-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H1MvIGM31D2o1TK2pwpRtlwSmb5mOQQS+EX9O8qI8xR4MCDlPvmCndZnPaAaW0cS zHmPNBC5PdX7CDXCpnkr0Q== 0000908834-00-000028.txt : 20000228 0000908834-00-000028.hdr.sgml : 20000228 ACCESSION NUMBER: 0000908834-00-000028 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LILLY INDUSTRIES INC CENTRAL INDEX KEY: 0000059479 STANDARD INDUSTRIAL CLASSIFICATION: PAINTS, VARNISHES, LACQUERS, ENAMELS & ALLIED PRODUCTS [2851] IRS NUMBER: 350471010 STATE OF INCORPORATION: IN FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11553 FILM NUMBER: 553640 BUSINESS ADDRESS: STREET 1: 733 S WEST ST CITY: INDIANAPOLIS STATE: IN ZIP: 46225 BUSINESS PHONE: 3176876700 MAIL ADDRESS: STREET 1: 733 S WEST STREET CITY: INDIANNAPOLIS STATE: IN ZIP: 46225 FORMER COMPANY: FORMER CONFORMED NAME: LILLY INDUSTRIAL COATINGS INC DATE OF NAME CHANGE: 19911229 10-K 1 FORM 10-K FOR LILLY INDUSTRIES, INC. FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended November 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-6953 LILLY INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) INDIANA 35-0471010 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 200 W. 103rd Street Indianapolis, Indiana 46290 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 317-814-8700 Securities registered pursuant to Section 12(b) of the Act: Class A Stock, without par value Common Share Purchase Right (Title of class) New York Stock Exchange (name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 14, 2000 was $288,728,000. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of February 14, 2000. 22,733,318 shares of Class A Common Stock, without par value; 486,306 shares of Class B Common Stock, without par value DOCUMENTS INCORPORATED BY REFERENCE Part II: Items 5 Annual Report to Shareholders for Fiscal through 8 Year Ended November 30, 1999 Part III: Items 10 Proxy Statement for Annual Meeting of through 13 Shareholders to be held March 31, 2000 PART I Lilly Industries, Inc. Item 1. BUSINESS Business Description Lilly Industries, Inc. (referred to herein as "Lilly" or the "Company") was founded in 1865, and incorporated under the laws of the State of Indiana on December 5, 1888. The Company believes it is a leader in the industrial coatings and specialty chemicals industry, one of the five largest industrial coatings and specialty chemicals manufacturers in North America, and one of the 15 largest in the world based on net sales of $656.2 million in fiscal 1999. Lilly formulates, manufactures and markets industrial coatings and specialty chemicals to original equipment manufacturers, enhancing the appearance of and providing durability to products such as home and office furniture, cabinets, appliances, building products, transportation, agricultural and construction equipment, mirrors and a variety of metal and fiberglass reinforced surfaces. A significant amount of the Company's sales represent industrial coatings and specialty chemicals developed in cooperation with its customers to meet their specific product requirements, resulting in a number of primary supplier relationships with those customers. No one class of similar products (other than protective and decorative coatings) accounted for 10% or more of the consolidated revenues of the Company in any of the last three fiscal years (1). The Company has only one reportable operating segment, and employs approximately 2,400 people. The Company has plants or sales offices in the U.S., Australia, Canada, China, Germany, Ireland, Malaysia, Mexico, Singapore, Taiwan and the United Kingdom. (1) References in this Form 10-K are references to the Company's fiscal years ended November 30, 1999, 1998 and 1997. Industrial Coatings and Specialty Chemicals Industry Industrial coatings and specialty chemicals protect a wide range of manufactured goods from the effects of external elements over the life of the product. In addition, industrial coatings and specialty chemicals make products more aesthetically pleasing to end use customers. Lilly competes in three end use markets: (i) wood coatings, such as lacquer and protective coatings for furniture, building products and kitchen cabinets; (ii) metal coatings, such as liquid and powder coatings used to finish building products, furniture, appliances and transportation equipment; and (iii) composites and glass coatings, such as gelcoats and specialty chemicals for transportation equipment, recreational vehicles and mirrors. Sales for the global paints and coatings market equal approximately $57 billion annually, with annual sales for the domestic market equaling approximately $17 billion. Annual sales for the industrial coatings and specialty chemicals segment in which Lilly participates are approximately $27 billion globally and $9 billion domestically. The balance of the market consists primarily of architectural coatings (primarily house paints), a market in which Lilly does not compete, and specialty coatings, including maintenance coatings and traffic paints. The industrial coatings and specialty chemicals industry is a mature and highly fragmented industry in the U.S., growing in-line with industrial production, and includes many small competitors. Long term annual unit growth in the U.S. industrial coatings and specialty chemicals business is projected between 1% and 2%, largely tied to fluctuations in general economic cycles. Annual unit growth rate is projected between 1% and 2% in Europe and between 4% and 6% in Asia. The North American industrial coatings and specialty chemicals industry is divided among over 700 participants. Due to its maturity and historically fragmented participant base, this industry is undergoing consolidation through mergers and acquisitions. Consolidation of the industrial coatings and specialty chemicals industry is being driven by several factors, including (i) the need for growth in maturing markets; (ii) environmental costs which, together with a more demanding global customer base, will make it difficult for smaller manufacturers with limited financial resources to remain independent; and (iii) the increasing technical and financial resources of the larger companies. To date, the effects of industry consolidation include a greater concentration of market share with fewer companies, a reduction in the number of competitors, and the creation of new synergies within the larger industrial coatings and specialty chemicals companies, such as raw material purchasing power and manufacturing economies of scale. Competition The industrial coatings and specialty chemicals industry is competitive, with more than 700 North American manufacturers operating in numerous end-use markets. Manufacturers include large international companies as well as small regional firms, and no one manufacturer dominates. Competitive advantages include developing industrial coatings and specialty chemicals that meet specific customer requirements, pricing industrial coatings and specialty chemicals competitively and rapidly delivering quality products. Technological developments that reduce negative environmental effects are also an important competitive factor. Lilly is one of the top five industrial coatings and specialty chemicals manufacturers in North America, one of the top 15 worldwide. While Lilly is among the top five North American producers of industrial coatings and specialty chemicals, some competitors are generally more diversified and have greater financial resources than the Company. Major competitors include Akzo Nobel; Ferro Corporation; BASF; The Sherwin-Williams Company; PPG Industries, Inc.; and The Valspar Corporation. End Use Markets The Company focuses on three end use markets, wood coatings; metal coatings; and composites and glass coatings. These three markets accounted for approximately 46%, 43%, and 11% of the Company's fiscal 1999 net sales, respectively. The following provides a summary of these markets. Wood Coatings. Lilly's wood coatings provide a full range of custom-formulated coatings designed to enhance the beauty of wood while providing maximum durability for products such as residential and office furniture, building products and kitchen cabinets. Wood coatings are manufactured at six U.S. locations, as well as five foreign facilities located in Canada, China, Ireland, Malaysia and Taiwan. Metal Coatings. The Company's metal coatings provide specialized coatings for numerous applications such as appliances, building products and fixtures (such as residential siding, aluminum gutters, and metal roofing), agricultural and construction equipment, furniture, bicycles, digital satellite systems, automotive trim and wheels, entry and garage doors, computers, window trim, shelving, and playground equipment. These coatings include traditional liquid coatings as well as coil coatings and a full range of decorative and functional powder coatings. The coil coatings process is considered one of the most environmentally safe, energy-efficient methods of applying coatings to metal substrates. Lilly's technical innovation has produced conventional and water-borne coil coatings formulated with proprietary resins that provide high durability, flexibility, corrosion resistance and chemical resistance. Powder coatings are experiencing growth because of their environmental desirability, as powder coatings have no solvent content. Lilly powder coatings are environmentally compliant and provide outstanding durability and performance for both interior and exterior applications. Metal coatings are manufactured at thirteen facilities in the U.S. and facilities in Canada and Germany. Composites and Glass Coatings. The Company's composites include gelcoats and fiberglass reinforced plastic composites for boats, recreational vehicles, cultured marble vanity tops, custom van and truck components and personal watercraft. Lilly's glass coatings are well recognized globally. The Company's glass coatings provide mirror manufacturers with everything needed to convert glass into mirrors of premier quality. Glass coatings are manufactured at one U.S. facility located in Connecticut, and foreign facilities located in Canada and Germany. Distribution and Customers Lilly's technical sales force of approximately 700 people market and sell its industrial coatings and specialty chemicals directly to over 6,000 customers throughout the world. Most of the Company's customers are located throughout the United States and Canada, with the remaining customers concentrated in Europe and Asia-Pacific. The Company is not dependent upon any single customer or few customers. The loss of any single customer would not have a material adverse impact on the Company. No single customer of the Company represented more than 5% of net sales. International sales, including U.S. exports, were $176.6 million in fiscal year 1999, which represented 27% of consolidated sales. Information concerning the Company's net sales, operating income and assets in foreign countries and the United States for the three years ended November 30, 1999 is set forth in Note 9 in the Notes to Consolidated Financial Statements in the Company's 1999 Annual Report to Shareholders, which is incorporated herein by reference. The Company has no significant order backlog. No material part of the business is subject to re-negotiation of profit or termination of contracts or subcontracts at the election of any governments. Historically, first quarter operating results are below operating results for the second, third and fourth quarters due to the lower demand for industrial production which typically occurs in December. Raw Materials Raw materials are the largest single cost in the industrial coatings and specialty chemicals business, representing about half of the selling price of most products. The typical product consists of pigments dispersed in a liquid known as the "vehicle," which is usually composed of one or more polymers, and a solvent. The solvent helps the product coat the substrate; the polymers form a film to hold the product coating in place after the solvent has evaporated and provides the unique performance characteristics of the product coating. Solvents are typically petrochemical-based products that evaporate quickly. However, the use of petrochemical-based solvents is declining as environmentally friendly technologies, such as water-borne liquid and powder coatings, gain market share. The pigment, usually an inorganic substance, provides the color. "Fillers" and "extender pigments" provide gloss and sheen control, while specialty chemicals known as additives, enhance the flow and application properties of the product coating. The Company manufactures its industrial coatings and specialty chemicals from a variety of polymers, pigments, solvents and other chemicals, the bulk of which are obtained from petrochemical feed stocks. In addition to petrochemicals, the Company uses both silver and copper. Under normal conditions, all of these raw materials are available on the open market, although prices and availability are subject to fluctuation from time to time. Lilly, like most other companies in the industrial coatings and specialty chemicals industry, uses a variety of organic and inorganic materials in its products. No single raw material cost currently accounts for over 5% of net sales and most account for less than 1% of net sales. The Company's largest single raw material cost is for titanium dioxide (TiO2), which is a white pigment, and accounts for approximately 30% of pigment usage in the industrial coatings and specialty chemicals industry. The Company's annual expenditures for TiO2 total approximately 5% of the Company's annual net sales. Research and Development Lilly's Corporate Technology Center, as well as laboratories at its major facilities, emphasize the development of product finishes to meet specific requirements of customers and the maintenance of quality throughout the manufacturing process. They are also engaged in research directed toward development of new products and new manufacturing and application techniques. Research and development expenses were $21.2 million (3.2% of net sales), $20.6 million (3.3% of net sales), and $18.7 million (3.1% of net sales) for the fiscal years 1999, 1998 and 1997, respectively. Future research and development expenses as a percent of net sales are anticipated to remain at current levels with emphasis on new product development. The Company holds several patents and trademarks, and considers patent and trademark protection to be important, but no individual patent is currently material to the Company's business as a whole. The Company has patents and licenses for glass coatings which are material to that specific business; and new patents are continually being developed to sustain the Company's competitive advantage. Properties Lilly maintains thirty principal facilities, of which eighteen were located in the U.S. See Item 2 - Properties. The plants range in size from approximately 260,000 square feet to approximately 9,000 square feet. The facilities vary in age and are well maintained and adequate for their present uses. Utilization rates vary from site to site depending on capacity, customers served and range of production capabilities. The Company believes it can take advantage of special situations (e.g., special orders, new customers, new technology) that may arise during the course of an operating cycle by adding capacity through incremental shifts. Each facility operates technical support centers to assist customers in addressing both application and processing issues. Although the Company has traditionally located its domestic plants near its customer base, the Company has begun to rely on larger, more efficient, centralized plants in the U.S. With respect to its foreign operations, the Company continues to adhere to its strategy of following, and being in close proximity to its customers as they open plants around the world. Employees and Collective Bargaining Units As of November 30, 1999, Lilly employed approximately 2,400 people. The industrial coatings and specialty chemical industry is not heavily unionized and to the extent there is unionization, it is highly fragmented. Unionized workers account for approximately 10% of the Company's total work force and operate through five separate unions at six Lilly facilities. The Company believes its relations with its employees are good. Environmental Regulation The Company's operations are subject to numerous foreign, federal, state and local environmental laws and regulations relating to protection of the environment, employee health and safety, and the discharge, storage, treatment and disposal of hazardous materials. In the United States, these laws include the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund"), the Resource Conservation and Recovery Act, the Clean Water Act, and the Clean Air Act. Certain operations of the Company use pigments, resins and solvents that contain chemicals that are considered hazardous under various environmental laws. Accordingly, management closely monitors the Company's environmental performance at its facilities. Management believes the Company is in compliance in material respects with all environmental laws and regulations. CERCLA imposes joint and several liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of hazardous substances into the environment. These persons include the owner and operator of the site where the release occurred and companies that disposed or arranged for disposal of the hazardous substances found at the site. The Company has been named as a potentially responsible party ("PRP") by the United States Environmental Protection Agency ("EPA") or similar state agencies with respect to several inactive waste processing and/or disposal sites where clean-up costs have been incurred or may be incurred. In addition to these sites, the Company is currently investigating and remediating on-site disposal areas at certain of its current and former facilities. The Company continually assesses its environmental matters and establishes reserves to provide for these matters as they arise. The Company's experience to date leads it to believe it will have continuing expenditures for compliance with provisions regulating protection of the environment and remediation efforts at waste and manufacturing sites. However, management believes such expenditures will not have a material adverse effect on operating results or the financial position of the Company as a whole. Under the Clean Air Act Amendments of 1990 ("CAAA"), the EPA is required to regulate volatile organic compound ("VOC") emissions from a variety of consumer and commercial products, including industrial coatings and specialty chemicals. Accordingly, the EPA has issued various regulations that limit VOCs from industrial coatings and specialty chemicals. Although the Company cannot accurately assess the impact of these regulations prior to their promulgation or implementation in final form, based on currently available information, the Company believes these regulations will not have a material adverse effect on the operating results or the financial position of the Company as a whole. FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains statements which constitute forward looking statements within the meaning of Section 27A of the Securities Act. Discussions containing such forward looking statements may be found under the captions "Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A"), and "Business," as well as elsewhere within this Report. Forward looking statements include statements regarding the intent, belief or current expectations of the Company, primarily with respect to the future operating performance of the Company or related industry developments. When used in this Report, terms such as "anticipate," "believe," "estimate," "expect," "intend," "indicate," "may be," "objective," "plan," "predict," and "will be" are intended to identify such statements. Forward looking statements are not guarantees of future performance and involve risks and uncertainties. Forward looking statements are based upon management's expectations at the time they are made. Actual results could differ materially from those projected in the forward looking statements as a result of the risk factors set forth below and the matters set forth in this Report generally, many of which are beyond the control of the Company. The Company cautions the reader, however, the following list of factors may not be exhaustive. Sensitivity to General Economic and Industry Conditions The Company's business, and the industrial coatings and specialty chemicals industry as a whole, is cyclical in nature and affected by the general trends of the economy. In particular, consumer behavior and confidence, the level of personal discretionary spending, housing activity, interest rates, credit availability, and demographics influence the Company's end use markets, such as the housing, building products, construction and agricultural equipment, appliance, furniture and automotive industries. During economic downturns, these industries tend to experience declines, which in turn diminish demand for the Company's products. Effects of Leverage The Company's level of indebtedness will have several important effects on its operations including (i) a substantial portion of the Company's cash flow from operations will be dedicated to debt service obligations, (ii) the covenants contained in the Company's revolving credit facility and senior notes may limit the Company's ability to borrow additional funds, and (iii) the Company's leveraged financial position may make the Company more vulnerable to economic downturns and may limit its ability to withstand competitive pressures, and plan for, or react to, changes in market conditions. Environmental Matters The operations of the Company, like those of other companies in the industrial coatings and specialty chemicals industry, are subject to numerous foreign, federal, state and local environmental laws and regulations. While the Company believes it is currently in material compliance with environmental requirements, any failure to comply with such present and future requirements could subject the Company to future liabilities. The imposition of more stringent environmental requirements, or a determination the Company is potentially responsible for site remediation where contamination is not presently known could result in expenditures for which no accrual has been made. Mature Industry The industrial coatings and specialty chemicals industry is a mature business in the U.S., growing in line with industrial production. Long-term annual growth in the U.S. industrial coatings and specialty chemicals industry is projected in the 1% to 2% range. To expand and remain competitive, the Company will be required to continue (i) to develop industrial coatings and specialty chemicals that meet specific customer requirements, (ii) to price those industrial coatings and specialty chemicals competitively, and (iii) to deliver quality products on time. In addition, the Company will also need to keep pace with technological developments to remain competitive, particularly technological developments that relate to environmental demands such as reductions of volatile organic compound emissions imposed by government regulations. Raw Materials Approximately 50% of the Company's operating costs are typically attributable to the cost of raw materials. The cost of these raw materials, most of which are derived from petrochemical products, depends on numerous factors, including changes in the economy, the level of foreign and domestic production, and the crude oil supply and demand balance. A rise in the price of raw materials could materially increase the Company's operating costs and thereby adversely affect its profit margins. International Operations During fiscal 1999, the Company's international sales, including U.S. exports accounted for approximately 27% of total sales, and this percentage may increase in the coming years. The Company's international operations subject it to the risks of doing business abroad, including currency fluctuations, various trade barriers, restrictions on the transfer of funds, greater difficulty in accounts receivable collection, burdens of complying with a wide variety of foreign laws, and, in certain parts of the world, economic, social, and political instability, any of which could have an adverse effect on the Company's financial position and results of operations. Executive Officers of the Company The executive officers of the Company, the age of each, the positions and offices held by each during the last five years, and the period during which each has served in such positions and offices are as follows: Name of Executive Officer Age Positions and Offices Held - ----------------- --- -------------------------- Douglas W. Huemme 58 Director since 1990; Chairman and Chief Executive Officer of the Company since prior to 1995; President from prior to 1995 to April, 1999. Robert A. Taylor 45 Director since April, 1997; President since April, 1999; Chief Operating Officer since February, 1997; Executive Vice President from February, 1997 to April, 1999; Vice President and General Manager, Wood Coatings from prior to 1995 to February, 1997; Larry H. Dalton 52 Vice President - Manufacturing and Engineering since prior to 1995. William C. Dorris 56 Director since 1989; Vice President - Corporate Development since prior to 1995. John C. Elbin 46 Director since April, 1999, Vice President, Chief Financial Officer and Secretary since April, 1997 when he joined the Company; Senior Vice President and Chief Financial Officer of Pet Incorporated from prior to 1995 to 1995. A. Barry Melnkovic 42 Vice President - Human Resources since April, 1996; Director, Corporate Employee & Labor Relations and Director Corporate Compensation and Benefits, Cummins Engine Company, Inc., from prior to 1995 to 1996. Kenneth L. Mills 51 Corporate Controller since 1999. Corporate Accounting Director from prior to 1995 to 1999. Assistant Secretary since prior to 1995. Each executive officer will serve as such until his successor is chosen and qualified. No family relationships exist among the Company's executive officers. Item 2. Properties. The Company has thirty principal facilities. The locations and approximate square footage at those facilities are as follows: Location Square Feet High Point, North Carolina (2 locations) 320,000 Indianapolis, Indiana 260,000 Grand Rapids, Michigan 165,000 North Kansas City, Missouri 138,000 Eschweiler, Germany 121,000 Fremont, Michigan 120,000 London, Ontario, Canada 103,000 Cornwall, Ontario, Canada 97,000 Bowling Green, Kentucky 94,000 Moline, Illinois 76,000 Kaohsiung Hsien, Taiwan, R.O.C. 64,000 Montebello, California 58,000 Charlotte, North Carolina 57,000 Rocky Hill, Connecticut 57,000 Gardena, California 52,000 Paulsboro, New Jersey 47,000 Dallas, Texas 36,000 Little Rock, Arkansas 35,000 Guadalupe, Mexico 35,000 Seattle, Washington 30,000 Elkhart, Indiana 25,000 Dongguan, China 25,000 Selangor, Malaysia 20,000 Davie, Florida 14,000 Ballinamore, Ireland 12,000 Abingdon, England 12,000 Wallenfels, West Germany 9,000 North Sydney, Australia 1,000 Singapore 1,000 All of these principal facilities noted above are owned directly or indirectly by the Company, except for leased facilities in Grand Rapids, Michigan; Dongguan, China; Selangor, Malaysia; Abingdon, England; Singapore; and North Sydney, Australia. Item 3. Legal Proceedings. The Company is involved in various litigation and other asserted and unasserted claims arising in the ordinary course of business, primarily relating to product warranty and clean-up costs at independently operated waste treatment/disposal sites previously used by the Company or the predecessors of businesses purchased by the Company. While the results of lawsuits or other proceedings against the Company cannot be predicted with certainty, management believes that uninsured and unreserved losses, if any, arising from these proceedings will not have a material adverse effect on the business or consolidated financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of fiscal 1999 to a vote of security holders through the solicitation of proxies or otherwise. PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters. The information required by this item is incorporated by reference herein from the information included under caption "Stock Trading and Dividend Information" in the Company's 1999 Annual Report to Shareholders and is included in Exhibit 13. There is no public trading market for the Company's Class B Common Stock. Item 6. Selected Financial Data. The information required by this item is incorporated by reference herein from the information included under the caption "Selected Financial Data" in the Company's 1999 Annual Report to Shareholders and is included in Exhibit 13. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. The information required by this item is incorporated by reference herein from the information included under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Company's 1999 Annual Report to Shareholders and is included in Exhibit 13. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company is subject to market risk in the form of interest rate risk and foreign currency risk. Both interest rate risk and foreign currency risk are immaterial to the Company. Item 8. Financial Statements and Supplementary Data. The consolidated financial statements of the Company are incorporated by reference from the Company's 1999 Annual Report to Shareholders and are included in Exhibit 13. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. No information is required to be disclosed under this item of this report pursuant to Instruction 1 to Item 304 of Regulation S-K. PART III Item 10. Directors and Executive Officers of the Company. The information required by this item with respect to directors of the Company is incorporated herein by reference from the section entitled "Proposal Number One, Election of Directors" of the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held March 31, 2000. See Part I, for a list of the Company's executive officers, and their ages, positions and offices. Item 11. Executive Compensation. The information required by this item is incorporated herein by reference from the section entitled "Compensation of Executive Officers" of the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held March 31, 2000. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated herein by reference from the sections entitled "Share Ownership of Certain Beneficial Owners" and "Proposal Number One, Election of Directors" of the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held March 31, 2000. Item 13. Certain Relationships and Related Transactions. The information required by this item, if any, is incorporated herein by reference from the section entitled "Proposal Number One, Election of Directors" of the Company's definitive Proxy statement relating to its Annual Meeting of Shareholders to be held March 31, 2000. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)-1 The following items, included in the Company's 1999 Annual Report to Shareholders, are incorporated herein by reference and are included herein in Exhibit 13. Report of Independent Auditors Consolidated Balance Sheets -- November 30, 1999 and 1998 Consolidated Statements of Income -- Years ended November 30, 1999, 1998 and 1997 Consolidated Statements of Cash Flows -- Years ended November 30, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity -- Years ended November 30, 1999, 1998 and 1997 Notes to Consolidated Financial Statements -- November 30, 1999 (a)-2 The following financial statement schedule is filed as a part of this report. Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)-3 Exhibits. Exhibits Incorporated by Reference EXHIBIT INDEX Exhibit No. Description 2 Merger Agreement, dated March 4, 1996, by and among Lilly Industries, Inc., LP Acquisition Corporation and Guardsman Products, Inc. This exhibit is incorporated by reference to Exhibit 2 to Lilly Industries, Inc.'s Form 8-K Current Report filed with the SEC on April 22, 1996. 3.1 Restated Articles of Incorporation of Lilly Industries, Inc., as amended. This exhibit is incorporated by reference to Exhibit 3(a) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1996. 3.2 Restated By-Laws of Lilly Industries, Inc., as amended. This exhibit is incorporated by reference to Exhibit 3(b) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1993. 4.1 Indenture, dated November 10, 1997,between Lilly Industries, Inc and Harris Trust and Savings Bank. This exhibit is incorporated by reference to Exhibit 4.1 to Lilly Industries, Inc.'s Registration Statement on Form S-4 filed with the Commission on December 5, 1997 (Commission No. 333-41587). 4.2 Credit Agreement, dated October 24, 1997, between Lilly Industries, Inc., the Lenders Signatory thereto, and NBD Bank, N.A. as Agent. This exhiit is incorporated by reference to Exhibit 4.2 to Lilly Industries, Inc.'s Registration Statement on Form S-4 filed with the Commission on December 5, 1997 (Commission No. 333-41587). First Amendment to Credit Agreement among Lilly Industries, Inc., the lenders signatory thereto and NBD Bank, N.A. as agent, dated as of April 4, 1998 is incorporated by reference to Exhibit 4.4 to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1998. 4.3 Rights Agreement, dated January 12, 1996, between Lilly Industries, Inc. and KeyCorp Shareholder Services, Inc. as Rights Agent. This exhibit is incorporated by reference to Exhibit 4 to Lilly Industries, Inc.'s Form 8-A filed with the SEC on January 23, 1996. 10.1 Registration Agreement, dated November 5, 1997, between Lilly Industries, Inc. and Salomon Brothers, Inc., Lehman Brothers, Inc. and Schroder & Co., Inc. This exhibit is incorporated by reference to Exhibit 10.1 to Lilly Industries, Inc.'s Registration Statement on Form S-4 filed with the Commission on December 5, 1997 (Commission No. 333-41587). 10.2 Form of Exchange Agent Agreement, dated December 22, 1997, between Lilly Industries, Inc. and Harris Trust and Savings Bank. This exhibit is incorporated by reference to Exhibit 10.2 to Lilly Industries, Inc.'s Registration Statement on Form S-4 filed with the Commission on December 5,1997 (Commission No. 333-41587). *10.3 Lilly Industries, Inc. Unfunded Supplemental Retirement Plan (as in effect November 29, 1990). This exhibit is Incorporated by reference to Exhibit 10(b) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1990. *10.4 Lilly Industries, Inc. Unfunded Excess Benefit Plan. This exhibit is incorporated by reference to Exhibit 10(c) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1989. *10.5 Lilly Industries, Inc. Second Unfunded Supplemental Retirement Plan (effective June 4, 1990). This exhibit is incorporated by reference to Exhibit 10(f) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1990. *10.7 Lilly Industries, Inc. 1991 Director Stock Option Plan. This exhibit is incorporated by reference to Exhibit 10(i) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1991. *10.8 Lilly Industries, Inc. 1992 Stock Option Plan. This exhibit is incorporated by reference to Exhibit 10(j) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1991. First Amendment to Lilly Industries, Inc. 1992 Stock Option Plan. This exhibit is incorporated by reference to Exhibit 10.8 to Lilly Industries, Inc.'s Registration Statement on Form S-4 filed with the Commission on December 5, 1997 (Commission No. 333-41587). *10.9 Lilly Industries, Inc. Executive Retirement Plan (effective as of January1, 1996). This exhibit is incorporated by reference to Exhibit 10(i) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1996. *10.10 Lilly Industries, Inc. Retirement Plan (effective as of January 1, 1996) and Trust Agreement for Lilly Industries, Inc. Replacement Plan between Lilly Industries, Inc. and Bankers Trust Company of Des Moines, dated September 27, 1996. This exhibit is incorporated by reference to Exhibit 10(j) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1996. *10.11 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Hugh M. Cates. This exhibit is incorporated by reference to Exhibit 10(1) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.12 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Larry H. Dalton. This exhibit is incorporated by reference to Exhibit 10(2) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.13 Change in Control Agreement, dated September 26, 1997, by and between Registrant and William C. Dorris. This exhibit is incorporated by reference to Exhibit 10(3) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.14 Change in Control Agreement, dated September 26, 1997, by and between Registrant and John C. Elbin. This exhibit is incorporated by reference to Exhibit 10(4) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.15 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Ned L. Fox. This exhibit is incorporated by reference to Exhibit 10(5) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.16 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Douglas W. Huemme. This exhibit is incorporated by reference to Exhibit 10(6) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.17 Change in Control Agreement, dated September 26, 1997, by and between Registrant and A. Barry Melnkovic. This exhibit is incorporated by reference to Exhibit 10(7) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.18 Change in Control Agreement, dated September 26, 1997, by and between Registrant and John D. Million. This exhibit is incorporated by reference to Exhibit 10(8) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.19 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Kenneth L. Mills. This exhibit is incorporated by reference to Exhibit 10(9) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.20 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Gary D. Missildine. This exhibit is incorporated by reference to Exhibit 10(10) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.21 Change in Control Agreement, dated September 5, 1997, by and between Registrant and Robert A. Taylor. This exhibit is incorporated by reference to Exhibit 10(11) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.22 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Keith C. Vander Hyde, Jr. This exhibit is incorporated by reference to Exhibit 10(12) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.23 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Jay M Wiegner. This exhibit is incorporated by reference to Exhibit 10(13) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. * Management contracts and compensatory plans required to be filed pursuant to Item 14(c) of Form 10-K. Exhibits Filed Herewith: 4.4 Second Amendment to Credit Agreement among Lilly Industries, Inc., the Lenders Signatory thereto and NBD Bank, N.A., as agent, dated as of August 31, 1999. 4.5 Letter date November 29, 1999 appointing National CityBank as Rights Agent under the Rights Agreement dated January 12, 1996 referenced as Exhibit 4.3 to this Form 10-K 10.24 Douglas W. Huemme Executive Employment Agreement dated as of January 14, 2000. 10.25 Change in Control Agreement, dated February 3, 2000, by and between Registrant and Olin R. Rocker. 10.26 Change in Control Agreement, dated February 3, 2000, by and between Registrant and Alan DeBlandre. 10.27 Change in Control Agreement, dated February 3, 2000, by and between Registrant and Virgil E. Underwood. 13 Excerpts from the Lilly Industries, Inc. 1999 Annual Report. 21 List of Subsidiaries. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 25, 2000 LILLY INDUSTRIES, INC. /s/ Douglas W. Huemme ------------------------------ Douglas W. Huemme, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date (1) Principal Executive Officer and Director /s/ Douglas W. Huemme Chairman and Chief February 25, 2000 - ----------------------- Executive Officer Douglas W. Huemme (2) Principal Financial Officer and Director /s/ John C. Elbin Vice President, February 25, 2000 - ------------------------ Chief Financial Officer John C. Elbin and Secretary (3) Principal Accounting Officer /s/ Kenneth L. Mills Corporate Controller February 25, 2000 - ----------------------- and Assistant Kenneth L. Mills Secretary (4) A majority of the Board of Directors /s/ James M. Cornelius Director February 25, 2000 - --------------------------- James M. Cornelius /s/ William C. Dorris Director February 25, 2000 - --------------------------- William C. Dorris /s/ Paul K. Gaston Director February 25, 2000 - --------------------------- Paul K. Gaston /s/ Harry Morrison, Ph.D. Director February 25, 2000 - --------------------------- Harry Morrison, Ph.D. /s/ Norma J. Oman Director February 25, 2000 - --------------------------- Norma J. Oman /s/ John D. Peterson Director February 25, 2000 - --------------------------- John D. Peterson /s/ Thomas E. Reilly, Jr. Director February 25, 2000 - --------------------------- Thomas E. Reilly, Jr. /s/ Robert A. Taylor Director February 25, 2000 - --------------------------- Robert A. Taylor SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS LILLY INDUSTRIES, INC. AND SUBSIDIARIES
COL. A COL. B COL. C COL. D COL. E - ------ ------ ------ ------ ------ Additions Description Balance at Deductions- Balance Beginning Charged to Charged to Acquired in Describe at End of of Period Costs and Other Accounts Business Period Expenditures -Describe Combination Year ended November 30, 1999: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts receivable $1,981,000 $127,000 $-- $-- $333,000 (A) $1,775,000 ============================================================================================== Year ended November 30, 1998: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts receivable $2,139,000 $752,000 $-- $-- $910,000 (A) $1,981,000 ============================================================================================== Year ended November 30, 1997: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts receivable $2,705,759 $538,000 $-- $-- $1,104,759 (A) $2,139,000 ==============================================================================================
Note A - Uncollectible accounts receivable charged off, net of recoveries. EX-4.4 2 SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT made as of the 31st day of August, 1999, by and among LILLY INDUSTRIES, INC., an Indiana corporation (the "Borrower"), the LENDERS party hereto, and BANK ONE, INDIANA, N.A., as successor by merger to NBD BANK, N.A., a national banking association, as agent for the Lenders hereunder (in such capacity, the "Agent"); W I T N E S S E T H: WHEREAS, as of October 24, 1997, the parties hereto entered into a certain Credit Agreement, as amended April 4, 1998 (as amended, the "Agreement"); and WHEREAS, the Borrower has requested modifications to the Agreement (a) to allow the Borrower to obtain mortgage financing on its new headquarters in Indianapolis, Indiana, and (b) to change the calculation of the Fixed Charge Coverage Ratio, and the Required Lenders have consented to such modifications subject to and as provided in this Second Amendment; NOW, THEREFORE, in consideration of the premises, and the mutual promises herein contained, the parties agree that the Agreement shall be, and it hereby is, amended as provided herein and the parties further agree as follows: PART I. AMENDATORY PROVISIONS SECTION 1 Definitions 1.1 Defined Terms. ------------- Section 1.1 of the Agreement is hereby amended by substituting the following definition in lieu of the like existing definition: "Fixed Charge Coverage Ratio" means, with respect to Borrower and its Subsidiaries determined on a Consolidated basis, the ratio of (a) the sum of (i) EBITDA minus (ii) Capital Expenditures, plus (iii) Permitted Corporate Headquarters Expenditures, plus (iv) Rentals, to (b) the sum of (i) interest expense, plus (ii) scheduled principal payments in respect of Indebtedness paid in such period, plus (iii) taxes paid, plus (iv) Rentals, plus (v) dividends paid in such period, all as determined on the last day of each fiscal quarter of Borrower by reference to the Financial Statements; in each instance determined for the trailing four (4) quarter period ending on the date of determination. Section 1.1 of the Agreement is hereby further amended by adding the following definition: "Mortgage Lien" shall have the meaning ascribed in Schedule 5.2.2. "Permitted Corporate Headquarters Expenditures" means any expenditures incurred in any quarter related to the purchase and construction of the Borrower's corporate headquarters (including furniture and fixtures) located at 200 West 103rd, Indianapolis, Indiana 46290, but only to the extent the sum of all such expenditures whenever incurred do not exceed $15,000,000 in the aggregate. SECTION 5 Covenants 5.2. Negative Covenants. ------------------- 5.2.15. Restrictive Agreements. Section 5.2.15 of the Agreement is hereby amended by adding "and excluding any restrictions under the Mortgage Lien" after "Documents" in the second line thereof. PART II. SCHEDULES The Agreement is hereby amended by substituting Schedule 4.10, 5.2.2 and 5.2.3 to this Second Amendment in lieu of Schedules 4.10, 5.2.2 and 5.2.3, respectively, to the Agreement. PART III. CONTINUING EFFECT Except as expressly modified herein: (a) All terms, conditions, representations, warranties and covenants contained in the Agreement shall remain the same and shall continue in full force and effect, interpreted, wherever possible, in a manner consistent with this Second Amendment; provided, however, in the event of any irreconcilable inconsistency, this Second Amendment shall control; (b) The representations and warranties contained in the Agreement shall survive this Second Amendment in their original form as continuing representations and warranties of the Borrower; and (c) Capitalized terms used in this Second Amendment, and not specifically herein defined, shall have the meanings ascribed to them in the Agreement. In consideration hereof, the Borrower represents, warrants, covenants and agrees that: (aa) Each representation and warranty set forth in the Agreement, as hereby amended, remains true and correct as of the date hereof in all material respects, except to the extent that such representation and warranty is expressly intended to apply solely to an earlier date and except changes reflecting transactions permitted by the Agreement; (bb) There currently exists no offsets, counterclaims or defenses to the performance of the Obligations (such offsets, counterclaims or defenses, if any, being hereby expressly waived); (cc) There has not occurred any Default or Unmatured Default; and (dd) After giving effect to this Second Amendment and any transactions contemplated hereby, no Default or Unmatured Default is or will be occasioned hereby or thereby. PART IV. INDEPENDENT CREDIT DECISION Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender, based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Second Amendment. PART V. CONDITIONS PRECEDENT Notwithstanding anything contained in this Second Amendment to the contrary, the Lenders shall have no obligation under this Second Amendment until each of the following conditions precedent have been fulfilled to the satisfaction of the Agent: (a) Each of the conditions set forth in Section 6.2 of the Agreement shall have been satisfied; (b) The Agent shall have received counterparts of this Second Amendment duly executed by the Agent, Borrower and the Required Lenders; (c) A fee shall be paid by Borrower to the Agent for the benefit of each Lender that has executed and delivered a counterpart of this Second Amendment by September 8, 1999 in an amount equal to $3,000 for each such Lender; (d) All legal matters incident to this Second Amendment shall be reasonably satisfactory to the Agent and its counsel. IN WITNESS WHEREOF, the Borrower, the Agent and the Lenders have caused this Second Amendment to be executed by their respective officers duly authorized as of the date first above written. [This space intentionally left blank] SIGNATURE PAGE OF LILLY INDUSTRIES, INC. TO SECOND AMENDMENT TO CREDIT AGREEMENT LILLY INDUSTRIES, INC. By: /s/ John C. Elbin John C. Elbin, Vice President, Chief Financial Officer and Secretary Address: 200 West 103rd Street Indianapolis, Indiana 46290 Attention: John C. Elbin Facsimile: 317-814-8780 SIGNATURE PAGE OF BANK ONE, INDIANA, N.A. TO SECOND AMENDMENT TO CREDIT AGREEMENT BANK ONE, INDIANA, N.A.(successor by merger to NBD BANK, N.A.), individually and as Agent By: Dennis L. Bassett Its: Senior Vice President SIGNATURE PAGE OF FIRST UNION NATIONAL BANK TO SECOND AMENDMENT TO CREDIT AGREEMENT FIRST UNION NATIONAL BANK By: David C. Hauglia Its: Vice President SIGNATURE PAGE OF HARRIS TRUST AND SAVINGS BANK TO SECOND AMENDMENT TO CREDIT AGREEMENT HARRIS TRUST AND SAVINGS BANK By: Thad D. Rascne Its: Vice President SIGNATURE PAGE OF KEYBANK NATIONAL ASSOCIATION TO SECOND AMENDMENT TO CREDIT AGREEMENT KEYBANK NATIONAL ASSOCIATION By: Frank J. Jancar Its: Vice President SIGNATURE PAGE OF NATIONAL CITY BANK OF INDIANA TO SECOND AMENDMENT TO CREDIT AGREEMENT NATIONAL CITY BANK OF INDIANA By: Its: Vice President SIGNATURE PAGE OF BANK OF AMERICA N.A. TO SECOND AMENDMENT TO CREDIT AGREEMENT BANK OF AMERICA N.A. (formerly known as Bank of America N.T. & S.A.) By: Its: Managing Director SECOND AMENDMENT TO CREDIT AGREEMENT among LILLY INDUSTRIES, INC. an Indiana corporation the Lenders Signatory Hereto and BANK ONE, INDIANA, N.A. (successor by merger to NBD Bank, N.A.), as Agent Dated as of August 31, 1999 TABLE OF CONTENTS PART I. AMENDATORY PROVISIONS ........................................... 1 SECTION 1 Definitions ................................. 1 1.1 Defined Terms............... 1 SECTION 5 Covenants.................................... 2 5.2 Negative Covenants............. 2 5.2.15 Restrictive Agreements......... 2 PART II. SCHEDULES......................................................... 2 PART III. CONTINUING EFFECT................................................. 2 PART IV. INDEPENDENT CREDIT DECISION....................................... 3 PART V. CONDITIONS PRECEDENT.............................................. 3 SCHEDULE 4.10 and 5.2.3 Indebtedness The Borrower incorporates Schedule 5.2.2 by reference into Schedules 4.10 and 5.2.3. A 10-year economic development note relating to the State of Kentucky. The principal amount of the note is $186,000 and the lender is National City Bank. Indebtedness in the aggregate principal amount not exceeding $15,000,000 owed to a Lender party to the Agreement secured by the Mortgage Lien, including any renewal, extension or refinancing thereof. SCHEDULE 5.2.2 Permitted Liens The mortgage lien in favor of a Lender party to the Agreement encumbering Borrower's real estate located at 2200 West 103rd, Indianapolis, Indiana 46290, and all buildings and improvements now or hereafter located thereon and all other tangible personal property owned by Borrower and now or hereafter used or intended for use in constructing, furnishing, equipping and operating any improvements located on such real estate (the "Mortgage Lien"). EX-4.5 3 CHANGE IN RIGHTS AGENT November 29, 1999 Via Certified Mail Mr. J. Dean Presson Vice President National City Bank Corporate Trust Administration 629 Euclid Avenue, Suite 635 Cleveland, OH 4414 Re: Lilly Industries, Inc. Rights Agreement Dear Mr. Presson: Pursuant to Section 21 of that certain Rights Agreement by and between Lilly Industries, Inc. ("Lilly") and KeyCorp Shareholder Services, Inc. ("KeyCorp"), dated as of January 12, 1996 (the "Agreement"), Lilly hereby provides notice that, effective December 6, 1999, KeyCorp shall be removed as Rights Agent under this Agreement. Pursuant to Section 21 of the Agreement, Lilly has appointed National City Bank to be the successor Rights Agent effective as of December 6, 1999. For your records, please find enclosed a copy of the Rights Agreement. Sincerely, John C. Elbin Vice President, Chief Financial Officer and Secretary Encls. JCE/la 119905 November 29, 1999 Via Certified Mail Corporate Trust Officer KeyCorp Shareholder Services, Inc. 127 Public Square, 15th Floor Cleveland, OH 4414 Re: Lilly Industries, Inc. Rights Agreement To Whom It May Concern: Pursuant to Section 21 of that certain Rights Agreement by and between Lilly Industries, Inc. ("Lilly") and KeyCorp Shareholder Services, Inc. ("KeyCorp"), dated as of January 12, 1996 (the "Agreement"), Lilly hereby provides notice that effective December 6, 1999, KeyCorp shall be removed as Rights Agent under this Agreement. Sincerely, John C. Elbin Vice President, Chief Financial Officer and Secretary EX-10.24 4 DOUGLAS W. HUEMME EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into this 14th day of January 2000 by and between LILLY INDUSTRIES, INC. (the "Company"), an Indiana corporation with its principal place of business in Indianapolis, Indiana, and DOUGLAS W. HUEMME ("Executive"). Background Executive has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since 1991. The Company recognizes Executive's service, experience, and knowledge in the coatings industry generally and with the Company specifically, and desires to retain the future services of Executive to the date of his retirement, and Executive wishes to continue to be employed by the Company on the terms set out in this Agreement. Agreement In consideration of the mutual promises and covenants made herein, and intending to be legally bound, the parties agree as follows: 1. Employment. The Company hereby agrees to continue the employment of Executive as Chairman of the Board of Directors and Chief Executive Officer of the Company and in such other capacity as the Company and Executive may mutually agree from time to time. As Chairman and Chief Executive Officer, Executive shall report directly to, and be subject to the direction of, the Board of Directors of the Company (the "Board"). Executive shall perform all management and executive duties incident to the offices of the Chairman and Chief Executive Officer, and such other duties as, from time to time, may be assigned to him by the Board. Executive, if so appointed or elected, shall serve as an officer of the Company or of any other company which is a subsidiary or affiliate of the Company ("Affiliate") or as a director of an Affiliate, and, if appointed or elected, shall serve in each of such other capacities without compensation in addition to the compensation and benefits provided in this Agreement. 2. Employment Term. The employment of Executive under this Agreement shall commence on January 14, 2000 (the "Commencement Date") and shall continue until the close of business on January 14, 2002; provided, however, that commencing on January 14, 2001 and on each anniversary thereafter, the term of this Agreement shall automatically be extended for an additional one (1) year unless either the Board or Executive give written notice to the other at least one (1) year prior thereto that the term of the Agreement shall not be extended. Notwithstanding the foregoing, the employment of Executive hereunder shall be subject to resignation or termination in accordance with the provisions of Section 6. As used in this Agreement, the term "Expiration Date" means January 14, 2002 or, if applicable, the annual anniversary thereafter on which the employment of Executive shall automatically terminate in accordance with the provisions of this Section 2, and the term "Employment Term" means the period beginning on the Commencement Date and ending on the earlier of the Expiration Date, "Termination Date," "Resignation Date," or other date Executive ceases to be employed by the Company in accordance with Section 6. - 1 - 3. Compensation. Executive shall receive a base salary of no less than Five Hundred Thousand and No/100 Dollars ($500,000.00) per year beginning on the Commencement Date ("Annual Base Salary"). In addition, Executive shall receive a year-end bonus ("Bonus") paid in accordance with the Company's bonus plan for its corporate executive officers. The Annual Base Salary and Bonus of Executive shall be set annually by the Board. 4. Other Benefits. In addition to the Annual Base Salary and Bonus, Executive shall be entitled to the following benefits during the Employment Term and to the extent specifically so provided for the period after the Employment Term regardless of the type of termination: (a) Executive shall have the right to participate in the Company's group life, supplemental life, medical, dental, accidental death and dismemberment, long-term disability, and other insurance programs, sick pay program, flexible spending plan, tuition assistance plan, 401(k) savings and employee stock purchase plans, incentive and non- qualified stock option programs, pension plan, and any other employee benefit plan offered by the Company to its executive officers as a group, on the same terms as the other executive officers of the Company. (b) The Company shall reimburse Executive for all reasonable travel and other business out-of-pocket expenses incurred by Executive in the performance of his duties hereunder. Such reimbursements shall be subject to the policies and procedures established by the Company. (c) Executive shall be entitled to continued participation in the Company's Second Unfunded Supplemental Retirement Plan pursuant to the terms of said plan, as amended by letter dated December 22, 1993. (d) Executive shall be entitled to continued participation in the Company's Executive Retirement Plan pursuant to the terms of said plan, as amended by letter dated June 14, 1996. (e) Executive shall be entitled to continued participation in the Company's Replacement Plan pursuant to the terms of said plan. (f) Executive shall be entitled to the continued protections and benefits of the Company's Change in Control Agreement, executed on September 26, 1997. (g) Executive shall be entitled to continued participation in the Company's Split Dollar Insurance Agreement providing $2.0 million of death benefit. Notwithstanding the terms of said agreement, the Company shall pay the premiums as required under Section 4 thereof until the policy value is sufficient to be in paid-up status. - 2 - (h) Executive shall be reimbursed for fees and expenses incurred by him in connection with the preparation of his income taxes and the receipt of financial and estate planning advice; provided, however, the reimbursed amount shall be grossed up to cover any income taxes of Executive arising out of any reimbursement under this subsection. (i) Executive shall receive an annual executive physical examination to be provided by the Company at no cost to Executive, as approved by the Board. (j) The Company shall pay all club membership dues of Executive, as approved by the Board; provided, however, the reimbursed amount shall be grossed up to cover any income taxes of Executive arising out of any reimbursement under this subsection. (k) Executive and his spouse shall be entitled to medical and dental benefits coverage upon retirement, substantially similar to existing coverage. (l) Executive shall be entitled to five (5) weeks of paid vacation time per year. Such vacation time shall not cumulate year to year. (m) If Executive retires or is subject to a Long-Term Disability, or if the employment of Executive terminates in the circumstances described in Section 7, the Company shall accelerate and make immediately exercisable, any and all unmatured options (whether or not such options are otherwise exercisable) which Executive then holds, to acquire securities from the Company; provided, however, that Executive shall have until the original expiration date to exercise any such outstanding options. If such acceleration causes any incentive stock option to be converted to a nonqualified stock option, Executive shall be grossed up for any income taxes to the extent of the tax savings to the Company as a result of such conversion. This section shall apply in all cases except if Executive is terminated for cause under Section 6(c). 