-----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, O7RSQNPmKyXuNAhQYPzk9FGjhY4reeMz5K7bSpl8K2JTlfZvO4vThH1Y+RQpDs04 BDIje8ARvQ2J5uPj7ay7IA== 0000908834-97-000055.txt : 19970228 0000908834-97-000055.hdr.sgml : 19970228 ACCESSION NUMBER: 0000908834-97-000055 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970227 SROS: NYSE 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: 1934 Act SEC FILE NUMBER: 001-11553 FILM NUMBER: 97546199 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 [FEE REQUIRED] For the Fiscal Year ended November 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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.) 733 South West Street Indianapolis, Indiana 46225 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 317-687-6700 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Stock, without par value (Title of class) 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] Page 1 of Pages Exhibit Index on Page The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 13, 1997 was $408,000,000. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of February 13, 1997. 22,431,987 shares of Class A Common Stock, without par value 339,691 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, 1996 Part III: Items 10 Proxy Statement for Annual Meeting of through 13 Shareholders to be held April 24, 1997 2 PART I Item 1. Business. Business Description Lilly Industries, Inc. (referred to herein as "Lilly" or the "Company") was incorporated under the laws of the State of Indiana on December 5, 1888. The Company is principally in the business of formulating, producing and selling industrial coatings to manufacturing companies. The Company also markets various household furniture care and automotive aftermarket products. No one class of similar products (other than protective and decorative coatings) accounted for 10% or more of consolidated revenues of the Company in any of the last three fiscal years, and the Company has only one reportable industry segment. The Company employs approximately 2,140 people. On April 8, 1996 the Company acquired all the outstanding shares of Guardsman Products, Inc.("Guardsman") for $235 million in cash. Like the Company, Guardsman was in the business of formulating, producing and selling industrial coatings. Guardsman also marketed various household furniture care and automotive aftermarket products. The Company's principal products include wood coatings for furniture, building products and cabinets; coil coatings for building products, appliances and transportation equipment; specialty coatings for a variety of metal products and fiberglass reinforced products; powder coatings for a variety of metal products; glass coatings for mirrors; household furniture care products; and automotive aftermarket products. The Company manufactures its industrial coatings from a variety of resins, pigments, solvents and other chemicals, the bulk of which are obtained from petrochemical feed stocks. In addition, the Company uses 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. The Company's products are sold into industrial markets through a technical sales force of approximately 590 people. Some products are also sold through retail outlets or through distributors. The Company sold products to approximately 6,000 different industrial customers during 1996.(1) - -------- (1) References in this Form 10-K are references to the Company's fiscal years ended November 30, 1994, 1995 and 1996. 3 Most of the Company's customers are located throughout the United States and Canada, with remaining customers concentrated in Asia and Europe. No material part of the business is dependent on any single customer or a few customers, the loss of which would have a material adverse effect on the Company. During 1996, the Company's operations outside the United States accounted for approximately 17% of its total net sales. Information concerning the Company's net sales, pre-tax profit and assets in foreign countries and the United States for the three years ended November 30, 1996 is set forth in Note 9 in the Notes to Consolidated Financial Statements in the Company's 1996 Annual Report to Shareholders. Note 9 is incorporated herein by reference. 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 the development of new products and new manufacturing and application techniques. Research and development expenses were $17.3 million (3.4% of net sales),$13.2 million (4.0% of net sales), and $13.0 million (3.9% of net sales) for the years ended November 30, 1996, 1995 and 1994, 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. Although the Company holds several patents and trademarks and considers patent and trademark protection to be important from an overall standpoint, none are currently material (as a percent of total revenues) to the Company's business as a whole. The many patents and licenses for glass coatings are material to those specific products and new patents are continually being developed to replace older patents as they expire. The Company has no significant backlog of orders. No material part of the business is subject to renegotiation of profit or termination of contracts or subcontracts at the election of the Government. Historically, first quarter operating results are below operating results for the second, third and fourth quarters due to lower demand for the Company's products during this time period. 4 The industrial coatings industry is very competitive. There are more than 700 manufacturers of protective and decorative coatings in North America. Manufacturers are comprised of large international companies as well as small regional firms. No one manufacturer dominates. Competitive advantages include developing coatings that meet specific customer requirements, pricing those coatings competitively and delivering quality products on time. Industrial coatings manufacturers also need to keep pace with technological developments particularly as they relate to environmental demands. Lilly is among the five largest manufacturers of industrial coatings in North America based on annual sales to industrial customers. The Company is the leading supplier of residential wood furniture coatings and also has a strong presence in other product markets. Although Lilly is among the top five producers of industrial coatings, some competitors have far greater financial resources than the Company. The Company undertakes to comply with applicable laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment and the Company believes it is in substantial compliance with such federal, state and local provisions. Capital expenditures for this purpose were not material in fiscal 1996, and capital expenditures for this purpose are not anticipated to be material for 1997. In addition, like most companies in the paint and coatings industry, the Company has been named as a potentially responsible party (a "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 or may be incurred under the Federal Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes. While the Company is not usually a major contributor of wastes to these sites, each contributor may face agency assertions of joint and several liability. Generally, however, a final allocation of costs is made based on relative contributions of wastes to the site. The Company also, from time to time, conducts or participates in remedial investigations and clean-up activities at currently and formerly occupied facilities. The Company is continually assessing its environmental matters and establishing reserves to handle these matters as they arise. The Company's experience to date leads it to believe that 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 that such expenditures will not have a material adverse effect on operating results or the financial condition of the Company as a whole. 5 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 Larry H. Dalton 49 Vice President - Operations and Manufacturing since July, 1994; General Manager of the Company's Indianapolis Division from prior to 1992 to July, 1994. William C. Dorris 53 Director since 1989; Vice President - Corporate Development since July, 1994; General Manager of the Company's High Point Division from prior to 1992 to July, 1994; of the Company's Templeton Division from prior to 1992 to July, 1994; and of the Company's Dallas Division from 1993 to July, 1994. Douglas W. Huemme 55 Director since 1990; Chairman, President and Chief Executive Officer of the Company since prior to 1992. A. Barry Melnkovic 39 Vice President - Human Resources since April, 1996; Director, Corporate Employee & Labor Relations and Director Corporate Compensation and Benefits, Cummins Engine Company, Inc., August, 1993 to February, 1996; Division Human Resource Manager, Ashland Chemical, Inc. from prior to 1992 to August, 1993. Kenneth L. Mills 48 Assistant Secretary since prior to 1992; Treasurer from prior to 1992 until October, 1993; Corporate Accounting Director since October, 1993. Each executive officer will serve as such until his successor is chosen and qualified. No family relationships exist among the Company's executive officers. 6 Item 2. Properties. The Company has 31 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 (2 locations) 296,000 Grand Rapids, Michigan 165,000 Fremont, Michigan 120,000 North Kansas City, Missouri 106,000 London, Ontario, Canada 103,000 Bowling Green, Kentucky 94,000 Moline, Illinois 76,000 Cornwall, Ontario, Canada 71,000 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 Dothan, Alabama 42,000 South Gate, California 41,000 Dallas, Texas 36,000 Little Rock, Arkansas 35,000 Seattle, Washington 30,000 Elkhart, Indiana 25,000 Guangdon, China 25,000 Selangor, Malaysia 20,000 Davie, Florida 14,000 Woodbridge, Connecticut 13,000 Ballinamore, Ireland 12,000 Oxfordshire, England 12,000 Wallenfels, West Germany 9,000 Singapore 1,000 All of these principal facilities noted above are owned directly or indirectly by the Company, except for the facilities in Grand Rapids, Michigan, Gardena, California, Guangdon, China, Selangor, Malaysia, Oxfordshire, England, and Singapore which are leased. The facilities are of varying ages, and are well maintained and adequate for their present uses. Additional productive capacity at these facilities is generally available by increasing the number of shifts worked. The Company also owns the Corporate Technology Center and office facilities in Indianapolis which contain approximately 37,000 square feet. 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 7 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. 8 Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of 1996 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 "Dividend Information and Common Stock Prices" in the Company's 1996 Annual Report to Shareholders and is included in Exhibit 13. There is no established 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 1996 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 1996 Annual Report to Shareholders and is included in Exhibit 13. Item 8. Financial Statements and Supplementary Data. The consolidated financial statements of the Company are incorporated by reference from the Company's 1996 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. 9 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 I, Election of Directors" of the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held April 24, 1997. 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 sections entitled "Cash Compensation of Executive Officers" and "Non-Cash Compensation Arrangements" of the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held April 24, 1997. 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 "Outstanding Shares and Voting Rights" and "Proposal I, Election of Directors" of the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held April 24, 1997. 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 I, Election of Directors" of the Company's definitive Proxy statement relating to its Annual Meeting of Shareholders to be held April 24, 1997. 10 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)-1 The following items, included in the Company's 1996 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, 1996 and 1995 Consolidated Statements of Income and Retained Earnings -- Years ended November 30, 1996, 1995 and 1994 Consolidated Statements of Cash Flows -- Years ended November 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements -- November 30, 1996 (a)-2 The following financial statement schedule is filed as a part of this report. Schedule Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 11 (a)-3 Exhibits. Exhibits Incorporated by Reference 2 Merger Agreement, dated March 4, 1996, by and among Lilly Industries, Inc., LP Acquisition Corporation and Guardsman Products, Inc. This document is incorporated by reference to Exhibit 2 to the Company's Form 8-K Current Report filed with the SEC on April 22, 1996. 3(b) The Company's Code of By-Laws, as amended. This exhibit is incorporated by reference to Exhibit 3(b) to the Company's Form 10-K Annual Report for the fiscal year ended November 30, 1993. 4(a) Rights agreement, dated as of January 12, 1996, between Lilly Industries, Inc. and KeyCorp Shareholder Services, Inc. as Rights Agent. This Document is incorporated by reference to Exhibit 4 to the Company's Form 8-A filed with the SEC on January 23, 1996. 4(b) See Exhibit 10(h). *10(b) Lilly Industries, Inc. Unfunded Supplemental Retirement Plan (as in effect November 29, 1990). This exhibit is incorporated by reference to Exhibit 10(b) to the Company's Form 10-K Annual Report for the fiscal year ended November 30, 1990. *10(c) Lilly Industries, Inc. Unfunded Excess Benefit Plan. This exhibit is incorporated by reference to Exhibit 10(c) to the Company's Form 10-K Annual Report for the fiscal year ended November 30, 1989. *10(d) Lilly Industries, Inc. Second Unfunded Supplemental Retirement Plan effective June 4, 1990. This exhibit is incorporated by reference to Exhibit 10(f) to the Company's Form 10-K Annual Report for the fiscal year ended November 30, 1990. *10(e) Lilly Industries, Inc. Termination Benefits Agreement (form of agreement applicable to 2 officers). This exhibit is incorporated by reference to Exhibit 10(g) to the Company's Form 10-K Annual Report for the fiscal year ended November 30, 1990. 12 *10(f) Lilly Industries, Inc. 1991 Director Stock Option Plan. This exhibit is incorporated by reference to Exhibit 10(i) to the Company's Form 10-K Annual Report for the fiscal year ended November 30, 1991. *10(g) Lilly Industries, Inc. 1992 Stock Option Plan. This exhibit is incorporated by reference to Exhibit 10(j) to the Company's Form 10-K Annual Report for the fiscal year ended November 30, 1991. 10(h) Credit Agreement, dated as of April 8, 1996, between Lilly Industries, Inc., the Lenders Signatory thereto, NBD Bank, N.A., as Agent and Harris Trust and Savings Bank, Comerica Bank, Mercantile Bank of St. Louis and Bank One, Indianapolis, N.A., Co-Agents. This document is incorporated by reference to Exhibit 4 to the Company's Form 8-K Current Report filed with the SEC on April 22, 1996. ------------------- * Management contracts and compensatory plans required to be filed pursuant to Item 14(c) of Form 10-K. 13 Exhibits Filed Herewith: 3(a) The Company's Amended and Restated Articles of Incorporation. * 10(i) Lilly Industries, Inc. Executive Retirement Plan (effective as of January 1, 1996). * 10(j) Lilly Industries, Inc. Replacement 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. 11 Computation of Earnings Per Share. 13 Excerpts from the Lilly Industries, Inc. 1996 Annual Report. 21 List of Subsidiaries. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule. (b) No reports on Form 8-K were filed during the fourth quarter of fiscal year 1996. (c) The response to this portion of this item is submitted as a separate section of this report. (d) The response to this portion of this item is submitted as a separate section of this report. - ---------- * Management contracts and compensatory plans required to be filed pursuant to Item 14(c) of Form 10-K 14 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 21, 1997 LILLY INDUSTRIES, INC. /s/ Douglas W. Huemme -------------------------- Douglas W. Huemme, Chairman, President 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, President February 21, 1997 - ----------------------- and Chief Executive Douglas W. Huemme Officer (2) Corporate Accounting Director and Principal Accounting Officer /s/ Kenneth L. Mills Corporate Accounting February 21, 1997 - ----------------------- Director and Kenneth L. Mills Assistant Secretary (4) A majority of the Board of Directors /s/ H. J. Baker Director February 21, 1997 - ---------------------- H. J. (Jack) Baker /s/ James M. Cornelius Director February 21, 1997 - ---------------------- James M. Cornelius /s/ William C. Dorris Director February 21, 1997 - ---------------------- William C. Dorris /s/ Paul K. Gaston Director February 21, 1997 - ---------------------- Paul K. Gaston /s/ Harry Morrison, Ph.D. Director February 21, 1997 - ---------------------- Harry Morrison, Ph.D. /s/ John D. Peterson Director February 21, 1997 - ---------------------- John D. Peterson /s/ Thomas E. Reilly, Jr. Director February 21, 1997 - ---------------------- Thomas E. Reilly, Jr. /s/ Van P. Smith Director February 21, 1997 - ---------------------- Van P. Smith /s/ Richard A. Steele Director February 21, 1997 - ---------------------- Richard A. Steele 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 (1) (2) (3) 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, 1996: Reserve and allowances deducted from asset accounts: Allowance for doubtful accounts receivable $2,050,922 $ 510,826 $ -- $729,307 $585,296 (A) $2,705,759 ========== ========== ====== ======== ======== ========== Year ended November 30, 1995: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts receivable $1,758,769 $ 600,717 $ -- $ -- $308,564 (A) $2,050,922 ========== ========== ====== ======== ======== ========== Year ended November 30, 1994: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts receivable $1,353,042 $ 790,422 $ -- $ -- $384,695 (A) $1,758,769 ========== ========== ====== ======== ======== ==========
Note A - Uncollectible accounts receivable charged off, net of recoveries. 17 EX-3.(A) 2 AMENDED ARTICLES AMENDED AND RESTATED ARTICLES OF INCORPORATION OF LILLY INDUSTRIES, INC. As Fully Restated on June 21, 1996 ARTICLE 1 NAME The name of the corporation is Lilly Industries, Inc. (the "Corporation"). ARTICLE 2 PURPOSE AND POWERS OF THE CORPORATION The Corporation is organized for the purpose of engaging in any and all lawful businesses for which corporations may be incorporated under the Indiana Business Corporation Law, as amended from time to time (the "Act"). The Corporation shall have the same powers as an individual to do all things necessary or convenient to carry out its business and affairs, subject to any limitations or restrictions imposed by applicable law or these Articles of Incorporation (the "Articles"). ARTICLE 3 PERIOD OF EXISTENCE The period during which the Corporation shall continue is perpetual. ARTICLE 4 REGISTERED OFFICE AND REGISTERED AGENT The name of the registered agent and the address of the principal and registered office of the Corporation are: Roman J. Klusas Lilly Industries, Inc. 733 South West Street Indianapolis, Indiana 46225 ARTICLE 5 NUMBER OF AUTHORIZED SHARES OF THE CORPORATION The Corporation has authority to issue 100,000,000 shares, all of which are shares without par value. ARTICLE 6 GENERAL PROVISIONS REGARDING SHARES OF THE CORPORATION Section 6.1. Designation of Classes and Numbers of Shares of Capital Stock. 