-----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, SqI2xLCknbAOSN+gA/nAq/wDBVgmZK2rqQ6VM05dFymhbCTEZOqFq/HIvVSVykuh 8HrIkeXTbRY5ovjiAGlQAA== 0000908834-98-000057.txt : 19980302 0000908834-98-000057.hdr.sgml : 19980302 ACCESSION NUMBER: 0000908834-98-000057 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980227 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: SEC FILE NUMBER: 001-11553 FILM NUMBER: 98552945 BUSINESS ADDRESS: STREET 1: 733 S WEST ST CITY: INDIANAPOLIS STATE: IN ZIP: 46225 BUSINESS PHONE: 3176876700 MAIL ADDRESS: STREET 1: 733 S WEST STREET CITY: INDIANNAPOLIS STATE: IN ZIP: 46225 FORMER COMPANY: FORMER CONFORMED NAME: LILLY INDUSTRIAL COATINGS INC DATE OF NAME CHANGE: 19911229 10-K 1 FORM 10-K FOR LILLY INDUSTRIES, INC. FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended November 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-6953 LILLY INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) INDIANA 35-0471010 (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 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 Common Share Purchase Right (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 17, 1998 was $442,468,000. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of February 17, 1998. 22,702,280 shares of Class A Common Stock, without par value 422,687 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, 1997 Part III: Items 10 Proxy Statement for Annual Meeting of through 13 Shareholders to be held April 23, 1998 2 PART I Lilly Industries, Inc. Item 1. BUSINESS Business Description Lilly Industries, Inc. (referred to herein as "Lilly" or the "Company") was founded in 1865, and incorporated under the laws of the State of Indiana on December 5, 1888. The Company believes it is a leader in the industrial coatings industry, one of the five largest industrial coatings manufacturers in North America, and one of the 15 largest in the world based on net sales of $601.3 million in fiscal 1997. Lilly formulates, produces and sells coatings primarily to original equipment manufacturers, enhancing the appearance of and providing durability to products such as home and office furniture, cabinets, appliances, building products, transportation, agricultural and construction equipment, mirrors and a variety of metal and fiberglass reinforced surfaces. A significant amount of the Company's sales represent coatings developed in cooperation with its customers to meet their specific product requirements, resulting in a number of primary supplier relationships with those customers. Lilly also produces and sells household products, such as fabric protectors, furniture care products and cleaning aids. 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. The Company has only one reportable industry segment, and employs approximately 2,100 people. The Company has plants and sales offices in the U.S., Australia, Canada, China, Germany, Ireland, Malaysia, Singapore, Taiwan and the United Kingdom. (1) On April 8, 1996, the Company acquired all the outstanding shares of Guardsman Products, Inc. ("GPI") for $235 million in cash. Like the Company, GPI was in the business of formulating, producing and selling industrial coatings. GPI also marketed various household furniture care and automotive after-market products. With the acquisition of GPI, Lilly increased its fiscal 1996 net sales by approximately 55% over fiscal 1995 net sales. The GPI acquisition strengthened Lilly's market position by broadening customer base and product lines. The acquisition increased Lilly's presence in industrial wood and metal coatings, and provided it with important environmentally-friendly water-borne technologies. Lilly also gained a household products business focused on fabric and stain protection products for household furniture. This business is characterized by relatively high margins and the potential for new product development, and adds a degree of diversification to the Company. - -------------- (1) References in this Form 10-K are references to the Company's fiscal years ended November 30, 1995, 1996 and 1997. Industrial Coatings Industry Coatings protect a wide range of manufactured goods from the effects of external elements over the life of the product. In addition, coatings make products more aesthetically pleasing to end-use customers. Lilly competes in three principal industrial coatings markets: (i) wood coatings, such as furniture lacquer and protective color; (ii) metal coatings, such as coil and powder coatings used to finish furniture, appliances and transportation equipment; and (iii) composites and glass coatings, such as those used for mirrors. Sales for the global paints and coatings market equal approximately $50 billion annually, with annual sales for the domestic market equaling approximately $17 billion. Annual sales for the industrial coatings segment in which Lilly participates are approximately $25 billion globally and $8.5 billion domestically. The balance of the market consists primarily of architectural coatings (primarily house paints), a market in which Lilly does not compete, and specialty coatings, including maintenance coatings and traffic paints. Industrial coatings is a mature and highly fragmented industry in the U.S., growing in-line with industrial production, and includes many small competitors. Long term annual unit growth in the U.S. industrial coatings business is projected between 1% and 2%, largely tied to fluctuations in general economic cycles. Annual unit growth rate is projected between 1% and 2% in Europe and between 4% and 6% in Asia. The North American industrial coatings industry is divided among over 700 participants. Due to its maturity and historically fragmented participant base, the coatings industry is undergoing consolidation through mergers and acquisitions. Consolidation of the coatings industry is being driven by several factors, including (i) the need for growth in maturing markets; (ii) environmental costs which, together with a more demanding global customer base, will make it difficult for smaller manufacturers with limited financial resources to remain independent; and (iii) the increasing technical and financial resources of the larger players. To date, the effects of industry consolidation include a greater concentration of market share with fewer companies, a reduction in the number of competitors, and the creation of new synergies within the larger coatings companies, such as raw material purchasing power and manufacturing economies of scale. Competition The industrial coatings industry is competitive, with more than 700 North American manufacturers operating in numerous market segments. Manufacturers include large international companies as well as small regional firms, and no one manufacturer dominates. Competitive advantages include developing coatings that meet specific customer requirements, pricing coatings competitively and rapidly delivering quality products. Increasingly, technological developments that reduce negative environmental effects are becoming an important competitive factor. Lilly is one of the top five industrial coatings manufacturers in North America, one of the top 15 worldwide, and, with the acquisition of GPI, became the largest supplier to the U.S. residential furniture market, serving virtually all of the top 25 U.S. furniture manufacturers. The Company is also well represented in other wood coatings, industrial metal finishes, coil and powder coatings and mirror glass coatings markets. While Lilly is among the top five North American producers of industrial coatings, some competitors are generally more diversified and have greater financial resources than the Company. Major competitors include Akzo Nobel; Ferro Corporation; Morton International, Inc.; The Sherwin-Williams Company; PPG Industries, Inc.; and The Valspar Corporation. End Use Markets The Company focuses on four end use markets: metal coatings; wood coatings; glass coatings and composites; and Guardsman products. These four markets accounted for approximately 39%, 38%, 12% and 11% of the Company's fiscal 1997 net sales, respectively. The following provides a summary of these markets. Metal Coatings. The Company's metal coatings provide specialized coatings for numerous applications such as appliances, building products and fixtures (such as residential siding, aluminum gutters, and metal roofing), agricultural and construction equipment, furniture, bicycles, digital satellite systems, automotive trim and wheels, entry and garage doors, computers, window trim, shelving, and playground equipment. These coatings include traditional liquid coatings as well as polyester-based coil coatings and a full range of decorative and functional powder coatings. The coil coatings process is considered one of the most environmentally safe, energy-efficient methods of applying coatings to metal substrates. Lilly's technical innovation has produced conventional and waterborne coil coatings formulated with proprietary resins that provide high exterior durability, flexibility, corrosion resistance and chemical resistance. Powder coatings are experiencing growth because of their environmental desirability, as powder coatings have no solvent content. Lilly powder coatings are environmentally compliant and provide outstanding durability and performance for both interior and exterior applications. Metal coatings are manufactured at fourteen facilities in the U.S. and two in Canada. Wood Coatings. Lilly's wood coatings provide a full range of custom-formulated coatings designed to enhance the beauty of wood while providing maximum durability for products such as residential and office furniture, building products and kitchen cabinets. Wood coatings are manufactured at six U.S. locations, as well as five foreign facilities located in Canada, China, Ireland, Malaysia and Taiwan. Glass Coatings and Composites. Lilly's glass coatings are well recognized globally. The Company's glass coatings provide mirror manufacturers with everything needed to convert glass into mirrors of premier quality. Glass coatings include patented silver and copper plating solutions, as well as low-lead and lead-free