10-K405 1 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 Commission File Number 1-6351 ELI LILLY AND COMPANY An Indiana Corporation I.R.S. Employer Number 35-0470950 Address: Lilly Corporate Center, Indianapolis, Indiana 46285 Telephone number, including area code: (317) 276-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name Of Each Exchange Title Of Each Class On Which Registered ------------------- --------------------- Common Stock New York Stock Exchange Pacific Stock Exchange Contingent Payment Obligation Units American Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Pacific Stock Exchange 8-1/8% Notes Due December 1, 2001 New York Stock Exchange 8-3/8% Notes Due December 1, 2006 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, 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 the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Aggregate market value of voting stock of the Registrant held by non-affiliates as of February 10, 1995 (Common Stock): $15,909,739,084 Number of shares of common stock outstanding as of February 10, 1995: 292,260,706 Portions of the following documents have been incorporated by reference into this report: Document Parts Into Which Incorporated -------- ----------------------------- Registrant's Annual Report to Shareholders Parts I, II, and IV for fiscal year ended December 31, 1994 Registrant's Proxy Statement dated March 6, 1995 Part III PART I Item 1. BUSINESS Eli Lilly and Company was incorporated in 1901 under the laws of Indiana to succeed to the drug manufacturing business founded in Indianapolis, Indiana, in 1876 by Colonel Eli Lilly. The Company*, including its subsidiaries, is engaged in the discovery, development, manufacture, and sale of products and the provision of services in one industry segment----Life Sciences. Products are manufactured or distributed through owned or leased facilities in the United States, Puerto Rico, and 26 other countries, in 19 of which the Company owns or has an interest in manufacturing facilities. Its products are sold in approximately 117 countries. Through its PCS Health Systems subsidiary, the Company provides pharmacy benefit management services in the United States. Most of the Company's products were discovered or developed through the Company's research and development activities, and the success of the Company's business depends to a great extent on the introduction of new products resulting from these research and development activities. Research efforts are primarily directed toward the discovery of products to diagnose and treat diseases in human beings and animals and to increase the efficiency of animal food production. Research efforts are also directed toward developing medical devices. RECENT DEVELOPMENTS Divestiture of Medical Device and Diagnostics Businesses On January 18, 1994, the Company announced its intent to divest itself of its medical device and diagnostics ("MDD") businesses. During the year, the Company completed the following transactions in furtherance of its divestiture plan: Formation of Guidant Corporation; Initial Public Offering. In September, 1994, the Company formed Guidant Corporation, a Company subsidiary comprising five of the nine MDD businesses ---- Advanced Cardiovascular Systems, Inc., Cardiac Pacemakers, Inc., Devices for Vascular Intervention, Inc., Heart Rhythm Technologies, Inc. and Origin Medsystems, Inc. On December 20, 1994, Guidant completed an initial public offering of approximately 20% of its outstanding shares of common stock. The Company currently owns the remaining 80% of the shares. Under current plans, which are subject to market and other conditions, the Company intends to distribute the remaining Guidant shares to Company shareholders on a tax-free basis in the latter half of 1995 through a "split- off," an exchange offer pursuant to which Company shareholders would be given the opportunity to exchange some or all of their Company shares for Guidant shares. Sale of Remaining MDD Companies. During 1994 and early 1995, the Company sold three of the four MDD companies that are not part of Guidant. On July 29, 1994, the Company sold Physio-Control Corporation to Bain Capital, Inc. On December 30, 1994, the Company sold IVAC Corporation to River Acquisition Corporation, an affiliate of River Medical Corporation. Finally, on January 5, 1995, the Company sold Pacific Biotech, Inc. to Quidel Corporation. The Company is continuing its efforts to sell the last remaining MDD company, Hybritech Incorporated. Any divestiture of Hybritech will be consistent with the Company's obligations under its Contingent Payment Obligation Units issued in connection with the Hybritech acquisition. In light of the divestiture, the results of operations of the MDD businesses are reflected as "discontinued operations" in the Company's consolidated statements of income that are incorporated by reference in this Form 10-K. For comparability, the other financial and quantitative information contained in this Form 10-K excludes the MDD businesses unless specifically noted to the contrary. Acquisition of PCS Health Systems, Inc. On November 21, 1994, the Company acquired PCS Health Systems, Inc. and an affiliated corporation, Clinical Pharmaceuticals, Inc. (together, "PCS") from McKesson Corporation for approximately $4.1 billion in cash. PCS is the largest provider of pharmacy benefit management services in the United States. For a description of PCS's business, see "Pharmacy Benefit Management Services" at page 3 of this Form 10-K. FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS AND CLASSES OF PRODUCTS Financial information relating to industry segments and classes of products, set forth in the Company's 1994 Annual Report at pages 28-29 under "Review of Operations----Segment Information" (pages 12-13 of Exhibit 13 to this Form 10- K), is incorporated herein by reference. Due to several factors, including the introduction of new products by the Company and other manufacturers, the relative contribution of any particular Company product to consolidated net sales is not necessarily constant from year to year, and its contribution to net income is not necessarily the same as its contribution to consolidated net sales. PRODUCTS AND SERVICES Pharmaceutical Products Pharmaceutical products include Central-nervous-system agents, including the antidepressant agent Prozac(R), a highly specific serotonin uptake inhibitor, indicated for the treatment of depression and, in many countries, for bulimia and obsessive- compulsive disorder; the analgesic Darvocet-N(R) 100, which is indicated for the relief of mild-to-moderate pain; and Permax(R), a treatment for Parkinson's disease; Anti-infectives, including the oral cephalosporin antibiotics Ceclor(R), Keflex(R), and Keftab(R), used in the treatment of a wide range of bacterial infections; the oral carbacephem antibiotic LorabidTM, used to treat a variety of infections; the oral macrolide antibiotic Dynabac(R), approved in certain overseas countries; the injectable cephalosporin antibiotics Mandol(R), Tazidime(R), Kefurox(R), and Kefzol(R), used to treat a wide range of infections in the hospital setting; Nebcin(R), an injectable aminoglycoside antibiotic used in hospitals to treat various infections caused by staphylococci and Gram-negative bacteria; Vancocin(R) HCl, an injectable antibiotic used primarily to treat staphylococcal infections; and cefaclor, a generic formulation of Ceclor; Diabetic care products, including Iletin(R) (insulin) in its various pharmaceutical forms; and Humulin(R), human insulin produced through recombinant DNA technology; An antiulcer agent, Axid(R), an H2 antagonist, indicated for the treatment of active duodenal ulcer, for maintenance therapy for duodenal ulcer patients after healing of an active duodenal ulcer, and for reflux esophagitis; Oncolytic agents, including Oncovin(R), indicated for treatment of acute leukemia and, in combination with other oncolytic agents, for treatment of several different types of advanced cancers; Velban(R), used in a variety of malignant neoplastic conditions; and Eldisine(R), indicated for treatment of acute childhood leukemia resistant to other drugs; and Additional pharmaceuticals, including cardiovascular therapy products, principally Dobutrex(R); hormones, including Humatrope(R), human growth hormone produced by recombinant DNA technology; hematinics; sedatives; and vitamins. Medical Devices and Diagnostic Products Medical devices, marketed by Guidant Corporation, include implantable cardiac pacemakers and implantable cardioverter/defibrillators, coronary angioplasty catheter systems, peripheral and coronary atherectomy catheter systems, and devices for use during minimally-invasive surgery procedures. Diagnostic products, marketed by Hybritech Incorporated, include monoclonal- antibody-based diagnostic tests for colon, prostate, and testicular cancer, as well as for infertility, pregnancy, heart attack, thyroid deficiencies, anemia, dwarfism, and infectious diseases. Animal Health Products Animal health products include Tylan(R), an antibiotic used to control certain diseases in cattle, swine, and poultry and to improve feed efficiency and growth; Rumensin(R), a cattle feed additive that improves feed efficiency and growth; Compudose(R), a controlled-release implant that improves feed efficiency and growth in cattle; Coban(R), Monteban(R) and Maxiban(R), anticoccidial agents for use in poultry; Apralan(R), an antibiotic used to control enteric infections in calves and swine; Micotil(R), an antibiotic used to treat bovine respiratory disease; and other products for livestock and poultry. Pharmacy Benefit Management Services PCS provides computer-based prescription drug claims processing and pharmacy benefit design, administration and management services to health plan sponsors, including insurance companies, third-party administrators, self-insured employers, health maintenance organizations, and Blue Cross/Blue Shield organizations that underwrite or administer prescription benefit plans. PCS helps these customers manage prescription benefit costs by providing drug utilization reviews, clinically-based formularies and generic substitution programs. PCS also operates an on-line electronic network to transmit medical, hospital, laboratory, clinical and billing information that links health care providers (physicians, hospitals and clinics) with health plan sponsors. RECAP(R), PCS's on-line prescription claims management system, is linked with over 95% of retail pharmacies in the U.S. MARKETING Most of the Company's major products are marketed worldwide. Pharmacy benefit management services are marketed primarily in the United States. In the United States, the Company's Pharmaceutical Division distributes pharmaceutical products principally through approximately 232 wholesale distributing outlets. Marketing policy is designed to assure immediate availability of these products to physicians, pharmacies, hospitals, and appropriate health care professionals throughout the country. Five wholesale distributing companies in the United States accounted for approximately 13%, 10%, 9%, 8%, and 6% respectively, of consolidated net sales in 1994. No other distributor accounted for as much as 5% of consolidated net sales. The Company also makes direct sales of its pharmaceutical products to the United States government and to other manufacturers, but those direct sales do not constitute a material portion of consolidated net sales. The Company's pharmaceutical products are promoted in the United States under the Lilly and Dista trade names by one hospital and three retail sales forces employing salaried sales representatives. These sales representatives, approximately half of whom are registered pharmacists, call upon physicians, wholesalers, hospitals, managed-care organizations, retail pharmacists, and other health care professionals. Their efforts are supported by the Company through advertising in medical and drug journals, distribution of literature and samples of certain products to physicians, and exhibits for use at medical meetings. In 1994, the Company created a new sales force dedicated to diabetes care. In the past few years, large purchasers of pharmaceuticals, such as managed- care groups and government and long-term care institutions, have begun to account for an increasing portion of total pharmaceutical purchases in the United States. The Company has created special sales groups to service government and long-term care institutions, and expanded its managed-care sales organization. In response to competitive pressures, the Company has entered into arrangements with a number of these organizations providing for discounts or rebates on one or more Company products or other cost-sharing arrangements. During 1994, the Company also entered into agreements with a generic pharmaceutical company for the promotion, distribution and/or supply of generic forms of certain brand name products of both Lilly and other companies. In addition, in 1994 the Company formed Integrated Disease Management, Inc. ("IDM") and acquired Control Diabetes Services, Inc. IDM will provide disease- management services, including capitation and risk-sharing arrangements, to managed-care customers. Control Diabetes provides education to diabetics to help them aggressively manage their disease and thereby minimize their long-term risk of serious complications. Outside the United States, pharmaceutical products are promoted by salaried sales representatives. While the products marketed vary from country to country, anti-infectives constitute the largest single group in total sales. Distribution patterns vary from country to country. In recent years, the Company has significantly expanded its marketing efforts in a number of overseas markets, including emerging markets in Central and Eastern Europe, Latin America, and Asia. Guidant Corporation markets its medical device products in the United States substantially through its direct sales forces. Outside the Unites States, Guidant's products are marketed by both direct sales representative and independent distributors. Hybritech Incorporated markets its immunodiagnostic products to hospitals, commercial laboratories, clinics, and physicians. Sales are conducted by direct sales representatives and by independent distributors both inside and outside the United States. Elanco Animal Health, a division of the Company, employs field salespeople throughout the United States to market animal health products. Sales are made to wholesale distributors, retailers, feed manufacturers, or producers in conformance with varying distribution patterns applicable to the various types of products. The Company also has an extensive sales force outside the United States to market its animal health products. RAW MATERIALS Most of the principal materials used by the Company in manufacturing operations are chemical, plant, and animal products that are available from more than one source. Certain raw materials are available or are purchased principally from only one source. Unavailability of certain materials from present sources could cause an interruption in production pending establishment of new sources or, in some cases, implementation of alternative processes. Although the major portion of the Company's sales abroad are of products manufactured wholly or in part abroad, a principal source of active ingredients for these manufactured products continues to be the Company's facilities in the United States. PATENTS AND LICENSES The Company owns, has applications pending for, or is licensed under, a substantial number of patents, both in the United States and in other countries, relating to products, product uses, and manufacturing processes. There can be no assurance that patents will result from the Company's pending applications. Moreover, patents relating to particular products, uses, or processes do not preclude other manufacturers from employing alternative processes or from successfully marketing substitute products to compete with the patented products or uses. Patent protection of certain products, processes, and uses---- particularly that relating to Ceclor, Humulin, Prozac, Axid, and Lorabid----is considered to be important to the operations of the Company. The United States patent covering Humulin expires in 2001, the Prozac patent expires in 2001, the Axid patent expires in 2002, and the Lorabid patent expires in 2004. The United States product patent covering Ceclor, the Company's second largest selling product, expired in December 1992, and a U.S. patent on a key intermediate material expired in December 1994. It has been reported that several abbreviated new drug applications for generic formulations of cefaclor (the active ingredient in Ceclor) have been filed in the U.S. To date, the Company has experienced only limited competition from generic cefaclor in markets outside the United States and the Company is not aware that any competitor has received U.S. FDA approval for the product. However, the Company expects that within the near term competitors will be entering the U.S. market with generic cefaclor. The Company believes that the quantity of available competitive product will be limited initially by manufacturing capacity constraints but that those constraints will likely lessen over time. In October, 1994, the Company's subsidiary STC Pharmaceuticals, Inc., entered into an agreement with Mylan Pharmaceuticals, Inc. to market and distribute a generic form of cefaclor in the U.S. The Company anticipates that the combined impact of the continued competition from other anti-infectives and the introduction of generic cefaclor could have a material adverse effect on the Company's 1995 consolidated results of operations. However, the Company believes that the patent expirations and increased competition will not have a material adverse effect on the Company's near-term consolidated financial position. The United States patent covering Dobutrex expired in October 1993. The patent expiration has resulted in a significant decline in U.S. Dobutrex sales. The Company also grants licenses under patents and know-how developed by the Company and manufactures and sells products and uses technology and know-how under licenses from others. Royalties received by the Company in relation to licensed pharmaceuticals amounted to approximately $5 million in 1994, and royalties paid by it in relation to pharmaceuticals amounted to approximately $89 million in 1994. COMPETITION The Company's pharmaceutical products compete with products manufactured by numerous other companies in highly competitive markets in the United States and throughout the world. Guidant Corporation's medical devices compete with numerous domestic and foreign manufacturers of implantable cardiac pacemakers and cardioverter/defibrillators, angioplasty catheter systems, and minimally- invasive surgery devices. Hybritech's diagnostic products compete with conventional immunodiagnostic assays as well as with monoclonal-antibody-based products marketed by numerous foreign and domestic manufacturers. The Company's animal health products compete on a worldwide basis with products of pharmaceutical, chemical, and other companies that operate animal health divisions or subsidiaries. PCS faces strong competition from other pharmacy benefit management companies and claims processors in the United States. For certain accounts, PCS competes with some retail pharmacy chains, mail order programs and organized groups of independent pharmacists. Important competitive factors include price and demonstrated cost- effectiveness, product characteristics and dependability, service, and research and development of new products and processes. The introduction of new products and the development of new processes by domestic and foreign companies can result in progressive price reductions or decreased volume of sales of competing products, or both. New products introduced with patent protection usually must compete with other products already on the market at the time of introduction or products developed by competitors after introduction. The Company believes its competitive position in these markets is dependent upon its research and development endeavors in the discovery and development of new cost-effective products, together with increased productivity resulting from improved manufacturing methods, marketing efforts, and customer service. There can be no assurance that products manufactured or processes used by the Company will not become outmoded from time to time as a result of products or processes developed by its competitors. GOVERNMENTAL REGULATION The Company's operations have for many years been subject to extensive regulation by the federal government, to some extent by state governments, and in varying degrees by foreign governments. The Federal Food, Drug, and Cosmetic Act, other federal statutes and regulations, various state statutes and regulations, and laws and regulations of foreign governments govern testing, approval, production, labeling, distribution, post-market surveillance, advertising, promotion, and in some instances, pricing, of most of the Company's products. In addition, the Company's operations are subject to complex federal, state, local, and foreign environmental laws and regulations. It is anticipated that compliance with regulations affecting the manufacture and sale of current products and the introduction of new products will continue to require substantial scientific and technical effort, time, and expense and significant capital investment. In the United States, health care reform was debated at the federal level in 1994 but no legislation was adopted. It is expected that Congress will resume the debate in 1995. Many state legislatures are also considering health care reform measures. The nature of the changes that may ultimately be enacted and their impact on the Company and the pharmaceutical industry are unknown. However, several of the measures currently under discussion, if enacted, could affect the industry and the Company by, among other things, increasing pressures on pricing and reducing pricing flexibility, restricting physicians' choice of therapies, and reducing incentives to invest in research and development. Outside the United States, governments in several countries are implementing health care cost-control measures that may adversely affect pharmaceutical industry revenues. The Company is unable to predict the extent to which its business may be affected by these or other future legislative and regulatory developments. RESEARCH AND DEVELOPMENT The Company's research and development activities are responsible for the discovery or development of most of the products offered by the Company today. Its commitment to research and development dates back more than 100 years. The growth in research and development expenditures and personnel over the past several years demonstrates both the continued vitality of the Company's commitment and the increasing costs and complexity of bringing new products to the market. At the end of 1994, approximately 4,200 people, including a substantial number who are physicians or scientists holding graduate or postgraduate degrees or highly skilled technical personnel, were engaged in pharmaceutical and animal health research and development activities. The Company expended $731.0 million on these research and development activities in 1992, $755.0 million in 1993, and $838.7 million in 1994. The Company's research is concerned primarily with the effects of synthetic chemicals and natural products on biological systems. The results of that research are applied to the development of products for use by or on humans and animals, and for other uses. Major effort is devoted to pharmaceutical products. The Company now concentrates its pharmaceutical research and development efforts in five therapeutic categories: central nervous system and related diseases; endocrine diseases, including diabetes and osteoporosis; infectious diseases; cancer; and cardiovascular diseases. The Company is engaged in biotechnology research programs involving recombinant DNA and monoclonal antibodies. The Company's biotechnology research is supplemented through its Hybritech subsidiary, which conducts research using monoclonal- antibody-based product technology for diagnosis of certain diseases or medical conditions. In September 1994, the Company acquired Sphinx Pharmaceuticals Corporation of Durham, North Carolina. Sphinx, which is now a division of Lilly Research Laboratories, uses a proprietary combinatorial chemistry technology to create large libraries of small organic molecules and screen them at high speeds for biological activity. In addition to the research activities carried on in the Company's own laboratories, the Company sponsors and underwrites the cost of research and development by independent organizations, including educational institutions and research-based human health care companies, and contracts with others for the performance of research in their facilities. It utilizes the services of physicians, hospitals, medical schools, and other research organizations in the United States and numerous other countries to establish through clinical evidence the safety and effectiveness of new products. The Company's business- development groups actively seek out opportunities to invest in external research and technologies that hold the promise to complement and strengthen the Company's own research efforts in the five chosen therapeutic categories. Such investments can take many forms, including licensing arrangements, co- development and co-marketing agreements, and outright acquisitions. Extensive work is also conducted in the animal sciences, including animal nutrition and physiology and veterinary medicine. Certain of the Company's research and development activities relating to pharmaceutical products may be applicable to animal health products. An example is the search for agents that will cure infectious disease. Guidant Corporation conducts research and development in the area of medical devices, seeking to introduce clinically advanced new products, to enhance the effectiveness, ease of use, safety and reliability of existing products, and to expand uses of existing products. QUALITY ASSURANCE The Company's success depends in great measure upon customer confidence in the quality of the Company's products and in the integrity of the data that support their safety and effectiveness. The quality of the Company's products arises from the total commitment to quality in all parts of the Company, including research and development, purchasing, facilities planning, manufacturing, and distribution. Quality-assurance procedures have been developed relating to the quality and integrity of the Company's scientific information and production processes. With respect to pharmaceutical, diagnostic, and animal health products, control of production processes involves rigid specifications for ingredients, equipment, facilities, manufacturing methods, packaging materials, and labeling. Control tests are made at various stages of production processes and on the final product to assure that the product meets the Company's standards. These tests may involve chemical and physical chemical analyses, microbiological testing, testing in animals, or a combination of these tests. Additional assurance of quality is provided by a corporate quality-assurance group that monitors existing pharmaceutical and animal health manufacturing procedures and systems in the parent company, subsidiaries, and affiliates. The quality of medical devices is assured through specifications of components and finished products, inspection of certain components, certification of certain vendors, control of the manufacturing environment, and use of statistical process controls. Final products are tested to assure conformance with specifications. EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information regarding the executive officers of the Company. All but four of the executive officers have been employed by the Company in executive or managerial positions during the last five years. Randall L. Tobias became Chairman of the Board and Chief Executive Officer in June 1993. He had served as Vice Chairman of the Board of American Telephone and Telegraph Company from 1986 until he assumed his present position. He has been a member of the Board of Directors of the Company since 1986. From 1987 until he joined the Company in August 1990, Mitchell E. Daniels, Jr., President, North American Pharmaceutical Operations, Pharmaceutical Division, served as President and Chief Executive Officer of the Hudson Institute and was of counsel to Baker & Daniels. From 1985 to 1987 he served on former President Reagan's staff as Assistant to the President for Political and Intergovernmental Affairs. Thomas Trainer joined the Company in January 1995. Since 1991 he had served as Vice President and Chief Information Officer of Reebok International Ltd. Prior to joining Reebok, he was Senior Vice President of Operations of A.C. Nielson Co. August M. Watanabe joined the Company in 1990 as Vice President of Lilly Research Laboratories. Previously he had served as Chairman of the Department of Medicine at Indiana University School of Medicine from 1983 through 1990. Except as indicated in the table below, the term of office for each executive officer indicated herein expires on the date of the annual meeting of the Board of Directors, to be held on April 17, 1995, or on the date his or her successor is chosen and qualified. No director or executive officer of the Company has a "family relationship" with any other director or executive officer of the Company, as that term is defined for purposes of this disclosure requirement. There is no understanding between any executive officer of the Company and any other person pursuant to which the executive officer was selected. NAME AGE OFFICES ----------------------------------------------------------------------------- Randall L. Tobias 53 Chairman of the Board and Chief Executive Officer (since June 1993) and a Director Sidney Taurel 46 Executive Vice President and President, Pharmaceutical Division (since January 1993) and a Director James M. Cornelius 51 Vice President, Finance and Chief Financial Officer (since January 1983) and a Director Mitchell E. Daniels, Jr. 45 President, North American Pharmaceutical Operations, Pharmaceutical Division (since April 1993)1 Ronald W. Dollens 48 President and Chief Executive Officer, Guidant Corporation, a majority-owned subsidiary of the Company (since September 1994)2 Michael L. Eagle 47 Vice President, Manufacturing (since January 1994) Brendan P. Fox 51 President, Elanco Animal Health Division (since January 1991)1 Rebecca O. Goss 47 Vice President and General Counsel (since March 1995)3 Michael E. Hanson 47 President, Internal Medicine Business Unit, Pharmaceutical Division (since August 1994)1,4 James A. Harper 47 President, Endocrine Business Unit, Pharmaceutical Division (since August 1994)1,4 Pedro P. Granadillo 47 Vice President, Human Resources (since April 1993) J. B. King 65 Vice President and General Counsel (since October 1987)5 Gerhard N. Mayr 48 President, European Pharmaceutical Operations (Europe, Africa, Middle East and India), Pharmaceutical Division (since January 1993)1,4 Robert N. Postlethwait 46 President, Central Nervous System Business Unit, Pharmaceutical Division (since August 1994)1,4 Stephen A. Stitle 49 Vice President, Corporate Affairs (since April 1993) and a Director W. Leigh Thompson, Ph.D., M.D. 56 Chief Scientific Officer (since January 1993)6 Thomas Trainer 48 Vice President, Information Technology, and Chief Information Officer (since January 1995)1,4 August M. Watanabe, M.D. 53 Vice President and President, Lilly Research Laboratories (since January 1994) and a Director EMPLOYEES At the end of 1994, the Company had approximately 24,900 employees, including approximately 10,500 employees outside the United States. A substantial number of the Company's employees have long records of continuous service. FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS Financial information relating to foreign and domestic operations, set forth in the Company's 1994 Annual Report at pages 28-29 under "Review of Operations-- --Segment Information" (pages 12-13 of Exhibit 13), is incorporated herein by reference. Eli Lilly International Corporation, a subsidiary, coordinates the Company's manufacture and sale of products outside the United States. Local restrictions on the transfer of funds from branches and subsidiaries located abroad (including the availability of dollar exchange) have not to date been a significant deterrent in the Company's overall operations abroad. The Company cannot predict what effect these restrictions or the other risks inherent in foreign operations, including possible nationalization, might have on its future operations or what other restrictions may be imposed in the future. Item 2. PROPERTIES The Company's principal domestic and international executive offices are located in Indianapolis. At December 31, 1994, the Company owned 14 production plants and facilities in the United States and Puerto Rico. These plants and facilities contain an aggregate of approximately 12 million square feet of floor area. Most of the plants and facilities involve production of both pharmaceutical and animal health products. Guidant Corporation owns manufacturing, research, and administrative facilities for medical devices, containing an aggregate of approximately 1.2 million square feet, in four cities in the United States and Puerto Rico, and leases manufacturing, research, and administrative facilities in the United States containing an aggregate of approximately 350,000 square feet. The Company also leases sales offices in a number of cities located in the United States. PCS owns administrative facilities in Scottsdale, Arizona, containing an aggregate of approximately 350,000 square feet and leases a total of approximately 120,000 square feet of administrative space in other cities in the United States. Hybritech leases a manufacturing, research, and administrative facility in San Diego, containing an aggregate of approximately 350,000 square feet. The Company (including Guidant and Hybritech) has 26 production plants and facilities in 19 countries outside the United States, containing an aggregate of approximately 4.2 million square feet of floor space. Leased production and warehouse facilities are utilized in Puerto Rico and 14 other countries outside the United States. The Company's main research and development laboratories in Indianapolis and Greenfield, Indiana, consist of approximately 2.8 million square feet. Its major research and development facilities abroad are located in Belgium and the United Kingdom and contain approximately 435,000 square feet. The Company also owns two tracts of land, containing an aggregate of approximately 1,700 acres, a portion of which is used for field studies of products. The Company believes that none of its properties is subject to any encumbrance, easement, or other restriction that would detract materially from its value or impair its use in the operation of the business of the Company. The buildings owned by the Company are of varying ages and in good condition. Item 3. LEGAL PROCEEDINGS The Company is currently a defendant in a variety of product and patent litigation matters. In approximately 200 actions, including several with multiple claimants, plaintiffs seek to recover damages on behalf of children or grandchildren of women who ingested diethylstilbestrol during pregnancy. In another approximately 135 actions, plaintiffs seek to recover damages as a result of the ingestion of Prozac. In the patent suits, it is asserted that one or more Company products or processes infringe issued patents. The holders of those patents seek monetary damages and injunctions against further infringement. Products involved include Humulin, Humatrope, bovine somatotropin and certain medical devices. A federal grand jury in Baltimore, Maryland is conducting an inquiry into the Company's compliance with the Food and Drug Administration's regulatory requirements affecting the Company's pharmaceutical manufacturing operations. The Company is cooperating fully with the inquiry. The Company has been named, together with numerous other U.S. prescription pharmaceutical manufacturers and in some cases wholesalers or distributors, as a defendant in a large number of related actions brought by retail pharmacies in the United States alleging violations of federal or state antitrust laws, or both, based on the practice of providing discounts or rebates to managed-care organizations and certain other large purchasers. The federal cases have been consolidated or coordinated for pre-trial proceedings in the Northern District of Illinois. The federal suits include a certified class action on behalf of nearly all retail pharmacies in the United States. The class plaintiffs allege an industrywide agreement in violation of the Sherman Act to deny favorable pricing on sales of brand-name prescription pharmaceuticals to certain retail pharmacies in the United States. The other federal suits, brought as individual claims by several thousand pharmacies, allege price discrimination in violation of the Robinson-Patman Act as well as Sherman Act claims. Defense motions to dismiss have been denied and discovery has begun. The federal class action case is scheduled to begin trial in February, 1996. In addition, there are related state court cases pending in Alabama, California, Minnesota, and Wisconsin brought by large numbers of retail pharmacies alleging violations of various state antitrust and pricing laws, purporting to be class actions on behalf of retail pharmacies in those states. There are also cases in California and Washington that purport to be class actions on behalf of consumers of prescription pharmaceuticals. The Company is also a defendant in other litigation, including product liability suits, of a character regarded as normal to its business. While it is not possible to predict or determine the outcome of the legal actions pending against the Company, in the opinion of the Company such actions will not ultimately result in any liability that would have a material adverse effect on its consolidated financial position. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1994, no matters were submitted to a vote of security holders. PART II Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Information relating to the principal market for the Company's common stock and related stockholder matters, set forth in the Company's 1994 Annual Report under "Review of Operations----Selected Quarterly Data (unaudited)," at page 30 (page 14 of Exhibit 13), and "Review of Operations----Selected Financial Data (unaudited)," at page 31 (page 15 of Exhibit 13), is incorporated herein by reference. Item 6. SELECTED FINANCIAL DATA Selected financial data for each of the Company's five most recent fiscal years, set forth in the Company's 1994 Annual Report under "Review of Operations----Selected Financial Data (unaudited)," at page 31 (page 15 of Exhibit 13), are incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following portions of the Company's 1994 Annual Report (found at pages 1- 7 of Exhibit 13) constitute management's discussion and analysis of results of operations and financial condition and are incorporated herein by reference: "Review of Operations----Strategic Actions" (page 18) "Review of Operations----Operating Results of Continuing Operations----1994" (pages 18-19 and 21) "Review of Operations----Operating Results of Continuing Operations----1993" (pages 21-23) "Review of Operations----Financial Condition" (pages 23 and 26) "Review of Operations----Environmental and Legal Matters" (page 26) Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and its subsidiaries, listed in Item 14(a)1 and included in the Company's 1994 Annual Report at pages 20, 24-25, and 27 (Consolidated Statements of Income, Consolidated Balance Sheets, and Consolidated Statements of Cash Flows), pages 28-29 (Segment Information), and pages 32-46 (Notes to Consolidated Financial Statements) (together, pages 8-13 and 16-31 of Exhibit 13), and the Report of Independent Auditors set forth in the Company's 1994 Annual Report at page 47 (page 33 of Exhibit 13), are incorporated herein by reference. Information on quarterly results of operations, set forth in the Company's 1994 Annual Report under "Review of Operations----Selected Quarterly Data (unaudited)," at page 30 (page 14 of Exhibit 13), is incorporated herein by reference. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to the Company's directors, set forth in the Company's Proxy Statement dated March 6, 1995, under "Election of Directors----Nominees for Election," at pages 1-5, is incorporated herein by reference. Information relating to the Company's executive officers is set forth at pages 7-9 of this Form 10-K under "Executive Officers of the Company." Item 11. EXECUTIVE COMPENSATION Information relating to executive compensation, set forth in the Company's Proxy Statement dated March 6, 1995, under "Election of Directors----Executive Compensation," at pages 10-19, is incorporated herein by reference, except that the Compensation and Management Development Committee Report and Performance Graph are not so incorporated. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to ownership of the Company's common stock and Guidant's common stock by persons known by the Company to be the beneficial owners of more than 5% of the outstanding shares of common stock and by management, set forth in the Company's Proxy Statement dated March 6, 1995, under "Election of Directors----Common Stock Ownership by Directors and Executive Officers," at pages 6-8, and "Election of Directors----Principal Holders of Common Stock," at page 8, is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to a Registration Rights Agreement between Guidant Corporation and Lilly Endowment, Inc., set forth in the Company's Proxy Statement dated March 6, 1995, under "Election of Directors----Principal Holders of Common Stock," at page 8, is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. Financial Statements The following consolidated financial statements of the Company and its subsidiaries, included in the Company's 1994 Annual Report at the pages indicated in parentheses, are incorporated by reference in Item 8: Consolidated Statements of Income----Years Ended December 31, 1994, 1993, and 1992 (page 20) (page 8 of Exhibit 13) Consolidated Balance Sheets----December 31, 1994 and 1993 (pages 24-25) (pages 9-10 of Exhibit 13) Consolidated Statements of Cash Flows----Years Ended December 31, 1994, 1993, and 1992 (page 27) (page 11 of Exhibit 13) Segment Information (pages 28-29) (pages 12-13 of Exhibit 13) Notes to Consolidated Financial Statements (pages 32-46) (pages 16-31 of Exhibit 13) (a)2. Financial Statement Schedules The consolidated financial statement schedules of the Company and its subsidiaries have been omitted because they are not required, are inapplicable, or are adequately explained in the financial statements. Financial statements of interests of 50% or less, which are accounted for by the equity method, have been omitted because they do not, considered in the aggregate as a single subsidiary, constitute a significant subsidiary. (a)3. Exhibits 2.1 Agreement and Plan of Merger dated as of July 10, 1994, among McKesson Corporation, Eli Lilly and Company, and ECO Acquisition Corporation(7) 2.2 Reorganization and Distribution Agreement dated as of July 10, 1994, by and among McKesson Corporation (a Delaware corporation), McKesson Corporation (a Maryland corporation), Clinical Pharmaceuticals, Inc., PCS Health Systems, Inc., and SP Ventures, Inc.(7) 3.1 Amended Articles of Incorporation 3.2 By-laws 4.1 Form of Indenture with respect to Contingent Payment Obligation Units dated March 18, 1986, between Eli Lilly and Company and Harris Trust and Savings Bank, as Trustee 4.2 Rights Agreement dated as of July 18, 1988, between Eli Lilly and Company and Bank One, Indianapolis, NA 4.3 Form of Indenture dated as of February 21, 1989, between Eli Lilly and Company and Merchants National Bank & Trust Company of Indianapolis, as Trustee 4.4 Form of Eli Lilly and Company Five Year Convertible Note 4.5 Form of Indenture with respect to Debt Securities dated as of February 1, 1991, between Eli Lilly and Company and Citibank, N.A., as Trustee 4.6 Form of Standard Multiple-Series Indenture Provisions dated, and filed with the Securities and Exchange Commission on, February 1, 1991 4.7 Form of Indenture dated as of September 5, 1991, among the Lilly Savings Plan Master Trust Fund C, as Issuer; Eli Lilly and Company, as Guarantor; and Chemical Bank, as Trustee(8) 4.8 Form of Fiscal and Paying Agency Agreement dated July 8, 1993, between Eli Lilly and Company and Citibank, N.A., Fiscal and Paying Agent, including forms of Notes, relating to 5-1/2% Notes Due 1998(8) 4.9 Form of Fiscal and Paying Agency Agreement dated February 7, 1995, between Eli Lilly and Company and Citibank, N.A., Fiscal and Paying Agent, including forms of Notes, relating to 8-1/8%% Notes Due February 7, 2000(8) 4.10 Form of Fiscal and Paying Agency Agreement dated February 7, 1995, between Eli Lilly and Company and Citibank, N.A., Fiscal and Paying Agent, including forms of Notes, relating to 8-3/8%% Notes Due February 7, 2005(8) 10.1 1984 Lilly Stock Plan, as amended 10.2 1989 Lilly Stock Plan, as amended 10.3 1994 Lilly Stock Plan 10.4 The Lilly Deferred Compensation Plan, as amended 10.5 The Lilly Directors' Deferred Compensation Plan, as amended 10.6 The Lilly Non-Employee Directors' Deferred Stock Plan, as amended 10.7 Eli Lilly and Company Senior Executive Bonus Plan, as amended 10.8 The Eli Lilly and Company Executive Bonus Plan 10.9 The Lilly Non-Employee Directors' Retirement Plan 10.10 Letter Agreement dated September 3, 1993, between the Company and Vaughn D. Bryson 11. Computation of Earnings Per Share on Primary and Fully Diluted Bases 12. Computation of Ratio of Earnings to Fixed Charges 13. Annual Report to Shareholders for the Year Ended December 31, 1994 (portions incorporated by reference into this Form 10-K) 21. List of Subsidiaries 23. Consent of Independent Auditors 27. Financial Data Schedule 99. Report to Holders of Eli Lilly and Company Contingent Payment Obligation Units (b) Reports on Form 8-K During the fourth quarter of 1994, the Company filed two reports on Form 8- K. On November 29, 1994, the Company filed a Form 8-K/A (amending a Form 8-K filed on November 23, 1994) reporting the acquisition of over 94% of the shares of common stock of McKesson Corporation pursuant to the Company's tender offer for those shares. On December 12, 1994, the Company filed a Form 8-K in order to file as exhibits certain documents and schedules required for the Company to issue two series of notes under its Registration Statements on Form S-3 (Reg. Nos. 33- 38347 and 33-56208, respectively) under Rule 415 of the Securities Act of 1933, as amended. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ELI LILLY AND COMPANY By s/Randall L. Tobias --------------------------------- (Randall L. Tobias, Chairman of the Board and Chief Executive Officer) March 20, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 20, 1995 by the following persons on behalf of the Registrant and in the capacities indicated. SIGNATURE TITLE --------------------------------------------------------------- s/Randall L. Tobias Chairman of the Board, Chief Executive ------------------------------ Officer, and a Director (principal (RANDALL L. TOBIAS) executive officer) s/James M. Cornelius Vice President, Finance, Chief ------------------------------ Financial Officer and a Director (JAMES M. CORNELIUS) (principal financial officer) s/Arnold C. Hanish Chief Accounting Officer ------------------------------ (principal accounting officer) (ARNOLD C. HANISH) s/Steven C. Beering, M.D. Director ------------------------------ (STEVEN C. BEERING, M.D.) s/James W. Cozad Director ------------------------------ (JAMES W. COZAD) s/Karen N. Horn Director ------------------------------ (KAREN N. HORN, Ph.D.) s/J. Clayburn La Force, Jr., Ph.D. Director ---------------------------------- (J. CLAYBURN LA FORCE, JR., Ph.D.) s/Kenneth L. Lay, Ph.D. Director ------------------------------ (KENNETH L. LAY, Ph.D.) s/Ben F. Love Director ------------------------------ (BEN F. LOVE) s/Stephen A. Stitle Director ------------------------------ (STEPHEN A. STITLE) s/Sidney Taurel Director ------------------------------ (SIDNEY TAUREL) s/August M. Watanabe, M.D. Director ------------------------------ (AUGUST M. WATANABE, M.D.) s/Alva O. Way Director ------------------------------ (ALVA O. WAY) s/Richard D. Wood Director ------------------------------ (RICHARD D. WOOD) TRADEMARKS Apralan(R) (apramycin sulfate, Elanco) Axid(R) (nizatidine, Lilly) Ceclor(R) (cefaclor, Lilly) Coban(R) (monensin sodium, Elanco) Compudose(R) (estradiol controlled-release implant, Elanco) Darvocet-N(R) (propoxyphene napsylate with acetaminophen, Lilly) Dobutrex(R) (dobutamine hydrochloride, Lilly) Dynabac(R) (dirithromycin, Lilly) Eldisine(R) (vindesine sulfate, Lilly) Humatrope(R) (somatropin of recombinant DNA origin, Lilly) Humulin(R) (human insulin of recombinant DNA origin, Lilly) lletin(R) (insulin, Lilly) Keflex(R) (cephalexin, Dista) Keftab(R) (cephalexin hydrochloride, Dista) Kefurox(R) (cefuroxime sodium, Lilly) Kefzol(R) (cefazolin sodium, Lilly) LorabidTM (loracarbef, Lilly) Mandol(R) (cefamandole nafate, Lilly) Maxiban(R) (narasin and nicarbazine, Elanco) Micotil(R) (tilmicosin phosphate, Elanco) Monteban(R) (narasin, Elanco) Nebcin(R) (tobramycin sulfate, Lilly) Oncovin(R) (vincristine sulfate, Lilly) Permax(R) (pergolide mesylate, Lilly) Prozac(R) (fluoxetine hydrochloride, Dista) RECAP(R) (PCS) Rumensin(R) (monensin sodium, Elanco) Tazidime(R) (ceftazidime, Lilly) Tylan(R) (tylosin, Elanco) Vancocin(R) (vancomycin hydrochloride, Lilly) Velban(R) (vinblastine sulfate, Lilly) _______________________________ *The terms "Company" and "Registrant" are used interchangeably herein to refer to Eli Lilly and Company or to Eli Lilly and Company and its consolidated subsidiaries, as the context requires. 1 Serves in office until successor is appointed 2 Serves in office until Guidant Corporation annual meeting presently scheduled on May 30, 1995 3 Became executive officer March 1995 4 Became executive officer January 1995 5 Retired from the Company and as an officer February 28, 1995 6 Retired from the Company and as an officer December 31, 1994 7 Copies of agreements and disclosure schedules ancillary to the Agreement and Plan of Merger and the Reorganization and Distribution Agreement are not filed with this report. Copies will be furnished to the Securities and Exchange Commission upon request. 