97,000,000 shares of capital stock, without par value, shall be known as "Class A Stock," and 3,000,000 shares of capital stock, without par value, shall be known as "Class B Stock." -1- Section 6.2. Mechanism to Insure Management of the Corporation By its Key Persons. The following provisions and all provisions affecting, implementing or amplifying this Section 6.2 shall be known as the "Mechanism to Insure Management of the Corporation by its Key Persons." Clause 6.21. Issuance of Class B Stock. The Corporation shall issue and deliver shares of Class B Stock only to Key Persons at such times, in such amounts, and for such consideration as the board of directors of the Corporation (the "Board") may, from time to time, determine; provided, however, that no Key Person shall be permitted to purchase or have registered in his name more than ten percent of the aggregate number of issued shares of Class B Stock. "Key Persons" are those agents, employees, officers, and directors determined by the Board in its discretion to be key persons in the organization of the Corporation or any of its majority-owned or wholly-owned subsidiaries ("Subsidiaries"). A Key Person shall be designated as such only upon the adoption by the Board of a resolution declaring a proposed registered holder of Class B Stock to be a Key Person of the Corporation. Upon the designation of a Key Person as such, the Corporation shall issue and deliver to the Key Person a Class B Stock certificate representing the shares of Class B Stock to be acquired by the Key Person. This certificate shall be duly endorsed in blank by the Key Person and witnessed. The Key Person shall then deposit the certificate, or cause it to be deposited, in a safety deposit box maintained for the purpose of having such certificates, already duly endorsed in blank and witnessed, available for exchange upon the happening of an Event of Exchange (as defined in Clause 6.23). Such safety deposit box shall be under the name of "Lilly Industries, Inc., Escrow Agent for Key Person Holders of Shares of Class B Stock" at the principal office of the Corporation or at a bank duly designated by the Board (the "Safety Deposit Box"). Upon the deposit of a Class B Stock certificate in the Safety Deposit Box, the Corporation shall issue and deliver to the Key Person involved an "Escrow Receipt for Certificates Representing Class B Stock" ("Escrow Receipt"), issued in the name of the Key Person as provided in Clause 6.22 below. Clause 6.22. Escrow Receipts for Certificates Representing Class B Stock. An Escrow Receipt shall require delivery of the same number of shares of Class A Stock as Class B Stock represented by the receipt to the holder in due course of such receipt upon the happening of an Event of Exchange (as defined in Clause 6.23). An Escrow Receipt shall be negotiable with the standard form of assignment on the back thereof. The Escrow Receipt shall provide that upon the happening of an Event of Exchange to the Key Person in whose name the Escrow Receipt is registered, the Corporation shall be entitled and obligated to issue and deliver, and the lawful owner of such Escrow Receipt shall be entitled and obligated to receive, a certificate representing shares of Class A Stock in lieu of the certificate representing shares of Class B -2- Stock which was originally deposited in escrow. Escrow Receipts shall not be subject to transfer upon the books of the Corporation by the lawful owners thereof, but shall only entitle such lawful owners to the very limited rights specifically set forth in the Articles. The substance and form of the Escrow Receipts and all further regulations concerning the issuance of Escrow Receipts shall be covered by provisions set forth in the Code of By-Laws of the Corporation (the "By-Laws"). Clause 6.23. Exchange of Class B Stock for Class A Stock. Upon the happening of any one or more of the events listed below ("Events of Exchange") to a specific Key Person who is the registered holder of Class B Stock, that registered holder is obligated to exchange with the Corporation, share for share, all of the shares of Class B Stock which he holds, will hold or is entitled to hold (including any shares of Class B Stock he acquired by purchase, exchange, recapitaliza- tion, stock split-up, stock dividend, merger, consolidation, reorganization, or other corporate, statutory, or legal mechanism) for shares of Class A Stock ("Obligation to Exchange"). The Events of Exchange that precipitate an Obligation to Exchange are: (a) The death of the shareholder, and the conclusion of administration of his estate; (b) The discharge of the shareholder, if an employee, by the Corporation or one of its Subsidiaries; (c) The retirement of the shareholder, if an employee, from the active service of the Corporation or one of its Subsidiaries, whether pursuant to a retirement plan or not; (d) The termination by the shareholder, if an employee, of his employment by the Corporation or one of its Subsidiaries; (e) The decision of the shareholder to sell or otherwise dispose of the shares of Class B Stock registered in his name, or the decision of a pledgee or other transferee of an Escrow Receipt to sell or otherwise dispose of the shares of Class B Stock represented by such Escrow Receipt. The Obligation to Exchange is binding upon both the Corporation and the individual shareholder affected by the Event of Exchange. As soon as possible after the happening of an Event of Exchange, the Corporation shall issue and deliver to the shareholder affected by the Event of Exchange, or his duly authorized executor, administrator, heirs, successors or assigns if the shareholder is not living, a certificate -3- representing the same number of shares of Class A Stock as the number of shares of Class B Stock covered by the Event of Exchange. The Corporation shall then remove the certificate(s) of the Class B Stock standing in the name of the Key Person affected by the Event of Exchange from the Safety Deposit Box. The shares of Class B Stock represented thereby shall then be transferred into new certificate(s) standing in the name of the Corporation. The new certificate(s) shall be held in the Corporation's Treasury Stock Account and placed in the Safety Deposit Box. All shares of Class B Stock now standing in or hereafter transferred or retransferred into the name of the Corporation and held in its Treasury Stock Account pursuant to the foregoing procedure shall be available for sale to and registry in the names of Key Persons upon resolution(s) of the Board. All provisions hereinabove or hereinafter set forth affecting the existing registered holders of shares of Class B Stock shall also apply to the future registered holders of Class B Stock, so long as the Corporation shall exist. Clause 6.24. Class B Stock Pending Exchange. Prior to the actual date of the happening of an Event of Exchange, the registered holder of any shares of Class B Stock (rather than the lawful owner of the Escrow Receipt covering the same) shall be legal and beneficial owner thereof. As legal and beneficial owner, he shall be entitled (a) to vote the same at all meetings of the Corporation at which such stock is entitled to vote; (b) to receive all dividends declared and paid thereon; and (c) to exercise any and all other rights and privileges appurtenant to such Class B Stock. Under no circumstances shall a registered holder of the Class B Stock have the power to sell, transfer, pledge or otherwise dispose of such stock, or any interest therein, except to transfer such stock back to the Corporation. Section 6.3. Class B Stock Held in the Treasury Stock Account of the Corporation. Class B Stock which is held or will be held in the Treasury Account of the Corporation pursuant to the Mechanism to Insure Management of the Corporation by Key Persons may not be sold for less than 100% of the fair market value of the Class A Stock at the date of sale, but may be issued for such form of consideration as the Board determines. Section 6.4. Shares of Class A Stock Reserved for Exchange for Class B Stock. 3,000,000 shares of Class A Stock, without par value, are hereby reserved only for exchange by the Corporation, pursuant to the Obligation to Exchange explained in Section 6.2, upon a share for share basis, for Class B Stock standing in the names of Key Persons upon the happening of any one or more of the Events of Exchange enumerated in Clause 6.23. However, none of such 3,000,000 shares of Class A Stock so reserved shall be issued pursuant to the Obligation to Exchange unless the Corporation shall fail to have acquired for its Treasury Stock Account the necessary number of shares of Class A Stock at prices the Board deems reasonable and proper. When any of the 3,000,000 shares of Class -4- A Stock reserved for exchange by this Section are issued, the number of shares of Class A Stock reserved hereunder shall automatically be increased to 3,000,000 shares so as to have at all times a total of 3,000,000 shares of Class A Stock reserved for fulfillment of the Obligation to Exchange. Section 6.5. Issuance of Remaining Shares of Class A Stock. The Board has the authority to issue the remaining shares of Class A Stock (including the shares of Class A Stock held in the Treasury Stock Account of the Corporation) at such times, in such amounts, to such persons, for such consideration and upon such terms and conditions as it may, from time to time, determine upon, subject only to the restrictions, limitations, conditions and requirements imposed by the Act, other applicable laws, and the Articles. Section 6.6. Fractional Shares of Class A Stock and Scrip. The Board has authority (but shall not be obliged) (a) to authorize the issuance by the Corporation of fractional shares of Class A Stock, (b) to arrange for the disposition of fractional shares by the holders of the same, (c) to pay in cash or otherwise the fair value of fractional shares of Class A Stock as of the time when those entitled to such fractional shares are determined, and (d) to issue scrip in registered or bearer form which shall entitle the holder of the same to receive a certificate evidencing a full share of Class A Stock upon surrender of such scrip aggregating a full share. A fractional share of Class A Stock shall, but scrip shall not (unless in registered form and containing the terms so providing), entitle the holder to exercise the same rights (proportionately reduced) possessed by the holder of Class A Stock. The Board has authority to authorize such scrip to be issued subject to the condition that it shall become void if not exchanged for certificates evidencing full shares upon or before a specified date, or subject to the condition that the shares for which such scrip is exchangeable may be sold by the Corporation and the proceeds of such sale distributed to the holders of such scrip, or subject to any other conditions which the Board may determine. Section 6.7. Distributions Upon Shares. The Board has authority to authorize and direct the payment of dividends and the making of other distributions by the Corporation in respect of shares of the issued and outstanding Class A Stock and Class B Stock, share for share, in the form of cash, property, or shares of the Class A Stock, at such times, in such amounts, from such sources and upon such terms and conditions as it may, from time to time, determine upon, subject only to the restrictions, limitations, conditions and requirements imposed by the Act, by other applicable laws, and by the Articles. Dividends payable in shares of Class A Stock on shares of Class A Stock and Class B Stock shall be paid at such value as shall be fixed by the Board at the time such dividends are declared. Section 6.8. Acquisition of Shares of Class A Stock. The Board has authority to authorize and direct the acquisition by the Corporation of the issued and outstanding shares of Class A Stock at such times, in such amounts, from such persons, for such -5- consideration, from such sources and upon such terms and conditions as it may, from time to time, determine upon, subject only to the restrictions, limitations, conditions and requirements imposed by the Act, by other applicable laws, and by the Articles. Section 6.9. Liquidation. In the event of any liquidation, dissolution, or winding up of the Corporation, the holders of the Class A Stock and Class B Stock shall be entitled to receive, share for share, all of the net assets of the Corporation remaining after due payment, or provision for payment, of the debts or other liabilities of the Corporation. Section 6.10. No Preemptive Rights. Except as otherwise provided in Clause 7.31 hereof, shareholders shall have no preemptive rights to subscribe to or purchase any shares of capital stock or other securities of the Corporation. ARTICLE 7 VOTING RIGHTS Section 7.1. General Voting Rights of the Holders of the Class A Stock and Class B Stock. The holders of the Class B Stock shall be entitled to vote upon all questions presented at meetings of shareholders upon the basis of one vote for each share of Class B Stock. The holders of Class A Stock shall be entitled to vote and elect four directors of the Company (collectively, the "Directors," and individually, a "Director") if there are ten or more Directors and two Directors if there are nine or fewer Directors. The holders of the Class B Stock shall be entitled to vote and elect the remaining Directors. With the foregoing exception, the holders of Class A Stock shall not be entitled to vote at meetings of the shareholders, except as set forth in Sections 7.2, 7.3, 7.5 and 7.7. When entitled to vote, the holders of Class A Stock shall vote upon the basis of one vote for each share of Class A Stock. Section 7.2. Voting Rights of Holders of Class A Stock and Class B Stock in Event of Merger, Consolidation, Dissolution, or Sale, Lease, Exchange, Mortgage or Pledge of Assets. In the event of merger, consolidation, or dissolution of the Corporation, or sale, lease, exchange, mortgage or pledge of all, or of substantially all, of the fixed assets of the Corporation for the purpose of terminating and winding up, or changing the nature of the business of the Corporation, the holders of the Class A Stock and the Class B Stock shall have equal voting rights, share for share, voting as one class. Section 7.3. Increase of Authorized Stock. The Corporation reserves the right to increase the total amount of authorized shares of Class A Stock or Class B Stock, or both, in any manner now or hereafter permitted by statute, subject to the following limitations: Clause 7.31. Increase of Class A Stock. The authorized shares of Class A stock shall not be increased unless: -6- (a) The affirmative vote or consent in writing of the holders of two-thirds in amount of the Class A Stock outstanding, and of the holders of two-thirds in amount of the Class B Stock outstanding, shall first be obtained, or (b) The affirmative vote or consent in writing of the holders of two-thirds in amount of the Class B Stock outstanding shall first be obtained, and the increased Class A Stock so authorized shall first be offered to the then existing holders of the Class A Stock and Class B Stock, in proportion to their then holdings, upon terms at least as favorable as it subsequently shall be sold or distributed to others. However, the provisions of this latter requirement shall be satisfied if, in lieu of offering such increased Class A Stock to the then existing holders of the Class A Stock and Class B Stock, the Corporation shall issue to them warrants entitling the bearers thereof to purchase the number of shares in question. Any offers so made, or warrants so issued, shall be mailed to the last known addresses of the holders of the Class A Stock and Class B Stock, by registered mail, at least ten (10) days before the expiration of such offer or warrant. In determining whether the terms upon which any Class A Stock is offered to the then existing holders of the Class A Stock and Class B Stock are at least as favorable as the terms upon which such stock subsequently shall be sold to others, such determination shall be made without deducting from the gross price, at which such stock may subsequently be sold to others, any reasonable commissions, discounts, fees or other charges which may be approved by the Board. The provisions contained in this Clause 7.31 respecting increase of the Class A Stock shall not apply in the event that the increased Class A Stock is applied in payment of a stock dividend upon the Class A Stock and Class B Stock. In this latter event, except as otherwise required by the Act, the affirmative vote or consent in writing of a majority of the Board, and the holders of a majority of the Class B Stock, shall be sufficient to increase the amount of Class A Stock. Clause 7.32. Increase of Class B Stock. The Class B Stock shall not be decreased. The Class B Stock shall not be increased unless the affirmative vote or consent in writing of the holders of two-thirds in amount of Class A Stock outstanding, and of the holders of four-fifths in amount of Class B Stock outstanding, shall first be obtained. Section 7.4. Amendment of Articles by Vote of Holders of Class B Stock. The Articles may be amended from time to time so as -7- (a) to change the Corporation's name, (b) to change the Corporation's period of duration, or (c) to change, enlarge, or diminish its corporate purposes, upon proposal by the Board, by the adoption of a resolution setting forth the proposed amendment and directing that it be submitted to a vote of the holders of the Class B Stock at a designated meeting thereof, which may be an annual meeting or a special meeting. Such amendment shall be adopted upon receiving the affirmative votes of holders of two-thirds of the Class B Stock. Section 7.5. Amendment of Articles by Vote of Holders of Class A Stock and Class B Stock. The Articles may be amended from time to time so as (a) to decrease the aggregate number of shares, or shares of any class other than shares of Class B Stock, which the Corporation has authority to issue, (b) to exchange, classify, reclassify or cancel all or any part of its shares other than shares of Class B Stock, whether issued or unissued, (c) to change the designation of all or any part of its shares other than shares of Class B Stock, whether issued or unissued, and to change the designations, relative rights, interests, preferences, qualifications, limitations, or restrictions of all or any part of its shares other than shares of Class B Stock, whether issued or unissued, (d) to divide any preferred or special class of shares other than shares of Class B Stock, whether issued or unissued, into series and fix and determine the designations of such series and the variations in the relative rights and preferences as between the shares of such series, (e) to change the shares of any class other than shares of Class B Stock, whether issued or unissued, into a different number of shares of the same class or into the same or a different number of shares of other classes, (f) to create new classes of shares having rights and preferences either prior and superior or subordinate and inferior to the shares of any class then authorized, whether issued or unissued, but no new classes of shares shall have voting rights greater than those presently accorded the holders of the Class A Stock, (g) to limit, deny, or grant to shareholders of any class the preemptive right to subscribe for or acquire additional shares of the Corporation, whether then or thereafter authorized, -8- upon proposal by the board, by the adoption of a resolution setting forth the proposed amendment and directing that it be submitted to a vote of the holders of the Class A Stock and Class B Stock at a designated meeting thereof, which may be an annual meeting or a special meeting. Except as otherwise provided by the Act, such amendment shall be adopted upon receiving the affirmative votes of the holders of two-thirds of the Class A Stock and the Class B Stock, voting as one class. Section 7.6. Amendments Affecting Class B Stock. Section 6.2, Clause 7.32 and Section 7.6 of the Articles may only be amended upon proposal by the Board, by the adoption of a resolution setting forth the proposed amendment and directing that it be submitted to a vote of the holders of the Class B Stock at a designated meeting thereof, which may be an annual meeting or a special meeting. Such amendment shall be adopted upon receiving the affirmative votes of the holders of four-fifths of the Class B Stock issued and entitled to vote. Section 7.7. Miscellaneous Amendments. Any other amendments of the Articles not specified in Sections 7.2 through 7.6 shall be made, upon proposal by the Board, by the adoption of a resolution setting forth the proposed amendment and directing that it be submitted to a vote of the holders of the Class B Stock at a designated meeting thereof, which may be an annual meeting or a special meeting. Such amendment shall be adopted upon receiving the affirmative votes of the holders of two-thirds of the Class B Stock. Amendments decreasing (but not increasing) the voting rights of the holders of the Class A Stock for the election of directors under the provisions of Section 7.1 shall only be adopted upon also receiving the affirmative votes of the holders of nine-tenths of the Class A Stock. ARTICLE 8 NUMBER AND QUALIFICATIONS OF DIRECTORS The Board shall consist of not fewer than five nor more than seventeen Directors. The By-Laws shall specify the exact number. Directors need not be shareholders of the Corporation ("Shareholders"). A majority of the Directors shall at all times be citizens of the United States. ARTICLE 9 PROVISIONS FOR REGULATION OF BUSINESS AND CONDUCT OF AFFAIRS OF THE CORPORATION Section 9.1. Meetings of Shareholders and Directors. Meetings of the Shareholders and meetings of the Board or any committees thereof (collectively, "Committees," and individually, a "Committee") shall be held at such places, within or without the State of Indiana, as the Board may, from time to time, establish by appropriate provisions in the By-Laws or by resolution. Section 9.2. Amendment of Articles. The Corporation reserves the right to amend, alter, change or repeal any provision contained -9- in the Articles or any amendment thereto, or to add any provision to the Articles or any amendment thereto, subject to all the provisions and limitations prescribed by the Act, any other applicable laws, and the various applicable provisions of the Articles. All rights and powers conferred on Shareholders, Directors and/or officers of the Corporation ("Officers") by the Articles or any amendment thereto, are subject to this reserve power. Section 9.3. By-Laws. The Board shall have the power, without the assent or vote of the Shareholders, to make, alter, amend or repeal the By-Laws, but the affirmative vote of a number of Directors equal to a majority of the number of all Directors who are elected and qualified at the time of such action shall be necessary to take any action for the making, alteration, amendment or repeal of the By-Laws. Section 9.4. Conflicts of Interest. No contract or other transaction between the Corporation and (a) any Director or (b) any corporation, unincorporated association, business trust, estate, partnership, trust, joint venture, individual or other legal entity (individually, a "Legal Entity"), (1) in which any Director has a material financial interest or is a general partner, or (2) of which any Director is a director, officer or trustee (a "Conflict Transaction"), shall be void or voidable because of such interest or relationship if the material facts of the Conflict Transaction and the Director's interest were disclosed or known to the Board, a Committee with authority to act thereon, or the Shareholders entitled to vote thereon, and the Board, such Committee or such Shareholders authorized, approved or ratified the Conflict Transaction, or the Conflict Transaction was fair to the Corporation. A Conflict Transaction is authorized, approved or ratified: (i) By the Board or such Committee if it receives the affirmative vote of a majority of the Directors who have no interest in the Conflict Transaction, notwithstanding the fact that such majority may not constitute a quorum or a majority of the Directors present at the meeting, and notwithstanding the presence or vote of any Director who does have such an interest; provided, however, that no Conflict Transaction may be authorized, approved or ratified by a single Director; or (ii) By such Shareholders, if it receives the vote of a majority of the shares entitled to be counted, in which vote, shares owned or voted under the control of any Director who, or of any Legal Entity that, has an interest in the Conflict Transaction may be counted. This Section 9.4 shall not be construed to require authorization, ratification or approval by the Shareholders of any Conflict Transaction, or to invalidate any Conflict Transaction which would otherwise be valid under applicable common and statutory law. -10- Section 9.5. Limitation of Liability and Reliance on Corporate Records and Other Information. Clause 9.51. General Limitation. No Director shall be liable for any loss or damage suffered by the Corporation because of any action taken or not taken by such Director, as a Director or a member of any Committee or any other committee appointed by the Board, if, in taking or omitting to take any action causing such loss or damage, either (a) such Director acted (1) in good faith, (2) with the care an ordinarily prudent person in a like position would have exercised upon similar circumstances, and (3) in a manner such Director reasonably believed was in the best interests of the Corporation, or (b) such Director's breach of or failure to act in accordance with the standards of conduct set forth in Subsection (a) hereof did not constitute willful misconduct or recklessness. Clause 9.52. Reliance on Corporate Records and Other Information. No person shall be liable to the Corporation for any loss or damage suffered by the Corporation because of any action taken or not taken by such person as a Director, Officer, employee or agent of the Corporation (a "Corporate Person"), or as a director, officer, partner, trustee, employee or agent of another Legal Entity which