-----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, PARO5n96mx41M6nXjH6qE/PCnNtND3A08P+e44Cwx0Z4DJUi8IkBr93r8eC8GJkw Sw1bkooQcRrzguVGBYb5tA== 0000950152-99-004351.txt : 19990514 0000950152-99-004351.hdr.sgml : 19990514 ACCESSION NUMBER: 0000950152-99-004351 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUBRIZOL CORP CENTRAL INDEX KEY: 0000060751 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 340367600 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05263 FILM NUMBER: 99619879 BUSINESS ADDRESS: STREET 1: 29400 LAKELAND BLVD CITY: WICKLIFFE STATE: OH ZIP: 44092 BUSINESS PHONE: 2169434200 MAIL ADDRESS: STREET 1: 29400 LAKELAND BLVD CITY: WICKLIFFE STATE: OH ZIP: 44092 10-Q 1 THE LUBRIZOL CORPORATION FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ..... to ..... Commission File Number 1-5263 THE LUBRIZOL CORPORATION (Exact name of registrant as specified in its charter) Ohio 34-0367600 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 29400 Lakeland Boulevard Wickliffe, Ohio 44092-2298 (Address of principal executive offices) (Zip Code) (440) 943-4200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Number of the registrant's common shares, without par value, outstanding, as of April 30, 1999: 54,549,876 2 PART I. FINANCIAL INFORMATION ----------------------------- Item 1 Financial Statements --------------------------- THE LUBRIZOL CORPORATION ------------------------ CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------ March 31 December 31 (In Thousands of Dollars) 1999 1998 - ------------------------------------------------------------------------------------------------------ ASSETS - ------ Cash and short-term investments ........................................ $ 92,261 $ 53,639 Receivables ............................................................ 337,635 301,644 Inventories: Finished products .................................................... 110,511 112,060 Products in process .................................................. 58,371 66,485 Raw materials ........................................................ 76,500 80,134 Supplies and engine test parts ....................................... 18,277 18,933 ----------- ----------- 263,659 277,612 ----------- ----------- Other current assets ................................................... 35,782 54,575 ----------- ----------- Total current assets ............................... 729,337 687,470 Property and equipment - net ........................................... 703,513 718,850 Goodwill and intangible assets - net ................................... 161,158 166,957 Investments in nonconsolidated companies ............................... 28,106 26,490 Other assets ........................................................... 38,283 43,470 ----------- ----------- TOTAL ......................................... $ 1,660,397 $ 1,643,237 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Short-term debt and current portion of long-term debt .................. $ 28,766 $ 38,926 Accounts payable ....................................................... 117,178 112,832 Accrued expenses and other current liabilities ......................... 141,586 118,270 ----------- ----------- Total current liabilities .......................... 287,530 270,028 Long-term debt ......................................................... 388,975 390,394 Postretirement health care obligation .................................. 106,892 106,641 Noncurrent liabilities ................................................. 45,786 48,950 Deferred income taxes .................................................. 57,329 58,106 ----------- ----------- Total liabilities .................................. 886,512 874,119 ----------- ----------- Contingencies and commitments Shareholders' equity: Preferred stock without par value - authorized and unissued: Serial Preferred Stock - 2,000,000 shares Serial Preferred Shares - 25,000,000 shares Common Shares without par value: Authorized 120,000,000 shares Outstanding - 54,549,476 shares as of March 31, 1999 after deducting 31,646,418 treasury shares, 54,548,110 shares as of December 31, 1998 after deducting 31,647,784 treasury shares .................. 84,674 84,651 Retained earnings .................................................... 734,905 709,994 Accumulated other comprehensive income (loss) ........................ (45,694) (25,527) ----------- ----------- Total shareholders' equity ......................... 773,885 769,118 ----------- ----------- TOTAL ......................................... $ 1,660,397 $ 1,643,237 =========== ===========
Amounts shown are unaudited. -2- 3 THE LUBRIZOL CORPORATION ------------------------ CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------- Three Months Ended March 31 -------------------------------- (In Thousands Except Per Share Data) 1999 1998 - -------------------------------------------------------------------------------------- Net sales........................................... $446,627 $399,900 Royalties and other revenues........................ 918 465 -------- -------- Total revenues............................ 447,545 400,365 Cost of sales....................................... 303,174 277,035 Selling and administrative expenses................. 45,003 42,028 Research, testing and development expenses.......... 36,898 35,280 -------- -------- Total cost and expenses................... 385,075 354,343 Gain from litigation settlement..................... 14,476 Special charge...................................... (3,136) Other income (expense) - net........................ (3,108) 1,025 Interest income..................................... 1,007 1,320 Interest expense.................................... (7,140) (3,073) -------- -------- Income before income taxes.......................... 64,569 45,294 Provision for income taxes.......................... 25,475 15,626 -------- -------- Net income.......................................... $ 39,094 $ 29,668 ======== ======== Net income per share................................ $0.72 $0.52 ===== ===== Net income per share, diluted....................... $0.72 $0.52 ===== ===== Dividends per share................................. $0.26 $0.26 ===== ===== Average common shares outstanding................... 54,549 56,838
Amounts shown are unaudited. -3- 4 THE LUBRIZOL CORPORATION ------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------- Three Months Ended March 31 -------------------------- (In Thousands of Dollars) 1999 1998 - -------------------------------------------------------------------------------- Cash provided from (used for): Operating activities: Net income ......................................... $ 39,094 $ 29,668 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization .................. 24,253 20,935 Deferred income taxes .......................... 4,106 1,556 Special charge ................................. 3,136 Change in current assets and liabilities: Receivables .................................. (28,749) 7,929 Receivable from litigation settlement ........ (16,800) Inventories .................................. 7,668 (6,523) Accounts payable and accrued expenses ........ 31,785 (13,109) Other current assets ......................... 15,333 2,075 Other items - net .............................. 2,775 1,793 -------- -------- Total operating activities ............... 82,601 44,324 Investing activities: Capital expenditures ............................. (18,327) (23,048) Acquisitions and investments in nonconsolidated companies ...................................... (14,630) Other - net ...................................... 547 55 -------- -------- Total investing activities ............... (17,780) (37,623) Financing activities: Short-term borrowings (repayment) ................ (8,122) 30,673 Long-term repayments ............................. (422) (706) Dividends paid ................................... (14,183) (14,785) Common shares purchased .......................... (20,023) Other ............................................ 23 3,329 -------- -------- Total financing activities ............... (22,704) (1,512) Effect of exchange rate changes on cash ............ (3,495) (353) -------- -------- Net increase in cash and short-term investments .... 38,622 4,836 Cash and short-term investments at the beginning of period ........................................ 53,639 86,504 -------- -------- Cash and short-term investments at end of period ... $ 92,261 $ 91,340 ======== ========