8 Exhibits 4.7-4.10 are not filed with this report. Copies will be furnished to the Securities and Exchange Commission upon request. EX-4.3 2 Exhibit 4.3 _________________________________________ ELI LILLY AND COMPANY and MERCHANT'S NATIONAL BANK & TRUST COMPANY OF INDIANAPOLIS as Trustee ______________ INDENTURE Dated as of February 21, 1989 --------------- Five Year Convertible Notes, issuable in various series _________________________________________ ELI LILLY AND COMPANY Reconciliation and tie between Trust Indenture Act of 1939 and Indenture dated as of February 21, 1989 Trust Indenture Indenture Act Section Section Section310(a)(1)..............................609 (a)(2)....................................609 (a)(3)....................................Not Applicable (a)(4)....................................Not Applicable (b) ....................................608 610 Section311(a) ..............................613(a) (b) ....................................613(b) (b)(2)....................................703(a)(2) 703(b) Section312(a) ..............................701 702(a) (b) ....................................702(b) (c) ....................................702(c) Section313(a) ..............................703(a) (b) ....................................703(b) (c) ....................................703(a) 703(b) (d) ....................................703(c) Section314(a) ..............................704 (b) ....................................Not Applicable (c)(1)....................................102 (c)(2)....................................102 (c)(3)....................................Not Applicable (d) ....................................Not Applicable (e) ....................................102 Section315(a) ..............................601(a) (b) ....................................602 703(a)(6) (c) ....................................601(b) (d) ....................................601(c) (d)(1)....................................601(a)(1) (d)(2)....................................601(c)(2) (d)(3)....................................601(c)(3) (e) ....................................514 Section316(a) ..............................101 (a)(1)(A).................................502 512 (a)(1)(B).................................513 (a)(2)....................................Not Applicable (b) ....................................508 Section317(a)(1)..............................503 (a)(2)....................................504 (b) ....................................1003 Section318(a) ..............................107 PAGE Parties................................................ 1 Recitals of the Company................................ 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions............................. 1 Act..................................... 2 Authenticating Agent.................... 2 Authorized Newspaper.................... 2 Board of Directors...................... 2 Board Resolution........................ 2 Business Day............................ 2 Commission.............................. 3 Common Stock............................ 3 Company................................. 3 Company Request; Company Order.......... 3 Conversion Price........................ 3 Corporate Trust Office.................. 3 Corporation............................. 3 Date of Conversion...................... 4 Defaulted Interest...................... 4 Event of Default........................ 4 Holder.................................. 4 Indenture............................... 4 Interest Payment Date................... 4 Maturity................................ 4 Officers' Certificate................... 4 Opinion of Counsel...................... 4 Outstanding............................. 4 Paying Agent............................ 5 Permitted Transferee.................... 5 Person.................................. 6 Place of Payment........................ 6 Predecessor Security.................... 6 Redemption Date......................... 6 Redemption Price........................ 6 Regular Record Date..................... 6 Responsible Officer..................... 7 Securities.............................. 7 Security Register and Security Registrar 7 Special Record Date..................... 7 Stated Maturity......................... 7 Subsidiary.............................. 7 Trustee................................. 7 Trust Indenture Act..................... 7 Vice President.......................... 7 PAGE SECTION 102. Compliance Certificates and Opinions.... 8 SECTION 103. Form of Documents Delivered to Trustee.. 8 SECTION 104. Acts of Holders......................... 9 SECTION 105. Notices, Etc., to Trustee and Company.. 10 SECTION 106. Notice to Holders; Waiver.............. 10 SECTION 107. Conflict With Trust Indenture Act...... 11 SECTION 108. Effect of Headings and Table of Content 11 SECTION 109. Successors and Assigns................. 11 SECTION 110. Separability Clause.................... 11 SECTION 111. Benefits of Indenture.................. 11 SECTION 112. Governing Law.......................... 12 SECTION 113. Legal Holidays......................... 12 ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally........................ 12 SECTION 202. Form of Trustee's Certificate of Authentication....................... 13 ARTICLE THREE THE SECURITIES SECTION 301. Amount; Issuable in Series............. 13 SECTION 302. Denominations.......................... 15 SECTION 303. Execution, Authentication, Delivery and Dating........................... 15 SECTION 304. Temporary Securities................... 17 SECTION 305. Registration; Registration of Transfer and Exchange.......................... 17 SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities........................... 19 SECTION 307. Payment of Interest; Interest Rights Preserved............................ 20 SECTION 308. Persons Deemed Owners.................. 21 SECTION 309. Cancellation........................... 21 SECTION 310. Computation of Interest................ 21 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture............................ 21 SECTION 402. Application of Trust Money............. 23 SECTION 403. Satisfaction, Discharge and Defeasance of Securities of Any Series.......... 23 PAGE ARTICLE FIVE REMEDIES SECTION 501. Events of Default...................... 25 SECTION 502. Acceleration of Maturity; Rescission and Annulment........................ 26 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee........... 27 SECTION 504. Trustee May File Proofs of Claim....... 28 SECTION 505. Trustee May Enforce Claims Without Possession of Securities............. 29 SECTION 506. Application of Money Collected......... 30 SECTION 507. Limitation on Suits.................... 30 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest............................. 31 SECTION 509. Restoration of Rights and Remedies..... 31 SECTION 510. Rights and Remedies Cumulative......... 31 SECTION 511. Delay or Omission Not Waiver........... 32 SECTION 512. Control by Holders..................... 32 SECTION 513. Waiver of Past Defaults................ 32 SECTION 514. Undertaking for Costs.................. 33 SECTION 515. Waiver of Stay or Extension Laws....... 33 ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities..... 34 SECTION 602. Notice of Defaults...................... 35 SECTION 603. Certain Rights of Trustee............... 35 SECTION 604. Not Responsible for Recitals or Issuance of Securities................ 37 SECTION 605. May Hold Securities..................... 37 SECTION 606. Money Held in Trust..................... 37 SECTION 607. Compensation and Reimbursement.......... 37 SECTION 608. Disqualification; Conflicting Interests. 38 (a) Elimination of Conflicting Interest or Resignation..................... 38 (b) Notice of Failure to Eliminate Con- flicting Interest or Resign........ 38 (c) "Conflicting Interest" Defined...... 38 (d) Definitions of Certain Terms Used in This Section.................... 42 (e) Calculation of Percentages of Securities......................... 43 SECTION 609. Corporate Trustee Required; Eligibility. 44 SECTION 610. Resignation and Removal; Appointment of Successor.......................... 44 PAGE SECTION 611. Acceptance of Appointment by Successor.. 46 SECTION 612. Merger, Conversion, Consolidation or Succession to Business................ 48 SECTION 613. Preferential Collection of Claims Against Company........................ 48 (a) Segregation and Apportionment of Certain Collections by Trustee; Certain Exceptions....... 48 (b) Certain Creditor Relationships Excluded From Segregation and Apportionment..................... 51 (c) Definitions of Certain Terms Used in This Section.............. 51 SECTION 614. Authenticating Agents................... 52 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders............... 55 SECTION 702. Preservation of Information; Communications to Holders.............. 55 SECTION 703. Reports by Trustee...................... 57 SECTION 704. Reports by Company...................... 58 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms...................... 59 SECTION 802. Successor Corporation Substituted....... 60 ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders.................... 60 SECTION 902. Supplemental Indentures With Consent of Holders............................ 61 SECTION 903. Execution of Supplemental Indentures.... 63 SECTION 904. Effect of Supplemental Indentures....... 63 SECTION 905. Conformity With Trust Indenture Act..... 63 SECTION 906. Reference in Securities to Supplemental Indentures............................ 63 SECTION 907. Notice of Supplemental Indenture........ 64 PAGE ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium and Interest............................. 64 SECTION 1002. Maintenance of Office or Agency........ 64 SECTION 1003. Money for Payment of Securities to be Held in Trust........................ 65 SECTION 1004. Statement as to Compliance............. 66 ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Applicability of Article............... 67 SECTION 1102. Election to Redeem; Notice to Trustee.. 67 SECTION 1103. Selection by Trustee of Securities to be Redeemed.......................... 67 SECTION 1104. Notice of Redemption................... 68 SECTION 1105. Deposit of Redemption Price............ 68 SECTION 1106. Securities Payable on Redemption Date.. 69 SECTION 1107. Securities Redeemed in Part............ 69 SECTION 1108. Redemption at Holder's Option.......... 69 ARTICLE TWELVE CONVERSION SECTION 1201. Conversion Privilege................... 72 SECTION 1202. Manner of Exercise of Conversion Privilege ................ 73 SECTION 1203. Cash Adjustment Upon Conversion........ 74 SECTION 1204. Conversion Price....................... 74 SECTION 1205. Adjustment of Conversion Price......... 74 SECTION 1206. Effect of Reclassifications, Consolidations, Mergers or Sales on Conversion Privilege ............. 78 SECTION 1207. Taxes on Conversion.................... 79 SECTION 1208. Company to Reserve Capital Stock ...... 79 SECTION 1209. Disclaimer by Trustee of Respon- sibility for Certain Matters ........ 79 SECTION 1210. Company to Give Notice of Certain Events....................... 80 SIGNATURES AND SEALS................................... 82 ACKNOWLEDGMENTS........................................ 83 INDENTURE, dated as of February 21, l989, between ELI LILLY AND COMPANY, a corporation duly organized and existing under the laws of the State of Indiana (herein called the "Company"), having its principal office at Lilly Corporate Center, Indianapolis, Indiana 46285, and MERCHANT'S NATIONAL BANK & TRUST COMPANY OF INDIANAPOLIS, a national banking association duly organized and existing under the laws of the United States of America, as Trustee (herein called the "Trustee"), having its principal corporate trust office at One Merchant's Plaza, Indianapolis, Indiana 46255. RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured Five- Year Convertible Notes (herein called the "Securities"), to be issued in one or more series as in this Indenture provided. The Securities are issuable pursuant to a Plan and Agreement of Reorganization and Merger dated as of November 30, 1988, among the Company, Trans-SW Company, and Devices for Vascular Intervention, Inc. (the "Acquisition Agreement"). All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and (4) the words, "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Six, are defined in that Article. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Authenticating Agent" means any agent of the Trustee which at any time shall be appointed and acting pursuant to the provisions of Section 614. "Authorized Newspaper" means a newspaper of general circulation in New York City, Indianapolis, San Francisco or Los Angeles, printed in the English language and customarily published on each business day, whether or not published on Saturdays, Sundays or holidays. Whenever successive weekly publications in an Authorized Newspaper are authorized hereunder, they may be made (unless otherwise expressly provided herein) on the same or different days of the week and in the same or in different Authorized Newspapers. "Board of Directors" means the board of directors of the Company or the executive committee or any other duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day", when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment are authorized or obligated by or pursuant to law, regulation or executive order 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 of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" means the common stock ($.62-1/2) par value) of the Company as the same exists at the date of this Indenture as originally executed or as such stock may be constituted from time to time, except that for the purpose of Section 1205 the term "Common Stock" shall also mean and include stock of the Company of any class, whether now or hereafter authorized, which shall have the right to participate in the distribution of either earnings or assets of the Company, without limit as to amount or percentage. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor corporation. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its President or any Vice President, and by its Treasurer, any Assistant Treasurer, its Controller, any Assistant Controller, its Secretary or any Assistant Secretary, and delivered to the Trustee. "Conversion Price" means the price per share of Common Stock from time to time in effect at which Securities may be converted into Common Stock as provided in the Board Resolution or supplemental indenture establishing the series of convertible Securities. "Corporate Trust Office" means the principal office of the Trustee in the City of Indianapolis, State of Indiana, at which at any particular time its corporate trust business shall be principally administered, which office at the date hereof is that indicated in the introductory paragraph of this Indenture, except that with respect to presentation of Securities for registration or transfer and exchange, such term shall mean the office or agency in said City at which at any particular time its corporate agency business shall be conducted. "Corporation" includes corporations, associations, companies and business trusts. "Date of Conversion" means the date on which any Security shall be surrendered for conversion and notice given in accordance with the provisions of Article Twelve. "Defaulted Interest" has the meaning specified in Section 307. "Event of Default" has the meaning specified in Section 501. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of particular series of Securities established as contemplated by Section 301. "Interest Payment Date", when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security. "Maturity", when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the President or any Vice President, and by the Treasurer, the Controller, the Secretary or any Assistant Treasurer, Assistant Controller or Assistant Secretary, of the Company, and delivered to the Trustee. Each such Officers' Certificate shall contain the statements provided in Section 102, if applicable. "Opinion of Counsel" means a written opinion of counsel who may be counsel for or an employee of the Company. Each Opinion of Counsel shall contain the statements provided in Section 102, if applicable. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; and (iv) Securities converted into Common Stock. provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be 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 Company or any other obligor upon the Securities or any affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Securities on behalf of the Company. "Permitted Transferee" means (i) for an initial holder of a Security who is a natural person, (A) the initial holder's spouse, ancestors, linear descendents, whether adopted or by the whole or half blood, brothers and sisters, whether adopted or by the whole or half blood, or any spouse of such persons (collectively, such person's "Immediate Family"), (B) any charitable institution for which a deduction is allowable under Section 170, 2055 or 2522 of the Internal Revenue Code of 1986, as amended (each a "Charitable Institution"), and (C) a trust, partnership or corporation at least 90 percent of the beneficial interest, partnership interest or capital stock of which is is held by the initial holder or members of the initial holder's Immediate Family; (ii) for an initial holder that is either (x) a trust for the benefit of Charitable Institutions, a natural person's Immediate Family or both, or (y) a common law trust having as beneficiaries only natural persons and no more than 15 such persons, the beneficiaries of the trust; (iii) for an initial holder which is a corporation, the survivor of a merger or consolidation involving the initial holder; (iv) for an initial holder which is a corporation or partnership having as shareholders or partners only natural persons and no more than 15 such persons, the shareholders or partners of the initial holder; (v) transferees by operation of law upon the death of the initial holder and (vi) pledgees of the initial holder. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment", when used with respect to the Securities of any series, means the place or places where the principal of (and premium, if any) and interest on the Securities of that series are payable as specified in accordance with Section 301. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security, and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or Security shall be deemed to evidence the same debt mutilated, destroyed, lost or stolen Security. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date on the Securities of any series means the date specified for that purpose as contemplated by Section 301, which date shall be the fifteenth day of the calendar month in which such Interest Payment Date occurs such Interest Payment Date is the last day of a calendar month, whether or not such day shall be a Business Day. "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice chairman of the board of directors, the chairman or any vice chairman of the executive committee of the board of directors, the president, any Vice President, the secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or assistant trust officer, or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture. "Security Register" and "Security Registrar" have the respective meanings specified in Section 305. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity", when used with respect to any Security thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. "Subsidiary" means any corporation of which the Company directly or indirectly owns or controls stock which under ordinary circumstances (not dependent upon the happening of a contingency) has voting power to elect more than 50% of the board of directors of such corporation. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall 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 Securities of that series. "Trust Indenture Act" means the Trust Indenture Act of 1939 as amended and as further amended from time to time and in force at the date as of which this instrument was executed, except as provided in Section 905. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, 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, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) 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; (3) a statement that, in the opinion of each such individual, 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 (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representation with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representation with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders 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 and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The ownership of Securities shall be proved by the Security Register. (d) Any request, demand, authorization , direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such act upon such Security. SECTION 105. Notices, etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office and unless otherwise herein expressly provided, any such document shall be deemed to be sufficiently made, given, furnished or filed upon its receipt by a Responsible Officer of the Trustee, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company. SECTION 106. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to 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 regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 107. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Indenture by any of the provisions of the Trust Indenture Act, such required provision shall control. SECTION 108. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 110. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 111. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 112. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York. SECTION 113. Legal Holidays. In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity, provided that no interest shall accrue on such payment for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be. ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally. The Securities of each series shall be in substantially the form as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto (which form shall be in substantially the form of Exhibit C to the Acquisition Agreement), in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. If the form of Securities of any series is established by, or by action taken pursuant to, a Board Resolution, a copy of the Board Resolution together with an appropriate record of any action taken pursuant thereto, which Board Resolution or record of such action shall have attached thereto a true and correct copy of the form of Security approved by or pursuant to such Board Resolution, shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 303 for the authentication and delivery of such Securities. The Trustee's certificates of authentication shall be in substantially the form set forth in this Article. The definitive Securities 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, as evidenced by their execution of such Securities. SECTION 202. Form of Trustee's Certificate of Authentication. This is one of the Securities of the series designated therein issued under the within-mentioned Indenture. Merchant's National Bank & Trust Company of Indianapolis , --------------------------- as Trustee By -------------------------- Authorized Officer ARTICLE THREE THE SECURITIES SECTION 301. Amount; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is $50,000,000. There shall be established in or pursuant to a Board Resolution, and set forth in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, (1) the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities); (2) any limit upon the aggregate principal amount of the Securities of the series which 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 304, 305, 306, 906, 1107 or 1202); (3) the date or dates on which the principal (and premium, if any) of the Securities of the series is payable or the method of determination thereof; (4) the rate or rates, or the method of determination thereof, at which the Securities of the series shall bear interest, if any, the date or dates from which such interest shall accrue, the Interest Payment Dates on which such interest shall be payable and the Regular Record Date for the interest payable on any Interest Payment Date; (5) the place or places where the principal of (and premium, if any) and interest, if any, on the Securities of the series shall be payable and the office or agency for the Securities of the series maintained by the Company pursuant to Section 1002; (6) the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Company; (7) the terms, if any, upon which the Holders may convert their Securities into Common Stock; (8) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which the Securities of the series shall be issuable; (9) 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 pursuant to Section 502; (10) the application, if any, of Section 403; (11) any deletions or modifications permitted hereunder of or additions to the Events of Default set forth in Section 501 or covenants of the Company set forth in Article Ten pertaining to the Securities of the series; (12) the form of the Securities of the series; and (13) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture). All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to such Board Resolution and set forth in such Officers' Certificate or in any such indenture supplemental hereto. At the option of the Company, interest on the Securities of any series that bears interest may be paid by mailing a check to the address of any Holder as such address shall appear in the Securities Register. If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action together with such Board Resolution shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the series. SECTION 302. Denominations. The Securities of each series shall be issuable in registered form without coupons in such denominations as shall be specified as contemplated by Section 301. In the absence of any such provisions with respect to the Securities of any series, the Securities of such series shall be issuable in denominations of $10,000 and any integral multiple thereof. 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 Company executing the same may determine with the approval of the Trustee. SECTION 303. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its President or one of its Vice Presidents and by its Secretary or one of its Assistant Secretaries, under its corporate seal or a facsimile thereof reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. In authenticating such Securities and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon: (1) an Officers' Certificate complying with Section 102 and stating to the best knowledge of the signers of such certificate no Event of Default, with respect to any series of Securities shall have occurred and be continuing; and (2) an Opinion of Counsel complying with Section 102 and stating: (a) the form of such Securities have been established in conformity with the provisions of this Indenture; (b) the terms of such Securities have been established in conformity with the provisions of this Indenture; and (c) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting the enforcement of creditors' rights and to general equity principles. The Trustee shall have the right to decline to authenticate and deliver such Securities if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if the Trustee in good faith by its board of directors or trustees, executive committee, or a trust committee of directors or trustees and/or vice presidents shall determine that such action would expose the Trustee to personal liability. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. SECTION 304. Temporary Securities. Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of the same series of authorized denominations. Such exchange shall be made by the Company at its expense and without any charge therefor. Until so exchanged the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series. SECTION 305. Registration; Registration of Transfer and Exchange. The Securities may not be transferred, conveyed, assigned or negotiated unless the Security Registrar receives from the proposed transferee a completed and executed affidavit in the form attached as Exhibit A hereto, to the effect that the proposed transferee is a Permitted Transferee and will be the beneficial owner of the Security. The Company shall cause to be kept for each series of Securities at one of the offices or agencies maintained pursuant to Section 1002 a register (the register maintained in such office and in any other office or agency of the Company in a Place of Payment being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of such Securities and of transfers of such Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security of any series at the office or agency in a Place of Payment for that series, along with evidence satisfactory to the Company and the Trustee that the contemplated transfer is permissible pursuant to the terms hereof, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series and of like tenor, of any authorized denominations and of a like aggregate principal amount and Stated Maturity. In no case shall there be more than one Security Register for a series of Securities. At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series and of like tenor, of any authorized denominations and of a like aggregate principal amount and Stated Maturity, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906 or 1107 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange Securities of any series during a period beginning at the opening of business 15 days before the day of selection of Securities of such series to be redeemed and ending at the close of business on the day of the mailing of a notice of redemption of Securities of such series so selected for redemption, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company 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) connected therewith. Every new Security of any series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 307. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest will be paid by the Company to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing as to the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Securities of such series at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 308. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Section 307) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 309. Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by a Company Order. SECTION 310. Computation of Interest. Except as otherwise specified as contemplated by Section 301 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to any rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture or any series of Securities hereunder, the obligations of the Company to the Trustee under Section 607 and the rights, privileges and immunities of the Trustee under this Indenture and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under 402 and the last paragraph of Section 1003 shall survive. SECTION 402. Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Sections 401 and 403 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. SECTION 403. Satisfaction, Discharge and Defeasance of Securities of Any Series. If this Section is specified, as contemplated by Section 301, to be applicable to Securities of any series, the Company shall be deemed to have paid and discharged the entire indebtedness on all the Outstanding Securities of any such series and the Trustee, at the expense of the Company and upon Company Request, shall execute proper instruments acknowledging satisfaction and discharge of such indebtedness, when (1) either (A) with respect to all Outstanding Securities of such series, (i) the Company has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on all Outstanding Securities of such series for principal (and premium, if any) and interest to the Stated Maturity or any Redemption Date as contemplated by the penultimate paragraph of this Section, as the case may be; or (ii) the Company has deposited or caused to be deposited with the Trustee as obligations in trust for the purpose such amount of direct noncallable obligations of, or noncallable obligations the payment of principal of and interest on which is fully guaranteed by, the United States of America, or to the payment of which obligations or guarantees the full faith and credit of the United States of America is pledged, maturing as to principal and interest in such amounts and at such times as will, together with the income to accrue thereon, without consideration of any reinvestment thereof, be sufficient to pay and discharge the entire indebtedness on all Outstanding Securities of such series for principal (and premium, if any) and interest to the Stated Maturity or any Redemption Date as contemplated by the penultimate paragraph of this Section, as the case may be; or (B) the Company has properly fulfilled such other means of satisfaction and discharge as is specified, as contemplated by Section 301, to be applicable to the Securities of such series; and (2) the Company has paid or caused to be paid all other sums payable with respect to the Outstanding Securities of such series; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of the entire indebtedness on all Outstanding Securities of any such series have been complied with. Any deposits with the Trustee referred to in Section 403(1)(A) above shall be irrevocable and shall be made under the terms of an escrow trust agreement in form and substance satisfactory to the Trustee. If any Outstanding Securities of such series are to be redeemed prior to their Stated Maturity pursuant to any optional redemption provisions, the applicable escrow trust agreement shall provide therefor and the Company shall make such arrangements as are satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company. Upon the satisfaction of the conditions set forth in this Section with respect to all the Outstanding Securities of any series, the terms and conditions of such series, including the terms and conditions with respect thereto set forth in this Indenture, shall no longer be binding upon, or applicable to, the Company; provided that, the Company shall not be discharged from any payment obligations in respect of Securities of such series which are deemed not to be Outstanding under clause (iii) of the definition thereof if such obligations continue to be valid obligations of the Company under applicable law or pursuant to Section 305 or 306. ARTICLE FIVE REMEDIES SECTION 501. Events Of Default. "Event of Default", wherever used herein with respect to Securities of any series, means any one of the following events (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): (1) default in the payment of any interest upon any Security of that series, or any Security of any other series, when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of (or premium, if any, on) any Security of that series, or any Security of any other series, at its Maturity; or (3) default in the performance, or breach, of any covenant of the Company in this Indenture (other than a default pursuant to clauses (1) or (2) of this Section 501, and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (4) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or (5) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or (6) any other Event of Default provided with respect to Securities of that series. Subject to Section 601 hereof, the Trustee shall not be charged with any knowledge of such Event of Default unless (A) a Responsible Officer of the Trustee assigned to its Corporate Trust Office shall, as such officer, have actual knowledge of such Event of Default, or (B) written notice thereof shall have been given to the Trustee by the Company, by the Holder of any Security or by the trustee then acting under such indenture under which such Event of Default shall have occurred. SECTION 502. Acceleration of Maturity; Rescission Annulment. If an Event of Default with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series may declare the principal amount of all of the Securities of that series to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount shall become immediately due and payable. At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of more than 50% in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all securities of that series, (B) the principal of (and premium, if any, on) any Securities of that series which have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates prescribed therefor in such Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; (2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series which has become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for the period of grace provided for with respect to such Security, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, then immediately upon such a default, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal (and premium, if any) and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate or rates prescribed therefor in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon such Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities, wherever situated. If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, 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 on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Securities 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 the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively; and THIRD: The balance, if any, to the Person or Persons entitled thereto. SECTION 507. Limitation on Suits. No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) an Event of Default with respect to Securities of such series shall have occurred and be continuing and such Holder has previously given written notice to the Trustee of such continuing Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of more than 50% in principal amount of the Outstanding Securities of that series; it being understood and intended that no one or more of such Holders shall have any right in any manner whatsoever by virtue of, or by availing of, any provision of this Indenture (including without limitation the provisions of Section 512) to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders. SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 307) interest on such Security on the Maturity or Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and shall have such rights to convert such Securities as shall be set forth in the Board Resolution or supplemental indenture establishing such convertible series, and to institute suit for enforcement of such rights, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders 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. SECTION 51l. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or any acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. The Holders of more than 50.0% in principal amount of the Outstanding Securities of any series 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, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture and shall not involve the Trustee in personal liability, (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (3) the Trustee shall have been offered satisfactory indemnification as required by Section 603. SECTION 513. Waiver of Past Defaults. The Holders of more than 50% in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to such series and its consequences, except a default (1) in the payment of the principal of (premium, if any) or interest on any Security of such series or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected. Upon any such waiver, such default shall cease to exist with respect to such series, and any Event of Default with respect to such series arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 514. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security 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 Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities of any series, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security on or after the Maturity or Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date) or for the enforcement of the right to convert any Security. SECTION 515. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture: and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such 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) In case an Event of Default with respect to the Securities of any series has occurred and is continuing, the Trustee shall, with respect to the Securities of such series, exercise 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. (c) 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 (1) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) 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 of more than 50% in principal amount of the Outstanding Securities of any series, given pursuant to Section 512, 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 with respect to the Securities of such series. (d) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (e) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 602. Notice of Defaults. Within 90 days after the occurrence of any default hereunder with respect to the Securities of any series, the Trustee shall transmit by first- class mail to all Holders of Securities, as their names and addresses appear in the Security Register, notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of (or premium, if any) or interest on any Security, 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 Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders of Securities of such series; and provided, further, that in the case of any default of the character specified in Section 501(3) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series. SECTION 603. Certain Rights of Trustee. Except as provided in Section 601: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness 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 or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) 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, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (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 and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (h) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. SECTION 604. Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities or any shares of Common Stock issuable upon conversion of the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 605. May Hold Securities. The Trustee, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 608 and 613, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent. SECTION 606. Money Held in Trust. Money held by the Trustee or any Paying Agent in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee or any Paying Agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. SECTION 607. Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee upon demand from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or willful misconduct; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or willful misconduct on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim of liability in connection with the exercise or performance of any of its powers or duties hereunder. As security for the performance of the obligations of the Company under this Section the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of, premium, if any, or interest, if any, on particular Securities. SECTION 608. Disqualification; Conflicting Interests. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section, with respect to the Securities of any series, it shall, within 90 days after ascertaining that it has such conflicting interest, either eliminate such conflicting interest or resign with respect to the Securities of that series in the manner and with the effect hereinafter specified in this Article. (b) In the event that the Trustee shall fail to comply with the provisions of Subsection (a) of this Section with respect to the Securities of any series, the Trustee shall, within 10 days after the expiration of such 90-day period, transmit by mail to all Holders of Securities of that series, as their names and addresses appear in the Security Register, notice of such failure. (c) For the purposes of this Section, the Trustee shall be deemed to have a conflicting interest with respect to the Securities of any series if (1) the Trustee is trustee under this Indenture with respect to the Outstanding Securities of any series other than that series or is trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Company are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Securities issued under this Indenture, provided that there shall be excluded from the operation of this paragraph (A) the Indenture dated as of May 15, 1985 between the Company and the Trustee, as supplemented on May 15, 1985 and December 22, 1986, relating to the Company's Convertible Debentures Due 1994, Series A and Series B and (B) this Indenture with respect to the Securities of any series other than that series or any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding, if (i) this Indenture and such other indenture or indentures are wholly unsecured and such other indenture or indentures are hereafter qualified under the Trust Indenture Act, unless the Commission shall have found and declared by order pursuant to Section 305(b) or Section 307(c) of the Trust Indenture Act that differences exist between the provisions of this Indenture with respect to Securities of that series and one or more other series or the provisions of such other indenture or indentures which are so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to the Securities of that series and such other series or under such other indenture or indentures, or (ii) the Company shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that trusteeship under this Indenture with respect to the Securities of that series and such other series or such other indenture or indentures is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to the Securities of that series and such other series or under such other indenture or indentures; (2) the Trustee or any of its directors or executive officers is an obligor upon the Securities or an underwriter for the Company; (3) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with the Company or an underwriter for the Company; (4) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee or representative of the Company, or of an underwriter (other than the Trustee itself) for the Company who is currently engaged in the business of underwriting, except that (i) one individual may be a director or an executive officer, or both, of the Trustee and a director or an executive officer, or both, of the Company but may not be at the same time an executive officer of both the Trustee and the Company; (ii) if and so long as the number of directors of the Trustee in office is more than nine, one additional individual may be a director or an executive officer, or both, of the Trustee and a director of the Company; and (iii) the Trustee may be designated by the Company or by any underwriter for the Company to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent or depositary, or in any other similar capacity, or, subject to the provisions of paragraph (1) of this Subsection, to act as trustee, whether under an indenture or otherwise; (5) 10% or more of the voting securities of the Trustee is beneficially owned either by the Company or by any director, partner or executive officer thereof, or 20% or more of such voting securities is beneficially owned, collectively, by any two or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Company or by any director, partner or executive officer thereof, or is beneficially owned, collectively, by any two or more such persons; (6) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined), (i) 5% or more of the voting securities, or 10% or more of any other class of security, of the Company not including the Securities issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (ii) 10% or more of any class of security of an underwriter for the Company; (7) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined), 5% or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Company; (8) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined), 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of the Company; or (9) the Trustee owns, on May 15 in any calendar year, in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under paragraph (6), (7) or (8) of this Subsection. As to any such securities of which the Trustee acquired ownership through becoming executor, administrator or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of two years from the date of such acquisition, to the extent that such securities included in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after May 15 in each calendar year, the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such May 15. If the Company fails to make payment in full of the principal of (or premium, if any) or interest on any of the Securities when and as the same becomes due and payable, and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph, all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of paragraphs (6), (7) and (8) of this Subsection. The specification of percentages in paragraphs (5) to (9), inclusive, of this Subsection shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of paragraph (3) or (7) of this Subsection. For the purposes of paragraphs (6), (7), (8) and (9) of this Subsection only, (i) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (ii) an obligation shall be deemed to be "in default" when a default in payment of principal shall have continued for 30 days or more and shall not have been cured; and (iii) the Trustee shall not be deemed to be the owner or holder of (A) any security which it holds as collateral security, as trustee or otherwise, for an obligation which is not in default as defined in clause (ii) above, or (B) any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (C) any security which it holds as agent for collection, or as custodian, escrow agent or depositary, or in any similar representative capacity. (d) For the purposes of this Section: (1) The term "underwriter", when used with reference to the Company, means every person who, within three years prior to the time as of which the determination is made, has purchased from the Company with a view to, or has offered or sold for the Company in connection with, the distribution of any security of the Company outstanding at such time, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. (2) The term "director" means any director of a corporation or any individual performing similar functions with respect to any organization, whether incorporated or unincorporated. (3) The term "person" means an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization or a government or political subdivision thereof. As used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security. (4) The term "voting security" means any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the person. (5) The term "Company" means any obligor upon the Securities. (6) The term "executive officer" means the president, every vice president, every trust officer, the cashier, the secretary and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors. (e) The percentages of voting securities and other securities specified in this Section shall be calculated in accordance with the following provisions: (1) A specified percentage of the voting securities of the Trustee, the Company or any other person referred to in this Section (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person. (2) A specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding. (3) The term "amount", when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares and the number of units if relating to any other kind of security. (4) The term "outstanding" means issued and not held by or for the account of the issuer. The following securities shall not be deemed outstanding within the meaning of this definition: (i) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (ii) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; (iii) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; and (iv) securities held in escrow if placed in escrow by the issuer thereof; provided, however, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof. (5) A security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; provided, however, that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes and provided, further, that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. SECTION 609. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000 subject to supervision or examination by Federal or State authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said 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. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 610. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee and Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 611. (b) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 611 shall not have been delivered to the resigning Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. (c) The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of more than 50% in principal amount of the Outstanding Securities of such series, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with Section 608(a) after written request therefor by the Company or by any Holder, or (2) the Trustee for a series shall cease to be eligible under Section 609 and shall fail to resign after written request therefor by the Company or by any Holder of Securities of such series, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of 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, (i) the Company by a Board Resolution may remove the Trustee with respect to all Securities, or (ii) subject to Section 514, any Holder may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and such successor Trustee or Trustees shall comply with the applicable requirements of Section 611. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of more than 50% in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 611, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 611, any Holder may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. (f) The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series by mailing written notice of such event by first-class mail, postage prepaid, to all Holders of Securities of such series as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office. SECTION 611. Acceptance of Appointment by Successor. (a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder, subject, nevertheless, its lien, if any, provided for by Section 607. (b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) 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 hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, subject, nevertheless, to its lien, if any, provided for by Section 607. (c) Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be. (d) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 612. Merger, Conversion, Consolidation or Succession to Business. 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 all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 613. Preferential Collection of Claims Against Company. (a) Subject to Subsection (b) of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company within four months prior to a default, as defined in Subsection (c) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the Holders of the Securities and the holders of other indenture securities, as defined in Subsection (c) of this Section: (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or interest, effected after the beginning of such four months' period and valid as against the Company and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (2) of this Subsection, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Company upon the date of such default; and (2) all property received by the Trustee in respect of any claims as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such four months' period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the Company and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee: (A) to retain for its own account (i) payments made on account of any such claim by any Person (other than the Company) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third Person, and (iii) distributions made in cash, securities or other property in respect of claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such four months' period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such four months' period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default, as defined in Subsection (c) of this Section, would occur within four months; or (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in paragraph (B) or (C), as the case may be, to the extent of the fair value of such property. For the purposes of paragraphs (B), (C) and (D), property substituted after the beginning of such four months' period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned among the Trustee, the Holders and the holders of other indenture securities in such manner that the Trustee, the Holders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Company of the funds and property in such special account and before crediting to the respective claims of the Trustee and the Holders and the holders of other indenture securities dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, whether such distribution is made in cash, securities or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceedings for reorganization is pending shall have jurisdiction (i) to apportion among the Trustee, the Holders and the holders of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such special account and proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee and the Holders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any Trustee which has resigned or been removed after the beginning of such four months' period shall be subject to the provisions of this Subsection as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such four months' period, it shall be subject to the provisions of this Subsection if and only if the following conditions exist: (i) the receipt of property or reduction of claim, which would have given rise to the obligation to account, if such Trustee had continued as Trustee, occurred after the beginning of such four months' period; and (ii) such receipt of property or reduction of claim occurred within four months after such resignation or removal. (b) There shall be excluded from the operation of Subsection (a) of this Section a creditor relationship arising from: (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee; (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction or by this Indenture, for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advances and of the circumstances surrounding the making thereof is given to the Holders at the time and in the manner provided in this Indenture (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity; (4) an indebtedness created as a result of services rendered or premises rented; or an indebtedness created as a result of goods or securities sold in a cash transaction, as defined in Subsection (c) of this Section; (5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Company; and (6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self-liquidating paper, as defined in Subsection (c) of this Section. (c) For the purposes of this Section only: (1) the term "default" means any failure to make payment in full of the principal of (or premium, if any) or interest on any of the Securities or upon the other indenture securities when and as such principal or interest becomes due and payable; (2) the term "other indenture securities" means securities upon which the Company is an obligor outstanding under any other indenture (i) under which the Trustee is also trustee, (ii) which contains provisions substantially similar to the provisions of this Section, and (iii) under which a default exists at the time of the apportionment of the funds and property held in such special account; (3) the term "cash transaction" means any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand; (4) the term "self-liquidating paper" means any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Company for the purpose of financing the purchase, processing, manufacturing, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Company arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation (5) the term "Company" means any obligor upon the Securities; and (6) the term "Federal Bankruptcy Act" means the Bankruptcy Act or Title 11 of the United States Code. SECTION 614. Authenticating Agents. There may be an Authenticating Agent or Authenticating Agents with respect to one or more series of Securities appointed by the Trustee from time to time with power to act on its behalf and subject to its direction in connection with the authentication and delivery of Securities of such series issued upon exchange, transfer or redemption thereof as fully to all intents and purposes as though such Authenticating Agent had been expressly authorized to authenticate and deliver Securities, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as though authenticated by the Trustee hereunder. For all purposes of this Indenture (except in the case of original issuance of the Securities and the issuance of Securities in replacement of lost, stolen, mutilated or destroyed Securities), the authentication and delivery of Securities by an Authenticating Agent appointed pursuant to the provisions of this Section shall be deemed to be the authentication and delivery of such Securities "by the Trustee," and whenever this Indenture provides (except in the case of original issuance of the Securities and the issuance of Securities in replacement of lost, stolen, mutilated or destroyed Securities) that "the Trustee shall authenticate and deliver" Securities, such authentication and delivery by any Authenticating Agent shall be deemed to be authentication and delivery by the Trustee. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States of America or any State or the District of Columbia, with a combined capital and surplus of at least $10,000,000 and authorized under such laws to act as an authenticating agent, duly registered to act as such, if and to the extent required by applicable law and subject to supervision or examination by Federal, State or District of Columbia authority. If such corporation publishes reports of its condition at least annually, pursuant to law or the requirements of such 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. If at any time an Authenticating Agent shall cease to be eligible to act as such in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. 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 be the successor of the Authenticating Agent hereunder, if such successor corporation is otherwise eligible to act as such in accordance with the provisions of this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent or such successor corporation. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon a termination, or in case at any time any Authenticating Agent shall cease to be eligible to act as such in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent. Upon the appointment, at any time after the original issuance of any of the Securities, of any successor, additional or new Authenticating Agent, the Trustee shall give written notice of such appointment to the Company and shall at the expense of the Company mail notice of such appointment to all Holders of Securities of the series with respect to which such Authenticating Agent will serve, as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment pursuant to the provisions of this Section shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if initially named as an Authenticating Agent herein. No successor Authenticating Agent shall be appointed unless eligible to act as such in accordance with the provisions of this Section. Any Authenticating Agent by the acceptance of its appointment shall be deemed to have represented to the Trustee that it is eligible for appointment as Authenticating Agent under this Section and to have agreed with the Trustee that: it will perform and carry out the duties of an Authenticating Agent as herein set forth, including among other things the duties to authenticate and deliver Securities when presented to it in connection with exchanges, registrations of transfer or redemptions thereof; it will keep and maintain, and furnish to the Trustee from time to time as requested by the Trustee, appropriate records of all transactions carried out by it as Authenticating Agent and will furnish the Trustee such other information and reports as the Trustee may reasonably require; and it will notify the Trustee promptly if it shall cease to be eligible to act as Authenticating Agent in accordance with the provisions of this Section. Any Authenticating Agent by the acceptance of its appointment shall be deemed to have agreed with the Trustee to indemnify the Trustee against any loss, liability or expense incurred by the Trustee and to defend any claim asserted against the Trustee by reason of any acts or failures to act of such Authenticating Agent, but such Authenticating Agent shall have no liability for any action taken by it in accordance with the specific written direction of the Trustee. The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation and expenses for its services (to the extent such compensation is not paid by the Company), and the Trustee shall be entitled to be reimbursed for such payments subject to the provisions of Section 607. The provisions of Sections 104, 603(a), (b), (c), (d), (f) and (g), 604 and 607 (insofar as they pertain to indemnification) shall inure to the benefit of each Authenticating Agent to the same extent that they inure to the benefit of the Trustee, ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee: (a) semi-annually, not later than January 15 and July 15 in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of each series as of the preceding January 1 or July 1, as the case may be, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content, such list to be dated as of a date not more than 15 days prior to the time such list is furnished; notwithstanding the foregoing, so long as the Trustee is the Security Registrar with respect to a particular series of Securities, no such list shall be required to be furnished in respect of such series. SECTION 702. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders of each series contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders of each series received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished. (b) If three or more Holders of any series (herein referred to as "applicants") apply in writing to the Trustee and such application states that the applicants desire to communicate with other Holders of such series with respect to their rights under this Indenture or under such Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within ten business days after the receipt of such application, at its election, either (i) afford such applicants access to the information preserved at the time by the Trustee in accordance with Section 702(a), or (ii) inform such applicants as to the approximate number of Holders of Securities of such series whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 702(a), and as to the approximate cost of mailing to such Holders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail by first-class mail to each Holder of Securities of such series whose name and address appear in the information preserved at the time by the Trustee in accordance with Section 702(a) a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender the Trustee shall mail by first-class mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interest of the Holders of such series or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail by first-class mail copies of such material to all such Holders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with Section 702(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 702(b). SECTION 703. Reports by Trustee. (a) On or before July 15 of each year commencing with the year 1989, the Trustee shall transmit by first-class mail to all Holders, as their names and addresses appear in the Security Register, a brief report dated as of the preceding May 15 with respect to: (1) its eligibility under Section 609 and its qualifications under Section 608, or in lieu thereof, if to the best of its knowledge it has continued to be eligible and qualified under said Sections, a written statement to such effect; (2) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to report such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount of the Securities Outstanding on the date of such report; (3) the amount, interest rate and maturity date of all other indebtedness owing by the Company (or by any other obligor on the Securities) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor relationship arising in any manner described in Section 613(b)(2), (3), (4) or (6); (4) the property and funds, if any, physically in the possession of the Trustee as such on the date of such report; (5) any additional issue of Securities which the Trustee has not previously reported; and (6) any action taken by the Trustee in the performance of its duties hereunder which it has not previously reported and which in its opinion materially affects the Securities, except action in respect of a default, notice of which has been or is to be withheld by the Trustee in accordance with Section 602. b) The Trustee shall transmit by first-class mail to all Holders, as their names and addresses appear in the Security Register, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) since the date of the last report transmitted pursuant to Subsection (a) of this Section (or if no such report has yet been so transmitted, since the date of execution of this instrument) for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities, on property or funds held or collected by it as Trustee and which it has not previously reported pursuant to this Subsection, except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of the Securities Outstanding at such time, such report to be transmitted within 90 days after such time. (c) The Trustee shall, at the time of the transmission to the holders of Notes of any report pursuant to the provisions of this Section 703, file a copy of such report with each stock exchange upon which the Notes are listed and also with the Commission. The Company agrees to notify the Trustee when, as and if the Notes become listed on any stock exchange. SECTION 704. Reports by Company. The Company shall: (1) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (3) transmit by mail to all Holders, as their names and addresses appear in the Security Register, (A) within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission and (B) within 30 days after dispatch thereof to holders of Common Stock, any and all quarterly and annual reports sent to holders of Common Stock generally. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other corporation or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (1) in case the Company shall consolidate with or merge into another corporation or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the corporation formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed; and (2) if a supplemental indenture is required in connection with such transaction, the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 802. Successor Corporation Substituted. Upon any consolidation by the Company with or merger by the Company into any other corporation or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor corporation formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation had been named as the Company herein, and thereafter, except in the case of such lease, the predecessor corporation shall be relieved of all obligations and covenants under this Indenture and the Securities and may be liquidated and dissolved. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another corporation to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default with respect to all or any series of the Securities (and, if such Event of Default is applicable to less than all series of Securities specifying the series to which such Event of Default is applicable); or (4) to add to or change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons; or (5) to change or eliminate any of the provisions of this Indenture, provided that any such change or elimination shall become effective only when there is no Security Outstanding of any series created prior to the execution of such supplemental indenture which is adversely affected by such change in or elimination of such provision; or (6) to establish the form or terms of Securities of any series as permitted by Sections 201 and 301; or (7) 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 611(b); or (8) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided such other provisions as may be made shall not adversely affect the interests of the Holders of Securities of any series in any material respect; provided, however, that no such supplemental indenture shall modify the form of the Security set forth in Exhibit C to the Acquisition Agreement. SECTION 902. Supplemental Indentures With Consent of Holders. With the consent of the Holders of more than 50% in principal amount of the Outstanding Securities of each series affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may 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 modifying in any manner the rights of the Holders of Securities of such series under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change any Place of Payment where, or the coin or currency in which, any Security or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or (2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) modify any of the provisions of this Section or Section 513, except to increase any such percentage or to provide with respect to any particular series the right to condition the effectiveness of any supplemental indenture as to that series on the consent of the Holders of a specified percentage of the aggregate principal amount of Outstanding Securities of such series (which provision may be made pursuant to Section 301 without the consent of any Holder) or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby, provided, however, that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section, or the deletion of this proviso, in accordance with the requirements of Sections 611(b) and 901(7), or (4) adversely affect any conversion rights of any Security. 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 the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive (in addition to the opinion which the Trustee is entitled to receive pursuant to Section 303), and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but 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. SECTION 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 905. Conformity With Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 906. Reference in Securities to Supplemental Indentures. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series. SECTION 907. Notice of Supplemental Indenture. Promptly after execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Article Nine, the Company shall mail a notice to the Holders setting forth the general terms of such supplemental indenture. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium and Interest. The Company will duly and punctually pay the principal of (and premium, if any) and interest on the Securities in accordance with the terms of the Securities and this Indenture. SECTION 1002. Maintenance of Office or Agency. The Company will maintain an office or agency in each Place of Payment for each series of Securities where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and of any change in the location, of such office or agency. The Corporate Trust Office of the Trustee shall be such agency in the City of Indianapolis, State of Indiana, and the principal corporate trust office of each Paying Agent, if any, with respect to a series of securities shall be such agency in the city where such office is located unless in any case the Company shall maintain some other office or agency for such purpose and give the Trustee written notice of the location thereof. If at any time the Company shall fail to maintain such office or agency in each Place of Payment or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee or the principal corporate trust office of the Paying Agent, if any, in the City of Indianapolis, State of Indiana, as the case may be, and the Company hereby appoints the Trustee and the Paying Agent, if any, in the City of Indianapolis, State of Indiana, its agents to receive all such presentations, surrenders, notices and demands. SECTION 1003. Money for Payment of Securities to be Held in Trust. If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it will, on or before each due date of the principal of (and premium, if any) or interest on any of the Securities of such series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal, premium, if any, or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, prior to each due date of the principal of (and premium, if any) or interest on any Securities, deposit with a Paying Agent a sum sufficient to pay the principal, premium, if any, or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium, if any, or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company will cause each Paying Agent for any series of Securities, other than the Trustee, to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of principal of (and premium, if any) or interest on Securities of that series in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities of such series) in the making of any such payment of principal, premium, if any, or interest; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Security of any series and remaining unclaimed for three years after such principal, premium, if any, or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in an Authorized Newspaper in each Place of Payment, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. Statement as to Compliance. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year, a written statement signed by any two of the Chairman of the Board, the President, a Vice President or the Treasurer of the Company stating that: (1) a review of the activities of the Company during such year and of performance under this Indenture has been made under his supervision; and (2) to the best of his knowledge, based on such review, the Company has fulfilled all its obligations under this Indenture throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to him and the nature and status thereof. ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Applicability of Article. Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for Securities of any series) in accordance with this Article. SECTION 1102. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of less than all the Securities of any series, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities of such series to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with such restriction. SECTION 1103. Selection by Trustee of Securities to be Redeemed. If less than all the Securities of any series are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any securities 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 shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 1104. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall state: (1) the Redemption Date; (2) the Redemption Price; (3) if less than all the Outstanding Securities of any series are to be redeemed, the identification (and, in the case of partial redemption, the principal amounts) of the particular Securities to be redeemed; (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date; and (5) the place or places where such Securities are to be surrendered for payment of the Redemption Price. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1105. Deposit of Redemption Price. At or prior to the opening of business on the date one day prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date other than Securities or portions thereof called for redemption on that date which have been converted into Common Stock prior to the date of such deposit. If any Security or portion thereof called for redemption is converted into Common Stock, any money deposited with the Trustee or so segregated and held in trust for the redemption of such Security or portion thereof shall be paid to the Company upon Company Request or, if then held by the Company, shall be discharged from such trust. SECTION 1106. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provision Section 307. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security. SECTION 1107. Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series and Stated Maturity of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. SECTION 1108. Redemption at Holder's Option. (a) Mandatory Redemption. If, with respect to any series of Securities, at any time prior to the fifth anniversary of the date of original issuance of such series, (i) a Designated Event shall occur, (ii) on the day immediately prior to the first public announcement of the Designated Event or the occurrence of such Designated Event, whichever shall first occur (the "Designated Event Date") the Prevailing Rating of each series of the Securities or of any other class or series of senior debt of the Company by Standard & Poor's Corporation ("S&P") is at least BBB- or the Prevailing Rating of each series of the Securities or of any other class or series of senior debt of the Company by Moody's Investors Service, Inc. ("Moody's"), is at least Baa3, and (iii) on any date within 90 days after the Designated Event Date such Prevailing Rating is reduced, in the case of S&P to less than BBB- or, in the case of Moody's to less than Baa3, then each holder of Securities will have the right, at such holder's option, to require the Company to redeem all (but not less than all) of the Securities held by such holder at the applicable Put Price. The first date on which all of the conditions specified in clauses (i) through (iii) are satisfied in respect of any Designated Event is referred to herein as a "Redemption Trigger Date". The Redemption Date in respect of any Designated Event will be the 60th day after the Redemption Trigger Date in respect of such Designated Event (unless such day is not a business day in which case the Redemption Date will be the next succeeding business day). On or before the 30th day after each Redemption Trigger Date, the Company will mail to all holders of Securities a notice (a "Redemption Obligation Notice") describing such holders' right of mandatory redemption, the date before which such right of redemption must be exercised, the procedures that holders must follow to exercise such right of redemption and the applicable Redemption Date. The Company will also cause a copy of such notice to be published in a newspaper of general circulation in the Borough of Manhattan, City of New York. In order for a Security to be validly tendered for redemption, the Company must receive, no later than 4:30 p.m. Indianapolis time on the fifth business day preceding the applicable Redemption Date, the Security or Securities to be redeemed (accompanied by duly endorsed instruments of transfer in blank) together with a written notice of election to redeem Securities (a "Redemption Notice"'), at the Corporate Trust Office (or such other agency or office of the Company in the City of Indianapolis, Indiana, of which the Company may notify holders of the Securities in the applicable Redemption Obligation Notice. All Redemption Notices and tenders of Securities for redemption pursuant thereto will be irrevocable. All payments of the Redemption Price of Securities will be made to the registered holder of the redeemed Security in New York Clearing House funds at the above office or will be mailed to such holder at its address listed on the register maintained by the Trustee. Notwithstanding the foregoing, in the event of a Triggering Event occurring on or before the first anniversary of the original issuance of a particular series of Securities, the Holders of such series of Securities shall in no event be entitled to tender such Securities for redemption prior to such first anniversary, and the Redemption Date shall be deemed to be thirty days after such first anniversary. (b) Designated Event. The term "Designated Event" means any one or more of the following: (i) (A) the Company directly or indirectly, consolidates with or merges into any other Person, or sells, leases or otherwise transfers all or substantially all of its assets to any Person, or (B) any agreement is entered into by the Company providing for any of the foregoing; or (ii) any person or group (as defined in Section 13(d)(3) of the 1934 Act), other than any employee benefit plan of the Company or any Subsidiary, and other than the Lilly Endowment, Inc., together with any affiliates and associates of any thereof, becomes or is the beneficial owner (as defined in Section 13(d)(3) of the 1934 Act) of Voting Securities representing 30% or more of the Voting Power of all outstanding Voting Securities (the Designated Event specified in this clause (ii) shall be conclusively presumed to have occurred upon the filing with the Commission of a Schedule 13D or an amendment thereto pursuant to Section 13(d) of the 1934 Act and the rules and regulations thereunder, indicating that the Designated Event specified in this clause (ii) occurred); and and, in the case of either clause (i) or (ii) of this Section 1108(b) such Designated Event has not been approved by a majority of the Disinterested Directors. (c) Certain Definitions. "Disinterested Director" means (i) any member of the Board of Directors who was serving as such prior to the occurrence of any Designated Event or (ii) any person who subsequently becomes a member of the Board of Directors to fill a vacancy created by an increase in the size of the Board of Directors, if such person's nomination for election to the Board of Directors is approved by a majority of the Disinterested Directors, or (iii) any successor of a Disinterested Director, if such person's nomination for election to the Board of Directors is approved by a majority of the Disinterested Directors. "Prevailing Rating" of any series of the Securities on any date means the rating of such series of Securities by S&P or Moody's as of the close of business on such date. "Put Price" means for any Security (i) 100% of the principal amount of such Security, and (ii) all accrued but unpaid interest on such Security to the Redemption Date. "Voting Power" means the aggregate number of votes to which the holders of all outstanding Voting Securities are entitled in the election of directors of the Company, assuming conversion or exchange of all outstanding Convertible Securities at the highest conversion or exchange rate at which they can be converted or exchanged and assuming the exercise of all Options. "Voting Securities" means all of the Company's (i) Common Stock, (ii) securities for any class or kind having power to vote for the election of directors ("Other Voting Securities"), (iii) securities that are convertible into or exchangeable for Common Stock or Other Voting Securities ("Convertible Securities") (which shall be counted at the highest conversion rate at which they can be converted or exchanged) and (iv) options or other rights to purchase or acquire Common Stock, Other Voting Stock, or Convertible Securities (whether presently exercisable or not) issued and outstanding as of such date ("Options"), and shall include in all cases any such Voting Securities during any period such Voting Securities may be subject to the voting limitation provisions of the Indiana Control Share Statue. ARTICLE TWELVE CONVERSION SECTION 1201. Conversion Privilege. Subject to and upon compliance with the provisions of this Article Twelve, at the option of the Holder, any series of Securities, may, at the times and prices set forth in the supplemental indenture establishing such series, be converted at the principal amount thereof into shares of Common Stock, as said shares shall be constituted at the Date of Conversion. In case a Security or a portion thereof is subject to a valid election to redeem pursuant to Section 1108 hereof, such conversion right in respect of the Security or portion so to be redeemed shall expire at the close of business on the Redemption Date, unless the Company shall default in the payment of the Put Price and accrued interest, if any. SECTION 1202. Manner of Exercise of Conversion Privilege. In order to exercise the conversion privilege, the Holder of any Security to be converted shall surrender such Security to the Company at its office or agency in the City of Indianapolis, State of Indiana, together with the conversion notice which shall be provided on the Security (or separate written notice) duly executed, and, if so required by the Company, accompanied by instruments of transfer, in form satisfactory to the Company and to the Trustee, duly executed by the Holder or by his duly authorized attorney in writing. Securities so surrendered during the period from the close of business on the Regular Record Date preceding an Interest Payment Date to the opening of business on such Interest Payment Date shall (unless the Holder of any such Securities or the portion thereof being converted shall have elected pursuant to Section 1108 hereof to cause the Company to redeem such Securities or the portion thereof being converted on a Redemption Date during such period, in which event no interest shall be payable with respect to such Securities or portion thereof, as the case may be, following such Redemption Date) also be accompanied by payment in the form of a certified or cashier's check or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of such Securities then being converted; provided, however, that no such payment need be made if there shall exist, at the time of conversion, a default in the payment of interest on the Securities. Except as provided in the immediately preceding sentence, no adjustment shall be made for interest accrued on any Security that shall be converted or for dividends on any shares of Common Stock that shall be delivered upon the conversion of such Security. The funds so delivered to such office or agency shall be paid to the Company on or after such Interest Payment Date, unless the Company shall default in the payment of the interest due on such Interest Payment Date, in which event such funds shall be repaid to the Person who delivered the same. As promptly as practicable after the surrender of any such Security for conversion as aforesaid, the Company shall deliver at said office or agency to such Holder, or on his written order, a certificate or certificates for the number of full shares deliverable upon the conversion of such Security or portion thereof and a check or cash in respect of any fraction of a share of Common Stock otherwise deliverable upon such conversion, all as provided in this Article Twelve, together with a Security or Securities in principal amount equal to the unconverted portion, if any, of the Security so converted. Such conversion shall be deemed to have been effected on the date on which such notice shall have been received at said office or agency and such Security shall have been surrendered as aforesaid, and the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock shall be deliverable upon such conversion shall be deemed to have become on said date the Holder or Holders of record of the shares represented thereby, provided, however, that any such surrender on any date when the stock transfer books of the Company shall be closed shall constitute the Person or Persons in whose name or names the certificates are to be delivered as the record Holder or Holders thereof for all purposes on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date of such surrender. SECTION 1203. Cash Adjustment Upon Conversion. The Company shall not be required to deliver fractions of shares of Common Stock upon conversions of Securities. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be deliverable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Securities so surrendered. If any fractional interest in a share of Common Stock would be deliverable upon the conversion of any Security or Securities, the Company shall make an adjustment therefor in cash equal to the current market value of such fractional interest computed to the nearest cent either on the basis of the closing market price as reported in the New York Stock Exchange - Composite Transactions Index (or successor index thereto) on the last Business Day prior to the Date of Conversion or, if there were no trades on such last Business Day, on the basis of the closing market price as reported in the New York Stock Exchange - Composite Transactions Index on the next preceding day on which a trade was made. SECTION 1204. Conversion Price. The initial Conversion Price shall be as specified in the supplemental indenture establishing the series of convertible Securities, subject to adjustment as provided in this Article Twelve. SECTION 1205. Adjustment of Conversion Price. The Conversion Price shall be adjusted from time to time as follows: (a) In case the Company shall, at any time or from time to time while any of the Securities are outstanding, (i) pay a dividend or make a distribution on its Common Stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, or (iii) combine its outstanding Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior thereto shall be adjusted so that the Holder of any Security thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock or other securities of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above, had such Security been converted immediately prior to the happening of such event. An adjustment made pursuant to this subdivision (a) shall become effective, in the case of a dividend, on the payment date retroactively to immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such dividend, subject to the provisions of paragraph (f) of this Section 1205, and shall become effective in the case of a subdivision or combination immediately after the opening of business on the day following the day when such subdivision or combination, as the case may be, becomes effective. (b) In case the Company shall, at any time or from time to time while any of the Securities are outstanding, issue rights or warrants to all holders of its shares of common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share of Common Stock (as defined in paragraph (d) below) at such record date, the Conversion Price in effect immediately prior to the issuance of such rights or warrants shall be adjusted as follows: the number of shares of Common Stock into which $10,000 principal amount of Securities was theretofore convertible shall be multiplied by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to such record date plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding immediately prior to such record date plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such current market price; and the Conversion Price shall be adjusted by dividing $10,000 by the new number of shares into which $10,000 principal amount of Securities shall be convertible as aforesaid. Such adjustment shall become effective on the date of such issuance retroactively to immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such rights or warrants, subject to the provisions of paragraph (f) of this Section 1205. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less that such current market price, and in determining the aggregate offering price of such shares, there shall be taken into account any consideration received by the-Company for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (c) In case the Company shall, at any time or from time to time while any of the Securities are outstanding, distribute to all holders of shares of its Common Stock evidences of its indebtedness or securities or assets (excluding cash dividends or cash distributions payable out of consolidated net earnings or retained earnings, or dividends payable in shares of Common Stock) or rights or warrants to subscribe therefor (but excluding rights or warrants referred to in paragraph (b) above), the Conversion Price in effect immediately prior to such distribution shall be adjusted by multiplying the number of shares of Common Stock into which $10,000 principal amount of Securities was theretofore convertible by a fraction, of which the numerator shall be the current market price per share of Common Stock (as defined in paragraph (d) below) on the record date for such distribution, and of which the denominator shall be such current market price per share of the Common Stock, less the then fair market value (as determined by the Board of Directors of the Company, whose determination shall be conclusive) of the portion of such evidences of indebtedness, securities or assets or of such subscription rights or warrants so distributed applicable to one share of Common Stock; and the Conversion Price shall be adjusted by dividing $10,000 by the new number of shares into which $10,000 principal amount of Securities shall be convertible as aforesaid. Such adjustment shall become effective on the date of such distribution retroactively to immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such distribution, subject to the provisions of paragraph (f) of this Section 1205. For the purposes of this paragraph (c) consolidated net earnings or retained earnings shall be computed by adding thereto all charges against retained earnings on account of dividends paid in shares of Common Stock in respect of which the conversion price has been adjusted, all as determined by the independent public accountants then regularly auditing the accounts of the Company, whose determination shall be conclusive. (d) For the purpose of any computation under paragraphs (b) and (c) above, the current market price per share of Common Stock at any date shall be deemed to be the average of the market values of the shares of Common Stock for the ten consecutive Business Days immediately preceding the day in question. The market value of the Common Stock for each day shall be determined as provided in Section 1203 hereof. (e) Except as herein otherwise provided, no adjustment in the Conversion Price shall be made by reason of the issuance, in exchange for cash, property or services, of shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock, or carrying the right to purchase any of the foregoing. (f) If the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive any dividend or any subscription or purchase rights or any distribution and shall, thereafter and before the distribution to shareholders of any such dividend, subscription or purchase rights or distribution, legally abandon its plan to pay or deliver such dividend, subscription or purchase rights or distribution, then no adjustment of the Conversion Price shall be required by reason of the taking of such record. (g) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this paragraph (g) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article Twelve shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (h) Whenever the Conversion Price is adjusted as herein provided, the Company shall (i) forthwith place on file at the Corporate Trust Office of the Trustee an Officers' Certificate showing in detail the facts requiring such adjustment and the Conversion Price after such adjustment and shall exhibit the same from time to time to any Holder desiring an inspection thereof, and (ii) cause a notice stating that such adjustment has been effected and the adjusted Conversion Price to be mailed to the holders of Securities at their last addresses as they shall appear on the Security Register. SECTION 1206. Effect of Reclassifications, Consolidations, Mergers or Sales on Conversion Privilege. In case of any reclassification or change of outstanding shares of the class of Common Stock issuable upon conversion of the Securities (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in case of any merger or consolidation of the Company with one or more other corporations (other than a merger of consolidation in which the Company is the continuing corporation and which does not result in any reclassification or change of outstanding shares of Common Stock issuable upon conversion of the Securities), or in case of the merger of the Company into another corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the holder of each Security then outstanding shall have the right to convert such Security into the kind and amount of shares of capital stock or other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock into which such Security might have been converted immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. In any such case the Company, or such successor or purchasing corporation as the case may be, shall execute with the Trustee a supplemental indenture (which shall conform to the Trust Indenture Act of 1939 as in force at the date of the execution of such supplemental indenture) containing provisions to the effect set forth above in this Section 1206 and providing further for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article Twelve; and any such adjustment which shall be approved by the Board of Directors and set forth in such supplemental indenture shall be conclusive for all purposes of this Section, and the Trustee shall not be under any responsibility to determine the correctness of any provision contained in such supplemental indenture relating to either the kind or amount of shares of stock or securities or property receivable by Debentureholders upon the conversion of their Debenture after any such reclassification, change, consolidation, merger, sale, or conveyance. The above provisions of this Section 1206 shall similarly apply to successive reclassifications, changes, consolidations, mergers, sales and conveyances. SECTION 1207. Taxes on Conversions. The issue of stock certificates on conversions of Securities shall be made without charge to the converting Holder for any tax in respect of the issue thereof. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares in any name other than that of the Holder of any Security converted, and the Company shall not be required to issue or deliver any such stock certificate unless and until the Person or Persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 1208. Company to Reserve Capital Stock. The Company shall at all times reserve and keep available out of the aggregate of its authorized but unissued shares and of its issued shares held in its treasury, or both, for the purpose of effecting the conversion of the Securities, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding convertible Securities. If any shares of Common Stock reserved or to be reserved for the purpose of conversion of Securities hereunder require registration with or approval of any governmental authority under any Federal or State law before such shares may be validly delivered upon conversion, then the Company covenants that it will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. The Company covenants that all shares of Common Stock which may be delivered upon conversion of Securities shall upon delivery be fully paid and nonassessable by the Company and free from all taxes, liens and charges with respect to the issue or delivery thereof. SECTION 1209. Disclaimer by Trustee of Responsibility for Certain Matters. Neither the Trustee nor any conversion agent shall at any time be under any duty or responsibility to any Holder of Securities to determine whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same, subject, however, to the provisions of Section 601 of this Indenture. Neither the Trustee nor any conversion agent shall be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any securities or property which may at any time be issued or delivered upon the conversion of any Security; and neither of them makes any representation with respect thereto. Neither the Trustee nor any conversion agent shall be responsible for any failure of the Company to make any cash payment or to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property upon the surrender of any Security for the purpose of conversion or, subject to Section 601, to comply with any of the covenants of the Company contained in this Article Twelve. SECTION 1210. Company to Give Notice of Certain Events. In the event (1) that the Company shall pay any dividend or make any distribution to the holders of shares of Common Stock otherwise than a regular quarterly dividend in cash charged against consolidated net earnings or retained earnings of the Company and its consolidated subsidiaries or in Common Stock; or (2) that the Company shall offer for subscription or purchase, pro rata, to the holders of shares of Common Stock any additional shares of stock of any class or any securities convertible into or exchangeable for stock of any class; or (3) of any reclassification or change of outstanding shares of the class of Common Stock issuable upon the conversion of the Securities (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or of any merger or consolidation of the Company with, or merger of the Company into, another corporation (other than a merger or consolidation in which the Company is the continuing corporation and which does not result in any reclassification or change of outstanding shares of Common Stock issuable upon conversion of the Securities), or of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety; then, and in any one or more of such events, the Company will give to the Trustee and each conversion agent written notice thereof at least fifteen days prior to (i) the record date fixed with respect to any of the events specified in (1) and (2) above, and (ii) the effective date of any of the events specified in (3) above; and shall mail promptly a copy of such notice to the Holders of Securities at their last addresses as they shall appear upon the Security Register. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale or transfer. * * * This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. SIGNATURES AND SEALS IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written (Corporate Seal) ELI LILLY AND COMPANY ATTEST: __________________________ By________________________ (Corporate Seal) MERCHANT'S NATIONAL BANK & TRUST COMPANY OF INDIANAPOLIS, as Trustee ATTEST: __________________________ By________________________ ACKNOWLEDGMENT STATE OF ) : ss.: COUNTY OF ) On the ________ day of , in the year 1989, before me personally came , to me known, who, being by me duly sworn, did depose and say that he resides at __________________, that he is _______________, of ELI LILLY AND COMPANY, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. (NOTARIAL SEAL) __________________________ ACKNOWLEDGMENT STATE OF ) : ss.: COUNTY OF ) On the -------------- day of ---------------, in the year 1989, before me personally came , to me known, who, being by me duly sworn, did depose and say that he resides at ------------------, that he is ---- --------------, of MERCHANT'S NATIONAL BANK & TRUST COMPANY OF INDIANAPOLIS, one of the corporations described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that he signed his name thereto by like authority. (NOTARIAL SEAL) ------------------------------------ EX-4.4 3 Exhibit 4.4. Form of Eli Lilly and Company Five Year Convertible Note ELI LILLY AND COMPANY Five Year Convertible Note, Series A This Note is not transferable and is non-negotiable except as set forth in the indenture mentioned in this Note. For purposes of Sections 1273 and 1275 of the Internal Revenue Code and regulations thereunder, the issue price is $740.90 and the original issue discount is $259.10 per $1,000 of principal amount, the yield to maturity is 8.62% per annum, and the issue date is February 21, 1989. Pursuant to regulations under Section 1272, the "exact method" will be utilized to allocate original issue discount to short accrual periods. The amount of the original issue discount to be allocated to the short accrual period ending on the first interest payment date is $11.32 per $1000 of principal amount. Eli Lilly and Company, an Indiana corporation (herein called the "Company", which term includes any successor corporation under the Indenture referred to in this Note), for value received, hereby promises to pay to ------------------, or registered assigns, the principal sum of ------------------------- Dollars on February 21, 1994, at the office or agency of the Company referred to below, and to pay interest thereon from the date of this Note or from the most recent Interest Payment Date to which Interest has been paid semi-annually on June 1 and December 1, in each year, commencing on June 1, 1989, and at the Maturity, at the rate of 2.13% per annum until the principal hereof is paid or duly provided for. The Interest so payable and punctually paid, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse of this Note, be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the Regular Record Date for such Interest, which shall be the May 15 or November 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or provided for shall immediately cease to be payable to the registered Holder on such Regular Record Date, and either shall be paid to the Person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee (notice of which shall be given to Holders of Notes not less than 10 days prior to such Special Record Date) or shall be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said indenture. Payment of the principal of (and premium, if any) and interest on this Note will be made at the office or agency of the Company maintained for that purpose in the City of Indianapolis, State of Indiana, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of Interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear on the Note Register. Interest on this Note shall be computed on the basis of a 360 day year of twelve 30-day months. Reference is hereby made to the further provisions of this Note set forth on the reverse of this Note, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication on this Note has been duly executed by the Trustee referred to on the reverse of this Note by manual signature, this Note shall not be entitled to any benefit under said Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this Instrument to be duly executed under its corporate seal. Dated: Eli Lilly and Company Attest: By s/Richard D. Wood -------------------------- Chairman of the Board President and Chief Executive Officer s/Dale K. Lewis -------------------- Secretary (seal) TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series designated therein issued under the within-mentioned indenture. MERCHANT'S NATIONAL BANK & TRUST COMPANY OF INDIANAPOLIS, as Trustee By Authorized Officer (reverse side) This Note is one of a duly authorized issue of Notes of the Company designated as its Five Year Convertible Notes, Series A (herein called the "Notes"), limited in aggregate principal amount to $12,500,000, which may be issued under an indenture and a supplemental indenture (herein collectively referred to as the "Indenture") dated as of February 21, 1989, between the Company and Merchant's National Bank & Trust Company of Indianapolis, as Trustee (herein called the "Trustee", which term includes any successor Trustee under the Indenture), to which indenture (and all indentures supplemental to the indenture) reference is made for a statement of the respective rights under the Indenture of the Company, the Trustee and the Holders of the Notes, and of the terms upon which the Notes are, and are to be, authenticated and delivered. The Notes are a duly authorized series of securities issued under the Indenture. Subject to the provisions of the Indenture, the Holder of this Note is entitled, at his option, at any time on or after one year from the date of original issuance of the Notes and on or before February 21, 1994 (except that, in case the Holder of this Note shall exercise his right to cause the Company to purchase all (but not less than all) of the Notes held by such Holder pursuant to the Indenture, such right shall terminate with respect to this Note at the close of business on the date fixed for redemption, if such redemption is effected, as provided in the Indenture), to convert the principal amount of this Note (or any portion of this Note which is $10,000 or an integral multiple of $10,000) into shares of Common Stock of the Company, as said shares shall be constituted at the Date of Conversion, at the Conversion Price equal to $92.8875 for each share of Common Stock, or at the adjusted Conversion Price in effect at the Date of Conversion determined as provided in the Indenture, upon surrender of this Note, together with the conversion notice on this Note duly executed, to the Company at the designated office or agency of the Company in the City of Indianapolis, State of Indiana, accompanied (if so required by the Company) by instruments of transfer, in form satisfactory to the Company and to the Trustee, duly executed by the Holder or by his duly authorized attorney in writing. Such surrender shall, if made during any period beginning at the close of business on a Regular Record Date and ending at the opening of business on the Interest Payment Date next following such Regular Record Date (unless the Holder of this Note shall have exercised his right to cause the Company to purchase all (but not less than all) of the Notes held by such Holder pursuant to the Indenture on a Redemption Date during such period, in which event no interest shall be payable with respect to this Note following such Redemption Date), also be accompanied by payment in the form of a certified or cashier's check or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of this Note then being converted. Except as provided in the immediately preceding sentence, no adjustment is to be made on conversion for interest accrued hereon or for dividends on shares of Common Stock issued on conversion. The Company is not required to issue fractional shares upon any such conversion, but shall make adjustment for fractional shares in cash on the basis of the current market value of such fractional interest as provided in the Indenture. The Notes may not be redeemed by the Company at any time prior to their final maturity date. Pursuant to the Indenture, in certain circumstances the Holder has the right to cause the Company to purchase all (but not less than all) of the Notes held by such Holder, at 100% of the principal amount thereof, plus accrued but unpaid interest to the Redemption Date. In the case of any redemption of Notes, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Notes, or one or more Predecessor Notes, of record at the close of business on the relevant Record Date referred to on the face of this Note. Notes (or portions of Notes) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the date fixed for redemption. In the event of conversion of this Note in part only, a new Note or Notes for the unconverted portion of this Note shall be issued in the name of the Holder of this Note upon the surrender of this Note. If an Event of Default shall occur and be continuing, the principal of all the Notes may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as provided in the Indenture, the amendment of the Indenture and the modification of the rights and obligations of the Company and the rights of the Holders of the Notes under the Indenture at any time by the Company with the consent of the Holders of a majority in aggregate principal amount of the Notes at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holders of such specified percentages in aggregate principal amount of the Notes at the time outstanding shall be conclusive and binding upon the Holder of this Note and upon all future Holders of this Note and of any Note issued upon the transfer of this Note or in exchange for this Note or in lieu of this Note whether or not notation of such consent or waiver is made upon this Note. No reference in this Note to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Note at the times, places, and rate, and in the coin or currency, prescribed in this Note. In the event of the consolidation or merger of the Company into or of the transfer of its assets substantially as an entirety to, a successor corporation, such successor corporation shall assume payment of the Notes and performance of every covenant of the Indenture on the part of the Company to be performed, and shall be substituted for the Company; and in the event of any such transfer the Company shall be discharged from all obligations and covenants in respect of the Notes and the Indenture and may be dissolved and liquidated, all as more fully set forth in the Indenture. This Note is not transferable and is non-negotiable, except as set forth in the Indenture. As provided in the Indenture and subject to the limitations therein set forth, the transfer of this Note is registrable on the Security Register of the Company, upon surrender of this Note for registration of transfer at the office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar, duly executed by the Holder of this Note or his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Notes are issuable only in registered form without coupons in denominations of $10,000 and any integral multiple of $10,000. As provided in the Indenture and subject to certain limitations set forth in the Indenture, Notes are exchangeable for a like aggregate principal amount of Notes of a different authorized denomination, as requested by the Holder making the surrender. No service charge shall be made for any registration of transfer or exchange, redemption or conversion of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to and at the time of due presentment of this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Note is registered as the owner of this Note for all purposes, whether or not this Note be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. CONVERSION NOTICE To Eli Lilly and Company: The undersigned owner of this Note irrevocably exercises the option to convert this Note, or portion of this Note (which is $10,000 or an integral multiple of $10,000) below designated, into shares of Common Stock of Eli Lilly and Company in accordance with the terms of the Indenture referred to in this Note, and directs that the shares issuable and deliverable upon the conversion, together with any check in payment for fractional shares and any Notes representing any unconverted principal amount of this Note, be issued and delivered to the registered holder of this Note unless a different name has been indicated below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Note. Dated ____________________________________ Signature Fill in for registration of shares of Common Stock and Notes if to be issued otherwise than to the registered holder. Signature Guaranteed by: _______________________________ ____________________________________ Name (Social Security or Other Taxpayer Identifying Number) _______________________________ $__________________________________ Address including zip code number Principal Amount to be Converted (in an integral multiple of $10,000, if less than all) EX-10.1 4 As amended through 4/20/87 1984 LILLY STOCK PLAN The 1984 Lilly Stock Plan ("1984 Plan") authorizes the Compensation Committee ("Committee") to provide officers and other key executive and management employees of Eli Lilly and Company and its subsidiaries ("Company") with certain rights to acquire shares of the Company's common stock. The Company believes that this incentive program will cause those persons to contribute materially to the growth of the Company, thereby benefiting its shareholders. 1. Administration. The 1984 Plan shall be administered and interpreted by the Committee consisting of not less than three persons appointed by the Board of Directors of the Company from among its members. A person may serve on the Committee only if he is not eligible and has not been eligible to receive a Grant under the 1984 Plan or the 1979 Lilly Stock Plan for at least one year before his appointment. The Committee shall determine the fair market value of the Company's common stock ("Lilly Stock") for purposes of the 1984 Plan. The Committee's decisions shall be final and conclusive with respect to the interpretation and administration of the 1984 Plan and any Grant made under it. 2. Grants. Incentives under the 1984 Plan shall consist of incentive stock options, nonqualified stock options, stock appreciation rights, performance awards, and restricted stock grants (collectively, "Grants"). All Grants shall be subject to the terms and conditions set out herein and to such other terms and conditions consistent with this 1984 Plan as the Committee deems appropriate. The Committee shall approve the form and provisions of each Grant. Grants under a particular section of the 1984 Plan need not be uniform and Grants under two or more sections may be combined in one instrument. 3. Eligibility for Grants. Grants may be made to any employee of the Company who is an officer or other key executive, professional, or administrative employee, including a person who is also a member of the Board of Directors ("Eligible Employee"). The Committee shall select the persons to receive Grants ("Grantees") from among the Eligible Employees and determine the number of shares subject to any particular Grant. 4. Shares Available for Grant. (a) Shares Subject to Issuance or Transfer. Subject to adjustment as provided in Section 4(b), the aggregate number of shares of Lilly Stock that may be issued or transferred under the 1984 Plan is 4,500,000. The shares may be authorized but unissued shares or treasury shares. The number of shares available for Grants at any given time shall be 4,500,000, reduced by the aggregate of all shares previously issued or transferred and of shares which may become subject to issuance or transfer under then- outstanding Grants. Payment in cash in lieu of shares shall be deemed to be an issuance of the shares. -1- (b) Recapitalization Adjustment. If any subdivision or combination of shares of Lilly Stock or any stock dividend, capital reorganization, recapitalization, consolidation, or merger with the Company as the surviving corporation occurs after the adoption of the 1984 Plan, the Committee shall make such adjustments as it determines appropriate in the number of shares of Lilly Stock that may be issued or transferred in the future under Section 4(a). The Committee shall also adjust the number of shares and Option Price in all outstanding Grants made before the event. 5. Stock Options. The Committee may grant options qualifying as incentive stock options under the Internal Revenue Code of 1954, as amended ("Incentive Stock Options"), and nonqualified options (collectively, "Stock Options"). The following provisions are applicable to Stock Options: (a) Option Price. The price at which Lilly Stock may be purchased by the Grantee under a Stock Option ("Option Price") shall be the fair market value of Lilly Stock on the date of the Grant. (b) Option Exercise Period. The Committee shall determine the option exercise period of each Stock Option. The period shall not exceed ten years from the date of the Grant. (c) Exercise of Option. A Grantee may exercise a Stock Option by delivering a notice of exercise to the Company, either with or without accompanying payment of the Option Price. The notice of exercise once delivered shall be irrevocable. (d) Satisfaction of Option Price. The Grantee shall pay the Option Price in cash, or with the Committee's permission, by delivering shares of Lilly Stock already owned by the Grantee and having a fair market value on the date of exercise equal to the Option Price, or a combination of cash and shares. The Grantee shall pay the Option Price not later than thirty (30) days after the date of a statement from the Company following exercise setting forth the Option Price, fair market value of Lilly Stock on the exercise date, the number of shares of Lilly Stock that may be delivered in payment of the Option Price, and the amount of withholding tax due, if any. If the Grantee fails to pay the Option Price within the thirty (30) day period, the Committee shall have the right to take whatever action it deems appropriate, including voiding the option exercise. The Company shall not issue or transfer shares of Lilly Stock upon exercise of a Stock Option until the Option Price is fully paid. (e) Share Withholding. With respect to any nonqualified option, the Committee may, in its discretion and subject to such rules as the Committee may adopt, permit the Grantee to satisfy, in whole or in part, any withholding tax obligation which may arise in connection with the exercise of the nonqualified option by electing to have the Company withhold shares of Lilly Stock having a fair market value equal to the amount of the withholding tax. -2- (f) Limits on Incentive Stock Options. In the case of Incentive Stock Options that are granted after December 31, 1986, the aggregate fair market value of the stock covered by Incentive Stock Options (granted under the 1984 Plan or any other stock option plan of the Company or any subsidiary or partner of the Company) that become exercisable for the first time by any employee in any calendar year shall be subject to a $100,000 limit. The aggregate fair market value will be determined at the time of Grant. An Incentive Stock Option shall not be granted to any Eligible Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any subsidiary or parent of the Company. 6. Stock Appreciation Right. The Committee may grant a Stock Appreciation Right ("SAR") with respect to any Stock Option granted under the 1984 Plan either at the time of grant of the option or thereafter and may also grant an SAR with respect to any outstanding option granted under a prior plan of the Company ("Prior Stock Option"). The following provisions are applicable to each SAR: (a) Options to Which Right Relates. Each SAR shall specify the Stock Option or Prior Stock Option to which the right is related, together with the Option Price and number of shares in the option subject to the SAR at the time of its grant. (b) Requirement of Employment. An SAR may be exercised only while the Grantee is in the employment of the Company, except that the Committee may provide for partial or complete exceptions to this requirement as it deems equitable. (c) Exercise. A Grantee may exercise an SAR in whole or in part by delivering a notice of exercise to the Company. The notice of exercise once given shall be irrevocable. An SAR may be exercised only to the extent that the Stock Option or Prior Stock Option to which it relates is exercisable. If a Grantee exercises an SAR, he agrees to forego the right to purchase the number of shares under the related Stock Option or Prior Stock Option with respect to which the SAR has been exercised. (d) Payment and Form of Settlement. If a Grantee exercises an SAR, he shall receive the aggregate of the excess of the fair market value of each share of Lilly Stock with respect to which the SAR is being exercised over the Option Price of each such share. Payment may be made in cash, Lilly Stock at fair market value, or a combination of the two, in the discretion of the Committee. The fair market value shall be determined as of the date of exercise. (e) Expiration and Termination. Each SAR shall expire on a date determined by the Committee at the time of grant. If a Stock Option or Prior Stock Option is exercised in whole or in part, the SAR related to the shares purchased shall terminate immediately. 7. Performance Awards. The Committee may grant Performance Awards under which payment shall be made in shares of Lilly Stock ("Performance Shares"), or in cash, if the financial performance of the Company or any subsidiary or division of the Company ("Business Unit") selected by the Committee during the Award Period meets certain financial goals established by the Committee. The following provisions are applicable to Performance Awards: -3- (a) Award Period. The Committee shall determine and include in the Grant the period of time (expressed in terms of one or more calendar years) for which a Performance Award is made ("Award Period"). Grants of Performance Awards need not be uniform with respect to the number of years in the Award Period. If a Performance Award is granted after the fifteenth (15th) day of May in any calendar year, the Award Period under that Performance Award shall commence at the beginning of the next calendar year. (b) Performance Goals and Payment. Before a Grant is made, the Committee shall establish objectives ("Performance Goals") that must be met by the Business Unit during the Award Period as a condition to payment being made under the Performance Award. The Performance Goals, which must be set out in the Grant, may include earnings per share, return on shareholders' equity, return on assets, net income, divisional income, or any other financial measurement established by the Committee. The Committee shall also establish the method of calculating the amount of payment to be made under a Performance Award if the Performance Goals are met, including the fixing of a maximum payment. (c) Computation of Payment. After an Award Period, the financial performance of the Business Unit during the period shall be measured against the Performance Goals. If the Performance Goals are not met, no payment shall be made under a Performance Award. If the Performance Goals are met or exceeded, the Committee shall determine the number of Performance Shares payable under a Performance Award. The Committee, in its sole discretion, may elect to pay the Performance Award in cash in lieu of issuing or transferring part or all of the Performance Shares. The cash payment shall be based on the fair market value of Lilly Stock on the date of payment. The Company shall promptly notify each Grantee of the number of Performance Shares and the amount of cash he or she is to receive. (d) Revisions for Significant Events. At any time before payment is made, the Committee may revise the Performance Goals and the computation of payment if unforeseen events occur during an Award Period which have a substantial effect on the financial performance of the Business Unit and which in the judgment of the Committee make the application of the Performance Goals unfair unless a revision is made. (e) Requirement of Employment. To be entitled to receive payment under a Performance Award, a Grantee must remain in the employment of the Company to the end of the Award Period, except that the Committee may provide for partial or complete exceptions to this requirement as it deems equitable. 8. Restricted Stock Grants. The Committee may issue or transfer shares of Lilly Stock to a Grantee under a Restricted Stock Grant. Upon the issuance or transfer, the Grantee shall be entitled to vote the shares and to receive any dividends paid. The following provisions are applicable to Restricted Stock Grants: (a) Requirement of Employment. If the Grantee's employment terminates during the period designated in the Grant as the "Restriction Period," the Restricted Stock Grant terminates and the shares of Lilly Stock must be returned immediately to the Company. However, the Committee may provide for complete or partial exceptions to this requirement as it deems equitable. -4- (b) Restrictions on Transfer and Legend on Stock Certificate. During the Restriction Period, a Grantee may not sell, assign, transfer, pledge, or otherwise dispose of the shares of Lilly Stock except to a Successor Grantee under Section 10(a). Each certificate for shares issued or transferred under a Restricted Stock Grant shall contain a legend giving appropriate notice of the restrictions in the Grant. (c) Lapse of Restrictions. All restrictions imposed under the Restricted Stock Grant shall lapse upon the expiration of the Restriction Period if all conditions stated in Sections 8(a) and (b) have been met. The Grantee shall then be entitled to have the legend removed from the certificate. 9. Amendment and Termination of the 1984 Plan. (a) Amendment. The Company's Board of Directors may amend or terminate the 1984 Plan, subject to shareholder approval to the extent necessary for the continued applicability of Rule 16b-3 under the Securities Exchange Act of 193~, but no amendment shall withdraw from the Committee the right to select Grantees under Section 3. (b) Termination of 1984 Plan. The 1984 Plan shall terminate on the fifth anniversary of its effective date unless terminated earlier by the Board or unless extended by the Board with the approval of the shareholders. (c) Termination and Amendment of Outstanding Grants. A termination or amendment of the 1984 Plan that occurs after a Grant is made shall not result in the termination or amendment of the Grant unless the Grantee consents or unless the Committee acts under Section 10(e). The termination of the 1984 Plan shall not impair the power and authority of the Committee with respect to outstanding Grants. Whether or not the 1984 Plan has terminated, an outstanding Grant may be terminated or amended under Section 10(e) or may be amended by agreement of the Company and the Grantee consistent with the 1984 Plan. 10. General Provisions (a) Prohibitions Against Transfer. Only a Grantee or his authorized representative may exercise rights under a Grant. Such persons may not transfer those rights. When a Grantee dies, the personal representative or other person entitled under a Prior Stock Option or a Grant under the 1984 Plan to succeed to the rights of the Grantee ("Successor Grantee") may exercise the rights. A Successor Grantee must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee's will or under the applicable laws of descent and distribution. (b) Substitute Grants. The Committee may make a Grant to an employee of another corporation who becomes an Eligible Employee by reason of a corporate merger, consolidation, acquisition o~ stock or property, reorganization or liquidation involving the Company in substitution for a stock option, stock appreciation right, performance award, or restricted stock grant granted by such corporation ("Substituted Stock Incentive"). The terms and conditions of the substitute Grant may vary from the terms and conditions required by the 1984 Plan and from those of the Substituted Stock Incentives. The Committee shall prescribe the exact provisions of the substitute Grants, preserving where possible the provisions of the Substituted Stock Incentives. The Committee shall also determine the number of shares of Lilly Stock to be taken into account under Section 4. -5- (c) Subsidiaries. The term "subsidiary" means a corporation of which the Company owns directly or indirectly 50% or more of the voting power. (d) Fractional Shares. Fractional shares shall not be issued or transferred under a Grant, but the Committee may pay cash in lieu of a fraction or round the fraction. (e) Compliance with Law. The 1984 Plan, the excercise of Grants, and the obligations of the Company to issue or transfer shares of Lilly Stock under Grants shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. The Committee may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payment to Grantees. (f) Ownership of Stock. A Grantee or Successor Grantee shall have no rights as a shareholder of the Company with respect to any shares of Lilly Stock covered by a Grant until the shares are issued or transferred to the Grantee or Successor Grantee on the Company's books. (g) No Right to Employment. The 1984 Plan and the Grants under it shall not confer upon any Grantee the right to continue in the employment of the Company or affect in any way the right of the Company to terminate the employment of a Grantee at any time. (h) Effective Date of the 1984 Plan. The 1984 Plan shall become effective upon its approval by the Company's shareholders at the annual meeting to be held on April 16, 1984, or any adjournment of the meeting. -6- EX-10.3 5 1994 LILLY STOCK PLAN The 1994 Lilly Stock Plan ("1994 Plan") authorizes the Compensation and Management Development Committee ("Committee") to provide officers and other key executive, management, professional, and administrative employees of Eli Lilly and Company and its subsidiaries with certain rights to acquire shares of Eli Lilly and Company common stock ("Lilly Stock"). The Company believes that this incentive program will benefit the Company's shareholders by allowing the Company to attract, motivate, and retain key employees and by causing those employees, through stock-based incentives, to contribute materially to the growth and success of the Company. For purposes of the 1994 Plan, the term "Company" shall mean Eli Lilly and Company and its subsidiaries, unless the context requires otherwise. 1. Administration. The 1994 Plan shall be administered and interpreted by the Committee consisting of not less than three persons appointed by the Board of Directors of the Company from among its members. A person may serve on the Committee only if he or she (i) is not eligible and has not received a Grant under the 1994 Plan or the 1989 Plan for at least one year before his or her appointment and otherwise satisfies the definition of a "disinterested person" for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, and (ii) satisfies the requirements of an "outside director" for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The Committee shall determine the fair market value of Lilly Stock for purposes of the 1994 Plan. The Committee may, subject to the provisions of the 1994 Plan, from time to time establish such rules and regulations as it deems appropriate for the proper administration of the Plan. The Committee's decisions shall be final, conclusive, and binding with respect to the interpretation and administration of the 1994 Plan and any Grant made under it. 2. Grants. Incentives under the 1994 Plan shall consist of incentive stock options, nonqualified stock options, performance awards, and restricted stock grants (collectively, "Grants"). All Grants shall be subject to the terms and conditions set out herein and to such other terms and conditions consistent with the 1994 Plan as the Committee deems appropriate. The Committee shall approve the form and provisions of each Grant. Grants under a particular section of the 1994 Plan need not be uniform and Grants under two or more sections may be combined in one instrument. 3. Eligibility for Grants. Grants may be made to any employee of the Company who is an officer or other key executive, managerial, professional, or administrative employee, including a person who is also a member of the Board of Directors ("Eligible Employee"). The Committee shall select the persons to receive Grants ("Grantees") from among the Eligible Employees and determine the number of shares subject to any particular Grant. 4. Shares Available for Grant. (a) Shares Subject to Issuance or Transfer. Subject to adjustment as provided in Section 4(b), the aggregate number of shares of Lilly Stock that may be issued or transferred under the 1994 Plan is 12,500,000. The shares may be authorized but unissued shares or treasury shares. The number of shares available for Grants at any given time shall be 12,500,000, reduced by the aggregate of all shares previously issued or transferred and of shares which may become subject to issuance or transfer under then-outstanding Grants. Payment in cash in lieu of shares shall be deemed to be an issuance of the shares for purposes of determining the number of shares available for Grants under the 1994 Plan as a whole or to any individual Grantee. (b) Adjustment Provisions. If any subdivision or combination of shares of Lilly Stock or any stock dividend, reorganization, recapitalization, or consolidation or merger with Eli Lilly and Company as the surviving corporation occurs, or if additional shares or new or different shares or other securities of the Company or any other issuer are distributed with respect to the shares of Lilly Stock through a spin off or other extraordinary distribution, the Committee shall make such adjustments as it determines appropriate in the number of shares of Lilly Stock that may be issued or transferred in the future under Sections 4(a), 5(f), and 6(f). The Committee shall also adjust as it determines appropriate the number of shares and Option Price in outstanding Grants made before the event. 5. Stock Options. The Committee may grant options qualifying as incentive stock options under the Code ("Incentive Stock Options"), and nonqualified options (collectively, "Stock Options"). The following provisions are applicable to Stock Options: (a) Option Price. The Committee shall determine the price at which Lilly Stock may be purchased by the Grantee under a Stock Option ("Option Price") which shall be not less than the fair market value of Lilly Stock on the date the Stock Option is granted (the "Grant Date"). In the Committee's discretion, the Grant Date of a Stock Option may be established as the date on which Committee action approving the Stock Option is taken or any later date specified by the Committee. (b) Option Exercise Period. The Committee shall determine the option exercise period of each Stock Option. The period shall not exceed ten years from the Grant Date. (c) Exercise of Option. A Grantee may exercise a Stock Option by delivering a notice of exercise to the Company or its representative as designated by the Committee, either with or without accompanying payment of the Option Price. The notice of exercise, once delivered, shall be irrevocable. (d) Satisfaction of Option Price. The Grantee shall pay or cause to be paid the Option Price in cash, or with the Committee's permission, by delivering shares of Lilly Stock already owned by the Grantee and having a fair market value on the date of exercise equal to the Option Price, or a combination of cash and shares. The Grantee shall pay the Option Price not later than 30 days after the date of a statement from the Company following exercise setting forth the Option Price, fair market value of Lilly Stock on the exercise date, the number of shares of Lilly Stock that may be delivered in payment of the Option Price, and the amount of withholding tax due, if any. If the Grantee fails to pay the Option Price within the 30-day period, the Committee shall have the right to take whatever action it deems appropriate, including voiding the option exercise. The Company shall not issue or transfer shares of Lilly Stock upon exercise of a Stock Option until the Option Price and any required withholding tax are fully paid. (e) Share Withholding. With respect to any nonqualified option, the Committee may, in its discretion and subject to such rules as the Committee may adopt, permit or require the Grantee to satisfy, in whole or in part, any withholding tax obligation which may arise in connection with the exercise of the nonqualified option by having the Company withhold shares of Lilly Stock having a fair market value equal to the amount of the withholding tax. (f) Limits on Individual Grants. No individual Grantee may be granted Stock Options under the 1994 Plan for more than 750,000 shares of Lilly Stock in any three consecutive calendar years. (g) Limits on Incentive Stock Options. The aggregate fair market value of the stock covered by Incentive Stock Options granted under the 1994 Plan or any other stock option plan of the Company or any subsidiary or parent of the Company that become exercisable for the first time by any employee in any calendar year shall not exceed $100,000. The aggregate fair market value will be determined at the Grant Date. An Incentive Stock Option shall not be granted to any Eligible Employee who, on the Grant Date, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary or parent of the Company. 6. Performance Awards. The Committee may grant Performance Awards which shall be denominated at the time of grant either in shares of Lilly Stock ("Stock Performance Awards") or in dollar amounts ("Dollar Performance Awards"). Payment under a Stock Performance Award or a Dollar Performance Award shall be made, at the discretion of the Committee, in shares of Lilly Stock ("Performance Shares"), or in cash or in any combination thereof, if the financial performance of the Company or any subsidiary, division, or other unit of the Company ("Business Unit") selected by the Committee meets certain financial goals established by the Committee for the Award Period. The following provisions are applicable to Performance Awards: (a) Award Period. The Committee shall determine and include in the Grant the period of time (which shall be four or more consecutive fiscal quarters) for which a Performance Award is made ("Award Period"). Grants of Performance Awards need not be uniform with respect to the length of the Award Period. Award Periods for different Grants may overlap. A Performance Award may not be granted for a given Award Period after one half (1/2) or more of such period has elapsed. (b) Performance Goals and Payment. Before a Grant is made, the Committee shall establish objectives ("Performance Goals") that must be met by the Business Unit during the Award Period as a condition to payment being made under the Performance Award. The Performance Goals, which must be set out in the Grant, are limited to earnings per share, divisional income, net income, or any of the foregoing before the effect of acquisitions, divestitures, accounting changes, and restructuring and special charges (determined according to criteria established by the Committee). The Committee shall also set forth in the Grant the number of Performance Shares or the amount of payment to be made under a Performance Award if the Performance Goals are met or exceeded, including the fixing of a maximum payment (subject to Section 6(f)). (c) Computation of Payment. After an Award Period, the financial performance of the Business Unit during the period shall be measured against the Performance Goals. If the Performance Goals are not met, no payment shall be made under a Performance Award. If the Performance Goals are met or exceeded, the Committee shall certify that fact in writing and certify the number of Performance Shares or the amount of payment to be made under a Performance Award in accordance with the grant for each Grantee. The Committee, in its sole discretion, may elect to pay part or all of the Performance Award in cash in lieu of issuing or transferring Performance Shares. The cash payment shall be based on the fair market value of Lilly Stock on the date of payment (subject to Section 6(f)). The Company shall promptly notify each Grantee of the number of Performance Shares and the amount of cash, if any, he or she is to receive. (d) Revisions for Significant Events. At any time before payment is made, the Committee may revise the Performance Goals and the computation of payment if unforeseen events occur during an Award Period which have a substantial effect on the Performance Goals and which in the judgment of the Committee make the application of the Performance Goals unfair unless a revision is made; provided, however, that no such revision shall be made with respect to a Performance Award to the extent that the Committee determines the revision would cause payment under the Award to fail to be fully deductible by the Company under Section 162 (m) of the Code. (e) Requirement of Employment. To be entitled to receive payment under a Performance Award, a Grantee must remain in the employment of the Company to the end of the Award Period, except that the Committee may provide for partial or complete exceptions to this requirement as it deems equitable in its sole discretion. (f) Maximum Payment. No individual may receive Performance Award payments in respect of Stock Performance Awards in excess of 30,000 shares of Lilly Stock in any calendar year or payments in respect of Dollar Performance Awards in excess of $2,000,000 in any calendar year. No individual may receive both a Stock Performance Award and a Dollar Performance Award for the same Award Period. 7. Restricted Stock Grants. The Committee may issue or transfer shares of Lilly Stock to a Grantee under a Restricted Stock Grant. Upon the issuance or transfer, the Grantee shall be entitled to vote the shares and to receive any dividends paid. The following provisions are applicable to Restricted Stock Grants: (a) Requirement of Employment. If the Grantee's employment terminates during the period designated in the Grant as the "Restriction Period," the Restricted Stock Grant terminates and the shares of Lilly Stock must be returned immediately to the Company. However, the Committee may provide for partial or complete exceptions to this requirement as it deems equitable. (b) Restrictions on Transfer and Legend on Stock Certificate. During the Restriction Period, a Grantee may not sell, assign, transfer, pledge, or otherwise dispose of the shares of Lilly Stock except to a Successor Grantee under Section 10(a). Each certificate for shares issued or transferred under a Restricted Stock Grant shall be held in escrow by the Company until the expiration of the Restriction Period. (c) Lapse of Restrictions. All restrictions imposed under the Restricted Stock Grant shall lapse (i) upon the expiration of the Restriction Period if all conditions stated in Sections 7(a) and (b) have been met or (ii) as provided under Section 9(a)(ii). The Grantee shall then be entitled to delivery of the certificate. 8. Amendment and Termination of the 1994 Plan. (a) Amendment. The Company's Board of Directors may amend or terminate the 1994 Plan, subject to shareholder approval to the extent necessary for the continued applicability of Rule 16b-3 under the Securities Exchange Act of 1934 (the "1934 Act"), but no amendment shall withdraw from the Committee the right to select Grantees under Section 3. (b) Termination of 1994 Plan. The 1994 Plan shall terminate on the fifth anniversary of its effective date unless terminated earlier by the Board or unless extended by the Board. (c) Termination and Amendment of Outstanding Grants. A termination or amendment of the 1994 Plan that occurs after a Grant is made shall not result in the termination or amendment of the Grant unless the Grantee consents or unless the Committee acts under Section 10(e). The termination of the 1994 Plan shall not impair the power and authority of the Committee with respect to outstanding Grants. Whether or not the 1994 Plan has terminated, an outstanding Grant may be terminated or amended under Section 10(e) or may be amended (i) by agreement of the Company and the Grantee consistent with the 1994 Plan or (ii) by action of the Committee provided that the amendment is consistent with the 1994 Plan and is found by the Committee not to impair the rights of the Grantee under the Grant. 