he serves or served at the request of the Corporation, if such person relied in good faith, upon information, opinions, reports or statements (including financial statements and other financial data) prepared or presented by (a) one or more other persons whom such person reasonably believes to be reliable and competent in the matters presented, (b) legal counsel, public accountants or other persons as to matters that such person reasonably believes are within the professional or expert competence of such legal counsel, public accountants or other persons, (c) a Committee or other committee appointed by the Board, of which such person is not a member, if such person reasonably believes such Committee or such appointed committee merits confidence, or (d) the Board, if such person is not a Director and reasonably believes that the Board merits confidence. Clause 9.53. Savings Clause. This Section 9.5 shall not be construed to subject any person to liability to the Corporation for loss or damage suffered by the Corporation because of any action taken or not taken by such person for which such person would not otherwise be liable to the Corporation under applicable common and statutory law. ARTICLE 10 INDEMNIFICATION Section 10.1. Indemnification of Directors. The Corporation shall, to the extent to which it is empowered to do so by the Act, or any other applicable laws, as from time to time in effect, -11- indemnify any Director who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal (an "Action"), by reason of the fact that he is or was a Director or who, while serving as such Director, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent (an "Authorized Capacity") of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not (individually, "Another Entity"), against expenses, including attorney's fees ("Expenses"), judgments, penalties, fines (including excise taxes assessed with respect to employee benefit plans) and amounts paid in settlement actually and reasonably incurred by him in connection with such Action if such person acted in good faith and in a manner he reasonably believed, in the case of conduct in his official capacity, was in the best interests of the Corporation, and in all other cases was not opposed to the best interests of the Corporation, and, with respect to any criminal Action, he either had reasonable cause to believe his conduct was lawful or no reasonable cause to believe his conduct was unlawful. The termination of any Action by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not meet the prescribed standards of conduct. Section 10.2. Indemnification of Officers, Employees and Agents. The Corporation may, to the extent to which it is empowered to do so by the Act, or any other applicable laws, as from time to time in effect, indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed Action, by reason of the fact that he is or was an Officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation in an Authorized Capacity for Another Entity, against Expenses, judgments, penalties, fines (including excise taxes assessed with respect to employee benefit plans) and amounts paid in settlement actually and reasonably incurred by him in connection with such Action if such person acted in good faith and in a manner he reasonably believed in the case of conduct in his official capacity was in the best interests of the Corporation, and in all other cases was not opposed to the best interests of the Corporation, and, with respect to any criminal Action, he either had reasonable cause to believe his conduct was lawful or had no reasonable cause to believe his conduct was unlawful. The termination of any Action, by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, be determinative that the person did not meet the prescribed standards of conduct. Section 10.3. Indemnification in Successfully Defended Actions. To the extent that a Director, Officer, employee or agent of the Corporation has been successful on the merits or otherwise in the defense of any Action referred to in Section 10.1 or Section 10.2, or in the defense of any claim, issue or matter in any such -12- Action, the Corporation shall indemnify him against Expenses actually and reasonably incurred by him in connection therewith. Section 10.4. Indemnification Procedure. Unless ordered by a court, any indemnification of any person under Section 10.1 or Section 10.2 shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of such person is proper in the circumstances because he met the applicable standards of conduct. Such determination shall be made (a) by the Board, by a majority vote of a quorum consisting of Directors who are not at the time parties to the Action involved ("Parties"), or (b) if a quorum cannot be obtained under Subsection (a), by a majority vote of a Committee duly designated by the Board (in which designation Directors who are Parties may participate), consisting solely of two or more Directors who are not at the time Parties, or (c) by written opinion of special legal counsel (1) selected by the Board or a Committee in the manner prescribed in Subsections (a) and (b), respectively, or (2) if a quorum cannot be obtained and a Committee cannot be designated under Subsections (a) and (b), respectively, selected by a majority of the full Board, in which selection of Directors who are Parties may participate, or (d) by the Shareholders who are not at the time Parties, voting together as a single class; and provided, further, that shares owned by or voted under the control of Directors who are at the time Parties may not be voted on the determination. Authorization of indemnification and evaluation as to the reasonableness of Expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of Expenses shall be made by those entitled under Subsection (c) to select counsel. Section 10.5. Good Faith Defined. For purposes of any determination under Section 10.1, a Director shall be deemed to have acted in good faith and to have otherwise met the applicable standard of conduct set forth in Section 10.1 if his action is based on information, opinions, reports, or statements, including financial statements and other financial data, prepared or presented by (a) one or more Officers, employees or agents of the Corporation or another enterprise whom he reasonably believes to be reliable and competent in the matters presented; (b) legal counsel, public accountants, appraisers or other persons as to matters he reasonably believes are within the person's professional or expert competence; or (c) a Committee, or a committee appointed by the Board or by the board of directors of another enterprise, of which the person is not a member, if he reasonably believes the Committee or committee, respectively, merits confidence. The term "another enterprise" as used in this Section 10.5 shall mean Another Entity of which such Director is or was serving at the request of the Corporation in an Authorized Capacity. The provisions of this Section 10.5 shall not be deemed to be exclusive or to limit in any way the circumstances in which a Director may be deemed to have met the applicable standards of conduct set forth in Section 10.1. -13- Section 10.6. Payment of Expenses in Advance. Expenses reasonably incurred in connection with any Action by any Director, Officer, employee or agent may be paid or reimbursed by the Corporation in advance of the final disposition of such Action as authorized in the specific case in the same manner described in Section 10.4 upon receipt of a written affirmation of such Director's, Officer's, employee's or agent's good faith belief that he has met the standards of conduct described in Section 10.1 or Section 10.2 and upon receipt of a written undertaking by or on behalf of such Director, Officer, employee or agent to repay such amount if it shall ultimately be determined that he did not meet the applicable standards of conduct and a determination is made under the procedure set forth in Section 10.4 that the facts then known to those making the determination would not preclude indemnification under this Article 10. Such an undertaking must be an unlimited general obligation of the person making it, but need not be secured and may be accepted by the Corporation without reference to such person's financial ability to make repayment. Section 10.7. Rights Not Exclusive. The indemnification provided in this Article 10(a) shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under (1) any law, (2) the By-laws, (3) any resolution of the Board or of the Shareholders, (4) any other authorization, whenever adopted, after notice, by a majority vote of all shares entitled to vote thereon, (5) any contract, or (6) the articles of incorporation, code of by-laws or other governing documents, or any resolution of or other authorization by the directors, shareholders, partners, trustees, members, owners or governing body of Another Entity; (b) shall inure to the benefit of the heirs, executors and administrators of such a person; and (c) shall continue as to any such person who has ceased to be a Director, Officer, employee, or agent of the Corporation or to be serving in an Authorized Capacity for Another Entity. Section 10.8. Insurance. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a Director, Officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation in an Authorized Capacity of or for Another Entity, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article 10. Section 10.9. Vested Right to Indemnification. The right of any person to indemnification under this Article 10 shall vest at the time of occurrence or performance of any event, act or omission giving rise to the Action for which indemnification is sought, and, once vested, shall not later be impaired as a result of any amendment, repeal, alteration or other modification of any or all of these provisions. Notwithstanding the foregoing, the indemnification afforded under this Article 10 shall be applicable to all alleged prior acts or omissions of any person seeking indemnification hereunder, regardless of the fact that such alleged -14- prior acts or omissions may have occurred prior to the adoption of this Article 10. To the extent such prior acts or omissions cannot be deemed to be covered by this Article 10, the right of any individual to indemnification shall be governed by the indemnification provisions in effect at the time of such prior acts or omissions. Section 10.10. Additional Definitions. For purposes of this Article 10, references to the "Corporation" shall include any domestic or foreign predecessor entity of the Corporation in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. For purposes of this Article 10, serving an employee benefit plan at the request of the Corporation shall include any service as a Director, Officer, employee or agent of the Corporation which imposes duties on, or involves services by such Director, Officer, employee or agent with respect to any employee benefit plan, its participants, or beneficiaries. A person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" referred to in this Article 10. For purposes of this Article 10, "party" includes any individual who is or was a plaintiff, defendant or respondent in any action, suit or proceeding, or who is threatened to be made a named defendant or respondent in any action, suit or proceeding. For purposes of this Article 10, "official capacity" when used with respect to a Director shall mean the office of Director of the Corporation; and when used with respect to an individual other than a Director, shall mean the office in the Corporation held by the Officer or the employment or agency relationship undertaken by the employee or agent on behalf of the Corporation. "Official Capacity" does not include service for any other foreign or domestic corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise, whether for profit or not. Section 10.11. Payments as a Business Expense. Any payments made to any indemnified party under this Article 10 or under any other right to indemnification shall be deemed to be an ordinary and necessary business expense of the Corporation, and payment thereof shall not subject any person responsible for the payment, or the Board, to any action for corporate waste or any similar action. -15- EX-10.(I) 3 EXECUTIVE RETIREMENT PLAN LILLY INDUSTRIES, INC. EXECUTIVE RETIREMENT PLAN Effective as of January 1, 1996 TABLE OF CONTENTS Page ARTICLE I. ESTABLISHMENT OF PLAN....................................1 Section 1.01. Establishment.....................................1 Section 1.02. Purpose...........................................1 Section 1.03. Funding...........................................1 ARTICLE II. DEFINITIONS AND INTERPRETATION....................1 Section 2.01. Definitions.......................................1 Section 2.02. Construction and Governing Law....................5 ARTICLE III. PARTICIPATION.....................................6 ARTICLE IV. VESTING AND FORFEITURE OF BASE PENSION............6 Section 4.01. Vesting...........................................6 Section 4.02. Forfeiture........................................6 ARTICLE V. PAYMENT OF BASE PENSION..................................7 Section 5.01. Normal Retirement.................................7 Section 5.02. Disability........................................7 Section 5.03. Termination of Employment.........................7 Section 5.04. Alternate Form....................................7 ARTICLE VI. SURVIVOR BENEFIT..................................7 ARTICLE VII. MISCELLANEOUS.....................................8 Section 7.01. Amendments........................................8 Section 7.02. General Administration............................8 Section 7.03. No Employment Rights..............................8 Section 7.04. Non-alienation....................................8 Section 7.05. Limitation of Liability...........................8 Section 7.06. Acceleration or Change of Payment.................9 Section 7.07. Tax Withholding...................................9 Section 7.08. Counterparts......................................9 1 LILLY INDUSTRIES, INC. EXECUTIVE RETIREMENT PLAN ARTICLE I. ESTABLISHMENT OF PLAN Section 1.01. Establishment. Lilly Industries, Inc. ("Company") hereby establishes the Lilly Industries, Inc. Executive Retirement Plan ("Plan"), effective as of January 1, 1996. Section 1.02. Purpose. The sole purpose of the Plan is to ensure a base retirement benefit to a select group of management and highly compensated employees who devote their full time and attention to the business of their Employer throughout their respective careers. Section 1.03. Funding. The Plan is an unfunded benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code of 1986, as amended, and corresponding provisions of subsequent federal income tax laws ("Code"). Benefits payable under the Plan with respect to a Participant or beneficiary shall be paid from the general assets of the Employer of the Participant. The right of a Participant or beneficiary to receive payment under the Plan is merely a contractual right to payment from the Employer of the Participant, and the Plan does not give Participants or beneficiaries any interest in, or right to, any of the assets of the Company or any Affiliated Employer other than as a general creditor of his or her Employer. ARTICLE II. DEFINITIONS AND INTERPRETATION Section 2.01. 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: (i) a member of a controlled group of corporations (as defined in Code Section 414(b)) of which the Company is a member; or (ii) an unincorporated trade or business which is under common control (as defined in Code Section 414(c)) with the Company. (b) "Base Pension" means a Single Life Annuity payable for life beginning at the Normal Retirement Date of the Participant, equal to fifty-five percent (55%) of the Final Average Compensation, reduced by the Pension Offsets. (c) "Board" means the board of directors of the Company. (d) "Change in Control" shall be deemed to have occurred if: (i) 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; (ii) 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 ("Person") which is not an Affiliated Employer; (iii) the approval by the shareholders of the Company of one or more amendments to the Articles of Incorporation of the Company which has a material adverse effect on the rights of, or control exercised by, the Class B shareholders of the Company; (iv) 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 securities of the Company; or (v) during any period of two consecutive years, individuals who, at the beginning of such period, constituted the Board, cease, for any reason, to constitute at least a majority thereof, unless the election or nomination for election for each new director was approved by the vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. (e) "Code" means the Internal Revenue Code of 1986, as amended, or any corresponding provisions of any subsequent federal income tax law. (f) "Committee" means the Compensation Committee of the Board, to which the Board has delegated authority to administer and interpret the Plan and to designate eligible participants. (g) "Company" means Lilly Industries, Inc. and any successor to Lilly Industries, Inc. (h) "Compensation" means the total cash wages actually paid to a Participant by one or more Employers for a calendar year and includible in the gross income of the Participant for - 2 - such calendar year, plus any amounts deferred or redirected by the Participant for such calendar year which are not includible in the gross income of the Participant for such calendar year pursuant to any cash or deferred arrangements or salary reduction plans maintained by the Employer under Code Section 401(k) or Code Section 125 and reduced by any amounts which are includible in the gross income of the Participant for such calendar year under the Replacement Plan. (i) "Competition" means any of the activities described within this Subsection. A Participant engages in Competition if he or she at any time (A) directly or indirectly engages in any activity or business that is the same as or substantially similar to or competitive with that of the Company or any Affiliated Employer, (B) directly or indirectly engages in, owns, manages, operates, joins, controls, lends money or other assistance to, or participates in or is connected with, as an officer, employee, partner, stockholder, consultant, or otherwise, any individual, partnership, firm, corporation, or other business organization or entity that is engaged in any activity or business that is the same as or substantially similar to or competitive with that of the Company or any Affiliated Employer, or (C) discloses or uses, other than in the normal and ordinary performance of service for the Employer, any Confidential Information of the Company or any Affiliated Employer. Nothing contained in the foregoing, however, shall prohibit a Participant from owning shares of stock representing less than one percent (1%) of the outstanding shares of any publicly-held competitor of the Company or any Affiliated Employer. (j) "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 and 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. (k) "Disability" means a disability as determined for purposes of any group disability insurance policy of the Company in effect for the Participant which qualifies the Participant 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 the Participant, at intervals of not less than six (6) months. (l) "Effective Date" means January 1, 1996, the date the Plan became effective. (m) "Employer" means the Company and any Affiliated Employer which adopts the Plan with the consent of the Committee, and any successor thereto. (n) "Final Average Compensation" means the average of the Compensation of a Participant for the three (3) consecutive calendar years of his or her employment with one or more Employers which produce the highest such average; provided, however, if the - 3 - Compensation of a Participant for the first calendar year in such three (3) year period includes any bonus with respect to such calendar year and the previous calendar year then the bonus for the previous calendar year shall be excluded from such Compensation for purposes of computing such Final Average Compensation. (o) "Good Cause" means (i) 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 his or her termination of employment; (ii) engaging in conduct that has caused demonstrable and material injury to the Company or an Affiliated Employer, monetary or otherwise; (iii) 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 (iv) the disclosure or use of Confidential Information 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 and in its sole discretion. (p) "Normal Retirement Date" means the first day of the month coinciding with or immediately following the later of the date the Participant (i) reaches age sixty-five (65), or (ii) retires from employment with the Company. (q) "Participant" means any employee of an Employer who is employed in a key executive or managerial position, who is designated by the Committee to be eligible for participation in the Plan, and who agrees to be bound by the provisions of the Plan on a form provided by the Committee. (r) "Pension Offsets" means the aggregate amount of benefits payable to a Participant under the Pension Plan, the Savings Plan, or the Replacement Plan, but only to the extent that such benefits are attributable to contributions by the Employer; provided, however, that Pension Offsets shall not include (i) Employer matching contributions to the Savings Plan (and investment gains and losses thereon), (ii) Employer matching contributions to the Replacement Plan (and investment gains and losses thereon), (iii) Participant salary redirection contributions to the Savings Plan (and investment gains and losses thereon), (iv) Participant salary redirection contributions to the Replacement Plan (and investment gains and losses thereon), or (v) investment gains or losses attributable to Employer profit sharing contributions to the Savings Plan or the Replacement Plan. To the extent that any Pension Offsets are payable to a Participant in a form or at a time other than in the form and at the time that the Base Pension of the Participant is payable to him or her under the Plan, the amount of such Pension Offsets shall be adjusted as necessary to convert such amount to an amount which, if payable in the form and at the time that the Base Pension of the Participant is payable under the Plan, is actuarially equivalent to the amount of such Pension Offsets actually payable to the Participant. (s) "Pension Plan" means the "Lilly Employees' Pension Plan," as amended from time to time. - 4 - (t) "Plan" means the "Lilly Industries, Inc. Executive Retirement Plan," as set forth herein and as it may be amended from time to time. (u) "Plan Year" means a calendar year. (v) "Replacement Plan" means the "Lilly Industries, Inc. Replacement