Amounts shown are unaudited. -4- 5 THE LUBRIZOL CORPORATION ------------------------ Notes to Consolidated Financial Statements ------------------------------------------ March 31, 1999 1. The accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position as of March 31, 1999 and December 31, 1998, and the results of operations and cash flows for the applicable periods ended March 31, 1999 and 1998. 2. 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 dilutive effect resulting from outstanding stock options and stock awards. Per share amounts are computed as follows:
Three Months Ended March 31 ------------------- 1999 1998 ------- ------ Numerator: Net income available to common shareholders $39,094 $29,668 ======= ======= Denominator: Weighted average common shares outstanding 54,549 56,838 Dilutive effect of stock options and awards 59 315 ------- ------- Denominator for net income per share, diluted 54,608 57,153 ======= ======= Net income per share $ .72 $ .52 ======= ======= Net income per share, diluted $ .72 $ .52 ======= =======
3. Total comprehensive income for the three-month periods ended March 31, 1999 and 1998 is comprised as follows:
Three Months Ended March 31 ------------------ 1999 1998 -------- -------- Net income $39,094 $29,668 Other comprehensive income(loss) (20,167) 66 ------- ------- Total comprehensive income $18,927 $29,734 ======= =======
Other comprehensive income (loss) in each of the periods above is comprised solely of foreign currency translation adjustments, net of related tax effects. -5- 6 THE LUBRIZOL CORPORATION Notes to Consolidated Financial Statements ------------------------------------------ March 31, 1999 4. The company recorded a special charge of $23.3 million in the fourth quarter of 1998 related to the first phase of its cost reduction program. In the first quarter of 1999, the company recognized additional expense of $3.1 million, to reflect a greater amount for separation benefits, principally in Japan. This first phase will result in a reduction of approximately 300 employees, most of whom are entitled to special severance benefit payments with the remaining positions eliminated through attrition. Approximately 90% of these employee reductions occurred prior to March 31, 1999, and the remaining 10% will occur during the second quarter of 1999. The special charge also included $2.8 million for the impairment of assets related to production units to be taken out of service. These units were permanently removed from service during the first quarter of 1999. Cash expenditures related to the cost reduction program of approximately $5.0 million and $7.7 million were made in the fourth quarter of 1998 and first quarter of 1999, respectively. Approximately $10.9 million remains as an accrued liability at March 31, 1999, nearly all of which represents cash yet to be expended in 1999. 5. 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. On March 31, 1999, the company and Exxon Corporation reached a settlement of all pending intellectual property litigation between the two companies and their affiliates, except for litigation pending in Canada. Under the settlement agreement, Exxon paid the company cash of $16.8 million in April 1999. After deducting related expenses, this settlement increased pre-tax income by $14.5 million for the three-month period ended March 31,1999. The company has prevailed in a case brought in Canada against Exxon's Canadian affiliate, Imperial Oil, Ltd., for infringement of the company's patent pertaining to dispersants, the largest additive component used in motor oils. A 1990 trial court verdict in favor of the company regarding the issue of liability was upheld by the Federal Court of Appeals of Canada in December 1992, and in October 1993, the Supreme Court of Canada dismissed Imperial Oil's appeal of the Court of Appeals' decision. The case has been returned to the trial court for an assessment of compensation damages, but no date has been set for a determination of such damages. In October 1994, the trial court judge determined that Imperial Oil had violated an earlier injunction for the manufacture or sale of the dispersant that is the subject of this case. The determination of penalty damages, if any, on account of this violation will be made after the court has determined the compensation damages for patent infringement. A reasonable estimation of the company's potential recovery relating to this litigation can not 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 March 31, 1999. -6- 7 THE LUBRIZOL CORPORATION ------------------------ Notes to Consolidated Financial Statements ------------------------------------------ March 31, 1999 6. At December 31, 1998, the company adopted Statement of Financial Standards (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. The company aggregates its product lines into two principal operating segments: chemicals for transportation and chemicals for industry. The company evaluates performance and allocates resources based on segment contribution income, defined as revenues less expenses directly identifiable to the product lines aggregated within each segment. In addition, the company allocates corporate research, testing, selling and administrative expenses in arriving at segment operating profit before tax. The following table presents a summary of the company's reportable segments for the three months ended March 31, 1999 and 1998 on a basis of segmentation and on a basis of measurement of segment contribution income consistent with the previous year end:
Three Months Ended March 31 ----------------------- 1999 1998 -------- ------ Revenue from external customers: Chemicals for transportation $374,172 $341,882 Chemicals for industry 73,373 58,483 -------- -------- Total revenues $447,545 $400,365 ======== ======== Segment contribution income: Chemicals for transportation $79,773 $ 67,648 Chemicals for industry 11,069 8,605 -------- -------- Total segment contribution income $ 90,842 $ 76,253 ======== ======== Segment operating profit before tax: Chemicals for transportation $ 51,701 $ 41,239 Chemicals for industry 7,661 5,808 -------- -------- Total segment operating profit before tax 59,362 47,047 Gain from litigation settlement 14,476 Special charge (3,136) Interest expense - net (6,133) (1,753) -------- -------- Consolidated income before tax $ 64,569 $ 45,294 ======== ========