9. Change of Control. (a) Effect on Grants. Unless the Committee shall otherwise expressly provide in the agreement relating to a Grant, upon the occurrence of a Change of Control (as defined below): (i) In the case of Stock Options, (y) each outstanding Stock Option that is not then fully exercisable shall automatically become fully exercisable until the termination of the option exercise period of the Stock Option (as modified by subsection (i)(z) that follows), and (z) in the event the Grantee's employment is terminated within two years after a Change of Control, his or her outstanding Stock Options at that date of termination shall be immediately exercisable for a period of three months following such termination, provided, however, that, to the extent the Stock Option by its terms otherwise permits a longer option exercise period after such termination, such longer period shall govern, and provided further that in no event shall a Stock Option be exercisable more than 10 years after the Grant Date; (ii) The Restriction Period on all outstanding Restricted Stock Grants shall automatically expire and all restrictions imposed under such Restricted Stock Grants shall immediately lapse; and (iii) Each Grantee of a Performance Award for an Award Period that has not been completed at the time of the Change of Control shall be deemed to have earned a minimum Performance Award equal to the product of (y) such Grantee's maximum award opportunity for such Performance Award, and (z) a fraction, the numerator of which is the number of full and partial months that have elapsed since the beginning of such Award Period to the date on which the Change of Control occurs, and the denominator of which is the total number of months in such Award Period. (b) Change of Control. For purposes of the 1994 Plan, a Change of Control shall mean the happening of any of the following events: (i) The acquisition by any "person," as that term is used in Sections 13(d) and 14(d) of the 1934 Act (other than (v) the Company, (w) any subsidiary of the Company, (x) any employee benefit plan or employee stock plan of the Company or a subsidiary of the Company or any trustee or fiduciary with respect to any such plan when acting in that capacity, (y) Lilly Endowment, Inc., or (z) any person who acquires such shares pursuant to a transaction or series of transactions approved prior to such transaction(s) by the Board of Directors of the Company) of "beneficial ownership," as defined in Rule 13d-3 under the 1934 Act, directly or indirectly, of 20% or more of the shares of the Company's capital stock the holders of which have general voting power under ordinary circumstances to elect at least a majority of the Board of Directors of the Company (or which would have such voting power but for the application of the Indiana Control Share Statute) ("Voting Stock"); (ii) the first day on which less than two-thirds of the total membership of the Board of Directors of the Company shall be Continuing Directors (as that term is defined in Article 13(f) of the Company's Articles of Incorporation); (iii) approval by the shareholders of the Company of a merger, share exchange, or consolidation of the Company (a "Transaction"), other than a Transaction which would result in the Voting Stock of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the Voting Stock of the Company or such surviving entity immediately after such Transaction; or (iv) approval by the shareholders of the Company of a complete liquidation of the Company or a sale or disposition of all or substantially all the assets of the Company. 10. General Provisions. (a) Prohibitions Against Transfer. Only a Grantee or his or her authorized legal representative may exercise rights under a Grant. Such persons may not transfer those rights. The rights under a Grant may not be disposed of by transfer, alienation, pledge, encumbrance, assignment, or any other means, whether voluntary, involuntary, or by operation of law, and any such attempted disposition shall be void; provided, however, that when a Grantee dies, the personal representative or other person entitled under a Grant under the 1994 Plan to succeed to the rights of the Grantee ("Successor Grantee") may exercise the rights. A Successor Grantee must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee's will or under the applicable laws of descent and distribution. (b) Substitute Grants. The Committee may make a Grant to an employee of another corporation who becomes an Eligible Employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company in substitution for a stock option, performance award, or restricted stock grant granted by such other corporation ("Substituted Stock Incentive"). The terms and conditions of the substitute Grant may vary from the terms and conditions required by the 1994 Plan and from those of the Substituted Stock Incentives. The Committee shall prescribe the exact provisions of the substitute Grants, preserving where possible the provisions of the Substituted Stock Incentives. The Committee shall also determine the number of shares of Lilly Stock to be taken into account under Section 4. (c) Subsidiaries. The term "subsidiary" means a corporation of which Eli Lilly and Company owns directly or indirectly 50% or more of the voting power. (d) Fractional Shares. Fractional shares shall not be issued or transferred under a Grant, but the Committee may pay cash in lieu of a fraction or round the fraction. (e) Compliance with Law. The 1994 Plan, the exercise of Grants, and the obligations of the Company to issue or transfer shares of Lilly Stock under Grants shall be subject to all applicable laws and regulations and to approvals by any governmental or regulatory agency as may be required. The Committee may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory law or government regulation. The Committee may also adopt rules regarding the withholding of taxes on payment to Grantees. (f) Ownership of Stock. A Grantee or Successor Grantee shall have no rights as a shareholder of the Company with respect to any shares of Lilly Stock covered by a Grant until the shares are issued or transferred to the Grantee or Successor Grantee on the Company's books. (g) No Right to Employment. The 1994 Plan and the Grants under it shall not confer upon any Grantee the right to continue in the employment of the Company or affect in any way the right of the Company to terminate the employment of a Grantee at any time, with or without notice or cause. (h) Foreign Jurisdictions. The Committee may adopt, amend, and terminate such arrangements, not inconsistent with the intent of the 1994 Plan, as it may deem necessary or desirable to make available tax or other benefits of the laws of foreign jurisdictions to Grantees who are subject to such laws. (i) Governing Law. The 1994 Plan and all Grants made under it shall be governed by and interpreted in accordance with the laws of the State of Indiana, regardless of the laws that might otherwise govern under applicable Indiana conflict-of-laws principles. (j) Effective Date of the 1994 Plan. The 1994 Plan shall become effective upon its approval by the Company's shareholders at the annual meeting to be held on April 18, 1994, or any adjournment of the meeting. * * * EX-10.4 6 THE LILLY DEFERRED COMPENSATION PLAN (As Amended and Restated as of August 1, 1994) Section 1. Establishment of the Plan. There is hereby established for the benefit of Participants an unfunded plan of voluntarily deferred compensation known as "The Lilly Deferred Compensation Plan." Section 2. Definitions. When used in the Plan, the following terms shall have the definitions set forth in this Section 2: 2.1. Base Salary. The term "Base Salary" means the base salary to which a management employee is entitled for services rendered to the Company as a management employee. 2.2. Base Salary Year. The term "Base Salary Year" means each calendar year in which Base Salary deferred under the Plan is earned by a Participant. 2.3. Beneficiary. The term "Beneficiary" means the beneficiary or beneficiaries (including any contingent beneficiary or beneficiaries) designated pursuant to subsection 6.2 hereof. 2.4. Board of Directors. The term "Board of Directors" means the Board of Directors of Eli Lilly and Company. 2.5. Bonus. The term "Bonus" means the payment to which an Eligible Employee is entitled pursuant to the Contingent Compensation Plan, the Senior Executive Bonus Plan or the Lilly Executive Bonus Plan (the EVA Bonus Plan) of the Company or any other similar compensation plan as may from time to time be designated by the Committee. 2.6. Bonus Year. The term "Bonus Year" means each calendar year in which a Bonus deferred under the Plan is earned by a Participant. 2.7. Committee. The term "Committee" means the committee designated in subsection 9.1 hereof to administer the Plan. 2.8. Company. The term "Company" means Eli Lilly and Company and its affiliates and subsidiaries. 2.9. Company Credit. The term "Company Credit" means an amount computed and credited annually to Participants' accounts hereunder at a rate that is two percent (2%) above the rate that the Treasurer of Lilly determines was the prime rate of interest charged by Chemical Bank, New York, New York (the "Bank") on loans made on the immediately preceding December 15 or, if the Bank was closed on December 15, the last day preceding December 15 on which the Bank was open for business. 2.10. Disability. The term "Disability" means a condition that the Committee determines (i) is attributable to sickness, injury, or disease and (ii) renders a Participant incapable of engaging in any activity for remuneration or profit commensurate with the Participant's education, experience, and training. 2.11. Eligible Employee. The term "Eligible Employee" means a management employee of the Company who is designated by the Committee as eligible to defer a Bonus earned in the following year. 2.12. Lilly. The term "Lilly" means Eli Lilly and Company. 2.13. Participant. The term "Participant" means an Eligible Employee who has elected to defer all or part of a Bonus pursuant to the Plan in accordance with Section 3.1 hereof or an SEC Executive Officer who has elected to defer all or part of Base Salary pursuant to the Plan in accordance with Section 3.2 hereof. 2.14. Plan. The term "Plan" means "The Lilly Deferred Compensation Plan" as set forth herein and as it may be amended from time to time. 2.15. Retirement. The term "Retirement" means the first day of the month next following the Participant's last day of work for the Company, but only if such first day of the month occurs on or after the first to occur of (i) the day on which the Participant attains age 65 or (ii) the day on which the Participant is eligible to commence receiving a monthly retirement benefit under a funded, defined benefit retirement plan maintained by the Company and covering the Participant. 2.16. SEC Executive Officers. The term "SEC Executive Officers" shall mean those officers and employees from time to time designated as Executive Officers for purposes of the proxy statement and Form 10-K. Section 3. Participation. 3.1. Bonuses. Prior to the beginning of each Bonus Year, the Committee shall select those Eligible Employees who may elect to defer Bonuses pursuant to the Plan. Upon selection by the Committee and before the beginning of the applicable Bonus Year, an Eligible Employee may defer the receipt of a Bonus pursuant to the Plan by filing a written election with the Committee, in a form satisfactory to the Committee, that (i) defers payment of a designated amount (of One Thousand Dollars ($1,000) or more) or percentage of the Bonus, if any, to be earned in the Bonus Year, and (ii) specifies the payment option selected by the Participant pursuant to subsection 6.1 hereof. The amount deferred may not exceed the amount of the Bonus. Except as provided in subsections 6.1 and 6.3 hereof, any election made pursuant to this Section 3 (including any election made pursuant to paragraphs (i) and (ii), above) with respect to a Bonus Year shall be irrevocable when made. Selection of an Eligible Employee for deferral of a Bonus during one year does not confer upon the Eligible Employee a right to defer Bonuses for subsequent years. The Eligible Employees who shall be permitted to defer Bonuses pursuant to the Plan shall be selected annually by the Committee. If an Eligible Employee is also an SEC Executive Officer as of the beginning of the Bonus Year, the Eligible Employee may also defer the receipt of Base Salary as provided in Section 3.2. 3.2. Base Salary. Subject to the right of the Committee to limit deferrals described below, prior to the beginning of each Compensation Year, an SEC Executive Officer may defer the receipt of up to one hundred percent (100%) of Base Salary pursuant to the Plan by filing a written election with the Committee, in a form satisfactory to the Committee, that (i) defers payment of a designated amount of One Thousand Dollars ($1,000) or more or a percentage of Base Salary, and (ii) specifies the payment option selected by the Participant pursuant to subsection 6.1 hereof. The amount deferred may not exceed the amount of Base Salary. Except as provided in subsections 6.1 and 6.3 hereof, any election made pursuant to this Section 3 (including any election made pursuant to paragraphs (i) and (ii), above) with respect to a Bonus Year shall be irrevocable when made and shall not be affected by the Participant's ceasing to be an SEC Executive Officer after the beginning of the Bonus Year. The Committee reserves the right to limit the amount of deferrals of Base Salary to assure that the Company has sufficient funds to cover taxes, benefit payments, and other necessary and appropriate deductions. Section 4. Individual Account. The Treasurer of Lilly shall maintain an account in the name of each Participant. In the year following the Bonus Year or Base Salary Year, each Participant's account shall be credited, as of the first day of the month in which Bonuses or Base Salary are paid, with the amount that the Participant has elected to defer hereunder. Each Participant shall be given an annual statement, as of December 31 of each year, showing for each year (i) the amount of Bonuses or Base Salary deferred and (ii) the amount of the Company Credit to the Participant's account. Section 5. Accrual of Company Credit. The Treasurer of Lilly shall determine the applicable annual rate of Company Credit on or before December 31 of each calendar year. This rate shall be effective for the following calendar year. The Company Credit shall accrue monthly, at one-twelfth of the applicable annual rate, on all amounts credited to the Participant's account, including the Company Credits for prior years. The Company Credit shall not accrue on any amount distributed to the Participant (or to the Participant's Beneficiary) during the month for which the accrual is determined, except where an amount is distributed to a Beneficiary in the month of the Participant's death. The Company Credit for each year shall be credited to each Participant's account as of December 31 of that year and shall be compounded annually. Section 6. Payment. 6.1. Payment Options. The Participant shall select a payment election from the payment options described below. A Participant may elect that his final payment election control over all prior payment elections. The payment option selected by a Participant shall provide for payment to the Participant of the amount credited to the Participant's account in (i) a lump sum in January of the second calendar year following the calendar year in which the Participant's employment terminates by reason of Retirement or Disability; or (ii) annual installments over a period of two to ten years commencing in January of the second calendar year following the calendar year in which the Participant's employment terminates by reason of Retirement or Disability; provided, that in no event shall a lump sum be paid or installment payments begin under any payment option before the first January that begins after any Bonus that has been deferred under the payment option has been determined. The Company shall pay the aggregate amounts deferred, together with a proportionate part of the aggregate Company Credit accrued to the date (or dates) of payment, in the manner and on the date(s) specified by the Participant. If a payment option described in paragraph (i), above, has been elected, the amount of the lump sum shall be equal to the amount credited to the Participant's account as of the December 31 next preceding the date of the payment. If the payment option described in paragraph (ii), above, has been elected, the amount of each installment shall be equal to the amount credited to the Participant's account as of the December 31 next preceding the date of the installment payment divided by the number of installment payments that have not yet been made. If the Participant fails to elect a payment option, the amount credited to the Participant's account shall be distributed in a lump sum in accordance with the payment option described in paragraph (i), above. If the amount credited to the Participant's account is less than $25,00 at any time following the year in which the Participant's employment terminates by reason of Retirement of Disability, the Committee, in its sole discretion, may pay out the amount credited to the Participant's account in a lump sum. 6.2. Payment upon Death. Within a reasonable period of time following the death of a Participant, the balance in the Participant's account shall be paid in a lump sum to the Participant's Beneficiary. For purposes of this subsection 6.2, the balance in the Participant's account shall be determined as of the date of payment. A Participant may designate the Beneficiary, in writing, in a form acceptable to the Committee, and filed with the Committee before the Participant's death. A Participant may, before the Participant's death, revoke a prior designation of Beneficiary and may also designate a new Beneficiary without the consent of the previously designated Beneficiary, provided that such revocation and new designation (if any) are in writing, in a form acceptable to the Committee, and filed with the Committee before the Participant's death. If the Participant does not designate a Beneficiary, or if no designated Beneficiary survives the Participant, any amount not distributed to the Participant during the Participant's life shall be paid to the Participant's estate in a lump sum in accordance with this subsection 6.2. 6.3. Resignation or Dismissal. Within a reasonable time following termination of a Participant's employment by resignation or dismissal, the balance in the Participant's account shall be paid in a lump sum to the Participant. For purposes of this subsection 6.3, the balance in the Participant's account shall be determined as of a date determined by the Committee in its sole discretion. 6.4. Payment on Unforeseeable Emergency. The Administrator may, in its sole discretion, direct payment to a Participant of all or of any portion of the Participant's Account balance, notwithstanding an election under Section 6.1. above, at any time that it determines that such Participant has an unforeseeable emergency and then only to the extent reasonably necessary to meet the emergency. For purposes of this rule, "unforeseeable emergency" means severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but, in any case, payment may not be made to the extent that such hardship is or may be relieved -- (i) Through reimbursement or compensation by insurance or otherwise, (ii) By liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (iii) By cessation of deferrals under the Plan. Examples of what are not considered to be unforeseeable emergencies include the need to send a Participant's child to college or the desire to purchase a home. 6.5. Cash Payments. All payments under the Plan shall be made in cash. Section 7. Prohibition Against Transfer. The right of a Participant to receive payments under the Plan may not be transferred except by will or applicable laws of descent and distribution. A Participant may not assign, sell, pledge, or otherwise transfer any amount to which he is entitled hereunder prior to transfer or payment thereof to the Participant. Section 8. Participant's Rights Unsecured. The Plan is unfunded. The right of any Participant to receive payments under the Plan shall be an unsecured claim against the general assets of the Company. Section 9. Administration. 9.1. Committee. The Plan shall be administered by the Compensation and Management Development Committee of the Board of Directors, the members of which shall be selected by the Board of Directors from among its members. No member of the Committee may be a salaried employee of the Company. 9.2. Powers of the Committee. The Committee's powers shall include, but not be limited to, the power (i) to select Eligible Employees for participation in the Plan, (ii) to interpret the terms and provisions of the Plan and to determine any and all questions arising under the Plan, including, without limitation, the right to remedy possible ambiguities, inconsistencies, or omissions by a general rule or particular decision, (iii) to adopt rules consistent with the Plan, and (iv) to limit the deferrals of SEC Executive Officers to assure that the Company has sufficient funds to cover taxes, benefit payments, and other necessary or appropriate deductions. 9.3. Finality of Committee Determinations. Determinations by the Committee and any interpretation, rule, or decision adopted by the Committee under the Plan or in carrying out or administering the Plan shall be final and binding for all purposes and upon all interested persons, their heirs, and personal representatives. 9.4. Claims Procedures. Any person making a claim for benefits hereunder shall submit the claim in writing to the Committee. If the Committee denies the claim in whole or in part, it shall issue to the claimant a written notice explaining the reason for the denial and identifying any additional information or documentation that might enable the claimant to perfect the claim. The claimant may, within 60 days of receiving a written notice of denial, submit a written request for reconsideration to the Committee, together with a written explanation of the basis of the request. The Committee shall consider any such request and shall provide the claimant with a written decision together with a written explanation thereof. All interpretations, determinations, and decisions of the committee in respect of any claim shall be final and conclusive. 9.5. Withholding. The Company shall have the right to deduct from all payments hereunder any taxes required by law to be withheld from such payments. The recipients of such payments shall bear all taxes on amounts paid under the Plan to the extent that no taxes are withheld thereon, irrespective of whether withholding is required. 9.6. Incapacity. If the Committee determines that any person entitled to benefits under the Plan is unable to care for his or her affairs because of illness or accident, any payment due (unless a duly qualified guardian or other legal representative has been appointed) may be paid for the benefit of such person to such person's spouse, parent, brother, sister, or other party deemed by the Committee to have incurred expenses for such person. 9.7. Inability to Locate. If the Committee is unable to locate a person to whom a payment is due under the Plan for a period of twelve (12) months, commencing with the first day of the month as of which the payment becomes payable, the total amount payable to such person shall be forfeited. 9.8. Legal Holidays. If any day on (or on or before) which action under the Plan must be taken falls on a Saturday, Sunday, or legal holiday, such action may be taken on (or on or before) the next succeeding day that is not a Saturday, Sunday, or legal holiday; provided, that this subsection 9.8 shall not permit any action that must be taken in one calendar year to be taken in any subsequent calendar year. Section 10. No Employment Rights. No provision of the Plan or any action taken hereunder by the Company, the Board of Directors, or the Committee shall give any person any right to be retained in the employ of the Company, and the right and power of the Company to dismiss or discharge any Participant is specifically reserved. Section 11. Amendment, Suspension, and Termination. The Board of Directors shall have the right to amend, suspend, or terminate the Plan at any time. The Committee shall also have the right to amend the Plan, except for subsection 9.1 hereof and this Section 11. Section 12. Applicable Law. The Plan shall be governed by, and construed in accordance with, the laws of the State of Indiana, except to the extent that such laws are preempted by Federal law. Section 13. Effective Date. This amendment and restatement of the Plan is effective as of August 1, 1994. Nothing herein shall invalidate or adversely affect any previous election, designation, deferral, or accrual in accordance with the terms of the Plan that were then in effect. EX-10.5 7 THE LILLY DIRECTORS' DEFERRED COMPENSATION PLAN (As Amended and Restated as of August 1, 1994) Section 1. Establishment of the Plan. There is hereby established a plan for the voluntary deferral of compensation by members of the Board of Directors who are not employees of the Company. The Plan is known as "The Lilly Directors' Deferred Compensation Plan." Section 2. Definitions. When used in the Plan, the following terms shall have the definitions set forth in this Section 2: 2.1. Account. The term "Account" means the separate account maintained under the Plan for each Participant as described in Section 4 hereof. 2.2. Beneficiary. The term "Beneficiary" means the beneficiary or beneficiaries (including any contingent beneficiary or beneficiaries) designated pursuant to subsection 5.2 hereof. 2.3. Board of Directors. The term "Board of Directors" means the Board of Directors of the Company. 2.4. Committee. The term "Committee" means the Compensation and Management Development Committee of the Board of Directors, provided that no Participant shall be considered to be a member of the Committee for purposes of the Plan. 2.5. Company. The term "Company" means Eli Lilly and Company. 2.6. Company Credit. The term "Company Credit" means an amount computed and credited annually to a Participant's Account at a rate that is two percent (2%) above the rate that the Treasurer of the Company determines was the prime rate of interest charged by Chemical Bank, New York, New York (the "Bank"), on loans made on the immediately preceding December 15 or, if the Bank was closed on December 15, the last day preceding December 15 on which the Bank was open for business. 2.7. Compensation. The term "Compensation" means any or all compensation to which a Director is entitled for services rendered to the Company as a Director. 2.8. Deferral Allocation Date. The term "Deferral Allocation Date" means the first Monday that (i) follows the earlier of (a) the date on which a deferred amount would have been paid in cash if a deferral election had not been made hereunder, or (b) in the case of an award of compensation which by its terms is subject to a deferred payment date, the date of award; and (ii) is the third Monday of a month. 2.9. Director. The term "Director" means a member of the Board of Directors who is not a salaried employee of the Company. 2.10. Participant. The term "Participant" means a Director who has elected to defer all or part of his Compensation pursuant to the Plan in accordance with Section 3 hereof. 2.11. Plan. The term "Plan" means The Lilly Directors' Deferred Compensation Plan, as set forth herein and as it may be amended from time to time. Section 3. Participation. Prior to the beginning of each calendar year, a Director may defer the receipt of Compensation to be earned by the Director during such year by filing with the Company a written election that: (i) defers payment of a designated amount (of one Thousand Dollars ($1,000) or more) or percentage of his Compensation for services attributable to the following calendar year (or portion thereof); and (ii) specifies the payment option selected by the Participant pursuant to subsection 5.1 hereof. The amount deferred may not exceed the Director's Compensation for the calendar year. Notwithstanding the foregoing, any individual who is newly elected or appointed to serve as a Director may, not later than thirty (30) days after his election or appointment becomes effective, elect, in accordance with the preceding provisions of this Section 3, to defer the receipt of Compensation earned during the portion of the current calendar year that follows the filing of the election with the Company. Except as provided in subsections 5.1 and 5.3 hereof, any elections made pursuant to this Section 3 with respect to a calendar year shall be irrevocable when made. Section 4. Account. The Company shall maintain an individual Account in the name of each participant in respect of each calendar year a Participant elects to defer receipt of Compensation pursuant to Section 3 hereof. 4.1. Account. The Account shall be denominated in U.S. dollars, rounded to the nearest whole cent. A deferred amount allocated to an Account pursuant to Section 3 hereof shall be credited to the Participant's Account as of the Deferral Allocation Date. 4.2. Account Statements. Within a reasonable time following the end of each calendar year, the Company shall render an annual statement to each Participant. The annual statement shall report the dollar amount credited to the Participant's Account as of December 31 of that year. 4.3. Accrual of Company Credit. The Treasurer of the Company shall determine the annual rate of Company Credit on or before December 31 of each calendar year. This rate shall be effective for the following calendar year. The Company Credit shall accrue monthly, at one-twelfth of the applicable annual rate, on all amounts credited to the Participant's Account, including the Company Credits for prior years. The Company Credit shall not accrue on any amount distributed to the Participant (or to the Participant's Beneficiary) during the month for which the accrual is determined, except where an amount is distributed to a Beneficiary in the month of the Participant's death. The Company Credit for each year shall be credited to each Participant's Account as of December 31 of that year and shall be compounded annually. 4.4. Transfer of Share Account Balance to Interest Account. The credited account balance as of September 1, 1994, in the Participant's Share Account shall be transferred to the Participant's Interest Account and such Accounts shall be consolidated into a single Account as of that date. The valuation of the Participant's Share Account for purposes of this transfer shall be based upon the value of the Company shares allocated to the Participant's Share Account on September 1, 1994. The valuation of the Company shares shall be based on the average of the high and low price for a share of common stock of the Company on September 1, 1994, as reported on the composite tape for shares listed on The New York Stock Exchange. As of September 1, 1994, no further amounts shall be credited or allocated to the Participant's Share Account. Company Credit will continue to accrue to the Participant's Account. Section 5. Payment. 5.1. Payment Options. The Participant shall select a payment election from the payment elections described below. The Participant's final payment election shall control over all prior payment elections. The payment option selected by a Participant in connection with the election to defer Compensation for a calendar year shall provide for payment to the Participant of the amounts credited to the Participant's Account for that year in: (i) a lump sum in January of the calendar year following the calendar year in which the Participant ceases to be a Director; or (ii) annual installments over a period of two to ten years commencing in January of the calendar year following the calendar year during which the Participant ceases to be a Director. If the payment option described in paragraph (i), above, has been elected, the amount of the lump sum shall be equal to the amount credited to the Participant's Account as of the December 31 next preceding the date of the payment. If the payment option described in paragraph (ii), above, has been elected, the amount of each installment shall be equal to the amount credited to the Participant's Account as of the December 31 next preceding the date of the installment payment divided by the number of installment payments that have not yet been made. If the Participant fails to elect a payment option, the amount credited to the Participant's Account shall be distributed in a lump sum in accordance with the payment option described in paragraph (i), above. If the amount credited to the Participant's Account is less than $25,000, the Committee, in its sole discretion, may pay out the amount credited to the Participant's Account in a lump sum. 5.2. Payment Upon Death. Within a reasonable period of time following the death of the Participant, the balance in the Participant's Account shall be paid by the Company in a lump sum to the Participant's Beneficiary. For purposes of this subsection 5.2, the amount credited to the Participant's Account shall be determined as of the date of payment. A Participant may designate the Beneficiary, in writing, in a form acceptable to the Committee and filed with the Company before the Participant's death. A Participant may, before the Participant's death, revoke a prior designation of Beneficiary and may also designate a new Beneficiary without the consent of the previously designated Beneficiary, provided that such revocation and new designation (if any) are in writing, in a form acceptable to the Committee, and filed with the Company before the Participant's death. If the Participant does not designate a Beneficiary, or if no designated Beneficiary survives the Participant, any amount not distributed to the Participant during the Participant's life shall be paid to the Participant's estate in a lump sum in accordance with this subsection 5.2. 5.3. Payment on Unforeseeable Emergency. The Administrator may, in its sole discretion, direct payment to a Participant of all or of any portion of the Participant's Account balance, notwithstanding an election under Section 5.1. above, at any time that it determines that such Participant has an unforeseeable emergency and then only to the extent reasonably necessary to meet the emergency. For purposes of this rule, "unforeseeable emergency" means severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but, in any case, payment may not be made to the extent that such hardship is or may be relieved -- (i) Through reimbursement or compensation by insurance or otherwise, (ii) By liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (iii) By cessation of deferrals under the Plan. Examples of what are not considered to be unforeseeable emergencies include the need to send a Participant's child to college or the desire to purchase a home. 5.4. Cash Payments. All payments under the Plan shall be made in cash. Section 6. Prohibition Against Transfer. The right of a Participant to receive payments under the Plan may not be transferred except by will or applicable laws of descent and distribution. A Participant may not assign, sell, pledge, or otherwise transfer any amount to which he is entitled hereunder prior to transfer or payment thereof to the Participant. Section 7. General Provisions. 7.1. Participant's Rights Unsecured. The Plan is unfunded. The right of any Participant to receive payments under the provisions of the Plan shall be an unsecured claim against the general assets of the Company. 7.2. Administration. Except as otherwise provided in the Plan, the Plan shall be administered by the Committee, which shall have the authority to adopt rules and regulations for carrying out the Plan, and which shall interpret, construe, and implement the provisions of the Plan. 7.3. Legal Opinions. The Committee may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to its obligations and duties under the Plan, or with respect to any action, proceeding, or any questions of law, and shall not be liable with respect to any action taken, or omitted, by it in good faith pursuant to the advice of such counsel. 7.4. Liability. Any decision made or action taken by the Board of Directors, the Committee, or any employee of the Company or any of its subsidiaries, arising out of or in connection with the construction, administration, interpretation, or effect of the Plan, shall be absolutely discretionary, and shall be conclusive and binding on all parties. Neither the Committee nor a member of the Board of Directors and no employee of the Company or any of its subsidiaries shall be liable for any act or actions hereunder, whether of omission or commission, by any other member or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or, except in circumstances involving bad faith, for anything done or omitted to be done. 7.5. Withholding. The Company shall have the right to deduct from all payments hereunder any taxes required by law to be withheld from such payments. The recipients of such payments shall bear all taxes on amounts paid under the Plan to the extent that no taxes are withheld thereon, irrespective of whether withholding is required. 7.6. Incapacity. If the Committee determines that any person entitled to benefits under the Plan is unable to care for his or her affairs because of illness or accident, any payment due (unless a duly qualified guardian or other legal representative has been appointed) may be paid for the benefit of such person to such person's spouse, parent, brother, sister, or other party deemed to have incurred expenses for such person. 7.7. Inability to Locate. If the Committee is unable to locate a person to whom a payment is due under the Plan for a period of twelve (12) months, commencing with the first day of the month as of which the payment becomes payable, the total amount payable to such person shall be forfeited. 7.8. Legal Holidays. If any day on (or on or before) which action under the Plan must be taken falls on a Saturday, Sunday, or legal holiday, such action may be taken on (or on or before) the next succeeding day that is not a Saturday, Sunday, or legal holiday; provided, that this subsection 7.8 shall not permit any action that must be taken in one calendar year to be taken in any subsequent calendar year. Section 8. Amendment, Suspension, and Termination. The Board of Directors shall have the right at any time and from time to time, to amend, suspend, or terminate the Plan. Section 9. Applicable Law. The Plan shall be governed by, and construed in accordance with, the laws of the State of Indiana, except to the extent that such laws are preempted by Federal Law. Section 10. Effective Date. The effective date of this amendment and restatement of the Plan is August 1, 1994. Nothing herein shall invalidate or adversely affect any previous election, designation, deferral, or accrual in accordance with the terms of the Plan that were then in effect. EX-10.6 8 THE LILLY NON-EMPLOYEE DIRECTORS' DEFERRED STOCK PLAN (As Amended and Restated as of August 1, 1994) Section 1. Establishment of the Plan. There is hereby established a plan whereby certain Directors of the Company can share in the long-term growth of the Company by acquiring an ownership interest in Company. The Plan covers only Directors who are not current or former full- time salaried employees of the Company and who do not Participate in The Lilly Deferred Compensation Plan. Section 2. Definitions. When used in the Plan, the following terms shall have the definitions set forth in this Section 2: 2.1. Accrual Date. The term "Accrual Date" means the first day in December of each calendar year on which the common stock of the Company is traded, or such other annual date, not earlier than the third Monday in February, established by the Committee as the date as of which Shares are allocated to each Share Account. 2.2. Beneficiary. The term "Beneficiary" means the beneficiary or beneficiaries (including any contingent beneficiary or beneficiaries) designated pursuant to subsection 6.2 hereof. 2.3. Board of Directors. The term "Board of Directors" means the Board of Directors of the Company. 2.4. Committee. The term "Committee" refers to the Compensation and Management Development Committee of the Board of Directors, provided that no Participant shall be considered to be a member of the Committee for purposes of the Plan. 2.5. Company. The term "Company" means Eli Lilly and Company. 2.6. Company Credit. The term "Company Credit" means an amount computed, and credited annually to a Director's Interest Account at a rate that is two percent (2%) above the rate that the Treasurer of the Company determines was the rate of interest charged by Chemical Bank, New York, New York (the "Bank") on loans made on the immediately preceding December 15 or, if the Bank was closed on December 15, the last day preceding December 15 on which the Bank was open for business. 2.7. Director. The term "Director" means each member of the Board of Directors who is not and has never been a full-time salaried employee of the Company. 2.8. Dividend Allocation Date. The term "Dividend Allocation Date" means the first Monday that (a) follows a Dividend Payment Date and (b) is the third Monday of a Month. 2.9. Dividend Payment Date. The term "Dividend Payment Date" means the date as of which the Company pays a cash dividend on Shares. 2.10. Dividend Record Date. The term "Dividend Record Date" means, with respect to any Dividend Payment Date, the date established by the Board of Directors as the record date for determining shareholders entitled to receive payment of the dividend. 2.11. Individual Accounts. The term "Individual Accounts" or "Accounts" means the two separate accounts (the Share Account and the Interest Account) established under the Plan for each Director as described in Section 4 hereof. When used in the singular, the terms shall refer to one or the other of those accounts, as the context requires. 2.12. Participant. The term "Participant" means a Director who becomes a participant in the Plan in accordance with Section 3 hereof. 2.13. Plan. The term "Plan" mean The Lilly Non-Employee Directors' Deferred Stock Plan, as set forth herein and as it may be amended from time to time. 2.14. Share. The term "Share" means a share of common stock of the Company. Section 3. Participation. Each Director who participated in the Plan immediately before the effective date of this amendment and restatement of the Plan shall continue as a Participant on such effective date. Each person who is thereafter elected or appointed as a Director shall become a Participant beginning the month in which such Director takes office. A Participant shall cease to participate in the Plan when the Participant ceases to be a Director. For purposes of the Plan, a Participant shall be deemed to cease to be a Director on the first day of the month next following in which he last serves as a Director. Section 4. Individual Accounts. The Company shall maintain two Individual Accounts in the name of each Director, a Share Account and an Interest account, as follows: 4.1. Share Account. The Share Account shall be denominated in Shares, and shall be maintained in fractions rounded to three (3) decimal places. 4.2. Interest Account. The Interest Account (known previously as the "Cash Account") shall be denominated in U.S. Dollars, rounded to the nearest whole cent. The opening balance of each Interest Account on January 1, 1988, shall be equal to the closing balance of the corresponding Cash Account maintained under the Plan on December 31, 1987. 4.3. Account Statements. Within a reasonable time following the end of each calendar year, the Company shall render an annual statement to each Director. The annual statement shall report the number of Shares credited to the Director's Share Account and the dollar amount credited to the Director's Interest Account as of December 31 of that year. Section 5. Allocations to Accounts. 5.1. Allocation of Shares. As of the Accrual Date of each calendar year, there shall be allocated to the Share Account of each person who is a Director on that date, as part of the compensation to such Director for service on the Board of Directors, four hundred (400) Shares. Shares allocated to each Director's Share Account shall be hypothetical and not issued or transferred by the Company until payment is made pursuant to Section 6 hereof. 5.2. Cash Dividends. Cash dividends paid on Shares shall be deemed to have been paid on the Shares allocated to each Director's Share Account as if the allocated Shares were actual Shares issued and outstanding on the Dividend Record Date. An amount equal to the amount of such dividends shall be credited to each Interest Account as of each Dividend Allocation Date. 5.3. Accrual of Company Credit. The Treasurer of the Company shall determine the annual rate of Company Credit on or before December 31 of each calendar year. This rate shall be effective for the following calendar year. The Company Credit shall accrue monthly, at one-twelfth of the applicable annual rate, on all amounts credited to the Director's Interest Account, including the Company Credits for prior years. The Company Credit shall not accrue on any amount distributed to the Director (or to the Director's Beneficiary) during the month for which the accrual is determined, except where an amount is distributed to a Beneficiary in the month of the Director's death. The Company Credit for each year shall be credited to each Director's Account as of December 31 of that year and shall be compounded annually. 5.4. Capital Adjustments. The number of Shares referred to in subsection 5.1 hereof and the number of Shares allocated to each Share account shall be adjusted to reflect stock dividends, stock splits, and reclassifications, as if those Shares were actual Shares. Section 6. Payment Provisions 6.1. Payment of Deferred Shares and Cash. All payments to a Director (or to a Director's Beneficiary) with respect to the Director's Share Account shall be paid in Shares at which time the Shares shall be issued or transferred on the books of the Company. All payments to a Director (or to a Director's Beneficiary) with respect to the Director's Interest Account shall be paid in cash. Except with respect to compensation for which the Director elects a payment option in accordance with subsection 6.2 hereof, payment to the Director from each Account shall be made in a lump sum in January of the calendar year immediately following the calendar year during which the Director ceases to be a Director. All Shares to be transferred hereunder shall be transferred out of treasury shares to the extent available. Fractional shares shall not be transferred to a Director, provided that in the case of a final payment under the Plan with respect to a Director, any fractions remaining in the Director's Share Account shall be rounded up to the next whole Share and that number of whole Shares shall be transferred to the Director (or, after the Director's death, to the Director's Beneficiary). If Shares are not traded on The New York Stock Exchange on any day on which a payment of Shares is to be made under the Plan, then that payment shall be made on the next day on which Shares are traded on The New York Stock Exchange. 6.2. Payment Option. Within thirty (30)days after becoming a Director, the Director may elect payment of the amount in either or both of his Individual accounts in annual installments over a period of two to ten years commencing in January of the calendar year immediately following the year during which the Director ceases to be a Director. The amount of each installment with respect to the Interest Account shall be equal to the amount credited to the Interest Account as of December 31 next preceding the date of the installment payment divided by the number of installment payments that have not been made, and the amount of each installment with respect to the Director's Share Account shall be equal to the number of Shares credited to the Share Account as of the third Monday in the December next preceding the date of the installment payment divided by the number of installment payments that have not yet been made. If the amounts credited to the Director's Individual Accounts are less than $25,000, the Committee, in it sole discretion, may pay out the amounts credited to the Director's Individual Accounts in a lump sum. After the thirty (30) day period described above expires, a Director may make a payment election for the first time or may amend a previous election; provided, however that his final payment election shall control over all prior payment elections. 6.3. Payment Upon Death. Within a reasonable period of time following the death of the Director, all of the Shares and cash credited to the Director's Individual Accounts shall be paid by the Company in a lump sum to the Director's Beneficiary. For purposes of this subsection 6.3, the number of Shares credited to the Director's Share Account and the amount credited to the Director's Interest Account shall be determined as of the date of payment. A Director may designate the Beneficiary, in writing, in a form acceptable to the Committee before the Director's death. A Director may, before the Director's death, revoke a prior designation of Beneficiary and may also designate a new Beneficiary the consent of the previously designated Beneficiary provided that such revocation and new designation (if any) are in writing, in a form acceptable to the Committee, and filed with the Committee before the Director's death. If the Director does not designate a Beneficiary, or if no designated Beneficiary survives the Director, any amount not distributed to the Director during the Director's life shall be paid to the Director's estate in a lump sum in accordance with this subsection 6.3. 6.4. Payment on Unforeseeable Emergency. The Administrator may, in its sole discretion, direct payment to a Participant of all or of any portion of the Participant's Account balance, notwithstanding an election under Section 6.2. above, at any time that it determines that such Participant has an unforeseeable emergency and then only to the extent reasonably necessary to meet the emergency. For purposes of this rule, "unforeseeable emergency" means severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that will constitute an unforeseeable emergency will depend upon the facts of each case, but, in any case, payment may not be made to the extent that such hardship is or may be relieved -- (i) Through reimbursement or compensation by insurance or otherwise, (ii) By liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (iii) By cessation of deferrals under the Plan. Examples of what are not considered to be unforeseeable emergencies include the need to send a Participant's child to college or the desire to purchase a home. Section 7. Ownership of Shares. A Director shall have no rights as a shareholder of the Company with respect to any Shares until the Shares are transferred to the Director on the books of the Company. Section 8. Prohibition Against Transfer. The right of a Director to receive payments of Shares and cash under the Plan may not be transferred except by will or applicable laws of descent and distribution. A Director may not assign, sell, pledge, or otherwise transfer Shares or cash to which he is entitled hereunder prior to transfer or payment thereof to the Director. Section 9. General Provisions. 9.1. Director's Rights Unsecured. The Plan is unfunded. The right of any Director to receive payments of Shares or cash under the provisions of the Plan shall be an unsecured claim against the general assets of the Company. 9.2. Administration. Except as otherwise provided in the Plan, the Plan shall be administered by the Committee, which shall have the authority to adopt rules and regulations for carrying out the Plan, and which shall interpret, construe, and implement the provisions of the Plan. 9.3. Legal Opinions. The Committee may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to its obligations and duties under the Plan, or with respect to any action, proceeding, or any questions of law, and shall not be liable with respect to any action taken, or omitted, by it in good faith pursuant to the advice of such counsel. 