coatings for mirror-back protection, all of which meet the environmental and quality performance standards of mirror manufacturers. Glass coatings are manufactured at two facilities located in Connecticut, and foreign facilities located in Canada and Germany. The Company's composites include in-mold coatings ("gelcoats") that are used as the surface finish on boats, recreational vehicles, cultured marble vanity tops, custom van and truck components and personal watercraft. Guardsman Products. The Company also manufactures and distributes a wide variety of household products consisting of four distinct businesses: Interior Care, Consumer Products, Specialty Chemicals and WoodPro(R). The Interior Care business provides fabric protection and furniture care products to consumers through furniture stores, and is the world's largest supplier of retail-applied fabric protection, Fabri-Coate(R). The Consumer Products business markets several well-known brand name household specialty items, such as Guardsman(R) Furniture Polish, Goof Off(R) remover, One-Wipe(R) dust clothes and Chip Clip(R) snack closures. These products are sold through hardware, home center, paint, mass merchant and grocery retailers. The Specialty Chemicals business manufactures private-label automotive chemicals such as brake part cleaner, fuel injector cleaner, and engine oil supplements for national automotive customers. This division also serves as a private-label contractor in the chemical packaging market. The WoodPro(R) business is a franchise group that offers on-site repair and maintenance of wood and upholstered furnishings for the home or office. These businesses operate from two facilities located in Michigan and one facility located in the United Kingdom. Distribution and Customers Lilly's technical sales force of approximately 600 people market and sell its industrial coatings directly to over 6,000 industrial customers throughout the world. Most of the Company's customers are located throughout the United States and Canada, with the remaining customers concentrated in Asia and Europe. The Company is not dependent upon any single customer or few customers. The loss of any single customer would not have a material adverse impact on the Company. No single customer of the Company represented more than 5% of net sales. International sales, including U.S. exports of $17.2 million, were $126.5 million in fiscal year 1997, which represented 21% of consolidated 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, 1997 is set forth in Note 9 in the Notes to Consolidated Financial Statements in the Company's 1997 Annual Report to Shareholders. Note 9 is incorporated herein by reference. The Company has no significant order backlog. No material part of the business is subject to re-negotiation of profit or termination of contracts or subcontracts at the election of any governments. Historically, first quarter operating results are below operating results for the second, third and fourth quarters due to the lower demand for industrial production which typically occurs in December. Raw Materials Raw materials are the largest single cost in the industrial coatings business, representing about half of the selling price of most coatings. The typical coating consists of pigments dispersed in a liquid known as the "vehicle," which is usually composed of one or more polymers, and a solvent. The solvent helps the coating spread over the substrate; the polymers form a film to hold the coating in place after the solvent has evaporated and provides the unique performance characteristics of the coating. Solvents are typically petrochemical-based products that evaporate quickly. However, the use of petrochemical-based solvents is declining as environmentally friendly technologies, such as water-borne and powder coatings, gain market share. The pigment, usually an inorganic substance, provides the color. "Fillers" and "extender pigments" provide gloss and sheen control, while specialty chemicals known as additives, enhance the flow and application properties of the coating. The Company manufactures its industrial coatings from a variety of polymers, pigments, solvents and other chemicals, the bulk of which are obtained from petrochemical feed stocks. In addition to petrochemicals, the Company uses both silver and copper. Under normal conditions, all of these raw materials are available on the open market, although prices and availability are subject to fluctuation from time to time. Lilly, like most other companies in the coatings industry, uses a variety of organic and inorganic materials in its products. No single raw material cost currently accounts for over 4% of net sales and most account for 1% of net sales or less. The Company's largest single raw material cost is for titanium dioxide (TiO2), which is a white pigment, and accounts for approximately 30% of pigment usage in the coatings industry. The Company's annual expenditures for TiO2 total approximately 4% of the Company's annual net sales. Research and Development Lilly's Corporate Technology Center, as well as laboratories at its major facilities, emphasize the development of product finishes to meet specific requirements of customers and the maintenance of quality throughout the manufacturing process. They are also engaged in research directed toward development of new products and new manufacturing and application techniques. Research and development expenses were $18.7 million (3.1% of net sales), $17.3 million (3.4% of net sales) and $13.2 million (4.0% of net sales) for the fiscal years 1997, 1996 and 1995, respectively. Future research and development expenses as a percent of net sales are anticipated to remain at current levels with emphasis on new product development. The Company holds several patents and trademarks, and considers patent and trademark protection to be important, but no individual patent is currently material to the Company's business as a whole. The Company has patents and licenses for glass coatings which are material to that specific business; and new patents are continually being developed to sustain the Company's competitive advantage. Properties As of November 30, 1997, Lilly maintained 31 principal facilities, of which 20 were located in the U.S. See Item 2 - Properties. The plants range in size from approximately 260,000 square feet to approximately 9,000 square feet. The facilities vary in age and are well maintained and adequate for their present uses. Utilization rates vary from site to site depending on capacity, customers served and range of production capabilities. The Company believes it can take advantage of special situations (e.g., special orders, new customers, new technology) that may arise during the course of an operating cycle by adding capacity through incremental shifts. Each facility operates technical support centers to assist customers in addressing both application and processing issues. Although the Company has traditionally located its domestic plants near its customer base, the Company has begun to rely on larger, more efficient, centralized plants in the U.S. With respect to its foreign operations, the Company continues to adhere to its strategy of following, and being in close proximity to, its customers as they open plants around the world. Employees and Collective Bargaining Units As of November 30, 1997, Lilly employed approximately 2,100 people. The coatings industry is not heavily unionized and to the extent that there is unionization, it is highly fragmented. Unionized workers account for approximately 14% of the Company's total work force and operate through six separate unions at seven Lilly facilities. The Company believes that its relations with its employees are good. Environmental Regulation The Company's operations are subject to numerous foreign, federal, state and local environmental laws and regulations relating to protection of the environment, employee health and safety, and the discharge, storage, treatment and disposal of hazardous materials. In the United States, these laws include the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund"), the Resource Conservation and Recovery Act, the Clean Water Act, and the Clean Air Act. Certain operations of the Company use pigments, resins and solvents that contain chemicals that are considered hazardous under various environmental laws. Accordingly, management closely monitors the Company's environmental performance at its facilities. Management believes that the Company is in compliance in material respects with all environmental laws and regulations. CERCLA imposes joint and several liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the release of hazardous substances into the environment. These persons include the owner and operator of the site where the release occurred and companies that disposed or arranged for disposal of the hazardous substances found at the site. The Company has been named as a potentially responsible party ("PRP") by the United States Environmental Protection Agency ("EPA") or similar state agencies with respect to several inactive waste processing and/or disposal sites where clean-up costs have been incurred or may be incurred. In addition to these sites, the Company is currently investigating and remediating on-site disposal areas at certain of its current and former facilities. The Company continually assesses its environmental matters and establishes reserves to provide for these matters as they arise. The Company's experience to date leads it to believe 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 position of the Company as a whole. Under the Clean Air Act Amendments of 1990 ("CAAA"), the EPA is required to regulate volatile organic compound ("VOC") emissions from a variety of consumer and commercial products, including coatings. Accordingly, in June 1996, the EPA issued proposed regulations that would limit VOCs from industrial coatings. Final regulations are expected in 1998. Although the Company cannot accurately assess the impact of these regulations prior to their promulgation or implementation in final form, based on currently available information, the