Plan," as amended from time to time. (w) "Savings Plan" refers collectively to the "Lilly Industries, Inc. Employee 401(k) Savings Plan," as amended from time to time, and the "Lilly Industries, Inc. Defined Contribution Plan," as amended from time to time. (x) "Single Life Annuity" means an annual annuity payable to the Participant beginning as of his or her Normal Retirement Date and on each subsequent anniversary thereof, and ending on the anniversary date coinciding with or immediately preceding the date of his or her death. (y) "Spouse" means the spouse of the Participant, provided that the Participant and his or her spouse have been married continuously throughout the one-year period ending on the date of death of the Participant. (z) "Years of Service" means the continuous employment service (based on full years and completed months) of a Participant with the Company and any Affiliated Employer; provided, however, that Years of Service may include such continuous employment service with a prior employer if so designated by the Committee in writing for a particular Participant; and may include any additional service granted under the terms of any applicable Severance Agreement of the Participant. Section 2.02. Construction and Governing Law. (a) The Plan shall be construed, enforced and administered, and the validity thereof determined in accordance with, the laws of the State of Indiana. (b) Words used herein in the masculine gender shall be construed to include the feminine gender where appropriate, and words used herein in the singular or plural shall be construed as being in the plural or singular where appropriate. (c) Whenever any actuarial present value or actuarial equivalency is to be determined under the Plan, it shall be based on such actuarial assumptions as may be provided under the Pension Plan for comparable situations as determined by the Committee in its sole discretion. - 5 - ARTICLE III. PARTICIPATION The Committee may designate from time to time which employees of an Employer are eligible to participate in the Plan. Any such employee shall become a Participant only after completing such forms and making such elections as the Committee may prescribe, including an agreement to be bound by all terms of the Plan and all determinations of the Committee. A Participant shall remain a Participant until all amounts to which he or she is entitled under the Plan have been paid to him or her. ARTICLE IV. VESTING AND FORFEITURE OF BASE PENSION Section 4.01. Vesting. A Participant shall become vested in his or her Base Pension as follows: (a) Subject to Section 4.02, the Base Pension of a Participant shall be ten percent (10%) vested upon the later of the date that the Participant (i) reaches age fifty-three (53), or (ii) completes thirteen (13) Years of Service, and shall be vested thereafter at the rate of ten percent (10%) per year for each subsequent Year of Service. (b) Subject to Section 4.02, a Participant shall be one hundred percent (100%) vested in his or her Base Pension in the event that the Participant becomes Disabled. Section 4.02. Forfeiture. A Participant shall forfeit his or her Base Pension as follows: (a) A Participant shall forfeit any and all rights he or she may have to the nonvested portion of his or her Base Pension as of the date his or her employment with the Employer ends either voluntarily or involuntarily, subject to the terms of any applicable Severance Agreement of the Participant. (b) Notwithstanding any other provision of the Plan, a Participant shall forfeit any and all rights he or she may have to the vested or nonvested Base Pension of the Participant if (i) the employment of the Participant is involuntarily terminated by the Employer for Good Cause, as determined by the Committee in its sole discretion, or (ii) the Participant, either before or after any termination of employment with the Employer (including, without limitation, retirement from the Employer), engages in Competition. (c) If a Participant dies before any Base Pension becomes payable to him or her under the Plan, the Participant shall forfeit any and all rights that the Participant may have had to any Base Pension whether or not vested, except any survivor benefit payable pursuant to Article VI. - 6 - ARTICLE V. PAYMENT OF BASE PENSION Section 5.01. Normal Retirement. A Participant who retires from the Employer on or after reaching age sixty-five (65) shall be entitled to receive the vested portion of his or her Base Pension payable as a Single Life Annuity beginning as of his or her Normal Retirement Date, unless an alternate form of benefit has been elected by the Participant as provided in Section 5.04. Section 5.02. Disability. A Participant who terminates employment with the Employer before reaching age sixty-five (65) due to Disability shall be entitled to receive his or her full Base Pension payable as a Single Life Annuity beginning as of his or her Normal Retirement Date, unless an alternate form of benefit has been selected by the Participant as provided in Section 5.04. Section 5.03. Termination of Employment. A Participant who terminates employment with the Employer before reaching age sixty-five (65), other than due to Disability and other than an involuntary termination for Good Cause, shall be entitled to receive the vested portion of his or her Base Pension, payable as a Single Life Annuity beginning as of his or her Normal Retirement Date, unless an alternate form of benefit has been elected by the Participant as provided in Section 5.04. Section 5.04. Alternate Form. Upon becoming a Participant in the Plan and at any time thereafter at least one (1) year before his or her Base Pension becomes due and payable under the Plan, a Participant may elect in writing, on a form prescribed by the Committee, an actuarially equivalent alternate form of benefit then available under the Pension Plan; provided, however, that any such election shall not become effective until the date that is one (1) year after the date on which such election is approved by the Committee, which approval may be withheld by the Committee in its sole discretion. ARTICLE VI. SURVIVOR BENEFIT If a married Participant dies before reaching his or her Normal Retirement Date and while still employed by the Employer, but after reaching age fifty-five (55), an annual survivor annuity equal to fifty percent (50%) of the Base Pension which would have been payable to the Participant as a Single Life Annuity if he or she had retired from the Employer on the later of his or her sixty-fifth (65th) birthday or date of death, and assuming his or her service with the Employer would have continued uninterrupted until such date, shall be paid to the surviving Spouse of the Participant beginning as of the first day of the month coinciding with or next following the later of the date the Participant would have reached age sixty-five (65) or the date - 7 - of death; provided, however, that the Committee may determine in its sole discretion to begin payment at an earlier date in an actuarially equivalent amount. ARTICLE VII. MISCELLANEOUS Section 7.01. Amendments. The Board from time to time may amend, suspend, or terminate the Plan or any part hereof, effective as of the beginning of any Plan Year commencing on or after the date of adoption of such action by the Board; provided, however, that no such action shall affect the rights of the Participant or the operation of the Plan with respect to the portion of the Base Pension of the Participant that has become payable or vested before such action; and provided, further, however, that the Board may not amend, suspend or terminate the Plan or any part hereof after a Change in Control with respect to any Participant without the written consent of the Participant. Section 7.02. General Administration. The Committee shall have exclusive authority to administer the Plan. The Committee shall have the exclusive right and authority to interpret the Plan and resolve any ambiguities. The decisions, actions and records of the Committee shall be conclusive and binding upon the Company, any Employer, and all persons having or claiming to have any right or interest in or under the Plan. The Committee may delegate to such officers, employees or departments of the Company such authority, duties, and responsibilities of the Committee as it, in its sole discretion, considers necessary or appropriate for the proper and efficient operation of the Plan, including, without limitation, (a) interpretation of the plan, (b) approval and payment of claims, and (c) establishment of procedures for administration of the Plan. Section 7.03. No Employment Rights. Neither the establishment of the Plan nor the status of an employee as a Participant shall give any Participant any right to be retained in the employ of the Employer; and no Participant and no person claiming under or through such Participant shall have any right or interest in any benefit under the Plan unless and until the terms, conditions, and provisions of the Plan affecting such Participant shall have been satisfied. Section 7.04. Non-alienation. The right of any Participant or any person claiming under or through such Participant to any benefit or any payment hereunder shall not be subject in any manner to attachment or other legal process for the debts of such Participant or person; and the same shall not be subject to anticipation, alienation, sale, transfer, assignment or encumbrance. Section 7.05. Limitation of Liability. No member of the Board or the Committee, and no officer or employee of the Company or any Affiliated Employer, shall be liable to any person for any action taken or omitted in connection with the administration of the Plan, nor shall the Company or any Affiliated Employer be liable to any person for any such action or omission. No person shall, because of the Plan, acquire any right to an accounting or to examine the books - 8 - or the affairs of the Company or any Affiliated Employer. Nothing in the Plan shall be construed to create any trust or any fiduciary relationship between the Company or any Affiliated Employer and any Participant or any other person. Section 7.06. Acceleration or Change of Payment. Notwithstanding any provisions of the Plan to the contrary, the Committee, in its sole discretion, may accelerate the time of payment of any benefit to a Participant to the extent that it deems equitable or desirable under the circumstances or, if there has been a change in the family circumstances of a Participant, the Committee, in its sole discretion, may change the form of payment of any benefit to a Participant; provided, however, any such change shall not reduce the benefit payable to an amount which is less than the actuarial equivalent of the Base Pension payable to the Participant. Section 7.07. Tax Withholding. The Employer may withhold from any payment due hereunder any taxes required to be withheld under applicable federal, state, or local tax laws or regulations. Section 7.08. Counterparts. The Plan may be evidenced by any number of counterparts, each of which shall constitute an original. The Lilly Industries, Inc. Executive Retirement Plan has been executed by the duly authorized officers of Lilly Industries, Inc. on this 27th day of September, 1996. LILLY INDUSTRIES, INC. By: /s/ Douglas W. Huemme -------------------------------------- Douglas W. Huemme, Chairman, President & Chief Executive Officer ATTEST: By: /s/ Kenneth L. Mills ------------------------------------------------ Kenneth L. Mills Title: Corporate Accounting Director ---------------------------------------------- - 9 - EX-10.(J) 4 REPLACEMENT PLAN LILLY INDUSTRIES, INC. REPLACEMENT PLAN Effective as of January 1, 1996 TABLE OF CONTENTS Page ARTICLE I. ESTABLISHMENT OF PLAN........................................... 1 Section 1.01. Establishment....................................... 1 Section 1.02. Purpose............................................. 1 Section 1.03. Funding............................................. 1 Section 1.04. Trust............................................... 1 ARTICLE II. DEFINITIONS AND INTERPRETATION................................. 1 Section 2.01. Definitions......................................... 1 Section 2.02. Construction and Governing Law...................... 5 ARTICLE III. PARTICIPATION................................................. 5 ARTICLE IV. VESTING AND FORFEITURE......................................... 6 Section 4.01. Vesting............................................. 6 Section 4.02. Forfeiture.......................................... 6 ARTICLE V. PENSION REPLACEMENT BENEFIT..................................... 6 Section 5.01. Pension Replacement Benefit......................... 6 Section 5.02. Alternate Form...................................... 7 Section 5.03. Death of Participant................................ 7 ARTICLE VI. 401(k) REPLACEMENT BENEFIT..................................... 7 Section 6.01. Matching Contributions and Profit Sharing Contributions..................... 7 Section 6.02. Adjustments to Participant Accounts................. 7 Section 6.03. Distribution of Net Earnings........................ 8 Section 6.04. 401(k) Replacement Benefit.......................... 8 Section 6.05. Alternate Form...................................... 8 Section 6.06. Death of Participant................................ 8 ARTICLE VII. MISCELLANEOUS................................................. 9 Section 7.01. Plan Terminations................................... 9 Section 7.02. Amendments.......................................... 9 Section 7.03. General Administration.............................. 9 Section 7.04. No Employment Rights................................ 9 Section 7.05. Non-alienation...................................... 9 Section 7.06. Limitation of Liability............................. 9 Section 7.07. Acceleration or Change of Payment................... 10 Section 7.08. Tax Withholding..................................... 10 Section 7.09. Counterparts........................................ 10 - 1 - LILLY INDUSTRIES, INC. REPLACEMENT PLAN ARTICLE I. ESTABLISHMENT OF PLAN Section 1.01. Establishment. Lilly Industries, Inc. ("Company") hereby establishes the Lilly Industries, Inc. Replacement Plan ("Plan"), effective January 1, 1996. Section 1.02. Purpose. The sole purpose of the Plan is to replace certain benefits for a select group of management and highly compensated employees of the Company and its Affiliated Employers to the extent that the benefits to which such employees would otherwise be entitled under the Lilly Employees' Pension Plan, the Lilly Industries, Inc. Employee 401(k) Savings Plan, and the Lilly Industries, Inc. Defined Contribution Plan are limited by Sections 401(a)(17), 402(g), and 415 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of subsequent federal income tax laws ("Code"). Section 1.03. Funding. The Plan is an unfunded benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended, and the Code. The right of a Participant or Beneficiary to receive payment under the Plan is merely a contractual right to payment from the Employer of the Participant, and the Plan does not give Participants or Beneficiaries any interest in, or right to, any of the assets of the Company or any Affiliated Employer other than as a general creditor of his or her Employer. Pension Replacement Benefits payable under the Plan with respect to a Participant shall be paid solely from the general assets of the Employer of the Participant. Section 1.04. Trust. The Company has established the Company Trust for the purpose of satisfying the payment obligations of the Company and other Employers with respect to Matching Contribution Accounts and Profit Sharing Contribution Accounts of Participants under the Plan. Benefits payable under the Plan with respect to the Matching Contribution Account and Profit Sharing Contribution Account of a Participant shall be paid from the Company Trust, or if the assets of the Company Trust are not sufficient to pay such benefits, the Employer of the Participant shall pay such benefits from its general assets. The interests or rights of Participants or Beneficiaries in or to any of the funds, property, or assets held by the Company Trust shall not be senior to the unsecured general creditors of the Company or any Affiliated Employer. ARTICLE II. DEFINITIONS AND INTERPRETATION Section 2.01. 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: (i) a member of a controlled group of corporations (as defined in Code Section 414(b)) of which the Company is a member; or (ii) an unincorporated trade or business which is under common control (as defined in Code Section 414(c)) with the Company. (b) "Beneficiary" means the person or persons entitled to Plan benefits with respect to the Participant after he or she is deceased. (c) "Board" means the board of directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended, or any corresponding provisions of any subsequent federal income tax law. (e) "Committee" means the Compensation Committee of the Board to whom authority to administer and interpret the Plan and to designate eligible participants has been delegated by the Board. (f) "Company" means Lilly Industries, Inc. and any successor to Lilly Industries, Inc. (g) "Company Trust" means the trust created by the Company under the "Trust Agreement for Lilly Industries, Inc. Replacement Plan," as amended from time to time. (h) "Competition" means any of the activities described within this Subsection. A Participant engages in Competition if he or she at any time (A) directly or indirectly engages in any activity or business that is the same as or substantially similar to or competitive with that of the Company or any Affiliated Employer, (B) directly or indirectly engages in, owns, manages, operates, joins, controls, lends money or other assistance to, or participates in or is connected with, as an officer, employee, partner, stockholder, consultant, or otherwise, an individual, partnership, firm, corporation or other business organization or entity that is engaged in any activity or business that is the same as or substantially similar to or competitive with that of the Company or any Affiliated Employer, or (C) discloses or uses, other than in the normal and ordinary performance of service for the Employer, any Confidential Information of the Company or any Affiliated Employer. Nothing contained in the foregoing, however, shall prohibit the Participant from owning shares of stock representing less than one percent (1%) of the outstanding shares of any publicly-held competitor of the Employer or any Affiliated Employer. (i) "Confidential Information" means any information not in the public domain and not previously disclosed to the public by the Board or the management of the Company or an Affiliated Employer with respect to the products, facilities and 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 - 2 - or an Affiliated Employer, or any information which the Company or an Affiliated Employer has designated as Confidential Information. (j) "Creditor Exempt Group Annuity Contract" means any group annuity contract issued by an insurance company to the Company, as agent for each Participant who elects to make Participant Contributions, for the purpose of receiving and holding in accordance with its terms (i) Participant Contributions (and investment earnings, gains and losses thereon) and (ii) amounts (and investment earnings, gains, and losses thereon) transferred from the Company Trust to the Creditor Exempt Group Annuity Contract in accordance with the terms of the Plan and the Company Trust. Any amounts (plus additions thereon) held under such Creditor Exempt Group Annuity Contract shall be solely the property of the Participant and shall be paid to the Participant or to his beneficiary at the time and in the manner provided for the 401(k) Replacement Benefit and the terms of such annuity contract. (k) "Employer" means the Company, any Affiliated Employer which adopts the Plan with the consent of the Committee, and any successor thereto. (l) "Good Cause" means (i) 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 his or her termination of employment; (ii) engaging in conduct that has caused demonstrable and material injury to the Company or an Affiliated Employer, monetary or otherwise; (iii) 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 (iv) the disclosure or use of Confidential Information 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 and in its sole discretion. (m) "Matching Contribution" means for any Plan Year the excess, if any, of (i) the Employer matching contributions which would have been contributed to the Savings Plan with respect to a Participant for the Plan Year if the Participant had contributed his or her Participant Contributions for the Plan Year to the Savings Plan and if the limitations of Code Sections 401(a)(17), 402(g), and 415 had not applied, over (ii) the actual Employer matching contributions contributed to the Savings Plan with respect to the Participant for the Plan Year. Such Matching Contribution shall be contributed to the Company Trust at least annually and at such times and in such manner as may be determined by the Committee in its sole discretion from time to time. (n) "Matching Contribution Account" means the bookkeeping account under which Matching Contributions of a Participant are credited, as adjusted for investment earnings, gains, and losses thereon and reduced by prior distributions therefrom as provided under the terms of the Plan. - 3 - (o) "Participant" means each employee of an Employer who is employed in a key executive or managerial position, who is designated by the Committee to be eligible for participation in the Plan, and who agrees to be bound by the provisions of the Plan on a form provided by the Committee. (p) "Participant Contribution" means for any Plan Year the after-tax amount contributed, at the written election of the Participant on the applicable form, by the Participant to the Creditor Exempt Group Annuity Contract or the Participant Trust, if any, up to an amount equal to the difference between (i) the amount that he or she could have contributed to the Savings Plan if the limitations of Code Sections 401(a)(17), 402(g), and 415 had not applied and (ii) the amount that he or she was actually permitted to contribute to the Savings Plan for such year, taking into account those limitations. Such Participant Contributions shall be withheld from the pay of the Participant throughout the year (after withholding applicable federal, state, and local taxes) and shall be contributed to the Creditor Exempt Group Annuity Contract or the Participant Trust, if any, at such times and in such manner as may be determined by the Committee in its sole discretion from time to time. (q) "Participant Trust" refers to any grantor trust established by any Participant for the purpose of holding (i) Participant Contributions (and investment earnings, gains, and losses thereon) and (ii) amounts (and investment earnings, gains, and losses thereon) transferred from the Company Trust to the Participant Trust in accordance with the terms of the Plan and the Company Trust. (r) "Pension Plan" means the "Lilly Employees' Pension Plan," as amended from time to time. (s) "Pension Replacement Benefit" means the excess, if any, of (i) the amount of benefit that would have accrued to a Participant under the Pension Plan if the amount of such accrued benefit were calculated without giving effect to the limitations on compensation and benefits under Code Sections 401(a)(17) and 415; provided, however, that such amount shall be determined after taking into account the reduction in such retirement income that would have accrued if Code Section 415(e) limitations applied, but only to the extent that such reduction is attributable to contributions of the Participant to the Savings Plan which are not matched by Employer Matching Contributions, over (ii) the retirement benefit actually accrued to, or with respect to, the Participant under the Pension Plan. (t) "Plan" means the "Lilly Industries, Inc. Replacement Plan," as set forth herein and as it may be amended from time to time hereafter. (u) "Plan Year" means the calendar year. (v) "Profit Sharing Contribution" means for any Plan Year the excess, if any, of (i) the Employer profit sharing contributions which would have been contributed to the Savings Plan with respect to a Participant for the Plan Year if the limitations of Code Sections 401(a)(17) and - 4 - 415 had not applied, over (ii) the actual Company profit sharing contributions to the Savings Plan with respect to the Participant for the Plan Year. Such Profit Sharing Contribution shall be contributed to the Company Trust at least annually and at such times and in such manner as may be determined by the Committee in its sole discretion from time to time. (w) "Profit Sharing Contribution Account" means the bookkeeping account under which Profit Sharing Contributions of a Participant are credited, as adjusted for investment earnings, gains, and losses thereon and reduced by prior distributions therefrom as provided under the terms of the Plan. (x) "401(k) Replacement Benefit" means the aggregate amount of the Matching Contribution Account and Profit Sharing Contribution Account of a Participant as of the date of the retirement of the Participant under the Savings Plan. (y) "Savings Plan" refers collectively to the "Lilly Industries, Inc. Employees 401(k) Savings Plan," as amended from time to time, and the "Lilly Industries, Inc. Defined Contribution Plan," as amended from time to time. Section 2.02. Construction and Governing Law. (a) The Plan shall be construed, enforced, and administered, and the validity thereof determined in accordance with, the laws of the State of Indiana. (b) Words used herein in the masculine gender shall be construed to include the feminine gender where appropriate, and the words used herein in the singular or plural shall be construed as being in the plural or singular where appropriate. (c) Whenever any actuarial present value or actuarial equivalency is to be determined under the Plan, it shall be based on such actuarial assumptions as may be provided under the Pension Plan for comparable situations as determined by the Committee in its sole discretion. ARTICLE III. PARTICIPATION The Committee may designate from time to time which employees of an Employer are eligible to participate in the Plan. Any such employee shall become a Participant only after completing such forms and making such elections as the Committee may prescribe, including an agreement to be bound by all terms of the Plan and all determinations of the Committee. A Participant shall remain a Participant until all amounts to which he or she is entitled under the Plan have been paid to him or her. - 5 - ARTICLE IV. VESTING AND FORFEITURE Section 4.01. Vesting. A Participant shall become vested in his or her Pension Replacement Benefit and 401(k) Replacement Benefit as follows: (a) Subject to Section 4.02, the Pension Replacement Benefit of a Participant shall be vested in accordance with the vesting provisions set forth in the Pension Plan. (b) Subject to Section 4.02, the 401(k) Replacement Benefit of a Participant shall be fully vested at all times. Section 4.02. Forfeiture. A Participant shall forfeit his or her Pension Replacement Benefit and 401(k) Replacement Benefit as follows: (a) A Participant shall forfeit any and all rights he or she may have to the nonvested portion of his or her Pension Replacement Benefit as of the date his or her employment with the Employer ends either voluntarily or involuntarily. (b) Notwithstanding any other provision of the Plan, a Participant shall forfeit any and all rights he or she may have to any 401(k) Replacement Benefit or Pension Replacement Benefit if (i) the employment of the Participant is involuntarily terminated by the Employer for Good Cause, as determined by the Committee in its sole discretion, or (ii) the Participant, either before or after any termination of employment with the Employer (including, without limitation, retirement from the Employer) engages in Competition. (c) If a Participant dies before any benefit becomes payable to him or her under the Plan, the Participant shall forfeit any and all rights that Participant may have had to any benefit under the Plan, except any death benefit payable pursuant to Article V or VI. ARTICLE V. PENSION REPLACEMENT BENEFIT Section 5.01. Pension Replacement Benefit. A Participant who retires from the Employer in accordance with the Pension Plan and is entitled to receive a retirement benefit under the Pension Plan shall be entitled to receive the vested portion of his or her Pension Replacement Benefit, payable as an actuarially equivalent lump sum payment at the same time as the initial benefit payment of the pension under the Pension Plan, unless an alternate form of benefit then available under the Pension Plan has been elected by the Participant as provided in Section 5.02. - 6 - Section 5.02. Alternate Form. Upon becoming a Participant in the Plan and at any time thereafter at least one (1) year before his or her Pension Replacement Benefit becomes due and payable under the Plan, a Participant may elect in writing, on a form prescribed by the Committee, an actuarially equivalent alternate form of benefit then available under the Pension Plan; provided, however, that any such election shall not become effective until the date that is one (1) year after the date on which such election is approved by the Committee, which approval may be withheld by the Committee in its sole discretion. Section 5.03. Death of Participant. (a) If a married Participant dies prior to the date he or she begins receiving payments under the Plan, and the survivor annuity payable to the spouse of the Participant under the Pension Plan is less than the survivor annuity which would have been payable if it were calculated without giving effect to the limitations on benefits under Code Sections 401(a)(17) and 415, the spouse of the deceased Participant shall be entitled to receive a survivor annuity equal to the excess of (i) the survivor annuity that would have been payable if it were calculated without giving effect to such Code limitations, over (ii) the survivor annuity actually payable to such spouse under the Pension Plan. Such survivor annuity payable under the Plan shall be payable at the same time and in the same form as the survivor annuity under the Pension Plan is payable. (b) If a Participant dies after the date he or she begins receiving payments under the Plan, survivor benefits, if any, will continue to be paid pursuant to the alternate form of benefit, if any, elected under Section 5.02. ARTICLE VI. 401(k) REPLACEMENT BENEFIT Section 6.01. Matching Contributions and Profit Sharing Contributions. Subject to the provisions of Section 6.03, the Employer shall credit to the Matching Contribution Account of a Participant the Matching Contributions, if any, with respect to the Participant for the Plan Year at the time and in such manner as determined by the Committee in its sole discretion from time to time. Subject to the provisions of Section 6.03, the Employer shall also credit to the Profit Sharing Contribution Account of a Participant the Profit Sharing Contributions, if any, with respect to the Participant for the Plan Year at the time and in such manner as determined by the Committee in its sole discretion from time to time. Section 6.02. Adjustments to Participant Accounts. The Matching Contribution Account and Profit Sharing Contribution Account of a Participant shall be adjusted from time to time to reflect actual investment earnings, gains, and losses under the equivalent accounts maintained for the Participant under the Company Trust. The assets of said Trust shall be invested in a manner which approximates as closely as practicable the investment options under the equivalent accounts established and maintained for the Participant under the Savings Plan. - 7 - The Matching Contribution Account and Profit Sharing Contribution Account of a Participant shall also be adjusted to reflect distributions from such accounts under the Plan and from the equivalent accounts established and maintained for the Participant under the Company Trust. Section 6.03. Distribution of Net Earnings. A Participant shall receive, as soon as administratively practicable after the end of each Plan Year, an annual distribution in an amount equal to the investment earnings and realized gains with respect to each account of the Participant for the Plan Year under the Company Trust. Upon becoming a Participant in the Plan or at any time thereafter, a Participant may elect in writing, on a form prescribed by the Committee, that distributions made pursuant to this Section 6.03 shall, in lieu of being paid directly to the Participant, be contributed to the Creditor Exempt Group Annuity Contract or the Participant Trust of the Participant. Any such election shall remain effective until revoked by the Participant in writing, on a form prescribed by the Committee. If the Participant does not make such an election, or later revokes such an election, the Participant shall not be entitled to any Matching Contributions or Profit Sharing Contributions for the Plan Year within which a distribution of net earnings is made directly to the Participant pursuant to this Section 6.03, or for any Plan Year thereafter until the Participant has made such an election. Section 6.04. 401(k) Replacement Benefit. A Participant who terminates employment with the Employer shall be entitled to receive his or her 401(k) Replacement Benefit, payable as a lump sum payment at the same time as the initial benefit payment of the Participant under the Savings Plan, unless an alternate form of benefit then available under the Savings Plan has been elected by the Participant as provided in Section 6.05. Section 6.05. Alternate Form. Upon becoming a Participant in the Plan and at any time thereafter at least one (1) year before his or her 401(k) Replacement Benefit becomes due and payable under the Plan, a Participant may elect in writing, on a form prescribed by the Committee, an actuarially equivalent alternate form of benefit permitted by the Committee; provided, however, that any such election shall not become effective until the date that is one (1) year after the date on which such election is approved by the Committee, which approval may be withheld by the Committee in its sole discretion. Section 6.06. Death of Participant. (a) If a Participant dies prior to the date he or she begins receiving payments under the Plan, the designated Beneficiary of the Participant shall be entitled to receive an amount equal to the sum of the Matching Contribution Account and Profit Sharing Contribution Account balances of the Participant as of the date of death of the Participant. The spouse of the Participant shall be the beneficiary if the Participant is married at the time of his death, unless the spouse consents to the designation of an alternate beneficiary. (b) If a Participant dies after the date he or she begins receiving payments under the Plan, survivor benefits, if any, will continue to be paid pursuant to the alternate form of benefit, if any, elected under Section 6.05. - 8 - ARTICLE VII. MISCELLANEOUS Section 7.01. Plan Terminations. If the Pension Plan is terminated in accordance with the terms thereof, the obligation to provide any Pension Replacement Benefit accrued up to the termination date shall continue and shall be payable in accordance with the terms of the Plan. If the Savings Plan (or either of them) is terminated in accordance with the terms thereof, the obligation to provide any 401(k) Replacement Benefit shall continue and shall be payable in accordance with the terms of the Plan. Section 7.02. Amendments. The Board from time to time may amend, suspend, or terminate the Plan or any part hereof, effective as of the beginning of any Plan Year commencing on or after the date of adoption of such action by the Board; provided, however, that no such action shall affect the rights of the Participant or the operation of the Plan with respect to any benefits of the Participant that may have accrued or become payable before such action. Section 7.03. General Administration. The Committee shall have exclusive authority to administer the Plan. The Committee shall have the exclusive right and authority to interpret the Plan and resolve any ambiguities. The decisions, actions and records of the Committee shall be conclusive and binding upon the Company, any Employer, and all persons having or claiming to have any right or interest in or under the Plan. The Committee may delegate to such officers, employees or departments of the Company such authority, duties, and responsibilities of the Committee as it, in its sole discretion, considers necessary or appropriate for the proper and efficient operation of the Plan, including, without limitation, (a) interpretation of the plan, (b) approval and payment of claims, and (c) establishment of procedures for administration of the Plan. Section 7.04. No Employment Rights. Neither the establishment of the Plan nor the status of an employee as a Participant shall give any Participant any right to be retained in the employ of the Employer; and no Participant and no person claiming under or through such Participant shall have any right or interest in any benefit under the Plan unless and until the terms, conditions, and provisions of the Plan affecting such Participant shall have been satisfied. Section 7.05. Non-alienation. The right of any Participant or any person claiming under or through such Participant to any benefit or any payment hereunder shall not be subject in any manner to attachment or other legal process for the debts of such Participant or person; and the same shall not be subject to anticipation, alienation, sale, transfer, assignment or encumbrance. Section 7.06. Limitation of Liability. No member of the Board or the Committee, and no officer or employee of the Company or any Affiliated Employer, shall be liable to any person for any action taken or omitted in connection with the administration of the Plan, nor shall the - 9 - Company or any Affiliated Employer be liable to any person for any such action or omission. No person shall, because of the Plan, acquire any right to an accounting or to examine the books or the affairs of the Company or any Affiliated Employer. Nothing in the Plan shall be construed to create any trust or any fiduciary relationship between the Company or any Affiliated Employer and any Participant or any other person. Section 7.07. Acceleration or Change of Payment. Notwithstanding any provision of the Plan to the contrary, the Committee, in its sole discretion, may accelerate the time of payment of any benefit to a Participant to the extent that it deems equitable or desirable under the circumstances or, if there has been a change in the family circumstances of the Participant, may change the method of payment of any such benefit; provided, however, any such change shall not reduce the benefit payable to an amount which is less than the actuarial equivalent of the benefit payable to the Participant. Section 7.08. Tax Withholding. The Employer may withhold from any payment due hereunder any taxes required to be withheld under applicable federal, state, or local tax laws or regulations. Section 7.09. Counterparts. The Plan may be evidenced by any number of counterparts, each of which shall constitute an original. The Lilly Industries, Inc. Replacement Plan has been executed by the duly authorized officers of Lilly Industries, Inc. on this 27th day of September, 1996. LILLY INDUSTRIES, INC. By: /s/ Douglas W. Huemme -------------------------------------- Douglas W. Huemme, Chairman, President & Chief Executive Officer By: /s/ Kenneth L. Mills ------------------------------------------------ Kenneth L. Mills Title: Corporate Accounting Director ---------------------------------------------- - 10 - TRUST AGREEMENT FOR LILLY INDUSTRIES, INC. REPLACEMENT PLAN This Agreement is executed by and between LILLY INDUSTRIES, INC., with its principal place of business in Indianapolis, Indiana ("Company"), and Bankers Trust Company of Des Moines, as trustee ("Trustee"). RECITALS The Company has established the Lilly Industries, Inc. Replacement Plan ("Plan") to provide a select group of employees of the Company and its subsidiaries and affiliates with benefits to replace those lost under the Lilly Employees' Pension Plan, the Lilly Industries, Inc. Employee 401(k) Savings Plan, and the Lilly Industries, Inc. Defined Contribution Plan as a result of the limitations of Sections 401(a)(17), 402(g), and 415 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of subsequent federal income tax laws ("Code"). The Plan is incorporated herein and made a part hereof by this reference the same as if fully set forth herein. The Company wishes to establish a trust ("Trust") for the purpose of satisfying the payment obligations of the Company and other Employers with respect to Matching Contribution Accounts and Profit Sharing Contribution Accounts of Participants under the Plan, and the Company and other Employers wish to contribute assets to the Trust for such purpose. Assets contributed by an Employer (including the Company) will be subject to the claims of the general creditors of the Employer in the event of the insolvency or bankruptcy of the Employer. Benefits payable under the Plan with respect to Matching Contribution Accounts and Profit Sharing Contribution Account of a Participant shall be paid from the Trust, or if the assets of the Trust -1- are not sufficient to pay such benefits, the Employer of the Participant shall pay such benefits from its general assets. The interests or rights of Participants or their beneficiaries in or to any of the funds, property, or assets held by the Trust shall not be senior to the unsecured general creditors of the Company or any Affiliated Employer. Pension Replacement Benefits payable under the Plan with respect to a Participant shall not be paid from the Trust, but instead shall be paid solely out of the general assets of the Employer of the Participant. The Company has selected the Trustee to serve as trustee of the Trust, and the Trustee agrees to serve in that capacity, all on the terms and conditions set forth herein. The Company intends that the Trust shall constitute an unfunded arrangement and shall not affect the status of the Plan as an unfunded benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). AGREEMENT NOW, THEREFORE, the Company and the Trustee hereby agree as follows: Section 1. Establishment of Trust. The Company establishes the Trust for the purpose of providing assets to satisfy the payment obligations of the Company and other Employers with respect to Matching Contribution Accounts and Profit Sharing Contribution Accounts of Participants under the Plan. Section 2. Defined Terms. Except as otherwise expressly provided herein, whenever the initial letter of a word or phrase is capitalized, and the word or phrase is defined by Article II of the Plan, the word or phrase shall have the meaning given to that term in Article II of the Plan. -2- Section 3. Rules of Construction. Except as otherwise expressly provided herein, the rules of construction specified in the Plan shall apply with respect to the Trust. The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of Section 671 of the Code, and it shall be construed accordingly. Section 4. Trust Fund. (a) The Trustee shall receive and accept for the purposes hereof all property paid to it by or at the direction of the Company or other Employer from time to time, and shall hold, invest, reinvest, manage, administer, and distribute such property and the increments, proceeds, earnings, and income thereof for the exclusive benefit of the Participants and their beneficiaries under the Plan. All assets held by the Trustee in the Trust are referred to herein as the "Trust Fund." The Trust Fund shall be held by the Trustee, in trust, and dealt with in accordance with the provisions of this Trust Agreement. The Trustee shall maintain accurate and detailed records regarding the receipt and amount of property paid to it by or at the direction of the Company and each other Employer. (b) Except as may be provided in Sections 6(d), (6(e), and 7(a), at no time shall any part of the Trust Fund be used for, or diverted to, purposes other than for the exclusive benefit of Participants and their beneficiaries as provided in the Plan or for defraying the reasonable expenses of administering the Trust Fund. However, Participants and their beneficiaries shall not have any preferred claim on, or any beneficial ownership interest in the Trust Fund, and any rights created under the Plan and this Trust Agreement shall be unsecured contractual rights of Participants and their beneficiaries. -3- Section 5. Investments by Trustee. (a) The Trustee shall, if so directed in writing by the Committee, segregate all or a portion of the Trust Fund held by it into one (1) or more separate investment accounts, each separate account being hereinafter referred to as an "Investment Fund." The Trustee shall be under no duty to question, and shall not incur any liability on account of following, any such direction of the Committee. The Trustee shall manage, acquire, or dispose of the assets in an Investment Fund in accordance with the investment guidelines, objectives, and restrictions established, or the specific investment directions given by the Committee for that Investment Fund. Unless otherwise provided in specific investment directions given by the Committee, it is the intent of the Committee that the assets held in an Investment Fund shall be invested pursuant to the written directions of the Participants in accordance with procedures established by the Committee from time to time. Subject to the provisions of the Plan and this