9.4. Liability. Any decision made or action taken by the Board of Directors, the Committee, or any employee of the Company or any of its subsidiaries, arising out of or in connection with the construction, administration, interpretation, or effect of the Plan, shall be absolutely discretionary, and shall be conclusive and binding on all parties. Neither the Committee nor a member of the Board of Directors and no employee of the Company or any of its subsidiaries shall be liable for any act or action hereunder, whether of omission or commission, by any other member or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or, except in circumstances involving bad faith, for anything done or omitted to be done. 9.5. Withholding. The company shall have the right to deduct from all payments hereunder any taxes to be withheld from such payments. The recipients of such payments shall bear all taxes on amounts paid under the Plan to the extent that no taxes are withheld thereon, irrespective of whether withholding is required. 9.6. Incapacity. If the Committee determines that any person is entitled to benefits of illness or accident, any payment due (unless a duly qualified guardian or other legal representative has been appointed) may be paid for the benefit of such person to such person's spouse, parent, brother, sister, or other party deemed by the Committee to have incurred expenses for such person. 9.7. Inability to Locate. If the Committee is unable to locate a person to whom a payment is due under the plan for a period of twelve (12) months, commencing with the first day of the month as of which the payment becomes payable, the total amount payable to such person shall be forfeited. 9.8. Legal Holidays. If any day on (or on or before) which action under the Plan must be taken falls on a Saturday, Sunday, or legal holiday, such action may be taken on (or on or before) the next succeeding day that is not a Saturday, Sunday, or legal holiday; provided, that this subsection 9.8 shall not permit any action that must be taken in one calendar year to be taken in any subsequent calendar year. Section 10. Amendment, Suspension, and Termination. The Board of Directors shall have the right at any time, and from time to time, to amend, suspend, or terminate the Plan, provided that no amendment or termination shall reduce the number of Shares or the cash balance in an Individual Account, and provided further that the number of Shares allocated annually pursuant to subsection 5.1 hereof and the basis on which cash is paid with respect to dividends may not be changed more frequently than every calendar year. Section 11. Applicable Law. The Plan shall be governed by, and construed in accordance with, the laws of the State of Indiana, except to the extent that such laws are preempted by Federal law. Section 12. Effective Date. The effective date of this amendment and restatement of the Plan is August 1, 1994. Nothing herein shall invalidate or adversely affect any previous election, designation, deferral, or accrual in accordance with the terms of the Plan that were then in effect. EX-10.8 9 Eli Lilly and Company Executive Bonus Plan (Economic Value Added (EVA) Bonus Plan) ARTICLE I Bonus Plan Statement of Purpose and Summary 1.1 The purpose of the Plan is to provide a system of bonus compensation for the senior executives of Eli Lilly and Company and subsidiaries which will promote the maximization of shareholder value over the long term, by linking performance incentives to increases in shareholder value. The Plan ties bonus compensation to Economic Value Added ("EVA"), and thereby rewards employees for long-term, sustained improvement in shareholder value. 1.2 EVA will be used as the performance measure of value creation. EVA reflects the benefits and costs of capital employment. Employees create economic value when the operating profits from a business exceed the cost of the capital employed. ARTICLE II Definitions of Certain Terms Unless the context requires a different meaning, the following terms shall have the following meanings: 2.1 "Company" means Eli Lilly and Company and its subsidiaries. 2.2 "Committee" means the Compensation and Management Development Committee, the members of which shall be selected by the Board of Directors from among its members. 2.3 "Participant" means any senior executive of the Company designated by the Committee as a participant in the Plan with respect to any Plan Year. 2.4 "Plan" means this Eli Lilly and Company Executive Bonus Plan. 2.5 "Plan Year" means the applicable calendar year. 2.6 "Retirement" means the cessation of employment upon the attainment of at least eighty age and service points, as determined by the provisions of The Lilly Retirement Plan as amended from time to time, assuming eligibility to participate in that plan. 2.7 "Disability" means the time at which a Participant becomes eligible for a payment under The Lilly Extended Disability Plan, assuming eligibility to participate in that plan. -1- ARTICLE III Definition and Components of EVA The following terms set forth the calculation of EVA and the components of calculating EVA. The calculation of EVA for a Plan Year is used in determining the bonuses earned by Participants under the Plan, as set forth in Article IV. 3.1 "Economic Value Added" or "EVA" means the excess NOPAT that remains after subtracting the Capital Charge. 3.2 "Net Operating Profit After Tax" or "NOPAT" means the after tax operating earnings of the Company for the Plan Year. NOPAT is determined by adding net sales plus other income and subtracting the following: cost of goods sold, selling, general and administrative expenses (excluding goodwill amortization and interest expense), amortization of research and development, taxes (excluding the tax benefit of interest expense) and amounts associated with discontinued operations (including DowElanco). 3.3 Capital Charge" means the deemed opportunity cost of employing Capital for the Company. The Capital Charge is calculated by multiplying Capital times Cost of Capital (C*). 3.4 "Capital" means the net investment employed in the operations of the Company produced by operations and financing activities. Capital is calculated by adding together current assets, net property, plant and equipment, gross goodwill, net intangibles, other assets, and capitalized research and development, and subtracting the following: non-interest bearing current liabilities (including accounts payable), employee compensation payable, income taxes payable, dividends payable, other current liabilities and capital associated with discontinued operations (including DowElanco). 3.5 "Cost of Capital" or "C*" is the percentage calculated from the weighted average of Cost of Debt and Cost of Equity. Cost of Capital for each Plan Year is determined by reference to the percentage calculated at the end of October of the prior Plan Year. Cost of Debt capital is the marginal long-term borrowing rate of the Company times (one minus the tax rate). Cost of Equity capital is the risk-free rate plus (beta times the market risk premium). ARTICLE IV Definition and Computation of the EVA Bonus Bonuses earned under the Plan for a Plan Year are determined based on a comparison of actual EVA to the "Target EVA" for the year, which is established as described below to ensure improvement in EVA from year to year. The result of this comparison is adjusted by a "Leverage Factor" measuring the volatility of industry returns. The factor produced is referred to as the "Bonus Multiple," which is multiplied by the Participant's "Target Bonus" amount established for the year to produce the actual bonus earned. This amount, referred to as the "Declared Bonus," is credited to the Participant's "Bonus Bank" balance and paid out in the manner provided below. 4.1 Target Bonus. The Target Bonus Awards will be determined according to a schedule determined by the Committee that associates job responsibilities with a specified dollar amount of Target Bonus. If a Participant moves from one Target Bonus to another during a Plan Year by virtue of a change in job responsibilities, he/she will receive an award that is pro-rated according to time. The Target Bonus will be based on the currency in which the highest portion of base pay is regularly paid. 4.2 Declared Bonus. A Declared Bonus is the Target Bonus times the Bonus Multiple. 4.3 Bonus Multiple. The Bonus Multiple is Actual EVA minus Target EVA over the Leverage Factor, plus one. 4.4 Bonus Bank. All bonus payments are made from the Bonus Bank. Each Participant's Bonus Bank balance on January 1, 1995 is zero. The Bonus Bank is increased or decreased for any plan years by the amount of Declared Bonus, except that no negative amounts will be credited on account of Plan Year 1995. If the available Bonus Bank balance is positive, the participant will be paid from such balance up to the Target Bonus amount, plus one third of any such balance that remains after subtracting the Target Bonus from available Bonus Bank balance. If the available Bonus Bank balance is negative, no payment will occur. 4.5 Target EVA and Annual Target Readjustment. The Target EVA for the 1995 Plan Year will equal Plan EVA, which is determined by the Committee. The Target EVA for the following years will be calculated as follows: Target EVA=(Prior Year's Actual EVA + Prior Year's Target EVA)+Expected --------------------------------------------------- 2 Improvement 4.6 Expected Improvement. The Expected Improvement is the additional EVA amount determined by the Committee that is used to assure that a minimum level of improvement is achieved in order to earn target awards. 4.7 Leverage Factor. The Leverage Factor determines the rate of change in bonuses as EVA surpasses or falls short of Target EVA, determined by the Committee from an evaluation of the long term volatility of industry returns. 4.8 Working Plan Example. Examples of the mechanics of the Plan are shown on Schedule A. ARTICLE V Plan Administration 5.1 Time of Payment. Payment from the Bonus Bank will be made before March 1 of the year following the Plan Year. Payments are eligible for deferral under The Lilly Deferred Compensation Plan. 5.2 Certification of Results. Before any amount is paid under the Plan, the Committee shall certify in writing the calculation of EVA for the Plan Year and the satisfaction of all other material terms of the calculation of the Declared Bonus. 5.3 New Hires, Promotions. New hires or individuals promoted who are first selected for participation by the Committee effective on a date other than January 1 will participate on a pro-rata basis in their first year of participation, based on the Declared Bonus determined for the Plan Year, pro-rated for that period of the year during which the Participant was selected for participation in the Plan. 5.4 Termination of Employment. If a Participant ceases employment with the Company before the end of a Plan Year for reasons other than Retirement, Disability or death, the Participant shall receive no Bonus for that Plan Year, and his/her Bank Balance shall be forfeited. The Committee may make complete or partial exceptions to this rule, with respect to the Bank Balance only, in its sole discretion. 5.5 Retirement, Disability or Death. If a Participant ceases employment with the Company because of Retirement, Disability or death, the Participant or personal representative, as the case may be, shall receive full payment of his/her Bank Balance and a bonus based on the Declared Bonus determined for the Plan Year but pro-rated for that period of the year during which the Participant was an active employee of the Company. 5.6 Plan Participation. A Participant may not participate in this Plan for any portion of a year for which he/she is entitled to receive payment under the Eli Lilly and Company Contingent Compensation Plan, and shall be treated in accordance with 5.3. ARTICLE VI General Provisions 6.1 Withholding of Taxes. The Company shall have the right to withhold the amount of taxes which in the sole determination of the Company are required to be withheld under law with respect to any amount due or payable under the Plan. 6.2 Expenses. All expenses and costs in connection with the adoption and administration of the plan shall be borne by the Company. 6.3 No Prior Right or Offer, No Right to Employment. Except and until expressly granted pursuant to the Plan, nothing in the Plan shall be deemed to give any employee any contractual or other right to participate in the benefits of the Plan. No award to any such Participant in any Plan Year shall be deemed to create a right to receive any award or to participate in the benefits of the Plan in any subsequent Plan Year. 6.4 Rights Personal to Employee. Any rights provided to an employee under the Plan shall be personal to such employee, shall not be transferable, except by will or pursuant to the laws of descent or distribution, and shall be exercisable during his/her lifetime, only by such employee, or a court- appointed guardian for the employee. 6.5 Non-Allocation of Award. In the event of a suspension of the Plan in any Plan Year, as described in Section 11.1, no awards under the Plan for the Plan Year during which such suspension occurs shall affect the calculation of awards for any subsequent period in which the Plan in continued. ARTICLE VII Limitations 7.1 No Continued Employment. Neither the establishment of the Plan nor the grant of an award thereunder shall be deemed to constitute an express or implied contract of employment of any Participant for any period of time or in any way abridge the rights of the Company to determine the terms and conditions of employment or to terminate the employment of any employee with or without notice or cause at any time. 7.2 No Vested Rights. Except as expressly provided herein, no employee or other person shall have any claim of right (legal, equitable, or otherwise) to any award, allocation, or distribution or any right, title, or vested interest in any amounts in his/her Bonus Bank and no officer or employee of the Company or any other person shall have any authority to make representations or agreements to the contrary. No interest conferred herein to a Participant shall be assignable or subject to claim by a Participant's creditors. 7.3 Non-alienation. Except as provided in Subsection 5.1, no Participant or other person shall have any right or power, by draft, assignment, or otherwise, to mortgage, pledge or otherwise encumber in advance any payment under the plan, and every attempted draft, assignment, or other disposition thereof shall be absolutely void. ARTICLE VIII Committee Authority 8.1 Authority to Interpret and Administer. Except as otherwise expressly provided herein, full power and authority to interpret and administer this Plan shall be vested in the Committee. The Committee may from time to time make such decisions and adopt such rules and regulations for implementing the Plan as it deems appropriate for any Participant under the Plan. Any decision taken by the Committee arising out of or in connection with the construction, administration, interpretation and effect of the Plan shall be final, conclusive and binding upon all Participants and any person claiming under or through Participants. 8.2 Committee Discretion to Revise Rates and Amounts. The Committee may, in its sole discretion, revise the various rates, amounts and percentages provided in the Plan from time to time (including, without limitation, with respect to each of the foregoing defined terms), provided that the methods and assumptions used in making such determinations shall be established and applied by the Committee on the basis of reasonable, objective criteria that are applied in a uniform manner from Plan Year to Plan Year. 8.3 Financial And Accounting Terms. Except as otherwise provided, financial and accounting terms, including terms defined herein, shall be determined by the Committee in accordance with generally accepted accounting principles and as derived from the audited consolidated financial statements of the Company, prepared in the ordinary course of business. ARTICLE IX Notice 9.1 Any notice to be given to the Company or Committee pursuant to the provisions of the Plan shall be in writing and directed to Secretary, Eli Lilly and Company, Drop Code 1093, Lilly Corporate Center, Indianapolis, IN 46285. ARTICLE X Effective Date 10.1 This Plan shall be effective as of January 1, 1995. ARTICLE XI Amendments and Termination 11.1 This Plan may be amended, suspended or terminated at any time at the discretion of the Board of Directors of Eli Lilly and Company, and may, except for this Section 11.1, be amended at any time by the Committee. ARTICLE XII Applicable Law 12.1 This Plan shall be governed by and construed in accordance with the provisions of the laws of the State of Indiana. EX-10.9 10 THE LILLY NON-EMPLOYEE DIRECTORS' RETIREMENT PLAN (Effective as of January 1, 1989) Section 1. Establishment of the Plan. The Lilly Non-Employee Directors' Retirement Plan (the "Plan") provides for retirement benefit payments for members of the Board of Directors of Eli Lilly and Company (the "Company") who are not eligible to receive benefits under The Lilly Retirement Plan. Section 2. Definitions For purposes of the Plan, the definitions set forth in Appendix A shall control. Section 3. Eligibility. A Director is eligible to participate in the Plan if he or she has completed a Period of Service of five (5) years or more. Section 4. Monthly Retirement Benefit. 4.1. Benefit Amount. The "Monthly Retirement Benefit" is an amount equal to the monthly retainer in effect on the date a Director retires from the Board or on the date of a Director's death, whichever occurs first. 4.2 Initiation and Duration of Benefit Payment. Monthly Retirement Benefits are first payable in the month following the Participant's Retirement from the Board of Directors. Monthly Retirement Benefits will continue to be paid until the earlier of the Participant's death or the expiration of the Participant's Benefit Period. 4.3. Spouse's Benefit. Upon the death of the Participant, a Participant's Spouse shall be entitled to a spouse's benefit under the Plan as set forth below (a) Participant's Period of Service - Fifteen Years or More A monthly benefit for life equal to fifty percent (50%) of the Participant's Monthly Retirement Benefit. (b) Participant's Period of Service - Less Than Fifteen Years A monthly benefit equal to fifty percent (50%) of the Participant's Monthly Retirement Benefit until the earlier of (i) the end of the Participant's Benefit Period, or (ii) the Spouse's death. If the Benefit Period expired prior to the Participant's death, no spouse's benefit shall be paid. If a spouse's benefit is payable under the Plan, the benefit will first be paid in the month following the Participant's death 4.4. Forfeiture of Benefits. A Director's eligibility to participate in the Plan or receive a Monthly Retirement Benefit shall cease if, in the judgment of the Executive Committee, the Director (1) renders services for any organization or engages directly or indirectly in any business which competes with the Company or its subsidiaries, or (2) engages in any other activities otherwise prejudicial to or conflicting with the interests of the Company or its subsidiaries. Section 5. Prohibition Against Transfer. Participant or Spouse may not mortgage, pledge, assign or otherwise encumber in advance any payment under the Plan. Any attempt to do so shall be absolutely void and of no force and effect. Section 6. General Provisions. 6.1. Participant's Rights Unsecured. The Plan is unfunded. The right of any Participant or Spouse to receive a benefit under this Plan shall be an unsecured claim against the general assets of the Company. 6.2. Administration. The Plan shall be administered and interpreted by the Executive Committee, which may adopt rules and regulations to carry out the Plan and implement its provisions. The Committee's decisions with respect to the administration and interpretation of the Plan shall be final and conclusive. The Committee shall not be liable for any action taken or omitted by it in good faith in administering and interpreting the Plan. 6.3. Withholding. The Company shall have the right to deduct from any benefit payment under the Plan any taxes required by law to be withheld. The recipients of benefit payments shall be responsible for all taxes on amounts paid under the Plan to the extent that no taxes are withheld thereon, irrespective of whether withholding is required. 6.4. Incapacity. When any person entitled to benefits under the Plan is unable to care for his or her affairs because of illness or accident, any payment due may be paid for the benefit of such person to the person's duly appointed guardian or other legal representative. Section 7. Amendment. Suspension and Termination. The Board of Directors shall have the right at any time, and from time to time, to amend, suspend, or terminate the Plan, including the right to reduce or to eliminate altogether the benefits payable under the Plan (including benefits that have previously accrued and benefits then in pay status). Section 8. Applicable Law. The Plan shall be governed by and construed in accordance with the laws of the State of Indiana, except to the extent that such laws are preempted by Federal law. Section 9. Effective Date. The Plan is effective as of January 1, 1989. APPENDIX Definitions. When used in the Plan, the following terms shall have the definitions set forth in this Appendix: A-1. Benefit Period. "Benefit Period" means the period of time, beginning on the first day of the first month a Monthly Retirement Benefit is payable under the Plan and continuing for the number of months in the Participant's Period of Service; provided that if the Participant's Period of Service is equal to fifteen (15) years or more, the "Benefit Period" shall continue until the Participant's death. A-2. Board of Directors. "Board of Directors" means the Board of Directors of Eli Lilly and Company. A-3. Director. "Director" means a member of the Board of Directors who is not a salaried employee of the Company or its subsidiaries, and who is not receiving and is not eligible to receive benefits under the Lilly Retirement Plan. "Director" shall include an individual who was a member of the Board of Directors before January 1, 1989, as well as an individual who becomes a member of the Board of Directors on or after January 1, 1989. A-4. Executive Committee. "Executive Committee" means the Executive Committee of the Board of Directors. A-5. Monthly Retainer. "Monthly Retainer" means the monthly payment to a Director for service on the Board of Directors, but does not include fees for attendance at Board or Committee meetings or payments for travel or other expenses. A-6. Participant. "Participant" means a Director who has become, and remains, a participant under the Plan in accordance with Section (2) of the Plan. A-7. Period of Service. "Period of Service" means the aggregate period(s) of time (including periods before January 1, 1989) during which the Director served as a member of the Board of Directors. A-8. Retire or Retirement. "Retire" and "Retirement" refer to a Participant's separation from service as a member of the Board of Directors for a reason other than the Participant's death or removal for cause. A-9. Spouse. "Spouse" means the person to whom a Participant has been married throughout the one (1) year period ending on the date of the Participant's death. EX-11 11 EXHIBIT 11. COMPUTATION OF EARNINGS PER SHARE ON PRIMARY AND FULLY DILUTED BASES Eli Lilly and Company and Subsidiaries Year Ended December 31 1994 1993 1992 ---- ---- ---- (Dollars in millions, except per-share data; shares in thousands) PRIMARY: Net income ................ $1,286.1 $ 480.2 $ 708.7 ======= ======= ======= Average number of common shares outstanding 289,189 292,673 292,593 Add incremental shares: Stock plans and contingent payments 2,307 1,178 1,885 ----- ----- ----- Adjusted average shares.............. 291,496 293,851 294,478 ======= ======= ======= Primary earnings per share .. $ 4.41 $ 1.63 $ 2.41 FULLY DILUTED: Net income $1,286.1 $ 480.2 $ 708.7 ======= ======= ======= Average number of common shares outstanding 289,189 292,673 292,593 Add incremental shares: Stock plans and contingent payments 3,540 1,616 1,885 ----- ----- ----- Adjusted average shares 292,729 294,289 294,478 ======= ======= ======= Fully diluted earnings per share $ 4.39 $ 1.63 $ 2.41 EX-12 12 EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Years Ended December 31, ------------------------------------------ 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Consolidated Pretax Income From Continuing Operations Before Changes in Accounting Principles $1,698.6 $ 662.8 $1,193.5 $1,626.3 $1,418.1 Interest from Continuing Operations 129.2 96.1 108.4 87.1 94.7 Less Interest Capitalized During the Period from Continuing Operations (25.4) (25.5) (35.2) (48.1) (27.3) ---- ---- ---- ---- ---- Earnings $1,802.4 $ 733.4 $1,266.7 $1,665.3 $1,485.5 ======= ======= ======= ====== ======= Fixed Charges: Interest Expense from Continuing Operations $ 129.2 $ 96.1 $ 108.4 $ 87.1 $ 94.7 ======= ======= ====== ====== ===== Ratio of Earnings to Fixed Charges 14.0 7.6 11.7 19.1 15.7 ====== ====== ====== ====== ======
EX-13 13 EXHIBIT 13. ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1994 REVIEW OF OPERATIONS STRATEGIC ACTIONS During 1994, the company took several steps in implementing its plan to divest the Medical Devices and Diagnostics (MDD) Division businesses. Five of the MDD companies, Advanced Cardiovascular Systems, Inc.; Cardiac Pacemakers, Inc.; Devices for Vascular Intervention, Inc.; Heart Rhythm Technologies, Inc.; and Origin Medsystems, Inc., were combined into a newly formed company, Guidant Corporation (Guidant). In December, Guidant completed an initial public offering of approximately 20 percent of its common stock. Under current plans, Lilly intends to distribute the remaining 80 percent of Guidant's shares in 1995 through a split off (an exchange offer pursuant to which Lilly shareholders would be given the opportunity to exchange some of or all their Lilly shares for Guidant shares). Three of the other MDD companies, Physio-Control Corporation; IVAC Corporation; and Pacific Biotech, Inc., have been sold in private transactions, and negotiations are continuing for the sale of the remaining MDD company, Hybritech Incorporated. As a consequence of the divestiture plan, the operating results of the MDD companies have been reflected as "discontinued operations" in the company's financial statements and have been excluded from consolidated sales and expenses reflected therein. The company presently anticipates that the divestiture will be completed in 1995 at an overall net gain. This net gain will be recognized when realized. See Note 4 to the consolidated financial statements for a further discussion. On November 21, 1994, the company acquired PCS Health Systems, Inc. (PCS), the pharmaceutical benefits management business of McKesson Corporation. The purchase price was approximately $4.1 billion, substantially all of which was allocated to goodwill. Also, on September 9, 1994, the company acquired Sphinx Pharmaceuticals Corporation (Sphinx). The purchase price was approximately $80.0 million. Both of these acquisitions were accounted for using the purchase method of accounting. Therefore, operating results of the companies from their respective dates of acquisition have been included in the company's consolidated financial statements. See Note 2 to the consolidated financial statements for a further discussion of these acquisitions. OPERATING RESULTS OF CONTINUING OPERATIONS--1994 Worldwide sales rose 10 percent in 1994, to $5.7 billion. The factor that contributed most to the increase was an 11 percent rise in unit volume. Price declines reduced sales by 2 percent, while exchange rates increased sales by 1 percent. The company achieved sales increases both in the United States and abroad. Sales in the United States were $3.3 billion, a 6 percent increase. Sales outside the United States were $2.4 billion, an increase of 16 percent from the previous year. Pharmaceutical sales for the year increased approximately 10 percent, to $5.2 billion, led by the antidepressant Prozac(R) (up 39 percent, to approximately $1.7 billion). The company expects a continuing growth of Prozac sales but at a lower rate. Other products contributing significantly to worldwide pharmaceutical sales growth included the antiulcer drug Axid(R), the human insulin product Humulin(R), the human growth hormone Humatrope(R), and the oral antibiotic 1 LorabidTM. Sales also benefited slightly from the inclusion of PCS. Sales of central-nervous-system, diabetes-care, and gastrointestinal products, as therapeutic classes, increased from 1993 levels. However, sales of anti- infectives decreased as international sales growth was offset by a decline in the U.S. In addition, U.S. sales of Dobutrex(R) declined approximately 91 percent compared with 1993 as a result of the product's patent expiration in October 1993. U.S. pharmaceutical sales increased 6 percent, to nearly $3.1 billion, in 1994, despite the growth in product discounts and rebates associated with the company's increased participation in managed-care programs and the negative effects of federally mandated rebates to the states on sales to Medicaid recipients. For 1994, Medicaid rebates totaled $166 million, a 6 percent increase over 1993. Pharmaceutical sales outside the U.S. increased 17 percent, to nearly $2.2 billion, in 1994. Contributing substantially to the international sales growth were strong results in emerging markets, including Eastern Europe, Asia, and Latin America. Sales of the oral antibiotic Ceclor(R) in the United States, which accounted for approximately 7 percent of the company's worldwide sales in 1994, declined in both 1993 and 1994, primarily as a result of intense competition from other anti-infective products. These competitive pressures are expected to continue to have a negative effect on Ceclor sales. The U.S. product patent for Ceclor expired in 1992, and a patent on a key intermediate in Lilly's manufacturing process for the compound expired in December 1994. To date, the company has experienced only limited competition from generic cefaclor in markets outside the United States and is not aware that any competitor has received U.S. Food and Drug Administration (FDA) approval to market generic cefaclor. However, the company expects that, within the near term, competitors will be entering the U.S. market with generic cefaclor. The company believes that the quantity of available competitive product will be limited initially by manufacturing capacity constraints but that those constraints are likely to lessen over time. In response to these competitive challenges, in October 1994, the company, on behalf of its subsidiary STC Pharmaceuticals, Inc., announced an agreement with Mylan Pharmaceuticals, Inc., to market and distribute a generic form of cefaclor in the United States. This arrangement is intended to enhance cefaclor's competitiveness in the U.S. anti-infectives marketplace and to position the company as the leading supplier to the market of generic cefaclor after the introduction of the product by other manufacturers. The company anticipates that the combined impact in the United States of the continued competition from other anti-infectives and the introduction of generic cefaclor could have a material adverse effect on the company's 1995 consolidated results of operations. Worldwide sales of Elanco Animal Health products increased 6 percent to $464 million. Sales increased 1 percent in the United States and 9 percent outside the U.S. compared with 1993. The worldwide sales increase was led by Tylan(R), an antibiotic for swine and cattle. Manufacturing costs of products sold increased in 1994 to 29.4 percent of sales from 27.9 percent of sales in 1993. The increase is due primarily to a decision in early 1994 to reduce certain in-process inventory levels, which resulted in greater amounts of overhead costs being charged against income. This increase was partially offset by a favorable product mix and continued reduction in spending. Research and development expenses increased 11 percent in 1994. Research expenditures continue to increase due in part to the growth of global clinical trials to support the company's extensive pipeline of potential new products. The company anticipates that research and development expenses will grow at a rate in excess of sales for at least the next two years, primarily as a result of compounds moving into the more costly stages of clinical research. See Note 2 to the consolidated financial statements for a discussion of acquired research. 2 Marketing and administrative expenses increased 5 percent in 1994. Marketing costs increased largely due to the continued expansion of sales forces in emerging international markets. Administrative expenses reflected a decrease compared with 1993 due in part to the impact of special charges taken as part of the 1993 restructuring. This decrease was offset in part by increased legal expenses associated with litigation resolved during the year. In the first half of 1994, the company incurred $66 million of pretax charges associated with the March 31 voluntary recall of three of the company's liquid oral antibiotics. The recall, which was initiated by the company after consultation with the FDA, was made after four instances were reported of small plastic caps being found in the antibiotics. Shipments of these products were resumed during the second and third quarters. Net other income in 1994 declined compared with 1993 levels largely as a consequence of increased interest expense due to higher debt levels. The effective tax rate for 1994 was 30.2 percent compared with 29.9 percent in 1993. This increase was due largely to the impact of the Omnibus Budget Reconciliation Act (OBRA) of 1993, which reduced the tax benefit from operations in Puerto Rico. For 1995, the company anticipates that various tax-planning strategies will offset the impact of further reductions in the tax benefit from its operations in Puerto Rico. Net income and earnings per share were $1.3 billion and $4.45, respectively, for 1994. These amounts reflect substantial increases over 1993 due to both the negative impact on 1993 operations of the company's 1993 restructuring and special charges and the continued growth of the company's pharmaceutical and animal health businesses in 1994. This growth was partially offset by the impact of increased interest expense related to the Guidant debt and the debt used to finance the PCS acquisition, amortization of goodwill associated with the PCS acquisition, the product recall, and the acquired research related to the Sphinx acquisition. Net income and earnings per share would have been $1.4 billion and $4.84 per share, respectively, without these items. For 1995, the company expects that the impacts of the PCS goodwill amortization and the interest expense on debt used to finance the acquisition will depress net income. This impact will be offset in part by the operating results of PCS and anticipated growth of the company's pharmaceutical and animal health businesses. Fundamental changes continued to reshape the traditional patterns of health care delivery in 1994. In the United States, managed-care organizations and other large customers account for a growing portion of total pharmaceutical purchases and are exerting increasing pricing pressures on the pharmaceutical industry and the company. In the U.S. Congress, the health-care-reform debate continued during 1994 and is expected to be renewed in 1995. It is uncertain whether significant federal health-care-reform legislation will be adopted or what form it may take. Health-care-reform proposals have been introduced or adopted in a number of states as well, including unitary pricing laws (currently adopted in a small number of states) that attempt to limit pharmaceutical pricing flexibility. To varying degrees, changes in health care delivery and pharmaceutical reimbursement policies are also occurring outside the United States. It is difficult to predict the impact these changes will have on the industry and the company. As previously noted, the company has responded to the changes with several strategic actions, including the MDD divestiture, the PCS acquisition, increased participation in managed-care and disease-management programs, and a refocusing of research efforts on a smaller number of therapeutic areas offering the most promise. As in 1994, the company has pledged voluntarily to hold the increase in the weighted-average transaction price of its U.S. pharmaceutical products in 1995 to the projected rate of inflation and to limit increases in the prices of individual products to the forecasted increase in the Consumer Price Index for all urban consumers, all items (CPI-U), during the year plus 2 percent. This 3 policy, as in the past, will be contingent upon stable market conditions and governmental policies recognizing, acknowledging, and supporting innovation. OPERATING RESULTS OF CONTINUING OPERATIONS --1993 Worldwide sales rose 5 percent in 1993, to $5.2 billion. Unit volume provided a 6 percent increase, while price increases contributed a modest 1 percent. The impact of exchange rates decreased sales growth by 2 percent. The company achieved sales increases both in the United States and abroad. Sales in the United States were $3.1 billion, a 5 percent increase. Sales outside the United States were $2.1 billion, which also reflected a gain of 5 percent from the previous year. Pharmaceutical sales increased 7 percent, to $4.7 billion in 1993, led by Axid and Prozac. Other products contributing to worldwide pharmaceutical sales growth included Humatrope, Humulin, and Vancocin(R) HCl. Sales also benefited from the first full year of sales of Lorabid. Ceclor sales declined slightly in 1993, as good sales growth abroad was offset by intense competition from other oral antibiotics in the United States. Sales of central-nervous-system, diabetes-care, and gastrointestinal products, as therapeutic classes, increased from 1992 levels, while sales of anti-infectives decreased slightly. U.S. pharmaceutical sales increased 5 percent, to $2.9 billion, despite the growth in discounts and rebates associated with increased participation in managed-care programs and the negative effects of Medicaid rebates. Medicaid rebates totaled $156 million in 1993, a 44 percent increase over 1992. Pharmaceutical sales outside the U.S. were $1.8 billion in 1993. Worldwide sales of Elanco Animal Health products increased 3 percent, to $439 million, in 1993. The increase was largely due to strong worldwide sales growth of Micotil(R), an antibiotic for bovine respiratory disease, offset slightly by a decline in sales of Tylan. The company implemented various restructuring and streamlining initiatives and strategic actions in both 1993 and 1992. These strategic actions were taken largely in response to the changing environment in which the company operates and were designed to enhance the company's core competencies, enable the company to deliver more clinical and economic value to its customers worldwide, streamline global manufacturing operations, and enhance the company's competitiveness. See Note 3 to the consolidated financial statements for a further discussion. The 1993 initiatives included a voluntary early-retirement program under which approximately 2,600 employees worldwide retired. Further, the company announced a goal of eliminating another 1,400 positions over the next several years by restricting its use of temporary and contract workers and consultants and through ongoing normal attrition and strict hiring practices. The 1993 actions, including the early-retirement programs, resulted in restructuring, special, and other charges to continuing operations of approximately $1.0 billion before tax. Costs associated with the early- retirement programs were approximately $535 million before tax. Other actions included consolidation of certain manufacturing and distribution operations and streamlining of various other operations ($250 million before tax). In addition, anticipated expenses of $248 million before tax were recorded relating to impaired manufacturing assets, write-offs of certain acquired intangibles, and certain patent and product liability matters. Of the total 1993 charges, approximately $130 million were paid in cash as of December 31, 1993. In 1994, another $110 million of these charges were paid in cash. Charges yet to be paid in cash total approximately $252 million and are expected to be funded from operations primarily over the next two years. The 1992 actions centered around a streamlining of the global manufacturing operations and other actions designed to enhance the company's competitiveness. 4 For continuing operations, these actions resulted in restructuring and special charges of $404 million and other charges of $184 million, substantially all of which were before taxes. These other charges, representing miscellaneous unusual items covering a variety of operational matters, are reflected in the applicable operating expense lines of the statement of income. Manufacturing costs of products sold decreased in 1993 to 27.9 percent of sales from 28.6 percent in 1992. This decline relates largely to the number of other charges taken as part of the 1992 restructuring actions. Research and development expenses increased 3 percent in 1993. Global clinical trial expenses more than doubled compared with 1992, reflecting the movement of several compounds into the later and most costly stages of clinical trials. Marketing and administrative expenses increased 7 percent in 1993. The increase in marketing costs was primarily associated with the continued globalization of the company's products, including the U.S. launch of Lorabid pediatric; the full-year impact of the 1992 expansion of the pharmaceutical sales forces outside the United States; a realignment of sales forces in the U.S.; and the inclusion of a full year of expenses of Beiersdorf-Lilly G.m.b.H., a 1992 acquisition. Administrative expenses declined in 1993. This decline was largely attributable to a number of one-time expenses recognized in 1992 in connection with the 1992 strategic actions and to various cost-containment measures. Net other income in 1993 increased slightly from 1992 levels due primarily to the additional charges recognized in 1992 in connection with the strategic actions. However, net other income in 1993 was negatively affected by lower interest income on investments. The effective tax rate for 1993 was 29.9 percent compared with the 1992 rate of 29.4 percent. The company's effective tax rate was not significantly increased in 1993 by OBRA because the effect of the corporate rate increase was largely offset by the retroactive restoration of the research tax credit. Both 1993 net income and earnings per share declined from 1992 levels by 32 percent. The declines were primarily the result of the impacts of the company's strategic business actions on costs and expenses and the growth in Medicaid rebates. Excluding the impact of these strategic business actions, net income and earnings per share for the year would have been $1.3 billion and $4.54, respectively. FINANCIAL CONDITION The company maintained a sound financial position in 1994 despite the impacts of substantial additional borrowings in 1994 and restructuring and special charges taken in 1993. The cash generated from operations provided the resources to fund capital expenditures and dividends. In 1994, the company incurred additional debt to finance the acquisition of PCS ($3.8 billion) and as part of the overall Guidant divestiture strategy ($473 million). Total debt reached a record level of $4.85 billion at December 31, 1994, compared with $1.36 billion at December 31, 1993. As a consequence of the anticipated additional debt and the likelihood of heightened competition for the antibiotic Ceclor, the company's long-term debt rating was lowered from AAA to AA by Standard & Poor's in October 1994 and from Aa1 to Aa3 by Moody's in November. Commercial paper ratings of A1+ by Standard & Poor's and Prime-1 by Moody's were affirmed. Maintenance of these ratings will depend largely on continued strong financial performance and reductions of existing debt levels. The acquisition of PCS was initially financed through the issuance of $3.8 billion in commercial paper. In December, the company replaced $450 million of the commercial paper with 7 and 12 year fixed-rate debt. Further, in February 5 1995, the company replaced another $350 million of the commercial paper through the issuance of 5 and 10 year fixed-rate Eurobonds. The remaining commercial paper is backed up by committed bank credit facilities. The company continues to believe it will have sufficient cash flow from continuing operations to fund operating needs, including debt service, capital expenditures, and dividends. The company conducts its business in various foreign currencies and, as a result, is subject to the exposures that arise from foreign exchange rate movements. The company's hedging activities, all of which are for "purposes other than trading" (as defined by Financial Accounting Standards Board Statement 119), are initiated within the guidelines of documented corporate risk-management policies and do not create risk because gains and losses on these instruments generally offset losses and gains on the assets, liabilities, and transactions being hedged. The company uses foreign currency forward contracts, currency swaps, and option contracts to reduce the effect of fluctuating foreign currencies. Instruments related to transactional exposures are carried in the financial statements at current rates, with rate changes reflected directly in income. Gains and losses on instruments designed to hedge anticipated foreign currency transactions are deferred and recognized in the same period as the hedged transactions. Further, interest-rate swap agreements are used to reduce the impact of interest rate changes on net income. In 1994, the impact of the company's risk-management strategies was not material to the results of operations. Capital expenditures of $576.5 million during 1994 were $57 million less than in 1993, as work progressed toward completion of new manufacturing, development, research, and administrative facilities. The company expects near-term capital expenditures to increase slightly over 1994 levels. Sufficient liquidity exists to meet these near-term requirements. The company is a 40 percent partner in DowElanco, a global agricultural products joint venture, with The Dow Chemical Company. The company holds a put option, which became exercisable after October 31, 1994, which requires Dow to purchase the company's interest in DowElanco at fair market value. Dividends of $2.50 per share were paid in 1994, a 3 percent increase from the $2.42 per share paid in 1993. The 1993 dividend reflected a 10 percent increase from the $2.20 per share paid in 1992. The year 1994 was the 110th consecutive year that the company made dividend payments and the 27th consecutive year in which dividends have been increased. ENVIRONMENTAL AND LEGAL MATTERS As with other industrial enterprises, the company's operations are subject to increasingly complex and changing federal, state, and local environmental laws and regulations, which will continue to require capital investment and operational expenses. The company also has been designated a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Superfund, with respect to approximately 10 sites with which the company had varying degrees of involvement. Further, the company continues remediation of certain of its own properties consistent with current environmental practices. The company has accrued for estimated Superfund costs and remediation of its own properties, taking into account, as applicable, available information regarding site conditions, potential cleanup methods, estimated costs, and the extent to which other parties can be expected to contribute to those costs. In addition, the company has accrued for certain other environmental matters. During 1994, the company continued to be named as a defendant in lawsuits involving Prozac. The number of new case filings in 1994 declined from the 1993 level. 6 The company has been named, together with numerous other U.S. prescription drug manufacturers, as a defendant in a large number of related actions brought by retail pharmacies alleging violations of federal and state antitrust and pricing laws. The federal suits include a class action on behalf of nearly all U.S. retail pharmacies. The class plaintiffs allege an industrywide agreement to deny favorable prices on prescription drugs to retail pharmacies that manufacturers grant to managed-care organizations and certain other large purchasers. Other related suits, brought by several thousand pharmacies, involve claims of price discrimination or claims under other pricing laws. The suits are presently in discovery. While it is not possible to predict the outcome of these matters, the company believes they will not have a material adverse effect on its consolidated financial position. For additional information on litigation and environmental matters, see Note 12 to the consolidated financial statements. 7 Consolidated Statements of Income ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data)
Year Ended December 31 1994 1993 1992 -------------------------------------------------- Net sales $5,711.6 $5,198.5 $4,963.1 Cost of sales 1,679.7 1,448.0 1,417.5 Research and development 838.7 755.0 731.0 Acquired research (Note 2) 58.4 - - Marketing and administrative 1,398.3 1,332.4 1,247.0 Restructuring and special charges (Note 3) 66.0 1,032.6 404.4 Other income--net (28.1) (32.3) (30.3) ------- ------- ------- 4,013.0 4,535.7 3,769.6 ------- ------- ------- Income from continuing operations before income taxes and cumulative effect of changes in accounting principles 1,698.6 662.8 1,193.5 Income taxes (Note 10) 513.5 198.0 351.0 ------- ------- ------- Income from continuing operations before cumulative effect of changes in accounting principles 1,185.1 464.8 842.5 Income (loss) from discontinued operations, net of tax (Note 4) 101.0 26.3 (14.9) ------- ------- ------- Income before cumulative effect of changes in accounting principles 1,286.1 491.1 827.6 Cumulative effect of changes in accounting principles - net of taxes (Note 5) - (10.9) (118.9) ------- ------- ------- Net income $1,286.1 $480.2 $708.7 ======= ===== ===== Earnings per share: Income from continuing operations $4.10 $1.58 $2.86 Income (loss) from discontinued operations .35 .09 (.05) Cumulative effect of changes in accounting principles - (.04) (.40) ------- ------- ------- Net income $4.45 $1.63 $2.41 ======= ===== ===== See notes to consolidated financial statements.