Company believes that these regulations will not have a material adverse effect on the operating results or the financial position of the Company as a whole. FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains statements which constitute forward looking statements within the meaning of Section 27A of the Securities Act. Discussions containing such forward looking statements may be found under the captions "Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A"), and "Business," as well as elsewhere within this Report. Forward looking statements include statements regarding the intent, belief or current expectations of the Company, primarily with respect to the future operating performance of the Company or related industry developments. When used in this Report, terms such as "anticipate," "believe," "estimate," "expect," "intend," "indicate," "may be," "objective," "plan," "predict," and "will be" are intended to identify such statements. Forward looking statements are not guarantees of future performance and involve risks and uncertainties. Forward looking statements are based upon management's expectations at the time they are made. Actual results could differ materially from those projected in the forward looking statements as a result of the risk factors set forth below and the matters set forth in this Report generally, many of which are beyond the control of the Company. The Company cautions the reader, however, that the following list of factors may not be exhaustive. Sensitivity to General Economic and Industry Conditions The Company's business, and the industrial coatings industry as a whole, is cyclical in nature and affected by the general trends of the economy. In particular, consumer behavior and confidence, the level of personal discretionary spending, housing activity, interest rates, credit availability, and demographics influence the Company's end use markets, such as the housing, building products, construction and agricultural equipment, appliance, furniture and automotive industries. During economic downturns, these industries tend to experience declines, which in turn diminish demand for the Company's products. Effects of Leverage The Company's level of indebtedness will have several important effects on its operations including (i) a substantial portion of the Company's cash flow from operations will be dedicated to debt service obligations, (ii) the covenants contained in the Company's revolving credit facility and senior notes may limit the Company's ability to borrow additional funds, and (iii) the Company's leveraged financial position may make the Company more vulnerable to economic downturns and may limit its ability to withstand competitive pressures, and plan for, or react to, changes in market conditions. Environmental Matters The operations of the Company, like those of other companies in the industrial coatings industry, are subject to numerous foreign, federal, state and local environmental laws and regulations. While the Company believes that it is currently in material compliance with environmental requirements, any failure to comply with such present and future requirements could subject the Company to future liabilities. The imposition of more stringent environmental requirements, or a determination that the Company is potentially responsible for site remediation where contamination is not presently known could result in expenditures for which no accrual has been made. Mature Industry The industrial coatings industry is a mature business in the U.S., growing in line with industrial production. Long-term annual growth in the U.S. industrial coatings industry is projected in the 1% to 2% range. To expand and remain competitive, the Company will be required to continue (i) to develop coatings that meet specific customer requirements, (ii) to price those coatings competitively, and (iii) to deliver quality products on time. In addition, the Company will also need to keep pace with technological developments to remain competitive, particularly technological developments that relate to environmental demands such as reductions of volatile organic compound emissions imposed by the Clean Air Act Amendments of 1990. Raw Materials Over 50% of the Company's operating costs are typically attributable to the cost of raw materials. The cost of these raw materials, most of which are derived from petrochemical products, depends on numerous factors, including changes in the economy, the level of foreign and domestic production, and the crude oil supply and demand balance. A rise in the price of raw materials could materially increase the Company's operating costs and thereby adversely affect its profit margins. International Operations During fiscal 1997, the Company's international sales, including U.S. exports of $17.2 million, accounted for approximately 21% of total sales, and the Company may increase this percentage in the coming years. The Company's international operations subject it to the risks of doing business abroad, including currency fluctuations, various trade barriers, restrictions on the transfer of funds, greater difficulty in accounts receivable collection, burdens of complying with a wide variety of foreign laws, and, in certain parts of the world, economic, social, and political instability, any of which could have an adverse effect on the Company's financial position and results of operations. Executive Officers of the Company The executive officers of the Company, the age of each, the positions and offices held by each during the last five years, and the period during which each has served in such positions and offices are as follows: Name of Executive Officer Age Positions and Offices Held - ----------------- --- -------------------------- Larry H. Dalton 50 Vice President - Manufacturing and Engineering since July, 1994; General Manager of the Company's Indianapolis Division from prior to 1992 to July, 1994. William C. Dorris 54 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. John C. Elbin 44 Vice President, Chief Financial Officer and Secretary since April, 1997; Senior Vice President and Chief Financial Officer, Pet Incorporated from prior to 1992 to June, 1995. Douglas W. Huemme 56 Director since 1990; Chairman, President and Chief Executive Officer of the Company since prior to 1992. A. Barry Melnkovic 40 Vice President - Human Resources since April, 1996; Director, Corporate Employee & Labor Relations and Director Corporate Compensation and Benefits, Cummins Engine Company, Inc., from August, 1993 to February, 1996; Division Human Resource Manager, Ashland Chemical, Inc. from prior to 1992 to August, 1993. Kenneth L. Mills 49 Assistant Secretary since prior to 1992; Treasurer from prior to 1992 until October, 1993; Corporate Accounting Director since October, 1993. Robert A. Taylor 43 Director since April, 1997; Executive Vice President and Chief Operating Officer since February, 1997; Vice President and General Manager, Wood Coatings from April 1994 to February, 1997; Vice President, Specialty and Container Coatings, AKZ0 Coatings, Inc. from 1992 to April, 1994. 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 260,000 Grand Rapids, Michigan 165,000 Eschweiler, Germany 121,000 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 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 North Sydney, Australia 1,000 Singapore 1,000 All of these principal facilities noted above are owned directly or indirectly by the Company, except for the facilities in Grand Rapids, Michigan, Gardena, California, Guangdon, China, Selangor, Malaysia, Oxfordshire, England, Singapore and Australia which are leased. Item 3. Legal Proceedings. The Company is involved in various litigation and other asserted and unasserted claims arising in the ordinary course of business, primarily relating to product warranty and clean-up costs at independently operated waste treatment/disposal sites previously used by the Company or the predecessors of businesses purchased by the Company. While the results of lawsuits or other proceedings against the Company cannot be predicted with certainty, management believes that uninsured and unreserved losses, if any, arising from these proceedings will not have a material adverse effect on the business or consolidated financial position of the Company. 8 Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of fiscal 1997 to a vote of security holders through the solicitation of proxies or otherwise. PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters. The information required by this item is incorporated by reference herein from the information included under caption "Stock Trading and Dividend Information" in the Company's 1997 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 1997 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 1997 Annual Report to Shareholders and is included in Exhibit 13. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. No information is required to be disclosed under this item of this report pursuant to General Instruction 1 to Item 305 of Regulation S-K. Item 8. Financial Statements and Supplementary Data. The consolidated financial statements of the Company are incorporated by reference from the Company's 1997 Annual Report to Shareholders and are included in Exhibit 13. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. No information is required to be disclosed under this item of this report pursuant to Instruction 1 to Item 304 of Regulation S-K. 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 Number One, Election of Directors" of the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held April 23, 1998. See Part I, for a list of the Company's executive officers, and their ages, positions and offices. Item 11. Executive Compensation. The information required by this item is incorporated herein by reference from the section entitled "Compensation of Executive Officers" of the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held April 23, 1998. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated herein by reference from the sections entitled "Share Ownership of Certain Beneficial Owners" and "Proposal Number One, Election of Directors" of the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held April 23, 1998. Item 13. Certain Relationships and Related Transactions. The information required by this item, if any, is incorporated herein by reference from the section entitled "Proposal Number One, Election of Directors" of the Company's definitive Proxy statement relating to its Annual Meeting of Shareholders to be held April 23, 1998. 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 1997 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, 1997 and 1996 Consolidated Statements of Income and Retained Earnings -- Years ended November 30, 1997, 1996 and 1995 Consolidated Statements of Cash Flows -- Years ended November 30, 1997, 1996 and 1995 Notes to Consolidated Financial Statements -- November 30, 1997 (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 EXHIBIT INDEX Exhibit No. Description Page 2 Merger Agreement, dated March 4, 1996, by and among Lilly Industries, Inc., LP Acquisition Corporation and Guardsman Products, Inc. This exhibit is incorporated by reference to Exhibit 2 to Lilly Industries, Inc.'s Form 8-K Current Report filed with the SEC on April 22, 1996. 3.1 Restated Articles of Incorporation of Lilly Industries, Inc., as amended. This exhibit is incorporated by reference to Exhibit 3(a) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1996. 3.2 Restated By-Laws of Lilly Industries, Inc., as amended. This exhibit is incorporated by reference to Exhibit 3(b) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1993. 4.1 Indenture, dated November 10, 1997, between Lilly Industries, Inc. and Harris Trust and Savings Bank. This exhibit is incorporated by reference to Exhibit 4.1 to Lilly Industries, Inc.'s Registration Statement on Form S-4 filed with the Commission on December 5, 1997 (Commission No. 333-41587). 4.2 Credit Agreement, dated October 24, 1997, between Lilly Industries, Inc., the Lenders Signatory thereto, and NBD Bank, N.A. as Agent. This exhibit is incorporated by reference to Exhibit 4.2 to Lilly Industries, Inc.'s Registration Statement on Form S-4 filed with the Commission on December 5, 1997 (Commission No. 333-41587). 4.3 Rights Agreement, dated January 12, 1996, between Lilly Industries, Inc. and KeyCorp Shareholder Services, Inc. as Rights Agent. This exhibit is incorporated by reference to Exhibit 4 to Lilly Industries, Inc.'s Form 8-A filed with the SEC on January 23, 1996. 10.1 Registration Agreement, dated November 5, 1997, between Lilly Industries, Inc. and Salomon Brothers, Inc., Lehman Brothers, Inc. and Schroder & Co., Inc. This exhibit is incorporated by reference to Exhibit 10.1 to Lilly Industries, Inc.'s Registration Statement on Form S-4 filed with the Commission on December 5, 1997 (Commission No. 333-41587). 10.2 Form of Exchange Agent Agreement, dated December 22, 1997, between Lilly Industries, Inc. and Harris Trust and Savings Bank. This exhibit is incorporated by reference to Exhibit 10.2 to Lilly Industries, Inc.'s Registration Statement on Form S-4 filed with the Commission on December 5, 1997 (Commission No. 333-41587). *10.3 Lilly Industries, Inc. Unfunded Supplemental Retirement Plan (as in effect November 29, 1990). This exhibit is incorporated by reference to Exhibit 10(b) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1990. *10.4 Lilly Industries, Inc. Unfunded Excess Benefit Plan. This exhibit is incorporated by reference to Exhibit 10(c) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1989. *10.5 Lilly Industries, Inc. Second Unfunded Supplemental Retirement Plan (effective June 4, 1990). This exhibit is incorporated by reference to Exhibit 10(f) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1990. *10.7 Lilly Industries, Inc. 1991 Director Stock Option Plan. This exhibit is incorporated by reference to Exhibit 10(i) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1991. *10.8 Lilly Industries, Inc. 1992 Stock Option Plan. This exhibit is incorporated by reference to Exhibit 10(j) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1991. First Amendment to Lilly Industries, Inc. 1992 Stock Option Plan. This exhibit is incorporated by reference to Exhibit 10.8 to Lilly Industries, Inc.'s Registration Statement on Form S-4 filed with the Commission on December 5, 1997 (Commission No. 333-41587). 10.9 First Amendment to Credit Agreement, dated April 2, 1997, 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., as Co-Agents. This exhibit is incorporated by reference to Exhibit 10 to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended May 31, 1997. *10.10 Lilly Industries, Inc. Executive Retirement Plan (effective as of January 1, 1996). This exhibit is incorporated by reference to Exhibit 10(i) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1996. *10.11 Lilly Industries, Inc. Retirement Plan (effective as of January 1, 1996) and Trust Agreement for Lilly Industries, Inc. Replacement Plan between Lilly Industries, Inc. and Bankers Trust Company of Des Moines, dated September 27, 1996. This exhibit is incorporated by reference to Exhibit 10(j) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1996. *10.12 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Hugh M. Cates. This exhibit is incorporated by reference to Exhibit 10(1) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.13 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Larry H. Dalton. This exhibit is incorporated by reference to Exhibit 10(2) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.14 Change in Control Agreement, dated September 26, 1997, by and between Registrant and William C. Dorris. This exhibit is incorporated by reference to Exhibit 10(3) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.15 Change in Control Agreement, dated September 26, 1997, by and between Registrant and John C. Elbin. This exhibit is incorporated by reference to Exhibit 10(4) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.16 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Ned L. Fox. This exhibit is incorporated by reference to Exhibit 10(5) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.17 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Douglas W. Huemme. This exhibit is incorporated by reference to Exhibit 10(6) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.18 Change in Control Agreement, dated September 26, 1997, by and between Registrant and A. Barry Melnkovic. This exhibit is incorporated by reference to Exhibit 10(7) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.19 Change in Control Agreement, dated September 26, 1997, by and between Registrant and John D. Million. This exhibit is incorporated by reference to Exhibit 10(8) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.20 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Kenneth L. Mills. This exhibit is incorporated by reference to Exhibit 10(9) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.21 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Gary D. Missildine. This exhibit is incorporated by reference to Exhibit 10(10) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.22 Change in Control Agreement, dated September 5, 1997, by and between Registrant and Robert A. Taylor. This exhibit is incorporated by reference to Exhibit 10(11) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.23 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Keith C. Vander Hyde, Jr.. This exhibit is incorporated by reference to Exhibit 10(12) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.24 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Jay M. Wiegner. This exhibit is incorporated by reference to Exhibit 10(13) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. - ---------------- * Management contracts and compensatory plans required to be filed pursuant to Item 14(c) of Form 10-K. 13 Exhibits Filed Herewith: 11 Computation of Earnings Per Share. 13 Excerpts from the Lilly Industries, Inc. 1997 Annual Report. 21 List of Subsidiaries. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule. (b) The Following Reports on Form 8-K were filed by Lilly Industries, Inc. during the fourth quarter of fiscal 1997: Report on Form 8-K filed on October 17, 1997 filing a press release announcing the offer of $100 million in ten year Senior Unsecured Notes maturing in 2007 and the finalizing of a five year $175 million unsecured bank revolving credit facility to replace an exisiting $300 million facility. Report on Form 8-K filed on November 10, 1997 filing a press release announcing completion of the offering of $100 million of Senior Unsecured Notes and the closing of a new $175 million unsecured bank revolving credit facility. (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. 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 23, 1998 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 23, 1998 - ----------------------- and Chief Executive Douglas W. Huemme Officer (2) Principal Financial Officer /s/ John C. Elbin Vice President, February 23, 1998 - ------------------------ Chief Financial Officer John C. Elbin and Secretary (3) Principal Accounting Officer /s/ Kenneth L. Mills Corporate Accounting February 23, 1998 - ----------------------- Director and Kenneth L. Mills Assistant Secretary (4) A majority of the Board of Directors /s/ James M. Cornelius Director February 23, 1998 - ---------------------- James M. Cornelius /s/ William C. Dorris Director February 23, 1998 - ---------------------- William C. Dorris /s/ Paul K. Gaston Director February 23, 1998 - ---------------------- Paul K. Gaston /s/ Harry MoRrison Director February 23, 1998 - ---------------------- Harry Morrison, Ph.D. /s/ Norma J. Oman Director February 23, 1998 - ---------------------- Norma J. Oman /s/ John D. Peterson Director February 23, 1998 - ---------------------- John D. Peterson /s/ Thomas E. Reilly, Jr. Director February 23, 1998 - ---------------------- Thomas E. Reilly, Jr. /s/ Van P. Smith Director February 23, 1998 - ---------------------- Van P. Smith /s/ Robert A. Taylor Director February 23, 1998 - ---------------------- Robert A. Taylor SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS LILLY INDUSTRIES, INC. AND SUBSIDIARIES
