in November 1998 a series of steps to be implemented over the next two years that will reduce its costs and improve its worldwide operating structure. These steps, which will occur in two phases, include reorganization of the company's commercial structure, changes in work processes using the company's new globally integrated management information system, the shutdown of production units and consolidation of facilities and offices. These actions are discussed below under the caption entitled "Special Charges and Adibis Assimilation." Acquisitions continue to be an important part of the company's strategy to strengthen its business position and expand into new markets. In 1998, the company made seven acquisitions for an aggregate of approximately $158 million in cash and common shares. The largest acquisition was Adibis, formerly the lubricant and fuel additives group of British Petroleum Group P.L.C., which had annualized 1998 revenues of approximately $100 million and is within the company's chemicals for transportation segment. The other six acquisitions were "building block" acquisitions within the company's chemicals for industry segment and had annualized 1998 revenues of approximately $62 million. Further information regarding these acquisitions is contained in Note 12 to the financial statements. 1998 RESULTS OF OPERATIONS [GRAPHIC] - -----------
1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- REVENUES (millions) $1,599.0 $1,663.6 $1,597.6 $1,673.8 $1,617.9
In 1998, the continuing weak business environment of the lubricant additives industry and poor economic conditions in Asia-Pacific and Latin America negatively impacted the financial results for the year, particularly during the second half of the year. Despite acquisitions contributing 5% to consolidated revenues during 1998, annual revenues declined 3% as compared with 1997. Lower average selling prices combined with relatively level material costs have compressed profit margins. In addition, higher interest expense and a higher effective tax rate each contributed to 1998 earnings being significantly lower than 1997 earnings. 10 2 THE LUBRIZOL CORPORATION Consolidated revenues for 1998 of $1.62 billion decreased $55.9 million, or 3%, as compared with the record 1997 annual revenues of $1.67 billion. The primary factors causing the decline in revenues from the prior year were lower average selling prices and lower pre-acquisition volume, which more than offset the year-over-year incremental revenues from acquisitions. Excluding acquisitions, sales volume declined by 4% for 1998 and by 10% for the second half of 1998 as compared with the comparable 1997 periods. The 1998 average selling price declined 5% as compared with 1997, of which 75% was due to lower product pricing and changing product mix and 25% was due to currency. The year-over-year increase in revenues from acquisitions was $81.2 million, of which $38.0 million pertained to chemicals for transportation and $43.2 million pertained to chemicals for industry. The slowing of lubricant additive demand in virtually all geographic areas during 1998 and the current economic conditions in Asia-Pacific caused difficult comparisons against 1997, a year in which the company achieved record revenues and sales volume. Although sales volume in 1998 was flat with 1997, excluding acquisitions, sales volume declined 4%. On this same basis, sales volume to customers in North America during 1998 was level with 1997, but declined 7% to international customers. For the 1998 second half compared with the same period of 1997, sales volume (excluding acquisitions) decreased 3% to customers in North America and decreased 15% to international customers. The continuing economic difficulties in the Asia-Pacific region had an accelerating, unfavorable effect on the company's 1998 results. Products shipped to customers in Asia-Pacific are manufactured primarily in production facilities in the United States and comprised approximately 16% and 19% of the company's revenues in 1998 and 1997, respectively. Sales volume to customers in Asia-Pacific during the first half of 1998 declined by only 1% as compared with the first half of 1997, but declined by 21% in the 1998 second half as compared with the 1997 second half. Lower sales volume into Asia-Pacific was the primary reason that overall sales volume declined in 1998. Asia-Pacific revenues declined by $53 million, or 17% for the year 1998 and by $40 million, or 24% for the second half of 1998 as compared with the respective 1997 periods. Some forward buying during the second half of 1997 by customers in Asia-Pacific in a reaction to worsening economic conditions exacerbated the comparison with the current year. Cost of sales for the full year 1998, including acquisitions, increased only 1% over 1997 as sales volume, average material unit costs and manufacturing costs, remained relatively constant between the comparable periods. Average material unit costs declined less than 1% from 1997. The company's manufacturing costs do not fluctuate significantly with changes in production volume. The effects of the company's ongoing manufacturing rationalization program and other cost management initiatives, for the second consecutive year, helped keep manufacturing costs level as compared with the prior year, despite a $12.2 million increase from acquisitions. Gross profit (net sales less cost of sales) decreased $64.4 million, or 12%, in 1998 compared with 1997. Excluding acquisitions, gross profit declined $82.3 million, or 15%, in 1998 compared with 1997. Gross profit decreased $30.2 million, or 11%, ($35.3 million, or 13%, excluding acquisitions) in the first half of 1998 and decreased $34.2 million, or 13%, ($47.0 million, or 18%, excluding acquisitions) in the second half of 1998 compared with the same 1997 periods. The decrease in gross profit for each of the respective periods was primarily due to the decline in selling prices and, in the second half of 1998, also due to the lower sales volume. The $17.9 million increase in gross profit contributed from acquisitions made over the past year was partially offset by unfavorable currency effects of $7.4 million for 1998. [GRAPHIC] - -----------
1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- GROSS PROFIT (millions) $520.7 $522.9 $509.5 $545.6 $481.2
The gross profit percentage (gross profit divided by net sales) was 29.8% for 1998 as compared with 32.7% for 1997. This decrease in gross profit percentage was attributable to the lower average selling price as well as the unfavorable effect on per unit manufacturing costs resulting from lower production levels, particularly in the fourth quarter of 1998. In addition, the gross profit percentage of 27.6% in the fourth quarter of 1998 reflected a $4.3 million inventory write-down primarily due to a change in a customer product specification. Selling and administrative expenses increased by $8.5 million, or 5%, in 1998 compared with 1997. Excluding acquisitions, selling and administrative expenses were $1.5 million, or 1%, lower compared with 1997. Selling and administrative expenses in 1998 reflect increased spending of $11.3 million related to the implementation of the new, enterprise-wide, management information system, but this was more than offset by lower variable pay expense, lower litigation expense and other cost reductions. [GRAPHIC] - -----------
1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- RESEARCH TESTING & DEVELOPMENT (millions) $165.5 $179.6 $161.0 $146.7 $151.0
Research, testing and development expenses (technology expenses) increased $4.3 million, or 3%, in 1998 compared with 1997. Excluding acquisitions, technology expenses declined $1.9 million, or 1%, from 1997. Product standards change periodically to meet new emissions, efficiency, durability and other performance factors as engine and transmission designs are improved by the equipment manufacturers. These changes influence the timing and amount of the technology expense. Approximately 80% of the company's technology cost is incurred in company-owned facilities and 20% is incurred at third-party testing facilities. Testing expenses incurred at third-party testing facilities increased $5.5 million in 1998 11 3 THE LUBRIZOL CORPORATION over 1997 primarily due to a new performance specification for heavy-duty engine oils. The company's technology expense in 1998, as well as in 1997, included costs related to new performance specifications for heavy-duty engine oils, which were introduced into the market in late 1998, and new performance specifications for passenger car engine oils expected to become effective during 2000. Primarily as a result of the factors previously discussed, the change in revenues together with the change in total costs and expenses unfavorably affected the company's pretax profits by $78.4 million for the full year 1998 and by $45.3 million for the second half of 1998 as compared with respective 1997 periods. In the fourth quarter of 1998, the company recorded special charges aggregating $36.9 million. These special charges related to the first phase of the company's cost reduction program, which amounted to $23.3 million, and the write-off of $13.6 million of purchased technology under development originating from the Adibis acquisition. After-tax, these special charges reduced 1998 net income by $25.8 million, or $.47 per share. For further information see the caption "Special Charges and Adibis Assimilation" below. On April 23, 1998, the company reached a settlement with Exxon Corporation of a lawsuit pending in federal court in Ohio and the company received cash of $19 million from Exxon. The pretax gain from this litigation settlement, net of related expenses, was $16.2 million. After-tax, the litigation settlement increased net income by $10.5 million or $.19 per share. Further information regarding the company's litigation with Exxon is contained in Note 17 to the financial statements. The change in other income (expense) unfavorably affected 1998 pre-tax income by $6.3 million compared with 1997. This change mostly occurred during the second half of the year and resulted primarily from higher goodwill amortization, higher currency exchange transaction losses, and lower equity earnings from joint venture companies. Interest expense increased $8.2 million in 1998 compared with 1997, reflecting significantly higher borrowings that were incurred primarily to finance acquisitions during the year. While changes in the dollar value of foreign currencies will affect earnings from time to time, the longer-term economic effect of these changes should not be significant given the company's net asset exposure, currency mix and use of U.S. dollar-based pricing in certain countries. As the U.S. dollar strengthens or weakens against other international currencies in which the company transacts business, the financial results of the company will be affected. During 1998, the U.S. dollar strengthened and the change in currency exchange rates had an unfavorable effect on net income per share of $.07 for the year 1998 as compared with exchange rates in effect during 1997. As a result of the factors discussed above, income before income taxes decreased by $112.3 million for the full year 1998 and by $93.8 million for the second half of 1998 as compared with the respective periods of 1997. Excluding from 1998 the litigation gain and special charges, income before income taxes decreased by $91.6 million or 40% for the full year 1998 and by $56.9 million for the second half of 1998 as compared with the respective periods of 1997. The current year effective tax rate on income, before the litigation gain and special charges, increased to 38% as compared with 33% in 1997. This increase, which lowered 1998 earnings before these items by $.12 per share, was primarily a result of lower 1998 operating earnings and increased non-tax deductible 1998 translation losses incurred by the company's foreign subsidiaries using a U.S. dollar functional currency. Other reasons for the change in the effective tax rate included shifts in earnings between the various countries in which the company operates and the tax benefits recognized during the second half of 1997 resulting from favorable tax law changes enacted by France, the United States and the United Kingdom. Taking into account the litigation gain and the fourth quarter special charges, the overall effective tax rate for 1998 was 40%. Net income in 1998 was $71.2 million, or $1.27 per share. In 1997, net income was $154.9 million, or $2.68 per share. After excluding from 1998 the litigation gain and the special charges, net income in 1998 was $86.5 million, a decrease of 44% from 1997. On this same basis, 1998 net income per share was $1.55, a decline of 42% from the $2.68 per share earned in 1997. SPECIAL CHARGES AND ADIBIS ASSIMILATION The company initiated a series of steps in 1998 to reduce costs and improve its worldwide operating structure and will execute these steps in two phases over a period approximating two years. The first phase, which began in the fourth quarter of 1998, will result in employee reductions of approximately 6%, or 250 employees at both domestic and international locations. Approximately 55% of the employee reductions occurred by December 31, 1998, and the remaining 45% will occur during the first half of 1999. Of the 250 employees, approximately 40% were in the manufacturing area and 60% were in the selling, administrative, research and testing areas. In addition, the company will permanently remove several component production units from service during this first phase. The second phase of the company's cost reduction program will focus on lowering costs and improving efficiency in production and distribution activities. The company will continue to reduce its number of intermediate components, which will enable the number of its production units to be reduced by approximately 20% over the next two years. This will occur through the shutdown of certain production units and facilities worldwide. The company believes employee levels will be reduced a further 5% during this second phase. Definitive plans must be completed before the company is able to reasonably 12 4 THE LUBRIZOL CORPORATION estimate and recognize the costs of facility write-downs and employee reductions anticipated during this second phase of the cost reduction program. Such charges may be material to the operating results of the company for the period(s) in which they are recognized. The company recorded a special charge of $23.3 million in the fourth quarter of 1998 for the cost directly associated with the first phase of the cost reduction program. Employee severance costs approximate $20.0 million and other exit costs approximate $3.3 million, including $2.8 million related to asset impairments for component production units to be taken out of service. Cash expenditures of approximately $5.0 million were made in 1998 related to the cost reduction program. Approximately $15.5 million remains as an accrued liability at December 31, 1998, most of which represents cash to be expended in 1999. The company estimates annual savings of $26 million from the first phase of the cost reduction program. For financial reporting purposes, the company engaged an independent appraiser to provide a basis for allocating the purchase price of Adibis to the acquired intangible assets. The valuation included the amount to be assigned to technology under development which, under purchase accounting, is to be written off against income in the period of acquisition. Technology under development comprises on-going research and development projects which may form the basis for new products or replacements for existing products. The fair value assigned to the Adibis technology under development was determined by the independent appraiser applying the income approach and a valuation model, incorporating among other assumptions revenue and expense projections, probability of success and present value factors. The resulting value allocated to each of the technology projects under development represents the product of the present value of debt-free cash flows and the percent of research and development completed. The fair value of technology under development was comprised of three projects within engine oil additives aggregating $7.1 million; six projects within fuel additives aggregating $3.4 million; and two projects within marine diesel additives aggregating $3.1 million. The amount of the purchase price allocated to technology under development was $13.6 million and was charged against income in the fourth quarter of 1998. The company is in the process of assimilating the Adibis additives business, which it acquired effective August 1, 1998. The company's assimilation plan includes separation of a number of Adibis employees at an estimated cost of $3.9 million and terminating certain Adibis contracts for tolling arrangements, office leases and sales agents at an estimated cost of $2.7 million. These activities are planned for completion by the end of 1999, with the employee separations completed by the end of the first half of 1999. The aggregate cost of $6.6 million represents cash expenditures expected to be made in 1999. The cost of these activities was included in the allocation of the acquisition costs to the net assets acquired. 