5. Employment Duties and Best Efforts. During the Employment Term, Executive shall work full-time for the Company and shall devote his full attention, knowledge, skills, energies and best efforts to the performance of his duties and responsibilities to the Company and its Affiliates and in his activities to further the businesses and interests of the Company and its Affiliates. The Board recognizes the benefit to the Company of Executive serving on other company and not-for- profit boards, so long as such services do not significantly interfere with the performance of his duties under this Agreement. Throughout the Employment Term, Executive shall not indirectly engage in any activity which would significantly interfere with the faithful performance of his duties under this Agreement. - 3 - 6. Termination. Executive's employment may terminate, in addition to its automatic termination at the Expiration Date under Section 2, as follows: (a) Termination Upon Death. In the event of Executive's death, the Employment Term shall cease, and Executive's Beneficiary, as defined below, shall be entitled to receive: (i) his Annual Base Salary at the rate then in effect pursuant to Section 3 for a period of six (6) months following the date of death; (ii) a year-end Bonus (paid in accordance with the Company's bonus plan) prorated for the months during which Executive received his Annual Base Salary for that fiscal year in which his death occurs; and (iii) any medical, pension, death, disability, supplemental executive retirement plan ("SERP") and/or other benefits to which Executive is entitled under the terms of this Agreement or under the terms of any employee benefit plan of the Company in which he participates and which is in effect at the time of his death. All compensation hereunder shall be subject to withholding and other applicable tax laws. Executive's Beneficiary shall mean a revocable trust created by Executive during his lifetime and in existence at the date of his death, but only if Executive has given written notice to the Company of the existence of such trust by providing the name of the trust, the date created, and the name of the trustee, or in the absence of such notification, Executive's Beneficiary shall be his estate. (b) Termination Upon Long-Term Disability. In the event of Executive's Long- Term Disability, the Employment Term shall cease, and Executive shall be entitled to receive: (i) his Annual Base Salary at the rate then in effect pursuant to Section 3 for a period of six (6) months following the date the Long-Term Disability first occurs; (ii) a year- end Bonus (paid in accordance with the Company's bonus plan) prorated for the months during which Executive received his Annual Base Salary for that fiscal year in which the Long-Term Disability occurs; and (iii) any medical, pension, death, disability, SERP and/or other benefits to which Executive is entitled under the terms of this Agreement or under the terms of any employee benefit plan of the Company in which he participates and which is in effect at the time his Long-Term Disability occurs. Following the expiration of six (6) months, Executive shall be entitled to benefits under the Company's long-term disability insurance program, pursuant to the terms thereunder. For purposes of this Agreement, "Long- Term Disability" shall mean a physical or mental disability which renders Executive incapable of performing his duties under this Agreement or comparable duties for another employer and which disability is reasonably expected to continue for a period of at least six (6) months or more, as determined in good faith by the Board based on reasonable medical evidence, including the opinion of an independent physician mutually agreed to by Executive and the Company (which agreement shall not be unreasonably withheld). All compensation hereunder shall be subject to withholding and other applicable tax laws. (c) Termination for Cause. In the event Executive: (i) commits any dishonest, fraudulent, or felonious act which act has a material adverse effect on the Company; - 4 - (ii) commits any gross dereliction of duties or willful malfeasance in the discharge of his duties to the Company or any of its Affiliates having a material adverse effect on the Company; (iii) discloses or uses confidential information as set forth in Section 11 to a party unrelated to the Company or an Affiliate, other than in the normal and ordinary performance of service for the Company or Affiliate which has a material adverse effect on the Company; or (iv) engages in competition as set forth in Section 12 with the Company or an Affiliate which has a material adverse effect on the Company; then the Employment Term shall terminate automatically upon action by the Board. Such termination shall be treated as a termination for "Cause" and the "Termination Date" shall be the actual date Executive terminates employment with the Company, notwithstanding any resignation under Section 6(e). If, prior to the Expiration Date, the Board terminates Executive's employment for Cause, Executive shall be entitled to payment of that portion of the Annual Base Salary under Section 3 that Executive earned through and including the Termination Date at the rate of the Annual Base Salary in effect at that time; provided, however, that Executive shall not be eligible for any Bonus under Section 3 with respect to any periods before or after said Termination Date. In no event shall Executive be eligible to receive any portion of his Annual Base Salary or any other compensation or benefits under this Agreement with respect to any future periods beginning on or after the Termination Date, including, but not limited to, any Bonus under Section 3, except any vested retirement or medical benefits under any employee benefit plan. (d) Termination for Good Reason. Executive shall have the right to terminate his employment with the Company for "Good Reason" by providing written notice of the termination to the Company ("Termination Notice"). The effective date of Executive's termination shall be that specified in the Termination Notice, or the actual date Executive terminates employment with the Company, whichever occurs earlier (the "Termination Date"). For purposes of this Agreement, "Good Reason" shall mean: (i) Any change in Executive's title, authority, or responsibilities which, in Executive's reasonable judgment, does not represent a promotion from his status, title, position or responsibilities under this Agreement; (ii) The assignment to Executive of any duties or work responsibilities which, in Executive's reasonable judgment, are inconsistent with his status, title, position or work responsibilities under this Agreement; (iii) A reduction by the Company in Executive's Annual Base Salary; - 5 - (iv) The relocation of the Company's principal office or the reassignment of Executive to a location more than forty (40) miles from the location at which Executive performed his duties at the Commencement Date of this Agreement (except for required travel on the Company's business to an extent substantially consistent with his business travel obligations immediately prior to the relocation); (v) The failure by the Company to continue in effect any Bonus or other compensation plan in which Executive participates, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue Executive's participation therein, or any action by the Company which would directly or indirectly materially reduce his participation therein or reward opportunities thereunder; (vi) The failure by the Company to continue in effect in substantially equivalent form any employee benefit plan (including any medical, hospitalization, life insurance or disability benefit plan in which Executive participates), or any material fringe benefit or perquisite enjoyed by Executive, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan; (vii) Any material breach by the Company of any provision of this Agreement; (viii) The failure of the Company to obtain a satisfactory agreement from any successor or assign of the Company to assume and agree to perform this Agreement; (ix) A family emergency of Executive which is approved by the Board, which approval shall not be unreasonably withheld; or (x) Executive's terminal illness, if Executive provides the Board satisfactory evidence of such illness from his medical doctor(s). If, prior to the Expiration Date, Executive terminates his employment with the Company for Good Reason, Executive shall be entitled to payment of that portion of the Annual Base Salary under Section 3 that Executive earned through and including the Termination Date, at the rate of the Annual Base Salary in effect at that time. In addition, Executive shall be entitled to the separation benefits under Section 7. (e) Termination With Notice. Executive may resign from his employment with the Company pursuant to this Agreement at any time by providing written notice to the Board of his resignation at least twelve (12) months prior to the effective date of the - 6 - resignation (the "Resignation Notice"). The effective date of Executive's resignation shall be that specified in the Resignation Notice, or the actual date Executive terminates employment with the Company as the result of a resignation, whichever occurs earlier (the "Resignation Date"). If, prior to the Expiration Date, Executive resigns his employment, Executive shall be entitled to payment of that portion of the Annual Base Salary and prorated Bonus under Section 3 that Executive earned through and including the Resignation Date, at the rate of the Annual Base Salary in effect at that time. Executive shall not be eligible to receive any portion of the Annual Base Salary with respect to any future periods beginning on or after the Resignation Date, including, but not limited to, any Bonus under Section 3 which was not due and payable in accordance with the provisions thereof prior to the Resignation Date. Executive shall be entitled, however, to any medical, pension, death, disability, SERP and/or other benefits to which he is entitled under this Agreement or under the terms of any employee benefit plan of the Company in which he participates and which is in effect at the time of his Resignation Date. (f) Termination Without Cause. The Board may, in its sole discretion, terminate Executive's employment with the Company pursuant to this Agreement at any time without Cause, by providing written notice to Executive at least thirty (30) days prior to the "Termination Date". The term "Termination Date" shall mean the actual date Executive terminates employment with the Company as a result of action taken by the Board, and not as a result of Executive's resignation as provided in Section 6(e). If, prior to the Expiration Date, the Board terminates Executive's employment without Cause, Executive shall be entitled to payment of that portion of the Annual Base Salary under Section 3 that Executive earned through and including the Termination Date, at the rate of the Annual Base Salary in effect at that time. In addition, Executive shall be entitled to the separation benefits under Section 7. 7. Separation Protections. Executive shall be entitled to separation pay as provided in this Section 7, if the Company terminates Executive's employment without Cause or if Executive terminates his employment for Good Reason. In the event of such termination, the Company shall pay or provide Executive: (a) Executive's Annual Base Salary at the rate in effect as of his Termination Date, payable through the Expiration Date as if Executive had continued in his employment; (b) An amount equal to all Bonus payments to which Executive would have been entitled had he continued in his employment through the Expiration Date; (c) During the period Executive's Annual Base Salary is continued under this Section 7, Executive shall be entitled to continue his (and his spouse's) coverage under the Company's group medical, dental, accident, life and disability benefit insurance plans in which Executive was entitled to participate immediately prior to his Termination Date. In the event Executive's participation in any such plan, program or arrangement is not legally - 7 - possible under any such plan, or any such plan, program or arrangement is discontinued or the benefits thereunder are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which Executive would have otherwise been entitled to receive under such plans, programs and arrangements prior thereto at the Company's cost; (d) As provided under Section 4(m), the Company shall accelerate and make immediately exercisable any and all unmatured options (whether or not such options are otherwise exercisable) which Executive then holds to acquire securities from the Company; provided, however, that Executive shall have until the original expiration date to exercise any such outstanding options. Any separation payments made under this Section 7 shall be offset by any severance amounts payable under the September 26, 1997 Change in Control Agreement, exclusive of any excise taxes and/or gross-up payments. The separation payments under this Section 7 shall be subject to all applicable federal and state income and other withholding taxes. 8. Relocation Expenses. At the Expiration Date or upon Executive's resignation or termination of employment under Section 6, the Company shall pay or reimburse Executive for all reasonable costs incurred by Executive in relocating to a location within the continental United States (but outside of Hamilton County and the counties contiguous to it) within five (5) years from the date of Executive's resignation or termination, including all reasonable costs of moving, selling Executive's residence and purchasing a new residence, and with full reimbursement of income taxes, but not including any guarantee of the market value of Executive's residence; provided, however, that any of such costs which are also paid or reimbursed by any third party shall not be paid or reimbursed by the Company and Executive shall return any monies already paid or reimbursed by the Company in such event. 9. Fees and Expenses. The Company shall pay all reasonable legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by Executive as a result of (a) Executive's termination of employment for Good Reason (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment whether or not such contest or dispute is resolved in Executive's favor), (b) the Company's termination of Executive's employment without Cause, or (c) Executive seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company under which Executive is or may be entitled to receive benefits, unless the Company shall ultimately prevail in establishing termination of Executive's employment for Cause. In addition, the Company shall gross up any payments under this Section 9 to cover any income taxes of Executive arising out of any reimbursement under this Section 9. 10. Inventions. Executive agrees that all processes, discoveries, formulas, improvements, technologies, designs and inventions ("Inventions"), including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by him, - 8 - or by him jointly with others, during the Employment Term shall belong to the Company or its Affiliates. Executive shall further: (a) promptly disclose such Inventions to the Company; (b) assign to the Company, without additional compensation, all patent and other rights to such Inventions, whether patentable or unpatentable, including all substitute, continuation-in-part and reissue applications, patents of addition, and confirmation relative thereto, for the United States of America and foreign countries; (c) sign all papers necessary to carry out the foregoing; and (d) give testimony in support of his inventorship. Furthermore, if any Invention is described in a patent application or is disclosed to third parties, directly or indirectly, by Executive within one (1) year after the termination of his Employment Term by the Company, it is to be presumed that the Invention was conceived or made during the Employment Term. Executive agrees that he will not assert any rights to any Invention as having been made or acquired by him prior to June 4, 1990, his original date of employment by the Company, except for Inventions, if any, disclosed to the Company in writing prior to said date. 11. Confidentiality Covenant. Executive agrees that while he is employed by the Company and at all times thereafter he shall not, directly or indirectly, disclose or use to the detriment of the Company or any of its Affiliates or for the benefit of any other person or firm any confidential information or trade secrets of the Company or any of its Affiliates which are not readily available in the public domain (including, but not limited to, the identity and particular needs of any customer of the Company or any of its Affiliates, the methods and techniques of any of the businesses of the Company or any of its Affiliates, the marketing and business plans and objectives of the Company or any of its Affiliates, and the formula of any product of the Company or any of its Affiliates). Furthermore, Executive shall promptly deliver to the Company upon termination of his employment, or at any time the Company may so request, all memoranda, notes, records, reports, manuals, drawings, blueprints, formulas, and other documents (and all copies thereof, excluding Executive's personal calendar and telephone directory) relating to the businesses of the Company or any of its Affiliates and all property associated therewith, which he may then possess or have under his control. This Agreement supplements and does not supersede Executive's obligations under a statute or the common law to protect the Company's trade secrets and confidential information. 12. Covenant Not to Compete. The restrictions of this Section 12 shall apply during the Employment Term and for the two (2) year period following the end of the Employment Term. If Executive breaches any provision of this Agreement, the period during which the restrictions of this Agreement apply shall be extended for an additional period equal to the period of the breach plus an additional three (3) months. While the restrictions of this Section 12 apply, Executive is - 9 - prohibited from engaging in any direct or indirect competition with the Company or an Affiliate, including, but not limited to: (a) Directly or indirectly accepting employment with, consulting with, or assisting any activity or business that is the same as, substantially similar to, or competitive with that of the Company or an Affiliate, including a business that is involved with the sale, design, development, manufacture, or production of products competitive with those sold (or anticipated to be sold) by the Company or an Affiliate. This prohibition shall apply to any employment with, involvement in, or control of another business, whether as an employee, owner, manager, sole proprietor, joint venturer, partner, shareholder, independent contractor, consultant, officer, director, or in any other capacity. This prohibition shall not prevent the ownership of stock of less than five percent (5%) of the outstanding shares of any publicly-held competitor of the Company or Affiliate, provided that (i) the investment is passive, (ii) Executive has no other involvement with the corporation, and (iii) Executive makes full disclosure to the Company of the stock ownership at the time Executive acquires it. (b) Soliciting, contacting, or servicing any current customer or client of the Company or Affiliate, or any person who has been a customer or client of the Company or Affiliate at any time during the previous three (3) years, or any potential customer or client of the Company or Affiliate whom Executive has solicited on behalf of the Company or Affiliate in the previous year. (c) Directly or indirectly seeking to influence, facilitate, or encourage any employee of the Company or Affiliate to leave its employment. The restrictions outlined above shall be applicable and enforceable only in the geographical area served by the Company or an Affiliate during the two (2) years prior to Executive's termination of employment with the Company. Executive agrees to inform any prospective competing employer about the existence of this Section 12 before accepting new employment and shall not agree, as a term of any new employment, that the new employer will defend Executive or pay his attorneys' fees in the event of a lawsuit brought by the Company to enforce the terms of this Section 12. 13. Remedies for Breach. Executive acknowledges that breach of the covenants contained in Sections 10, 11, and 12 would cause the Company immediate and irreparable harm and that the legal remedies for breach of the covenants contained in Sections 10, 11 and 12 are inadequate, and therefore agrees that, in addition to any or all other remedies available to the Company and its Affiliates, in the event of a breach or a threatened breach of any covenant contained in Section 10, 11 or 12, the Company or any of its Affiliates may: (a) Obtain immediate injunctive relief in the form of a temporary restraining order without notice, preliminary injunction, and/or permanent injunction against - 10 - Executive to enforce the terms of this Agreement, and the Company shall not be required to post any bond or other security to obtain such injunctive relief from the courts; and (b) Recover from Executive an amount equal to (i) all sums paid by the Company or any of its Affiliates to him after commencement of the breach plus (ii) all costs and expenses (including reasonable attorneys' fees) incurred by the Company or any of its Affiliates in enforcement of the covenant plus (iii) all revenues derived from the actions in breach of the covenants which are received by Executive or by any person or firm on whose behalf Executive breached or threatened to breach the covenants in Section 10, 11 or 12. 14. Notice. Any notice required to be given by the Company hereunder to Executive shall be in proper form if signed by the Secretary of the Company or other person designated by the Board. Until one party shall advise the other in writing to the contrary, notices shall be deemed delivered (a) To the Company if delivered to the Secretary of the Company, or, if mailed, by certified or registered mail, postage prepaid, to: Lilly Industries, Inc. 200 West 103rd Street Indianapolis, Indiana 46290 Attn: Chair of Compensation Committee/ Board of Directors (b) To Executive if delivered to Executive in person or if mailed, by certified or registered mail, postage prepaid, to the address as designated by Executive on his most recent personnel form containing such information. 15. Liability Insurance Coverage and Indemnification. Nothing in this Agreement shall deprive Executive, either during or subsequent to the termination of his employment pursuant to this Agreement, of the benefits of the Company's existing or hereafter obtained liability insurance coverage, subject to the terms and conditions of such coverage, nor of any right to indemnification agreement between the Company and Executive, subject to the limitations on indemnification set forth therein. 16. Consulting. Upon expiration of the Employment Term (including extensions), Executive agrees to provide consulting services to the Company, as an independent contractor and as requested by the Company, for a period of thirty-six (36) months after such expiration. In consideration for Executive's consulting services, Company shall pay to Executive One Hundred Thousand and No/100 Dollars ($100,000.00) for each of the three (3) twelve (12) month periods in such thirty-six (36) month period. Each payment shall be made on the first day of each twelve (12) month period. This Section 16 shall apply in all cases except if Executive is terminated for Cause - 11 - under Section 6(c), in the case of death of Executive, or if Executive is subject to a Long-Term Disability. 17. Non-assignability, Binding Agreement. (a) By Executive. Executive shall not assign or delegate this Agreement or any right, duty, obligation, or interest under this Agreement without the Company's prior written consent; provided, however, that nothing shall preclude Executive from designating beneficiaries to receive benefits payable under this Agreement upon his death, and nothing shall preclude Executive's executors, administrators, or their legal representatives, from assigning any rights under this Agreement to any person. (b) By the Company. The Company shall assign, delegate, or transfer this Agreement and all of its rights and obligations under this Agreement to any of its Affiliates or subsidiaries or to any business entity that, by merger, consolidation, or otherwise, acquires all or substantially all of the assets of the Company or to which the Company transfers all or substantially all of its assets. (c) Binding Effect. Except as limited under Sections 17(a) and (b), this Agreement shall be binding upon and inure to the benefit of the parties, any successors to or assigns of the Company, Executive's heirs, and the personal representatives or executor of Executive's estate. 18. Severability. If a court of competent jurisdiction makes a final determination that any term or provision of this Agreement is invalid or unenforceable, and all rights to appeal the determination have been exhausted or the period of time during which any appeal of the determination may be perfected has been exhausted, the remaining terms and provisions shall be unimpaired and the invalid or unenforceable term or provision shall be deemed replaced by a term or provision that is valid and enforceable and that most closely approximates the intention of the parties with respect to the invalid or unenforceable term or provision, as evidenced by the remaining valid and enforceable terms and conditions of this Agreement. 19. Amend. No provision of this Agreement may be modified, amended, waived, or discharged in any manner except by an instrument in writing signed by Executive and on behalf of the Company by such officer as may be specifically designated by the Board. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by any party which are not expressly set forth in this Agreement. 20. Waiver. The waiver by any party of compliance by any other party with any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement (whether or not similar), or a continuing waiver or a waiver of any subsequent breach by a party of a provision of this Agreement. Performance by any party of any act not required of it under the terms and conditions of this Agreement shall not constitute a waiver of the limitations on - 12 - its obligations under this Agreement, and no performance shall estop that party from asserting those limitations as to any further or future performance of its obligations. 21. Applicable Law and Forum. This Agreement has been entered into in the State of Indiana and shall be governed by and construed in accordance with the laws of the State of Indiana. Except as specifically provided elsewhere in this Agreement, the parties agree that any action in law or equity brought by any party arising from or in connection with this Agreement or arising from or in connection with the performance by either party of its obligations hereunder shall be brought only in the United States District Court for the Southern District of Indiana, Indianapolis Division or the Circuit Court of Marion County, Indiana, and the parties hereto consent to the jurisdiction of such forums. 22. Prior Employment Agreements. This Agreement is a complete and total integration of the understanding of the parties with respect to the subject matter of this Agreement and supersedes all prior or contemporaneous negotiations, commitments, agreements, writings and discussions with respect to the subject matter of this Agreement, except those agreements which are specifically identified herein. Any and all such prior negotiations, commitments, agreements, writings and discussions shall have no force or effect, except those agreements which are specifically identified herein. 23. Heading. The headings of the Sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction of this Agreement. 24. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same Agreement. Only one counterpart, signed by the party against which enforcement is sought, needs to be produced to evidence the existence of this Agreement. EXECUTED as of the date first written above. EXECUTIVE LILLY INDUSTRIES, INC. - ----------------------------- By: ------------------------------------ Douglas W. Huemme James M. Cornelius, Compensation Committee Chairman, Board of Directors By: ------------------------------------ John C. Elbin, Vice President and Chief Financial Officer - 13 - EX-10.25 5 CROCKER CHANGE-IN-CONTROL AGREEMENT LILLY INDUSTRIES, INC. CHANGE IN CONTROL AGREEMENT OLIN RAY CROCKER This CHANGE IN CONTROL AGREEMENT, dated as of February 3, 2000, evidences an agreement by and between LILLY INDUSTRIES, INC., an Indiana corporation having its principal executive offices at 200 West 103rd Street, Indianapolis, Indiana 46290 (the "Company") and OLIN RAY CROCKER, an individual residing at 4572 Peebles Road, Oak Ridge, North Carolina 27310 ("Executive"). Background A. The Board of Directors of the Company has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued undivided time, attention, loyalty, and dedication of Executive, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined in subsection 3(b) hereof) of the Company. B. The Board believes it is imperative to diminish the inevitable distraction of Executive by virtue of the personal uncertainties and risks created by pending or threatened Change in Control and to encourage Executive's full undivided time, attention, loyalty, and dedication to the Company currently and in the event of any threatened or pending Change in Control. C. By this Agreement, the Board intends upon a Change in Control to assure Executive with compensation and benefits arrangements if his employment terminates as a result of a Change in Control which are competitive with those of other corporations similarly situated to the Company. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. D. In reliance on this Agreement, Executive is willing to continue his employment with the Company on the terms agreed to by Executive and the Company from time to time. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Undertaking. Subject to Section 4, the Company agrees to pay or provide to Executive the termination benefits specified in Section 2 hereof if: (a) within three (3) years after, a Change in Control (as defined in subsection 3(b) hereof): either (i) the Company terminates the employment of Executive before age sixty-five (65) for any reason other than Good Cause (as defined in subsection 3(g) hereof), death, Disability (as defined in subsection 3(f) hereof), or (ii) Executive voluntarily terminates his employment for Good Reason (as defined in subsection 3(h) hereof), or (b) the employment of Executive is terminated before such a Change in Control, or an anticipated Change in Control, and Executive reasonably demonstrates that such termination occurred in connection with, or in anticipation of such a Change in Control (whether or not such Change in Control actually occurs). - 1 - 2. Termination Benefits. Subject to Section 4, if Executive is entitled to termination benefits pursuant to Section 1 hereof, the Company shall pay or provide the following: (a) Severance Pay. The Company shall pay to Executive, in a cash lump sum, an amount equal to the sum of: (1) two (2) times the sum of (i) plus (ii) below: (i) Executive's annual base salary, inclusive of any elective deferrals made by Executive to the Company's Employee 401(k) Savings Plan and the Replacement Plan, at the rate in effect as of the date of termination of employment (or, at Executive's election, at the rate in effect on any date during the period beginning on the first day of the month immediately prior to the occurrence of events constituting "Good Reason" or a Change in Control), plus ---- (ii) an amount equal to the targeted variable compensation of Executive for the year in which such termination occurs (or, if Executive is advised of the amount of such targeted amount after events specified herein which constitute "Good Reason," or the targeted amount constitutes "Good Reason," at Executive's election, the variable compensation paid for any fiscal year for which Executive has actually received a variable compensation payment either in the twelve (12) months before a Change in Control or any fiscal year after a Change in Control), plus ---- (2) two (2) times an amount equal to any contributions the Company would have otherwise made on Executive's behalf to the Company's Employee Stock Purchase Plan during the twelve (12) months following Executive's date of termination, had Executive's employment and/or the plan or amounts contributed thereto by the Company on Executive's behalf not been reduced or terminated (or, at Executive's election, two (2) times an amount equal to any contributions the Company made on Executive's behalf to such plan for any plan year ending either in the twelve (12) months before a Change in Control or any fiscal year after a Change in Control), plus (3) two (2) times an amount equal to any employer matching contributions the Company would have otherwise made on Executive's behalf to the Company's Employee 401(k) Savings Plan and under the Company's Executive Replacement Plan during the - 2 - twelve (12) months following Executive's date of termination, had Executive's employment and/or the amounts contributed thereto by the Company on Executive's behalf not been reduced or terminated, and assuming Executive made elective deferrals to the maximum extent permitted by Section 402(g) of the Internal Revenue Code of 1986, as amended (the "Code") (or, at Executive's election, two (2) times an amount equal to any employer matching contributions made on Executive's behalf to such plan or plans for any plan year ending either in the twelve (12) months before a Change in Control or any fiscal year after a Change in Control). The Company shall make such lump sum payments within an administratively reasonable period (but not to exceed sixty (60) days) after the Release Effective Date (as defined in Section 4(b) hereof). Such payments shall be in addition to any salary, variable compensation or benefits earned or accrued by Executive for services rendered prior to his termination. (b) Health, Accident, and Life Insurance and Disability Benefits. The Executive shall be entitled to continue for two (2) years following the date of termination, at the Company's cost, Executive's coverage under the Company's group insurance, health and accident, life, and disability benefit plans in which Executive was entitled to participate immediately prior to the Change in Control provided that continued participation is possible under the general terms and provisions of such plans, programs, and arrangements; provided, however, such continuation coverage shall run concurrently with any COBRA continuation coverage otherwise available to Executive under the terms of such plans. In the event Executive's participation in any such plan, program, or arrangement is barred, or any such plan, program, or arrangement is discontinued or the benefits thereunder are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which Executive would have otherwise been entitled to receive under such plans, programs, and arrangements prior thereto at the Company's cost. (c) Acceleration of Stock Options. The Company shall accelerate and make immediately exercisable any and all unmatured stock options (whether or not such stock options are otherwise exercisable) which Executive then holds to acquire securities from the Company; provided, however, that Executive shall have ninety (90) days after such termination of employment to exercise any outstanding stock options and after such ninety (90) days any and all unexpired stock options shall lapse; and, provided, further, however, any tax benefit provisions with respect to any stock options shall apply to any and all unmatured stock options (whether or not such stock options are otherwise exercisable). If as a result of such acceleration of incentive stock options the $100,000 limitation would be exceeded with respect to an optionee, such incentive stock options shall be converted, as of the date such incentive stock options become exercisable, to non-qualified stock options to the extent necessary to comply with the $100,000 limitation and the Company shall pay to - 3 - such optionee an additional cash payment equal to the tax benefit to be received by the Company attributable to its federal income tax deduction resulting from the exercise of such converted non-qualified stock options. 3. Definitions. When the initial letter of a word or phrase is capitalized herein, such word or phrase shall have the meaning hereinafter set forth: (a) "Affiliated Employer" means: (1) a member of a controlled group of corporations (as defined in Code Section 414(b)) of which the Company is a member; or (2) an unincorporated trade or business which is under common control (as defined in Code Section 414(c)) with the Company. (b) "Change in Control" shall be deemed to have occurred if: (1) the Company shall become a party to an agreement of merger, consolidation, or other reorganization pursuant to which the Company will be a constituent corporation and the Company will not be the surviving or resulting corporation, or which will result in less than 50% of the outstanding voting securities of the surviving or resulting entity being owned by the former shareholders of the Company; (2) the Company shall become a party to an agreement providing for the sale or other disposition by the Company of all or substantially all of the assets of the Company to any individual, partnership, joint venture, association, trust, corporation, or other entity which is not an Affiliated Employer; or (3) the acquisition by any individual, entity, or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended from time to time) of an aggregate of more than 20% of the combined voting power of the then outstanding Class A Stock of the Company. (c) "Committee" means the Compensation Committee of the Board to which the Board has delegated authority to administer and interpret this Agreement. (d) "Company" means Lilly Industries, Inc. and any successors to Lilly Industries, Inc. - 4 - (e) "Confidential Information" means any information not in the public domain and not previously disclosed to the public by the Board or management of the Company or an Affiliated Employer with respect to the products, facilities, methods, trade secrets and other intellectual property, systems, procedures, manuals, confidential reports, product price lists, customer lists, financial information, business plans, prospects, or opportunities of the Company or an Affiliated Employer, or any information which the Company or an Affiliated Employer has designated as Confidential Information. (f) "Disability" means a disability as determined for purposes of any group disability insurance policy of the Company in effect for Executive which qualifies Executive for permanent disability insurance payments in accordance with such policy. The Committee may require subsequent proof of continued Disability, prior to the sixty-fifth (65th) birthday of Executive, at intervals of not less than six (6) months. (g) "Good Cause" means: (1) conviction for a felony or conviction for any crime or offense lesser than a felony involving the property of the Company or an Affiliated Employer, whether such conviction occurs before or after termination of employment; (2) engaging in conduct that has caused demonstrable and material injury to the Company or an Affiliated Employer, monetary or otherwise; (3) gross dereliction of duties or other gross misconduct and the failure to cure such situation within thirty (30) days after receipt of notice thereof from the Committee; or (4) the disclosure or use of Confidential Information to a party unrelated to the Company or an Affiliated Employer other than in the normal and ordinary performance of service for the Company or an Affiliated Employer. The determination as to whether Good Cause exists shall be made by the Committee in good faith. Notwithstanding anything herein to the contrary, no act or failure to act of Executive shall be considered to be "Good Cause" under this Agreement unless it shall be done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (h) "Good Reason" means, without Executive's written consent: (1) a substantial change in Executive's status, position or responsibilities which does not represent a promotion from Executive's status, position or responsibilities as in effect immediately prior to the Change in Control; the assignment to Executive of any material duties or responsibilities which are clearly inconsistent with Executive's status, position or responsibilities; or any removal of Executive from, or failure to reappoint or reelect Executive to, any of such positions, except in connection with the termination of Executive's employment for Disability, death, Good Cause, or by Executive other than for Good Reason; - 5 - (2) a reduction by the Company in Executive's annual base salary as in effect on the date hereof, or as the same may be increased from time to time during the term of this Agreement, or the Company's failure to increase (within twelve (12) months of Executive's last increase in annual base salary) Executive's annual base salary after a Change in Control in an amount which at least equals, on a percentage basis, eighty percent (80%) of the average percentage increase in annual base salary for all corporate officers of the Company effected in the preceding twelve (12) months; (3) a change by the Company in the methodology of computing Executive's bonus under the Variable Compensation Plan or the termination of such plan or its replacement with a plan using a methodology less favorable to Executive than that used for any fiscal year for which Executive has actually received a variable compensation payment either in the last fiscal year before a Change in Control or any fiscal year after a Change in Control; (4) if Executive performed his principal duties at the Company's executive offices in Indianapolis, Indiana immediately before the Change in Control, the relocation of the Company's principal executive offices to a location outside of the Indianapolis, Indiana metropolitan area (which consists of all counties which are contiguous to Marion County, Indiana), or if Executive performed his principal duties at a location other than the Company's executive offices in Indianapolis, Indiana immediately before the Change in Control, the Company's requiring Executive to be based at any place more than forty (40) miles distance from the location which Executive performed his principal duties prior to a Change in Control, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations at the time of a Change in Control; (5) the failure by the Company to continue to provide Executive with benefits (including any variable compensation program) substantially similar to, or of substantially the same aggregate value to Executive, as those enjoyed by all other corporate officers of the Company or any Affiliated Employer from time to time either before or after a Change in Control; (6) the failure of the Company to obtain an agreement satisfactory to Executive(which satisfaction may not be unreasonably withheld) - 6 - from any successor or assign of the Company to assume and agree to perform this Agreement; (7) any purported termination of Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of subsection 3(i) hereof; or (8) any request by the Company that Executive participate in an unlawful act or take any action constituting a breach of Executive's professional standard of conduct. Notwithstanding anything in this subsection to the contrary, Executive's right to terminate his employment for Good Reason pursuant to this subsection shall not be affected by Executive's incapacity due to physical or mental illness. (i) "Notice of Termination" means a notice which shall indicate the date on which Executive's employment shall terminate and the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. 4. Conditions to Payments and Benefits. (a) Internal Revenue Code Limits and Other Limits. (1) Notwithstanding anything in this Agreement to the contrary, in the event that Ernst & Young or any other independent auditor substituted for Ernst & Young pursuant to an agreement in writing by and between the Company and Executive (the "Auditor") determines that any payment by the Company to or for the benefit of Executive, whether paid or payable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be an "excess parachute payment" within the meaning of Section 280G of the Code, then the Company shall pay an additional amount of money to Executive that will equal (based on Executive's good faith representations of Executive's income tax position for the year of payment hereunder) the sum of (i) all excise tax imposed on Executive by Section 4999 of the Code and (ii) all additional state and federal income taxes attributable to the additional payments to Executive pursuant to this Section 4(a)(1), including all state and federal income taxes on the additional income tax payments hereunder ("Additional Payment"). - 7 - (2) If the Auditor determines that any Payment would be such an "excess parachute payment" because of Section 280G of the Code, then the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof and Executive shall provide in writing within ten (10) days of Executive's receipt of such notice, a good faith representation of Executive's income tax position so that such Additional Payment may be calculated. All determinations made by the Auditor under this Section 4 shall be binding upon the Company and Executive and shall be made within sixty (60) calendar days of Executive's termination of employment. Following such determination and the notices hereunder and subject to the other conditions set forth in this Section 4, the Company shall pay to or distribute to, or for the benefit of, Executive such amounts as are then due to Executive under this Agreement in the manner identified in Section 2 and this Section 4 of this Agreement, and shall promptly pay to or distribute for the benefit of Executive in the future such amounts as become due to Executive under this Agreement. (3) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Auditor hereunder, it is possible that Additional Payment will have been made by the Company which should not have been made (an "Overpayment") or that an increase in the Additional Payment which will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of such excess parachute payment hereunder. In the event that the Auditor, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or Executive, which the Auditor believes has a high probability of success, determines that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to Executive which Executive shall repay to the Company, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code. In the event that the Auditor, based upon controlling precedent, determines that an Underpayment has occurred, such Underpayment shall promptly be paid by the Company to or for the benefit of Executive, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code. (b) Release of Claims. As a condition of Executive receiving from the Company the payments and benefits provided for in this Agreement, which payments and benefits Executive is not otherwise entitled to receive, Executive understands and agrees that he will be required to execute a release of all claims against the Company (arising out of matters - 8 - occurring on or prior to such termination) in the form attached hereto as Exhibit 1 (the "Release"). Executive acknowledges that he has been advised in writing to consult with an attorney prior to executing the Release, and Executive agrees that he will consult with his attorney prior to executing the Release. The Executive and the Company agree that Executive has a period of twenty-one (21) days within which to consider this Release, and has a period of seven (7) days following the execution of the Release within which to revoke the Release. The parties also acknowledge and agree that the Release shall not be effective or enforceable until the seven (7) day revocation period expires. The date on which this seven (7) day period expires shall be the effective date of the Release (the "Release Effective Date"). THE EXECUTIVE AGREES THAT EXECUTION AND DELIVERY TO THE COMPANY OF THE RELEASE REQUESTED BY THE COMPANY, AND THE PASSAGE OF ALL NECESSARY WAITING PERIODS IN CONNECTION THEREWITH, SHALL BE A CONDITION TO THE RECEIPT OF ANY PAYMENT OR BENEFITS TO BE PROVIDED BY THE COMPANY UNDER THIS AGREEMENT. IF THE EXECUTIVE ELECTS NOT TO EXECUTE AND DELIVER TO THE COMPANY THE RELEASE REQUESTED BY THE COMPANY, THE EXECUTIVE SHALL NOT BE ENTITLED TO ANY PAYMENTS OR BENEFITS UNDER THIS AGREEMENT AND ALL SUCH PAYMENTS AND BENEFITS SHALL BE FORFEITED. 5. Additional Provisions. (a) Enforcement of Agreement. The Company is aware that upon the occurrence of a Change in Control, the Board or a shareholder of the Company may then cause or attempt to cause the Company to refuse to comply with its obligations under this Agreement, or may cause or attempt to cause the Company to institute, or may institute, litigation seeking to have this Agreement declared unenforceable, or may take or attempt to take other action to deny Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of the Company that Executive not be required to incur the expenses associated with the enforcement of Executive's rights under this Agreement by litigation or other legal action, nor that Executive be bound to negotiate any settlement of Executive's rights hereunder, because the cost and expense of such legal action or settlement would substantially detract from the benefits intended to be extended to Executive hereunder. Accordingly, if following a Change in Control it should appear to Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person (including the Internal Revenue Service) takes any action to declare this Agreement void or unenforceable, or institutes any litigation or other legal action designed to deny, diminish or to recover from Executive the benefits entitled to be provided to Executive hereunder, and Executive has complied with all of his obligations under this Agreement, the Company irrevocably authorizes Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as provided in this subsection, to represent Executive in connection with the - 9 - initiation or defense of any litigation or other legal action, whether such action is by or against the Company or any director, officer, shareholder, or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to Executive entering into an attorney-client relationship with such counsel, and in that connection the Company and Executive agree that a confidential relationship shall exist between Executive and such counsel. The reasonable fees and expenses of counsel selected from time to time by Executive as herein above provided shall be paid or reimbursed to Executive by the Company on a regular, periodic basis upon presentation by Executive of a statement or statements prepared by such counsel in accordance with its customary practices. Any legal expenses incurred by the Company by reason of any dispute between the parties as to enforceability of or the terms contained in this Agreement, notwithstanding the outcome of any such dispute, shall be the sole responsibility of the Company, and the Company shall not take any action to seek reimbursement from Executive for such expenses. (b) Severance Pay; No Duty to Mitigate. The amounts payable to Executive under this Agreement shall not be treated as damages but as severance compensation to which Executive is entitled by reason of termination of Executive's employment in the circumstances contemplated by this Agreement. The Company shall not be entitled to set off against the amounts payable to Executive any amounts earned by Executive in other employment after termination of Executive's employment with the Company, or any amounts which might have been earned by Executive in other employment, had Executive sought such other employment, or any set-off, counterclaim, recoupment, defense, or any other claim, right, or action which the Company may have against Executive or others. (c) Notice of Termination. Any purported termination of employment by the Company or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with subsection 3(i) hereof and shall provide at least ten (10) business days notice prior to the date of termination. Solely for purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. (d) Assignment. This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company shall assign this Agreement to any corporation or other business entity succeeding to substantially all of the business and assets of the Company by merger, consolidation, sale of assets, or otherwise and shall obtain the assumption of this Agreement by such successor. (e) Termination. The Board shall have the right to terminate this Agreement, for any reason, upon twelve (12) months' written notice to Executive prior to a Change in Control. - 10 - (f) Amendment. The Board shall have the right to amend this Agreement, for any reason, upon twelve (12) months' written notice to Executive prior to a Change in Control. (g) Governing Law. This Agreement shall be governed by and subject to the laws of the State of Indiana. (h) Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had not been contained herein. (i) Captions. The captions in this Agreement are for convenience and identification purposes only, are not an integral part of this Agreement, and are not to be considered in the interpretation of any part hereof. (j) Source of Payment. For purposes of this Agreement, employment and compensation paid by any direct or indirect subsidiary of the Company will be deemed to be employment and compensation paid by the Company. (k) Notices. Except as specifically set forth in this Agreement, all notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person or sent by registered or certified mail, postage prepaid, addressed as set forth above, or to such other address as shall be furnished in writing by any party to the other. (l) Waivers. The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right Executive or the Company may have hereunder, including, without limitation, the right of Executive to terminate Executive's employment for Good Reason, shall not be deemed to be a waiver of such provision or right, or of any other provision or right of this Agreement. (m) Non-exclusivity of Right. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its Affiliated Employers and for which Executive may qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company or any Affiliated Employer. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company or any Affiliated Employer at or subsequent to the date of termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement except as explicitly modified by this Agreement; provided, however, this Agreement shall be the sole source of any and all severance benefits that Executive is entitled to receive, and Executive will not be entitled to participate in, or receive benefits from, any other severance plan or - 11 - severance policy or program of the Company, and Executive shall not be entitled to any severance benefits other than as identified in this Agreement and Executive hereby waives any and all rights to any such other severance benefits. (n) Integration and Counterparts. This Agreement supercedes all prior agreements between the parties with respect to the matters covered herein. This Agreement may be signed in any number of counterparts, each of which shall be deemed to be the original. IN WITNESS WHEREOF, Executive has executed and, pursuant to the authorization from its Board, the Company has caused this Agreement to be executed in its name and on its behalf, all as of the day and year first above written. "EXECUTIVE" - ----------------------------------------------------- Olin Ray Crocker "LILLY INDUSTRIES, INC." - ----------------------------------------------------- Chairman of the Board - ----------------------------------------------------- Chairman of the Compensation Committee 588652.1-2/21/00 - 12 - RELEASE OF ALL CLAIMS In consideration of receiving from LILLY INDUSTRIES, INC. (the "Company"), the payments and benefits provided for in the Change in Control Agreement, dated as of February 3, 2000, (the "Change in Control Agreement") between the Company and the undersigned (the "Executive"), which payments and benefits Executive was not otherwise entitled to receive, Executive unconditionally releases and discharges the Company from any and all claims, causes of action, demands, lawsuits or other charges whatsoever, known or unknown, directly or indirectly related to Executive's employment with the Company, except for a breach of the Company's obligations under the Change in Control Agreement. The claims or actions released herein include, but are not limited to, those based on allegations of wrongful discharge, breach of contract, promissory estoppel, defamation, infliction of emotional distress, and those alleging discrimination on the basis of race, color, sex, religion, national origin, age, disability, or any other basis, including, but not limited to, any claim or action under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Rehabilitation Act of 1973, the Americans with Disabilities Act of 1990, the Equal Pay Act of 1963, the Civil Rights Act of 1991, the Employee Retirement Income Security Act of 1974, or any other federal, state, or local law, rule, ordinance, or regulation as presently enacted or adopted and as each may hereafter be amended; PROVIDED, HOWEVER, THAT THE EXECUTIVE DOES NOT WAIVE RIGHTS OR CLAIMS THAT MAY ARISE AFTER THE DATE OF THIS RELEASE, OR THAT ARISE EITHER BEFORE OR AFTER THE DATE OF THIS RELEASE, OUT OF CLAIMS FOR BENEFITS UNDER ANY EMPLOYEE PENSION, WELFARE, OR BENEFIT PLAN OR PROGRAM OF THE COMPANY OR AS A RESULT OF THE COMPANY'S BREACH OF THE CHANGE IN CONTROL AGREEMENT. With respect to any claim that Executive might have under the Age Discrimination in Employment Act of 1967, as amended: (i) The Executive's waiver of said rights or claims under the Age Discrimination in Employment Act of 1967 is in exchange for the consideration reflected in this Release; (ii) The Executive acknowledges that he has been advised in writing to consult with an attorney prior to executing this Release and that he has consulted with his attorney prior to executing this Release; (iii) The Executive acknowledges that he has been given a period of at least twenty-one (21) days within which to consider this Release; and (iv) The Executive and the Company agree that Executive has a period of seven (7) days following the execution of this Release within which to revoke the Release. Exhibit 1 The parties also acknowledge and agree that this Release shall not be effective or enforceable until the seven (7) day revocation period expires. The date on which this seven (7) day period expires shall be the effective date of this Release. The Executive further agrees, in consideration of receiving the payments and benefits provided for in the Change in Control Agreement, not to initiate or instigate any claims, causes of action or demands against the Company in any way directly or indirectly related to Executive's employment with the Company or the termination of his employment except for a breach of the Company's obligations under the Change in Control Agreement, and Executive agrees to reimburse, defend, and hold harmless the Company against any such claims, causes of action or demands. The Executive agrees that he or she will not seek, nor be entitled to, employment with the Company, and hereby waives any future right to consideration for employment by the Company. The Executive further agrees that if he or she seeks employment with the Company in violation of this Agreement and is hired, the Company shall have the right to immediately and unconditionally terminate his or her employment without any reason and without recourse by Executive. The Executive understands that as used in this Release, the "Company" includes its past, present and future officers, directors, trustees, shareholders, parent corporations, employees, agents, subsidiaries, affiliates, distributors, successors, and assigns, any and all employee benefit plans (and any fiduciary of such plans) sponsored by the Company, and any other persons related to the Company. Olin Ray Crocker Date WITNESS: EX-10.26 6 DEBLANDRE CHANGE-IN-CONTROL AGREEMENT LILLY INDUSTRIES, INC. CHANGE IN CONTROL AGREEMENT ALAIN DEBLANDRE This CHANGE IN CONTROL AGREEMENT, dated as of February 3, 2000, evidences an agreement by and between LILLY INDUSTRIES, INC., a Canadian corporation organized under the laws of the Province of Ontario, having its principal executive offices at 65 Duke Street, London, Ontario ("Lilly Canada"), a subsidiary of Lilly Industries, Inc., an Indiana corporation having its principal executive offices at 200 West 103rd Street, Indianapolis, Indiana 46290 (the "Company") and ALAIN DEBLANDRE, an individual residing at 1216 Gordon Street, Guelph, Ontario, Canada N1H 6H9 ("Executive"). Background A. The Board of Directors of the Company has determined that it is in the best interests of the Company and its shareholders to assure that the Company and Lilly Canada will have the continued undivided time, attention, loyalty, and dedication of Executive, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined in subsection 3(c) hereof) of the Company. B. The Board believes it is imperative to diminish the inevitable distraction of Executive by virtue of the personal uncertainties and risks created by pending or threatened Change in Control and to encourage Executive's full undivided time, attention, loyalty, and dedication to the Company and Lilly Canada currently and in the event of any threatened or pending Change in Control. C. By this Agreement, the Board intends upon a Change in Control to assure Executive with compensation and benefits arrangements if his employment terminates as a result of a Change in Control which are competitive with those of other corporations similarly situated to the Company. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. D. In reliance on this Agreement, Executive is willing to continue his employment with Lilly Canada on the terms agreed to by Executive and Lilly Canada from time to time. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Undertaking. Subject to Section 4, Lilly Canada agrees to pay or provide to Executive the termination benefits specified in Section 2 hereof if: (a) within three (3) years after, a Change in Control (as defined in subsection 3(c) hereof): either (i) the Company or Lilly Canada terminates the employment of Executive before age sixty-five (65) for any reason other than Good Cause (as defined in subsection 3(h) hereof), death, Disability (as defined in subsection 3(g) hereof), or (ii) Executive voluntarily terminates his employment for Good Reason (as defined in subsection 3(i) hereof), or (b) the employment of Executive is terminated before such a Change in Control, or an anticipated Change in Control, and Executive reasonably demonstrates that such termination - 1 - occurred in connection with, or in anticipation of such a Change in Control (whether or not such Change in Control actually occurs). 