COL. A COL. B COL. C COL. D COL. E - ------ ------ ---------------------------------------------- ------ ------ Additions Description Balance at (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, 1997: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts receivable $2,705,759 $ 538,000 $ -- $ -- $1,104,759 (A) $2,139,000 ========== ========== ====== ======== ========= ========== Year ended November 30, 1996: Reserves 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 ========== ========== ====== ======== ======== ==========
Note A - Uncollectible accounts receivable charged off, net of recoveries. 17 EX-11 2 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 1997 1996 1995 Primary: Average shares outstanding 22,940 22,600 22,677 Net Income $28,095 $18,776 $20,264 Net Income per common share $1.22 $0.83 $0.89 ======= ======= ======= Average shares outstanding 22,940 22,600 22,677 Dilutive stock options based on treasury stock method using average market price 460 500 409 ------- ------- ------- 23,400 23,100 23,086 ======= ======= ======= Net Income $28,095 $18,776 $20,264 Net Income per common and common equivalent share $1.20 $0.81 $0.88 ======== ======= ======= Fully diluted: Average shares outstanding 22,940 22,600 22,677 Dilutive stock options based on treasury stock method using the higher of year-end, quarter-end or average market price 460 600 423 -------- ------- ------- 23,400 23,200 23,100 ======== ======= ======= Net Income $28,095 $18,776 $20,264 Net Income per common and common equivalent share $1.20 $0.81 $0.88 ======== ======= ======= EX-13 3 EXCERPTS FROM ANNUAL REPORT Selected Financial Data (1) (In thousands, except per share data)
Year Ended November 30 1997 1996 (2) 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- Operations Net sales $601,296 $508,976 $328,345 $331,306 $284,325 $236,476 Cost of products sold 373,015 321,748 219,899 214,809 189,111 152,480 Gross margin percentage 38.0% 36.8% 33.0% 35.2% 33.5% 35.5% Selling, general and administrative expenses 139,467 112,361 59,874 61,498 53,319 50,128 Research and development expenses 18,680 17,294 13,184 12,982 12,325 11,030 Operating income 70,134 57,573 35,388 42,017 29,570 22,838 Operating income percentage 11.7% 11.3% 10.8% 12.7% 10.4% 9.7% Interest expense 19,317 14,466 2,158 2,919 1,925 1,662 Income taxes 23,068 11,039 13,510 16,350 11,784 9,201 Net income 28,095 24,060 20,264 23,302 16,155 12,706 EBITDA (3) 92,470 73,761 44,106 51,536 36,751 30,361 EBITDA interest coverage (4) 4.8 5.1 20.4 17.7 19.1 18.3 Per Share Data (5) Net income 1.20 1.04 .88 1.00 .70 .55 Cash dividends .32 .32 .31 .27 .24 .22 Book value 6.16 5.36 4.86 4.38 3.60 3.16 Price range of common stock 24 1/8-16 3/4 19 3/4-12 1/4 15-11 18-11 3/4 15 7/8-9 3/8 9 3/4-5 5/8 Other Data Total assets 501,795 521,860 183,582 190,252 167,044 117,049 Working capital 52,126 50,579 35,505 41,604 33,270 27,131 Capital expenditures(6) 12,673 19,233 15,599 6,693 7,598 3,262 Depreciation 8,850 6,453 4,251 4,637 3,746 3,965 Amortization of intangibles 13,140 9,097 3,923 4,328 3,141 2,827 Total debt 224,171 261,561 28,229 35,110 44,101 14,642 Book value 142,439 121,889 109,374 99,424 81,128 70,125 Return on equity 21.3% 20.8% 19.4% 25.8% 21.4% 17.6% Debt to total capitalization 61% 68% 21% 26% 35% 17% Sales per employee 283 274 282 281 253 214 Operating income per employee 33 31 30 36 26 21 Average shares outstanding (7) 23,400 23,200 23,100 23,250 23,123 23,189
Year Ended November 30 1991 1990 1989 1988 1987 - ------------------------------------------------------------------------------------------------------- Operations Net sales $220,508 $240,146 $219,713 $203,499 $189,213 Cost of products sold 150,669 161,626 145,592 134,114 122,135 Gross margin percentage 31.7% 32.7% 33.7% 34.1% 35.5% Selling, general and administrative expenses 46,921 50,404 44,113 42,516 39,779 Research and development expenses 10,606 10,814 9,708 8,980 8,872 Operating income 12,312 17,302 20,300 17,889 18,427 Operating income percentage 5.6% 7.2% 9.2% 8.8% 9.7% Interest expense 2,437 2,635 1,399 806 708 Income taxes 4,417 6,850 8,399 7,550 8,599 Net income 6,357 10,022 12,574 11,284 10,272 EBITDA (3) 20,177 26,179 26,958 23,540 23,050 EBITDA interest coverage (4) 8.3 9.9 19.3 29.2 32.6 Per Share Data (5) Net income .27 .41 .51 .45 .40 Cash dividends .21 .20 .17 .15 .14 Book value 3.16 3.10 3.00 2.65 2.34 Price range of common stock 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 Other Data Total assets 127,342 125,371 129,025 101,357 96,814 Working capital 30,405 34,513 40,389 36,368 26,006 Capital expenditures(6) 1,928 3,968 2,486 2,930 5,397 Depreciation 4,038 4,021 3,387 3,133 2,785 Amortization of intangibles 2,928 2,651 1,199 767 686 Total debt 21,501 28,345 25,560 10,007 8,419 Book value 74,187 73,185 74,482 65,987 58,755 Return on equity 8.6% 13.6% 17.9% 18.1% 18.3% Debt to total capitalization 22% 28% 26% 13% 13% Sales per employee 186 186 174 170 160 Operating income per employee 10 13 16 15 16 Average shares outstanding (7) 23,499 24,659 24,863 24,921 25,511
1 This table of Selected Financial Data should be read in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition and the Company's consolidated financial statements included herein. 2 1996 operations include the effect of the acquisition of Guardsman Products, Inc. on April 8, 1996 and exclude the effect of a restructuring charge of $9,607 which reduced net income by $5,284 or $.23 per share. 3 EBITDA represents earnings before interest, taxes, depreciation and amortization. 4 EBITDA interest coverage is determined by dividing EBITDA by interest expense. 5 Adjusted for all stock splits and stock dividends through November 30, 1997 inclusive. Prices are rounded to nearest 1/8. 6 Excludes effect of acquisitions. 7 Used to calculate net income per share. Management's Discussion and Analysis of Results of Operations and Financial Condition Operating Results 1997 vs. 1996 ================================================================================ Consolidated net sales increased 18.1% to a record $601.3 million for 1997. Sales benefited from the full-year inclusion of Guardsman Products Inc. ("GPI"), acquired in April, 1996. During 1997, the Company experienced volume growth in each of its end use markets. Sales to the Company's four primary end use markets (metal, wood, glass and composites, and Guardsman products) represented 39%, 38%, 12% and 11% of 1997 consolidated sales, respectively. International sales, including U.S. exports of $17.2 million, grew 29.7% to $126.5 million during 1997. This represented an increase of 1.8 percentage points to 21.0% of sales. For the first time in the Company's history, international sales exceeded 20% of total sales, despite the negative impact of foreign exchange rate volatility in several of the Company's overseas markets. Selling prices for most of the Company's products remained stable during the year. Gross profit margin continued to improve in 1997, rising 1.2 percentage points over 1996 to 38.0%. Continued improvements in supply chain management, including leveraging larger raw material order quantities and reducing the number of raw materials, contributed to a 1.6 percentage point reduction in raw material costs as a percentage of sales. The Company will continue to pursue improvement in gross margin by reducing the number of raw material items, process engineering, company-wide purchasing initiatives, and product reformulations. Direct labor and overhead costs increased slightly as a percentage of sales during 1997. Operating expenses totaled $158.1 million for 1997, an increase of $28.5 million, or 22.0%, over 1996 (excluding the restructuring charge reported during 1996). Increases in 1997 operating expenses were due primarily to the full-year inclusion of GPI operations. As a percentage of sales, operating expenses increased 0.8 percentage points to 26.3%. The increase primarily reflects higher amortization expense associated with intangibles acquired in the GPI transaction, as well as higher selling and marketing costs associated with certain Guardsman product lines, which target retail accounts rather than original equipment manufacturers. Interest expense increased 33.5% during 1997 to $19.3 million, primarily due to the full-year inclusion of debt associated with the GPI acquisition. The increase was partially mitigated by a reduction in interest-bearing borrowings during 1997. Management anticipates that the restructuring of the Company's debt capitalization during the fourth quarter of 1997 should contribute to a slightly lower average interest rate on borrowings going forward. (See "Liquidity and Capital Resources"). The Company's effective tax rate remained virtually unchanged for 1997 at 45.1%. The effective tax rate remained above U.S. statutory rates, primarily due to the impact of non-deductible intangibles acquired as part of the GPI acquisition, and generally higher foreign tax rates. Operating Results 1996 vs. 1995 ================================================================================ Consolidated net sales increased to a record $509.0 million for 1996, up from $328.3 million, or 55.0%, over 1995. Sales increased due to higher volumes associated with the acquisition of GPI, overall volume increases in Lilly's pre-acquisition business, and selected price increases instituted during the second half of 1995. Gross profit margin improved to 36.8% in 1996 from 33.0% in 1995. Improved 1996 margins were due to lower raw material costs, efficiencies in raw material procurement, and selected selling price increases instituted during the second half of 1995. Operating expenses increased to $139.3 million in 1996 from $73.1 million in 1995. Increases in 1996 were due to the inclusion of GPI's operations, increased amortization expense associated with intangibles acquired as part of the GPI acquisition, and the one-time restructuring charge of $9.6 million discussed below. Interest expense in 1996 was $14.5 million, compared to $2.2 million in 1995. The increase was directly attributable to significantly higher levels of interest-bearing debt