7. In June 1998, the Financial Accounting Standards Board issued 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 and believes SFAS 133 will have an immaterial effect on the company's reported financial position and results of operations when adopted. -7- 8 THE LUBRIZOL CORPORATION ------------------------ Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- RESULTS OF OPERATIONS - --------------------- Revenues in the first quarter of 1999 grew 12% primarily as a result of acquisitions made during the year 1998 and higher lubricant additives shipments to customers in North America and Asia-Pacific. The higher revenues coupled with lower material costs and lower per unit manufacturing costs resulted in the expansion of gross profit margins to 32.1% in the first quarter of 1999 as compared with 30.7% in the first quarter of 1998. Excluding the gain from the litigation settlement and the increase in special charge, and despite lower other income, higher interest expense and a higher tax rate, net income increased by $3.3 million, or 11%, for the three months ended March 31, 1999 as compared with the same 1998 period. Detailed comments relating to the company's results of operations and financial position follow below. The company groups its product lines into two operating segments: chemicals for transportation and chemicals for industry. Chemicals for transportation comprises the predominant portion of the company's consolidated revenues and segment pretax operating profits. This discussion and analysis of the company's financial condition and results of operations is primarily focused upon the company as a whole, rather than the individual operating segments, since the company believes this provides the most appropriate understanding of its business. See Note 6 to the financial statements for further financial disclosures by operating segment. Consolidated revenues increased $47.2 million or 12% for the first quarter of 1999 compared with the same 1998 period. Chemicals for transportation revenues of $374.2 million in the first quarter of 1999 increased 9% over the first quarter of 1998. Chemicals for industry revenues of $73.4 million in the first quarter of 1999 increased 25% over the first quarter of 1998. Acquisitions contributed $30.7 million to the growth of consolidated revenues and constituted 67% and 61% of the revenue increase for chemicals for transportation and chemicals for industry, respectively. The overall unit average selling price in the first quarter of 1999 declined by 4% (3% excluding acquisitions) when compared with the first quarter of 1998, but was stable as compared with the fourth quarter of 1998. The decline in the average selling price compared with the first quarter of 1998 was primarily due to lower product pricing and changing product mix, and offset some of the positive effect the higher volume had on revenues. Sales volume increased 13% (6% excluding acquisitions) in the first quarter of 1999 as compared with the first quarter of 1998, with lubricant additive shipments to North American customers increasing 18% and to international customers increasing 10%. The increase in shipments to customers in North America reflects new business awarded during the second half of 1998 as well as some spot business that is not expected to recur. Acquisitions predominately affected lubricant additive shipments to international customers, which after excluding acquisitions decreased 2% in the first quarter of 1999 compared with the same 1998 period reflecting weaker sales in Europe. Shipments to customers in Asia-Pacific increased 23% (20% excluding acquisitions) in the first quarter of 1999 compared with the first quarter of 1998. The company believes the increased sales volume in Asia-Pacific is more indicative of order pattern than sustainable economic improvement within that region. -8- 9 THE LUBRIZOL CORPORATION ------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- Cost of sales for the three-month period ended March 31, 1999, increased $26.1 million over the first quarter of 1998 and reflects the higher sales volume mitigated by lower average raw material costs for the comparable periods. In addition, manufacturing cost per metric ton sold in the first quarter of 1999 was 2% lower than the same 1998 period. Gross profit (net sales less cost of sales) for the three-month period ended March 31, 1999 increased $20.6 million compared with the same 1998 period. Approximately two-thirds of the higher gross profit was due to higher sales revenue and lower average material costs and one-third was due to acquisitions between the periods. The change in currency rates had an insignificant effect on the gross profit earned in the first quarter of 1999. The gross profit percentage (gross profit divided by net sales) increased to 32.1% in the first quarter of 1999 as compared to 30.7% in the first quarter of 1998. This improvement in gross profit percentage was a result of raw material costs declining more than the decrease in selling prices and the positive effect that higher production had on lowering manufacturing cost per metric ton sold. Selling and administrative expenses increased by approximately $3.0 million or 7% for the three months ended March 31, 1999 compared with the same 1998 period. Excluding the effect from acquisitions, selling and administrative expenses increased less than 1%. Research, testing and development expenses (technology expenses) increased $1.6 million or nearly 5% for the first quarter of 1999 compared with the same 1998 period. Approximately 60% of the increase was due to acquisitions. The remainder of the increase was due to higher spending for engine tests performed at third-party facilities related to new performance specifications for engine oils expected to become effective during the years 1999 and 2000. Primarily as a result of the above factors, the change in revenues together with the change in total costs and expenses favorably affected the company's pre-tax profits by $16.4 million for the three months ended March 31,1999, as compared with the same 1998 period. The change in other income (expense) unfavorably affected pre-tax income by $4.1 million for the three-month period ended March 31, 1999 as compared with the same 1998 period. This unfavorable change was primarily due to higher amortization of goodwill resulting from acquisitions and higher currency translation and transaction losses, principally in Brazil. Interest expense increased $4.1 million for the three-month period ended March 31, 1999 as compared with the same 1998 period. This increase reflected the significantly higher borrowings necessitated by the acquisition activities that occurred largely during the second half of 1998. On March 31, 1999, the company and Exxon Corporation reached a settlement of all pending intellectual property litigation between the two companies and their affiliates, except for litigation pending in Canada. Under the settlement agreement, Exxon paid the company cash of $16.8 million in April 1999. After deducting related expenses, this settlement increased pre-tax income by $14.5 million ($9.0 million after-tax or $.16 per share) for the three months ended March 31,1999. Refer to Note 5 to the financial statements for further discussion regarding the company's litigation with Exxon. -9- 10 THE LUBRIZOL CORPORATION ------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- In the first quarter of 1999, the company recognized additional expense of $3.1 million ($2.9 million after-tax or $.05 per share), to reflect an additional amount for separation benefits, principally in Japan, under its cost reduction program originally announced and recognized in the fourth quarter of 1998. For further information, see the caption "Cost Reduction Program" below and Note 4 to the financial statements. During 1998, the company increased its annual effective tax rate (ETR) once in the second quarter and again in the third quarter in arriving at an annual ETR of 38%, on pre-tax income. In the first quarter of 1999, the ETR, before the gain from the litigation settlement and the increase to the special charge, was 38% as compared to 34.5% for the first quarter of 1998. The higher ETR had an unfavorable effect of $.03 on earnings per share for the first quarter of 1999. After