2. Termination Benefits. Subject to Section 4, if Executive is entitled to termination benefits pursuant to Section 1 hereof, Lilly Canada shall pay or provide the following: (a) Severance Pay. Lilly Canada shall pay to Executive, in a cash lump sum, an amount equal to the sum of: (1) two (2) times the sum of (i) plus (ii) below: (i) Executive's annual base salary at the rate in effect as of the date of termination of employment (or, at Executive's election, at the rate in effect on any date during the period beginning on the first day of the month immediately prior to the occurrence of events constituting "Good Reason" or a Change in Control), plus (ii) an amount equal to the targeted variable compensation of Executive for the year in which such termination occurs (or, if Executive is advised of the amount of such targeted amount after events specified herein which constitute "Good Reason," or the targeted amount constitutes "Good Reason," at Executive's election, the variable compensation paid for any fiscal year for which Executive has actually received a variable compensation payment either in the twelve (12) months before a Change in Control or any fiscal year after a Change in Control), plus ---- (2) two (2) times an amount equal to any contributions the Company or Lilly Canada would have otherwise made on Executive's behalf to the Company's Employee Stock Purchase Plan during the twelve (12) months following Executive's date of termination, had Executive's employment and/or the plan or amounts contributed thereto by the Company or Lilly Canada on Executive's behalf not been reduced or terminated (or, at Executive's election, two (2) times an amount equal to any contributions the Company or Lilly Canada made on Executive's behalf to such plan for any plan year ending either in the twelve (12) months before a Change in Control or any fiscal year after a Change in Control). - 2 - Lilly Canada shall make such lump sum payments within an administratively reasonable period (but not to exceed sixty (60) days) after the Release Effective Date (as defined in Section 4(a) hereof). Such payments shall be in addition to any salary, vacation pay, variable compensation or benefits earned or accrued by Executive for services rendered prior to his termination. (b) Health, Accident, and Life Insurance and Disability Benefits. The Executive shall be entitled to continue for two (2) years following the date of termination, at the Company's or Lilly Canada's cost, Executive's coverage under the Company's or Lilly Canada's group insurance, health and accident, life, and disability benefit plans in which Executive was entitled to participate immediately prior to the Change in Control provided that continued participation is possible under the general terms and provisions of such plans, programs, and arrangements; provided, however, such continuation coverage shall run concurrently with any continuation coverage otherwise available to Executive under the terms of such plans. In the event Executive's participation in any such plan, program, or arrangement is barred, or any such plan, program, or arrangement is discontinued or the benefits thereunder are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which Executive would have otherwise been entitled to receive under such plans, programs, and arrangements prior thereto at the Company's cost. (c) Acceleration of Stock Options. The Company shall accelerate and make immediately exercisable any and all unmatured stock options (whether or not such stock options are otherwise exercisable) which Executive then holds to acquire securities from the Company; provided, however, that Executive shall have ninety (90) days after such termination of employment to exercise any outstanding stock options and after such ninety (90) days any and all unexpired stock options shall lapse; and, provided, further, however, any tax benefit provisions with respect to any stock options shall apply to any and all unmatured stock options (whether or not such stock options are otherwise exercisable). 3. Definitions. When the initial letter of a word or phrase is capitalized herein, such word or phrase shall have the meaning hereinafter set forth: (a) "Affiliated Employer" means: (1) a member of a controlled group of corporations (as defined in Code Section 414(b)) of which the Company is a member; or (2) an unincorporated trade or business which is under common control (as defined in Code Section 414(c)) with the Company. (b) "Board" means the board of directors of Lilly Industries, Inc, an Indiana corporation. - 3 - (c) "Change in Control" shall be deemed to have occurred if: (1) the Company shall become a party to an agreement of merger, consolidation, or other reorganization pursuant to which the Company will be a constituent corporation and the Company will not be the surviving or resulting corporation, or which will result in less than 50% of the outstanding voting securities of the surviving or resulting entity being owned by the former shareholders of the Company; (2) the Company shall become a party to an agreement providing for the sale or other disposition by the Company of all or substantially all of the assets of the Company to any individual, partnership, joint venture, association, trust, corporation, or other entity which is not an Affiliated Employer; or (3) the acquisition by any individual, entity, or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended from time to time) of an aggregate of more than 20% of the combined voting power of the then outstanding Class A Stock of the Company. (d) "Committee" means the Compensation Committee of the Board to which the Board has delegated authority to administer and interpret this Agreement. (e) "Company" means Lilly Industries, Inc. and any successors to Lilly Industries, Inc., an Indiana corporation. (f) "Confidential Information" means any information not in the public domain and not previously disclosed to the public by the Board or management of the Company or an Affiliated Employer with respect to the products, facilities, methods, trade secrets and other intellectual property, systems, procedures, manuals, confidential reports, product price lists, customer lists, financial information, business plans, prospects, or opportunities of the Company or an Affiliated Employer, or any information which the Company or an Affiliated Employer has designated as Confidential Information. (g) "Disability" means a disability as determined for purposes of any group disability insurance policy of Lilly Canada in effect for Executive which qualifies Executive for permanent disability insurance payments in accordance with such policy. The Committee may require subsequent proof of continued Disability, prior to the sixty-fifth (65th) birthday of Executive, at intervals of not less than six (6) months. (h) "Good Cause" means: (1) conviction for a felony or conviction for any crime or offense lesser than a felony involving the property of the Company or an Affiliated Employer, whether such conviction occurs before or after termination of employment; (2) - 4 - engaging in conduct that has caused demonstrable and material injury to the Company or an Affiliated Employer, monetary or otherwise; (3) gross dereliction of duties or other gross misconduct and the failure to cure such situation within thirty (30) days after receipt of notice thereof from the Committee; or (4) the disclosure or use of Confidential Information to a party unrelated to the Company or an Affiliated Employer other than in the normal and ordinary performance of service for the Company or an Affiliated Employer. The determination as to whether Good Cause exists shall be made by the Committee in good faith. Notwithstanding anything herein to the contrary, no act or failure to act of Executive shall be considered to be "Good Cause" under this Agreement unless it shall be done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company or an Affiliated Employer. (i) "Good Reason" means, without Executive's written consent: (1) a substantial change in Executive's status, position or responsibilities which does not represent a promotion from Executive's status, position or responsibilities as in effect immediately prior to the Change in Control; the assignment to Executive of any material duties or responsibilities which are clearly inconsistent with Executive's status, position or responsibilities; or any removal of Executive from, or failure to reappoint or reelect Executive to, any of such positions, except in connection with the termination of Executive's employment for Disability, death, Good Cause, or by Executive other than for Good Reason; (2) a reduction by Lilly Canada in Executive's annual base salary as in effect on the date hereof, or as the same may be increased from time to time during the term of this Agreement, or Lilly Canada's failure to increase (within twelve (12) months of Executive's last increase in annual base salary) Executive's annual base salary after a Change in Control in an amount which at least equals, on a percentage basis, eighty percent (80%) of the average percentage increase in annual base salary for all corporate officers of the Company or Lilly Canada effected in the preceding twelve (12) months; (3) a change by Lilly Canada in the methodology of computing Executive's bonus under the Variable Compensation Plan or the termination of such plan or its replacement with a plan using a methodology less favorable to Executive than that used for any fiscal year for which Executive has actually received a variable compensation payment either in the last fiscal year before a Change in Control or any fiscal year after a Change in Control; - 5 - (4) if Executive performed his principal duties at the Company's executive offices in Indianapolis, Indiana immediately before the Change in Control, the relocation of the Company's principal executive offices to a location outside of the Indianapolis, Indiana metropolitan area (which consists of all counties which are contiguous to Marion County, Indiana), or if Executive performed his principal duties at a location other than the Company's executive offices in Indianapolis, Indiana immediately before the Change in Control, the Company's requiring Executive to be based at any place more than forty (40) miles distance from the location which Executive performed his principal duties prior to a Change in Control, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations at the time of a Change in Control; (5) the failure by Lilly Canada to continue to provide Executive with benefits (including any variable compensation program) substantially similar to, or of substantially the same aggregate value to Executive, as those enjoyed by all other corporate officers of the Company or any Affiliated Employer from time to time either before or after a Change in Control; (6) the failure of the Company or Lilly Canada to obtain an agreement satisfactory to Executive (which satisfaction may not be unreasonably withheld) from any successor or assign of the Company to assume and agree to perform this Agreement; (7) any purported termination of Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of subsection (k) hereof; or (8) any request by Lilly Canada that Executive participate in an unlawful act or take any action constituting a breach of Executive's professional standard of conduct. Notwithstanding anything in this subsection to the contrary, Executive's right to terminate his employment for Good Reason pursuant to this subsection shall not be affected by Executive's incapacity due to physical or mental illness. (j) "Lilly Canada" means Lilly Industries, Inc., a Canadian corporation organized under the laws of the Province of Ontario. (k) "Notice of Termination" means a notice which shall indicate the date on which Executive's employment shall terminate and the specific termination provision in this - 6 - Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. 4. Conditions to Payments and Benefits. (a) Release of Claims. As a condition of Executive receiving from Lilly Canada or the Company the payments and benefits provided for in this Agreement, which payments and benefits Executive is not otherwise entitled to receive, Executive understands and agrees that he will be required to execute a release of all claims against the Company or Lilly Canada (arising out of matters occurring on or prior to such termination) in the form attached hereto as Exhibit 1 (the "Release"). Executive acknowledges that he has been advised in writing to consult with an attorney prior to executing the Release, and Executive agrees that he will consult with his attorney prior to executing the Release. The Executive and the Company and Lilly Canada agree that Executive has a period of twenty-one (21) days within which to consider this Release, and has a period of seven (7) days following the execution of the Release within which to revoke the Release. The parties also acknowledge and agree that the Release shall not be effective or enforceable until the seven (7) day revocation period expires. The date on which this seven (7) day period expires shall be the effective date of the Release (the "Release Effective Date"). THE EXECUTIVE AGREES THAT EXECUTION AND DELIVERY TO THE COMPANY AND LILLY CANADA OF THE RELEASE REQUESTED BY THE COMPANY AND/OR LILLY CANADA, AND THE PASSAGE OF ALL NECESSARY WAITING PERIODS IN CONNECTION THEREWITH, SHALL BE A CONDITION TO THE RECEIPT OF ANY PAYMENT OR BENEFITS TO BE PROVIDED BY THE COMPANY AND LILLY CANADA UNDER THIS AGREEMENT. IF THE EXECUTIVE ELECTS NOT TO EXECUTE AND DELIVER TO THE COMPANY AND LILLY CANADA THE RELEASE REQUESTED BY THE COMPANY AND/OR LILLY CANADA, THE EXECUTIVE SHALL NOT BE ENTITLED TO ANY PAYMENTS OR BENEFITS UNDER THIS AGREEMENT AND ALL SUCH PAYMENTS AND BENEFITS SHALL BE FORFEITED. 5. Additional Provisions. (a) Enforcement of Agreement. The Company and Lilly Canada are aware that upon the occurrence of a Change in Control, the Board or a shareholder of the Company and Lilly Canada may then cause or attempt to cause the Company or Lilly Canada to refuse to comply with its obligations under this Agreement, or may cause or attempt to cause the Company or Lilly Canada to institute, or may institute, litigation seeking to have this Agreement declared unenforceable, or may take or attempt to take other action to deny Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of the Company and Lilly Canada that Executive not be required to incur the expenses associated with the enforcement of - 7 - Executive's rights under this Agreement by litigation or other legal action, nor that Executive be bound to negotiate any settlement of Executive's rights hereunder, because the cost and expense of such legal action or settlement would substantially detract from the benefits intended to be extended to Executive hereunder. Accordingly, if following a Change in Control it should appear to Executive that the Company or Lilly Canada has failed to comply with any of its obligations under this Agreement or in the event that the Company or Lilly Canada or any other person (including the Internal Revenue Service) takes any action to declare this Agreement void or unenforceable, or institutes any litigation or other legal action designed to deny, diminish or to recover from Executive the benefits entitled to be provided to Executive hereunder, and Executive has complied with all of his obligations under this Agreement, the Company and Lilly Canada irrevocably authorizes Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as provided in this subsection, to represent Executive in connection with the initiation or defense of any litigation or other legal action, whether such action is by or against the Company or Lilly Canada or any director, officer, shareholder, or other person affiliated with the Company or Lilly Canada, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company and Lilly Canada irrevocably consents to Executive entering into an attorney-client relationship with such counsel, and in that connection the Company and Lilly Canada and Executive agree that a confidential relationship shall exist between Executive and such counsel. The reasonable fees and expenses of counsel selected from time to time by Executive as herein above provided shall be paid or reimbursed to Executive by the Company or Lilly Canada on a regular, periodic basis upon presentation by Executive of a statement or statements prepared by such counsel in accordance with its customary practices. Any legal expenses incurred by the Company or Lilly Canada by reason of any dispute between the parties as to enforceability of or the terms contained in this Agreement, notwithstanding the outcome of any such dispute, shall be the sole responsibility of the Company and Lilly Canada, and the Company and Lilly Canada shall not take any action to seek reimbursement from Executive for such expenses. (b) Severance Pay; No Duty to Mitigate. The amounts payable to Executive under this Agreement shall not be treated as damages but as severance compensation to which Executive is entitled by reason of termination of Executive's employment in the circumstances contemplated by this Agreement, and is inclusive of Executive's entitlement to termination pay and severance pay under the Employment Standards Act, R.S.O. 1990, E.14, as amended. The Company and Lilly Canada shall not be entitled to set off against the amounts payable to Executive any amounts earned by Executive in other employment after termination of Executive's employment with Lilly Canada, or any amounts which might have been earned by Executive in other employment, had Executive sought such other employment, or any set-off, counterclaim, recoupment, defense, or any other claim, right, or action which the Company or Lilly Canada may have against Executive or others. (c) Notice of Termination. Any purported termination of employment by Lilly Canada or by Executive shall be communicated by written Notice of Termination to the other - 8 - party hereto in accordance with subsection 3(k) hereof and shall provide at least ten (10) business days notice prior to the date of termination. Solely for purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. (d) Assignment. This Agreement is personal to Executive and without the prior written consent of the Company and Lilly Canada shall not be assignable by Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and Lilly Canada and their successors and assigns. The Company and Lilly Canada shall assign this Agreement to any corporation or other business entity succeeding to substantially all of the business and assets of the Company by merger, consolidation, sale of assets, or otherwise and shall obtain the assumption of this Agreement by such successor. (e) Termination. The Board shall have the right to terminate this Agreement, for any reason, upon twelve (12) months' written notice to Executive prior to a Change in Control. (f) Amendment. The Board shall have the right to amend this Agreement, for any reason, upon twelve (12) months' written notice to Executive prior to a Change in Control. (g) Governing Law. This Agreement shall be governed by and subject to the laws of the State of Indiana, U.S.A. (h) Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had not been contained herein. (i) Captions. The captions in this Agreement are for convenience and identification purposes only, are not an integral part of this Agreement, and are not to be considered in the interpretation of any part hereof. (j) Source of Payment. For purposes of this Agreement, employment and compensation paid by any direct or indirect subsidiary of the Company will be deemed to be employment and compensation paid by the Company. (k) Notices. Except as specifically set forth in this Agreement, all notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person or sent by registered or certified mail, postage prepaid, addressed as set forth above, or to such other address as shall be furnished in writing by any party to the other. - 9 - (l) Waivers. The Executive's or the Company's or Lilly Canada's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right Executive or the Company or Lilly Canada may have hereunder, including, without limitation, the right of Executive to terminate Executive's employment for Good Reason, shall not be deemed to be a waiver of such provision or right, or of any other provision or right of this Agreement. (m) Non-exclusivity of Right. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its Affiliated Employers and for which Executive may qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company or any Affiliated Employer. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company or any Affiliated Employer at or subsequent to the date of termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement except as explicitly modified by this Agreement; provided, however, this Agreement shall be the sole source of any and all severance benefits that Executive is entitled to receive, and Executive will not be entitled to participate in, or receive benefits from, any other severance plan or severance policy or program of the Company, and Executive shall not be entitled to any severance benefits other than as identified in this Agreement and Executive hereby waives any and all rights to any such other severance benefits. (n) Integration and Counterparts. This Agreement supercedes all prior agreements between the parties with respect to the matters covered herein. This Agreement may be signed in any number of counterparts, each of which shall be deemed to be the original. 6. Guarantee. The Company guarantees the obligations and performance of Lilly Canada under this Agreement. IN WITNESS WHEREOF, Executive has executed and, pursuant to the authorization from its Board, the Company has caused this Agreement to be executed in its name and on its behalf, all as of the day and year first above written. "EXECUTIVE" - ----------------------------------------------------- Alain DeBlandre "LILLY INDUSTRIES, INC., a Canadian Corporation" - ----------------------------------------------------- President "LILLY INDUSTRIES, INC., an Indiana Corporation" - ----------------------------------------------------- Chairman of the Board - ----------------------------------------------------- Chairman of the Compensation Committee 574258.3-2/21/00 574258.3-2/21/00 - 10 - RELEASE OF ALL CLAIMS In consideration of receiving from LILLY INDUSTRIES, INC., a Canadian corporation organized under the laws of the Province of Ontario, having its principal executive offices at 65 Duke Street, London, Ontario ("Lilly Canada"), a subsidiary of Lilly Industries, Inc., an Indiana corporation having its principal executive offices at 200 West 103rd Street, Indianapolis, Indiana 46290 (the "Company"), the payments and benefits provided for in the Change in Control Agreement, dated as of February 3, 2000, (the "Change in Control Agreement") between the Company and the undersigned ("Executive"), which payments and benefits Executive was not otherwise entitled to receive, Executive unconditionally releases and discharges the Company from any and all claims, causes of action, demands, lawsuits or other charges whatsoever, known or unknown, directly or indirectly related to Executive's employment with the Company, except for a breach of the Company's obligations under the Change in Control Agreement. The claims or actions released herein include, but are not limited to, those based on allegations of wrongful discharge, breach of contract, promissory estoppel, defamation, infliction of emotional distress, and those alleging discrimination on the basis of race, color, sex, religion, national origin, age, disability, or any other basis, including, but not limited to, any claim or action under Title VII of the Civil Rights Act of 1964, the Employment Standards Act, R.S.O. 1990, E.14, as amended, the National Labor Relations Act, the Family and Medical Leave Act, the Fair Labor Standards Act or the Worker Adjustment and Retraining Notification Act, those alleging discrimination on the basis of race, color, sex, religion, national origin, age, disability, or handicap or any other prohibited ground of discrimination under the Human Rights Code, R.S.O. 1990, H.19, as amended, the Age Discrimination in Employment Act of 1967, the Rehabilitation Act of 1973, the Americans with Disabilities Act of 1990, the Equal Pay Act of 1963, the Civil Rights Act of 1991, the Employee Retirement Income Security Act of 1974, or any other federal, state, or local law, rule, ordinance, or regulation as presently enacted or adopted and as each may hereafter be amended; PROVIDED, HOWEVER, THAT EXECUTIVE DOES NOT WAIVE RIGHTS OR CLAIMS THAT MAY ARISE AFTER THE DATE OF THIS RELEASE, OR THAT ARISE EITHER BEFORE OR AFTER THE DATE OF THIS RELEASE, OUT OF CLAIMS FOR BENEFITS UNDER ANY EMPLOYEE PENSION, WELFARE, OR BENEFIT PLAN OR PROGRAM OF THE COMPANY OR AS A RESULT OF THE COMPANY'S BREACH OF THE CHANGE IN CONTROL AGREEMENT. With respect to any claim that Executive might have under the Age Discrimination in Employment Act of 1967, as amended: (i) The Executive's waiver of said rights or claims under the Age Discrimination in Employment Act of 1967 is in exchange for the consideration reflected in this Release; (ii) The Executive acknowledges that he has been advised in writing to consult with an attorney prior to executing this Release and that he has consulted with his attorney prior to executing this Release; Exhibit 1 (iii) The Executive acknowledges that he has been given a period of at least twenty-one (21) days within which to consider this Release; and (iv) The Executive and the Company agree that Executive has a period of seven (7) days following the execution of this Release within which to revoke the Release. The parties also acknowledge and agree that this Release shall not be effective or enforceable until the seven (7) day revocation period expires. The date on which this seven (7) day period expires shall be the effective date of this Release. The Executive further agrees, in consideration of receiving the payments and benefits provided for in the Change in Control Agreement, not to initiate or instigate any claims, causes of action or demands against the Company in any way directly or indirectly related to Executive's employment with the Company or the termination of his employment except for a breach of the Company's obligations under the Change in Control Agreement, and Executive agrees to reimburse, defend, and hold harmless the Company against any such claims, causes of action or demands. The Executive agrees that he will not seek, nor be entitled to, employment with the Company, and hereby waives any future right to consideration for employment by the Company. The Executive further agrees that if he seeks employment with the Company in violation of this Agreement and is hired, the Company shall have the right to immediately and unconditionally terminate his employment without any reason and without recourse by Executive. The Executive understands that as used in this Release, the "Company" includes its past, present and future officers, directors, trustees, shareholders, parent corporations, employees, agents, subsidiaries, affiliates, distributors, successors, and assigns, any and all employee benefit plans (and any fiduciary of such plans) sponsored by the Company, and any other persons related to the Company. Alain DeBlandre Date WITNESS: EX-10.27 7 UNDERWOOD CHANGE-IN-CONTROL AGREEMENT LILLY INDUSTRIES, INC. CHANGE IN CONTROL AGREEMENT VIRGIL E. UNDERWOOD This CHANGE IN CONTROL AGREEMENT, dated as of February 3, 2000, evidences an agreement by and between LILLY INDUSTRIES, INC., an Indiana corporation having its principal executive offices at 200 West 103rd Street, Indianapolis, Indiana 46290 (the "Company") and VIRGIL E. UNDERWOOD, an individual residing at 432 Calumet Way, Bowling Green, Kentucky 42104 ("Executive"). Background A. The Board of Directors of the Company has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued undivided time, attention, loyalty, and dedication of Executive, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined in subsection 3(b) hereof) of the Company. B. The Board believes it is imperative to diminish the inevitable distraction of Executive by virtue of the personal uncertainties and risks created by pending or threatened Change in Control and to encourage Executive's full undivided time, attention, loyalty, and dedication to the Company currently and in the event of any threatened or pending Change in Control. C. By this Agreement, the Board intends upon a Change in Control to assure Executive with compensation and benefits arrangements if his employment terminates as a result of a Change in Control which are competitive with those of other corporations similarly situated to the Company. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. D. In reliance on this Agreement, Executive is willing to continue his employment with the Company on the terms agreed to by Executive and the Company from time to time. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Undertaking. Subject to Section 4, the Company agrees to pay or provide to Executive the termination benefits specified in Section 2 hereof if: (a) within three (3) years after, a Change in Control (as defined in subsection 3(b) hereof): either (i) the Company terminates the employment of Executive before age sixty-five (65) for any reason other than Good Cause (as defined in subsection 3(g) hereof), death, Disability (as defined in subsection 3(f) hereof), or (ii) Executive voluntarily terminates his employment for Good Reason (as defined in subsection 3(h) hereof), or (b) the employment of Executive is terminated before such a Change in Control, or an anticipated Change in Control, and Executive reasonably demonstrates that such termination occurred in connection with, or in anticipation of such a Change in Control (whether or not such Change in Control actually occurs). - 1 - 2. Termination Benefits. Subject to Section 4, if Executive is entitled to termination benefits pursuant to Section 1 hereof, the Company shall pay or provide the following: (a) Severance Pay. The Company shall pay to Executive, in a cash lump sum, an amount equal to the sum of: (1) two (2) times the sum of (i) plus (ii) below: (i) Executive's annual base salary, inclusive of any elective deferrals made by Executive to the Company's Employee 401(k) Savings Plan and the Replacement Plan, at the rate in effect as of the date of termination of employment (or, at Executive's election, at the rate in effect on any date during the period beginning on the first day of the month immediately prior to the occurrence of events constituting "Good Reason" or a Change in Control), plus ---- (ii) an amount equal to the targeted variable compensation of Executive for the year in which such termination occurs (or, if Executive is advised of the amount of such targeted amount after events specified herein which constitute "Good Reason," or the targeted amount constitutes "Good Reason," at Executive's election, the variable compensation paid for any fiscal year for which Executive has actually received a variable compensation payment either in the twelve (12) months before a Change in Control or any fiscal year after a Change in Control), plus ---- (2) two (2) times an amount equal to any contributions the Company would have otherwise made on Executive's behalf to the Company's Employee Stock Purchase Plan during the twelve (12) months following Executive's date of termination, had Executive's employment and/or the plan or amounts contributed thereto by the Company on Executive's behalf not been reduced or terminated (or, at Executive's election, two (2) times an amount equal to any contributions the Company made on Executive's behalf to such plan for any plan year ending either in the twelve (12) months before a Change in Control or any fiscal year after a Change in Control), plus (3) two (2) times an amount equal to any employer matching contributions the Company would have otherwise made on Executive's behalf to the Company's Employee 401(k) Savings Plan and under the Company's Executive Replacement Plan during the - 2 - twelve (12) months following Executive's date of termination, had Executive's employment and/or the amounts contributed thereto by the Company on Executive's behalf not been reduced or terminated, and assuming Executive made elective deferrals to the maximum extent permitted by Section 402(g) of the Internal Revenue Code of 1986, as amended (the "Code") (or, at Executive's election, two (2) times an amount equal to any employer matching contributions made on Executive's behalf to such plan or plans for any plan year ending either in the twelve (12) months before a Change in Control or any fiscal year after a Change in Control). The Company shall make such lump sum payments within an administratively reasonable period (but not to exceed sixty (60) days) after the Release Effective Date (as defined in Section 4(b) hereof). Such payments shall be in addition to any salary, variable compensation or benefits earned or accrued by Executive for services rendered prior to his termination. (b) Health, Accident, and Life Insurance and Disability Benefits. The Executive shall be entitled to continue for two (2) years following the date of termination, at the Company's cost, Executive's coverage under the Company's group insurance, health and accident, life, and disability benefit plans in which Executive was entitled to participate immediately prior to the Change in Control provided that continued participation is possible under the general terms and provisions of such plans, programs, and arrangements; provided, however, such continuation coverage shall run concurrently with any COBRA continuation coverage otherwise available to Executive under the terms of such plans. In the event Executive's participation in any such plan, program, or arrangement is barred, or any such plan, program, or arrangement is discontinued or the benefits thereunder are materially reduced, the Company shall arrange to provide Executive with benefits substantially similar to those which Executive would have otherwise been entitled to receive under such plans, programs, and arrangements prior thereto at the Company's cost. (c) Acceleration of Stock Options. The Company shall accelerate and make immediately exercisable any and all unmatured stock options (whether or not such stock options are otherwise exercisable) which Executive then holds to acquire securities from the Company; provided, however, that Executive shall have ninety (90) days after such termination of employment to exercise any outstanding stock options and after such ninety (90) days any and all unexpired stock options shall lapse; and, provided, further, however, any tax benefit provisions with respect to any stock options shall apply to any and all unmatured stock options (whether or not such stock options are otherwise exercisable). If as a result of such acceleration of incentive stock options the $100,000 limitation would be exceeded with respect to an optionee, such incentive stock options shall be converted, as of the date such incentive stock options become exercisable, to non-qualified stock options to the extent necessary to comply with the $100,000 limitation and the Company shall pay to - 3 - such optionee an additional cash payment equal to the tax benefit to be received by the Company attributable to its federal income tax deduction resulting from the exercise of such converted non-qualified stock options. 3. Definitions. When the initial letter of a word or phrase is capitalized herein, such word or phrase shall have the meaning hereinafter set forth: (a) "Affiliated Employer" means: (1) a member of a controlled group of corporations (as defined in Code Section 414(b)) of which the Company is a member; or (2) an unincorporated trade or business which is under common control (as defined in Code Section 414(c)) with the Company. (b) "Change in Control" shall be deemed to have occurred if: (1) the Company shall become a party to an agreement of merger, consolidation, or other reorganization pursuant to which the Company will be a constituent corporation and the Company will not be the surviving or resulting corporation, or which will result in less than 50% of the outstanding voting securities of the surviving or resulting entity being owned by the former shareholders of the Company; (2) the Company shall become a party to an agreement providing for the sale or other disposition by the Company of all or substantially all of the assets of the Company to any individual, partnership, joint venture, association, trust, corporation, or other entity which is not an Affiliated Employer; or (6) the acquisition by any individual, entity, or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended from time to time) of an aggregate of more than 20% of the combined voting power of the then outstanding Class A Stock of the Company. (c) "Committee" means the Compensation Committee of the Board to which the Board has delegated authority to administer and interpret this Agreement. (d) "Company" means Lilly Industries, Inc. and any successors to Lilly Industries, Inc. - 4 - (e) "Confidential Information" means any information not in the public domain and not previously disclosed to the public by the Board or management of the Company or an Affiliated Employer with respect to the products, facilities, methods, trade secrets and other intellectual property, systems, procedures, manuals, confidential reports, product price lists, customer lists, financial information, business plans, prospects, or opportunities of the Company or an Affiliated Employer, or any information which the Company or an Affiliated Employer has designated as Confidential Information. (f) "Disability" means a disability as determined for purposes of any group disability insurance policy of the Company in effect for Executive which qualifies Executive for permanent disability insurance payments in accordance with such policy. The Committee may require subsequent proof of continued Disability, prior to the sixty-fifth (65th) birthday of Executive, at intervals of not less than six (6) months. (g) "Good Cause" means: (1) conviction for a felony or conviction for any crime or offense lesser than a felony involving the property of the Company or an Affiliated Employer, whether such conviction occurs before or after termination of employment; (2) engaging in conduct that has caused demonstrable and material injury to the Company or an Affiliated Employer, monetary or otherwise; (3) gross dereliction of duties or other gross misconduct and the failure to cure such situation within thirty (30) days after receipt of notice thereof from the Committee; or (4) the disclosure or use of Confidential Information to a party unrelated to the Company or an Affiliated Employer other than in the normal and ordinary performance of service for the Company or an Affiliated Employer. The determination as to whether Good Cause exists shall be made by the Committee in good faith. Notwithstanding anything herein to the contrary, no act or failure to act of Executive shall be considered to be "Good Cause" under this Agreement unless it shall be done, or omitted to be done, by Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (h) "Good Reason" means, without Executive's written consent: (1) a substantial change in Executive's status, position or responsibilities which does not represent a promotion from Executive's status, position or responsibilities as in effect immediately prior to the Change in Control; the assignment to Executive of any material duties or responsibilities which are clearly inconsistent with Executive's status, position or responsibilities; or any removal of Executive from, or failure to reappoint or reelect Executive to, any of such positions, except in connection with the termination of Executive's employment for Disability, death, Good Cause, or by Executive other than for Good Reason; - 5 - (2) a reduction by the Company in Executive's annual base salary as in effect on the date hereof, or as the same may be increased from time to time during the term of this Agreement, or the Company's failure to increase (within twelve (12) months of Executive's last increase in annual base salary) Executive's annual base salary after a Change in Control in an amount which at least equals, on a percentage basis, eighty percent (80%) of the average percentage increase in annual base salary for all corporate officers of the Company effected in the preceding twelve (12) months; (3) a change by the Company in the methodology of computing Executive's bonus under the Variable Compensation Plan or the termination of such plan or its replacement with a plan using a methodology less favorable to Executive than that used for any fiscal year for which Executive has actually received a variable compensation payment either in the last fiscal year before a Change in Control or any fiscal year after a Change in Control; (4) if Executive performed his principal duties at the Company's executive offices in Indianapolis, Indiana immediately before the Change in Control, the relocation of the Company's principal executive offices to a location outside of the Indianapolis, Indiana metropolitan area (which consists of all counties which are contiguous to Marion County, Indiana), or if Executive performed his principal duties at a location other than the Company's executive offices in Indianapolis, Indiana immediately before the Change in Control, the Company's requiring Executive to be based at any place more than forty (40) miles distance from the location which Executive performed his principal duties prior to a Change in Control, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations at the time of a Change in Control; (5) the failure by the Company to continue to provide Executive with benefits (including any variable compensation program) substantially similar to, or of substantially the same aggregate value to Executive, as those enjoyed by all other corporate officers of the Company or any Affiliated Employer from time to time either before or after a Change in Control; (6) the failure of the Company to obtain an agreement satisfactory to Executive (which satisfaction may not be unreasonably withheld) - 6 - from any successor or assign of the Company to assume and agree to perform this Agreement; (7) any purported termination of Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of subsection 3(i) hereof; or (8) any request by the Company that Executive participate in an unlawful act or take any action constituting a breach of Executive's professional standard of conduct. Notwithstanding anything in this subsection to the contrary, Executive's right to terminate his employment for Good Reason pursuant to this subsection shall not be affected by Executive's incapacity due to physical or mental illness. (i) "Notice of Termination" means a notice which shall indicate the date on which Executive's employment shall terminate and the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. 4. Conditions to Payments and Benefits. (a) Internal Revenue Code Limits and Other Limits. (1) Notwithstanding anything in this Agreement to the contrary, in the event that Ernst & Young or any other independent auditor substituted for Ernst & Young pursuant to an agreement in writing by and between the Company and Executive (the "Auditor") determines that any payment by the Company to or for the benefit of Executive, whether paid or payable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be an "excess parachute payment" within the meaning of Section 280G of the Code, then the Company shall pay an additional amount of money to Executive that will equal (based on Executive's good faith representations of Executive's income tax position for the year of payment hereunder) the sum of (i) all excise tax imposed on Executive by Section 4999 of the Code and (ii) all additional state and federal income taxes attributable to the additional payments to Executive pursuant to this Section 4(a)(1), including all state and federal income taxes on the additional income tax payments hereunder ("Additional Payment"). - 7 - (2) If the Auditor determines that any Payment would be such an "excess parachute payment" because of Section 280G of the Code, then the Company shall promptly give Executive notice to that effect and a copy of the detailed calculation thereof and Executive shall provide in writing within ten (10) days of Executive's receipt of such notice, a good faith representation of Executive's income tax position so that such Additional Payment may be calculated. All determinations made by the Auditor under this Section 4 shall be binding upon the Company and Executive and shall be made within sixty (60) calendar days of Executive's termination of employment. Following such determination and the notices hereunder and subject to the other conditions set forth in this Section 4, the Company shall pay to or distribute to, or for the benefit of, Executive such amounts as are then due to Executive under this Agreement in the manner identified in Section 2 and this Section 4 of this Agreement, and shall promptly pay to or distribute for the benefit of Executive in the future such amounts as become due to Executive under this Agreement. (3) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Auditor hereunder, it is possible that Additional Payment will have been made by the Company which should not have been made (an "Overpayment") or that an increase in the Additional Payment which will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of such excess parachute payment hereunder. In the event that the Auditor, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or Executive, which the Auditor believes has a high probability of success, determines that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to Executive which Executive shall repay to the Company, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code. In the event that the Auditor, based upon controlling precedent, determines that an Underpayment has occurred, such Underpayment shall promptly be paid by the Company to or for the benefit of Executive, together with interest at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code. (b) Release of Claims. As a condition of Executive receiving from the Company the payments and benefits provided for in this Agreement, which payments and benefits Executive is not otherwise entitled to receive, Executive understands and agrees that he will be required to execute a release of all claims against the Company (arising out of matters - 8 - occurring on or prior to such termination) in the form attached hereto as Exhibit 1 (the "Release"). Executive acknowledges that he has been advised in writing to consult with an attorney prior to executing the Release, and Executive agrees that he will consult with his attorney prior to executing the Release. The Executive and the Company agree that Executive has a period of twenty-one (21) days within which to consider this Release, and has a period of seven (7) days following the execution of the Release within which to revoke the Release. The parties also acknowledge and agree that the Release shall not be effective or enforceable until the seven (7) day revocation period expires. The date on which this seven (7) day period expires shall be the effective date of the Release (the "Release Effective Date"). THE EXECUTIVE AGREES THAT EXECUTION AND DELIVERY TO THE COMPANY OF THE RELEASE REQUESTED BY THE COMPANY, AND THE PASSAGE OF ALL NECESSARY WAITING PERIODS IN CONNECTION THEREWITH, SHALL BE A CONDITION TO THE RECEIPT OF ANY PAYMENT OR BENEFITS TO BE PROVIDED BY THE COMPANY UNDER THIS AGREEMENT. IF THE EXECUTIVE ELECTS NOT TO EXECUTE AND DELIVER TO THE COMPANY THE RELEASE REQUESTED BY THE COMPANY, THE EXECUTIVE SHALL NOT BE ENTITLED TO ANY PAYMENTS OR BENEFITS UNDER THIS AGREEMENT AND ALL SUCH PAYMENTS AND BENEFITS SHALL BE FORFEITED. 5. Additional Provisions. (a) Enforcement of Agreement. The Company is aware that upon the occurrence of a Change in Control, the Board or a shareholder of the Company may then cause or attempt to cause the Company to refuse to comply with its obligations under this Agreement, or may cause or attempt to cause the Company to institute, or may institute, litigation seeking to have this Agreement declared unenforceable, or may take or attempt to take other action to deny Executive the benefits intended under this Agreement. In these circumstances, the purpose of this Agreement could be frustrated. It is the intent of the Company that Executive not be required to incur the expenses associated with the enforcement of Executive's rights under this Agreement by litigation or other legal action, nor that Executive be bound to negotiate any settlement of Executive's rights hereunder, because the cost and expense of such legal action or settlement would substantially detract from the benefits intended to be extended to Executive hereunder. Accordingly, if following a Change in Control it should appear to Executive that the Company has failed to comply with any of its obligations under this Agreement or in the event that the Company or any other person (including the Internal Revenue Service) takes any action to declare this Agreement void or unenforceable, or institutes any litigation or other legal action designed to deny, diminish or to recover from Executive the benefits entitled to be provided to Executive hereunder, and Executive has complied with all of his obligations under this Agreement, the Company irrevocably authorizes Executive from time to time to retain counsel of Executive's choice, at the expense of the Company as provided in this subsection, to represent Executive in connection with the - 9 - initiation or defense of any litigation or other legal action, whether such action is by or against the Company or any director, officer, shareholder, or other person affiliated with the Company, in any jurisdiction. Notwithstanding any existing or prior attorney-client relationship between the Company and such counsel, the Company irrevocably consents to Executive entering into an attorney-client relationship with such counsel, and in that connection the Company and Executive agree that a confidential relationship shall exist between Executive and such counsel. The reasonable fees and expenses of counsel selected from time to time by Executive as herein above provided shall be paid or reimbursed to Executive by the Company on a regular, periodic basis upon presentation by Executive of a statement or statements prepared by such counsel in accordance with its customary practices. Any legal expenses incurred by the Company by reason of any dispute between the parties as to enforceability of or the terms contained in this Agreement, notwithstanding the outcome of any such dispute, shall be the sole responsibility of the Company, and the Company shall not take any action to seek reimbursement from Executive for such expenses. (b) Severance Pay; No Duty to Mitigate. The amounts payable to Executive under this Agreement shall not be treated as damages but as severance compensation to which Executive is entitled by reason of termination of Executive's employment in the circumstances contemplated by this Agreement. The Company shall not be entitled to set off against the amounts payable to Executive any amounts earned by Executive in other employment after termination of Executive's employment with the Company, or any amounts which might have been earned by Executive in other employment, had Executive sought such other employment, or any set-off, counterclaim, recoupment, defense, or any other claim, right, or action which the Company may have against Executive or others. (c) Notice of Termination. Any purported termination of employment by the Company or by Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with subsection 3(i) hereof and shall provide at least ten (10) business days notice prior to the date of termination. Solely for purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. (d) Assignment. This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company shall assign this Agreement to any corporation or other business entity succeeding to substantially all of the business and assets of the Company by merger, consolidation, sale of assets, or otherwise and shall obtain the assumption of this Agreement by such successor. (e) Termination. The Board shall have the right to terminate this Agreement, for any reason, upon twelve (12) months' written notice to Executive prior to a Change in Control. - 10 - (f) Amendment. The Board shall have the right to amend this Agreement, for any reason, upon twelve (12) months' written notice to Executive prior to a Change in Control. (g) Governing Law. This Agreement shall be governed by and subject to the laws of the State of Indiana. (h) Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had not been contained herein. (i) Captions. The captions in this Agreement are for convenience and identification purposes only, are not an integral part of this Agreement, and are not to be considered in the interpretation of any part hereof. (j) Source of Payment. For purposes of this Agreement, employment and compensation paid by any direct or indirect subsidiary of the Company will be deemed to be employment and compensation paid by the Company. (k) Notices. Except as specifically set forth in this Agreement, all notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person or sent by registered or certified mail, postage prepaid, addressed as set forth above, or to such other address as shall be furnished in writing by any party to the other. (l) Waivers. The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right Executive or the Company may have hereunder, including, without limitation, the right of Executive to terminate Executive's employment for Good Reason, shall not be deemed to be a waiver of such provision or right, or of any other provision or right of this Agreement. (m) Non-exclusivity of Right. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its Affiliated Employers and for which Executive may qualify, nor shall anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company or any Affiliated Employer. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of, or any contract or agreement with, the Company or any Affiliated Employer at or subsequent to the date of termination shall be payable in accordance with such plan, policy, practice, program, contract or agreement except as explicitly modified by this Agreement; provided, however, this Agreement shall be the sole source of any and all severance benefits that Executive is entitled to receive, and Executive will not be entitled to participate in, or receive benefits from, any other severance plan or - 11 - severance policy or program of the Company, and Executive shall not be entitled to any severance benefits other than as identified in this Agreement and Executive hereby waives any and all rights to any such other severance benefits. (n) Integration and Counterparts. This Agreement supercedes all prior agreements between the parties with respect to the matters covered herein. This Agreement may be signed in any number of counterparts, each of which shall be deemed to be the original. IN WITNESS WHEREOF, Executive has executed and, pursuant to the authorization from its Board, the Company has caused this Agreement to be executed in its name and on its behalf, all as of the day and year first above written. "EXECUTIVE" - ----------------------------------------------------- Virgil E. Underwood "LILLY INDUSTRIES, INC." - ----------------------------------------------------- Chairman of the Board - ----------------------------------------------------- Chairman of the Compensation Committee 571136.2-2/21/00 - 12 - RELEASE OF ALL CLAIMS In consideration of receiving from LILLY INDUSTRIES, INC. (the "Company"), the payments and benefits provided for in the Change in Control Agreement, dated as of February 3, 2000, (the "Change in Control Agreement") between the Company and the undersigned (the "Executive"), which payments and benefits Executive was not otherwise entitled to receive, Executive unconditionally releases and discharges the Company from any and all claims, causes of action, demands, lawsuits or other charges whatsoever, known or unknown, directly or indirectly related to Executive's employment with the Company, except for a breach of the Company's obligations under the Change in Control Agreement. The claims or actions released herein include, but are not limited to, those based on allegations of wrongful discharge, breach of contract, promissory estoppel, defamation, infliction of emotional distress, and those alleging discrimination on the basis of race, color, sex, religion, national origin, age, disability, or any other basis, including, but not limited to, any claim or action under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Rehabilitation Act of 1973, the Americans with Disabilities Act of 1990, the Equal Pay Act of 1963, the Civil Rights Act of 1991, the Employee Retirement Income Security Act of 1974, or any other federal, state, or local law, rule, ordinance, or regulation as presently enacted or adopted and as each may hereafter be amended; PROVIDED, HOWEVER, THAT THE EXECUTIVE DOES NOT WAIVE RIGHTS OR CLAIMS THAT MAY ARISE AFTER THE DATE OF THIS RELEASE, OR THAT ARISE EITHER BEFORE OR AFTER THE DATE OF THIS RELEASE, OUT OF CLAIMS FOR BENEFITS UNDER ANY EMPLOYEE PENSION, WELFARE, OR BENEFIT PLAN OR PROGRAM OF THE COMPANY OR AS A RESULT OF THE COMPANY'S BREACH OF THE CHANGE IN CONTROL AGREEMENT. With respect to any claim that Executive might have under the Age Discrimination in Employment Act of 1967, as amended: (i) The Executive's waiver of said rights or claims under the Age Discrimination in Employment Act of 1967 is in exchange for the consideration reflected in this Release; (ii) The Executive acknowledges that he has been advised in writing to consult with an attorney prior to executing this Release and that he has consulted with his attorney prior to executing this Release; (iii) The Executive acknowledges that he has been given a period of at least twenty-one (21) days within which to consider this Release; and (iv) The Executive and the Company agree that Executive has a period of seven (7) days following the execution of this Release within which to revoke the Release. Exhibit 1 The parties also acknowledge and agree that this Release shall not be effective or enforceable until the seven (7) day revocation period expires. The date on which this seven (7) day period expires shall be the effective date of this Release. The Executive further agrees, in consideration of receiving the payments and benefits provided for in the Change in Control Agreement, not to initiate or instigate any claims, causes of action or demands against the Company in any way directly or indirectly related to Executive's employment with the Company or the termination of his employment except for a breach of the Company's obligations under the Change in Control Agreement, and Executive agrees to reimburse, defend, and hold harmless the Company against any such claims, causes of action or demands. The Executive agrees that he or she will not seek, nor be entitled to, employment with the Company, and hereby waives any future right to consideration for employment by the Company. The Executive further agrees that if he or she seeks employment with the Company in violation of this Agreement and is hired, the Company shall have the right to immediately and unconditionally terminate his or her employment without any reason and without recourse by Executive. The Executive understands that as used in this Release, the "Company" includes its past, present and future officers, directors, trustees, shareholders, parent corporations, employees, agents, subsidiaries, affiliates, distributors, successors, and assigns, any and all employee benefit plans (and any fiduciary of such plans) sponsored by the Company, and any other persons related to the Company. Virgil E. Underwood Date WITNESS: EX-13 8 LILLY INDUSTRIES, INC. 1999 ANNUAL REPORT Selected Financial data1 (in thousands, except per share data and number of employees) Lilly Industries, Inc. and Subsidiaries SELECTED FINANCIAL DATA (1) (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF EMPLOYEES)
Year Ended November 30 1999 1998 1997 1996 (2) - ------------------------------------------------------------------------------------------------------------ Operations Net sales $656,201 $619,002 $601,296 $508,976 Cost of products sold 401,286 379,641 373,015 321,748 Gross margin percentage 38.8% 38.7% 38.0% 36.8% Selling, general and administrative expenses 160,861 146,763 139,467 112,361 Research and development expenses 21,154 20,567 18,680 17,294 Operating income 72,900 72,031 70,134 57,573 Operating income percentage 11.1% 11.6% 11.7% 11.3% Interest expense, net 15,791 16,919 18,967 13,938 Income taxes 23,155 22,867 23,068 11,039 Effective income tax rate 41.0% 42.0% 45.1% 45.0% Net income 33,321 31,579 28,095 24,060 EBITDA (3) 93,202 91,389 92,120 73,233 EBITDA interest coverage (4) 5.9 5.4 4.9 5.3 Per Share Data (5) Net income, diluted 1.43 1.35 1.20 1.04 Cash dividends .32 .32 .32 .32 Book value 8.28 7.15 6.21 5.36 Price range of common stock 20 1/8-13 1/8 24 5/8-14 3/8 24 1/8-163/4 19 3/4-12 1/4 Other Data Total assets 550,426 516,485 501,795 521,860 Working capital 48,720 50,071 52,126 50,579 Capital expenditures (6) 41,472 17,015 12,673 19,233 Depreciation 10,391 9,102 8,850 6,453 Amortization 10,544 10,922 13,140 9,097 Total debt 206,803 203,700 224,171 261,561 EBITDA to total debt 45.1% 44.9% 41.1% 28.0% Book value 192,171 165,575 142,439 121,889 Return on equity 18.6% 20.5% 21.3% 20.8% Debt to total capitalization 52% 55% 61% 68% Number of employees 2,395 2,291 2,116 2,140 Sales per employee 274 270 283 274 Operating income per employee 30 31 33 31 Average shares outstanding, diluted (7) 23,320 23,400 23,400 23,100
1 This table of Selected Financial Data should be read in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition and the Company's consolidated financial statements included herein. 2 1996 includes the effect of the acquisition of Guardsman Products, Inc. on April 8, 1996 and excludes the effect of a restructuring charge of $9,607 which reduced net income by $5,284 or $.23 per diluted share. 3 EBITDA represents earnings before interest, taxes, depreciation and amortization. 4 EBITDA interest coverage is determined by dividing EBITDA by net interest expense. 5 Adjusted for all stock splits and stock dividends through November 30, 1999 inclusive. Prices are rounded to nearest 1/8th. 6 Excludes effect of acquisitions. 7 Used to calculate net income per diluted share.