1997 RESULTS OF OPERATIONS IN 1997, the company made significant progress with each of its strategies to grow its business, improve its cost structure and build its franchise. During 1997, revenues increased 5% as product shipments increased 17% over 1996 and the company's market share grew. The company continued its focus to improve its cost structure as operating expenses were flat versus 1996, even with significantly higher production throughput. Net income per share in 1997 increased 20%, after excluding from 1996 the gain on investments. This record performance was achieved despite the unfavorable effect on earnings of the stronger U.S. dollar. In 1997, the company had record revenues of $1.67 billion, an increase of $76.2 million over 1996. Increased revenues resulted from a 17% increase in specialty chemical shipment volumes (contributing a 15% increase in consolidated revenues), partially offset by a 10% decline in the average selling price. Although the average selling price stabilized during the second half of the year, the full-year decline for 1997 was attributable approximately 50% to changing product mix, 30% to unfavorable currency effects and 20% to lower product pricing. The unfavorable product mix effect resulted from volume gains in product lines having lower than the overall average selling price. On balance, the company's acquisition/divestiture activity did not significantly affect 1997 annual revenues as recent acquisitions offset a prior year disposition. However, acquisitions contributed one-fourth, or $11.4 million, of the 13% increase in consolidated revenues for the fourth quarter of 1997 compared with the fourth quarter of 1996. A primary strategy of the company in 1997 was to grow its business. The company had success building global and regional alliances with targeted customers and continued actively pursuing additional strategic relationships with finished lubricant suppliers. As compared with 1996, sales volume increased throughout the year. Higher sales volumes were realized in all geographic zones and across a broad customer base. In 1997, sales volume increased 14% to North American customers and 18% to international customers, primarily in Asia-Pacific, Western Europe and Latin America. The growth in sales volume was derived principally from market share gains within established markets rather than overall industry growth. Cost of sales reflected the higher sales volume as well as lower average raw material costs and level manufacturing costs. Compared with the respective prior year periods, average material costs, including favorable currency effects and the impact of less expensive product mix, were 10% lower in the first half of 1997, 6% lower in the second half of 1997 and 8% lower for the year. The company's manufacturing costs do not fluctuate significantly with changes in production volume. The effects of the company's ongoing manufacturing 13 5 THE LUBRIZOL CORPORATION rationalization program and other cost management initiatives have improved manufacturing efficiency as the company is operating fewer manufacturing units at higher capacity levels. Manufacturing costs, aided by currency effects, were flat in 1997 compared with 1996, even though production activity was significantly higher in 1997 and the company resumed pay increases following the salary freeze in effect during 1996. Gross profit increased $36.2 million, or 7%, in 1997 compared with 1996. This improvement in gross profit amount was after unfavorable currency effects of $20.0 million, which occurred evenly over the four quarters. Acquisition/divestiture activity contributed $13.0 million to the increase in gross profit for 1997. Gross profit improved to 32.7% of sales in 1997 compared with 32.0% in 1996 as manufacturing efficiencies, lower material costs and the effect of acquisition/divestiture activities more than offset the effect of lower average selling price. Gross profit was 31.4% during the second half of 1997 due to sequentially lower average selling price, higher material costs and the effect of asset impairment losses of $4.4 million principally in the fourth quarter. Selling and administrative expenses increased $12.6 million, or 8%, in 1997 compared with 1996. These expenses, which were higher in the second half of the year compared with the first half, increased primarily due to higher patent-related litigation expenses, the effect of acquisitions, incremental expenses related to the implementation of the new enterprise-wide management information system and increased variable compensation as a result of higher earnings. During 1997, research, testing and development expense (technology expense) decreased $14.3 million, or 9%, from 1996. The lower spending level in 1997 was due to the timing of testing programs particularly within the engine oil and gear oil product lines, greater internalization of testing activity that reduced outside testing requirements and workforce reductions. The company's technology expense in 1997 includes some costs related to new performance specifications for heavy-duty engine oils which are expected to become effective during 1998 and new performance specifications for passenger car engine oils expected to become effective during 2000. As discussed in Note 16 to the financial statements, in 1997, the company provided $9.4 million for the impairment of long-lived assets. These charges related to a shutdown of an intermediate manufacturing system and the write-off of certain computer equipment and legacy software systems that will be disposed of due to the computer equipment standardization project and the new enterprise-wide management information system being implemented. Primarily as a result of these factors, consolidated revenues increased $37.7 million more than the increase in total costs and expenses in 1997. Interest income in 1997 was lower than in 1996 as proceeds from the 1996 sale of investments (discussed below) were temporarily invested in interest-bearing instruments until used in the company's share repurchase program. Interest expense in 1997 was level with 1996. The average daily balance of total debt outstanding during 1997 was $195 million as compared with $188 million in 1996. The company conducts a significant amount of its business outside of the United States and is subject to certain related risks including currency fluctuations. The U.S. dollar continued to strengthen during 1997, causing an unfavorable effect on net income of approximately $10.0 million, or $.17 per share. As a result of the factors discussed above and after excluding from 1996 the gain on investments, income before income taxes increased 17%, or $33.8 million, from 1996. The company adjusted its tax provision in the third quarter of 1997 to reflect a legislated increase in the statutory tax rate applicable to its earnings in France, where the company has significant operations. This adjustment resulted in an effective tax rate of 33.0% for the full year 1997 as compared with 31.5% in 1996, after excluding the 1996 gain on investments on which a 35% tax rate applied. The higher effective tax rate reduced net income by $3.5 million, or $.06 per share in 1997. Net income in 1997 was $154.9 million, or $2.68 per share. In 1996, net income was $169.8 million, or $2.80 per share, which included investment gains. After excluding from 1996 the non-recurring gains, net income in 1997 was 15% higher than the $135.2 million for 1996. On this same basis, net income per share was 20% higher than the $2.23 per share for 1996, reflecting the company's share repurchase program. 1996 RESULTS OF OPERATIONS IN 1996, management of the company took action early in the year to improve its cost structure as part of its continuing efforts to enhance its efficiency as an additive supplier. Although revenues in 1996 declined 4% from 1995, this was offset by the effects of aggressive cost management and management's focus on strengthening of customer and supplier relationships. In addition, lower working capital, significantly reduced capital expenditures and the sale of nonstrategic investments resulted in improved cash flow and enabled the company to repurchase 7% of its common shares outstanding during 1996. As a result, the company was able to grow net income and net income per share, despite unfavorable currency effects. Consolidated revenues were $1.60 billion in 1996, a decrease of $66 million, or 4%, from 1995 levels. Volume in 1996 was equal with 1995 despite the introduction of a new industry specification discussed below. Revenues decreased 2% due to price/mix effects and 1% due to unfavorable currency effects. In addition, the sale of the specialty vegetable oil business in September 1996 reduced consolidated revenues by 1% as compared with 1995. 14 6 THE LUBRIZOL CORPORATION During 1996, new passenger car engine oil additives were introduced to meet a new U.S. industry specification. Most of the company's customers converted to this new specification by September 1996. This new specification required approximately 10% less additive than the prior specification, and the company estimates that it negatively impacted annual sales volume in North America by 2% in 1996 (1% worldwide). However, other volume gains, primarily in heavy-duty engine oils, more than offset the impact from the new specification and overall volume in North America increased 1% over 1995. Internationally, volume declined 1%, as growth in Asia-Pacific was offset by lower volume in Western Europe. Gross profit of $509.5 million was $13.5 million, or 3%, lower in 1996 compared with 1995. Excluding the effects of the $9.5 million asset impairment in 1995 (discussed below), gross profit in 1996 was $23.0 million lower than in 1995. Unfavorable currency effects accounted for one-half of this decline with the balance attributable to lower revenues. However, the company aggressively managed its procurement costs of raw materials and continued its cost management efforts under its manufacturing rationalization initiative. These efforts lowered the cost of production to maintain 1996 gross profit as a percent of sales at 32.0%, compared with 32.1% in 1995 (excluding asset impairment). The company continued to lower its operating costs through aggressive cost management. This included a worldwide freeze on salary increases and hiring throughout all of 1996 and the manufacturing rationalization and organizational realignment initiatives that began in 1993. Employee levels, excluding acquisitions and divestitures during the year, were reduced by nearly 6% at December 31, 1996, compared with December 31, 1995, as retiring or departing employees were not replaced. The company's manufacturing costs and selling, administrative and technology expenses in 1996 were each lower than in 1995 and, in the aggregate, declined nearly 6%, or $40 million (excluding the effects of the 1995 asset impairment). Currency had a favorable effect on costs and accounted for approximately 25% of this reduction. Technology expense decreased 10% in 1996 compared with 1995. In addition to the effects of cost management strategies discussed above, the decrease was due to reduced testing requirements for product specifications primarily within driveline and engine oils. The effect of currency on technology expenses was not significant. Primarily as a result of the above factors, total costs and expenses declined $75.0 million in 1996 from 1995 ($65.5 million excluding the asset impairment), offsetting the revenue decline for the year. During 1996, the company completed the divestiture of substantially all of its agribusiness assets comprised of its equity investment in Mycogen Corporation and the assets of the company's wholly-owned subsidiary, SVO Specialty Products, Inc. (SVO). These transactions generated cash proceeds of $149.0 million and, after losses on other investment activity, resulted in the $53.3 million ($34.6 million, or $.57 per share after taxes) gain on investments. (See Note 7 to the financial statements.) The company has substantially liquidated its nonstrategic investments. The U.S. dollar strengthened during 1996 as compared with exchange rates in effect during 1995, particularly against the French franc, German mark and Japanese yen, causing an unfavorable effect on 1996 net income of $4.9 million, or $.08 per share. Interest expense, net of interest income, declined $2.4 million in 1996 compared with 1995. Proceeds collected from the sale of investments were used to temporarily reduce commercial paper borrowings and acquire short-term investments until used in the company's share repurchase program. The average daily balance of total debt outstanding during 1996 was $188 million as compared with $203 million in 1995. As a result of the factors discussed above, 1996 net income was $169.8 million, an increase of 12%, or $18.2 million from 1995. Net income per share for 1996 was $2.80, or 18% higher than in 1995 and reflected the impact of the company's share repurchase program. Excluding the gain on investments from each year, net income increased to $135.2 million from $126.6 million in 1995, a 7% increase. The corresponding net income per share of $2.23 in 1996 was a 13% increase from the $1.98 earnings per share in 1995. RETURN ON AVERAGE SHAREHOLDERS' EQUITY Return on average shareholders' equity was 9% in 1998 (11% excluding the litigation gain and the special charges), 19% in 1997 and 20% in 1996 (16% excluding gain on investments). [GRAPHIC] - -----------
1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- RETURN ON EQUITY*(percent) 19% 15% 16% 19% 11% (Before investment gains, litigation gain and special charges.)
WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES The company's cash flows for the years 1996 through 1998 are presented in the consolidated statements of cash flows. Cash provided from operating activities was $155.2 million in 1998 as compared with $234.4 million in 1997. This decrease of $79.2 million in cash flow from operations was primarily due to the lower net income earned in 1998 as compared with 1997. Operating cash was used to reduce accounts payable and accrued expenses, before the effect of the special charge for the cost reduction program. This use of cash reflects the timing of payments principally for inventory purchases and the payments for income taxes. The use of cash to increase other current assets reflects payments of estimated income taxes in excess of the company's obligation. 15 7 THE LUBRIZOL CORPORATION During 1996, the company initiated a four-year project to implement a global enterprise-wide management information system and standardize its computer equipment among all of its major facilities. This project supports the company's strategy to improve its cost structure by reducing complexity and increasing efficiency and is a critical component in the company's "Year 2000" compliance plan for its business information systems. When fully implemented, this system will provide access to information within the company so that resources will be shared and processes will be standardized and integrated worldwide. The company implemented the new enterprise-wide management information system in the United States during April 1998, anticipates completing the European implementation in April 1999, and will continue to implement this system globally over the next two years. [GRAPHIC] - -----------
1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- CASH PROVIDED FROM OPERATING ACTIVITIES (MILLIONS) CASH PROVIDED $156.8 $187.4 $231.0 $234.4 $155.2
Capital expenditures in 1998 were $93.4 million compared with $100.7 million in 1997. Capital expenditures include $17.6 million and $26.3 million in 1998 and 1997, respectively, related to the company's multi-year project to implement an enterprise-wide management information system. Capital expenditures for 1999 are estimated to be $85 million, including $6 million related to the continued implementation of the management information system. In years prior to 1998, the company divested its marketable securities and nonstrategic assets, primarily its former agribusiness assets. The after-tax proceeds from these activities generally were used in the company's share repurchase program. Proceeds received from the sale of investments in the amounts of $3.5 million and $2.5 million in 1998 and 1997, respectively, reflect collections on a promissory note from the 1996 sale of certain technology rights related to the company's former specialty vegetable business (SVO). Also, proceeds from the sale of investments received during 1997 reflect $9.6 million from the sale of a nonstrategic investment. Proceeds from the sale of investments during 1996 were principally comprised of $126.2 million from the sale of Mycogen and $22.8 million from the sale of SVO assets. In 1998, the company made six acquisitions for cash of $155.4 million and one acquisition for 89,806 of the company's common shares valued at $2.4 million. These acquisitions were in the areas of lubricant additives, metalworking additives and coating additives and broaden the company's base in performance chemicals. During 1997, the company invested $21.5 million in several acquisitions in the areas of metalworking additives and performance systems. In December 1996, the company acquired a formulator of specialty synthetic lubricants used by original equipment manufacturers in air and refrigeration compressors, for $24.6 million. In addition, the company invested $2.1 million and $2.7 million in 1997 and 1996, respectively, in joint ventures in China. The company maintained an active share repurchase program in each of the past three years. During 1998, the company repurchased approximately 2.6 million common shares, or 4.6% of its common shares outstanding at the beginning of the year, for $80 million. During 1997, the company repurchased 1.8 million common shares, or 3.1% of its common shares outstanding at the beginning of 1997, for $70.1 million. In 1996, the share repurchase program was increased to utilize the after-tax proceeds from the sale of investments as the company repurchased 4.5 million, or 7.1%, of its outstanding shares for $135.2 million. Under current circumstances, including the company's desire to maintain borrowing capacity to finance future acquisitions, the company does not anticipate making share repurchases during 1999. [GRAPHIC] - -----------
1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- CAPITALIZATION (MILLIONS) EQUITY $832.0 $849.0 $819.4 $815.4 $769.1 TOTAL DEBT $167.9 $247.1 $198.5 $220.3 $429.3
The company's net borrowings during 1998 totaled $201.7 million. These borrowings were used primarily to finance $155 million of cash expended for acquisitions, most of which occurred in the third quarter, and the company's share repurchase program. As discussed in Note 4 to the financial statements, the company replaced a significant portion of the outstanding commercial paper borrowings by issuing $200 million of long-term debt in November 1998. The company incurred debt issuance costs of $10.5 million in 1998, including a $6.5 million loss related to a hedge against changes in interest rates relative to the anticipated issuance of this debt. Debt increased during 1997 primarily to finance several acquisitions and the increase in working capital. During 1996, improved cash flow and lower capital expenditures enabled the company to have net repayments of short- and long-term debt of $43.6 million. The company's debt as a percent of total capitalization (shareholders' equity plus short- and long-term debt) increased to 36% at December 31, 1998, as compared with 21% at December 31, 1997. Primarily as a result of these activities and the payment of dividends, the balance of cash and short-term investments decreased $32.9 million at December 31, 1998, compared with December 31, 1997. The company's financial position remains strong with a ratio of current assets to current liabilities of 2.5:1 at December 31, 1998, and at December 31, 1997. Effective July 1, 1998, the company increased its committed revolving credit facilities from $75 million to $300 million. One-half of the aggregate amount of these facilities expires on June 30, 1999, and the remainder expires on June 30, 2003, subject in each case to annual extension provisions. These facilities, which were unused at December 31, 1998, permit the company to borrow at or below the U.S. prime rate. The company believes that its existing credit facilities, internally generated funds and ability to obtain additional financing, if desired, will be sufficient to meet its future capital needs. 16 8 THE LUBRIZOL CORPORATION YEAR 2000 MATTERS THIS IS A YEAR 2000 READINESS DISCLOSURE UNDER THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT, P.L. 105-271 The company relies on its computer-based management information systems, as well as computer-based systems used for other purposes, in conducting its normal business activities. Certain of these computer-based programs may not have been designed to function properly with respect to the application of dating systems relating to the Year 2000 and beyond. The company has developed a global Year 2000 strategy covering each of its facilities designed to minimize Year 2000 disruptions to its computer-based systems, including business information systems and process control, testing and laboratory equipment and embedded systems. The Year 2000 project manager regularly updates the company's senior management as to the implementation status of the Year 2000 strategy, and periodic reviews are conducted with the company's Audit Committee and Board of Directors. The company believes that its computer-based systems will be functional and operate without significant disruption both before and after January 1, 2000. The company's Year 2000 compliance strategy incorporates the conversion of most of its business information systems from mainframe systems to compliant, client/server systems. The company believes that implementation of such systems permits it to avoid approximately 80% of the effort that otherwise would have been required to make these legacy systems Year 2000 compliant. This conversion process is part of the company's global enterprise-wide management information system, which was implemented in the United States during 1998 and is scheduled for implementation in Europe in April 1999. Although the implementation date for the global enterprise-wide management system at a number of company facilities outside of the United States and Europe is anticipated to be after January 1, 2000, the company has developed Year 2000 compliance plans to address business information systems at each of those facilities. The company estimates approximately 20% of the total remediation effort is attributable to activities not related to the global enterprise-wide management information system discussed above. Based upon the effort expended through December 31, 1998, the company believes it has completed approximately 30% of the desired remediation activities that are in addition to its progress on the enterprise-wide management information systems. The company has substantially completed its assessment of the actions necessary with respect to all of its other date-based computer systems in order to minimize Year 2000-related disruptions. The company has completed compiling, categorizing as to criticality, and prioritizing all of its date-based computer systems at each of its facilities. Plans for remediation, testing and certification of such systems have been developed for each site and are aggressively being implemented. The company has targeted completion of all remedial activities, including testing and certification, and final contingency plans by July 1, 1999. Through December 31, 1998, the company incurred costs of approximately $61 million in connection with the implementation of its global enterprise-wide management information systems, of which approximately $46 million was capitalized and $15 million expensed. The company estimates additional costs in 1999 of approximately $18 million, of which approximately $6 million is expected to be capitalized. In addition, the company estimates the total costs for conducting its Year 2000 remedial activities not addressed by the global enterprise-wide management information system at approximately $10 million. The company has expended approximately $2.0 million for these activities, most of which was spent in 1998. The company has also surveyed suppliers critical to its business for the purpose of obtaining assurance regarding their ability to properly operate their systems in the Year 2000. Based on this process, the company believes its ability to obtain critical materials will not be significantly affected by its suppliers' Year 2000 situations. The company has been surveying significant customers for this same purpose in the first quarter of 1999 and expects to complete this process early in the second quarter. However, the company has no contractual or other right to compel its suppliers or customers to be Year 2000 compliant. The company has developed high-level contingency plans in the event any of its critical suppliers or significant customers should incur Year 2000 failures in their systems that would cause a disruption in the company's ability to conduct business. More detailed contingency plans are in the process of being developed for each facility. Some of the areas addressed in these plans include increased staffing, higher carrying levels of inventory for critical materials, components and finished goods and alternate suppliers for critical raw materials. The company's view of a "reasonably likely worst case scenario" would entail the temporary shutdown of a production unit at one or more of the company's major manufacturing sites. Although the company does not anticipate such a scenario will occur, if it were to occur, the company believes it would be able to correct the problem in a timely fashion, alternatively source the production or satisfy the customer demand from existing inventory. If the company's contingency plans are not adequate or its suppliers or customers fail to remedy their own Year 2000 matters, the company's results of operations and financial condition may be materially adversely affected. 17 9 THE LUBRIZOL CORPORATION EURO In anticipation of the introduction of the Euro, the company initiated steps in 1998 to: (i) conduct business using the Euro on January 1, 1999; (ii) integrate the Euro into its business, with full integration targeted for January 1, 2002; and (iii) meet the Euro needs of customers, including assisting them in their Euro integration. As a result of this effort, the company expects minimal impact from pricing transparency beyond that which already exists with major international accounts and large European regional customers. Contract continuity disputes with customers and vendors are not anticipated given the company's long-standing relationships and European Council regulations precluding using Euro conversion as a reason to invalidate contracts. The new enterprise software system being installed at the company's European sites is fully Euro compliant and no additional system enhancements are expected. Other conversion costs have been minor and absorbed in normal operating expense. Euro adoption also will consolidate a portion of the company's foreign currency exposures and reduce the number and cost of currency transactions. Although final tax guidance on all aspects of the Euro conversion has yet to be released, the company has no reason to believe that the conversion will have significant tax effects for the company. CAUTIONARY STATEMENT FOR "SAFE HARBOR" PURPOSES UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Management's Discussion and Analysis of Financial Condition and Results of Operations and the letter "To Our Shareholders" from W. G. Bares, Chairman, President and Chief Executive Officer of the company, contain forward-looking statements within the meaning of the federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to the company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the company. Such uncertainties and factors could cause actual results of the company to differ materially from those matters expressed in or implied by such forward-looking statements. The company believes that the following factors, among others, could affect its future performance and cause actual results of the company to differ materially from those expressed or implied by forward-looking statements made in this annual report: * the overall demand for lubricant additives on a worldwide basis, which has a slow growth rate in mature markets such as North America and Europe; * the effect on the company's business resulting from economic uncertainty within the Asia-Pacific and Latin American regions; * the lubricant additive demand in developing regions such as China and India, which geographic areas are an announced focus of the company's activities; * technology developments that affect longer-term trends for lubricant additives, such as: improved engine design, fuel economy, longer oil drain intervals, alternative fuel powered engines and emission system compatibility; * the company's success at continuing to develop proprietary technology to meet or exceed new industry performance standards and individual customer expectations; * the frequency of change in industry performance standards, which affects the level and timing of the company's technology costs, the product life cycles and the relative quantity of additives required for new specifications; * the rate of progress in continuing to reduce complexities and conversion costs and in modifying the company's cost structure to maintain and enhance its competitiveness; * the success of the company in strengthening and retaining relationships with lubricant additive customers, growing sales at targeted accounts, and expanding geographically; * the extent to which the company is successful in expanding beyond its core chemicals for transportation business and into new areas for its chemicals for industry businesses; * the recoveries, judgments, costs and future impact of legal proceedings, including those relating to intellectual property litigation with Exxon Corporation and its affiliates; * the potential impact of consolidation among lubricant additive manufacturers and finished lubricant marketers, including the pending merger between Exxon and Mobil, two of the company's larger customers; * the relative degree of competitive and customer price pressure on lubricant additives; * the cost, availability and quality of raw materials, including petroleum-based products, required for the manufacture of lubricant additives; * the effects of fluctuations in currency exchange rates upon the company's reported results from its international operations, together with non-currency risks of investing in and conducting significant operations in foreign countries, including those relating to political, social, economic and regulatory factors; * the ability to achieve and timing of cost efficiencies resulting from the multi-year program to implement the new enterprise-wide management information system; 18 10 THE LUBRIZOL CORPORATION * the ability of the company to operate its computer-based systems without significant disruption due to dating systems application in the Year 2000; and * changes in significant government regulations affecting environmental compliance. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company operates manufacturing and blending facilities, laboratories and offices around the world and utilizes fixed and floating rate debt to finance its global operations. As a result, the company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. The company believes the political and economic risks related to its foreign operations are mitigated due to the stability of the countries in which its largest foreign operations are located. In the normal course of business, the company uses derivative financial instruments including interest rate swaps and foreign currency forward exchange contracts to manage its market risks. Additional information regarding the company's financial instruments is contained in Notes 4 and 14 to the financial statements. The company's objective in managing its exposure to changes in interest rates is to limit the impact of such changes on earnings and cash flow and to lower its overall borrowing costs. The company's objective in managing its exposure to changes in foreign currency exchange rates is to reduce volatility on earnings and cash flow associated with such changes. The company's principal currency exposures are in the major European currencies, the Japanese yen and certain Latin American currencies. The company does not hold derivatives for trading purposes. The company measures its market risk, related to its holdings of financial instruments based on changes in interest rates and foreign currency rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential loss in fair values, cash flows and earnings based on a hypothetical 10% change (increase and decrease) in interest and currency exchange rates. The company used current market rates on its debt and derivative portfolio to perform the sensitivity analysis. Certain items such as lease contracts, insurance contracts, and obligations for pension and other post-retirement benefits were not included in the analysis. The company's primary interest rate exposures relate to its cash and short-term investments, fixed and variable rate debt and interest rate swaps. The potential loss in fair values is based on an immediate change in the net present values of the company's interest rate-sensitive exposures resulting from a 10% change in interest rates. The potential loss in cash flows and earnings 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 does not have a material impact on the fair values, cash flows or earnings of the company. The company's primary currency rate exposures are to its foreign denominated debt, intercompany debt, cash and short-term investments and foreign currency forward exchange contracts. The potential loss in fair values is based on an immediate change in the U.S. dollar equivalent balances of the company's currency exposures due to a 10% shift in exchange rates. The potential loss in cash flows and earnings is based on the change in cash flow and earnings over a one-year period resulting from an immediate 10% change in currency exchange rates. A hypothetical 10% change in currency exchange rates does not have a material impact on its fair values, cash flows or earnings of the company. 19 11 [Deloitte & Touche LLP LOGO] THE LUBRIZOL CORPORATION INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE LUBRIZOL CORPORATION We have audited the accompanying consolidated balance sheets of The Lubrizol Corporation and its subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Lubrizol Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Cleveland, Ohio February 4, 1999 20 12 THE LUBRIZOL CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 ------------------------------------------ (In Thousands of Dollars Except Per Share Data) 1998 1997 1996 - -------------------------------------------------------------------------------------- Net sales ................................ $ 1,614,558 $ 1,669,251 $ 1,592,877 Royalties and other revenues ............. 3,361 4,531 4,685 ----------- ----------- ----------- Total revenues .................... 1,617,919 1,673,782 1,597,562 Cost of sales ............................ 1,133,327 1,123,602 1,083,394 Selling and administrative expenses ...... 179,759 171,244 158,633 Research, testing and development expenses 150,980 146,678 160,978 ----------- ----------- ----------- Total cost and expenses ........... 1,464,066 1,441,524 1,403,005 Special charges .......................... (36,892) Gain from litigation settlement .......... 16,201 Gain on investments ...................... 53,280 Other income (expense) - net ............. (1,152) 5,104 6,012 Interest income .......................... 5,780 4,588 7,714 Interest expense ......................... (18,976) (10,803) (10,955) ----------- ----------- ----------- Income before income taxes ............... 118,814 231,147 250,608 Provision for income taxes ............... 47,614 76,278 80,806 ----------- ----------- ----------- Net income ............................... $ 71,200 $ 154,869 $ 169,802 =========== =========== =========== Net income per share ..................... $ 1.27 $ 2.68 $ 2.80 =========== =========== =========== Net income per share, diluted ............ $ 1.27 $ 2.66 $ 2.79 =========== =========== =========== Dividends per share ...................... $ 1.04 $ 1.01 $ .97 =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. 21 13 THE LUBRIZOL CORPORATION CONSOLIDATED BALANCE SHEETS
December 31 -------------------------- (In Thousands of Dollars) 1998 1997 - -------------------------------------------------------------------------------------------- ASSETS Cash and short-term investments ............................... $ 53,639 $ 86,504 Receivables ................................................... 301,644 273,505 Inventories ................................................... 277,612 260,118 Other current assets .......................................... 54,575 36,949 ----------- ----------- Total current assets ................................... 687,470 657,076 ----------- ----------- Property and equipment - at cost .............................. 1,608,500 1,513,824 Less accumulated depreciation ................................. 889,650 821,147 ----------- ----------- Property and equipment - net ........................... 718,850 692,677 ----------- ----------- Goodwill and intangible assets - net .......................... 166,957 58,066 Investments in nonconsolidated companies ...................... 26,490 25,904 Other assets .................................................. 43,470 28,569 ----------- ----------- TOTAL ........................................... $ 1,643,237 $ 1,462,292 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt and current portion of long-term debt ......... $ 38,926 $ 38,095 Accounts payable .............................................. 112,832 127,347 Accrued expenses and other current liabilities ................ 118,270 96,488 ----------- ----------- Total current liabilities .............................. 270,028 261,930 ----------- ----------- Long-term debt ................................................ 390,394 182,165 Postretirement health care obligation ......................... 106,641 105,962 Noncurrent liabilities ........................................ 48,950 42,878 Deferred income taxes ......................................... 58,106 53,909 ----------- ----------- Total liabilities ...................................... 874,119 646,844 ----------- ----------- Contingencies and commitments Preferred stock without par value - unissued Common shares without par value - outstanding 54,548,110 shares in 1998 and 56,966,894 shares in 1997 ...................... 84,651 82,669 Retained earnings ............................................. 709,994 773,184 Accumulated other comprehensive income (loss) ................. (25,527) (40,405) ----------- ----------- Total shareholders' equity ............................. 769,118 815,448 ----------- ----------- TOTAL ........................................... $ 1,643,237 $ 1,462,292 =========== ===========
The accompanying notes to financial statements are an integral part of these statements. 22 14 THE LUBRIZOL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 -------------------------------------- (In Thousands of Dollars) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- CASH PROVIDED FROM (USED FOR): OPERATING ACTIVITIES: Net income .......................................................... $ 71,200 $ 154,869 $ 169,802 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization .................................. 88,047 87,217 80,964 Deferred income taxes .......................................... 5,732 8,585 23,074 Special charges and asset impairments .......................... 36,892 9,360 Gain on investments ............................................ (53,280) Change in current assets and liabilities net of acquisitions and dispositions: Receivables ................................................ 3,870 (47,313) 9,834 Inventories ................................................ 9,839 (16,919) 46,658 Accounts payable and accrued expenses ...................... (41,749) 46,524 (38,693) Other current assets ....................................... (17,012) 4,101 (1,610) Change in noncurrent liabilities ............................... 5,357 (169) (1,317) Other items - net .............................................. (6,985) (11,889) (4,430) ---------- ---------- ---------- Total operating activities ............................ 155,191 234,366 231,002 INVESTING ACTIVITIES: Proceeds from sale of investments ................................... 3,500 12,117 149,603 Capital expenditures ................................................ (93,421) (100,700) (94,297) Acquisitions and investments in nonconsolidated companies ........... (155,418) (23,636) (27,309) Other - net ......................................................... 749 5,164 4,357 ---------- ---------- ---------- Total investing activities ............................ (244,590) (107,055) 32,354 FINANCING ACTIVITIES: Short-term borrowing (repayment) .................................... 4,175 26,772 (52,890) Long-term borrowing ................................................. 203,059 5,572 28,425 Long-term repayment ................................................. (5,515) (4,159) (19,141) Debt issuance costs ................................................. (10,523) Dividends paid ...................................................... (58,256) (58,469) (59,033) Common shares purchased, net of options exercised .................. (76,542) (63,391) (133,926) ---------- ---------- ---------- Total financing activities ............................ 56,398 (93,675) (236,565) Effect of exchange rate changes on cash ............................. 136 (2,205) (2,297) ---------- ---------- ---------- Net increase (decrease) in cash and short-term investments ......... (32,865) 31,431 24,494 Cash and short-term investments at the beginning of year ............ 86,504 55,073 30,579 ---------- ---------- ---------- Cash and short-term investments at the end of year .................. $ 53,639 $ 86,504 $ 55,073 ========== ========== ==========
The accompanying notes to financial statements are an integral part of these statements. 23 15 THE LUBRIZOL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Shareholders' Equity ---------------------------------------------- Number of Accumulated Other Shares Common Retained Comprehensive (Dollars in Thousands) Outstanding Shares Earnings Income (Loss) Total - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 .............................. 62,951,288 $83,254 $762,747 $ 2,982 $848,983 -------- Comprehensive income: Net income 1996 ...................................... 169,802 169,802 Other comprehensive income (loss) .................... (6,450) (6,450) -------- Comprehensive income .................................... 163,352 Cash dividends .......................................... (59,033) (59,033) Common shares - treasury: Shares purchased ..................................... (4,496,427) (5,982) (129,206) (135,188) Shares issued upon exercise of stock options ......... 67,815 1,262 1,262 ---------- ------ -------- --------- -------- BALANCE, DECEMBER 31, 1996 .............................. 58,522,676 78,534 744,310 (3,468) 819,376 -------- Comprehensive income: Net income 1997 ...................................... 154,869 154,869 Other comprehensive income (loss) .................... (36,937) (36,937) -------- Comprehensive income .................................... 117,932 Cash dividends .......................................... (58,469) (58,469) Common shares - treasury: Shares purchased ..................................... (1,812,841) (2,538) (67,526) (70,064) Shares issued upon exercise of stock options ......... 257,059 6,673 6,673 ---------- ------ -------- --------- -------- BALANCE, DECEMBER 31, 1997 .............................. 56,966,894 82,669 773,184 (40,405) 815,448 -------- Comprehensive income: Net income 1998 ...................................... 71,200 71,200 Other comprehensive income (loss) .................... 14,878 14,878 -------- Comprehensive income .................................... 86,078 Cash dividends .......................................... (58,256) (58,256) Common shares issued for subsidiary acquisition ......... 89,806 2,390 2,390 Common shares - treasury: Shares purchased ..................................... (2,621,173) (3,944) (76,134) (80,078) Shares issued upon exercise of stock options ......... 112,583 3,536 3,536 ---------- ------ -------- --------- -------- BALANCE, DECEMBER 31, 1998 .............................. 54,548,110 $84,651 $709,994 $(25,527) $769,118 ========== ======= ======== ======== ========