considering the tax effects of the gain from the litigation settlement and the increase to the special charge, the ETR was 39.5% for the first quarter of 1999. Primarily as a result of the above factors, net income for the first quarter of 1999 was $39.1 million or $.72 per share as compared to $29.7 million or $.52 per share for the first quarter of 1998. After excluding from the first quarter of 1999 the gain from the Exxon litigation settlement and the special charge expense, net income for the first quarter of 1999, was $33.0 million or $.61 per share. WORKING CAPITAL, LIQUIDITY AND CAPITAL RESOURCES - ------------------------------------------------ Cash provided from operating activities was $82.6 million for the first three months of 1999 as compared with $44.3 million for the first three months of 1998. The increase in cash flow from operations of $38.3 million was principally due to the higher amount of net income and the collection of $16.1 million refund of federal income taxes. In addition cash flow in the first quarter of 1999 was benefited by improved timeliness of collecting trade receivables and higher inventory turnover. Capital expenditures in the first three months of 1999 were $18.3 million as compared with $23.0 million for same 1998 period. Capital expenditures declined $4.7 million primarily due to lower capital spending related to the implementation the company's enterprise-wide management information system. The company estimates capital spending for the full year 1999 will approximate $85 million as compared with $93.4 million in 1998. The company expended $14.6 million in cash for two acquisitions made during the first quarter of 1998. The acquisitions were in the company's chemicals for industry operating segment and in the business areas of metalworking additives and coating additives. The increase in cash flow from operating activities, and the absence of common share repurchases during the first quarter of 1999 as discussed below, enabled the company to reduce its borrowings by $8.5 million. In the first quarter of 1998, borrowings increased $30.0 million to partially finance acquisitions and the share repurchase program. The company's debt as a percent of total capitalization (shareholders' equity plus short-term and long-term debt) declined slightly to 35% at March 31, 1999, as compared with 36% at December 31, 1998. -10- 11 THE LUBRIZOL CORPORATION ------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- In prior years the company maintained an active share repurchase program. The company believes its present debt to capitalization percentage is appropriate under current circumstances and desires to maintain its borrowing capacity to finance future acquisitions. Therefore, the company did not repurchase shares during the first quarter of 1999 and does not anticipate making share repurchases during the remainder of 1999. Primarily as a result of these activities and the payment of dividends, the balance of cash and short-term investments increased $38.6 million at March 31, 1999 compared with December 31, 1998. The company's financial position remains strong with a ratio of current assets to current liabilities of 2.5 to 1 at March 31, 1999, the same as it was at December 31, 1998. Management believes the company's existing credit facilities, internally generated funds and ability to obtain additional financing will be sufficient to meet its future capital needs. COST REDUCTION PROGRAM - ---------------------- The company initiated a series of steps in 1998 to reduce costs and improve its worldwide operating structure and is executing 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 7%, or 300 employees at both domestic and international locations. Approximately 55% of the employee reductions occurred by December 31, 1998, and a further 35% occurred in the first quarter of 1999. Most of the remaining reductions in workforce will occur in the second quarter of 1999. The company estimates these actions will lower future operating costs by an annualized amount of $28 million beginning in 1999, of which approximately $4.4 million was realized in the first quarter of 1999. Refer to Note 4 to the financial statements for further information regarding the cost reduction program. Cash expenditures related to the cost reduction program of approximately $5.0 million and $7.7 million were made in the fourth quarter of 1998 and first quarter of 1999, respectively. Approximately $10.9 million remains as an accrued liability at March 31, 1999, nearly all of which represents cash yet to be expended in 1999. 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, and anticipates a 20% reduction in the number of its production units 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 further reduced by a minimum of 5% during this second phase. Definitive plans must be completed before the company is able to reasonably 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. -11- 12 THE LUBRIZOL CORPORATION ------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- 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 implemented 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 April 30, 1999, the company believes it has completed approximately 70% 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 during July of 1999. Through March 31, 1999, the company incurred costs of approximately $66 million related to the implementation of its global enterprise-wide management information systems, of which approximately $50 million was capitalized and $16 million expensed. The company estimates additional costs in 1999 of approximately $13 million, of which approximately $2 million is expected to be capitalized. In addition, the company estimates the total costs for conducting its Year 2000 remedial -12- 13 THE LUBRIZOL CORPORATION ------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- activities not addressed by the global enterprise-wide management information system at approximately $9.0 million. The company has expended approximately $3.5 million for these activities through March 31, 1999, including $1.5 million in the first quarter of 1999. 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 in the second quarter of 1999. 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. CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES - --------------------------------------------- This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements within the meaning of the federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters not historical in nature. Such forward-looking statements are subject to uncertainties and factors relating to the company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the company. 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 identified certain, but not necessarily all, of these uncertainties and factors in its MD&A contained on pages 18 and 19 of its 1998 Annual Report to its shareholders, to which reference is made and which are incorporated by reference herein. -13- 14 THE LUBRIZOL CORPORATION ------------------------ Item 3. 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. 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 the economic effect 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. A quantitative and qualitative discussion about the company's market risk is contained on page 19 of its 1998 Annual Report to its shareholders. There have been no material changes in the market risks faced by the company since December 31, 1998. -14- 15 PART II. OTHER INFORMATION -------------------------- Item 1. Legal Proceedings. The company was 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. This case is described further in Part I, Item 3 of the company's Annual Report on Form 10-K for the year ended December 31, 1998. On March 31, 1999, the company and Exxon reached a settlement of all intellectual property litigation between the two companies and their affiliates, including this case, except for litigation pending in Canada. Under this settlement agreement, the company received a cash payment of $16.8 million from Exxon in April 1999. The settlement concludes this case. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits (10) The Lubrizol Corporation 1991 Stock Incentive Plan, as amended. (27) Financial Data Schedule. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended March 31, 1999. Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE LUBRIZOL CORPORATION /s/Gregory P. Lieb ------------------------------ Gregory P. Lieb Chief Accounting Officer and Duly Authorized Signatory of The Lubrizol Corporation Date: May 13, 1999 -15- EX-10 2 EXHIBIT 10 1 Exhibit (10) THE LUBRIZOL CORPORATION 1991 STOCK INCENTIVE PLAN (As Amended March 22, 1999) SECTION 1. PURPOSE. The purposes of The Lubrizol Corporation 1991 Stock Incentive Plan are to encourage selected employees of The Lubrizol Corporation and its Subsidiaries and directors of the Company to acquire a proprietary and vested interest in the growth and performance of the Company, to generate an increased incentive to contribute to the Company's future success and prosperity, thus enhancing the value of the Company for the benefit of shareholders, and to enhance the ability of the Company and its Subsidiaries to attract and retain individuals of exceptional talent upon whom, in large measure, the sustained progress, growth and profitability of the Company depends. SECTION 2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Award" means any Option, Stock Appreciation Right, Restricted Stock Award, or Stock Award granted pursuant to the provisions of the Plan. (b) "Award Agreement" means a written document evidencing any Award granted hereunder, signed by the Company and delivered to the Participant or Outside Director, as the case may be. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" means a committee of not less than three (3) Outside Directors of the Board, each of whom shall be a "disinterested person" within the meaning of Rule 16b-3(d)(3) promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rule or statute. (f) "Company" means The Lubrizol Corporation. (g) "Employee" means any employee of the Company or of any Subsidiary. (h) "Fair Market Value" means the average of the high and low price of a Share on the New York Stock Exchange on the Grant Date (in the case of a Grant), or any other relevant date. (i) "Grant Date" means the date on which the Board approves the grant of an Option, Stock Appreciation Right, Restricted Stock Award, or Stock Award, and, with respect to an Option granted to an Outside Director pursuant to Section 10, the date of the Shareholders' Meeting on which such Option is granted. 2 THE LUBRIZOL CORPORATION Page 2 1991 STOCK INCENTIVE PLAN (j) "Incentive Stock Option" means an Option that is intended to meet the requirements of Section 422A of the Code or any successor provision thereto. (k) "Non-Statutory Stock Option" means an Option that is not intended to be an Incentive Stock Option. (l) "Option" means an option to purchase Shares granted hereunder. (m) "Option Price" means the purchase price of each Share under an Option. (n) "Outside Director" means a member of the Board who is not an employee of the Company or of any Subsidiary. (o) "Participant" means an Employee who is selected by the Committee to receive an Award under the Plan. (p) "Plan" means The Lubrizol Corporation 1991 Stock Incentive Plan. (q) "Restricted Stock Award" means an award of restricted Shares under Section 8 hereof. (r) "Restriction Period" means the period of time specified in an Award Agreement during which the following conditions remain in effect: (i) certain restrictions on the sale or other disposition of Shares awarded under the Plan, (ii) subject to the terms of the applicable Award Agreement, the continued employment of the Participant, and (iii) such other conditions as may be set forth in the applicable Award Agreement. (s) "Shareholders' Meeting" means the annual meeting of shareholders of the Company in each year. (t) "Shares" means common shares without par value of the Company. (u) "Stock Appreciation Right" means the right to receive a payment in cash or in Shares, or in any combination thereof, from the Company equal to the excess of the Fair Market Value of a stated number of Shares at the exercise date over a fixed price for such Shares. (v) "Stock Award" means the grant of unrestricted Shares under the Plan. (w) "Subsidiary" means a corporation which is at least 80% owned, directly or indirectly, by the Company. (x) "Voting Stock" means the then-outstanding securities entitled to vote generally in the election of directors of the Company. 3 THE LUBRIZOL CORPORATION Page 3 1991 STOCK INCENTIVE PLAN SECTION 3. ADMINISTRATION. The Plan shall be administered by the Committee. Members of the Committee shall be appointed by and serve at the pleasure of the Board, and may resign by written notice filed with the Chairman of the Board or the Secretary of the Company. A vacancy on the Committee shall be filled by the appointment of a successor member by the Board. Subject to the express provisions of this Plan, the Committee shall have conclusive authority to select Employees to be Participants for Awards and determine the type and number of Awards to be granted, to construe and interpret the Plan, any Award granted hereunder, and any Award Agreement entered into hereunder, and to establish, amend, and rescind rules and regulations for the administration of this Plan and shall have such additional authority as the Board may from time to time determine to be necessary or desirable. Notwithstanding the foregoing, the Committee shall not have discretion with respect to Options granted to Outside Directors pursuant to Section 10 such as to prevent any Award granted under this Plan from meeting the requirements for exemption from Section 16(b) of the Exchange Act, as set forth in Rule 16b-3 thereunder or any successor rule or statute. SECTION 4. SHARES SUBJECT TO THE PLAN. (a) Subject to adjustment as provided in the Plan, the total number of Shares available under the Plan in each calendar year shall be one percent (1%) of the total outstanding Shares as of the first day of any year for which the Plan is in effect; provided that such number shall be increased in any year by the number of Shares available for grant hereunder in previous years but not covered by Awards granted hereunder in such previous years; provided further, that a total of no more than two million (2,000,000) Shares shall be available for the grant of Incentive Stock Options under the Plan; and provided further, that no more than four hundred thousand (400,000) Shares shall be available for grant to any Participant during a calendar year. Settlement of an Award, whether by the issuance of Shares or the payment of cash, shall not be deemed to be the grant of an Award hereunder. In addition, any Shares issued by the Company through the assumption or substitution of outstanding grants from an acquired company shall not reduce the Shares available for grants under the Plan. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued Shares or treasury shares. If any Shares subject to any Award granted hereunder are forfeited or if such Award otherwise terminates without the issuance of such Shares or payment of other consideration in lieu of such Shares, the Shares subject to such Award, to the extent of any such forfeiture or termination, shall again be available for grant under the Plan as if such Shares had not been subject to an Award. (b) The number of Shares which remain available for grant pursuant to this Plan, together with Shares subject to outstanding Awards, at the time of any change in the Company's capitalization, including stock splits, stock dividends, mergers, reorganizations, consolidations, recapitalizations, or other changes in corporate structure, shall be appropriately and proportionately adjusted to reflect such change in capitalization. SECTION 5. ELIGIBILITY. Any Employee shall be eligible to be selected as a Participant. 4 THE LUBRIZOL CORPORATION Page 4 1991 STOCK INCENTIVE PLAN SECTION 6. STOCK OPTIONS. Non-Statutory Stock Options and Incentive Stock Options may be granted hereunder to Participants either separately or in conjunction with other Awards granted under the Plan. Any Option granted to a Participant under the Plan shall be evidenced by an Award Agreement in such form as the Committee may from time to time approve. Any such Option shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable. (a) OPTION PRICE. The purchase price per Share under an Option shall be fixed by the Committee in its sole discretion; provided that the purchase price shall not be less than one hundred percent (100%) of the Fair Market Value of the Share on the Grant Date of the Option. Payment of the Option Price may be made in cash, Shares, or a combination of cash and Shares, as provided in the Award Agreement relating thereto. (b) OPTION PERIOD. The term of each Option shall be fixed by the Committee in its sole discretion; provided that no Incentive Stock Option shall be exercisable after the expiration of ten years from the Grant Date; and provided further, that no reload Option granted to a Participant pursuant to the terms of Section 6(e) shall be exercisable after the expiration of the term of the Option that gave rise to the grant of such reload Option. (c) EXERCISE OF OPTION. Options shall be exercisable to the extent of fifty percent (50%) of the Shares subject thereto after one year from the Grant Date, seventy-five percent (75%) of such Shares after two years from the Grant Date, and one hundred percent (100%) of such Shares after three years from the Grant Date, subject to any provisions respecting the exercisability of Options that may be contained in an Award Agreement; provided that a reload Option granted to a Participant pursuant to the terms of Section 6(e) shall be exercisable to the extent of one hundred percent (100%) of such Shares from the Grant Date. (d) INCENTIVE STOCK OPTIONS. The aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options held by any Participant which are exercisable for the first time by such Participant during any calendar year under the Plan (and under any other benefit plans of the Company, of any parent corporation, or Subsidiary) shall not exceed $100,000 or, if different, the maximum limitation in effect at the Grant Date under Section 422A of the Code, or any successor provision, and any regulations promulgated thereunder. The terms of any Incentive Stock Option granted hereunder shall comply in all respects with the provisions of Section 422A of the Code, or any successor provision, and any regulations promulgated thereunder. (e) RELOAD. In the event that a Participant or an Outside Director exercises an Option and pays some or all of the Option Price with Shares, such Participant or Outside Director shall be granted a reload Option to purchase the number of Shares equal to the number of Shares used as payment of the Option Price, such reload Option to be granted at the time and subject to the limitation described below. The Grant Date for the reload Option shall be the next date on which the Committee otherwise grants Options under this Plan to employees generally, whether or not during the same calendar year in which the original Option is exercised. Options granted to Participants pursuant to this Section 6(e) 5 THE LUBRIZOL CORPORATION Page 5 1991 STOCK INCENTIVE PLAN shall have terms and conditions as described in this Section 6 and Options granted to Outside Directors pursuant to this Section 6(e) shall have terms and conditions as described in Section 10. Options granted pursuant to this Section 6(e) shall be of the same character (i.e., Non-Statutory Stock Options or Incentive Stock Options) as the Option that is exercised to give rise to the grant of the reload Option, provided that if an Incentive Stock Option cannot be granted under this Section 6(e) in compliance with Section 422A of the Code, then a Non-Statutory Stock Option shall be granted in lieu thereof. Options shall be granted pursuant to this Section 6(e) only to the extent that the number of Shares covered by such Option grants does not, when added to the number of Shares covered by Awards previously granted during such calendar year, exceed the limitation set forth in Section 4(a). If such limitation would otherwise be exceeded by the operation of this Section 6(e), each Participant or Outside Director entitled to receive an Option under this Section 6(e) shall have the number of Shares subject to such Option reduced appropriately and proportionately (i.e., by the same percentage) so that the limitation set forth in Section 4(a) will not be exceeded. Shares received upon the exercise of an Option granted pursuant to this Section 6(e) may not be sold or otherwise transferred (i) by a Participant until such Participant ceases to be employed by the Company or a Subsidiary, or (ii) by an Outside Director until such Outside Director ceases to be an Outside Director, provided, however, that a Participant or Outside Director may use such Shares as payment of the Option Price of Options granted under this Plan to the extent permitted by the applicable Award Agreement, in which case a number of the Shares (equal to the number of Shares used for such payment) purchased by the exercise of such Options also shall be subject to the same restrictions upon transferability. Certificates for such Shares with a transferability restriction shall bear a legend referencing such restriction. SECTION 7. STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted hereunder to Participants either separately or in conjunction with other Awards granted under the Plan and may, but need not, relate to a specific Option granted under Section 6. The provisions of Stock Appreciation Rights need not be the same with respect to each Participant. Any Stock Appreciation Right related to a Non-Statutory Stock Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. Any Stock Appreciation Right related to an Incentive Stock Option must be granted at the same time such Option is granted. Any Stock Appreciation Right related to an Option shall be exercisable only to the extent the related Option is exercisable. In the case of any Stock Appreciation Right related to any Option, the Stock Appreciation Right or applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related Option. Similarly, upon exercise of a Stock Appreciation Right as to some or all of the Shares covered by a related Option, the related Option shall be canceled automatically to the extent of the Stock Appreciation Rights exercised, and such Shares shall not thereafter be eligible for grant under Section 4(a). The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. SECTION 8. RESTRICTED STOCK AWARDS. 