1995 1994 1993 1992 1991 1990 1989 -------------------------------------------------------------------------------------------- Operations Net sales $328,345 $331,306 $284,325 $236,476 $220,508 $240,146 $219,713 Cost of products sold 219,899 214,809 189,111 152,480 150,669 161,626 145,592 Gross margin percentage 33.0% 35.2% 33.5% 35.5% 31.7% 32.7% 33.7% Selling, general and administrative expenses 59,874 61,498 53,319 50,128 46,921 50,404 44,113 Research and development expenses 13,184 12,982 12,325 11,030 10,606 10,814 9,708 Operating income 35,388 42,017 29,570 22,838 12,312 17,302 20,300 Operating income percentage 10.8% 12.7% 10.4% 9.7% 5.6% 7.2% 9.2% Interest expense, net 1,487 2,465 1,568 1,245 2,254 2,573 1,111 Income taxes 13,510 16,350 11,784 9,201 4,417 6,850 8,399 Effective income tax rate 40.0% 41.2% 42.2% 42.0% 41.0% 40.6% 40.6% Net income 20,264 23,302 16,155 12,706 6,357 10,022 12,574 EBITDA (3) 43,435 51,082 36,394 29,944 19,994 26,117 26,670 EBITDA interest coverage (4) 29.2 20.7 23.2 24.1 8.9 10.2 24.0 Per Share Data (5) Net income, diluted .88 1.00 .70 .55 .27 .41 .51 Cash dividends .31 .27 .24 .22 .21 .20 .17 Book value 4.86 4.38 3.60 3.16 3.16 3.10 3.00 Price range of common stock 15-11 18-11 3/4 15 7/8-9 3/8 9 3/4-5 5/8 6 1/8-4 1/8 7 5/8-4 7 1/8-5 3/8 Other Data Total assets 183,582 190,252 167,044 117,049 127,342 125,371 129,025 Working capital 35,505 41,604 33,270 27,131 30,405 34,513 40,389 Capital expenditures (6) 15,599 6,693 7,598 3,262 1,928 3,968 2,486 Depreciation 4,251 4,637 3,746 3,965 4,038 4,021 3,387 Amortization 3,923 4,328 3,141 2,827 2,928 2,651 1,199 Total debt 28,229 35,110 44,101 14,642 21,501 28,345 25,560 EBITDA to total debt 153.9% 145.5% 82.5% 204.5% 93.0% 92.1% 104.3% Book value 109,374 99,424 81,128 70,125 74,187 73,185 74,482 Return on equity 19.4% 25.8% 21.4% 17.6% 8.6% 13.6% 17.9% Debt to total capitalization 21% 26% 35% 17% 22% 28% 26% Number of employees 1,148 1,182 1,176 1,072 1,140 1,230 1,350 Sales per employee 282 281 253 214 186 186 174 Operating income per employee 30 36 26 21 10 13 16 Average shares outstanding, diluted (7) 23,086 23,231 22,962 23,048 23,521 24,738 25,043
Management's Discussion and Analysis of Results of Operations and Financial Condition Operating Results 1999 vs. 1998 Consolidated net sales increased 6% to a record $656.2 million for fiscal year 1999. Sales benefited from strong volume increases, particularly in wood and metal coatings. Wood coatings increased in all major markets served, with especially strong growth in the Asia-Pacific Region. Metal coatings sales were led by continued large increases in powder coatings. The Company's international sales, including U.S. exports, grew $27.3 million to $176.6 million during 1999, representing growth of 18.3% over 1998. International sales now account for 27% of consolidated sales. Sales to the Company's three end-use markets (wood, metal and composites and glass) represented 46%, 43%, and 11% of 1999 consolidated sales, respectively. Overall, selling prices were stable during the year. Gross profit margin improved slightly to 38.8% of sales in 1999, rising 0.1 percentage point over 1998. Raw material costs are the largest component of the Company's cost structure. Continued emphasis on supply chain management, raw material consolidation, as well as favorable pricing in certain commodity markets, produced a 0.2 percentage point reduction in raw material costs as a percentage of net sales. Improvements in raw material costs were partially offset by a slight increase in direct labor and overhead costs. The Company will continue to pursue improvement in gross margin by reducing the number of raw materials used in products, process re-engineering, company-wide purchasing opportunities, and product re-formulations. As a percentage of sales, operating expenses increased 0.7 percentage points to 27.7%. Selling, general and administrative expenses, as a percentage of sales, increased 0.8 percentage points to 24.5%, primarily due to continued investments in selling, marketing and other infrastructure enhancements, as the Company continues to focus on global expansion and capturing additional market share in certain markets. Research and development expense increased by $0.6 million to $21.2 million for 1999. Net interest expense continued to decline during 1999, falling $1.1 million to $15.8 million, a decrease of 6.7%. The reduction in interest expense reflects improved cash management practices coupled with lower average market rates of interest, which reduced the cost of borrowing under the Company's variable rate debt facilities. The Company's effective tax rate declined one full percentage point to 41.0% for 1999, due primarily to a full year's impact of U.S. state and international tax planning strategies. The effective tax rate remained above U.S. statutory rates principally due to the impact of non-deductible amortization of intangibles acquired as part of the Guardsman Products, Inc. ("GPI") acquisition in 1996, and generally higher foreign tax rates. Operating Results 1998 vs. 1997 Consolidated net sales increased 2.9% to a record $619.0 million for fiscal year 1998, despite a $10 million unfavorable impact from foreign currency translations. Sales benefited from the December, 1997 acquisition in Germany of Merckens Lackchemie GmbH & Company. The acquisition helped boost the Company's international sales, including U.S. exports, to $149.3 million during 1998, representing growth of 18.0% over 1997. During 1998, Lilly experienced volume growth in each of its end-use markets. Sales to the Company's three end-use markets (wood, metal, and composites and glass) represented 44%, 44%, and 12% of 1998 consolidated sales, respectively. Overall, selling prices were stable during the year. Gross profit margin continued to improve in 1998, rising 0.7 percentage points over 1997 to 38.7%. Raw material costs are the largest component of the Company's cost structure. However, continued emphasis on supply chain management, as well as favorable pricing in certain commodity markets, produced a 1.1% reduction in raw material costs as a percentage of net sales. Improvements in raw material costs were partially mitigated by a slight increase in direct labor and overhead costs. The Company will continue to pursue improvement in gross margin by reducing the number of raw materials used in products, process re-engineering, company-wide purchasing opportunities and product re-formulations. As a percentage of sales, operating expenses increased 0.7 percentage points to 27.0%. Selling, general and administrative expenses, as a percentage of sales, increased from 23.2% to 23.7%, primarily due to increased marketing initiatives. In addition, the Company made record expenditures on research and development, which rose 10.1% to $20.6 million. Net interest expense declined significantly during 1998, falling $2.0 million, reflecting the benefits of the Company's 1997 debt restructuring and lower average debt outstanding. Continued strong cash flow from operations allowed the Company to reduce average debt outstanding during 1998, while lower average market rates of interest reduced the cost of borrowing under the Company's variable rate debt facilities. The improvement in interest expense was partially offset by additional interest expense associated with borrowings to finance the Company's acquisition in Germany in December, 1997. The Company's effective tax rate declined significantly to 42.0% during 1998, due primarily to implementation of international tax planning strategies. The effective tax rate remained above U.S. statutory rates, primarily due to the impact of non-deductible intangibles acquired as part of the GPI acquisition in 1996 and generally higher foreign tax rates. Environmental The Company's operations, like those of most companies in the coatings industry, are subject to regulations related to maintaining or improving the quality of the environment. Such regulations, along with the Company's own internal compliance efforts, have required, and will continue to require, ongoing expenditures. Spending for environmental compliance is not anticipated to be material to the Company's financial position. The Company has been notified that it is a potentially responsible party for clean-up costs with respect to several government investigations at independently operated waste disposal sites previously used by the Company. Management has accrued, as appropriate, for these environmental liabilities. Management believes the liabilities associated with these sites will not have a material adverse effect on its operating results or financial position. Year 2000 The Company completed all Year 2000 ("Y2K") readiness procedures during 1999 and did not experience any significant adverse effects on its systems or operations from the transition to Y2K. All critical IT systems were inventoried and assessed, and replacement of non-conforming IT systems began in 1998 and was completed in 1999. The Company estimates the total cost of resolving the Y2K issue was $5 million. Of this amount, the Company estimates $2 million was spent during fiscal year 1999. Approximately 70% of total Y2K costs were comprised of equipment and software replacement costs with the balance being comprised of assessment and remediation costs. Y2K costs were expensed as incurred except for new systems and equipment, which were capitalized and will be charged to expense over the estimated useful life of the related assets. Liquidity and Capital Resources During fiscal 1999, the Company continued to maintain a $175 million revolving credit facility ("Facility") and $100 million in senior notes ("Notes"). Both the Facility and the Notes are unsecured and require no principal amortization. The remaining terms on the Facility and Notes are three and eight years, respectively, as of November 30, 1999. During fiscal 1998, the Company's German subsidiary entered into a five-year, Deutsche Mark-denominated $10,000,000 revolving credit facility ("German Facility") to fund the German acquisition. The German Facility is unsecured. Principal amounts available for borrowing under the German Facility decline over the five-year term of the agreement. Management expects to fund required debt service on all borrowings from operating cash flows. The Company's total debt increased during 1999 by $3.1 million to a total of $206.8 million. The relatively low increase was mainly a result of capital investments in infrastructure expansion and improvements. Additional amounts available for borrowing under the Facility for general operating or other purposes totaled $74.9 million as of November 30, 1999. Management believes funds available from internal and external sources are sufficient to meet the liquidity needs of the Company during the next twelve months. Cash provided by operating activities declined by $16.5 million to $38.7 million during 1999. Higher net income was offset by the cash effect of changes in certain operating assets and liabilities including increases in accounts receivable and inventories to support higher sales levels. Cash used by investing activities increased by $17.2 million to $42.1 million during 1999. The increase was driven by a $24.5 million increase in capital expenditures primarily offset by a decrease of $8.5 million in payments for acquired businesses. Future investing activities are expected to be financed from internal sources and existing credit facilities. Cash used by financing activities decreased by $22.9 million to $4.2 million during 1999. Cash dividend payments of $7.4 million during 1999 remained the same as 1998 while long term borrowings increased by $3.1 million. In 1998 principal payments exceeded borrowings by $20.5 million. The Company focuses on three key measures of liquidity and access to capital markets: EBITDA (earnings before interest, taxes, depreciation and amortization); Interest Coverage (EBITDA divided by net interest expense); and Debt Capitalization (debt divided by the sum of debt plus equity). For 1999, the Company generated EBITDA of $93.2 million, an increase of $1.8 million over 1998. Interest Coverage improved to 5.9 times, due primarily to reduced interest expense associated with lower average borrowings and generally lower market rates of interest. Debt Capitalization improved 3.4 percentage points to 51.8% due to a relatively stable debt level and higher net income retained in the business during 1999. Forward-looking statements Statements in this annual report that are not strictly historical may be "forward-looking statements," which involve risks and uncertainties. Risk factors include general economic and industry conditions, effects of leverage, environmental matters, technological developments, product pricing, raw material cost changes, and international operations, among others, which are set forth in the Company's SEC filings. Consolidated Statements of Income (in thousands, except per share data)
Year Ended November 30 1999 1998 1997 - ------------------------------------------------------------------------------------------ Net sales $ 656,201 $ 619,002 $ 601,296 Costs and expenses: Cost of products sold 401,286 379,641 373,015 Selling, general and administrative 160,861 146,763 139,467 Research and development 21,154 20,567 18,680 ---------------------------------------- 583,301 546,971 531,162 ---------------------------------------- Operating income 72,900 72,031 70,134 Other expenses: Sundry expense (633) (666) (4) Interest expense, net (15,791) (16,919) (18,967) ---------------------------------------- (16,424) (17,585) (18,971) ---------------------------------------- Income before income taxes 56,476 54,446 51,163 Income taxes 23,155 22,867 23,068 ---------------------------------------- Net income $ 33,321 $ 31,579 $ 28,095 ======================================== Net income per share: Basic $ 1.44 $ 1.36 $ 1.22 Diluted $ 1.43 $ 1.35 $ 1.20
See accompanying notes. Consolidated Balance Sheets (in thousands)
November 30 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 5,714 $ 13,326 Accounts receivable, less allowance for doubtful accounts (1999, $1,775; 1998, $1,981) 91,369 82,039 Inventories 58,500 50,796 Deferred income taxes 2,848 3,251 Other 3,426 2,620 ------------------------- Total current assets 161,857 152,032 Other assets: Goodwill, less amortization (1999, $27,769; 1998, $21,547) 210,811 214,960 Other intangibles, less amortization (1999, $23,129; 1998, $22,621) 23,067 26,068 Deferred income taxes 3,974 8,838 Sundry 18,781 12,419 ------------------------- 256,633 262,285 Property and equipment: Land 13,872 11,845 Buildings 75,232 62,725 Equipment 110,610 87,787 Accumulated depreciation (67,778) (60,189) ------------------------- 131,936 102,168 ------------------------- $ 550,426 $ 516,485 ========================= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 60,317 $ 56,958 Salaries and payroll related items 20,975 21,624 Other 27,293 21,651 Income taxes payable 4,552 1,728 ------------------------- Total current liabilities 113,137 101,961 Long-term debt 206,803 203,700 Other liabilities 38,315 45,249 Shareholders' equity: Capital stock, $.55 stated value per share: Class A (limited voting) - 27,969 shares issued (1998, 27,825 shares) 15,539 15,459 Class B (voting) - 540 shares issued 300 300 Additional capital 83,833 81,890 Retained earnings 133,807 107,914 Accumulated other comprehensive loss (3,509) (4,096) Cost of capital stock in treasury (37,799) (35,892) ------------------------- 192,171 165,575 ------------------------- $ 550,426 $ 516,485 =========================
See accompanying notes. Consolidated Statements of Cash Flows (in thousands)
Year Ended November 30 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- Operating Activities Net income $ 33,321 $ 31,579 $ 28,095 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 10,391 9,102 8,850 Amortization 10,544 10,922 13,140 Deferred income taxes 5,267 209 4,085 Changes in operating assets and liabilities net of effects from acquired business: Accounts receivable (9,162) (422) 4,581 Inventories (7,680) (2,574) 1,842 Accounts payable and accrued expenses 11,101 5,985 2,933 Sundry (15,044) 418 (4,226) ------------------------------------- Net cash provided by operating activities 38,738 55,219 59,300 Investing Activities Purchases of property and equipment (41,472) (17,015) (12,673) Payment for acquired business (2,721) (11,253) - Sundry 2,052 3,367 5,716 ------------------------------------- Net cash used by investing activities (42,141) (24,901) (6,957) Financing Activities Dividends paid (7,428) (7,410) (7,340) Proceeds from senior notes - - 99,200 Proceeds from short-term and long-term borrowings 3,103 - - Principal payments on short-term and long-term borrowings - (20,470) (136,590) Sundry 116 809 (4,324) ------------------------------------- Net cash used by financing activities (4,209) (27,071) (49,054) ------------------------------------- (Decrease) increase in cash and cash equivalents (7,612) 3,247 3,289 Cash and cash equivalents at beginning of year 13,326 10,079 6,790 ------------------------------------- Cash and cash equivalents at end of year $ 5,714 $ 13,326 $ 10,079 =====================================
See accompanying notes. Consolidated Statements of Shareholders' Equity (in thousands)
Cost of Accumulated Class A Class B Capital Other Common Common Additional Retained Stock in Comprehensive Stock Stock Capital Earnings Treasury Income (Loss) Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 1, 1996 $15,103 $ 300 $ 75,433 $ 62,990 $ (32,025) $ 88 $ 121,889 Comprehensive income: Net income -- -- -- 28,095 -- -- 28,095 Currency translation adjustments -- -- -- -- -- (2,342) (2,342) ---------- Total comprehensive income -- -- -- -- -- -- 25,753 Stock options exercised 272 -- 3,834 -- (2,119) -- 1,987 Disqualifying disposition of stock options -- -- 150 -- -- -- 150 Cash dividends paid -- -- -- (7,340) -- -- (7,340) ------------------------------------------------------------------------------------- Balance at November 30, 1997 15,375 300 79,417 83,745 (34,144) (2,254) 142,439 Comprehensive income: Net income -- -- -- 31,579 -- -- 31,579 Currency translation adjustments -- -- -- -- -- (1,842) (1,842) ---------- Total comprehensive income -- -- -- -- -- -- 29,737 Stock options exercised 84 -- 1,820 -- (1,018) -- 886 Disqualifying disposition of stock options -- -- 653 -- -- -- 653 Cash dividends paid -- -- -- (7,410) -- -- (7,410) Repurchase of common stock -- -- -- -- (730) -- (730) ------------------------------------------------------------------------------------- Balance at November 30, 1998 15,459 300 81,890 107,914 (35,892) (4,096) 165,575 Comprehensive income: Net income -- -- -- 33,321 -- -- 33,321 Currency translation adjustments -- -- -- -- -- 587 587 ---------- Total comprehensive income -- -- -- -- -- -- 33,908 Stock options exercised 80 -- 1,870 -- (1,421) -- 529 Disqualifying disposition of stock options -- -- 73 -- -- -- 73 Cash dividends paid -- -- -- (7,428) -- -- (7,428) Repurchase of common stock -- -- -- -- (486) -- (486) ------------------------------------------------------------------------------------- Balance at November 30, 1999 $15,539 $ 300 $ 83,833 $ 133,807 $ (37,799) $ (3,509) $ 192,171 =====================================================================================
See accompanying notes. Notes to Consolidated Financial Statements November 30, 1999 1. Summary of Significant Accounting Policies Business. Lilly Industries, Inc. and its subsidiaries (the "Company") are principally in the business of formulating, manufacturing, and marketing industrial coatings and specialty chemicals to original equipment manufacturers on a worldwide basis. Primary manufacturing operations are located in North America, Europe and Asia-Pacific. The Company operates within three business segments which serve three end-use markets. Consolidation and Use of Estimates. The consolidated financial statements include the accounts of all subsidiaries after elimination of significant intercompany accounts and transactions. Preparation of these statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition. Revenue from sales of products is recognized at the time products are shipped to the customer. Cash Equivalents. Cash equivalents include time deposits and certificates of deposit with original maturities of three months or less. Inventories. Coatings inventories in the United States are stated at the lower of cost, determined by the last-in, first-out (LIFO) method, or market. All other inventories are stated at the lower of cost, determined by the first-in, first-out (FIFO) method, or market. Intangible Assets. Goodwill, which represents the excess of cost over fair value of net assets of purchased businesses, is amortized by the straight-line method over periods ranging from 20 to 40 years. Other intangible assets consist of noncompete agreements, customer lists and technology and are amortized by the straight-line method over periods ranging from 5 to 20 years. The Company periodically evaluates the carrying value of intangible assets to determine if an impairment has occurred. This evaluation is based on various analyses including reviewing anticipated cash flows. Property and Equipment. Property and equipment is recorded on the basis of cost and includes expenditures for new facilities and items which substantially increase the useful life of existing buildings and equipment. Depreciation is based on estimated useful lives (ranging from 3 to 45 years) and computed primarily by the straight-line method. Interest-Rate Swap Agreements. The Company periodically enters into interest rate swap agreements ("Swaps") to modify the interest characteristics of its outstanding debt. Swap agreements involve the exchange of floating rate and fixed rate interest payment flows between or among counterparties, including the Company, banks and / or other financial intermediaries. Such flows are calculated based upon a predetermined notional principal amount over the life of the Swaps. The notional amount of each Swap represents all or a portion of the principal balance of the Company's underlying debt obligation(s). The differential to be paid or received is accrued and recognized as an adjustment of interest expense. Reclassifications. Certain prior year amounts in the accompanying financial statements have been reclassified to conform with the current year presentation. 2. New Accounting Standards Effective December 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement establishes new rules for the reporting and display of comprehensive income and its components. The Company has reported, in addition to net income, the components of other comprehensive income in its consolidated statements of shareholders' equity. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. Implementation of this disclosure standard had no impact on the Company's financial position or results of operations. Effective November 30, 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Statement 131 requires public business enterprises to report information about operating segments in annual financial statements and selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of this statement did not affect the Company's financial position or results of operations. Effective December 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." Statement 132 revises the disclosure requirements for employers' pensions and other retiree benefits. Implementation of this disclosure standard did not affect the Company's financial position or results of operations. Effective December 1, 1998, the Company adopted the American Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires capitalization of certain costs incurred in the development of internal-use software, including external direct material and service costs, employee payroll and payroll-related costs, and capitalized interest. Prior to adoption of SOP 98-1, the Company expensed certain of these costs as incurred. The effect of the adoption of this statement on consolidated earnings during the current period is immaterial. 3. Inventories The principal inventory classifications at November 30 are summarized as follows (in thousands): 1999 1998 - -------------------------------------------------------------------------------- Finished products $33,628 $29,761 Raw materials 30,048 27,411 ------------------ 63,676 57,172 Less adjustment of certain inventories to LIFO basis 5,176 6,376 ------------------ $58,500 $50,796 ================== Inventory cost is determined by the LIFO method of inventory valuation for approximately 61% and 64% of inventories at November 30, 1999 and 1998, respectively. 4. Long-Term Debt Long-term debt consists of the following as of November 30 (in thousands): 1999 1998 - -------------------------------------------------------------------------------- 7.75% Unsecured Senior Notes $100,000 $100,000 Revolving Credit Facility 100,100 93,700 German Credit Facility 6,703 10,000 -------------------------- $206,803 $203,700 ========================== In February 1998, the Company's German subsidiary ("Subsidiary") entered into an unsecured Deutsche Mark ("DEM") denominated revolving credit facility ("German Facility") with a bank. The maximum borrowings available under the German Facility are $6,703,000 until November 29, 2000; thereafter, $4,460,000 until November 29, 2001; thereafter, $2,060,000 until maturity of the German Facility in February, 2003. German Facility advances of greater than $52,000 bear interest, at the Subsidiary's option, at either (i) the money market rate of the bank's German affiliate, or (ii) the Frankfurt, Germany Interbank Offered Rate for DEM deposits plus an interest rate margin of between 0.40% and 0.80%, depending on the Subsidiary's leverage at the time of each borrowing. Other advances bear interest at the prime rate of the bank's German affiliate. The principal of the German Facility is due upon maturity in February, 2003. In November 1997, the Company restructured its long-term debt into a $175,000,000 revolving credit facility ("Facility") with a group of financial institutions and $100,000,000 of senior notes ("Notes"). The Notes were issued as a 144A private placement offering and were subsequently registered. The Facility is unsecured and provides for borrowings under a revolving note. Interest is payable upon maturity of each revolving advance under the Facility, but in no case less frequently than quarterly. The principal of the Facility is due in October, 2002. The Notes are unsecured. Interest is payable on June 1 and December 1 of each year the Notes are outstanding. The principle of the Notes is due December, 2007. The Facility bears interest, at the Company's option, (i) the higher of the agent bank's prime rate (8.50% at November 30, 1999) or the Federal Funds rate plus 0.50% or, (ii) the London Interbank Offered Rate for U.S. Dollars plus 0.30% to 0.75%, depending upon the Company's credit rating. A commitment fee ranging from 0.10% to 0.25%, depending upon the Company's credit rating, is payable on the unused portion of the Facility. In April 1996, the Company entered into a forty-four month amortizing interest rate swap agreement with a notional amount of $175,000,000. This agreement expired November 30, 1999. This agreement effectively converted a portion of the Facility from variable rate debt to fixed rate debt. Interest of $15,818,000, $12,369,000 and $20,628,000 was paid in fiscal 1999, 1998 and 1997, respectively. The Company is subject to various debt covenants under the German Facility, Facility and Notes, including affirmative and negative covenants which require the maintenance of certain ratios for maximum leverage, fixed charge coverage and interest coverage. Additionally, such covenants place certain restrictions on the Company's ability to engage in mergers and acquisitions and incur additional indebtedness. 5. Income Taxes Income tax expense for the years ended November 30 is comprised of the following components (in thousands): 1999 1998 1997 - -------------------------------------------------------------------------------- Current expense: Federal $ 8,942 $ 12,757 $ 10,612 Foreign 8,126 7,290 7,674 State 820 2,358 697 ----------------------------------------- 17,888 22,405 18,983 Deferred expense (credit): Federal 4,334 593 2,818 Foreign 384 (139) 210 State 549 8 1,057 ----------------------------------------- 5,267 462 4,085 ----------------------------------------- $ 23,155 $ 22,867 $ 23,068 ========================================= A reconciliation of the statutory U.S. federal rate to the effective income tax rate for the years ended November 30 is as follows:
1999 1998 1997 - --------------------------------------------------------------------------------------------- Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% Increase resulting from: Goodwill 3.5 3.6 3.9 State income taxes, net of federal income tax benefit 1.6 2.8 2.3 Foreign 1.3 1.8 2.2 Other items (.4) (1.2) 1.7 ---------------------------- Effective income tax rate 41.0% 42.0% 45.1% ============================
Deferred income taxes are recorded based upon differences between the financial statement and tax basis of assets and liabilities. The deferred tax assets and liabilities recorded on the balance sheet at November 30 are as follows (in thousands): 1999 1998 - -------------------------------------------------------------------------------- Deferred tax assets: Goodwill and intangibles $ 1,121 $ 1,279 Employee benefits 5,812 5,565 Accounts receivable, inventory and other 11,051 13,839 ------------------ 17,984 20,683 Deferred tax liabilities: Property and equipment 6,582 5,526 Pension 4,580 3,068 ------------------ 11,162 8,594 ------------------ Net deferred tax assets $ 6,822 $12,089 ================== No provision has been made for U.S. federal income taxes on certain undistributed earnings of foreign subsidiaries that the Company intends to permanently invest or that may be remitted tax-free. The total of undistributed earnings that would be subject to federal income tax if remitted under existing law is approximately $24,500,000 at November 30, 1999. Determination of the unrecognized deferred tax liability related to these earnings is not practicable because of the complexities with its hypothetical calculation. Upon distribution of these earnings, the Company will be subject to U.S. taxes and withholding taxes payable to various foreign governments. A credit for foreign taxes already paid would be available to reduce the U.S. tax liability. Income taxes of $16,600,000, $21,800,000 and $20,500,000 were paid in 1999, 1998 and 1997, respectively. 6. Capital Stock The Company has two classes of common stock, Class A stock and Class B stock. Authorized shares of Class A and Class B stock are 97,000,000 and 3,000,000, respectively. The limited voting rights of Class A shareholders are equal to voting rights of Class B shareholders only with regard to voting for merger, consolidation or dissolution of the Company and voting and electing four directors of the Company if there are ten or more directors and two directors if there are nine or fewer directors. With respect to all rights other than voting, Class A shareholders are the same as Class B shareholders. The terms of the Class B stock, which is held only by employees, provide that these shares be exchanged for Class A stock on a share-for-share basis when the shareholder ceases to be an employee or decides to dispose of the shares. Accordingly, 3,000,000 shares of authorized Class A stock are reserved for this purpose. On January 12, 1996, the Company's board of directors ("Board") declared a dividend of one purchase right for each outstanding share of Class A and Class B stock. In addition, one right is distributed for each share issued after January 26, 1996. Upon exercise, each right entitles holders to purchase from the Company one share of stock at $55 per share, subject to certain adjustments. The rights become exercisable when a person or group acquires beneficial ownership of 15 percent or more of Class A stock or becomes the beneficial owner of an amount of Class A stock (but not less than 10 percent) which the Board determines to be substantial and not in the Company's best long-term interests or following the announcement of a tender or exchange offer for 30% or more of the Class A stock. In the event a person acquires 15 percent or more of Class A stock, or is determined by the Board to be a substantial owner whose ownership is not in the Company's best long-term interests or an acquiring person engages in certain self-dealing transactions, each holder will have the right to receive that number of common shares having a market value of two times the exercise price of the right. At any time after a person becomes an acquiring person, but before such person acquires 50 percent or more of outstanding Class A stock, the Board may exchange each right for one common share (subject to adjustment). In the event the Company is involved in certain business combination transactions, or 50 percent or more of the Company's consolidated assets or earning power are sold, each holder will have the right to receive, upon exercise at the then-current exercise price of the right, that number of shares of common stock of the acquiring company having a market value of two times the exercise price of the right. The Company may redeem the rights at a price of $.01 per right at any time prior to the time a person or group becomes an acquiring person as defined by the rights agreement. The rights expire in January, 2006. A summary of shares issued and held in treasury follows (in thousands): Capital Stock Capital Stock Issued Held in Treasury Class A Class B Class A Class B - -------------------------------------------------------------------------------- Balance at December 1, 1996 27,184 540 4,810 191 Class A exchanged for Class B -- -- 106 (106) Class B exchanged for Class A -- -- (22) 22 Stock options exercised 490 -- 29 75 ------------------------------------- Balance at November 30, 1997 27,674 540 4,923 182 Class A exchanged for Class B -- -- 92 (92) Class B exchanged for Class A -- -- (9) 9 Acquisition for treasury -- -- 39 -- Stock options exercised 151 -- 37 12 ------------------------------------- Balance at November 30, 1998 27,825 540 5,082 111 Class A exchanged for Class B -- -- 36 (36) Class B exchanged for Class A -- -- (13) 13 Acquisition for treasury -- -- 32 -- Stock options exercised 144 -- 56 19 ------------------------------------- Balance at November 30, 1999 27,969 540 5,193 107 ===================================== Incentive stock option plans entitle certain directors, officers and other key employees to buy shares of Class A stock at prices not less than fair market value on the date of grant. The options vest and become exercisable ratably over a three-year period commencing two years after the date of grant and expire five or ten years after the date of grant. Certain options are granted with stock appreciation rights (SAR) and reload options. An SAR entitles the option holder to receive a cash payment equal to the difference between the option price and the current value of Class A stock. The reload option entitles the option holder to the same number of options exercised with an option price equal to the fair market value at the date of exercise. Shares reserved under these plans were 1,785,129 and 1,931,420 at November 30, 1999 and 1998, respectively. A summary of stock option activity for the years ended November 30 follows: Weighted Average Number of Exercise Shares Price - -------------------------------------------------------------------------------- Balance at December 1, 1996 1,212,290 $ 11.05 Grants 77,072 18.43 Exercised (489,610) 8.39 Terminated (10,250) 13.39 ------------------------ Balance at November 30, 1997 789,502 13.39 Grants 460,022 18.84 Exercised (151,233) 12.60 Terminated (37,975) 17.41 ------------------------ Balance at November 30, 1998 1,060,316 15.72 Grants 561,095 18.21 Exercised (146,291) 13.57 Terminated (80,230) 18.93 ------------------------ Balance at November 30, 1999 1,394,890 $ 16.76 ======================== At November 30, 1999 the range of exercise prices and weighted-average remaining contractual life of outstanding options were $12.25 - $21.63 and 6.8 years, respectively. At November 30, 1999 and 1998, the number of options exercisable was 342,000 and 340,000 respectively, and the weighted-average exercise price of those options was $13.32 and $13.49, respectively. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) permits companies to continue to apply APB Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its plans. The Company has elected to follow APB 25 and related Interpretations. Under APB 25, because the exercise price of the Company's employee stock options is not less than fair market price of the share at the date of grant, no compensation expense is recognized in the financial statements. Pro forma information regarding net income and net income per share is required by SFAS 123 and has been determined as if the Company accounted for its employee stock options using the fair value method of that statement. The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rate of 6.2%, 4.7%, and 5.8%; dividend yields of 1.9% for all years; volatility factors of the expected market price of the Company's Class A stock of .29, .27 and .30; and a weighted average expected life of options of 7 years, 5 years and 4 years. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the option's vesting period. Pro forma amounts may not be representative of the expected effects on pro forma net income or net income per share in future years. The Company's pro forma information follows (in thousands, except per share amounts): 1999 1998 1997 - -------------------------------------------------------------------------------- Net income: As reported $ 33,321 $ 31,579 $ 28,095 Pro forma 32,235 30,924 27,608 Net income per share: As reported $ 1.43 $ 1.35 $ 1.20 Pro forma 1.38 1.32 1.18 Weighted average fair value of options granted during the year $ 6.37 $ 5.76 $ 4.93 7. Net Income Per Share Basic and diluted net income per share are computed by dividing net income as reported by the average number of shares outstanding as follows (in thousands):
1999 1998 1997 - --------------------------------------------------------------------------------- Basic Weighted-average common shares outstanding 23,205 23,160 22,940 =========================== Diluted Weighted-average common shares outstanding 23,205 23,160 22,940 Dilutive effect of stock options 115 240 460 --------------------------- Average common shares outstanding assuming dilution 23,320 23,400 23,400 ===========================
8. Benefit Plans The Company maintains defined benefit retirement plans that cover substantially all employees. The change in benefit obligation, change in plan assets, funded status and amounts recognized in the consolidated balance sheets at November 30 for the Company's defined benefit plans were as follows (in thousands):
1999 1998 - -------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of the year $ 76,458 $ 82,542 Service cost 400 457 Interest cost 5,020 5,380 Amendments and termination -- 22 Actuarial gain (1,461) (8,085) Benefits paid (4,434) (3,858) ---------------------- Benefit obligation at end of year $ 75,983 $ 76,458 ====================== Change in plan assets: Fair value of plan assets at beginning of year $ 96,571 $ 88,594 Actual return on plan assets 7,061 11,830 Employer contribution 20 5 Benefits paid (4,434) (3,858) ---------------------- Fair value of plan assets at end of year $ 99,218 $ 96,571 ====================== Funded status: Funded status $ 23,235 $ 20,113 Unrecognized net actuarial gain (13,730) (15,317) Unrecognized prior service cost 4,329 4,813 Unrecognized transition asset (731) (933) ---------------------- Net amount recognized $ 13,103 $ 8,676 ====================== Amounts recognized in the consolidated balance sheet consisted of: Prepaid benefit cost $ 13,103 $ 8,676 ---------------------- Net amount recognized $ 13,103 $ 8,676 ====================== Components of net periodic benefit cost: Service cost $ 400 $ 457 Interest cost 5,020 5,380 Expected return on plan assets (9,684) (8,876) Amortization of prior service cost 484 -- Amortization of transition asset (202) (202) Recognized net actuarial gain (424) -- ---------------------- Net periodic benefit $ (4,406) $ (3,241) ====================== Weighted-average assumptions as of year end: Discount rate 6.75% 6.75% Expected return on plan assets 10.25% 10.25% Rate of compensation increase 4.00% 4.00%
Certain employees from one of the Company's German subsidiaries participate in a frozen defined benefit retirement plan. The liability related to this plan totaled $4,000,000 and $4,400,000 and the expense related to this plan was $440,000 and $402,000 at November 30, 1999 and 1998, respectively. Accumulated benefits for supplemental executive retirement plans totaled approximately $9,595,000 and $8,765,000 at November 30, 1999 and 1998, respectively. Expense related to this plan amounted to $1,431,000 and $1,321,000 for the years ended November 30, 1999 and 1998, respectively. The Company also has a defined contribution retirement plan to which the Company contributed and charged to expense approximately $4,692,000, and $4,113,000 for the years ended November 30, 1999 and 1998, respectively. 9. Segment Information Lilly formulates, manufactures and markets industrial coatings and specialty chemicals primarily to original equipment manufacturers on a worldwide basis. The Company operates within three business segments which serve three end-use markets: wood coatings; metal coatings; and composites and glass coatings. Products sold to these markets have similar economic characteristics, production processes, distribution methods and regulatory environments. Based on these similarities, the Company's products are aggregated into one reportable segment, Industrial Coatings and Specialty Chemicals, for purposes of this disclosure. The accounting policies of the reportable segment are the same as those described in the summary of significant accounting policies. Net sales of Industrial Coatings and Specialty Chemical products by end-use market are as follows (in thousands): 1999 1998 1997 - -------------------------------------------------------------------------------- Wood Coatings $297,741 $269,585 $262,816 Metal Coatings 284,463 274,951 268,826 Composites and Glass Coatings 73,997 74,466 69,654 -------------------------------------- $656,201 $619,002 $601,296 ====================================== The Company maintains operations in the United States, Australia, Canada, China, Germany, Ireland, Malaysia, Mexico, Singapore, Taiwan and the United Kingdom. A summary of geographic data for the years ended November 30 is as follows (in thousands): 1999 1998 1997 - -------------------------------------------------------------------------------- Net sales to unaffiliated customers: United States $ 504,875 $ 488,703 $ 491,973 Outside U.S., excluding U.S. exports 151,326 130,299 109,323 ------------------------------------ Consolidated $ 656,201 $ 619,002 $ 601,296 ==================================== Operating income: United States $ 48,473 $ 50,942 $ 51,150 Outside U.S. 24,427 21,089 18,984 ------------------------------------ Consolidated $ 72,900 $ 72,031 $ 70,134 ==================================== Total assets: United States $ 446,259 $ 430,081 $ 453,456 Outside U.S. 101,618 87,165 49,007 Eliminations (deductions) 2,549 (761) (668) ------------------------------------ Consolidated $ 550,426 $ 516,485 $ 501,795 ==================================== 10. Quarterly Results of Operations (Unaudited) Quarterly results of operations are summarized as follows (in thousands, except per share data): Quarter Ended 1999 February 28 May 31 August 31 November 30 - -------------------------------------------------------------------------------- Net sales $146,139 $171,375 $169,452 $169,235 Gross profit 56,056 67,118 64,229 67,512 Net income 5,584 9,627 8,677 9,433 Net income per share Basic .24 .41 .38 .41 Diluted .24 .41 .37 .41 Quarter Ended 1998 February 28 May 31 August 31 November 30 - -------------------------------------------------------------------------------- Net sales $143,334 $159,198 $159,345 $157,125 Gross profit 53,431 61,794 61,752 62,384 Net income 5,140 8,715 8,674 9,050 Net income per share Basic .22 .38 .37 .39 Diluted .22 .37 .37 .39 Report of Independent Auditors Shareholders and Board of Directors Lilly Industries, Inc. We have audited the accompanying consolidated balance sheets of Lilly Industries, Inc. and subsidiaries as of November 30, 1999 and 1998, and the related consolidated statements of income, cash flows and shareholders' equity for each of the three years in the period ended November 30, 1999. 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 auditing standards generally accepted in the United States. 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 Lilly Industries, Inc. and subsidiaries at November 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP January 14, 2000 Indianapolis, Indiana Responsibility for Financial Statements The management of Lilly Industries, Inc. is responsible for the preparation of the financial statements in the Annual Report and for the integrity and objectivity of the information presented. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States and necessarily include amounts which are estimates and judgments. The fairness of the presentation in these statements of the Company's financial position, results of operations, cash flows and shareholders' equity is reported on by the independent auditors. To assist in carrying out the above responsibility, the Company has internal systems which provide for selection of personnel, segregation of duties and the maintenance of accounting policies, systems, procedures and related controls. Although no cost-effective system can insure the elimination of errors, the Company's systems have been designed to provide reasonable but not absolute assurances that assets are safeguarded, that policies and procedures are followed, and that the financial records are adequate to permit the production of reliable financial statements. The Audit Committee of the Board of Directors, which is composed of directors who are not employees of the Company or its subsidiaries, meets regularly with Company officers and independent auditors in connection with the adequacy and integrity of the Company's financial reporting and internal controls. /s/ John C. Elbin /s/ Kenneth L. Mills John C. Elbin Kenneth L. Mills Vice President, Chief Financial Officer Corporate Controller and and Secretary Assistant Secretary Investor Information Form 10-K A copy of the Form 10-K, which is filed with the Securities and Exchange Commission, will be sent free to any shareholder upon written request. Contact Kenneth L. Mills, Corporate Controller and Assistant Secretary, at Lilly Industries, Inc. 200 W. 103rd Street Indianapolis, IN 46290; or E-mail: millsk@lillyindustries.com. Registrar and Transfer Agent Communications concerning shareholder records, including address changes, stock transfers, cash dividends or other service needs should be directed to National City Bank, Attn: Corporate Trust Operations, P. O. Box 92301, Cleveland, Ohio 44193-0900, (800) 622-6757. Dividend Reinvestment Plan A dividend reinvestment and voluntary stock purchase plan for Lilly Industries, Inc. shareholders permits purchase of the Company's Class A stock without payment of brokerage commission or service charge. Participants in this plan may have cash dividends on their shares automatically reinvested and, if they choose, invest by making optional cash payments. Additional information on the plan is available by writing or calling: National City Bank, Attn: Corporate Trust Operations, P. O. Box 92301, Cleveland, Ohio, 44193-0900 (800) 622-6757. Analyst Contacts Security analyst inquiries are welcomed. Please call: John C. Elbin, Vice President, Chief Financial Officer, and Secretary (317) 814-8700. Annual Meeting The meeting notice and proxy materials were mailed to shareholders with their copies of this annual report. Lilly urges all shareholders to vote their proxies and thus participate in the decisions that will be made at the annual meeting. The meeting will be held on March 31, 2000 at 10:00 A.M., EST, at the Company's corporate offices located at 200 W. 103rd Street, Indianapolis, Indiana. (317) 814-8700. Stock Trading and Dividend Information The Company's Class A stock is traded on the New York Stock Exchange under the symbol LI. Dividends are traditionally paid on the 1st business day of January, April, July and October to shareholders of record approximately three weeks prior. The following table sets forth the dividends paid per share of stock and the high and low prices in each of the quarters in the past two years ended November 30. Dividends Price Range Fiscal 1999 Per Share High Low - -------------------------------------------------------------------------------- 1st quarter ended February 28 $ .08 20 1/8 16 1/4 2nd quarter ended May 31 .08 19 3/8 14 3rd quarter ended August 31 .08 19 3/4 15 5/8 4th quarter ended November 30 .08 16 1/4 13 1/8 ------ $ .32 ====== Dividends Price Range Fiscal 1998 Per Share High Low - -------------------------------------------------------------------------------- 1st quarter ended February 28 $ .08 20 5/8 17 7/8 2nd quarter ended May 31 .08 22 3/4 17 3/4 3rd quarter ended August 31 .08 24 5/8 18 1/2 4th quarter ended November 30 .08 19 7/8 14 3/8 ------ $ .32 ====== At November 30, 1999 there were approximately 2,500 registered shareholders of Class A stock and 62 registered shareholders of Class B stock, which is reserved for employees of the Company. Locations International Australia 283 Alfred Street North Sydney, NSW 2060 Australia Canada 1915 Second Street West Cornwall, Ontario K6H 5T1 Canada 65 Duke Street London, Ontario N6J 2X3 Canada China Lot 3 Xintang District Administration Dalinshan, Dongguan Guangdon China 511774 England 152 Milton Park Abingdon Oxfordshire OX14 4SD England Germany D-8649 Wallenfels Postfach 1126 Germany Friedensstrasse 40 D-52249 Eschweiler Germany Ireland Willowfield Road Ballinamore Co. Leitrim Ireland Malaysia Lot No. 4963, Jalan Teratai 5H Miles Meru Industrial Zone 41050 Klang Selangor Darul Ehsan Malaysia Mexico Ave. Central No. 223 Los Lermas, Guadalupe N.L. Mexico 67190 Singapore 09-09 International Building 360 Orchard Road Singapore Taiwan, R.O.C. No. 1 Kung Yeh First Road Zenwu Village Kaohsiung Hsien Taiwan, R.O.C. United States Arkansas 1900 E. 145th Street Little Rock, AR 72206 California 210 East Alondra Blvd. Gardena, CA 90248 901 West Union Street Montebello, CA 90640 Connecticut 145 Dividend Road Rocky Hill, CT 06067 Florida 2355 S.W. 66th Terrace Davie, FL 33317 Illinois 5400 23rd Avenue Moline, IL 61265 Indiana 28335 Clay Street Elkhart, IN 46517 546 W. Abbott Street Indianapolis, IN 46225 Kentucky 347 Central Avenue Bowling Green, KY 42101 Michigan 411 Darling Street, N. Fremont, MI 49412 4999 36th Street, SE Grand Rapids, MI 49512 Missouri 1136 Fayette N. Kansas City, MO 64116 New Jersey 1991 Nolte Drive Paulsboro, NJ 08066 North Carolina 10300 Claude Freeman Drive Charlotte, NC 28262 2147 Brevard Road High Point, NC 27263 1717 English Road High Point, NC 27262 Texas 2518 Chalk Hill Road Dallas, TX 75212 Washington 13535 Monster Road Seattle, WA 98178 Corporate Offices 200 W. 103rd Street Indianapolis, Indiana 46290 Corporate Technology CenterOfficers 521 W. McCarty Street Indianapolis, Indiana 46225 Officers and Directors Douglas W. Huemme, 58 Chairman and Chief Executive Officer Robert A. Taylor, 45 President and Chief Operating Officer Hugh M. Cates, 56 Vice President and General Manager, Wood Coatings Larry H. Dalton, 52 Vice President, Manufacturing and Engineering Alain DeBlandre, 43 Vice President and Managing Director - Europe William C. Dorris, 56 Vice President, Corporate Development John C. Elbin, 46 Vice President, Chief Financial Officer and Secretary Ned L. Fox, 58 Vice President, Supply Chain Management A. Barry Melnkovic, 42 Vice President, Human Resources John D. Million, 57 Vice President and Managing Director, Asia-Pacific Kenneth L. Mills, 51 Corporate Controller and Assistant Secretary Gary D. Missildine, 58 Vice President and General Manager, Industrial Coatings Virgil E. Underwood, 48 Vice President and General Manager, Coil Coatings Keith C. Vander Hyde, Jr., 41 Vice President and General Manager, Specialty Jay M. Wiegner, 56 Vice President and General Manager, Composites and Glass Coatings Directors James M. Cornelius, Chairman, Guidant Corporation William C. Dorris, Vice President, Corporate Development John C. Elbin, Vice President, Chief Financial Officer and Secretary Paul K. Gaston, Former Chairman, Guardsman Products, Inc. Douglas W. Huemme, Chairman and Chief Executive Officer Harry Morrison, Ph.D., Dean, School of Science Purdue University Norma J. Oman, President and Chief Executive Officer Meridian Insurance Group, Inc. John D. Peterson, Chairman, City Securities Corporation Thomas E. Reilly, Jr., Chairman and Chief Executive Officer Reilly Industries, Inc. Robert A. Taylor, President and Chief Operating Officer EX-21 9 LIST OF SUBSIDIARIES Exhibit 21
SUBSIDIARIES OF LILLY INDUSTRIES, INC. AS OF FEBRUARY 14, 2000 Name of Subsidiary State of Incorporation - ------------------ ---------------------- 1. Lilly Industries (USA), Inc. Indiana 2. Lilly Industries (Asia), Limited Hong Kong 3. Lilly Industries (Australia) Pty Ltd. Australia (Subsidiary of Lilly Industries (USA), Inc.) 4. Lilly Industries (Cornwall) Limited Ontario, Canada (Subsidiary of Lilly Industries (USA), Inc.) 5. Lilly Industries (Ireland) Limited Ireland 6. Lilly Industries (Malaysia) Sdn.Bhd. Malaysia 7. Lilly Industries de Mexico, S.A. de C.V. Mexico 8. Lilly Industries, Inc.(Canada) Ontario, Canada 9. Lilly Industries (Far East), Ltd. Taiwan 10. Lilly Industries (Thailand), Limited Thailand 11. London Laboratories GmbH Germany (Subsidiary of Lilly Industries (USA), Inc.) 12. Merckens Lackchemie GmbH and Company KG Germany (Subsidiary of London Laboratories, GmbH) 13. Dongguan Lilly Paint Industries, Ltd. Peoples Republic of China (Subsidiary of Lilly Industries (Asia), Limited) 14. G.C.I. Insurance Company, Limited Bermuda (Subsidiary of Lilly Industries (USA), Inc.) 15. Lilly Industries (UK), LTD United Kingdom (Subsidiary of Lilly Industries (USA), Inc.) 16. Pinturas Dygo, S.A. de C.V. Mexico (Subsidiary of Lilly Industries de Mexico, S.A. de C.V.) 17. Lilly Technologies, Inc. Delaware 18. Lilly Industries, LLC. Indiana 19. Lilly Industries International, LTD Barbados 20. Lilly Industries (Shanghai) Limited Peoples Republic of China
EX-23 10 CONSENT OF ERNST & YOUNG LLP Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Lilly Industries, Inc. of our report dated January 14, 1999, included in the 1999 Annual Report to Shareholders of Lilly Industries, Inc. Our audits also included the financial statement schedule of Lilly Industries, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We further consent to the incorporation by reference in Registration Statements (Form S-8 Nos. 2-59159, 2-76317, 33-52954, 33-52956 pertaining to the Lilly Employees' Stock Purchase Plan, the Lilly Industries, Inc. Stock Option Plan, the Lilly Industries, Inc. 1991 Director Stock Option Plan, and the Lilly Industries, Inc. Employee 401(k) Savings Plan, respectively, and 33-52958 and 333-32205 pertaining to the Lilly Industries, Inc. 1992 Stock Option plan) of our report dated January 14, 1999, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Lilly Industries, Inc. /s/ Ernst & Young LLP Indianapolis, Indiana February 25, 1999 EX-27 11 FDS
5 (Replace this text with the legend) 0000059479 Lilly Industries, Inc. 1,000 U.S. Dollars YEAR NOV-30-1999 DEC-1-1998 NOV-30-1999 1.000 5,714 0 93,144 1,775 58,500 161,857 199,714 67,778 550,426 113,137 0 0 0 99,672 92,499 550,426 656,201 656,201 401,286 583,301 633 0 15,791 56,476 23,155 0 0 0 0 33,321 1.44 1.43
-----END PRIVACY-ENHANCED MESSAGE-----