24 16 THE LUBRIZOL CORPORATION NOTES TO FINANCIAL STATEMENTS (In Thousands of Dollars Unless Otherwise Indicated) NOTE 1 - NATURE OF OPERATIONS The Lubrizol Corporation is a full-service supplier of performance chemicals and products to diverse markets worldwide. The company develops, produces and sells specialty additive packages used in transportation and industrial finished lubricants. The company's products are created through the application of advanced chemical and mechanical technologies to enhance the performance, quality and value of the products in which they are used. The company groups its product lines into two operating segments: chemicals for transportation and chemicals for industry. Chemicals for transportation comprise approximately 85% of the company's consolidated revenues and segment pretax operating profit in 1998. Refer to Note 13 for a further description of the nature of the company's operations, the product lines within chemicals for transportation and chemicals for industry and related financial disclosures. NOTE 2 - ACCOUNTING POLICIES CONSOLIDATION - The consolidated financial statements include the accounts of The Lubrizol Corporation and its subsidiaries where ownership is greater than 50% and the company has effective controlling financial interest. For nonconsolidated companies (affiliates), the equity method of accounting is used when ownership, unless temporary, exceeds 20% and when the company has the ability to exercise significant influence over the policies of the investee. The book value of investments carried at equity was $25.8 million and $25.0 million and of investments carried at cost was $.7 million and $.9 million at December 31, 1998 and 1997, respectively. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions pending completion of related events. These estimates and assumptions affect the amounts reported at the date of the financial statements for assets, liabilities, revenues and expenses and the disclosure of contingencies. Actual results could differ from those estimates. CASH EQUIVALENTS - The company generally invests any of its excess cash in short-term investments with various banks and financial institutions. Short-term investments are cash equivalents, as they are part of the cash management activities of the company and are comprised primarily of investments having maturities of three months or less when purchased. INVENTORIES - Inventories are stated at the lower of cost or market value. Cost of inventories is determined by the first-in, first-out (FIFO) method except for chemical inventories within the United States, which are valued using the last-in, first-out (LIFO) method. PROPERTY AND EQUIPMENT - Property and equipment are carried at cost. Repair and maintenance costs are charged against income while renewals and betterments are capitalized as additions to the related assets. Costs incurred for computer software developed or obtained for internal use are capitalized for application development activities and immediately expensed for preliminary project activities or post-implementation activities. Accelerated depreciation methods are used in computing depreciation on certain machinery and equipment, which comprise approximately 23% of the depreciable assets. The remaining assets are depreciated using the straight-line method. The estimated useful lives are 10 to 40 years for buildings and land improvements and range from 3 to 20 years for machinery and equipment. GOODWILL AND INTANGIBLE ASSETS - Intangibles resulting from business acquisitions including costs in excess of net assets of businesses acquired (goodwill), purchased technology and trademarks are being amortized on a straight-line method over years ranging from 5 to 25 years. Periodically, the company evaluates the recoverability of goodwill and intangible assets and measures the amount of impairment, if any, by assessing current and future levels of cash flows as well as other factors, such as business trends or market and economic conditions. RESEARCH, TESTING AND DEVELOPMENT - Research, testing and development costs are expensed as incurred. Research and development expenses, excluding testing, were $78.3 million, $88.4 million and $93.4 million in 1998, 1997 and 1996, respectively. FOREIGN CURRENCY TRANSLATION - The assets and liabilities of the company's international subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are translated at weighted average exchange rates in effect during the period. Unrealized translation adjustments are recorded as a component of other comprehensive income in shareholders' equity. Transaction gains or losses that arise from exchange rate changes on transactions denominated in a currency other than the functional currency, except those transactions that function as a hedge of an identifiable foreign currency commitment or as a hedge of a foreign currency investment, are included in income as incurred. SHARE REPURCHASES - The company utilizes the par value method of accounting for its treasury shares. Under this method, the cost to reacquire shares in excess of paid-in capital related to those shares is charged against retained earnings. 25 17 THE LUBRIZOL CORPORATION PER SHARE AMOUNTS - Net income per share is computed by dividing net income by average common shares outstanding during the period. Net income per diluted share includes the dilution effect resulting from outstanding stock options and stock awards. Per share amounts are computed as follows:
1998 1997 1996 -------- -------- -------- Numerator: Net income available to common shareholders .. $ 71,200 $154,869 $169,802 ======== ======== ======== Denominator: Weighted average common shares outstanding ... 55,939 57,843 60,694 Dilutive effect of stock options and awards ... 183 386 109 -------- -------- -------- Denominator for net income per share, diluted ..... 56,122 58,229 60,803 ======== ======== ======== Net income per share ...... $ 1.27 $ 2.68 $ 2.80 ======== ======== ======== Net income per share, diluted ................ $ 1.27 $ 2.66 $ 2.79 ======== ======== ========
ACCOUNTING FOR DERIVATIVE INSTRUMENTS - In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities," which becomes effective for the company no later than January 1, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives be measured at fair value and recognized as either assets or liabilities in the balance sheet. The accounting for changes in the fair value of a derivative (that is, gains or losses) depends on the intended use of the derivative and its resulting hedge designation. The company uses derivative financial instruments only to manage well-defined foreign currency and interest rate risks. The company does not use derivative financial instruments for trading purposes. The company is currently evaluating the requirements of SFAS 133 but, based on its limited use of derivative financial instruments, believes SFAS 133 will not have a significant effect on the company's reported financial position or results of operations when adopted. NOTE 3 - INVENTORIES
1998 1997 -------- -------- Finished products ............ $112,060 $ 94,010 Products in process .......... 66,485 67,246 Raw materials ................ 80,134 81,079 Supplies and engine test parts 18,933 17,783 -------- -------- $277,612 $260,118 ======== ========
Inventories on the LIFO method were 27% and 29% of consolidated inventories at December 31, 1998 and 1997, respectively. The current replacement cost of these inventories exceeded the LIFO cost at December 31, 1998 and 1997, by $41.1 million and $43.7 million, respectively. NOTE 4 - SHORT-TERM AND LONG-TERM DEBT
1998 1997 ---------- ---------- Long-term debt consists of: 5.875% notes, due 2008 .................. $ 200,000 7.25% debentures, due 2025 .............. 100,000 $ 100,000 Debt supported by long-term banking arrangements: Commercial paper at weighted average rates of 5.6% and 6.4% ............. 50,000 35,000 6.5% Marine terminal refunding revenue bonds, due 2000 ............ 18,375 18,375 Term loans: Dollar denominated, at 5.0% to 9.0%, due 2000 - 2003 .................... 4,204 5,544 Yen denominated, at 2.0% to 3.8%, due 1999 - 2003 .................... 18,656 19,450 Deutsche mark denominated, at 4.1% to 6.0%, due 1999 - 2004 ... 19,648 14,460 French franc denominated, at 3.5% to 5.0%, due 1999 - 2008 ... 645 366 ---------- ---------- 411,528 193,195 Less current portion .................... (21,134) (11,030) ---------- ---------- $ 390,394 $ 182,165 ========== ========== Short-term debt consists of: Commercial paper at weighted average rates of 5.6% and 6.4% ............... $ 5,300 $ 18,900 Other short-term debt at weighted average rates of 2.8% and 1.4% ............... 12,492 8,165 Current portion of long-term debt ....... 21,134 11,030 ---------- ---------- $ 38,926 $ 38,095 ========== ==========
In November 1998, the company issued notes having an aggregate principal amount of $200 million. The notes are unsecured, senior obligations of the company that mature on December 1, 2008, and bear interest at 5.875% per annum, payable semi-annually on June 1 and December 1 of each year, commencing June 1, 1999. The notes have no sinking fund requirement but are redeemable, in whole or in part, at the option of the company. The company incurred debt issuance costs aggregating $10.5 million, including a loss of $6.5 million related to closed Treasury rate lock agreements originally entered into as a hedge against changes in interest rates relative to the anticipated issuance of these notes. Debt issuance costs are deferred and then amortized as a component of interest expense over the term of the notes. Including debt issuance costs, these notes have an effective annualized interest rate of 6.6% to the company. 26 18 THE LUBRIZOL CORPORATION The company issued debentures in June 1995 having an aggregate principal amount of $100 million. These debentures are unsecured, senior obligations of the company that mature on June 15, 2025, and bear interest at an annualized rate of 7.25% payable semi-annually on June 15 and December 15 of each year. The debentures are not redeemable prior to maturity and are not subject to any sinking fund requirements. Effective July 1, 1998, the company increased its committed revolving credit facilities from $75 million to $300 million. One-half of the aggregate amount of these facilities expires on June 30, 1999, and the remainder expires on June 30, 2003, subject in each case to annual extension provisions. These facilities, which were unused at December 31, 1998, permit the company to borrow at or below the U.S. prime rate. These facilities also permit the company to refinance beyond one year $150 million of debt, which by its terms is due within one year. As permitted by these and previously existing credit facilities, the company classified as long-term at each balance sheet date the portion of commercial paper borrowings expected to remain outstanding throughout the following year and the amount due under the Marine Terminal Refunding Revenue Bonds, whose bondholders have the right to put the bonds back to the company. Amounts due on long-term debt are $21.1 million in 1999, $25.3 million in 2000, $1.7 million in 2001, $.7 million in 2002, $62.0 million in 2003 and $300.7 million thereafter. The company has an interest rate swap agreement that effectively converts variable rate interest payable on $18.4 million of Marine Terminal Refunding Revenue Bonds due July 1, 2000, to a fixed rate of 6.5%. The company also has interest rate swap agreements, which expire in March 2005, that exchange variable rate interest obligations on a notional principal amount of $50 million for a fixed payment obligation of 7.6% (see Note 14). Interest paid, net of amounts capitalized, amounted to $18.3 million, $10.9 million and $10.4 million during 1998, 1997 and 1996, respectively. The company capitalizes interest on qualifying capital projects. The amount of interest capitalized during 1998, 1997 and 1996 amounted to $1.2 million, $2.1 million and $3.0 million, respectively. NOTE 5 - OTHER BALANCE SHEET INFORMATION
Receivables: 1998 1997 -------- -------- Customers $269,264 $243,232 Affiliates 8,976 7,727 Other .... 23,404 22,546 -------- -------- $301,644 $273,505 ======== ========
Receivables are net of allowance for doubtful accounts of $2.2 million in 1998 and $1.4 million in 1997.
Property and Equipment: 1998 1997 ---------- ---------- Land and improvements .... $ 107,712 $ 102,831 Buildings and improvements 299,024 270,237 Machinery and equipment .. 1,145,471 1,059,575 Construction in progress . 56,293 81,181 ---------- ---------- $1,608,500 $1,513,824 ========== ==========
Depreciation and amortization of property and equipment was $79.7 million in 1998, $82.7 million in 1997 and $78.7 million in 1996.
Goodwill and Intangible Assets: 1998 1997 -------- -------- Goodwill ...................... $157,380 $ 58,026 Intangible assets ............. 34,271 16,356 -------- -------- 191,651 74,382 Less accumulated amortization . 24,694 16,316 -------- -------- $166,957 $ 58,066 ======== ========
Accrued Expenses and Other Current Liabilities: 1998 1997 -------- -------- Employee compensation ......... $ 36,094 $ 34,757 Income taxes .................. 16,910 25,509 Taxes other than income ....... 20,675 12,105 Special charges and acquisition assimilation costs ......... 18,738 Other ......................... 25,853 24,117 -------- -------- $118,270 $ 96,488 ======== ======== Noncurrent Liabilities: ....... 1998 1997 -------- -------- Employee benefits ............. $ 33,976 $ 27,867 Other ......................... 14,974 15,011 -------- -------- $ 48,950 $ 42,878 ======== ========
NOTE 6 - SHAREHOLDERS' EQUITY The company has 147 million authorized shares consisting of 2 million shares of serial preferred stock, 25 million shares of serial preference shares and 120 million common shares, each of which is without par value. Common shares outstanding exclude common shares held in treasury of 31,648,000 and 29,229,000 at December 31, 1998 and 1997, respectively. The company has a shareholder rights plan under which one right to buy one-half common share has been distributed for each common share held. The rights may become exercisable under certain circumstances involving actual or potential acquisitions of 20% or more of the common shares by a person or affiliated persons who acquire such stock without complying with the requirements of the company's articles of incorporation. The rights would entitle shareholders, 27 19 THE LUBRIZOL CORPORATION other than such person or affiliated persons, to purchase common shares of the company or of certain acquiring persons at 50% of then current market value. At the option of the directors, the rights may be exchanged for common shares, and may be redeemed in cash, securities or other consideration. The rights will expire in 2007 unless earlier redeemed. Accumulated other comprehensive income or loss shown in the consolidated statements of shareholders' equity at December 31, 1998, 1997 and 1996 is solely comprised of the accumulated foreign currency translation adjustment, net of tax effects. Components of other comprehensive income (loss) consists of the following:
1998 1997 1996 -------- -------- -------- Foreign currency translation adjustments ............. $ 14,840 $(36,941) $ (6,663) Income tax benefit ......... 38 4 213 -------- -------- -------- Other comprehensive income (loss) ........... $ 14,878 $(36,937) $ (6,450) ======== ======== ========
NOTE 7 - GAIN ON INVESTMENTS In 1996, the company sold its investments in Mycogen Corporation and Agrigenetics, Inc., for cash of $126.2 million. The company also sold certain rights to its SVO oilseed technology for $8.0 million, of which $2.0 million was collected in 1996, $2.5 million collected in 1997 and $3.5 million collected in 1998. Also, in 1996, the company sold substantially all the remaining assets of SVO for cash of $20.8 million. These transactions resulted in pretax gains of $57.3 million, but losses on other investment activity resulted in an overall gain of $53.3 million in 1996. After-tax, these gains contributed $.57 to 1996 net income per share. NOTE 8 - OTHER INCOME (EXPENSE) Other income (expense) - net consists of the following:
1998 1997 1996 -------- -------- -------- Equity earnings of nonconsolidated companies ............. $ 2,602 $ 4,804 $ 4,350 Amortization of goodwill and intangible assets . (7,512) (3,764) (1,629) Currency exchange/ transaction gain (loss) (1,260) 2,398 11 Other - net .............. 5,018 1,666 3,280 -------- -------- -------- $ (1,152) $ 5,104 $ 6,012 ======== ======== ========
NOTE 9 - INCOME TAXES The provision for income taxes is based upon income before tax for financial reporting purposes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. In estimating future tax consequences, the company considers anticipated future events, except changes in tax laws or rates, which are recognized when enacted. Income before income taxes consists of the following:
1998 1997 1996 -------- -------- -------- United States $ 78,305 $154,589 $196,390 Foreign ..... 40,509 76,558 54,218 -------- -------- -------- Total ....... $118,814 $231,147 $250,608 ======== ======== ========
The provision for income taxes consists of the following:
1998 1997 1996 -------- -------- -------- Current: United States $ 16,649 $ 35,556 $ 39,688 Foreign ..... 25,233 32,137 18,044 -------- -------- -------- 41,882 67,693 57,732 -------- -------- -------- Deferred: United States 3,385 8,784 16,842 Foreign ..... 2,347 (199) 6,232 -------- -------- -------- 5,732 8,585 23,074 -------- -------- -------- Total ....... $ 47,614 $ 76,278 $ 80,806 ======== ======== ========
The United States tax provision includes the U.S. tax on foreign income distributed to the company. The portion of the tax provision for taxes outside the United States includes withholding taxes. The differences between the provision for income taxes at the U.S. statutory rate and the tax shown in the consolidated statements of income are summarized as follows:
1998 1997 1996 -------- -------- -------- Tax at statutory rate of 35% $ 41,585 $ 80,901 $ 87,713 Foreign sales corporation earnings ................. (3,152) (4,704) (3,477) Equity income ............... (859) (2,775) (1,324) Foreign deferred tax valuation allowance ...... 4,878 (60) 674 Other foreign tax differences 5,995 3,523 1,866 Other - net ................. (833) (607) (4,646) -------- -------- -------- Provision for income taxes .. $ 47,614 $ 76,278 $ 80,806 ======== ======== ========
The company increased its 1997 tax provision by approximately $3.5 million primarily to reflect a legislated increase in the statutory tax rate applicable to its earnings in France, where the company has significant operations. 28 20 THE LUBRIZOL CORPORATION The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31 are as follows:
1998 1997 ---------- ---------- Deferred tax assets: Accrued compensation and benefits .. $ 48,178 $ 43,251 Intercompany profit in inventory ... 11,131 13,223 Net operating losses carried forward 18,284 15,217 Other .............................. 8,574 7,100 ---------- ---------- Total gross deferred tax assets ....... 86,167 78,791 Less valuation allowance .............. (9,057) (4,179) ---------- ---------- Net deferred tax assets ............... 77,110 74,612 ---------- ---------- Deferred tax liabilities: Depreciation and other basis differences ................ 101,658 93,206 Undistributed foreign equity income 3,894 3,626 Inventory basis differences ........ 3,706 2,588 Other .............................. 2,986 4,657 ---------- ---------- Total gross deferred tax liabilities .. 112,244 104,077 ---------- ---------- Net deferred tax liabilities .......... $ (35,134) $ (29,465) ========== ==========
At December 31, 1998, certain foreign subsidiaries have net operating loss carryforwards of $51.5 million for income tax purposes, of which $11.2 million expire in years 2000 through 2004 and $40.3 million has no expiration. After evaluating tax planning strategies and historical and projected profitability, a valuation allowance has been recognized to reduce the deferred tax assets related to those carryforwards to the amount expected to be realized. The net change in the total valuation allowance for the years ended December 31, 1998, 1997 and 1996, was an increase of $4.9 million, a decrease of $.1 million and an increase of $.7 million, respectively. U.S. income taxes or foreign withholding taxes are not provided on undistributed earnings of foreign subsidiaries, which are considered to be indefinitely reinvested in the operations of such subsidiaries. The amount of such earnings was approximately $386.6 million at December 31, 1998. Determination of the net amount of unrecognized U.S. income tax with respect to these earnings is not practicable. Income taxes paid during 1998, 1997 and 1996 amounted to $52.0 million, $53.0 million and $55.0 million, respectively. NOTE 10 - PENSION, PROFIT SHARING AND OTHER POSTRETIREMENT BENEFIT PLANS At December 31, 1998, the company adopted SFAS 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." This statement revises the disclosures about pension and other postretirement benefit plans but does not change the way obligations or expense are measured or recognized in the financial statements. Disclosures for prior periods have been restated to conform to the requirements of SFAS 132. The company has noncontributory defined benefit pension plans covering most employees. Pension benefits under these plans are based on years of service and the employee's compensation. The company's funding policy in the United States is to contribute amounts to satisfy the Internal Revenue Service funding standards and elsewhere to fund amounts in accordance with local regulations. Several of the company's defined benefit plans are not funded. Plan assets are invested principally in marketable equity securities and fixed income instruments. The company also provides certain non-pension postretirement benefits, primarily health care and life insurance benefits, for retired employees. Substantially all of the company's full-time employees in the U.S. become eligible for these benefits after attaining specified years of service and age 55 at retirement. Participants contribute a portion of the cost of such benefits. The company's non-pension postretirement benefit plans are not funded. Net periodic pension cost of the company's defined benefit pension plans consists of:
1998 1997 1996 -------- -------- -------- Service cost - benefits earned during period ............. $ 11,142 $ 10,269 $ 11,097 Interest cost on projected benefit obligation ........ 17,519 17,704 17,690 Expected return on plan assets ............... (23,818) (21,976) (19,935) Amortization of prior service costs ............. 1,718 1,827 2,045 Amortization of initial net (asset) obligation ........ (753) (1,295) (1,260) Recognized net actuarial (gain) loss ............... (381) (127) (206) -------- -------- -------- Net periodic pension cost .... $ 5,427 $ 6,402 $ 9,431 ======== ======== ========
The company also has defined contribution plans, principally involving profit sharing plans and a 401(k) savings plan, covering most employees in the United States and at certain non-U.S. subsidiaries. Expense for all defined contribution retirement plans was $8.1 million in 1998, $9.9 million in 1997 and $10.2 million in 1996. As discussed in Note 16, the company initiated a cost reduction program and recognized special termination benefits of $18.3 million in 1998, which were included in the special charge recognized in the fourth quarter. 29 21 THE LUBRIZOL CORPORATION Net non-pension postretirement benefit cost consists of:
1998 1997 1996 ------- ------- ------- Service cost - benefits earned during period .. $ 1,250 $ 1,465 $ 1,609 Interest cost on accumulated benefit obligation 4,415 4,989 4,987 Amortization of prior service costs ........... (3,218) (3,218) (3,218) Recognized net actuarial (gain) loss .......... (252) ------- ------- ------- Net non-pension postretirement benefits cost .. $ 2,195 $ 3,236 $ 3,378 ======= ======= =======
The change in benefit obligation, change in plan assets of the company's defined benefit pension and non-pension postretirement plans and the amounts recognized in the consolidated balance sheets at December 31 are as follows:
Pension Plans Other Benefits ----------------------- ----------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Change in benefit obligation: Benefit obligation at beginning of year ................................... $ 254,263 $ 248,719 $ 61,460 $ 66,547 Service cost ........................................................... 11,142 10,269 1,250 1,465 Interest cost .......................................................... 17,519 17,704 4,415 4,989 Actuarial (gain) loss .................................................. 27,096 8,827 8,352 (9,055) Currency exchange rate change .......................................... 2,834 (4,793) (80) (1) Amendments ............................................................. 709 (146) Curtailments ........................................................... (195) Special termination benefits ........................................... 4,684 974 Benefits paid .......................................................... (20,569) (27,291) (3,350) (2,485) --------- --------- --------- --------- Benefit obligation at end of year ......................................... 297,483 254,263 72,047 61,460 --------- --------- --------- --------- Change in plan assets: Fair value of plan assets at beginning of year ......................... 298,130 271,887 Actual return on plan assets ......................................... 16,786 45,479 Employer contributions ............................................... 4,719 4,739 3,350 2,485 Currency exchange rate change ........................................ 896 (3,331) Benefits paid ........................................................ (19,958) (20,644) (3,350) (2,485) --------- --------- --------- --------- Fair value of plan assets at end of year ............................... 300,573 298,130 --------- --------- --------- --------- Plan assets greater (less) than the benefit obligation .................... 3,090 43,867 (72,047) (61,460) Unrecognized net loss (gain) ........................................... (7,981) (42,550) (1,225) (9,819) Unrecognized net transition obligation (asset) ......................... (5,571) (6,851) Unrecognized prior service cost ........................................ 9,785 10,813 (30,620) (33,838) --------- --------- --------- --------- Net amount recognized ..................................................... $ (677) $ 5,279 $(103,892) $(105,117) ========= ========= ========= ========= Amount recognized in the statement of financial position consist of: Prepaid benefit cost ................................................... $ 15,885 $ 17,534 Accrued benefit liability .............................................. (20,120) (14,315) $(103,892) $(105,117) Intangible asset ....................................................... 3,558 2,060 --------- --------- --------- --------- Net amount recognized ..................................................... $ (677) $ 5,279 $(103,892) $(105,117) ========= ========= ========= =========
Pension Plans Other Benefits ----------------------- ----------------------- 1998 1997 1998 1997 --------- --------- --------- --------- The weighted average assumptions as of December 31: Discount rate for determining funded status ............................ 6.08% 6.92% 6.71% 7.21% Expected return on plan assets ......................................... 9.01% 9.00% Rate of compensation increase .......................................... 3.78% 4.01%
30 22 THE LUBRIZOL CORPORATION The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $123.1 million and $97.2 million, respectively, as of December 31, 1998, and $25.5 million and $6.2 million, respectively, as of December 31, 1997. The accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $31.6 million and $13.9 million, respectively, as of December 31, 1998, and $19.2 million and $6.2 million, respectively, as of December 31, 1997. For the company's postretirement health care plan in the United States, the company revised its assumed ultimate health care cost trend rate from 6% to 5% during 1997. This revision reduced the accumulated postretirement benefit obligation at December 31, 1997, by $8.9 million. Beginning in 1998, this gain is being amortized over the average remaining service period of participants. The weighted average of the assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation for the company's postretirement benefit plans at December 31, 1998, was 7.45% (8.00% at December 31, 1997), with subsequent annual decrements to an ultimate trend rate of 5.00%. The assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in the assumed health care cost trend rate would have the following effects as of and for the year ended December 31, 1998:
One Percentage Point -------------------- Increase Decrease -------- -------- Effect on postretirement benefit obligation .............. $ 8,810 $(7,157) Effect on total service and interest cost components ................. $ 961 $ (764)
NOTE 11 - LEASES The company has commitments under operating leases primarily for office space, terminal facilities, land, railroad tank cars and various computer and office equipment. Rental expense was $18.7 million in 1998, $13.8 million in 1997 and $16.9 million in 1996. Future minimum rental commitments under operating leases having initial or remaining noncancelable lease terms exceeding one year are $13.2 million in 1999, $10.2 million in 2000, $6.9 million in 2001, $5.5 million in 2002, $5.4 million in 2003 and $17.6 million thereafter. NOTE 12 - ACQUISITIONS In 1998, the company completed six acquisitions for cash of $155.4 million and one acquisition for 89,806 of the company's common shares valued at $2.4 million. These acquisitions were in the company's existing business areas of lubricant and fuel additives, metalworking additives and coating additives and broaden the company's base in performance chemicals. These acquisitions were accounted for using the purchase method of accounting. The fair value of assets acquired and liabilities assumed in these acquisitions is as follows: Inventories .................................. $ 20,713 Receivables .................................. 26,424 Property and equipment ....................... 8,502 Other tangible assets ........................ 2,986 Goodwill ..................................... 97,882 Technology and other intangibles ............. 16,173 Technology under development ................. 13,598 Accounts payable and other liabilities assumed (28,470) --------- Fair value of net assets acquired, less $2,165 of cash received .......................... $ 157,808 =========
These acquisitions were made at various times throughout the year; however, the two largest acquisitions were Adibis, formerly the lubricants and fuel additives business of British Petroleum Company P.L.C., which was acquired effective August 1, 1998, and Carroll Scientific, Inc., (Carroll), which was acquired in July 1998. Carroll specializes in the development and supply of varnish and wax-based performance additives to the ink market. The aggregate purchase price of these two acquisitions was $134 million, of which $111 million was assigned to goodwill and intangible assets. During 1997, the annual revenues of Carroll were approximately $30 million and of Adibis were approximately $150 million. 31 23 THE LUBRIZOL CORPORATION The impact of the acquisitions made in 1998 was not material in relation to the company's results of operations; consequently, pro forma information is not presented. However, these acquisitions had the following impact on revenues and expenses for 1998: Revenues .............................................. $ 71,662 Gross profit .......................................... $ 15,267 Selling and administration expenses ................... $ 7,397 Research, testing and development ..................... $ 5,591 After-tax loss, excluding write-off of technology under development and interest on acquisition debt ....... $ (1,844)
The company is in the process of assimilating the Adibis additives business. The company's assimilation plan includes separation of a number of Adibis employees at an estimated cost of $3.9 million and terminating certain Adibis contracts for tolling arrangements, office leases and sales agents at an estimated cost of $2.7 million. These activities are planned for completion by the end of 1999, with the employee separations completed by the end of the first half of 1999. The aggregate cost of $6.6 million represents cash expenditures expected to be made in 1999. The cost of these activities was included in the allocation of the acquisition costs to the net assets acquired. The company engaged an independent appraiser to provide a basis for allocating the purchase price of Adibis to the acquired intangible assets for financial reporting purposes. The appraisal included the determination of the amount to be assigned to technology under development which, under purchase accounting, is written off against income in the period of acquisition. Technology under development comprises ongoing research and development projects that may form the basis for new products or replacements for existing products. The fair value assigned to the Adibis technology under development was determined by the independent appraiser applying the income approach and a valuation model, incorporating among other assumptions revenue and expense projections, probability of success and present value factors. The resulting value allocated to each of the technology projects under development represents the product of the present value of debt-free cash flows and the percent of research and development completed. The fair value of technology under development was comprised of three projects within engine oil additives aggregating $7.1 million; six projects within fuel additives aggregating $3.4 million; and two projects within marine diesel additives aggregating $3.1 million. The amount of the purchase price allocated to technology under development was $13.6 million and was charged against income in the fourth quarter of 1998 upon completion of the appraisal. NOTE 13 - BUSINESS SEGMENTS AND GEOGRAPHIC REPORTING At December 31, 1998, the company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. Prior year financial data by geographic area has been restated to conform to the current year's presentation. The company aggregates its product lines into two principal operating segments: chemicals for transportation and chemicals for industry. Chemicals for transportation is comprised of additives for lubricating engine oils, such as for gasoline, diesel, marine and stationary gas engines; additives for driveline oils, such as automatic transmission fluids, gear oils and tractor lubricants; and additives for fuel products and refinery and oil field chemicals. In addition, the company sells additive components to its larger customers and viscosity improvers within its lubricant and fuel additives product lines. The company's chemicals for transportation product lines are generally produced in shared manufacturing facilities and sold largely to a common customer base. Chemicals for industry includes industrial additives, such as additives for hydraulic fluids, metalworking fluids, and compressor lubricants; performance chemicals, such as additives for coatings and inks and process chemicals; and performance systems, comprised principally of fluid metering devices and particulate emission trap devices. The company's accounting policies for its operating segments are the same as those described in Note 1. The company evaluates performance and allocates resources based on segment contribution income, which is revenues less expenses directly identifiable to the product lines aggregated within each segment. In addition, the company allocates corporate research, testing, selling and administrative expenses in arriving at segment operating profit before tax. 32 24 THE LUBRIZOL CORPORATION The following table presents a summary of the company's reportable segments for the years ended December 31:
1998 1997 1996 ----------- ----------- ----------- Chemicals for transportation: Revenues from external customers ............... $ 1,361,306 $ 1,446,342 $ 1,375,759 Equity earnings ........... 2,434 4,540 4,063 Goodwill and intangibles amortization ............ 2,964 1,239 1,207 Segment contribution income ................. 238,076 322,377 286,620 Operating profit before tax 130,149 213,184 185,068 Segment total assets ...... 1,191,175 1,076,153 1,057,959 Capital expenditures ...... 90,369 98,482 91,340 Chemicals for industry: Revenues from external customers ............... $ 256,613 $ 227,440 $ 221,803 Equity earnings ........... 168 264 287 Goodwill and intangibles amortization ............ 5,414 3,274 1,083 Segment contribution income .................. 33,959 37,302 27,330 Operating profit before tax 22,552 24,178 15,501 Segment total assets ...... 256,905 194,492 179,675 Capital expenditures ...... 3,052 2,218 2,957 Reconciliation to consolidated income before tax: Segment operating profit before tax .............. $ 152,701 $ 237,362 $ 200,569 Gain from litigation settlement .............. 16,201 Gain on investments ....... 53,280 Special charges ........... (36,892) Interest expense - net .... (13,196) (6,215) (3,241) ----------- ----------- ----------- Consolidated income before tax .............. $ 118,814 $ 231,147 $ 250,608 =========== =========== =========== Revenues from external customers by product group: Engine oil additives ...... $ 799,795 $ 862,488 $ 805,683 Driveline oil additives ... 384,880 400,154 397,475 Fuel additives and refinery oil additives ........... 78,023 69,904 73,425 Additive components ....... 98,608 113,796 99,176 ----------- ----------- ----------- Chemicals for transportation ........ 1,361,306 1,446,342 1,375,759 ----------- ----------- ----------- Industrial additives ...... 149,087 133,200 103,881 Performance chemicals ..... 84,478 73,702 68,559 Performance systems ....... 23,048 20,538 15,986 Specialty vegetable oils .. 33,377 ----------- ----------- ----------- Chemicals for industry .. 256,613 227,440 221,803 ----------- ----------- ----------- Total revenues from external customers ........ $ 1,617,919 $ 1,673,782 $ 1,597,562 =========== =========== ===========
Revenues are attributable to countries based on the location of the customer. The United States is the only country where sales to external customers comprise in excess of 10% of the company's consolidated revenues. Revenues from external customers by geographic area are as follows:
1998 1997 1996 ---------- ---------- ---------- United States ............. $ 605,145 $ 602,918 $ 565,516 Other North American ...... 50,685 53,030 57,647 Europe .................... 509,728 498,852 529,006 Asia-Pacific .............. 262,341 315,426 272,551 Latin America, Middle East, other .................. 190,020 203,556 172,842 ---------- ---------- ---------- Total revenues from external customers ..... $1,617,919 $1,673,782 $1,597,562 ========== ========== ==========
The company's sales and receivables are concentrated in the oil and chemical industries. The company's lubricant and fuel additive customers consist primarily of oil refiners and independent oil blenders and are located in more than 100 countries. The ten largest customers, most of which are international oil companies and a number of which are groups of affiliated entities, comprised approximately 42% of consolidated sales in 1998, and 44% of consolidated sales in 1997 and 1996. The company's largest single customer, including its affiliated entities, accounted for less than 10% of consolidated revenues in 1998, but in each of 1997 and 1996 accounted for revenues of $161.2 million and $163.7 million, respectively, predominately within chemicals for transportation segment. The table below presents a reconciliation of segment total assets to consolidated total assets for the years ended December 31:
1998 1997 1996 ---------- ---------- ---------- Total segment assets .... $1,448,080 $1,270,645 $1,237,634 Corporate assets ........ 195,157 191,647 164,481 ---------- ---------- ---------- Total consolidated assets $1,643,237 $1,462,292 $1,402,115 ========== ========== ==========
Segment assets include recievables, inventories, and long-lived assets including good will and intangible assets. Corporate assets include cash and short-term investments accounted for on the cost basis, and other current and noncurrent assets. The company's principal long-lived assets are located in the following countries at December 31:
1998 1997 -------- -------- United States ......... $554,983 $503,589 France ................ 109,990 105,777 England ............... 134,127 72,001 All other ............. 86,707 69,376 -------- -------- Total long-lived assets $885,807 $750,743 ======== ========
Net income of non-U.S. subsidiaries was $13 million in 1998, $43 million in 1997 and $29 million in 1996; and dividends received from these subsidiaries were $15 million, $7 million and $18 million, respectively. 33 25 THE LUBRIZOL CORPORATION NOTE 14 - FINANCIAL INSTRUMENTS The company has various financial instruments, including cash and short-term investments, investments in nonconsolidated companies, foreign currency forward contracts, interest rate swaps and short- and long-term debt. The company has determined the estimated fair value of these financial instruments by using available market information and generally accepted valuation methodologies. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. The estimated fair value of the company's debt instruments at December 31, 1998, approximates $437.1 million compared with the carrying value of $429.3 million. The company believes the carrying values of its other financial instruments approximate their fair values, except for certain interest rate swap agreements discussed below. The company uses derivative financial instruments only to manage well-defined foreign currency and interest rate risks. The company does not use derivative financial instruments for trading purposes. The company is exposed to the effect of changes in foreign currency rates on its earnings and cash flow as a result of doing business internationally. In addition to working capital management, pricing and sourcing, the company selectively uses foreign currency forward contracts to lessen the potential effect of currency changes. Such contracts are generally in connection with transactions with maturities of less than one year. The maximum amount of foreign currency forward contracts outstanding at any one time was $65.0 million in 1998, $58.4 million in 1997 and $41.2 million in 1996. At December 31, 1998, the company had short-term forward contracts to sell currencies at various dates during 1999 for $4.2 million. Realized and unrealized gains or losses on these contracts are recorded in the statement of income, or in the case of transactions designated as hedges of net foreign investments, in the foreign currency translation adjustment account in other comprehensive income. Additionally, foreign currency forward contract gains and losses on certain future transactions may be deferred until the future transaction is recorded. Deferred currency losses on foreign exchange contracts at December 31, 1998, were not significant. The company is exposed to market risk from changes in interest rates. The company's policy is to manage interest rate cost using a mix of fixed and variable rate debt. To manage this mix in a cost- efficient manner, the company may enter into interest rate swaps, in which the company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. The company has entered into interest rate swap agreements to convert variable rate debt to fixed rates (see Note 4). Interest payments receivable and payable under the terms of the interest rate swap agreements are accrued over the period to which the payment relates and the net difference is treated as an adjustment of interest expense related to the underlying liability. Changes in the underlying market value of the remaining swap payments are recognized in income when the underlying liability being hedged is extinguished or partially extinguished to a level less than the notional amount of the interest rate swaps. Consequently, market value losses of $1.0 million and $1.1 million were accrued in 1997 and 1996, respectively, and no amount was accrued in 1998. The company would have paid approximately $7.7 million, including accrued interest of $.9 million, if it had terminated these interest rate swap agreements at December 31, 1998. NOTE 15 - STOCK COMPENSATION PLANS The 1991 Stock Incentive Plan provides for granting of restricted and unrestricted shares and options to buy common shares up to an amount equal to 1% of the outstanding common shares at the beginning of any year, plus any unused amount from prior years. Options are intended either to qualify as "incentive stock options" under the Internal Revenue Code or "non-statutory stock options" not intended to so qualify. Under the 1991 Plan, options generally become exercisable 50% one year after grant, 75% after two years, 100% after three years, and expire up to ten years after grant. "Reload options," which are options to purchase additional shares if a grantee uses already-owned shares to pay for an option exercise, are granted automatically under the 1991 Plan and may be granted at the discretion of the administering committee under the 1985 Employee Stock Option Plan. The 1991 Plan generally supersedes the 1985 Plan, although options outstanding under the 1985 Plan remain exercisable until the expiration dates. The option price under both plans is the fair market value of the shares on the date of grant. Both plans permit or permitted the granting of stock appreciation rights in connection with the grant of options. In addition, the 1991 Plan provides to each outside director of the company an automatic annual grant of an option to purchase 2,000 common shares, with terms generally comparable to employee stock options. Under the 1991 Stock Incentive Plan, the company granted to certain executive officers 3,000 and 65,000 performance share stock awards in 1998 and 1997, respectively. Common shares equal to the number of performance share stock awards granted will be issued if the market price of the company's common stock reaches $45. per common share for ten consecutive trading days or after six years from date of grant, whichever occurs first. Under certain conditions such as retirement, a grantee of performance share stock awards may be issued a pro-rata number of common shares. The market value of the company's common shares at date of grant of the performance share stock awards was $38.25 per share in 1998 and $33.75 per share in 1997. The company recognizes compensation expense related to performance share stock awards ratably over the estimated period of vesting. Compensation costs recognized for 34 26 THE LUBRIZOL CORPORATION performance share stock awards was $.8 million in 1998 and $.5 million in 1997. At December 31, 1998, 67,166 performance share stock awards were outstanding. Generally accepted accounting principles encourage the fair-value based method of accounting for stock compensation plans under which the value of stock-based compensation is estimated at the date of grant using valuation formulas, but permit the continuance of intrinsic-value accounting. The company accounts for its stock compensation plans using the intrinsic-value accounting method (measured as the difference between the exercise price and the market value of the stock at date of grant). If the fair value method to measure compensation cost for the company's stock compensation plans had been used, the company's net income would have been reduced by $1.6 million in 1998, $2.6 million in 1997 and $2.0 million in 1996 with a corresponding reduction in net income per share of $.03 in 1998, $.05 in 1997 and $.03 in 1996. Disclosures under the fair value method are estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants of stock options in the following years:
1998 1997 1996 ---- ---- ---- 1985 Plan: Risk-free interest rate 4.6% 5.7% 6.6% Dividend yield ........ 4.0% 2.7% 3.4% Volatility ............ 21% 20% 23% Expected life (years) . 2.8 3.1 3.7 1991 Plan: Risk-free interest rate 4.7% 5.8% 6.3% Dividend yield ........ 4.0% 2.7% 3.4% Volatility ............ 23% 22% 23% Expected life (years) . 9.5 9.9 8.8
The fair value per share of the performance share stock awards granted in 1998 and 1997 was $38.16 and $31.80, respectively, using the following assumptions in 1998 and 1997, respectively: risk-free interest rate of 4.58% and 5.7%; volatility of 21% and 20%; and an expected life of three years. Dividends do not accumulate on performance share stock awards. Information regarding these option plans, excluding the performance share stock awards, follows:
Weighted- Average Exercise Shares Price ------ ----- Outstanding, January 1, 1998 ......... 3,212,157 $ 31.88 Granted .............................. 410,248 37.69 Exercised ............................ (125,463) 29.38 Forfeited ............................ (13,626) 31.23 --------- Outstanding, December 31, 1998 ....... 3,483,316 $ 32.64 ========= =========== Options exercisable, December 31, 1998 2,842,719 $ 31.97 ========= =========== Weighted-average fair value of options granted during the year ........... $ 7.74 =========== Outstanding, January 1, 1997 ......... 3,248,113 $ 30.93 Granted .............................. 417,561 35.07 Exercised ............................ (361,179) 25.85 Forfeited ............................ (92,338) 35.88 --------- Outstanding, December 31, 1997 ....... 3,212,157 $ 31.88 ========= =========== Options exercisable, December 31, 1997 2,590,556 $ 31.67 ========= =========== Weighted-average fair value of options granted during the year ........... $ 9.37 =========== Outstanding, January 1, 1996 ......... 2,958,416 $ 30.70 Granted .............................. 497,566 29.96 Exercised ............................ (99,427) 18.25 Forfeited ............................ (108,442) 31.86 --------- Outstanding, December 31, 1996 ....... 3,248,113 $ 30.93 ========= =========== Options exercisable, December 31, 1996 2,574,762 $ 30.57 ========= =========== Weighted-average fair value of options granted during the year ........... $ 8.05 ===========
The following table summarizes information about stock options outstanding, excluding the performance share stock awards, at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------------ ------------------------------- Number Weighted-Average Weighted- Number Weighted- Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/97 Exercise Price ----------- ---------------- -------------- ----------- -------------- $13 - $19 73,160 1.1 Years $16.66 73,160 $16.66 19 - 25 81,875 1.0 21.94 81,875 21.94 25 - 31 1,125,982 4.9 28.88 1,035,313 28.78 31 - 38 2,129,965 6.0 35.28 1,586,037 34.85 38 - 45 72,334 2.4 41.77 66,334 42.09 --------- --------- 3,483,316 5.4 $32.64 2,842,719 $31.97 ========= === ====== ========= =======