necessary to fund the GPI acquisition. The Company's effective tax rate rose to 45.0% in 1996 from 40.0% in 1995, due primarily to higher levels of non-deductible intangible amortization associated with the GPI acquisition. Environmental ================================================================================ The Company's operations, like those of most companies in the coatings industry, are subject to regulations related to maintaining or improving the quality of the environment. Such regulations, along with the Company's own internal compliance efforts, have required and will continue to require ongoing expenditures. Spending for environmental compliance is not anticipated to be material to the Company's financial position. The Company has been notified that it is a potentially responsible party for clean-up costs with respect to several government investigations at independently-operated waste disposal sites previously used by the Company. Management has accrued, as appropriate, for these environmental liabilities. Management believes the liabilities associated with these sites will not have a material adverse effect on its operating results or financial position. Computer Systems - Year 2000 Compliance ================================================================================ The Company has reviewed its computer and other operating systems to identify those that could be affected by the "Year 2000 Issue." During 1997, an implementation plan was developed to ensure that all significant aspects of Year 2000 compliance will be addressed. The Company will achieve Year 2000 compliance in connection with an upgrade to its computer processing software. This upgrade is scheduled to be completed in early 1999. Management believes that accomplishing Year 2000 compliance will not have a material adverse impact on its operations or financial position. Guardsman Acquisition and Restructuring ================================================================================ Effective April 8, 1996, the Company acquired the outstanding shares of GPI for $235 million. The purchase was financed through senior secured credit facilities. GPI's technology and related products were complementary to Lilly's, with little customer overlap. The combination of both companies has strengthened Lilly's ability to penetrate key markets. In 1997, the Company successfully completed its initiatives to reduce costs of the combined companies by approximately $25 million. These efforts included improving efficiencies in raw material procurement, facility rationalization, and workforce reductions. Costs associated with the closure of Lilly facilities and workforce reductions were recorded in the 1996 second quarter as a restructuring charge totaling $9.6 million, which reduced net income by $5.3 million or $0.23 per share. Costs associated with the closure of GPI facilities and workforce reductions totaled $9.0 million and were recorded in the opening balance sheet of the combined entity at the acquisition date. Liquidity and Capital Resources ================================================================================ During 1997, the Company restructured its debt capitalization on more favorable terms. The $300 million secured credit agreement ("Agreement"), which was executed to complete the GPI acquisition, was restructured into a five-year, $175 million revolving credit facility ("Facility"). In addition, the Company successfully accessed the public debt market for the first time by issuing $100 million in ten-year senior notes ("Notes"). Both the Facility and the Notes are unsecured and require no principal amortization prior to maturity. Management expects to fund required debt service from operating cash flows. Liquidity and Capital Resources, continued ================================================================================ As part of the debt restructuring, the Company used net proceeds of $99.2 million from the Notes offering to retire a portion of the debt outstanding under the prior Agreement. The Company reduced total debt by $37.4 million during 1997. Additional amounts available for borrowing under the Facility for acquisitions or general operating purposes totaled $51 million as of November 30, 1997. Management believes that funds available from internal and external sources are sufficient to meet the liquidity needs of the Company during the next twelve months. The Company manages exposure to interest rate movements primarily through the issuance of fixed-rate debt securities and the use of interest rate swap agreements. As of November 30, 1997, the Company was party to one interest rate swap agreement with a notional principal amount of $95 million. The agreement effectively converts a portion of the Company's debt from a floating to a fixed interest rate, which was 7.03% as of November 30, 1997. Cash provided by operating activities increased to $59.3 million during 1997, driven by higher levels of net income and non-cash charges for depreciation and amortization associated with the full-year inclusion of GPI. In addition, ongoing efforts to better manage working capital assets provided $5.1 million in operating cash. Cash used for investing activities returned to more historical levels during 1997, totaling a net $7.0 million. Included in this amount were $12.7 million of capital expenditures. Key capital project expenditures during 1997 included $4.8 million in additional capacity for the Company's powder and wood operations, and $2.0 million for a new manufacturing facility in Ireland. Net cash used for investing activities was partially offset by sundry inflows totaling $5.7 million, representing disposal of non-operating assets, primarily company-owned life insurance policies. Future investing activities are expected to be financed from internal sources and existing credit facilities. Cash used by financing activities totaled $49.1 million for 1997, due principally to the $37.4 million reduction in debt. The Company maintained cash dividend payments of $0.32 per share during 1997. The Company focuses on three key measures of liquidity and access to capital markets: EBITDA (earnings before interest, taxes, depreciation and amortization); Interest Coverage (EBITDA divided by interest expense); and Debt Capitalization (debt divided by the sum of debt plus equity). For 1997, the company generated EBITDA of $92.5 million, an improvement of $19.0 million over 1996. Interest Coverage declined slightly to 4.8 times, due primarily to the full-year inclusion of GPI and associated higher average debt outstanding during the year. Debt Capitalization improved 7.0 percentage points to 61% due to higher levels of net income retained in the business and lower levels of debt outstanding at year-end 1997. Subsequent Event - Acquisition of Merckens Lackchemie GmbH & Company ================================================================================ In December, 1997, the Company acquired Merckens Lackchemie GmbH and Company ("Merckens"). Located in Eschweiler, Germany, Merckens supplies industrial coatings to customers throughout Europe. The Merckens product lines are complementary to Lilly's existing products. Management anticipates that the acquisition will add more than US $15 million of annual revenues to Lilly's operations. Consolidated Statements of Income and Retained Earnings (In thousands, except per share data)
Year ended November 30 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Net sales $ 601,296 $ 508,976 $ 328,345 Costs and expenses: Cost of products sold 373,015 321,748 219,899 Selling, general and administrative 139,467 112,361 59,874 Research and development 18,680 17,294 13,184 Restructuring charge (Note 3) -- 9,607 -- -------------------------------------- 531,162 461,010 292,957 -------------------------------------- Operating income 70,134 47,966 35,388 Other income (expense): Interest income and sundry 346 638 544 Interest expense (19,317 (14,466) (2,158) -------------------------------------- (18,971) (13,828) (1,614) -------------------------------------- Income before income taxes 51,163 34,138 33,774 Income taxes (Note 7) 23,068 15,362 13,510 -------------------------------------- Net income 28,095 18,776 20,264 Retained earnings at beginning of year 62,990 51,446 38,223 -------------------------------------- 91,085 70,222 58,487 Deduct dividends paid (1997, $.32 per share; 1996, $.32 per share; 1995, $.31 per share) 7,340 7,232 7,041 -------------------------------------- Retained earnings at end of year $ 83,745 $ 62,990 $ 51,446 ====================================== Average number of shares and equivalent shares of capital stock outstanding 23,400 23,200 23,100 Net income per share $ 1.20 $ .81 $ .88
See accompanying notes. Consolidated Balance Sheets (In thousands)
November 30 1997 1996 - --------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 10,079 $ 6,790 Accounts receivable, less allowance for doubtful accounts (1997, $2,139; 1996, $2,706) 80,011 84,592 Inventories (Note 4) 45,704 47,546 Deferred income taxes 4,300 5,717 Other 6,580 14,073 ------------------------ Total current assets 146,674 158,718 Other assets: Goodwill, less amortization (1997, $15,368; 1996, $9,028) 220,897 228,536 Other intangibles, less amortization (1997, $17,963; 1996, $17,271) 30,059 30,275 Deferred income taxes 7,722 12,091 Sundry 13,604 11,658 ------------------------ 272,282 282,560 Property and equipment: Land 8,035 8,396 Buildings 50,621 48,087 Equipment 78,432 71,056 Allowances for depreciation (deduction) (54,249) (46,957) ------------------------ 82,839 80,582 ------------------------ $ 501,795 $ 521,860 ======================== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 60,510 $ 56,593 Salaries and payroll related items 20,814 22,681 Other 10,936 11,281 State and local taxes 1,212 269 Federal income taxes 1,076 791 Current portion of long-term debt (Note 6) -- 16,524 ------------------------ Total current liabilities 94,548 108,139 Long-term debt (Note 6) 224,171 245,037 Other liabilities 40,637 46,795 Shareholders' equity (Note 8): Capital stock, $.55 stated value per share: Class A (limited voting) - 27,674 shares issued (1996, 27,184 shares) 15,375 15,103 Class B (voting) - 540 shares issued 300 300 Additional capital 79,417 75,433 Retained earnings 83,745 62,990 Currency translation adjustments (2,254) 88 Cost of capital stock in treasury (deduction) (34,144) (32,025) ------------------------ 142,439 121,889 ------------------------ $ 501,795 $ 521,860 ========================