Trust Agreement, all income received with respect to, and any proceeds received from the disposition of, property held in an Investment Fund shall be credited to, and reinvested in, that Investment Fund. Subject to the provisions of the Plan, the Committee may direct the Trustee to transfer all or part of the assets of one Investment Fund to another Investment Fund. (b) The Trustee shall hold any portion of the Trust Fund not invested pursuant to Subsection (a) in an Investment Fund to be known as the "General Fund". Except as otherwise directed by the Committee in writing or provided herein, the Trustee shall have the power and authority, in its discretion, to manage, acquire, or dispose of the assets held in the General Fund and shall invest and reinvest the assets of the General Fund without distinction between principal and income in preferred or common stocks, including shares of investment companies or mutual -4- funds, bonds, notes, debentures or mortgages, equipment trust certificates, investment trust certificates, common trust funds, insurance contract or group annuity contract, or other real or personal property investments or securities of any kind, class, or character. The Trustee in its discretion may hold such portion of the General Fund in cash or cash balances as the Trustee may from time to time deem to be in the best interests of the Trust Fund. Section 6. Disbursements from the Trust Fund. (a) The Trustee shall make payments from the Trust Fund to Participants, their beneficiaries, and such other persons as the Committee may direct from time to time. Such payments shall be made in such manner, in such amounts, and for such purposes, including the payment of Plan benefits and the payment of expenses of administration of the Plan, as may be specified in the directions of the Committee. The Committee shall ensure that any payment directed under this Section conforms to the provisions of the Plan, this Trust Agreement, and the provisions of any applicable law. Each direction of the Committee shall be in writing and shall be deemed to include a certification that any payment or other distribution directed thereby is one that the Committee is authorized to direct, and the Trustee may rely conclusively on such certification without further investigation. Payments by the Trustee shall be made by its check (or the check of its agent) to the order of the payee. Payments or other distributions hereunder may be mailed to the payee at the address last furnished to the Trustee by the Committee or if no such address has been so furnished, to the payee in care of the Committee. The Trustee shall not incur any liability or other damage on account of any payments or other distributions made by it in accordance with the written directions of the Committee. -5- (b) A Participant who terminates employment with the Employer shall be entitled to a distribution from the Trust Fund in an amount equal to the Matching Contribution Account and Profit Sharing Contribution Account balances of the Participant under the Plan as of the date of termination of employment of the Participant. Unless otherwise directed by the Committee, such distribution shall be made as a lump sum payment at the same time as the initial benefit payment of the Participant under the Lilly Industries, Inc. 401(k) Savings Plan, as amended from time to time. If a Participant dies prior to the date he or she begins to receive distributions from the Trust Fund as provided in this Subsection, the designated beneficiary of the Participant shall be entitled to a distribution from the Trust Fund in an amount equal to the Matching Contribution Account and Profit Sharing Contribution Account balances of the Participant under the Plan as of the date of death of the Participant, payable as a lump sum payment as soon as administratively practicable after the date of death of the Participant, unless otherwise directed by the Committee. If a Participant dies after the date he or she begins to receive distributions from the Trust Fund as provided in this Subsection, the Trustee shall make such additional distributions from the Trust Fund on behalf of the Participant as may be directed by the Committee. (c) Each calendar year the Trustee shall set aside for each Participant and each Participant shall be entitled to a distribution from the Trust Fund of an amount equal to the investment earnings and realized gains with respect to the Trust Fund for such calendar year that were credited to the Matching Contribution Account and the Profit Sharing Contribution Account of the Participant under the Plan for such calendar year. As soon as administratively practicable, the Trustee shall distribute such amount to the Participant unless the Participant directs the Trustee to transfer such amount to the Creditor Exempt Group Annuity Contract or to his or her -6- Participant Trust. Payments made by the Trustee pursuant to this Subsection shall be made by its check (or the check of its agent) to the order of the Participant or the Creditor Exempt Group Annuity Contract or the Participant Trust, as the case may be, and shall be mailed to the payee at the address furnished by the Trustee by the Committee. The Trustee shall not incur any liability or other damage on account of any such payment or transfer as so directed by the Participant. Any amount set aside by the Trustee hereunder shall not be subject to the general creditors of the Company and the Participant shall have a security interest in such amounts until so paid or transferred. (d) All expenses of the Trust that are allocable to a particular Investment Fund shall be allocated and charged to that Fund. Expenses of the Trust that are not allocable to a particular Investment Fund shall be charged against any separate Investment Funds in proportion to their value relative to the value of the entire Trust Fund. (e) The Trustee shall pay from the Trust Fund all expenses of the Trust and any real and personal property taxes, income taxes, and other taxes levied or assessed under existing or future laws against the Trust Fund, unless the Company or other Employer elects to pay such expenses or taxes. (f) Upon termination of the Plan, after all Plan benefits have been paid to Participants and their beneficiaries, the Trustee shall pay any remaining assets of the Trust to the Company. Section 7. Trustee Responsibility Regarding Payments if an Employer Becomes Insolvent or Files for Bankruptcy. (a) The portion of the Trust Fund attributable to contributions by an Employer to the Trust Fund shall at all times be subject to the claims of the Employer's general creditors in the -7- event the Employer becomes Insolvent (as defined in Subsection (c)). If an Employer becomes Insolvent, and the Trustee is informed of that fact, the Trustee shall transfer Trust assets to satisfy claims against the Employer as directed by a court of competent jurisdiction. The Employer shall have the duty to inform the Trustee within three business days, if the Employer becomes Insolvent. If the Employer so notifies the Trustee, or a person claiming to be a creditor of the Employer alleges in writing to the Trustee that the Employer has become Insolvent, the Trustee shall independently determine, within thirty (30) days after receipt of the notice, whether the allegation is correct. Pending that determination, the Trustee shall discontinue payments to Participants and their beneficiaries pursuant to the Plan which are attributable to contributions by the Employer and shall hold such portion of the Trust Fund for the benefit of the Employer's general creditors. The Trustee shall notify the Employer in writing before any discontinuance of benefit payments pursuant to the preceding sentence. The Trustee shall resume payments to such Participants and their beneficiaries only after the Trustee has determined that the Employer is not Insolvent or is no longer Insolvent. Except as otherwise expressly provided herein, the Trustee shall have no duty to inquire as to whether an Employer is Insolvent. Moreover, in determining whether an Employer is Insolvent, the Trustee may rely conclusively on any evidence that gives it a reasonable basis for making a determination concerning the Employer's solvency. (b) If the Trustee discontinues payments from the Trust Fund pursuant to Subsection (a) above and subsequently resumes such payments, the first payment following the discontinuance shall include, to the extent available in the Trust Fund, the aggregate amount of all payments that would have been made to the Participants and their beneficiaries in accordance with the provisions -8- of the Plan during the period of discontinuance, less the aggregate amount of payments made to Participants and their beneficiaries by the Employer in lieu of the payments provided for hereunder during any period of discontinuance. (c) An Employer shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Employer is unable to pay its debts as they mature, or (ii) the Employer is subject to a pending proceeding as a debtor under any bankruptcy law. (d) Nothing in this Trust Agreement shall in any way diminish any rights of a Participant or a Participant's beneficiary to pursue his or her rights as a general creditor of an Employer with respect to any payments due under the Plan. Section 8. Powers and Duties of Trustee. Except as otherwise expressly provided herein, the Trustee shall discharge its duties under this Trust Agreement solely in the interest of Participants and their beneficiaries with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims, all in accordance with the provision of this Trust Agreement. Except to the extent that the Committee provides otherwise, in administering the Trust Fund, the Trustee shall have the power in its discretion: (a) To exercise, or to refrain from exercising, all voting rights with respect to any stocks, bonds, or other securities and to grant general or special proxies or powers of attorney with or without power of substitution, whether discretionary or otherwise, and to enter into any voting trust or similar agreement; -9- (b) To register and hold any investment in the name of the Trustee, in the name of one or more of its nominees or in the name of one or more nominees of any system for the central handling of securities, with or without indication of the capacity in which the investment is held, and to hold any investment in bearer form, but the books and records of the Trustee shall at all times show that such investments are part of the Trust Fund; (c) To collect and receive any and all money and other property due to the Trust Fund and to give full discharge therefor; (d) To employ suitable agents and counsel, and to pay their reasonable expenses and compensation from the Trust Fund; (e) To provide ancillary services for no more than reasonable compensation; (f) To make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted; (g) To invest the Trust Fund in deposits of the Trustee bearing a reasonable rate of interest, including, but not limited to, savings accounts, money market accounts, certificates of deposit and repurchase agreements; (h) To withhold any tax that by any present or future law is required to be withheld from any payment under the Plan and to issue required reports to payees and governmental authorities; (i) To pay the reasonable expenses of the Trust; and (j) Generally, to do all acts, whether or not expressly authorized, that the Trustee may deem necessary or desirable for the protection of the Trust Fund. -10- Section 9. Compensation to Trustee. The Trustee shall be paid such reasonable compensation as shall from time to time be agreed upon in writing by the Company and the Trustee. Such compensation shall include all reasonable and proper expenses of administration of the Trust, including reasonable fees for legal services. Such compensation shall be paid by the Trustee out of the Trust Fund, unless paid by the Company or other Employer. Section 10. Records of Trust. (a) The Trustee shall keep accurate and detailed accounts of all investments, receipts, disbursements and other transactions hereunder, and all accounts, books, and records relating thereto shall be open to inspection and audit at all reasonable times by any person designated by the Company. Within sixty (60) days following the close of each calendar year of the Trust (hereinafter referred to as "Trust Year"), and within sixty (60) days after the removal or resignation of the Trustee as provided in Section 12, the Trustee shall file with the Company a written account setting forth all investments, receipts, disbursements, and other transactions effected by it during the Trust Year or during the period from the close of the last Trust Year to the date of the removal or resignation. (b) The Trustee shall determine the fair market value of the Trust Fund and each Investment Fund as of the close of business on the last day of each Plan quarter and as of each other date designated by the Committee by a method uniformly applied. The Trustee shall determine the fair market value of the Trust Fund and each Investment Fund based upon information and financial publications of general circulation, statistical and valuation services, records of security exchanges, appraisals by qualified persons, transactions and bona fide offers -11- in assets of the type in question, and other information customarily used in the valuation of property. (c) The Trustee shall provide any additional information or reports as reasonably requested by the Company from time to time. Section 11. Limitation of Responsibilities of Trustee. The Trustee's responsibilities and liabilities shall be subject to the following limitations: (a) The Trustee shall have no duties other than those expressly set forth in this Trust Agreement and those imposed on the Trustee by applicable law. (b) The Trustee shall not be responsible for the administration of the Plan, for the correctness of any determination of payments or disbursements from the Trust Fund, or for the adequacy of the Trust Fund to pay the benefits arising under the provisions of the Plan. The Trustee is not a party to the Plan and shall have no responsibility to monitor any provisions of the Plan. (c) The Trustee shall not be under any duty to require payment of any contributions to the Trust Fund or to see that any payment made to it is computed in accordance with the terms of the Plan. (d) The Trustee shall have no duty to make recommendations concerning actions to be taken hereunder or to question the propriety of any action it is directed to take hereunder with respect to matters falling within the jurisdiction of the Company or the Committee, to the extent that the action is consistent with this Trust Agreement and applicable law. (e) The Trustee shall not be required to give any bond or other obligation to secure the due performance of the Trust by it, unless required by law. -12- (f) The Trustee shall have no liability for the acts or omissions of any predecessors or successors in office. Section 12. Resignation or Termination of Trustee. The Trustee may resign at any time by giving sixty (60) days' prior written notice to the Company, provided, however, that the Company may waive the sixty (60) day notice requirement. The Trustee may be removed by the Company at any time upon giving sixty (60) days' prior written notice to the Trustee, provided, however, that the Trustee may waive the sixty (60) day notice requirement. Upon resignation or removal of the Trustee or a successor trustee or trustees, the Committee shall appoint a successor trustee or trustees. The successor trustee or trustees shall have the same powers and duties as those conferred upon the Trustee hereunder, and upon acceptance of the successor trustee's acceptance of his appointment, the Trustee shall assign and transfer to the successor trustee or trustees the funds and properties then constituting the Trust Fund. The Trustee is authorized, however, to reserve such sums of money as it may deem advisable, for payment of reasonable fees and expenses in connection with the settlement of its account, and any balance of such reserve remaining after the payment of such fees and expenses shall be paid transferred to the successor trustee or trustees. Section 13. Non-alienation. To the extent permitted by law, benefits or rights under this Trust Agreement shall not be subject in any manner to anticipation, alienation, sale, transfer or assignment, charge, pledge or encumbrance of any kind, nor shall any such benefit or rights be liable for, or subject to attachment, executions, garnishment, sequestration, or other legal, equitable or other processes, nor shall the same be subject to the debts, obligations, liabilities, or torts of the Participants or beneficiaries entitled to any such benefits or rights under the Plan. -13- Section 14. Duty to Furnish Information. The Committee and the Trustee shall furnish to each other any documents, reports, returns, statements, or other information that the other reasonably deems necessary to perform duties imposed under the Plan or this Trust Agreement or otherwise imposed by law. Section 15. Reliance. Whenever any action is required to be taken by the Company hereunder, it shall be taken by the Chief Executive Officer, Chief Financial Officer, or Director of Corporate Accounting of the Company, or such other officer as may be authorized from time to time by the Board of Directors of the Company, in writing. Whenever any action is required to be taken by the Board of Directors, it shall be taken by a duly adopted resolution. All orders, requests, and instructions of the Committee or its delegate to the Trustee shall be in writing, and the Trustee shall act and shall be fully protected in acting in accordance with such orders, requests, and instructions. Section 16. Foreign Assets. The Trustee shall not permit the indicia of ownership of any of the assets of the Trust Fund to be maintained at a location outside the jurisdiction of the district courts of the United States. Section 17. Amendments. The Company may amend this Trust Agreement, in whole or in part, from time to time by action of its Board of Directors and notice thereof in writing delivered to the Trustee, provided that no such amendment that affects the rights, duties, or responsibilities of the Trustee shall be made without its written consent, and provided further that no amendment shall authorize or permit, at any time before the satisfaction of all liabilities with respect to the Participants or their beneficiaries, the Trust Fund to be used for or diverted to purposes other than for the exclusive benefit of such persons. In addition, no amendment shall -14- make this Trust Agreement revocable or terminate this Trust Agreement other than as provided in Section 18. Section 18. Termination of the Trust Agreement. This Trust Agreement shall terminate automatically on the date that all payments have been paid to the Participants and their beneficiaries as required by the Plan. On such termination, any remaining assets of the Trust Fund shall paid to the Company. Section 19. Governing Laws. This Trust Agreement shall be administered, construed, and enforced according to the laws of the State of Indiana. Section 20. Counterparts. This Trust Agreement may be executed in several counterparts, each one of which shall be deemed to be an original. IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be executed as of the 27th day of September, 1996. LILLY INDUSTRIES, INC. By: /s/ Douglas W. Huemme --------------------------------------- Douglas W. Huemme, Chairman, President & CEO ATTEST: By: /s/ Kenneth L. Mills -------------------------------- Title: Corporate Accounting Director -15- BANKERS TRUST COMPANY OF DES MOINES By: /s/ Niki Green --------------------------------------- Title: Trust Officer ATTEST: By: /s/ Bryan H. Hall ----------------------------------- Title: Vice President & Trust Officer EX-11 5 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE LILLY INDUSTRIES, INC. AND SUBSIDIARIES (In thousands, except per share data) Year Ended November 30 1996 1995 1994 Primary: Average shares outstanding - - Note A 22,600 22,677 22,660 Net Income $18,776 $20,264 $23,302 Net Income per common share - - Note A $0.83 $0.89 $1.03 ======= ======= ======= Average shares outstanding - - Note A 22,600 22,677 22,660 Dilutive stock options based on treasury stock method using average market price - - Note A 500 409 571 ------- ------- ------- 23,100 23,086 23,231 ======= ======= ======= Net Income $18,776 $20,264 $23,302 Net Income per common and common equivalent share - - Note A $0.81 $0.88 $1.00 ======= ======= ======= Fully diluted: Average shares outstanding - - Note A 22,600 22,677 22,660 Dilutive stock options based on treasury stock method using the higher of year end, quarter end or average market price - - Note A 600 423 590 ------- ------- ------- 23,200 23,100 23,250 ======= ======= ======= Net Income $18,776 $20,264 $23,302 Net Income per common and common equivalent share - - Note A $.81 $0.88 $1.00 ======= ======= ======= Note A - - Amounts have been adjusted to recognize the effect of all stock splits and stock dividends through November 30, 1996. EX-13 6 ANNUAL REPORT Selected Financial Data (1) (In thousands, except per share data)
Year Ended November 30 1996(2) 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- Operations Net sales $508,976 $328,345 $331,306 $284,325 Cost of products sold 321,748 219,899 214,809 189,111 Selling, administrative, research and development expenses 129,655 73,058 74,480 65,644 Income taxes 15,362 13,510 16,350 11,784 Net income as reported 18,776 20,264 23,302 16,155 Net income excluding restructuring charge 24,060 20,264 23,302 16,155 Per Share Data (3) Net income as reported .81 .88 1.00 .70 Net income excluding restructuring charge 1.04 .88 1.00 .70 Cash dividends .320 .310 .267 .238 Book value 5.36 4.86 4.38 3.60 Average number of shares and equivalent shares outstanding (4) 23,200 23,100 23,250 23,123 Shares outstanding at year end 22,723 22,502 22,710 22,517 Price range of Class A stock 19 3/4-12 1/4 15-11 18-11 3/4 15 7/8-9 3/8 Other Data Working capital 50,579 35,505 41,604 33,270 Current ratio 1.5:1 1.9:1 1.8:1 1.9:1 Total assets 521,860 183,582 190,252 167,044 Additions to property and equipment(5) 19,233 15,599 6,693 7,598 Depreciation 6,453 4,251 4,637 3,746 Cash dividends 7,232 7,041 6,049 5,327 Long-term debt 245,037 21,200 28,026 40,621 Shareholders' equity 121,889 109,374 99,424 81,128 Return on average equity 20.8%(6) 19.4% 25.8% 21.4% Return on sales 4.7%(6) 6.2% 7.0% 5.7%
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 Includes effect of the acquisition of Guardsman Products, Inc. on April 8, 1996. 3 Adjusted for all stock splits and stock dividends through November 30, 1996 inclusive. Prices are rounded to nearest 1/8. 4 Used to calculate net income per share. 5 Excludes effect of acquisitions. 6 Excludes effect of restructuring charge of $9,607 which reduced net income by $5,284 or $.23 per share.