35 27 THE LUBRIZOL CORPORATION NOTE 16 - SPECIAL CHARGES AND ASSET IMPAIRMENTS In the fourth quarter of 1998, the company recognized special charges of $36.9 million comprised of $23.3 million related to the first phase of the company's cost reduction program and $13.6 million for the write-off of purchased technology under development resulting from the acquisition of Adibis (see Note 12). After-tax, these charges reduced net income by $25.8 million, or by $.47 per share in the fourth quarter. These special charges related predominately to the company's chemicals for transportation segment. The company initiated a series of steps to reduce costs and improve its worldwide operating structure and will execute these steps in two phases over a period of approximately two years. The first phase, which began in the fourth quarter of 1998, will result in employee reductions of approximately 6%, or 250 employees worldwide. Approximately 55% of these employee reductions occurred prior to December 31, 1998, and the remaining 45% will occur during the first half of 1999. Of the 250 employees, approximately 40% were in the manufacturing area and 60% were in the selling, administrative, research and testing areas. In addition, the company will permanently remove several component production units from service during this first phase. The first phase of the company's cost reduction program included employee reduction cost estimated at $20.0 million and other exit costs estimated at $3.3 million, including $2.8 million related to asset impairments for production units to be taken out of service. Cash expenditures of approximately $5.0 million were made in 1998 related to the cost reduction program. Approximately $15.5 million remains as an accrued liability at December 31, 1998, most of which represents cash to be expended in 1999. The second phase of the company's cost reduction program will be focused on lowering costs and improving efficiency in production and distribution activities. The company will continue to reduce its number of intermediate components, which will enable the number of its production units to be reduced by approximately 20% in the next two years. This will occur through the shutdown of certain production units and facilities worldwide. The company believes employee levels will be reduced a further 5% from these steps. Definitive plans must be completed before the company is able to reasonably estimate and recognize the costs of facility write-downs and employee separations anticipated during this second phase of the cost reduction program. In 1997, the company provided $9.4 million for the impairment of long-lived assets. This included $6.3 million to reduce the carrying value of certain computer equipment and software made obsolete prior to expiration of their original estimated useful lives due to new systems being implemented. Also, during the fourth quarter the company decided to utilize a toll processor, beginning in 1998, rather than to produce an intermediate internally. This decision resulted in the permanent impairment of certain manufacturing equipment, and a provision of $3.1 million was recorded to reduce the asset carrying value to its estimated fair value. Fair value was determined by estimating the present value of future cash flows. These impairment losses are reflected in the consolidated statements of income for the year ended December 31, 1997, as follows: cost of sales - $4.4 million; research, testing and development expenses - $.9 million; selling and administrative expenses - $1.8 million and other income (net) - $2.3 million. NOTE 17 - LITIGATION The company has filed claims against Exxon Corporation and/or its affiliates relating to various commercial matters, including alleged infringements by Exxon of certain of the company's patents. These suits are pending in the United States (in Ohio) and Canada. On April 23, 1998, the company reached a settlement with Exxon of a lawsuit pending in federal court in Ohio and received cash of $19 million. After deducting related expenses, this settlement increased pretax income by $16.2 million in 1998. Other lawsuits then pending between the company and Exxon in the United States, Canada and the United Kingdom were not settled by this agreement. The company has prevailed in a case brought in Canada against Exxon's Canadian affiliate, Imperial Oil, Ltd., for infringement of the company's patent pertaining to dispersants, the largest additive component used in motor oils. A 1990 trial court verdict in favor of the company regarding the issue of liability was upheld by the Federal Court of Appeals of Canada in December 1992, and in October 1993, the Supreme Court of Canada dismissed Imperial Oil's appeal of the Court of Appeals' decision. The case has been returned to the trial court for an assessment of compensation damages, but no date has been set for a determination of such damages. In October 1994, the trial court judge determined that Imperial Oil had violated an earlier injunction for the manufacture or sale of the dispersant that is the subject of this case. The determination of penalty damages, if any, on account of this violation will be made after the court has determined the compensation damages for patent infringement. 36 28 THE LUBRIZOL CORPORATION In November 1996, a patent trial court in London declared a Lubrizol United Kingdom patent invalid, which patent was the subject of litigation brought by the company against Exxon in that country. Although the trial court decision did not involve any damage payments, the court awarded Exxon its recoverable legal costs in the case, as is customary under U.K. practice. Exxon originally filed with the court a request for legal costs of approximately $12.0 million. The company made a $3.0 million contingent payment to Exxon in July 1997, which was fully expensed in that year. On April 30, 1998, some, but not all, of the findings against the company were reversed and the percentage of Exxon's legal costs which are recoverable was reduced from 90% to 25%. The proceedings in this case are completed except for the final determination of Exxon's recoverable legal costs. The company presently believes it will not be required to make any further payments to Exxon for this matter. A reasonable estimation of the company's potential recovery relating to the Exxon litigation referenced above cannot be made at this time, and no amounts that may be recovered in the future have been recorded in the company's financial statements as of December 31, 1998. - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended ------------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 - ----------------------------------------------------------------------------------------- (In Thousands of Dollars Except Per Share Data) 1998 Net sales ........................... $ 399,900 $ 405,160 $ 403,262 $ 406,236 Gross profit ........................ 122,865 126,143 120,252 111,971 Net income (loss) ................... 29,668 39,963 16,614 (15,045) Net income (loss) per share ........ $ .52 $ .71 $ .30 $ (.27) Net income (loss) per share, diluted $ .52 $ .71 $ .30 $ (.27) 1997 Net sales ........................... $ 387,749 $ 432,556 $ 426,824 $ 422,122 Gross profit ........................ 129,642 149,543 136,540 129,924 Net income .......................... 38,861 46,900 38,652 30,456 Net income per share ................ $ .66 $ .81 $ .67 $ .53 Net income per share, diluted ....... $ .66 $ .80 $ .66 $ .53
In the second quarter of 1998, the company recorded a pretax gain from litigation settlement of $16.2 million ($.19 per share). In the fourth quarter of 1998, the company recorded pretax special charges of $23.3 million ($.30 per share) related to a cost reduction program and $13.6 million ($.17 per share) related to the write-off of purchased technology under development resulting from the company's acquisition of Adibis. 37 29 THE LUBRIZOL CORPORATION HISTORICAL SUMMARY
(In Millions, Except Shareholders, Employees and Per Share Data) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ OPERATING RESULTS: Revenues ....................................................... $ 1,617.9 $ 1,673.8 $ 1,597.6 Total cost and expenses ........................................ 1,464.1 1,441.5 1,403.0 Other income (charges) ......................................... (35.0) (1.1) 56.1 Net income ..................................................... 71.2 154.9 169.8 - Before unusual items and accounting changes ............... 86.5 154.9 135.2 Net income per share ........................................... 1.27 2.68 2.80 - Before unusual items and accounting changes ............... 1.55 2.68 2.23 FINANCIAL RATIOS: Gross profit percentage ........................................ 29.8 32.7 32.0 Percent of revenues: Selling and administrative expenses ......................... 11.1 10.2 9.9 Research and testing expenses ............................... 9.3 8.8 10.1 Return on average shareholders' equity (%) ..................... 9.0 19.0 20.4 - Before unusual items and accounting changes (%) ........... 10.9 19.0 16.2 Debt to capitalization (%) ..................................... 35.8 21.3 19.5 Current ratio .................................................. 2.5 2.5 2.6 OTHER INFORMATION: Dividends declared per share ................................... $ 1.04 $ 1.01 $ .97 Average common shares outstanding .............................. 55.9 57.8 60.7 Capital expenditures ........................................... $ 93.4 $ 100.7 $ 94.3 Depreciation expense ........................................... 79.7 82.7 78.7 At Year End: Total assets ................................................ $ 1,643.2 $ 1,462.3 $ 1,402.1 Total debt .................................................. 429.3 220.3 198.5 Total shareholders' equity .................................. 769.1 815.4 819.4 Shareholders' equity per share .............................. 14.10 14.31 14.00 Common share price .......................................... 25.69 36.88 31.00 Number of shareholders ...................................... 5,609 5,661 5,764 Number of employees ......................................... 4,324 4,291 4,358
38 30 THE LUBRIZOL CORPORATION
(In Millions, Except Shareholders, Employees and Per Share Data) 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------- OPERATING RESULTS: Revenues ....................................................... $ 1,663.6 $ 1,599.0 $ 1,525.5 $ 1,552.2 Total cost and expenses ........................................ 1,478.0 1,397.0 1,362.2 1,390.5 Other income (charges) ......................................... 40.0 49.4 (43.6) 15.4 Net income ..................................................... 151.6 175.6 45.6 124.6 - Before unusual items and accounting changes ............... 126.6 148.8 113.5 124.6 Net income per share ........................................... 2.37 2.67 .67 1.81 - Before unusual items and accounting changes ............... 1.98 2.26 1.67 1.81 FINANCIAL RATIOS: Gross profit percentage ........................................ 31.5 32.7 32.0 31.7 Percent of revenues: Selling and administrative expenses ......................... 9.8 10.0 10.4 11.7 Research and testing expenses ............................... 10.8 10.3 11.2 10.0 Return on average shareholders' equity (%) ..................... 18.0 22.5 5.9 15.4 - Before unusual items and accounting changes (%) ........... 15.1 19.0 14.6 15.4 Debt to capitalization (%) ..................................... 22.5 16.8 8.7 5.6 Current ratio .................................................. 2.4 2.5 2.5 2.9 OTHER INFORMATION: Dividends declared per share ................................... $ .93 $ .89 $ .85 $ .81 Average common shares outstanding .............................. 63.8 65.7 67.7 69.0 Capital expenditures ........................................... $ 189.3 $ 160.5 $ 127.9 $ 95.8 Depreciation expense ........................................... 71.8 63.9 59.6 58.4 At Year End: Total assets ................................................ $ 1,492.0 $ 1,394.4 $ 1,182.6 $ 1,127.1 Total debt .................................................. 247.1 167.9 69.6 48.4 Total shareholders' equity .................................. 849.0 832.0 732.2 819.4 Shareholders' equity per share .............................. 13.48 12.83 11.00 11.97 Common share price .......................................... 27.75 33.88 34.13 27.25 Number of shareholders ...................................... 6,304 6,494 6,616 6,822 Number of employees ......................................... 4,601 4,520 4,613 4,609
(In Millions, Except Shareholders, Employees and Per Share Data) 1991 1990 1989 1988 - ---------------------------------------------------------------------------------------------------------------- OPERATING RESULTS: Revenues ....................................................... $ 1,476.3 $ 1,452.7 $ 1,227.9 $ 1,125.7 Total cost and expenses ........................................ 1,308.7 1,288.4 1,109.7 1,009.9 Other income (charges) ......................................... 10.5 106.9 19.5 69.9 Net income ..................................................... 123.7 190.0 94.0 140.0 - Before unusual items and accounting changes ............... 123.7 133.5 94.0 88.4 Net income per share ........................................... 1.79 2.67 1.26 1.81 - Before unusual items and accounting changes ............... 1.79 1.87 1.26 1.14 FINANCIAL RATIOS: Gross profit percentage ........................................ 32.4 30.3 29.2 29.9 Percent of revenues: Selling and administrative expenses ......................... 11.7 10.9 10.8 10.5 Research and testing expenses ............................... 9.8 8.5 9.2 9.6 Return on average shareholders' equity (%) ..................... 16.2 27.2 14.2 21.8 - Before unusual items and accounting changes (%) ........... 16.2 18.0 14.2 13.7 Debt to capitalization (%) ..................................... 7.9 8.3 8.5 8.4 Current ratio .................................................. 2.7 2.7 3.0 3.1 OTHER INFORMATION: Dividends declared per share ................................... $ .77 $ .73 $ .69 $ .65 Average common shares outstanding .............................. 69.3 71.1 74.7 77.4 Capital expenditures ........................................... $ 82.4 $ 77.4 $ 64.7 $ 54.6 Depreciation expense ........................................... 54.6 54.0 48.7 46.6 At Year End: Total assets ................................................ $ 1,171.7 $ 1,114.6 $ 960.2 $ 970.7 Total debt .................................................. 67.8 66.6 61.2 60.8 Total shareholders' equity .................................. 794.5 736.2 663.3 664.3 Shareholders' equity per share .............................. 11.51 10.61 8.96 8.74 Common share price .......................................... 28.25 23.63 18.75 17.75 Number of shareholders ...................................... 6,767 6,692 7,370 7,782 Number of employees ......................................... 5,299 5,169 5,030 4,781
39 EX-21 9 EXHIBIT 21 1 EXHIBIT 21 THE LUBRIZOL CORPORATION
% OF STATE/COUNTRY PRINCIPAL SUBSIDIARIES OWNERSHIP OF INCORPORATION Lubrizol Adibis (UK) Limited 100% United Kingdom Lubrizol do Brasil Aditivos, Ltda. 100% Brazil Lubrizol Canada Limited 100% Canada Lubrizol de Chile Limitada 100% Chile Lubrizol China, Inc. 100% Ohio Lubrizol Coating Additives Company G.m.b.H. 100% Germany Lubrizol Espanola, S.A. 100% Spain Lubrizol Europe B.V. 100% The Netherlands Lubrizol France S.A. 99.995% France Lubrizol Gesellschaft m.b.H. 100% Austria Lubrizol G.m.b.H. 100% Germany Lubrizol International Inc. 100% Cayman Islands Lubrizol International Management Corporation 100% Nevada Lubrizol Italiana, S.p.A. 100% Italy Lubrizol Japan Limited 100% Japan Lubrizol Limited 100% United Kingdom Lubrizol Metalworking Additives Company, Inc. 100% Nevada Lubrizol de Mexico, S. de R.L. 100% Mexico Lubrizol de Mexico Comercial S. de R.L. de C.V. 100% Mexico Lubrizol Overseas Trading Corporation 100% Delaware Lubrizol Scandinavia AB 100% Sweden Lubrizol Servicios Tecnicos S. de R.L. 100% Mexico Lubrizol South Africa (Pty.) Limited 100% South Africa Lubrizol Southeast Asia (Pte.) Ltd. 100% Singapore Lubrizol de Venezuela C.A. 99.9% Venezuela Carroll Scientific, Inc. 100% Illinois CPI Engineering Services, Inc. 100% Michigan Engine Control Systems, Ltd. 100% Canada Gate City Equipment Company, Inc. 100% Georgia Gateway Additive Company 100% Pennsylvania Hyrolec Technical Services Limited 100% United Kingdom AFFILIATES Industrias Lubrizol S.A. de C.V. 40% Mexico Lanzhou Lubrizol - Lanlian Additive Co., Ltd. 50.05% China Lubrizol India Limited 40% India Lubrizol Transarabian Company Limited 49% Saudi Arabia Tianjin Lubrizol - Lanlian Additive Co., Ltd. 50.05% China
EX-23 10 EXHIBIT 23 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT ============================= THE LUBRIZOL CORPORATION We consent to the incorporation by reference in Registration Statement No. 2-99983 on Form S-8, in Registration Statement No. 33-61091 on Form S-8 and in Registration Statement No. 33-42211 on Form S-8 of our report dated February 4, 1999, incorporated by reference in this Annual Report on Form 10-K of The Lubrizol Corporation for the year ended December 31, 1998. /s/Deloitte & Touche LLP - --------------------------------- DELOITTE & TOUCHE LLP Cleveland, Ohio March 22, 1999 EX-27 11 EXHIBIT 27
5 This schedule contains summary financial information extracted from consolidated balance sheet and consolidated statements of income and is qualified in its entirety by reference to such financial statements. 0000060751 THE LUBRIZOL CORPORATION 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1.0 53,639 0 271,460 2,196 277,612 687,470 1,608,500 889,650 1,643,237 270,028 390,394 0 0 84,651 684,467 1,643,237 1,614,558 1,617,919 1,133,327 1,133,327 0 1,207 18,976 118,814 47,614 0 0 0 0 71,200 1.27 1.27
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