See accompanying notes. Consolidated Statements of Cash Flows (In thousands)
Year ended November 30 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 28,095 $ 18,776 $ 20,264 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring charge -- 9,607 -- Depreciation 8,850 6,453 4,251 Amortization of intangibles 13,140 9,097 3,923 Deferred income taxes 4,085 2,094 (70) Changes in operating assets and liabilities net of effects from acquired business: Accounts receivable 4,581 (5,849) 1,320 Inventories 1,842 (7,086) 8,474 Accounts payable and accrued expenses 2,933 7,825 (9,972) Sundry (4,226) (3,466) (987) ---------------------------------------- Net cash provided by operating activities 59,300 37,451 27,203 Investing Activities Purchases of property and equipment (12,673) (19,233) (15,599) Payment for acquired business -- (235,000 -- Sundry 5,716 4,590 (620) ---------------------------------------- Net cash used by investing activities (6,957) (249,643) (16,219) Financing Activities Dividends paid (7,340) (7,232) (7,041) Proceeds from senior notes 99,200 -- -- Proceeds from short-term and long-term borrowings -- 310,600 -- Principal payments on short-term and long-term borrowings (136,590) (105,817) (6,888) Purchases of capital stock for treasury -- -- (4,380) Sundry (4,324) 1,171 1,004 ---------------------------------------- Net cash (used) provided by financing activities (49,054) 198,722 (17,305) ---------------------------------------- Increase (decrease) in cash and cash equivalents 3,289 (13,470) (6,321) Cash and cash equivalents at beginning of year 6,790 20,260 26,581 ---------------------------------------- Cash and cash equivalents at end of year $ 10,079 $ 6,790 $ 20,260 ========================================
See accompanying notes. Notes to Consolidated Financial Statements November 30, 1997 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 products, including fabric protectors, furniture care products and cleaning aids. 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. Coatings inventories in the United States are stated at the lower of cost, determined by the last-in, first-out (LIFO) method, or market. All other inventories are stated at the lower of cost, determined by the first-in, first-out (FIFO) method, or market. Intangible Assets. Goodwill, which represents the excess of cost over fair value of net assets of purchased businesses, is amortized by the straight-line method over periods ranging from 20 to 40 years. Other intangible assets consist of noncompete agreements, customer lists and technology and are amortized by the straight-line method over periods ranging from 5 to 20 years. The Company periodically evaluates the 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. 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. In February, 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share," which requires certain modifications to the currently applicable net income per share calculations defined in Accounting Principles Board Opinion No. 15 and restatement of net income per share for all prior periods reported. The Company is required to adopt this standard in its first quarter of fiscal 1998. Adoption of SFAS No. 128 is not expected to materially impact the Company's net income per share. 2. Acquisition ================================================================================ On 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 used $275,000,000 of senior secured credit facilities (see Note 6) to fund the initial purchase of shares, pay-off existing debt and 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 included $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. If the acquisition had occurred on December 1, 1995, pro forma net sales and net income for the year ended November 30, 1996 would be $598,722,000 and $20,767,000, respectively, and net income per share would be $.90. The pro forma results include a restructuring charge of $9,607,000 which reduced net income by $5,284,000 or $.23 per share (see Note 3). The pro forma consolidated results of operations are not necessarily indicative of future results of operations or actual results of operations that would have occurred had the purchase been made at December 1, 1995. 3. Restructuring ================================================================================ In 1996 the Company adopted and commenced implementation of plans for the consolidation of manufacturing facilities related to the acquisition of Guardsman. These plans included the closure of both Lilly and Guardsman facilities and workforce reductions totaling approximately 250 employees. Closure costs included facility and equipment valuation adjustments, inventory disposal costs, dismantling and maintenance costs, and termination benefits. The primary employee groups affected included manufacturing, selling, administrative and research and development personnel. As of November 30, 1997 the plans are complete. Costs associated with the closure of former Lilly facilities and workforce reductions were recorded in the 1996 second quarter and reflected as a restructuring charge totaling $9,607,000, which reduced net income by $5,284,000 or $.23 per share. The amounts paid or charged against these reserves and amounts remaining as liabilities are as follows (in thousands): Facilities, Equipment, Inventories Termination and Other Benefits Total --------- -------- ----- Balance December 1, 1995 $ -- $ -- $ -- Provision 7,827 1,780 9,607 Amounts paid or charged 365 447 812 ---------------------------------- Balance November 30, 1996 7,462 1,333 8,795 Amounts paid or charged 7,462 1,333 8,795 ---------------------------------- Balance November 30, 1997 $ -- $ -- $ -- ================================== Costs associated with the closure of former Guardsman facilities and workforce reductions were recorded in the opening balance sheet of the combined entity at the acquisition date. The amounts paid or charged against these reserves and amounts remaining as liabilities are as follows (in thousands):
Facilities, Equipment, Inventories Termination and Other Benefits Total --------- -------- ----- Balance April 8, 1996 $6,532 $2,476 $9,008 Amounts paid or charged 1,642 469 2,111 ---------------------------------- Balance November 30, 1996 4,890 2,007 6,897 Amounts paid or charged 3,590 589 4,179 Adjustment of estimated liabilities to goodwill 1,300 1,418 2,718 ---------------------------------- Balance November 30, 1997 $ -- $ -- $ -- ==================================
4. Inventories ================================================================================ The principal inventory classifications at November 30 are summarized as follows (in thousands): 1997 1996 - -------------------------------------------------------------- Finished products $26,361 $25,847 Raw materials 27,019 29,375 ------------------- 53,380 55,222 Less adjustment of certain inventories to last-in, first-out (LIFO) basis 7,676 7,676 ------------------- $45,704 $47,546 =================== Inventory cost is determined by the LIFO method of inventory valuation for approximately 68% and 69% of inventories at November 30, 1997 and 1996, respectively. 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 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. 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):
1997 1996 1995 - --------------------------------------------------------------------------------------- Defined benefit plans Service cost - benefits earned during the period $2,099 $1,733 $ 708 Interest cost on projected benefit obligation 5,484 4,594 2,742 Actual net gain on plan assets (8,482) (9,056) (8,849) Net amortization and deferral 1,012 3,104 5,267 ---------------------------- Net pension cost (benefit) 113 375 (132) Defined contribution plans 3,740 2,219 2,130 ---------------------------- Pension expense $3,853 $2,594 $1,998 ============================
The expected long-term rate of return on assets used to compute the defined benefit plans' pension expense was 9.25% for 1997, 1996 and 1995. 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): 1997 1996 - --------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested $ 60,141 $ 58,699 Nonvested 4,767 6,774 ---------------------- Total accumulated benefit obligations $ 64,908 $ 65,473 ====================== Actuarial present value of projected benefit obligations for services rendered to date $(82,542) $(79,647) Plan assets at fair value 88,594 83,186 ---------------------- Excess of plan assets over projected benefit obligations 6,052 3,539 Unrecognized net gains (4,277) (768) Unrecognized prior service cost 5,274 2,794 Unrecognized transition obligation at December 1, 1985, net of amortization (1,135) (1,337) ---------------------- Net pension asset $ 5,914 $ 4,228 ====================== The discount rate and rate of increase in compensation levels used to measure benefit obligations were 7% and 5%, respectively, for both 1997 and 1996. Accumulated benefits for supplemental executive retirement plans totaled approximately $7,953,000 and $5,144,000 at November 30, 1997 and 1996, respectively. 6. Long-Term Debt ================================================================================ Long-term debt consists of the following as of November 30 (in thousands): 1997 1996 - ------------------------------------------------------ Revolving Credit Facility $124,000 $ -- 7.75% Senior Unsecured Notes 100,000 -- Facility A Term Note -- 171,500 Facility B Term Note -- 49,875 Facility C Revolving Note -- 40,000 Other 171 186 --------------------- 224,171 261,561 Less current portion -- 16,524 --------------------- $224,171 $245,037 ===================== In November 1997, the Company restructured its long-term debt into a $175,000,000 revolving credit facility ("Facility") with a group of financial institutions and $100,000,000 of senior notes ("Notes"). The Notes were issued as a 144A private placement offering with registration rights. The Facility is unsecured and provides for borrowings under a revolving note. Interest is payable upon maturity of each revolving advance, but in no case less frequently than quarterly. The principal of the Facility is due October, 2002. The Notes are unsecured. Interest is payable on June 1 and December 1 of each year the Notes are outstanding. The principal of the Notes is due December, 2007. 