6 THE LUBRIZOL CORPORATION Page 6 1991 STOCK INCENTIVE PLAN (a) ISSUANCE. Restricted Stock Awards may be issued hereunder to Participants, either separately or in conjunction with other Awards granted under the Plan. Each Award under this Section 8 shall be evidenced by an Award Agreement between the Participant and the Company which shall specify the vesting schedule, any rights of acceleration and such other terms and conditions as the Board shall determine, which need not be the same with respect to each Participant. (b) REGISTRATION. Shares issued under this Section 8 shall be evidenced by issuance of a stock certificate or certificates registered in the name of the Participant bearing the following legend and any other legend required by, or deemed appropriate under, any federal or state securities laws: The sale or other transfer of the common shares represented by this certificate is subject to certain restrictions set forth in the Award Agreement between ___________________ (the registered owner) and The Lubrizol Corporation dated _______________, under The Lubrizol Corporation 1991 Stock Incentive Plan. A copy of the Plan and Award Agreement may be obtained from the Secretary of The Lubrizol Corporation. Unless otherwise provided in the Award Agreement between the Participant and the Company, such certificates shall be retained by the Company until the expiration of the Restriction Period. Upon the expiration of the Restriction Period, the Company shall (i) cause the removal of the legend from the certificates for such Shares as to which a Participant is entitled in accordance with the Award Agreement between the Participant and the Company and (ii) release such Shares to the custody of the Participant. (c) FORFEITURE. Except as otherwise determined by the Committee at the Grant Date, upon termination of employment of the Participant for any reason during the Restriction Period, all Shares still subject to restriction shall be forfeited by the Participant and retained by the Company; provided that in the event of a Participant's retirement, permanent disability, death, or in cases of special circumstances, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to such Participant's Shares. In such case, unrestricted Shares shall be issued to the Participant at such time as the Committee determines. (d) RIGHTS AS SHAREHOLDERS. At all times during the Restriction Period, Participants shall be entitled to full voting rights with respect to all Shares awarded under this Section 8 and shall be entitled to dividends with respect to such Shares. SECTION 9. STOCK AWARDS. Awards of Shares may be granted hereunder to Participants, either separately or in conjunction with other Awards granted under the Plan. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine (i) the Employees to whom such Awards shall be granted, (ii) the time or times at which such Awards shall be granted, (iii) the number of Shares to be granted pursuant to such Awards, and (iv) all other conditions of the Awards. Such conditions may include issuance of Shares at the time of the Award is granted or 7 THE LUBRIZOL CORPORATION Page 7 1991 STOCK INCENTIVE PLAN issuance of Shares at a time or times subsequent to the time the Award is granted, which subsequent times may be specifically established by the Committee and/or may be determined by reference to the satisfaction of one or more performance measures specified by the Committee. The provisions of stock awards need not be the same with respect to each Participant. SECTION 10. OUTSIDE DIRECTORS' OPTIONS. On the close of business on the date of each Shareholders' Meeting, each Outside Director shall automatically be granted an Option to purchase 2,000 Shares. All such Options shall be Non-Statutory Stock Options and shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as are contained in the applicable Award Agreement. (a) OPTION PRICE. The purchase price per Share shall be one hundred percent (100%) of the Fair Market Value of the Share on the Grant Date. Payment of the Option Price may be made in cash, Shares, or a combination of cash and Shares, as provided in the Award Agreement in effect from time to time. (b) OPTION PERIOD. The term during which Options granted under this Section 10 shall be exercisable shall be ten (10) years from the Grant Date; provided that no reload Option granted to an Outside Director pursuant to the terms of Section 6(e) shall be exercisable after the expiration of the term of the Option that gave rise to the grant of such reload Option. (c) EXERCISE OF OPTIONS. Subject to the provisions of this Section 10(c), Options shall be exercisable to the extent of fifty percent (50%) of the Shares subject thereto after one year from the Grant Date, seventy-five percent (75%) of such Shares after two years from the Grant Date, and one hundred percent (100%) of such Shares after three years from the Grant Date; provided that a reload Option granted to an Outside Director pursuant to the terms of Section 6(e) shall be exercisable to the extent of one hundred percent (100%) of such Shares from the Grant Date. Options may be exercised by an Outside Director during the period that the Outside Director remains a member of the Board and under the circumstances described below. (i) If an Outside Director retires under a retirement plan or policy of the Company, then Options held by such Outside Director may be exercised for a period of thirty-six (36) months following retirement, to the extent of 100% of the Shares covered by such Options (notwithstanding the extent to which the Outside Director otherwise would have been entitled to exercise such Options at the date of retirement), provided that in no event shall an Option be exercisable after the expiration of the Option period provided in Section 10(b). (ii) In the event of the death of an Outside Director while serving as a director, Options held by such Outside Director may be exercised for a period of twelve (12) months following the date of death, (A) to the extent of 100% of the Shares covered by such Options (notwithstanding the extent to which the Outside Director otherwise would have been entitled to exercise the Option at the date of death), and (B) only by the executor or administrator of the Outside Director's 8 THE LUBRIZOL CORPORATION Page 8 1991 STOCK INCENTIVE PLAN estate or by the person or persons to whom the Outside Director's rights under the Options shall pass by the Outside Director's will or the laws of descent and distribution, provided that in no event shall an Option be exercisable after the expiration of the Option period provided in Section 10(b). (iii) If an Outside Director shall cease to be a director for any reason other than retirement under a retirement plan or policy of the Company or death, Options held by such Outside Director may be exercised for a period of three (3) months following such cessation, to the extent of 100% of the Shares covered by such Options (notwithstanding the extent to which the Outside Director otherwise would have been entitled to exercise such Options at the date of such cessation), provided that in no event shall an Option be exercisable after the expiration of the Option period provided in Section 10(b). (iv) In the event an Outside Director, after ceasing to be a director, dies during and subject to one of the periods described in Section 10(c)(i) or (iii), while possessed of unexercised Options, the executor or administrator of the Outside Director's estate, or the person entitled by will or the applicable laws of descent and distribution, may exercise such Options held by the Outside Director at the time of the Outside Director's death during the period that is applicable, as follows: (A) If Section 10(c)(i) was in effect, for one year after the Outside Director's death; (B) If Section 10(c)(iii) was in effect, for three months after the Outside Director's death; provided that, in no event shall the Option be exercisable after the expiration of the Option period provided in Section 10(b). SECTION 11. CHANGE IN CONTROL. Notwithstanding the provisions of Sections 