8 Consolidated Balance Sheets ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions)
December 31 1994 1993 ------------------------------------ Assets Current Assets Cash and cash equivalents. $ 536.9 $ 539.6 Short-term investments. 209.8 447.5 Accounts receivable, net of allowances of $46.6 (1994) and $32.3 (1993) 1,550.2 950.1 Other receivables 284.4 190.2 Inventories (Note 1) 968.9 1,103.0 Deferred income taxes 245.0 334.0 Prepaid expenses 167.1 132.7 ------- ------- Total current assets 3,962.3 3,697.1 Other Assets Prepaid retirement 411.9 266.0 Investments (Note 6) 464.1 221.7 Goodwill and other intangibles, net of allowances for amortization of $326.2 (1994) and $289.9 (1993) (Note 2) 4,411.5 405.0 Sundry 846.1 833.6 ------- ------- 6,133.6 1,726.3 Property and Equipment (Note 1) 4,411.5 4,200.2 ------- ------- $14,507.4 $9,623.6 ========= ========
9 Consolidated Balance Sheets ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions)
December 31 1994 1993 ------------------------------------- Liabilities and Shareholders' Equity Current Liabilities Short-term borrowings (Note 7) $2,724.4 $ 524.8 Accounts payable 878.2 329.6 Employee compensation 304.6 328.6 Dividends payable 188.8 183.3 Other liabilities 1,065.1 1,115.7 Income taxes payable 508.4 446.0 ------- ------- Total current liabilities 5,669.5 2,928.0 Other Liabilities Long-term debt (Note 7) 2,125.8 835.2 Deferred income taxes 188.9 127.5 Retiree medical benefit obligation 170.5 183.9 Other noncurrent liabilities 997.1 980.2 ------- ------- 3,482.3 2,126.8 Shareholders' Equity (Notes 8 and 9) Common stock--no par value Authorized shares: 800,000,000 Issued shares: 292,807,644 183.0 183.0 Additional paid-in capital 421.7 294.6 Retained earnings 5,062.1 4,500.9 Deferred costs--ESOP (218.2) (242.8) Currency translation adjustments (38.0) (163.5) ------- ------- 5,410.6 4,572.2 Less cost of common stock in treasury: 1994 -- 871,514 shares 1993 -- 59,277 shares 55.0 3.4 ------- ------- 5,355.6 4,568.8 ------- ------- $14,507.4 $9,623.6 ========= =======
See notes to consolidated financial statements. 10 Consolidated Statements of Cash Flows ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions)
Year Ended December 31 1994 1993 1992 -------------------------------------------------- Cash Flows From Operating Activities Net income $1,286.1 $ 480.2 $ 708.7 Adjustments To Reconcile Net Income to Cash Flows From Operating Activities Depreciation and amortization 432.2 398.3 368.1 Change in deferred taxes 172.2 (231.6) (184.3) Restructuring and special charges--net of payments - 1,041.3 565.7 Cumulative effect of changes in accounting principles - 10.9 118.9 Other noncash expense (income)--net 63.1 (53.1) (16.2) ------ ------- ------- 1,953.6 1,646.0 1,560.9 Changes in operating assets and liabilities: Receivables--(increase) decrease (322.9) (32.1) 28.1 Inventories--(increase) decrease 107.1 (192.3) (198.4) Other assets--increase (130.6) (104.5) (48.8) Accounts payable and other liabilities--increase (decrease) (74.9) 199.8 141.7 ------ ------- ------- (421.3) (129.1) (77.4) Net Cash From Operating Activities 1,532.3 1,516.9 1,483.5 Cash Flows From Investing Activities Acquisitions (4,050.8) (56.1) (89.2) Additions to property and equipment (576.5) (633.5) (912.9) Disposals of property and equipment 58.7 5.4 10.6 Additions to other assets (72.9) (70.1) (59.6) Reductions of investments 1,387.0 889.3 863.1 Additions to investments (1,150.5) (1,001.7) (740.2) ------- ------- ------ Net Cash Used for Investing Activities (4,405.0) (866.7) (928.2) Cash Flows From Financing Activities Dividends paid (723.1) (708.4) (643.7) Proceeds from Guidant initial public offering 192.5 - - Purchase of common stock and other capital transactions (111.0) (25.8) (68.5) Issuance under stock plans 50.5 19.8 26.0 Increase (decrease) in short-term borrowings 2,126.1 (152.7) (104.9) Additions to long-term debt 1,478.1 383.8 205.5 Reductions of long-term debt (175.8) (39.8) (3.0) ------ ------ ----- Net Cash From (Used) for Financing Activities 2,837.3 (523.1) (588.6) Effect of exchange rate changes on cash 32.7 (19.9) (13.5) ------ ------ ----- Net increase (decrease) in cash and cash equivalents (2.7) 107.2 (46.8) Cash and cash equivalents at beginning of year 539.6 432.4 479.2 ----- ----- ----- Cash and cash equivalents at end of year $ 536.9 $ 539.6 $ 432.4 ===== ===== =====
See notes to consolidated financial statements. 11 Segment Information
Industry Data (Dollars in millions) 1994 1993 1992 ----------------------------------------------------------------------- Net sales--to unaffiliated customers Life-sciences products Central nervous system $1,835.6 $1,393.6 $1,290.0 Anti-infectives 1,634.4 1,731.4 1,735.9 Diabetes care 774.4 687.4 641.8 Gastrointestinal 487.4 396.8 309.3 Animal health 463.6 439.1 426.5 All other 516.2 550.2 559.6 ------ ------- ------- Net sales $5,711.6 $5,198.5 $4,963.1 ====== ====== ======
Life-sciences products include a broad range of pharmaceuticals used for the treatment of human and animal diseases. The largest category of the products is central-nervous-system agents, which include Prozac and Darvon(R). Anti- infectives include Ceclor, Keflex(R), Kefzol(R), Lorabid, Nebcin(R), Tazidime(R), and Vancocin HCl. Diabetes-care products consist primarily of Humulin and Iletin(R). Other major groups are gastrointestinal, all of which is Axid, and animal health products that include a nonhormonal cattle feed additive, Rumensin(R); Micotil, an antibiotic for bovine respiratory disease; Tylan, an antibiotic for promoting feed efficiency and growth in swine and cattle; anticoccidial agents for use in broilers and layer replacements, the largest of which is Coban(R); and other products for livestock and poultry. Major products in the all-other category include cardiovascular therapy products, of which Dobutrex is the largest; hormone products, the largest of which is Humatrope; and other products, including cancer-therapy and other miscellaneous pharmaceutical products. In 1994, PCS sales are included in the all-other category. Most of the pharmaceutical products are distributed through wholesalers that serve physicians, dentists, pharmacies, and hospitals. In 1994, the company's largest two wholesalers accounted for approximately 13 percent and 10 percent, respectively, of consolidated net sales. Animal health products are sold to wholesale distributors, retailers, manufacturers, and producers. 12 Geographic Information (Dollars in millions) 1994 1993 1992 Net sales United States Sales to unaffiliated customers $3,281.5 $3,101.5 $2,967.2 Transfers to other geographic areas 405.2 394.6 338.9 ------- ------- ------- 3,686.7 3,496.1 3,306.1 Europe, Middle East, and Japan Sales to unaffiliated customers 1,765.3 1,526.4 1,493.0 Transfers to other geographic areas 269.0 218.5 207.0 ------- ------- ------- 2,034.3 1,744.9 1,700.0 Other Sales to unaffiliated customers 664.8 570. 6 502.9 Transfers to other geographic areas 11.3 3.9 4.9 ----- ----- ----- 676.1 574.5 507.8 Eliminations--transfers between geographic areas (685.5) (617.0) (550.8) ------- ------- ------- $5,711.6 $5,198.5 $4,963.1 ====== ====== ====== Income from continuing operations before income taxes and cumulative effect of changes in accounting principles United States $1,067.0 $ 444.3 $ 769.1 Europe, Middle East, and Japan 554.2 158.0 336.0 Other 102.9 74.1 91.0 Eliminations and adjustments (25.5) (13.6) (2.6) ------- ----- ------- $1,698.6 $ 662.8 $1,193.5 ====== ====== ======= Total assets United States $12,105.0 $7,187.8 $6,564.8 Europe, Middle East, and Japan 3,209.1 2,507.1 2,215.9 Other 505.3 382.5 330.3 Eliminations and adjustments (1,312.0) (453.8) (438.2) ------- ------- ------- $14,507.4 $9,623.6 $8,672.8 ======== ======= ======= Transfers between geographic areas are made at prices that are intended to reasonably approximate an arms-length value of the products. Remittances to the United States are subject to various regulations of the respective governments as well as to fluctuations in exchange rates. 13 Selected Quarterly Data (unaudited) ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) 1994(1) ----------------------------------------- Fourth Third Second(2) First(2)(3) ----------------------------------------- Net sales $1,548.4 $1,507.3 $1,346.8 $1,309.1 Cost of sales 460.4 451.4 385.8 382.1 Operating expenses 667.0 579.9 532.8 457.3 Restructuring and special charges - - 10.0 56.0 Acquired research - 58.4 - - Other income (loss) - net (42.5) 9.2 42.3 19.1 Income from: Continuing operations 269.6 295.6 319.2 300.7 Discontinued operations 20.5 23.1 27.4 30.0 Net income 290.1 318.7 346.6 330.7 Earnings per share: Continuing operations .93 1.02 1.10 1.04 Discontinued operations .07 .08 .10 .10 Net income 1.00 1.10 1.20 1.14 Dividends paid per share .625 .625 .625 .625 Common stock prices: High 66.25 59.25 58.88 61.88 Low 57.38 47.25 47.13 48.50 1993(1) --------------------------------------- Fourth(2) Third Second First(3) --------------------------------------- Net sales $1,457.1 $1,218.4 $1,253.5 $1,269.5 Cost of sales 436.4 339.0 347.3 325.3 Operating expenses 619.7 507.5 494.7 465.5 Restructuring and 1,032.6 - - - special charges Other income (loss) - (15.9) (5.4) 33.5 20.1 net Income (loss) from: Continuing operations before accounting changes (463.0) 260.0 315.2 352.6 Discontinued operations (60.6) 34.4 31.6 20.9 Net income (loss) (523.6) 294.4 346.8 362.6 Earnings (loss) per share: Continuing operations before accounting changes (1.57) .88 1.07 1.20 Discontinued operations (.20) .12 .11 .07 Net income (loss) (1.77) 1.00 1.18 1.23 Dividends paid per share .605 .605 .605 .605 Common stock prices: High 60.75 50.63 52.13 62.00 Low 50.13 43.63 45.00 45.13 (1)Amounts for net sales, cost of sales, and operating expenses for the first three quarters of 1994 and all of 1993 differ from previously reported amounts since the results of the MDD division have been reflected as "discontinued operations." See Note 4 to the consolidated financial statements. (2)Reflects the impact of restructuring and special charges. The charges in 1994 relate to the voluntary recall of three antibiotic products. See Note 3 to the consolidated financial statements. (3)Reflects the impact of accounting changes. See Notes 5, 6, and 9 to the consolidated financial statements. The company's common stock is listed on the New York, Tokyo, London, and other stock exchanges. 14 Selected Financial Data (unaudited) ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) 1994 1993 1992 1991 1990 ---------------------------------------------- Operations Net sales $ 5,711.6 $5,198.5 $4,963.1 $4,533.4 $4,179.0 Research and development expenses 838.7 755.0 731.0 590.5 549.4 Other costs and expenses 3,136.4 2,780.4 2,664.5 2,412.0 2,276.3 Restructuring and special charges 66.0 1,032.6 404.4 - - Income from continuing operations before taxes and accounting changes 1,698.6 662.8 1,193.5 1,626.3 1,418.1 Income taxes 513.5 198.0 351.0 460.2 395.4 Income from continuing operations1,185.1 464.8 842.5 1,166.1 1,022.7 Income (loss) from discontinued operations 101.0 26.3 (14.9) 148.6 104.6 Net income 1,286.1 480.2 708.7 1,314.7 1,127.3 As a percent of sales: Income from continuing operations 20.7% 8.9% 17.0% 25.7% 24.5% Research and development 14.7 14.5 14.7 13.0 13.1 Per-share data(1): Income from continuing operations $4.10 $1.58 $2.86 $3.99 $3.54 Income (loss) from discontinued operations .35 .09 (.05) .51 .36 Net income 4.45 1.63 2.41 4.50 3.90 Dividends declared 2.52 2.44 2.255 2.05 1.73 Average number of shares and share equivalents (thousands)(1) 289,189 294,289 294,478 294,244 289,993 =============================================== Financial Position Current assets $ 3,962.3 $3,697.1 $3,006.0 $2,939.3 $2,501.3 Current liabilities 5,669.5 2,928.0 2,398.6 2,272.0 2,817.6 Current ratio .7 1.3 1.3 1.3 .9 Property and equipment $ 4,411.5 $4,200.2 $4,072.1 $3,782.5 $2,936.7 Total assets 14,507.4 9,623.6 8,672.8 8,298.6 7,142.8 Long-term debt 2,125.8 835.2 582.3 395.5 277.0 Deferred income taxes 188.9 127.5 169.7 415.6 351.2 Other noncurrent liabilities 1,167.6 1,164.1 630.1 249.4 229.5 Shareholders' equity 5,355.6 4,568.8 4,892.1 4,966.1 3,467.5 Long-term debt as a percent of equity 39.7% 18.3% 11.9% 8.0% 8.0% ================================================ Financial Position Supplementary Data(2) Return on shareholders' equity 25.9% 10.2% 14.4% 31.2% 31.2% Return on assets 11.8% 5.2% 8.3% 17.2% 17.5% Capital expenditures $576.5 $633.5 $912.9 $1,142.4 $1,007.3 Depreciation and amortization 432.2 398.3 368.1 299.5 247.5 Effective tax rate 30.2% 29.9% 29.4% 28.3% 27.9% Number of employees 24,900 24,900 24,500 23,600 23,200 Number of shareholders 55,900 59,300 53,900 46,000 39,300 =============================================
(1)Earnings per share for 1994 are calculated based on the weighted-average number of shares outstanding, while prior years were calculated on a fully diluted basis using average shares and share equivalents. See Note 1 to the consolidated financial statements. (2)All supplementary financial data, other than the effective tax rate, have been computed using net income. The effective tax rate reflects continuing operations only. The number of employees reflects employees of continuing operations only. The reductions from the special retirement programs, which were part of the 1993 restructuring actions, are first reflected in the 1994 number since the retirements were generally effective January 1, 1994. The 1994 amount also includes additions for PCS, Sphinx and other global initiatives. See Notes 2 and 3 to the consolidated financial statements. 15 Notes to Consolidated Financial Statements ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Note 1: Summary of Significant Accounting Policies Basis of Presentation: The accounts of all wholly owned and majority-owned subsidiaries are included in the consolidated financial statements. All intercompany balances and transactions have been eliminated. Certain 1993 and 1992 amounts, as previously reported, have been reclassified to conform to the 1994 presentation of discontinued operations. See Note 4. Cash Equivalents: The company considers all highly liquid investments, generally with a maturity of three months or less, to be cash equivalents. The cost of these investments approximates fair value. Inventories: The company states all its inventories at the lower of cost or market. The company uses the last-in, first-out (LIFO) cost method for a significant portion of its inventories located in the continental United States, or approximately 55 percent of its total inventories. Other inventories are valued by the first-in, first-out (FIFO) method. Inventories at December 31 consisted of the following: 1994 1993 ---- ---- Finished products $ 288.0 $ 272.5 Work in process 515.1 667.7 Raw materials and supplies 239.0 271.5 ----- ----- 1,042.1 1,211.7 Less reduction to LIFO cost 73.2 108.7 ------- ------- $ 968.9 $1,103.0 ======= ======= Investments: All debt securities are classified as held-to-maturity because the company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Marketable equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. The company owns no investments that are considered to be trading securities. Intangible Assets: Intangible assets arising from acquisitions and research alliances are amortized over their estimated useful lives, ranging from 5 to 40 years, using the straight-line method. Impairments are recognized in operating results if a permanent decline in value occurs. Property and Equipment: Property and equipment is stated on the basis of cost. Provisions for depreciation of buildings and equipment are computed generally by the straight-line method at rates based on their estimated useful lives. At December 31, property and equipment consisted of the following: 1994 1993 ---- ---- Land $ 163.5 $ 130.2 Buildings 2,040.0 1,957.3 Equipment 4,060.9 3,771.7 Construction in progress 762.0 707.3 ------ ------- 7,026.4 6,566.5 Less allowances for depreciation 2,614.9 2,366.3 ------ ------- $4,411.5 $4,200.2 ======= ======= Approximately $25.4 million, $25.5 million, and $37.4 million of interest costs were capitalized as part of property and equipment in 1994, 1993, and 16 1992, respectively. The estimated cost to complete significant construction projects in progress at December 31, 1994, approximated $205.3 million. Total rental expense for all leases related to continuing operations, including contingent rentals (not material), amounted to approximately $81.8 million for 1994, $80.1 million for 1993, and $69.6 million for 1992. Capital leases included in property and equipment in the consolidated balance sheets and future minimum rental commitments are not material. Income Taxes: Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. Federal income taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the United States and be taxable. Earnings per Share: Earnings per share for 1994 are calculated based on the weighted-average number of outstanding common shares. Earnings per share for 1993 and 1992 are calculated on a fully diluted basis. They are based on the weighted-average number of outstanding common shares and common share equivalents (primarily stock options). Primary earnings per share have not been presented for 1993 and 1992 because they do not differ significantly from the reported earnings per share computed on a fully diluted basis. Earnings per share in 1994 are not materially different from the amount calculated using the method followed for 1993 and 1992. Note 2: Acquisitions On November 21, 1994, the company purchased PCS Health Systems, Inc. (PCS), McKesson Corporation's pharmaceuticals benefits management business, for approximately $4.1 billion. Substantially all the purchase price was allocated to goodwill which, is being amortized over 40 years. The acquisition was structured in the form of a tender offer for all McKesson's common stock. Immediately prior to the tender offer, McKesson spun off to its shareholders all its businesses other than PCS. In connection with the spin off, the newly created corporation ("New McKesson") assumed all PCS liabilities not related to the purchased business, including approximately $239 million of long-term notes and debentures. New McKesson has indemnified the company with respect to these liabilities and has agreed that it will, if the company so requests, seek consents from the debt holders to release the company from its obligations thereunder. Pending repaymant of the debt or receipt of releases from the debt holders, the company remains a co-obligor with New McKesson. The results of operations of PCS from the date of acquisition are included in the company's 1994 consolidated financial statements. The following unaudited pro forma summary reflects the company's consolidated results from continuing operations as if PCS had been acquired as of the beginning of 1993. This summary includes the impact of adjustments for the amortization of goodwill associated with the acquisition and an increase in interest expense resulting from the issuance of debt to finance the acquisition. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the entire year, nor are they intended to be a projection of future results. 1994 1993 ---- ---- Net sales $5,890.3 $5,372.0 Income from continuing operations before accounting changes 989.2 246.8 Earnings per share from continuing operations $ 3.42 $ .84 The inclusion of PCS in the company's consolidated balance sheet at December 31, 1994, accounted for, among other things, increases in accounts receivable and accounts payable of $481 million and $589 million, respectively. 17 On September 9, 1994, the company completed the acquisition of Sphinx Pharmaceuticals Corporation, a company engaging in drug discovery and development by generating combinatorial chemistry libraries of small molecule compounds and high throughput screening against biological targets central to human diseases. The purchase price was approximately $80 million, of which $58.4 million was allocated to in-process research and development projects, based on an independent valuation. The company determined that the feasibility of the acquired research had not yet been established and that the technology had no alternative future use. Accordingly, this acquired research was charged to expense in 1994. Note 3: Restructuring and Special Charges In 1994, the company incurred $66 million of pretax charges associated with the March 31 voluntary recall of three of its liquid oral antibiotics. The recall, which was initiated by the company after consultation with the FDA, was made after four instances were reported of small plastic caps being found in the antibiotics. Shipments of all three products were resumed during the second and third quarters. In both 1993 and 1992, the company took actions designed to enhance the company's competitiveness in the changing health care environment, reduce expenses, and improve efficiencies. As a result of these actions, the company recognized restructuring and special charges relating to continuing operations in the amounts of $1,032.6 million and $404.4 million for 1993 and 1992, respectively. (Restructuring costs and special charges relating to the MDD division, that amounted to $140.1 million and $161.3 million in 1993 and 1992, respectively, have been included in discontinued operations. See Note 4 for a further discussion.) Restructuring costs include those amounts that arose as a direct result of management's commitment to revised strategic actions. Special charges represent unusual, generally nonrecurring expense items. 18 Significant components of these charges and their status at December 31, 1993 and 1994, respectively, are summarized as follows: Original Charges 1993 1994 ------------------------------- Work force reductions $534.5 $ 94.9 $ 52.5 Manufacturing consolidations and other closings 204.3 176.3 136.1 Revised distribution strategies 10.2 10.2 - Pharmaceutical streamlining 35.3 34.4 23.8 Intangibles write-downs 56.5 - - Asset write-downs, legal accruals, and other 191.8 159.7 39.9 ----- ----- ---- Total - continuing operations 1,032.6 475.5 252.3 Total - discontinued operations 140.1 115.4 82.8 ----- ----- ---- $1,172.7 $590.9 $335.1 ======= ===== ===== 1992 ---- Global manufacturing strategy $218.9 $116.6 $108.4 Legal, environmental, asbestos abatement 139.4 134.1 66.8 Research investment expense 46.1 - - ----- ----- ----- Total - continuing operations 404.4 250.7 175.2 Total - discontinued operations 161.3 38.4 22.9 ----- ----- ----- $565.7 $289.1 $198.1 ======= ===== ===== The 1993 restructuring actions related to continuing operations consisted principally of early-retirement programs instituted in various countries that resulted in more than 2,600 employee positions being eliminated. The related provision for work force reductions included cash termination benefits, pension enhancements, and other costs associated with these and other severance programs. In addition, the company took actions to consolidate certain manufacturing operations around the world and to close certain European headquarters operations. The company also approved plans to streamline its core pharmaceutical operations. The company took special charges to write down certain operating assets and acquired intangibles as the result of recent developments in pharmaceutical markets and to provide for certain patent and product liability matters. The 1992 actions relating to continuing operations centered around a streamlining of the global manufacturing operations. These actions have resulted or will result in significant changes to the nature and/or location of future manufacturing operations. These charges also included accruals for asbestos abatement, other environmental and legal matters, and a charge for the write-down of the company's investment in Centocor, Inc., following the suspension of clinical trials of HA-1A_/Centoxin. In 1993 and 1992, the company also recognized other charges relating to continuing operations of approximately $30 million and $184 million, respectively, representing miscellaneous unusual items covering a variety of other operational matters. These charges are reflected in the applicable operating expense categories in the statements of income. Note 4: Discontinued Operations In January 1994, the company announced its intention to divest its Medical Devices and Diagnostics (MDD) Division. During the year, a separate company, Guidant Corporation (Guidant), was formed to be the parent company of five of the MDD companies. These five businesses are Advanced Cardiovascular Systems, Inc.; Cardiac Pacemakers, Inc.; Devices for Vascular Intervention, 19 Inc.; Heart Rhythm Technologies, Inc.; and Origin Medsystems, Inc. In December 1994, Guidant sold 14,260,000 shares of its common stock (approximately 20 percent) in an initial public offering. Presently, Lilly plans to dispose of its remaining ownership in Guidant (approximately 80 percent) in the latter half of 1995 via a "split off" (an exchange offer pursuant to which Lilly shareholders would be given the opportunity to exchange some of or all their Lilly shares for Guidant shares). Three of the other MDD companies, IVAC Corporation; Pacific Biotech, Inc.; and Physio Control Corporation, have been sold, and negotiations continue for the sale of the remaining company, Hybritech Incorporated. Based on current divestiture plans, an estimated gain on disposal of the segment will be recognized upon realization in 1995. The company anticipates that the remaining MDD companies will generate net income through the final disposal date. The income (loss) from discontinued operations appearing on the consolidated statements of income represents the results of the MDD division for the periods presented, which are summarized as follows: Year ended December 31, ----------------------- 1994 1993 1992 ---- ---- ---- Net sales $1,289.2 $1,254.0 $1,204.3 Cost of sales 536.6 511.3 479.8 Restructuring and special charges - 140.1 161.3 Other operating expenses 561.5 580.8 571.2 Income (loss) before tax 168.1 39.0 (11.2) Income taxes 67.1 12.7 3.7 Income (loss) from discontinued operations 101.0 26.3 (14.9) Net assets, excluding intercompany accounts, of the discontinued operations included in the company's consolidated balance sheet were approximately $441.7 million and $1.1 billion at December 31, 1994 and 1993, respectively. The assets and liabilities at December 31 are as follows: 1994 1993 ---- ---- Current assets $ 457.8 $ 572.6 Other assets 745.0 837.1 Current liabilities 238.0 252.3 Other liabilities 523.1 72.3 Note 5: Accounting Changes Effective January 1, 1993, the company elected the early adoption of Financial Accounting Standards Board (FAS) 112, "Employers' Accounting for Postemployment Benefits." FAS 112 requires employers to recognize currently the obligation to provide postemployment benefits to former or inactive employees and others. The company's adoption of FAS 112 resulted in a pretax charge of $17.3 million ($10.9 million after tax; $.04 per share), relating primarily to disability benefits. Prior to 1993, the company expensed these obligations when paid. In 1992, the company elected the early adoption of two Financial Accounting Standards Board pronouncements. The adoption of FAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," resulted in a pretax charge of $268.9 million ($167.5 million after tax; $.57 per share). The adoption of FAS 109, "Accounting for Income Taxes," produced a $48.6 million benefit to net income ($.17 per share). The effective date of adoption of both standards was January 1, 1992. The company elected to 20 report the cumulative effect on prior years of the changes as a charge to income in 1992 of $118.9 million. Note 6: Financial Instruments Risk-Management Instruments and Off-Balance-Sheet Risk In the normal course of business, operations of the company are exposed to continuing fluctuations in currency values and interest rates. These fluctuations can vary the costs of financing, investing, and operating. The company addresses these risks through a controlled program of risk management that includes the use of derivative financial instruments. The company's derivative activities, all of which are for purposes other than trading, are initiated within the guidelines of documented corporate risk-management policies and do not create risk because gains and losses on derivatives contracts offset losses and gains on the assets, liabilities, and transactions being hedged. The notional amounts of derivatives summarized in the following paragraphs do not represent amounts exchanged by the parties and thus are not a measure of the exposure of the company through its use of derivatives. The company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings. Foreign Exchange Risk Management: The company enters into foreign currency forward and option contracts to reduce the effect of fluctuating currency exchange rates (principally European currencies) on its foreign currency exposures. These instruments, which generally have maturities not exceeding 12 months, are marked to market with gains and losses recognized currently in income to offset the respective losses and gains recognized on the underlying exposures. The company also enters into foreign currency forward and option contracts and currency swaps to hedge anticipated foreign currency transactions, primarily intercompany purchases expected to occur within the next year. Such transactions represent firm commitments. Gains and losses on these contracts that qualify as hedges are deferred and recognized in cost of sales in the same period as the transactions occur. At December 31, the stated, or notional, amounts of the company's outstanding foreign currency derivative financial instruments were as follows: 1994 1993 ---- ---- Forward exchange contracts $1,138.1 $ 790.7 Foreign currency options - purchased 98.6 - Foreign currency options - issued 62.6 - Currency swaps 20.4 39.2 Interest Rate Risk Management: The company enters into interest rate swaps to lower funding costs, to diversify sources of funding, or to alter interest rate exposures arising from mismatches between assets and liabilities. Under interest rate swaps, the company agrees with other parties to exchange, at specified intervals, the difference between fixed- rate and floating-rate interest amounts calculated by reference to an agreed notional principal amount. The notional amounts of interest rate swaps outstanding at December 31, 1994 and 1993, were $175.0 million and $225.0 million, respectively. Substantially all the interest rate swaps outstanding at December 31, 1994, expired or were closed out in January 1995. Concentrations of Credit Risk: Financial instruments that potentially subject the company to credit risk consist principally of trade receivables and interest-bearing investments. Wholesale distributors of life-sciences products account for a substantial portion of trade receivables; collateral 21 is generally not required. The risk associated with this concentration is limited due to the large number of wholesalers and their geographic dispersion. The company places substantially all its interest-bearing investments with major financial institutions or in U.S. Government securities. In accordance with documented corporate policies, the company limits the amount of credit exposure to any one financial institution. Fair Value of Financial Instruments A summary of the company's outstanding financial instruments at December 31 follows. As summarized, "cost" relates to investments, while "carrying amount" relates to long-term debt.