Year Ended November 30 1992 1991 1990 1989 1988 1987 1986 - ---------------------------------------------------------------------------------------------------------------------------------- Operations Net sales $236,476 $220,508 $240,146 $219,713 $203,499 $189,213 $147,524 Cost of products sold 152,480 150,669 161,626 145,592 134,114 122,135 96,196 Selling, administrative, research and development expenses 61,158 57,527 61,218 53,821 51,496 48,651 35,551 Income taxes 9,201 4,417 6,850 8,399 7,550 8,599 7,785 Net income as reported 12,706 6,357 10,022 12,574 11,284 10,272 8,515 Net income excluding restructuring charge 12,706 6,357 10,022 12,574 11,284 10,272 8,515 Per Share Data (3) Net income as reported .55 .27 .41 .51 .45 .40 .33 Net income excluding restructuring charge .55 .27 .41 .51 .45 .40 .33 Cash dividends .223 .214 .199 .173 .153 .141 .131 Book value 3.16 3.16 3.10 3.00 2.65 2.34 2.11 Average number of shares and equivalent shares outstanding (4) 23,189 23,499 24,659 24,863 24,921 25,511 25,482 Shares outstanding at year end 22,226 23,480 23,634 24,863 24,863 25,104 25,284 Price range of Class A stock 9 3/4-5 5/8 6 1/8-4 1/8 7 5/8-4 7 1/8-5 3/8 7 1/8-4 7/8 7 5/8-4 5/8 6-4 1/4 Other Data Working capital 27,131 30,405 34,513 40,389 36,368 26,006 31,798 Current ratio 2.0:1 2.0:1 2.6:1 2.5:1 2.8:1 2.0:1 3.6:1 Total assets 117,049 127,342 125,371 129,025 101,357 96,814 75,924 Additions to property and equipment(5) 3,262 1,928 3,968 2,486 2,930 5,397 4,304 Depreciation 3,965 4,038 4,021 3,387 3,133 2,785 2,123 Cash dividends 5,104 5,005 4,923 4,341 3,843 3,603 3,293 Long-term debt 10,361 16,638 23,016 21,105 5,829 3,137 1,006 Shareholders' equity 70,125 74,187 73,185 74,482 65,987 58,755 53,359 Return on average equity 17.6% 8.6% 13.6% 17.9% 18.1% 18.3% 16.9% Return on sales 5.4% 2.9% 4.2% 5.6% 5.4% 5.4% 6.0%
Management's Discussion and Analysis of Results of Operations and Financial Condition (LEFT COLUMN) Sales for 1996 increased 55% to a new high of $509 million from $328 million for the prior year. Net income before the restructuring charge totaled $1.04 per share, an increase of 19% over 1995 net income. Guardsman Acquisition and Restructuring Effective April 8, 1996 the Company acquired the outstanding shares of Guardsman Products, Inc. for $235 million financed through senior secured credit facilities. This acquisition represents the most significant transaction in the Company's 131 year history. Guardsman's technology and related products are complementary to Lilly's with little customer overlap. Guardsman is well-known for its technological strengths in two-component coatings for agricultural and construction equipment, high solid coatings for major appliances and waterborne coatings for furniture and kitchen cabinets. The combination of both companies' technologies and products will materially aid Lilly's expansion into several key strategic markets. By the end of 1997, management expects the combined companies' operating costs to be approximately $25 million less than when the two companies operated separately. These savings will result from the elimination of redundant functions and expenses. Elimination of redundant functions and expenses include the consolidation of manufacturing facilities. These consolidations, which include both Lilly and Guardsman facilities, will result in the closure of some plants and workforce reductions totaling approximately 250 employees. Closure costs consist of facility and equipment valuation adjustments, inventory disposal costs, dismantling and maintenance costs, and termination benefits. In conjunction with these consolidation plans, the Company announced the closure of two older plants located in Tulsa, Oklahoma and Jamestown, New York. It is anticipated all facility consolidations will be completed by the end of fiscal 1997. Costs associated with the planned closure of former Lilly facilities and related reductions in workforce are reflected as a restructuring charge totaling $9.6 million which reduced net income by $5.3 million or $.23 per share. Costs associated with the planned closure of former Guardsman facilities and related reductions in workforce totaled $9 million and are recorded as liabilities in the opening balance sheet of the combined entity as of the acquisition date. Operating Results Net income was $18.8 million ($.81 per share), $20.3 million ($.88 per share) and $23.3 million ($1.00 per share) for 1996, 1995 and 1994, respectively. The 7% decline in 1996 net income from 1995 was due to a one-time restructuring (RIGHT COLUMN) charge of $9.6 million. Excluding the effect of this one-time charge, 1996 net income would have been $24.1 million ($1.04 per share), surpassing 1995 earnings of $.88 per share. Sales for 1996 increased 55% to a new high of $509 million from $328 million in 1995. This increase was due to higher volumes associated with the acquisition of Guardsman, overall volume increases in Lilly's pre-acquisition business and some selling price increases instituted in the second half of 1995. Sales in 1995 decreased from 1994 sales of $331.3 million. This decrease resulted from lower demand for liquid coatings due to decreased U.S. manufacturing activity in markets served by the Company. Gross profit margins were 36.8%, 33.0% and 35.2% for 1996, 1995 and 1994, respectively. Improved 1996 margins were due to lower raw material costs, efficiencies in raw material procurement, and selling price increases instituted in the second half of 1995. The decline in 1995 margins from 1994 was due to sharp increases in raw material prices during the first three quarters of 1995. Operating expenses totaled $139.3 million, $73.1 million and $74.5 million in 1996, 1995 and 1994, respectively. Increases in 1996 operating expenses were due to the inclusion of Guardsman operations, increased amortization expense associated with intangibles acquired in the Guardsman acquisition and the one-time restructuring charge of $9.6 million previously discussed. Operating expenses decreased in 1995 compared to 1994 due to cost control measures as well as lower business volumes. Interest expense in 1996 was $14.5 million compared to $2.2 million in 1995 resulting from borrowings necessary to fund the Guardsman acquisition. Interest expense in 1995 declined from 1994 expense of $2.9 million due to reductions in outstanding borrowings. The Company's effective tax rate was 45%, 40% and 41.2% in 1996, 1995 and 1994, respectively. The increase to 45% in 1996 is due largely to non-deductible goodwill associated with the Guardsman acquisition. 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 [LEFT COLUMN] internal compliance efforts, have required and will continue to require capital expenditures. Capital spending for environmental compliance is not anticipated to be material to the Company's financial condition. The Company has been notified that it is a potentially responsible party for clean-up costs with respect to several governmental 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 condition. Liquidity and Capital Resources In 1996 the Company changed its capital structure by entering into a $300 million credit agreement ("Agreement") that provided funds necessary to complete the Guardsman acquisition. The Agreement provides for $225 million of borrowings under term notes and $75 million under a revolving note. Annual principal payments on the term notes escalate annually and range from $16.5 to $39 million with final payment due in 2003. Final payment on the revolver is due in 2002. The Company uses interest rate swap agreements to convert the interest rate on a portion of these borrowings to a fixed rate which averaged 7.64% at November 30, 1996. Management expects to fund all debt service requirements from operating cash flows. As of November 30, 1996, the Company was in compliance with all restrictive covenants included in the Agreement. The Company used $275 million under the Agreement ($225 million in term notes and $50 million under the revolver) to fund the purchase of Guardsman shares, pay-off existing debt and to pay acquisition related expenses. The Company made additional borrowings under the revolver totaling $35.6 million which were used to fund various operating needs. The Company reduced the above borrowings by $49.2 million during 1996. Additional amounts available for borrowing under the revolver totaled $35 million at November 30, 1996. The Company's 1996 investing activities included the acquisition of Guardsman as previously discussed. The Company also invested $19.2 million in property and equipment. These investments were made to increase capacity, increase manufacturing efficiencies and improve product quality. Expenditures in 1996 included amounts for our new facility in Bowling Green, Kentucky and the purchase of a powder coatings facility in Charlotte, North Carolina. Capital expenditures in 1997 are expected to be lower than 1996 expenditures and will be financed from internal sources and existing credit facilities. Cash provided by operations increased to $37.5 million from $27.2 million in 1995. The increase is primarily due to the $9.6 million noncash restructuring charge, $5.2 million increase in amortization expense, and higher accounts payable offset by higher levels of accounts receivable and inventories. [RIGHT COLUMN] Higher levels of accounts receivable, inventories and accounts payable reflect increased business volumes. The Company's 1996 current ratio is 1.5:1 compared to 1.9:1 for 1995. The decrease is predominately due to non-recurring restructuring and other acquisition liabilities. The significant increases in deferred income taxes, goodwill and other noncurrent liabilities on the balance sheet are primarily related to the Guardsman acquisition. Management expects the Company to generate sufficient cash flow from operations to fund debt service requirements and meet other operating needs. - -------------------------------------------------------------------------------- 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 generally accepted accounting principles 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 and cash flows 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/ Kenneth L. Mills Kenneth L. Mills Corporate Accounting Director, Assistant Secretary [LEFT COLUMN] 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, 1996 and 1995, and the related consolidated statements of income and retained earnings and cash flows for each of the three years in the period ended November 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lilly Industries, Inc. and subsidiaries at November 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP January 13, 1997 Consolidated Statements of Income and Retained Earnings (In thousands, except per share data)
Year ended November 30 1996 1995 1994 - -------------------------------------------------------------------------------------------- Net sales $ 508,976 $ 328,345 $ 331,306 Costs and expenses Cost of products sold 321,748 219,899 214,809 Selling, administrative and general 112,361 59,874 61,498 Research and development 17,294 13,184 12,982 Restructuring charge (Note 3) 9,607 -- -- --------------------------------- 461,010 292,957 289,289 --------------------------------- Operating income 47,966 35,388 42,017 Other income (expense) Interest income and sundry 638 544 554 Interest expense (14,466) (2,158) (2,919) --------------------------------- (13,828) (1,614) (2,365) --------------------------------- Income before income taxes 34,138 33,774 39,652 Income taxes (Note 7) 15,362 13,510 16,350 --------------------------------- Net income 18,776 20,264 23,302 Retained earnings at beginning of year 51,446 38,223 20,970 --------------------------------- 70,222 58,487 44,272 Deduct dividends paid (1996, $.320 per share; 1995, $.310 per share; 1994, $.267 per share) 7,232 7,041 6,049 --------------------------------- Retained earnings at end of year $ 62,990 $ 51,446 $ 38,223 ================================= Average number of shares and equivalent shares of capital stock outstanding 23,200 23,100 23,250 Net income per share $ .81 $ .88 $ 1.00
See accompanying notes. Consolidated Balance Sheets (In thousands)
November 30 1996 1995 - ------------------------------------------------------------------------------------ Assets Current assets Cash and cash equivalents $ 6,790 $ 20,260 Accounts receivable, less allowances for doubtful accounts (1996, $2,706; 1995, $2,051) (Note 6) 84,592 40,911 Inventories (Note 4 and 6) 47,546 15,411 Deferred income taxes 5,717 -- Other 14,073 349 --------------------- Total current assets 158,718 76,931 Other assets Goodwill, less amortization (1996, $9,028; 1995, $4,658) 228,536 27,390 Other intangibles, less amortization (1996, $17,271; 1995, $12,544) 30,275 20,011 Deferred income taxes 12,091 2,370 Sundry 11,658 11,411 --------------------- 282,560 61,182 Property and equipment (Note 6) Land 8,396 4,176 Buildings 48,087 31,862 Equipment 71,056 50,235 Allowances for depreciation (deduction) (46,957) (40,804) --------------------- 80,582 45,469 --------------------- $ 521,860 $ 183,582 ===================== Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 56,593 $ 23,982 Salaries and payroll related items 22,681 7,970 Other 11,281 -- State and local taxes 269 661 Federal income taxes 791 1,784 Current portion of long-term debt (Note 6) 16,524 7,029 --------------------- Total current liabilities 108,139 41,426 Long-term debt (Note 6) 245,037 21,200 Other liabilities 46,795 11,582 Shareholders' equity (Note 8) Capital stock, $.55 stated value per share: Class A (limited voting) - 27,184 shares issued (1995, 26,903 shares) 15,103 14,947 Class B (voting) - 540 shares issued 300 300 Additional capital 75,433 73,450 Retained earnings 62,990 51,446 Currency translation adjustments 88 288 Cost of capital stock in treasury (deduction) (32,025) (31,057) --------------------- 121,889 109,374 --------------------- $ 521,860 $ 183,582 =====================
See accompanying notes. Consolidated Statements of Cash Flows (In thousands)
Year ended November 30 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 18,776 $ 20,264 $ 23,302 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring charge 9,607 -- -- Depreciation 6,453 4,251 4,637 Amortization of intangibles 9,097 3,923 4,328 Deferred income taxes 2,094 (70) (1,789) Changes in operating assets and liabilities net of effects from acquired business: Accounts receivable (5,849) 1,320 (2,295) Inventories (7,086) 8,474 (1,158) Accounts payable and accrued expenses 7,825 (9,972) 10,898 Sundry (3,466) (987) 1,047 ----------------------------------- Net cash provided by operating activities 37,451 27,203 38,970 Investing Activities Purchases of property and equipment (19,233) (15,599) (6,693) Payment for acquired business (235,000) -- -- Sundry 4,590 (620) 1,005 ----------------------------------- Net cash used by investing activities (249,643) (16,219) (5,688) Financing Activities Dividends paid (7,232) (7,041) (6,049) Proceeds from short-term and long-term borrowings 310,600 -- -- Principal payments on short-term and long-term borrowings (105,817) (6,888) (9,000) Purchases of capital stock for treasury -- (4,380) -- Sundry 1,171 1,004 964 ----------------------------------- Net cash provided (used) by financing activities 198,722 (17,305) (14,085) ----------------------------------- (Decrease) increase in cash and cash equivalents (13,470) (6,321) 19,197 Cash and cash equivalents at beginning of year 20,260 26,581 7,384 ----------------------------------- Cash and cash equivalents at end of year $ 6,790 $ 20,260 $ 26,581 ===================================
See accompanying notes. [LEFT COLUMN] Notes to Consolidated Financial Statements November 30, 1996 1. Summary of Significant Accounting Policies Business. Lilly Industries, Inc. and its subsidiaries (the Company) are principally in the business of formulating, producing and selling industrial coatings and specialty chemicals to manufacturing companies. The Company's products include wood coatings for furniture, building products and cabinets; coil coatings for building products, appliances and transportation equipment; specialty coatings for a variety of metal products and fiberglass reinforced products; powder coatings for a variety of metal products; and glass coatings for mirrors. The Company also sells various household interior care products, including fabric protectors and furniture polishes. Consolidation and Use of Estimates. The consolidated financial statements include the accounts of all subsidiaries after elimination of intercompany accounts and transactions. Preparation of these statements in conformity with generally accepted accounting principles 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. Cash Equivalents. Cash equivalents include time deposits and certificates of deposit with original maturities of three months or less. Inventories. Inventories in the United States are stated at the lower of cost, determined by the last-in, first-out (LIFO) method, or market. Inventories of foreign subsidiaries 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 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 40 years) and computed primarily by the straight-line method. [RIGHT COLUMN] Interest-Rate Swap Agreements. The Company periodically enters into interest-rate swap agreements to modify the interest characteristics of its outstanding debt. Swap agreements involve the exchange of interest payments based on a variable interest rate for interest payments based on a fixed interest rate calculated by reference to a notional amount over the life of the agreement. The notional amount of each swap agreement represents all or a portion of the principal balance of a specific debt obligation. The differential to be paid or received is accrued and recognized as an adjustment of interest expense. Net Income Per Share. Net income per share is computed on the basis of the weighted average number of shares outstanding during each year, adjusted for stock splits and the dilutive effect, if any, of common stock equivalents. 2. Acquisition Effective April 8, 1996 the Company acquired for $235,000,000 in cash all the outstanding shares of Guardsman Products, Inc. ("Guardsman"). To finance the acquisition, the Company obtained commitments for $300,000,000 of senior secured credit facilities (see Note 6) and used $275,000,000 of these facilities to fund the initial purchase of shares, pay-off existing debt and to pay related expenses. The acquisition was recorded using the purchase method and the consolidated financial statements include the results of operations of Guardsman since the date of acquisition. The fair value of net assets acquired include $40,031,000 net working capital, $50,246,000 noncurrent assets, $213,642,000 intangible assets, $28,549,000 long-term debt, and $40,370,000 noncurrent liabilities. Goodwill is being amortized by the straight-line method over 40 years. The following unaudited pro forma consolidated results of operations for the years ended November 30, 1996 and 1995 are stated as though the acquisition occurred on December 1, 1994 (in thousands, except per share data): 1996 1995 - -------------------------------------------------------------------------- Net sales $598,722 $578,919 Net income 20,767 20,287 Net income per share .90 .88 Pro forma results for the year ended November 30, 1996 include a restructuring charge of $9,607,000 which reduced net income by $5,284,000 or $.23 per share (see Note 3). Pro forma results for the year ended November 30, 1995 include a restructuring charge of $10,458,000 recorded by Guardsman in 1995 which reduced net income by $5,752,000 or $.25 per share. The pro forma consolidated results of operations are not necessarily indicative of future [LEFT COLUMN] results of operations or actual results of operations that would have occurred had the purchase been made at December 1, 1994. 3. Restructuring The Company has adopted and commenced implementation of plans for the consolidation of manufacturing facilities related to the acquisition of Guardsman. These plans, which include both Lilly and Guardsman facilities, will result in the closure of some plants and workforce reductions totaling approximately 250 employees. Closure costs consist of facility and equipment valuation adjustments, inventory disposal costs, dismantling and maintenance costs, and termination benefits. The primary employee groups affected include manufacturing, selling, administrative and research and development personnel. It is anticipated these plans will be completed by the end of fiscal 1997. Costs associated with the planned closure of former Lilly facilities and related reductions in workforce are reflected as a restructuring charge totaling $9,607,000, which reduced net income by $5,284,000 or $.23 per share. The components of the restructuring charge and amounts paid or charged against these reserves are as follows (in thousands): Costs Paid Ending Provision or Charged Balance - --------------------------------------------------------------------------- Facilities, equipment, inventories, and other $7,827 $ 365 $7,462 Termination benefits 1,780 447 1,333 -------------------------------- $9,607 $ 812 $8,795 ================================ Costs associated with the planned closure of former Guardsman facilities and related reductions in workforce are recorded as liabilities in the opening balance sheet of the combined entity as of the acquisition date. The components of these liabilities and amounts paid or charged against these reserves are as follows (in thousands): Costs Paid Ending Liabilities or Charged Balance - ----------------------------------------------------------------------------- Facilities, equipment, inventories, and other $6,532 $1,642 $4,890 Termination benefits 2,476 469 2,007 ------------------------------ $9,008 $2,111 $6,897 ============================== [RIGHT COLUMN] 4. Inventories The principal inventory classifications at November 30 are summarized as follows (in thousands): 1996 1995 - ---------------------------------------------------------------------------- Finished products $25,847 $11,065 Raw materials 29,375 12,584 --------------------- 55,222 23,649 Less adjustment of certain inventories to last-in, first-out (LIFO) basis 7,676 8,238 --------------------- $47,546 $15,411 ===================== Inventory cost is determined by the LIFO method of inventory valuation for approximately 82% and 70% of inventories at November 30, 1996 and 1995, respectively. While management believes the LIFO method results in a better matching of current costs and revenues, the FIFO method is used to cost inventories of foreign subsidiaries because foreign statutory requirements prohibit use of the LIFO method. During fiscal 1995 inventory quantities were reduced. This reduction resulted in a liquidation of LIFO inventory layers carried at lower costs which prevailed in prior years. The effect of this liquidation was to increase earnings by approximately $600,000. 