6(c) and 10(c), Options shall become exercisable with respect to 100% of the Shares upon the occurrence of any Change in Control (as hereafter defined) of the Company; except that no Options shall be exercised prior to the end of six months from the Grant Date. Notwithstanding the provisions of Section 8 and the applicable Award Agreement, any restricted Shares shall be 100% vested and without any restrictions upon the occurrence of any Change in Control of the Company. For all purposes of the Plan, a "Change in Control" shall have occurred if any of the following events shall occur: (a) The Company is merged, consolidated or reorganized into or with another corporation or other legal person, and immediately after such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the 9 THE LUBRIZOL CORPORATION Page 9 1991 STOCK INCENTIVE PLAN aggregate by the holders of Voting Stock of the Company immediately prior to such transaction; (b) The Company sells all or substantially all of its assets to any other corporation or other legal person, and less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such sale are held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale; (c) There is a report filed on Schedule 13D or Schedule 14D-l (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13(d)(3) or any successor rule or regulation promulgated under the Exchange Act) of securities representing 20% or more of the Voting Stock; (d) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (e) If during any period of two consecutive years, individuals who at the beginning of any such period constitute the Directors of the Company cease for any reason to constitute at least a majority thereof, provided, however, that for purposes of this Section 11(e), each Director who is first elected, or first nominated for election by the Company's stockholders, by a vote of at least two thirds of the Directors of the Company (or a committee thereof) then still in office who were Directors of the Company at the beginning of any such period will be deemed to have been a Director of the Company at the beginning of such period. Notwithstanding the foregoing provisions of Section 11(c) or 11(d) hereof, unless otherwise determined in a specific case by majority vote of the Board, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities, or (iii) any employee stock ownership plan or any other employee benefit plan sponsored by the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-l, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 20% or otherwise, or because the Company reports that a change in control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. SECTION 12. AMENDMENTS AND TERMINATION. The Board may, at any time, amend, alter or terminate the Plan, but no amendment, alteration, or termination shall be made that would impair the rights of an Outside Director or 10 THE LUBRIZOL CORPORATION Page 10 1991 STOCK INCENTIVE PLAN Participant under an Award theretofore granted, without the Outside Director's or Participant's consent, or that without the approval of the shareholders would: (a) except as is provided in Sections 4(b) and 13(c) of the Plan, increase the total number of Shares which may be issued under the Plan; (b) change the class of employees eligible to participate in the Plan; or (c) materially increase the benefits accruing to Participants under the Plan; so long as such approval is required by law or regulation; provided that, as long as required by law or regulation, the provisions of Section 10 hereof may not be amended or altered more than once every six (6) months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. The Committee may amend the terms of any Award heretofore granted (except, with respect to Options granted pursuant to Section 10 hereof, only to the extent not inconsistent with Rule 16b-3 under the Exchange Act or any successor rule or statute), prospectively or retroactively, but no such amendment shall impair the rights of any Participant or Outside Director without his consent. SECTION 13. GENERAL PROVISIONS. (a) No Option, Stock Appreciation Right, or Restricted Stock Award shall be assignable or transferable by a Participant or an Outside Director otherwise than by will or the laws of descent and distribution, and Options and Stock Appreciation Rights may be exercised during the Participant's or Outside Director's lifetime only by the Participant or the Outside Director or, if permissible under applicable law, by the guardian or legal representative of the Participant or Outside Director. (b) The term of each Award shall be for such period of months or years from its Grant Date as may be determined by the Committee or as set forth in the Plan; provided that in no event shall the term of any Incentive Stock Option or any Stock Appreciation Right related to any Incentive Stock Option exceed a period of ten (10) years from the Grant Date. (c) In the event of a merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure such that Shares are changed into or become exchangeable for a larger or smaller number of Shares, thereafter the number of Shares subject to outstanding Awards granted to Participants and to any Shares subject to Awards to be granted to Participants pursuant to this Plan shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of Shares by reason of such change in corporate structure; provided, however, that the number of Shares shall always be a whole number, and the purchase price per Share of any outstanding Options shall, in the case of an increase in the number of Shares, be proportionately reduced, and, in the case of a decrease in the number of Shares, shall be proportionately increased. The above adjustment shall also apply to any 11 THE LUBRIZOL CORPORATION Page 11 1991 STOCK INCENTIVE PLAN Shares subject to Options granted to Outside Directors pursuant to the provisions of Section 10. (d) No Employee shall have any claim to be granted any Award under the Plan and there is no obligation for uniformity of treatment of Employees or Participants under the Plan. (e) The prospective recipient of any Award under the Plan shall not, with respect to such Award, be deemed to have become a Participant, or to have any rights with respect to such Award, until and unless such recipient shall have executed an Award Agreement, and otherwise complied with the then applicable terms and conditions. (f) All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (g) Except as otherwise required in any applicable Award Agreement or by the terms of the Plan, Participants shall not be required, under the Plan, to make any payment other than the rendering of services. (h) The Company shall be authorized to withhold from any payment under the Plan, whether such payment is in Shares or cash, all withholding taxes due in respect of such payment hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. (i) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (j) Nothing in the Plan shall interfere with or limit in any way the right of the Company or any Subsidiary to terminate any Participant's employment at any time, nor shall the Plan confer upon any Participant any right to continued employment with the Company or any Subsidiary. SECTION 14. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall be effective as of April 22, 1991, and shall continue in effect until terminated by the Board. EX-27 3 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 COMPANY 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 92,261 0 297,527 1,962 263,659 729,337 1,594,441 890,928 1,660,397 287,530 388,975 0 0 84,674 689,211 1,660,397 446,627 447,545 303,174 303,174 0 (2) 7,140 64,569 25,475 0 0 0 0 39,094 0.72 0.72
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