1994 1993 ---------------------------------------- Cost/Carrying Fair Cost/Carrying Fair Amount Value Amount Value ------------- ----- ------------- ----- Short-term investments: Debt securities $ 191.4 $ 195.1 $415.3 $418.5 Marketable equity 19.1 18.4 32.2 41.5 Noncurrent investments: Marketable equity 80.5 74.9 63.0 69.8 Debt securities: Due within three years 15.6 15.6 2.5 2.5 Due after three years 147.4 144.1 47.3 46.7 Nonmarketable equity 30.0 31.3 35.3 36.5 Long-term debt 2,206.8 2,147.1 928.7 964.5 At December 31, 1994, the gross unrealized holding gains on available-for-sale securities were $22.2 million, and the gross unrealized holding losses were $27.0 million. The proceeds from sales of available-for-sale securities totaled $24.3 million. The net adjustment to unrealized gains and losses on available- for-sale securities reduced shareholders' equity by $13.7 million in 1994. The company uses the following methods and assumptions to estimate the fair value of its financial instruments: Investments: The fair values for marketable debt and equity securities are based on quoted market prices. The fair values of nonmarketable equity securities, which represent either equity investments in start-up technology companies or partnerships that invest in start-up technology companies, are estimated based on the fair value information provided by these ventures. The fair value of nonmarketable debt securities is based on quoted market prices of similar securities. The company is a limited partner in certain affordable housing investments that generate benefits in the form of tax credits. The determination of fair value of these investments is not practicable. The carrying value of such investments was $194.9 million and $73.6 million as of December 31, 1994 and 1993, respectively. Short-Term and Long-Term Debt: The fair value of the company's short-term borrowings approximates its carrying amount. The fair values of the company's long-term debt, including the current portion, are estimated using discounted cash flow analyses based on the company's current incremental borrowing rates for similar types of borrowing arrangements. A significant portion of long-term debt consists of noncallable notes and bonds. Risk-Management Instruments: The fair values of the company's foreign exchange and interest rate risk-management instruments are estimated based on quoted 22 market prices of comparable contracts. The fair values and carrying amounts of these instruments were not material at December 31, 1994. Effective January 1, 1994, the company adopted Financial Accounting Standards Board Statement (FAS)115, "Accounting for Certain Investments in Debt and Equity Securities," which requires designation of certain investments as either trading, held-to-maturity, or available-for-sale. As a consequence of the adoption, all available-for-sale securities on hand at January 1, 1994, have been marked to market and the opening balance of shareholders' equity has been increased by $10.7 million (net of $7.0 million in deferred income taxes) to reflect the net unrealized holding gains on these securities at that date. Note 7: Borrowings Long-term debt at December 31 consisted of the following: 1994 1993 -------------------- 6.25 to 8.38 percent notes (due 1999-2006) $ 750.0 $300.0 4.00 to 8.06 percent medium-term notes (due 1995-1999) 210.8 225.8 8.18 percent ESOP debentures (due in 2006) 143.7 159.1 5.5 percent Eurodollar bonds (due in 1998) 150.0 150.0 6.07 to 6.47 percent Guidant notes (due in 1996) 473.0 - Commercial paper to be refinanced as long term 350.0 - Other, including capitalized leases 140.8 104.1 ------ ----- 2,218.3 939.0 Less current portion 92.5 103.8 ------- ----- $2,125.8 $835.2 ====== ===== The 8.18 percent Employee Stock Ownership Plan (ESOP) debentures are obligations of the ESOP but are shown on the consolidated balance sheet because they are guaranteed by the company. The principal and interest on the debt will be funded by contributions from the company and by dividends received on certain shares held by the ESOP. Because of the amortizing feature of the ESOP debt, bondholders will receive both interest and principal payments each quarter. In connection with the creation of Guidant and its planned divestiture (see Note 4), Guidant has obtained credit facilities under which $473 million was outstanding at December 31, 1994. The company has guaranteed these credit facilities that aggregate $700 million. This guarantee can be withdrawn by Lilly prior to maturity of the credit facilities. The borrowings under these facilities will be retained by Guidant at the time of the divestiture. The company's acquisition of PCS (see Note 2) was financed primarily through the issuance of $3.8 billion in commercial paper. In December, the company replaced $450 million of the commercial paper with 7 and 12 year debt. Further, in February 1995, the company replaced another $350 million of commercial paper through the issuance of 5 and 10 year Eurobonds at 8 1/8 percent and 8 3/8 percent, respectively. This commercial paper has been classified as long-term debt at December 31, 1994. The aggregate amounts of maturities on long-term debt for the next 5 years are as follows: 1995, $92.5 million; 1996, $607.3 million; 1997, $89.5 million; 1998, $167.1 million; and 1999, $153.2 million. At December 31, 1994, short-term borrowings included $2,364.9 million of commercial paper and $267.0 million of notes payable to banks. At December 31, 1993, commercial paper and notes payable to banks totaled $346.4 million and $74.6 million, respectively. The weighted-average interest rates on short-term borrowings outstanding were 6 percent in 1994 and 4 percent in 1993. At December 31, 1994, unused committed lines of credit 23 approximated $4,227 million, including $227 million available under Guidant credit facilities. Compensating balances and commitment fees are not material, and there are no significant conditions under which the lines may be withdrawn. Interest expense attributable to continuing operations was $103.8 million, $70.6 million, and $73.2 million in 1994, 1993, and 1992, respectively. Cash payments of interest on borrowings totaled $102.4 million, $63.7 million, and $72.6 million in 1994, 1993, and 1992, respectively. Note 8: Stock Plans Stock options and performance awards have been granted to officers and other executive and key employees. Stock options are granted at prices equal to 100 percent of the fair market value at the dates of grant. In April 1993, the company announced the GlobalShares program, under which essentially all employees were given an option to buy 100 shares of the company's stock. Options to purchase approximately 3 million shares were granted under the program. Stock-option activity during 1994 and 1993 is summarized below: Number of Shares 1994 1993 ---------------------- Unexercised at January 1 14,451,818 8,359,206 Granted 2,863,722 6,964,325 Exercised (1,291,685) (671,038) Terminated (483,175) (200,675) ---------- ---------- Unexercised at December 31 15,540,680 14,451,818 ========== ========== Exercisable at December 31 6,911,530 5,617,344 ========== ========== The per-share price range of unexercised options at December 31, 1994 and 1993, was $14.54 to $81.88 and $9.14 to $81.88, respectively. Options were exercised at prices ranging from $9.14 to $47.06 in 1994 ($9.00 to $47.06 in 1993). At December 31, 1994, additional options, performance awards, or restricted stock grants may be granted under the 1994 Lilly Stock Plan for not more than 8,518,683 shares (1993--145,595 shares). 24 Note 9: Shareholders' Equity
Changes in the components of shareholders' equity were as follows: Additional Deferred Common Stock in Paid-in Retained Costs-- Treasury Capital Earnings ESOP Shares Amount ---------- -------- -------- ------------- Balance at January 1, 1992 $340.1 $4,693.0 $(286.2) 184,965 $ 14.5 Net income 708.7 Cash dividends declared per share: $2.255 (658.6) Purchase for treasury 970,000 72.5 Issuance of stock under employee stock plans (35.2) (1,021,375) (78.3) ESOP transactions 2.9 22.3 Other .1 (11,470) (.9) ------------------------------------------------ Balance at December 31, 1992 307.9 4,743.1 (263.9) 122,120 7.8 Net income 480.2 Cash dividends declared per share: $2.44 (715.7) Purchase for treasury 550,000 29.8 Issuance of stock under employee stock plans (16.3) (585,103) (32.5) ESOP transactions 3.6 21.1 Other (.6) (6.7) (27,740) (1.7) ----------------------------------------------- Balance at December 31, 1993 294.6 4,500.9 (242.8) 59,277 3.4 Net income 1,286.1 Cash dividends declared per share: $2.50 (728.6) Purchase for treasury 1,990,000 115.0 Issuance of stock under employee stock plans (12.0) (1,162,516) (62.5) ESOP transactions (0.2) 24.6 Unrealized investment gains and losses, net of tax (3.0) Net impact of Guidant public offering 139.9 Other (.6) 6.7 (15,247) (0.9) ------------------------------------------------- Balance at December 31, 1994 $421.7 $5,062.1 $(218.2) 871,514 $55.0 =================================================
The company has an Employee Stock Ownership Plan (ESOP) as a funding vehicle for the existing employee savings plan. The ESOP used the proceeds of a loan from the company to purchase shares of common stock from the treasury. In 1991, the ESOP issued $200 million of third-party debt, repayment of which was guaranteed by the company (see Note 7). The proceeds were used to purchase shares of the company's common stock on the open market. Shares of common stock held by the ESOP will be allocated to participating employees annually through 2006 as part of the company's savings plan contribution. During 1994, the company implemented the provisions of AICPA Statement of Position (SOP) 93-6, "Employers' Accounting for Employee Stock Ownership Plans." The principal impact of the adoption was to reduce the average shares outstanding for the year by 3.1 million (1993, 3.3 million; 1992, 3.6 million), which represents shares owned by the ESOP that have not been allocated to participants' accounts. The cost of shares allocated each period is recognized as expense equal to the fair value of the shares committed to be released. The increase in paid-in capital related to the Guidant initial public offering reflects net proceeds of the offering reduced by the resulting minority ownership interest in Guidant. Generally, the assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. For those operations, changes in 25 exchange rates generally do not affect cash flows; therefore, resulting translation adjustments are made to shareholders' equity rather than to income. Following is an analysis of currency translation adjustments reflected in shareholders' equity: 1994 1993 1992 ---- ---- ---- Balance (negative amount) at January 1 $(163.5) $ (70.2) $ 50.7 Translation adjustments and gains (losses) from intercompany transactions 125.5 (93.3) (121.0) Allocated income taxes - - .1 ----- ------ ----- Balance at December 31 $(38.0) $(163.5) $(70.2) ====== ====== ====== Under the terms of the company's Shareholder Rights Plan, all shareholders of common stock received for each share owned a preferred stock purchase right entitling them to purchase from the company one two-hundredth of a share of Series A Participating Preferred Stock at an exercise price of $162.50. The rights are not exercisable until after the date on which the company's right to redeem has expired. The company may redeem the rights for $.005 per right up to and including the 10th business day after the date of a public announcement that a person (the "Acquiring Person") has acquired ownership of stock having 20 percent or more of the company's general voting power (the "Stock Acquisition Date"). The plan provides that, if the company is acquired in a business combination transaction at any time after a Stock Acquisition Date, generally each holder of a right will be entitled to purchase at the exercise price a number of the acquiring company's shares having a market value of twice the exercise price. The plan also provides that, in the event of certain other business combinations, certain self-dealing transactions, or the acquisition by a person of stock having 25 percent or more of the company's general voting power, generally each holder of a right will be entitled to purchase at the exercise price a number of shares of the company's common stock having a market value of twice the exercise price. Any rights beneficially owned by an Acquiring Person shall not be entitled to the benefit of the adjustments with respect to the number of shares described above. The rights will expire on July 28, 1998, unless redeemed earlier by the company. 26 Note 10: Income Taxes Following is the composition of income taxes attributable to continuing operations: 1994 1993 1992 ---- ---- ---- Current: Federal $244.9 $296.5 $334.1 Foreign 60.2 81.6 87.3 State 30.9 26.7 59.4 ----- ----- ----- 336.0 404.8 480.8 Deferred: Federal 140.4 (81.9) (85.1) Foreign 1.9 (89.6) (34.6) State 35.2 (35.3) (10.1) ----- ----- ----- 177.5 (206.8) (129.8) ----- ----- ----- Income taxes $513.5 $198.0 $351.0 ===== ===== ===== Significant components of the company's deferred tax assets and liabilities as of December 31 are as follows: 1994 1993 ---- ---- Deferred tax assets: Restructuring and special charges--other $283.4 $392.2 Compensation and benefits 154.2 179.0 Litigation, environmental and asbestos 141.6 99.2 Inventory 77.6 103.1 Net operating losses of subsidiaries 69.4 59.1 Other 216.7 148.8 ----- ----- 942.9 981.4 Valuation allowances (97.9) (104.0) ----- ----- Total deferred tax assets 845.0 877.4 ----- ----- Deferred tax liabilities: Property and equipment (490.7) (435.6) Prepaid employee benefits (181.4) (122.9) Other (50.1) (52.8) ----- ----- Total deferred tax liabilities (722.2) (611.3) ----- ----- Deferred tax assets--net $122.8 $266.1 ===== ===== At December 31, 1994, the company had net operating loss carryforwards for income tax purposes of $191 million, of which $62 million will expire within 5 years. The majority of the remaining carryforwards do not expire. Unremitted earnings of foreign subsidiaries that have been, or are intended to be, permanently reinvested for continued use in foreign operations and which, if distributed, would result in taxes at approximately the U.S. statutory rate, aggregated $1,216 million at December 31, 1994 ($976 million at December 31, 1993). Cash payments of taxes totaled $378 million, $455 million, and $484 million in 1994, 1993, and 1992, respectively. 27 Following is a reconciliation of the effective income tax rate of the continuing operations: 1994 1993 1992 ---- ---- ---- United States federal statutory tax rate 35.0% 35.0% 34.0% Add (deduct): State taxes, net of federal tax benefit 2.5 (.9) 2.7 Tax savings from operations in Puerto Rico (2.1) (9.7) (7.0) Research tax credit (.2) (2.0) (.2) Effect of international operations (3.7) 2.2 (.8) Nondeductible impact of restructuring - 3.0 - Sundry (1.3) 2.3 .7 --- ---- ---- Effective income tax rate 30.2% 29.9% 29.4% ===== ==== ===== Note 11: Retirement Benefits Pension Plans: The company has noncontributory defined benefit retirement plans that cover substantially all United States employees and a majority of employees in other countries. Benefits under the domestic plans are calculated by using one of several formulas. These formulas are based on a combination of the following: (1) years of service, (2) final average earnings, (3) primary social security benefit, and (4) age. The benefits for the company's plans in countries other than the United States are based on years of service and compensation. The company's funding practice for all plans is consistent with local governmental and tax funding regulations. Generally, pension costs accrued are funded. Plan assets consist primarily of equity and fixed income instruments. Net pension expense/income for the company's retirement plans included the following components related to continuing operations: 1994 1993 1992 ---- ---- ---- Service cost--benefits earned during the year $ 69.3 $ 58.9 $ 63.8 Interest cost on projected benefit obligations 156.3 124.6 118.0 Actual return on assets (38.3) (276.4) (193.1) Net amortization and deferral (164.3) 88.6 16.9 ------ ----- ------ Net annual pension expense (income) $ 23.0 $ (4.3) $ 5.6 ====== ======= ====== The increase in the 1994 net annual pension expense was due primarily to the decrease in the discount rate at December 31, 1993, which generated an increase in the projected benefit obligation of approximately $210.4 million. In addition to the net pension cost above, the 1993 restructuring charges include curtailment losses and special termination costs resulting from the early-retirement programs of $133.3 million and $113.4 million, respectively. 28 The funded status and amounts recognized in the consolidated balance sheets for the company's defined benefit retirement plans at December 31 were as follows: Plans in Which Plan in Which Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets 1994 1993 1994 1993 ------------------------------------------ Plan assets at fair value $2,066.4 $2,033.8 $ - $ - Actuarial present value of benefit obligations Vested benefits 1,511.5 1,532.6 88.5 111.4 Nonvested benefits 96.0 149.0 1.2 1.6 ------- ------ ---- ----- Accumulated benefit obligation 1,607.5 1,681.6 89.7 113.0 Effect of projected future salary increases 258.2 395.8 10.1 4.0 ------- ------ ---- ----- Projected benefit obligation 1,865.7 2,077.4 99.8 117.0 ------- ------ ---- ----- Funded status 200. 7 (43.6) (99.8) (117.0) Unrecognized net (gain) loss 100.2 174.1 (8.5) 15.6 Unrecognized prior service cost 111.2 128.0 13.7 9.1 Unrecognized net obligation at January 1, 1986 1.8 3.8 2.4 2.8 Additional minimum liability - - - (23.5) ------- ------ ---- ----- Prepaid (accrued) pension cost $ 413.9 $ 262.3 $ (92.2) $(113.0) ======== ======= ======= ====== The assumptions used to develop net periodic pension expense from continuing operations and the actuarial present value of projected benefit obligations are shown below: (percents) 1994 1993 1992 ---- ---- ---- Weighted-average discount rate 8.6 7.6 8.7 Rate of increase in future compensation levels 4.5-9.5 4.5-9.5 6.0-9.5 Weighted-average expected long-term rate of return on plan assets 10.9 11.0 11.0 The discount rate increase at December 31, 1994, decreased the projected benefit obligation by approximately $271.5 million. The company has defined contribution savings plans that cover its eligible employees worldwide. The purpose of these defined contribution plans is generally to provide additional financial security during retirement by providing employees with an incentive to make regular savings. Company contributions to the plans are based on employee contributions and the level of company match. Expenses attributable to continuing operations under the plans totaled $37.9 million, $24.7 million, and $17.8 million for the years 1994, 1993, and 1992, respectively. 29 Retiree Health Benefits: The company's noncontributory defined benefit postretirement plans provide health benefits for the majority of the United States retirees and their eligible dependents. Certain of the company's non-U.S. subsidiaries have similar plans for retirees. Eligibility for these benefits is based upon retirement from the company. Effective October 1, 1992, the plan was modified such that the start date of an eligible employee's credited service period begins when the combination of an employee's age and years of service equals 60. The company's funding practice for all plans is consistent with local governmental and tax funding regulations. Plan assets consist primarily of equity and fixed income instruments. Net postretirement benefit expense from continuing operations included the following components: 1994 1993 1992 ---- ---- ---- Service cost--benefits earned during the year $ 11.4 $ 10.7 $ 7.2 Interest cost on accumulated postretirement benefit obligations 25.9 19.8 21.8 Actual return on assets 1.1 (11.2) (4.6) Net amortization and deferral (23.3) (10.2) (11.0) ---- ---- ---- Net periodic postretirement benefit cost $ 15.1 $ 9.1 $ 13.4 ===== ===== ===== The funded status and amounts recognized in the consolidated balance sheet for the company's defined benefit postretirement plans at December 31 were as follows: 1994 1993 ---- ---- Accumulated postretirement benefit obligation: Retirees $231.5 $217.8 Fully eligible active plan participants 19.4 61.0 Other active plan participants 53.7 75.7 ---- ---- 304.6 354.5 Plan assets at fair value 147.0 142.6 ---- ---- Accumulated postretirement benefit obligation in excess of plan assets 157.6 211.9 Unrecognized benefit of plan amendment 29.2 37.6 Unrecognized net loss (13.9) (66.5) ---- ---- Accrued postretirement benefit cost $172.9 $183.0 ===== ===== In connection with the company's early-retirement programs in 1993, restructuring charges include curtailment and termination costs relating to these plans of $52.4 million and $7.0 million, respectively. The assumptions used to develop the net postretirement benefit expense from continuing operations and the present value of the accumulated postretirement benefit obligations are shown below: (percents) 1994 1993 1992 ---- ---- ---- Weighted-average discount rate 8.5 7.5 8.5 Expected long-term rate of return 11.0 11.0 11.0 Health care cost trend rate for participants Under age 65 8.0 8.0 8.0 Over age 65 6.0 6.0 6.0 30 If these trend rates were to be increased by 1 percentage point each future year, the December 31, 1994, accumulated postretirement benefit obligation would increase by 13 percent and the aggregate of the service and interest cost components of 1994 annual expense from continuing operations would increase by 18 percent. The increase in the discount rate at December 31, 1994, decreased the accumulated postretirement benefit obligation by approximately $31.1 million. Note 12: Contingencies The company has been named as a defendant in numerous product liability lawsuits involving primarily two products, diethylstilbestrol and Prozac. The company has accrued for its estimated exposure, including costs of litigation, with respect to all current product liability claims. In addition, the company has accrued for certain future anticipated product liability claims to the extent the company can formulate a reasonable estimate of their costs. The company's estimates of these expenses are based primarily on historical claims experience and data regarding product usage. The company expects the cash amounts related to the accruals to be paid out over the next several years. The majority of costs associated with defending and disposing of these suits are covered by insurance. The company's estimate of insurance recoverables is based on existing deductibles, coverage limits, and the existing and projected future level of insolvencies among its insurance carriers. The company is a party to various patent litigation matters involving Humulin, Humatrope, bovine somatotropin, and various products within the Medical Devices and Diagnostics Division. Based upon historical and industry data, the company has accrued for the anticipated cost of resolution of the claims. Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as Superfund, the company has been designated as one of several potentially responsible parties with respect to certain sites. Under Superfund, each responsible party may be jointly and severally liable for the entire amount of the cleanup. The company also continues remediation of certain of its own sites. The company has accrued for estimated Superfund cleanup costs, remediation, and certain other environmental matters, taking into account, as applicable, available information regarding site conditions, potential cleanup methods, estimated costs, and the extent to which other parties can be expected to contribute to those costs. The company has asserted its right to coverage for defense costs in certain environmental proceedings and has reserved its right to pursue claims for insurance with respect to certain other environmental liabilities. However, because of uncertainties with respect to the timing and ultimate realization of those claims, the company has not recorded any environmental insurance recoverables. The product, patent, and environmental liabilities have been reflected in the company's consolidated balance sheet at a gross amount of approximately $445 million. Estimated insurance recoverables of approximately $150 million appear as assets in the consolidated balance sheet. The company has been named, along with numerous other U.S. prescription drug manufacturers, as a defendant in a large number of related actions brought by retail pharmacies alleging violations of federal and state antitrust and pricing laws. The federal suits include a class action on behalf of nearly all U.S. retail pharmacies alleging an industrywide agreement to deny favorable prices to retail pharmacies. Other related suits, brought by several thousand pharmacies, involve claims of price discrimination or claims under other pricing laws. These suits are presently in discovery. While it is not possible to predict or determine the outcome of the patent, product liability, antitrust, or other legal actions brought against the company, or the ultimate cost of environmental matters, the company continues to believe the costs associated with all such matters will not have a material adverse effect on its consolidated financial position. 31 Responsibility for Financial Statements Eli Lilly and Company and Subsidiaries The consolidated financial statements and related notes have been prepared by management, who are responsible for their integrity and objectivity. The statements have been prepared in accordance with generally accepted accounting principles and include amounts based on judgments and estimates by management. The other financial information in this annual report is consistent with that in the financial statements. The company maintains internal accounting control systems that are designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and are properly recorded, and that accounting records are adequate for preparation of financial statements and other financial information. The design, monitoring, and revision of internal accounting control systems involve, among other things, management's judgments with respect to the relative cost and expected benefits of specific control measures. A staff of internal auditors regularly monitors, on a worldwide basis, the adequacy and effectiveness of internal accounting controls. In addition to the system of internal accounting controls, the company maintains guidelines of company policy emphasizing proper overall business conduct, possible conflicts of interest, compliance with laws, and confidentiality of proprietary information. The guidelines are reviewed on a periodic basis with members of management worldwide. The financial statements have been audited by Ernst & Young LLP, independent auditors. Their responsibility is to examine the company's financial statements in accordance with generally accepted auditing standards and to express their opinion with respect to the fairness of presentation of the statements. The members of the audit committee of the board of directors, none of whom are employees of the company, recommend independent auditors for appointment by the board of directors, review the services performed by the independent auditors, and receive and review the reports submitted by them. The audit committee meets several times during the year with management, the internal auditors, and the independent auditors to discuss audit activities, internal controls, and financial reporting matters. The internal auditors and the independent auditors have full and free access to the committee. Randall L. Tobias James M. Cornelius Chairman of the Board and Vice President, Finance, and Chief Executive Officer Chief Financial Officer 32 Report of Independent Auditors Board of Directors and Shareholders Eli Lilly and Company We have audited the accompanying consolidated balance sheets of Eli Lilly and Company and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1994. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eli Lilly and Company and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 5 to the financial statements, in 1992 the company changed its methods of accounting for income taxes and postretirement health benefits. Ernst & Young LLP Indianapolis, Indiana February 8, 1995 33 Appendix to Exhibit 13 Graphs in Annual Report to Shareholders for the Year Ended December 31, 1994 Set forth below, converted to tabular format, are the graphs contained in the paper format of the portions of the Company's Annual Report to Shareholders that are contained in this Exhibit 13. Graph #1--Sales Outside the U.S. ($ millions) Year Amount ---- ------ 1990 $1,637 1991 1,807 1992 1,996 1993 2,098 1994 2,430 Caption: Sales outside the U.S. grew in each of the last five years. As a percent of total sales, sales outside the U.S. increased from 40.3 percent in 1993 to 42.5 percent in 1994 due to expansion into emerging markets. Graph #2--Sales of Leading Products ($ millions) Percent Change Product Amount from 1993 ------ ------ ------------ Prozac $1,665 +39% Ceclor 812 -10% Humulin 665 +19% Axid 487 +23% Vancocin 249 -3% Humatrope 226 +17% Keflex/Keftab(R) 140 +5% Lorabid 128 +34% Caption: Among Lilly's top eight products, five experienced significant sales growth in 1994, led by Prozac. While sales of Ceclor declined in the U.S., its sales increased outside the U.S. 34 Appendix to Exhibit 13 Continued Graph #3--Research and Development Expenses ($ millions) Year Amount ---- ------ 1990 $549.4 1991 590.5 1992 731.0 1993 755.0 1994 838.7 Caption: The company's global clinical trial spending increased approximately 30 percent in 1994, driven by the 15 compounds in Phase II or Phase III. Overall research and development spending increased 11 percent in 1994. Graph #4--Net Income from Continuing Operations ($ millions) Year Amount ---- ------ 1990 $1,022.7 1991 1,166.1 1992 842.5 1993 464.8 1994 1,185.1 Caption: After 2 years of expenses associated with refocusing the business through a series of restructuring and strategic actions, net income from continuing operations rose to nearly $1.2 billion. Graph #5--Capital Expenditures ($ millions) Year Amount ---- ------ 1990 $1,007.3 1991 1,142.4 1992 912.9 1993 633.5 1994 576.5 Caption: Capital expenditures during 1994 declined 9 percent from the 1993 level to below $600 million, their lowest level in 5 years. 35 Appendix to Exhibit 13 Continued Graph #6--Dividends per Share (dollars) Year Amount ---- ------ 1990 $1.64 1991 2.00 1992 2.20 1993 2.42 1994 2.50 Caption: The first-quarter 1995 dividend was increased 3.2 percent over 1994, reflecting the company's commitment to its shareholders. Nineteen ninety-four was the 27th consecutive year in which dividends increased. 36 EX-21 14 EXHIBIT 21 - LIST OF SUBSIDIARIES AND AFFILIATES The following are the subsidiaries and affiliated corporations of the Company at December 31, 1994. State or Jurisdiction of Incorporation % or Organization Owned ---------------------- ----- ELI LILLY AND COMPANY (1) Indiana Eli Lilly International Corporation Indiana 100 Eli Lilly Int'l. Corp.-Branch: England 100 Eli Lilly Int'l. Corp.-Branch: Poland 100 Eli Lilly Iran, S.A. Iran 100 ELCO Insurance Company, Ltd. Bermuda 100 Eli Lilly Interamerica, Inc. Indiana 100 Eli Lilly Interamerica, Inc.-Branch: Argentina 100 Eli Lilly Interamerica, Inc.-Branch: Columbia 100 Eli Lilly Interamerica, Inc.-Branch: Peru 100 Eli Lilly Interamerica, Inc.-Branch: Dominican Republic 100 Elanco Quimica Limitada Brazil 100 Eli Lilly do Brasil Limitada Brazil 100 Darilor Sociedad Anonima Uruguay 100 Beimirco Sociedad Anonima Uruguay 100 Eli Lilly Interamerica Inc., y Compania Limitada Chile 100 STC Pharmaceuticals, Inc. Indiana 100 Dista, Inc. Indiana 100 Eli Lilly de Centro America, S.A. Guatemala 100 Eli Lilly de Centro America, S.A.-Branch: Panama 100 Eli Lilly de Centro America, Sociedad Anonima Costa Rica 100 Eli Lilly y Compania de Mexico, S.A. de C.V. Mexico 100 Dista Mexicana, S.A. de C.V. Mexico 100 EPCO, Inc. Indiana 100 DowElanco* Indiana 40 Hybritech, Incorporated California 100 Hybritech International, Inc. California 100 Hybritech Europe, S.A. Belgium 100 Hybritech Clinical, Inc. California 100 Hybrigenetics Cancer Research, Inc. California 100 Hybritech G.m.b.H. Germany 100 Hybritech International Sales Corp. California 100 Pacific Biotech, Inc. California 100 Eli Lilly Industries, Inc. Delaware 100 Eli Lilly and Company (Taiwan), Inc. Taiwan 100 CBI Uniforms, Inc.* Delaware 50 Control Diabetes Services, Inc. Indiana 100 Integrated Disease Management, Inc. Indiana 100 -1- EXHIBIT 21 - LIST OF SUBSIDIARIES AND AFFILIATES The following are the subsidiaries and affiliated corporations of the Company at December 31, 1994. State or Jurisdiction of Incorporation % or Organization Owned --------------------- ----- PCS Holding Corporation Delaware 100 Clinical Pharmaceuticals, Inc. Delaware 100 Convenience Office Prescriptions California 100 Integrated Medical Systems, Inc.* Colorado 27.6 LP Holding Corporation Maryland 100 PCS Health Systems, Inc. Delaware 100 PCS of New York, Inc. New York 100 PCS Services, Inc. Delaware 100 Guidant Corporation Indiana 80 Advanced Cardiovascular Systems, Inc. California 100 Heart Rhythm Technologies, Incorporated California 100 Origin Medsystems, Inc. Delaware 100 Gynecare, Inc. California 60 Guidant Canada Corporation Canada 100 ACS Medizintechnik GmbH Germany 100 Guidant B.V.&Co. Medizintechnik KG Germany 100 Cardiac Pacemakers, Inc. Minnesota 100 CPI del Caribe, Ltd. Minnesota 100 CPI Delaware, Inc. Delaware 100 Guidant Italy, S.r.l. Italy 100 Guidant B.V. Netherlands 100 Elmedin-Guidant S.A. Spain 50>51 GuidantJapan K.K. Japan 100 Guidant Limited (U.K.) England 100 Guidant France S.A. France 100 Guidant Belgium S.A. Belgium 100 Guidant Skandinavia A.B. Sweden 100 Devices for Vascular Intervention, Inc. California 100 Guidant Europe S.A. Belgium 100 ELCO Management Corporation Delaware 100 -2- EXHIBIT 21 - LIST OF SUBSIDIARIES AND AFFILIATES The following are the subsidiaries and affiliated corporations of the Company at December 31, 1994. State or Jurisdiction of Incorporation % or Organization Owned --------------------- ----- ELCO MANAGEMENT CORPORATION Delaware 100 Eli Lilly Australia Pty. Limited Australia 100 Eli Lilly Australia Custodian Pty. Limited Bermuda 100 AZA Research Pty. Ltd. Australia 49 Eli Lilly and Company (N.Z.) Limited New Zealand 100 Eli Lilly (NZ) Staff Benefits Custodian Ltd. New Zealand 100 Eli Lilly Canada, Inc. Canada 100 ELCO Dominicana, S.A. Dominican Republic 100 ELCO International Sales Corporation Virgin Islands-US Possess. 100 Eli Lilly Group Limited England 100 Lilly Industries Limited England 100 Dista Products Limited England 100 Eli Lilly and Company Limited England 100 Lilly Research Centre Limited England 100 Elanco Products Limited England 100 Creative Packaging Limited England 100 Greenfield Pharmaceuticals Limited England 100 Lilly Medical Instruments Limited England 100 Eli Lilly Group Pension Trustees Limited England 100 Lilly Deutschland G.m.b.H. Germany 100 Eli Lilly (Suisse) S.A. & Co.Beteiligungs-KG Germany 100 Beiersdorf-Lilly G.m.b.H. Germany 51 Lilly Medizintechnik G.m.b.H. Germany 100 Danimed G.m.b.H. & Co. KG Germany 80 Eli Lilly & Co. (Ireland) Limited Ireland 100 Eli Lilly Overseas Finance N.V. Netherlands Antilles 100 Eli Lilly Overseas Finance II N.V. Netherlands Antilles 100 Eli Lilly Asia, Inc. Delaware 100 Eli Lilly Asia, Inc. - Branch Hong Kong 100 Eli Lilly Asia, Inc. - Branch Korea 100 Eli Lilly Asia, Inc. - Branch Thailand 100 Eli Lilly S.A. Switzerland 100 -3- EXHIBIT 21 - LIST OF SUBSIDIARIES AND AFFILIATES The following are the subsidiaries and affiliated corporations of the Company at December 31, 1994. State or Jurisdiction of Incorporation % or Organization Owned ---------------------- ----- ELI LILLY S.A. Switzerland 100 Branch Ireland 100 Eli Lilly Export S.A. Switzerland 100 Puerto Rico - Branch Puerto Rico 100 Egyptian Branch Egypt 100 Egyptian Branch Egypt 100 GEMS Services, S.A. Belgium 100 T. P. Eli Lilly and Elanco D.O.O. Yugoslavia 100 Elanco Trustees Limited Ireland 100 DowElanco, B.V. * Netherlands 40 Eli Lilly (Suisse) S.A Switzerland 100 Iranian Branch Iran 100 Bulgarian Branch Bulgaria 100 Czech Republic Branch Czech Repub. 100 Ivory Coast Branch Ivory Coast 100 Kazakhstan Branch Kazakhstan 100 Lithuanian Branch Lithuanian 100 Pakistani Branch Pakistan 100 Romanian Branch Romania 100 Russian Branch Russia 100 Saudi Arabian Branch Saudi Arabia 100 Slovakian Branch Slovakia 100 Ukraine Branch Ukraine 100 United Arab Emirates Branch U.A.E. 100 Oldfields Financial Management S.A. Switzerland 100 Eli Lilly Nederland B.V. Netherlands 100 Eli Lilly Ges.m.b.H. Austria 100 Lilly Development Centre S.A. Belgium 100 Lilly-MDD Mont-Saint-Guibert Headquarters S.A. Belgium 100 Lilly Clinical Operations S.A. Belgium 100 Eli Lilly Benelux, S.A. Belgium 100 Eli Lilly Denmark A/S Denmark 100 OY Eli Lilly Finland Ab Finland 100 Lilly France S.A. France 100 Medco Ltd. Hungary 50 Lilly Hungaria KFT Hungary 100 Eli Lilly (Philippines), Incorporated Philippines 100 Eli Lilly Ranbaxy Limited * India 50<51 Dista Italia S.r.l. Italy 100 Eli Lilly Italia S.p.A. Italy 100 Eli Lilly Japan K.K. Japan 100 Daewoong Lilly Pharmaceutical Co., Ltd. Korea 50 Eli Lilly Malaysia Sdn Bhd. Malaysia 100 Eli Lilly Maroc S.A.R.L. Morocco 100 ELCO Production Services B.V. Netherlands 100 Eli Lilly Norge A.S. Norway 100 Eli Lilly-Gohar (Private) Limited * Pakistan 30 Eli Lilly Polska Sp.z.o.o. (Ltd.) Poland 100 Lilly Industries Poland Sp. z.o.o. Poland 100 -4- EXHIBIT 21 - LIST OF SUBSIDIARIES AND AFFILIATES The following are the subsidiaries and affiliated corporations of the Company at December 31, 1994. State or Jurisdiction of Incorporation % or Organization Owned --------------------- ----- ELI LILLY S.A. Eli Lilly Nederland B.V. (cont'd) Netherlands 100 Dista-Produtos Quimicos & Farmaceuticos, LDA Portugal 100 Lilly-Farma, Produtos Farmaceuticos, Lda. Portugal 100 ELVA Joint Laboratory * Russia 50 Pharmaserve - Lilly S.A.C.I. Greece 50.9 Eli Lilly Asia Pacific Pte.Ltd. Singapore 100 Eli Lilly (S.A.) (Proprietary) Limited South Africa 100 Elanco-Valquimica, S.A. Spain 50<51 Derly, S.A. Spain 50<51 Dista, S.A. Spain 50<51 Lilly, S.A. Spain 50<51 Geserco, S.A. Spain 50<51 Hybritech, S.A. Spain 50<51 Eli Lilly Sweden AB Sweden 100 Lilly Ilac Ticaret A.S. Turkey 100 Eli Lilly y Compania de Venezuela, S.A. Venezuela 100 (1) All of the companies listed, except those that are asterisked, are included in the consolidated financial statements. * Not Consolidated. -5- EX-23 15 EXHIBIT 23. CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Eli Lilly and Company of our report dated February 8, 1995, included in the 1994 Annual Report to Shareholders of Eli Lilly and Company. We also consent to the incorporation by reference in Registration Statement Number 33-29482 on Form S-8 dated June 23, 1989, in Registration Statement Number 33-37341 on Form S-8 dated October 17, 1990, in Registration Statement Number 33-38347 on Form S-3 dated December 20, 1990, in Registration Statement Number 33-58466 on Form S-8 dated February 17, 1993, in Registration Statement Number 33-50783 on Form S-8 dated October 27, 1993, and in Registration Statement Number 33-56141 on Form S-8 dated October 24, 1994 of our report dated February 8, 1995 with respect to the consolidated financial statements incorporated by reference, in the Annual Report (Form 10-K) of Eli Lilly and Company. Ernst & Young LLP Indianapolis, Indiana March 21, 1995 EX-27 16
5 1,000 YEAR DEC-31-1994 DEC-31-1994 536,933 209,805 1,596,736 46,576 968,949 3,962,329 7,026,356 2,614,858 14,507,415 5,669,521 2,125,760 183,005 0 0 5,172,559 14,507,415 5,686,515 5,711,628 1,666,744 1,679,671 2,295,395 0 103,789 1,698,619 513,456 1,185,162 100,975 0 0 1,286,138 4.41 4.39 Note 1- The information called for is not given as the balance is not individually significant. Note 2 - Amount includes research and development, selling and general and administrative expenses.
EX-99 17 EXHIBIT 99. REPORT TO HOLDERS OF ELI LILLY AND COMPANY CONTINGENT PAYMENT OBLIGATION UNITS In 1994, sales of Hybritech Incorporated, including royalties, decreased to $23.6 million. Sales in 1993 were $149.0 million, down from $172.90 in 1992. Product sales declined in 1994 due primarily to lower unit volume. Sales of the company's largest selling product, Tandem(R) PSA, a prostate cancer test, were down when compared to 1993, due to competition. Hybritech's gross profits declined 20 percent, to $58.9 million in 1994, compared with $73.2 million and $90.7 million in 1993 and 1992, respectively. The gross-profit decline in 1994 was largely the result of lower sales and higher costs. Beginning in 1993, Hybritech combined certain operations with Pacific Biotech, Inc. (PBI), a wholly owned Lilly subsidiary. PBI was sold in January, 1995. In addition, Lilly has previously announced in 1994 that it intends to divest itself of its interest in Hybritech in a manner consistent with its obligations under the Contingent Payment Obligation Unit. Under the terms of the Contingent Payment Obligation Unit, payments are earned if the sum of 6 percent of sales and 20 percent of gross profits exceeds the annual deductible. The annual deductible was originally set in 1986 at $11 million and increases at a compounded rate of 35 percent per year thereafter. The deductibles through 1995 are as follows: (Dollars in millions) 1991 1992 1993 1994 1995 ----------------------------------- $49.3 $66.6 $89.9 $121.4 $163.8 In accordance with the formula, no payment was earned in 1994. Tandem(R)(dual monoclonal sandwich assay kits , Hybritech)