5. Benefit Plans The Company maintains defined benefit and defined contribution plans that cover substantially all employees. Retirement benefits under the defined benefit plans are based on final monthly compensation and years of service. Retirement benefits under the defined contribution plans are based on employer and employee contributions plus earnings to retirement. The plans' assets consist primarily of common stock, fixed income securities and guaranteed insurance contracts. In addition, unfunded supplemental executive retirement plans cover certain employees in which benefits, determined by the Board of Directors, are payable after retirement over periods ranging from 15 years to life of the participant. The provision for defined benefit pension cost is determined using the projected unit credit actuarial method. The Company's policy is to fund amounts as are necessary on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the Employee Retirement Income Security Act of 1974. Amounts contributed to union-sponsored pension plans are based upon requirements of collective bargaining agreements. Company contributions to the defined contribution plans are based on a percentage of employee contributions. The Guardsman defined benefit pension plans covering substantially all U.S. employees were amended to freeze years of service at December 31, 1996 and [LEFT COLUMN] merged into the defined benefit plan maintained by the Company. Concurrently with this amendment, these employees became participants in the Company's defined contribution plans. The impact of the plan merger was recorded in connection with the Guardsman acquisition. All 1996 amounts disclosed below reflect the effect of freezing years of service for the Guardsman plans and their merger into the Lilly plan. Effective December 1, 1994 the Lilly defined benefit pension plan covering substantially all U.S. employees was amended to freeze years of service at November 30, 1994. Concurrently with this amendment, the Company increased its matching contribution rates to defined contribution plans. A summary of the components of net pension cost for the defined benefit plans and amounts charged to expense for the defined contribution plans for the years ended November 30 follows (in thousands): 1996 1995 1994 - -------------------------------------------------------------------------------- Defined benefit plans Service cost - benefits earned during the period $ 1,733 $ 708 $ 2,109 Interest cost on projected benefit obligation 4,594 2,742 2,638 Actual net (gain) loss on plan assets (9,056) (8,849) 529 Net amortization and deferral 3,104 5,267 (4,224) --------------------------------- Net pension cost 375 (132) 1,052 Defined contribution plans 2,219 2,130 759 --------------------------------- Pension expense $ 2,594 $ 1,998 $ 1,811 ================================= The expected long-term rate of return on assets used to compute the defined benefit plans' pension expense was 9.25% for 1996, 1995 and 1994. The following table sets forth the funded status and amounts recognized in the consolidated balance sheets at November 30 for the Company's defined benefit pension plans (in thousands): 1996 1995 - ------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested $ 58,699 $ 33,498 Nonvested 19,612 3,126 ---------------------- Total accumulated benefit obligations $ 78,311 $ 36,624 ====================== Actuarial present value of projected benefit obligations for services rendered to date $(79,647) $(43,118) Plan assets at fair value 83,186 46,510 ---------------------- Excess of plan assets over projected benefit obligations 3,539 3,392 Unrecognized net (gains) losses (768) 535 Unrecognized prior service cost 2,794 2,248 Unrecognized transition obligation at December 1, 1985, net of amortization (1,337) (1,539) ---------------------- Net pension asset $ 4,228 $ 4,636 ====================== [RIGHT COLUMN] The discount rate and rate of increase in compensation levels used to measure benefit obligations were 7% and 5%, respectively, for both 1996 and 1995. Accumulated benefits for supplemental executive retirement plans totaled approximately $5,144,000 and $2,235,000 at November 30, 1996 and 1995, respectively. 6. Long-Term Debt Long-term debt consists of the following as of November 30 (in thousands): 1996 1995 - ------------------------------------------------------------------------------ Facility A Term Note $171,500 $ -- Facility B Term Note 49,875 -- Facility C Revolving Note 40,000 -- 4.92% unsecured senior notes -- 28,000 Other 186 229 ------------------------- 261,561 28,229 Less current portion 16,524 7,029 ------------------------- $245,037 $ 21,200 ========================= In April 1996 the Company entered into a $300,000,000 credit agreement ("Agreement") with a group of financial institutions to finance the acquisition of Guardsman and to repay existing debt. The Agreement provides for $175,000,000 and $50,000,000 of borrowings under term notes and $75,000,000 under a revolving note. Outstanding principal of the term notes is due in quarterly payments which escalate annually with final payment due November 30, 2003. Interest on the term notes is payable quarterly. The principal of the revolving note is due May, 2002 and interest is due quarterly. Amounts available under the revolver are limited to a borrowing base, as defined in the Agreement. Additional amounts available for borrowing under the revolver totaled $35,000,000 at November 30, 1996. The notes and revolver bear interest, at the Company's option, at (i) the higher of the agent bank's prime rate (8.25% at November 30, 1996) or the Federal Funds rate plus one-half (1/2%) percent, or (ii) the London Interbank Offered Rate; plus 50 to 225 basis points depending on the Company' s Leverage Ratio. A commitment fee, ranging from .25% to .50%, is payable on the unused portion of the revolving note. The outstanding notes are secured by the Company's accounts receivable and real and personal property. In April, 1996 the Company entered into a forty-four month interest rate swap agreement with a notional amount of $175,000,000; and in November, 1996, a twenty-four month interest rate swap agreement with a notional amount of $50,000,000. These agreements effectively convert a portion of the term notes [LEFT COLUMN] from floating rate debt to fixed rate debt with a weighted average rate of 7.64% at November 30, 1996. The notional amount of the $175,000,000 agreement was $135,000,000 at November 30, 1996 and reduces ratably on an annual basis to $50,000,000 in 1999. Minimum principal payments of long-term debt excluding the revolving note are: 1997 - $16,524,000; 1998 - $31,141,000; 1999 - $31,518,000; 2000 - $36,019,000; 2001 - $39,020,000; 2002 - $35,937,000; 2003 - $31,353,000. Interest of $12,746,000, $2,306,000 and $1,853,000 was paid in fiscal 1996, 1995 and 1994, respectively. The Company is subject to various debt covenants, including 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, incur additional indebtedness, acquire or dispose of fixed assets, and the use of Excess Cash Flow. 7. Income Taxes Income tax expense for the years ended November 30 is comprised of the following components (in thousands): 1996 1995 1994 - ------------------------------------------------------------------------------- Current expense: Federal $ 7,204 $ 7,953 $ 12,395 Foreign 4,736 3,267 2,944 State 1,328 2,360 2,800 -------------------------------------- 13,268 13,580 18,139 Deferred expense (credit): Federal 1,829 -- (1,627) Foreign (119) (70) (162) State 384 -- -- -------------------------------------- 2,094 (70) (1,789) -------------------------------------- $ 15,362 $ 13,510 $ 16,350 ====================================== A reconciliation of the statutory U.S. federal rate to the effective income tax rate for the years ended November 30 is as follows: 1996 1995 1994 - ----------------------------------------------------------------------------- Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% Increase resulting from: Goodwill 4.1 2.4 .5 State income taxes, net of federal income tax benefit 3.3 3.4 3.7 Other items 2.6 (0.8) 2.0 ------------------------- Effective income tax rate 45.0% 40.0% 41.2% ========================= [RIGHT COLUMN] 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): 1996 1995 - ------------------------------------------------------------------------------ Deferred tax assets: Restructuring and closure reserves $ 6,127 $ -- Goodwill 1,316 1,152 Employee benefits 4,398 1,520 Accounts receivable, inventory and other 15,281 5,927 --------------------- 27,122 8,599 Deferred tax liabilities: Property and equipment 8,003 3,264 Pension 1,311 1,630 Intangibles and other -- 1,335 --------------------- 9,314 6,229 --------------------- Net deferred tax assets $17,808 $ 2,370 ===================== 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 $14,000,000 at November 30, 1996. 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 $20,177,000, $16,524,000 and $13,400,000 were paid in 1996, 1995 and 1994, respectively. 8. Capital Stock Authorized shares of Class A and Class B stock were increased in 1996 from 48,500,000 and 1,500,000 shares, respectively, to 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 [LEFT COLUMN] 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% 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 Issued Held in Treasury Class A Class B Class A Class B - -------------------------------------------------------------------------------- Balance at November 30, 1993 17,646 360 2,825 170 Class A exchanged for Class B -- -- 74 (74) Class B exchanged for Class A -- -- (40) 40 Stock options exercised 161 -- 8 17 Three-for-two stock split 8,888 180 1,437 69 ---------------------------------- Balance at November 30, 1994 26,695 540 4,304 222 Class A exchanged for Class B -- -- 78 (78) Class B exchanged for Class A -- -- (8) 8 Acquisition for treasury -- -- 370 -- Stock options exercised 208 -- 10 35 ---------------------------------- Balance at November 30, 1995 26,903 540 4,754 187 Class A exchanged for Class B -- -- 78 (78) Class B exchanged for Class A -- -- (54) 54 Stock options exercised 281 -- 32 28 ---------------------------------- Balance at November 30, 1996 27,184 540 4,810 191 ================================== [RIGHT COLUMN] Changes in capital stock are summarized as follows (in thousands): Cost of Capital Stock Capital (Stated Amount) Additional Stock in Class A Class B Capital Treasury - -------------------------------------------------------------------------------- Balance at November 30, 1993 $14,705 $ 300 $70,635 $25,587 Stock options exercised 126 -- 1,177 500 Disqualifying disposition of stock options -- -- 160 -- ------------------------------------- Balance at November 30, 1994 14,831 300 71,972 26,087 Acquisition for treasury -- -- -- 4,380 Stock options exercised 116 -- 1,376 590 Disqualifying disposition of stock options -- -- 102 -- ------------------------------------- Balance at November 30, 1995 14,947 300 73,450 31,057 Stock options exercised 156 -- 1,828 968 Disqualifying disposition of stock options -- -- 155 -- ------------------------------------- Balance at November 30, 1996 $15,103 $ 300 $75,433 $32,025 ===================================== 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 number of shares reserved and the number and price per share of options granted are adjusted for subsequent stock dividends and stock splits. Shares reserved under these plans totaled 1,604,254 at November 30, 1996 of which option grants have been made for 1,210,322 shares at prices ranging from $5.19 to $17.17. During 1996, 280,962 options were exercised at prices ranging from $5.01 to $14.33 and 309,336 additional options were granted. Options to buy 648,000 shares are currently exercisable. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require companies to record compensation expense for grants of stock options and other equity instruments at fair value. The Statement permits companies to continue to apply APB Opinion 25 and related Interpretations in accounting for its plans. The Company has elected to continue to apply APB Opinion 25 which will result in no income statement effect. However, additional disclosures will be required in the financial statements for the year ending November 30, 1997 to comply with Statement 123. The Company sponsors an employees' stock purchase plan and defined contribution plans that allow participants to acquire Class A stock at the current fair market value. At November 30, 1996, 4,926,000 shares of Class A stock were reserved for sale under the plans. [LEFT COLUMN] 9. Foreign Operations United States and foreign operations, which include subsidiaries located in Canada, the United Kingdom, Germany, Taiwan, Malaysia and China are as follows (in thousands): 1996 1995 1994 - -------------------------------------------------------------------------------- Net sales to unaffiliated customers: United States $423,753 $ 277,494 $ 284,826 Foreign 85,223 50,851 46,480 ---------------------------------- Consolidated $508,976 $ 328,345 $ 331,306 ================================== Income before income taxes: United States $ 41,501 $ 25,943 $ 33,340 Foreign 16,710 9,989 9,231 Interest expense (14,466) (2,158) (2,919) Restructuring charge (9,607) -- -- ---------------------------------- Consolidated $ 34,138 $ 33,774 $ 39,652 ================================== Total assets: United States $463,557 $ 158,338 $ 165,182 Foreign 58,725 25,784 25,572 Eliminations (deductions) (422) (540) (502) ---------------------------------- Consolidated $521,860 $ 183,582 $ 190,252 ================================== 10. Quarterly Results of Operations (Unaudited) Quarterly results of operations are summarized as follows (in thousands, except per share data): Quarter Ended 1996 Feb. 29 May 31 Aug. 31 Nov. 30 - -------------------------------------------------------------------------------- Net sales $73,271 $131,711 $150,859 $153,135 Gross profit 24,061 47,474 56,188 59,505 Net income 3,486 616 7,012 7,662 Net income per share .15 .03 .30 .33 Quarter Ended 1995 Feb. 28 May 31 Aug. 31 Nov. 30 - -------------------------------------------------------------------------------- Net sales $80,447 $ 85,407 $ 79,705 $ 82,786 Gross profit 26,880 28,530 25,119 27,917 Net income 4,647 5,808 4,577 5,232 Net income per share .20 .25 .20 .23 Shareholder Information [LEFT COLUMN] 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. Write to: Mr. Kenneth L. Mills, Assistant Secretary Lilly Industries, Inc. 733 S. West Street Indianapolis, IN 46225 Registrar & Transfer Agent KeyCorp Shareholder Services, Inc. P. O. Box 6477 Cleveland, Ohio 44101 (800) 542-7792 (216) 813-5745 Communications concerning shareholder records, including address changes, stock transfers, cash dividends or other service needs should be directed to KeyCorp Shareholder Services, Inc. Analyst Contacts Security analyst inquiries are welcomed. Please call: Douglas W. Huemme (317) 687-6700 Annual Meeting Thursday, April 24, 1997 10:00 A.M., EST Rooms 101 and 102 Indiana Convention Center & RCA Dome Indianapolis, Indiana The meeting notice and proxy materials will be mailed to shareholders on or about March 20, 1997. Lilly urges all shareholders to vote their proxies and thus participate in the decisions that will be made at the annual meeting. [RIGHT COLUMN] 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: KeyCorp Shareholder Services, Inc. P.O. Box 6477 Cleveland, Ohio 44101 Dividend Information and Common Stock Prices 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 Fiscal 1996 Per Share High Low - ------------------------------------------------------------------------------- 1st quarter ended February 29 $ .08 $ 19 3/4 $ 16 1/4 2nd quarter ended May 31 .08 19 15 3rd quarter ended August 31 .08 15 3/4 12 1/2 4th quarter ended November 30 .08 14 1/8 12 1/4 ----------------------------------------- $ .32 ========================================= Dividends Fiscal 1995 Per Share High Low - ------------------------------------------------------------------------------- 1st quarter ended February 28 $ .07 $ 14 1/2 $ 11 3/4 2nd quarter ended May 31 .08 15 11 3rd quarter ended August 31 .08 13 1/2 11 4th quarter ended November 30 .08 13 1/2 12 1/8 ----------------------------------------- $ .31 ========================================= Stock Trading The Company's Class A stock is traded on the New York Stock Exchange under the symbol LI. At November 30, 1996 there were approximately 2,300 registered shareholders of Class A stock and 65 registered shareholders of Class B stock, which is reserved for employees of the Company. [TOP PORTION OF PAGE] Officers and Directors As of November 30, 1996 Officers Douglas W. Huemme, 55 Chairman, President and Chief Executive Officer Larry H. Dalton, 49 Vice President, Operations and Manufacturing Alain DeBlandre, 40 Vice President and General Manager, Coil Coatings William C. Dorris, 53 Vice President, Corporate Development Ned L. Fox, 55 Vice President and General Manager, Specialty Coatings A. Barry Melnkovic, 39 Vice President, Human Resources Kenneth L. Mills, 48 Corporate Accounting Director, Assistant Secretary Gary D. Missildine, 55 Vice President and General Manager, Powder Coatings Robert A. Taylor, 42 Vice President and General Manager, Wood Coatings Keith C. Vander Hyde, Jr., 38 Vice President and General Manager, Guardsman Products Jay M. Wiegner, 53 Vice President and General Manager, Glass Coatings - -------------------------------------------------------------------------------- [BOTTOM PORTION OF PAGE] Directors H. J. (Jack) Baker, 69 Chairman Emeritus BMW Constructors, Inc. James M. Cornelius, 53 Chairman Guidant Corporation William C. Dorris, 53 Vice President, Corporate Development Paul K. Gaston, 62 Former Chairman Guardsman Products, Inc. Douglas W. Huemme, 55 Chairman, President and Chief Executive Officer Harry Morrison, Ph.D., 59 Dean, School of Science Purdue University John D. Peterson, 63 Chairman City Securities Corporation Thomas E. Reilly, Jr., 56 Chairman and Chief Executive Officer Reilly Industries, Inc. Van P. Smith, 68 Chairman Ontario Corporation Richard A. Steele, 69 Retired President and Chief Executive Officer Citizens Gas and Coke Utility Locations Corporate Office 733 S. West Street Indianapolis, Indiana 46225 Corporate Technology Center 521 W. McCarty Indianapolis, Indiana 46225
- -------------------------------------------------------------------------------- United States Alabama Illinois New Jersey 1771 Industrial Road 5400 23rd Avenue 1991 Nolte Drive Dothan, AL 36303 Moline, IL 61265 Paulsboro, NJ 08066 Arkansas Indiana North Carolina 1900 E. 145th Street 28335 Clay Street 10300 Claude Freeman Drive Little Rock, AR 72206 Elkhart, IN 46517 Charlotte, NC 28262 California 546 W. Abbott Street 2147 Brevard Road 210 East Alondra Blvd. Indianapolis, IN 46225 High Point, NC 27216 Gardena, CA 90248 715 East Maryland Street 1717 English Road 9845 Miller Way Indianapolis, IN 46202 High Point, NC 27262 South Gate, CA 90280 Kentucky Texas 901 West Union Street 347 Central Avenue 2518 Chalk Hill Road Montebello, CA 90640 Bowling Green, KY 42101 Dallas, TX 75212 Connecticut Michigan Washington 145 Dividend Road 411 Darling Street 13535 Monster Road Rocky Hill, CT 06067 Fremont, MI 49412 Seattle, WA 98178 15 Lunar Drive 4999 36th Street SE Woodbridge, CT 06525 Grand Rapids, MI 49518 Florida Missouri 2355 S.W. 66th Terrace 1136 Fayette Street Davie, FL 33317 N. Kansas City, MO 64116
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International Canada England Malaysia 1915 Second Street West 152 Milton Park Lot No. 4963, Jalan Teratai Cornwall, Ontario K6H 5T1 Abingdon 51/2 Miles, Meru Industrial Zone Canada Oxfordshire OX14 4SD 41050 Klang, Selangor Darul Ehsan England Malaysia 65 Duke Street London, Ontario N6J 2X3 Germany Singapore Canada D-8649 Wallenfels/Ofr. Level 36, Hong Leong Building Postfach 1126 16 Raffles Quay 04851 China Germany Singapore Lot 3 Xintang District Administration Ireland Taiwan, R.O.C. Dalinshan, Dongguan Willowfield Road No. 1 Kung Yeh First Road Guangdon, China Ballinamore Zenwu Village Co. Leitrim Kaohsiung Hsien Ireland Taiwan, R.O.C.
EX-21 7 LIST OF SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF LILLY INDUSTRIES, INC. AS OF FEBRUARY 21, 1997 Name of Subsidiary State of Incorporation 1. Lilly Industries (USA), Inc. Indiana 2. Lilly Industries (Asia), Limited Hong Kong 3. Lilly Industries (Ireland) Limited Ireland 4. Lilly Industries (Malaysia) Sdn.Bhd. Malaysia 5. Lilly Industries, Inc.(Canada) Ontario, Canada 6. Lilly Industries (Far East), Ltd. Taiwan 7. Lilly Industries (Thailand), Limited Thailand 8. London Laboratories GmbH Germany (Subsidiary of Lilly Industries (USA), Inc.) 9. London Laboratories Limited Ontario, Canada (Subsidiary of Lilly Industries (USA), Inc.) 10. Dongguan Lilly Paint Industries, Ltd. Peoples Republic (Subsidiary of Lilly Industries (Asia), Limited) of China 11. G.C.I. Insurance Company, Limited Bermuda (Subsidiary of Lilly Industries (USA), Inc.) 12. Guardsman Products Limited Ontario, Canada (Subsidiary of Lilly Industries (USA), Inc.) 13. Guardsman UK Limited United Kingdom (Subsidiary of Lilly Industries (USA), Inc.) 14. Guardsman Chemical International Virgin Islands (Subsidiary of Lilly Industries (USA), Inc. EX-23 8 CONSENT OF INDEPENDENT AUDITORS 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 13, 1997, included in the 1996 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, 33-52959, 33-52956 and 33-52958 pertaining to the Lilly Employees' Stock Purchase Plan, the Lilly Industries, Inc. Stock Option Plan, the Lilly Industries, Inc. 1991 Director Stock Option Plan, the Lilly Industries, Inc. Employee 401(k) Savings Plan and the Lilly Industries, Inc. 1992 Stock Option Plan, respectively) of our report dated January 13, 1997, 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. February 27, 1997 /s/ Ernst & Young LLP EX-27 9 FDS FOR LILLY INDUSTRIES, INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED CONDENSED BALANCE SHEET OF LILLY INDUSTRIES, INC. AT NOVEMBER 30, 1996 AND THE CONSOLIDATED CONDENSED STATEMENT OF INCOME OF LILLY INDUSTRIES, INC. FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000
Year NOV-30-1996 NOV-30-1996 6,790 0 87,298 2,706 47,546 158,718 127,539 46,957 521,860 108,139 0 90,836 0 0 31,053 521,860 508,976 508,976 321,748 461,010 638 0 14,466 34,138 15,362 0 0 0 0 18,776 .81 .81
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