6. Long-Term Debt, continued ================================================================================ The Facility bears interest, at the Company's option, at (i) the higher of the agent bank's prime rate (8.25% at November 30, 1997) or the Federal Funds rate plus 0.50%, or (ii) the London Interbank Offered Rate for U.S. Dollars plus 0.40% to 1.00%, depending upon the Company's leverage. A commitment fee ranging from 0.15% to 0.25%, depending upon the Company's leverage, is payable on the unused portion of the Facility. In April 1996, the Company entered into a forty-four month amortizing interest rate swap agreement ("Swap") with a notional amount of $175,000,000. This agreement effectively converts a portion of the revolving note from variable rate debt to fixed rate debt with a rate of 7.03% at November 30, 1997. The notional amount of the Swap was $95,000,000 at November 30, 1997, and reduces ratably on an annual basis to $50,000,000 in 1999. Interest of $20,628,000, $12,746,000 and $2,306,000 was paid in fiscal 1997, 1996 and 1995, respectively. The Company is subject to various debt covenants under the Facility and Notes, including affirmative and negative covenants which require the maintenance of certain ratios for maximum leverage, fixed charge coverage and interest coverage. Additionally, such covenants place certain restrictions on the Company's ability to engage in mergers and acquisitions and incur additional indebtedness. 7. Income Taxes ================================================================================ Income tax expense for the years ended November 30 is comprised of the following components (in thousands): 1997 1996 1995 - ---------------------------------------------------------------------------- Current expense: Federal $ 10,612 $ 7,204 $ 7,953 Foreign 7,674 4,736 3,267 State 697 1,328 2,360 ----------------------------------- 18,983 13,268 13,580 Deferred expense (credit): Federal 2,818 1,829 -- Foreign 210 (119) (70) State 1,057 384 -- ----------------------------------- 4,085 2,094 (70) ----------------------------------- $ 23,068 $ 15,362 $ 13,510 =================================== A reconciliation of the statutory U.S. federal rate to the effective income tax rate for the years ended November 30 is as follows: 1997 1996 1995 - ----------------------------------------------------------------------------- Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% Increase resulting from: Goodwill 3.9 4.1 2.4 State income taxes, net of federal income tax benefit 2.3 3.3 3.4 Foreign 2.2 1.3 -- Other items 1.7 1.3 (.8) ----------------------------- Effective income tax rate 45.1% 45.0% 40.0% ============================= 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): 1997 1996 - -------------------------------------------------------------------------- Deferred tax assets: Restructuring and closure reserves $ -- $ 6,127 Goodwill and intangibles 1,426 1,316 Employee benefits 6,467 4,398 Accounts receivable, inventory and other 13,937 15,281 ------------------- 21,830 27,122 Deferred tax liabilities: Property and equipment 7,709 8,003 Pension 2,099 1,311 ------------------- 9,808 9,314 ------------------- Net deferred tax assets $12,022 $17,808 =================== 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 $12,000,000 at November 30, 1997. 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 $20,500,000, $20,177,000 and $16,524,000 were paid in 1997, 1996 and 1995, respectively. 8. Capital Stock ================================================================================ The Company has two classes of common stock, Class A stock and Class B stock. Authorized shares of Class A and Class B stock are 97,000,000 and 3,000,000, respectively. The limited voting rights of Class A shareholders are equal to voting rights of Class B shareholders only with regard to voting for merger, consolidation or dissolution of the Company and voting and electing four directors of the Company if there are ten or more directors and two directors if there are nine or fewer directors. With respect to all rights other than voting, Class A shareholders are the same as Class B shareholders. The terms of the Class B stock, which is held only by employees, provide that these shares be exchanged for Class A stock on a share-for-share basis when the shareholder ceases to be an employee or decides to dispose of the shares. Accordingly, 3,000,000 shares of authorized Class A stock are reserved for this purpose. On January 12, 1996, the Company's Board of Directors ("Board") declared a dividend of one purchase right for each outstanding share of Class A and Class B stock. In addition, one right is distributed for each share issued after January 26, 1996. Upon exercise, each right entitles holders to purchase from the Company one share of stock at $55 per share, subject to certain adjustments. The rights become exercisable when a person or group acquires beneficial ownership of 15 percent or more of Class A stock or becomes the beneficial owner of an amount of Class A stock (but not less than 10 percent) which the Board determines to be substantial and not in the Company's best long-term interests or following the announcement of a tender or exchange offer for 30% or more of the Class A stock. In the event a person acquires 15 percent or more of Class A stock, or is determined by the Board to be a substantial owner whose ownership is not in the Company's best long-term interests or an acquiring person engages in certain self-dealing transactions, each holder will have the right to receive that number of common shares having a market value of two times the exercise price of the right. At any time after a person becomes an acquiring person, but before such person acquires 50 percent or more of outstanding Class A stock, the Board may exchange each right for one common share (subject to adjustment). In the event the Company is involved in certain business combination transactions, or 50 percent or more of the Company's consolidated assets or earning power are sold, each holder will have the right to receive, upon exercise at the then-current exercise price of the right, that number of shares of common stock of the acquiring company having a market value of two times the exercise price of the right. The Company may redeem the rights at a price of $.01 per right at any time prior to the time a person or group becomes an acquiring person as defined by the rights agreement. The rights expire in January, 2006. A summary of shares issued and held in treasury follows (in thousands):
Capital Stock Capital Stock Issued Held in Treasury Class A Class B Class A Class B - ------------------------------------------------------------------------------------- Balance at December 1, 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 Class A exchanged for Class B -- -- 106 (106) Class B exchanged for Class A -- -- (22) 22 Stock options exercised 490 -- 29 75 --------------------------------------- Balance at November 30, 1997 27,674 540 4,923 182 =======================================
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 December 1, 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 Stock options exercised 272 -- 3,834 2,119 Disqualifying disposition of stock options -- -- 150 -- ------------------------------------------- Balance at November 30, 1997 $15,375 $ 300 $79,417 $34,144 ===========================================
Incentive stock option plans entitle certain directors, officers and other key employees to buy shares of Class A stock at prices not less than fair market value on the date of grant. The options vest and become exercisable ratably over a three-year period commencing two years after the date of grant and expire five years after the date of grant. The options are granted with stock appreciation rights (SAR) and reload options. An SAR entitles the option holder to receive a cash payment equal to the difference between the option price and the current value of Class A stock. The reload option entitles the option holder to the same number of options exercised with an option price equal to the fair market value at the date of exercise. Shares reserved under these plans were 3,008,125 and 2,008,125 at November 30, 1997 and 1996, respectively. A summary of stock option activity for the years ended November 30 follows: Weighted Average Number of Exercise Shares Price - ---------------------------------------------------------- Balance at December 1, 1994 1,319,418 $ 8.99 Grants 101,041 13.12 Exercised (208,229) 7.16 Terminated (13,350) 10.60 ------------------------ Balance at November 30, 1995 1,198,880 9.64 Grants 311,304 12.88 Exercised (280,962) 7.06 Terminated (16,932 10.84 ------------------------ Balance at November 30, 1996 1,212,290 11.05 Grants 77,072 18.43 Exercised (489,610) 8.39 Terminated (10,250) 13.39 ------------------------ Balance at November 30, 1997 789,502 $ 13.39 ======================== At November 30, 1997 the range of exercise prices and weighted-average remaining contractual life of outstanding options were $10.59 - $21.63 and three years, respectively. At November 30, 1997 and 1996, the number of options exercisable was 279,000 and 570,000 respectively, and the weighted-average exercise price of those options was $12.93 and $8.93, respectively. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," became effective for the Company in 1997. SFAS 123 permits companies to continue to apply APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its plans. The Company has elected to follow APB 25 and related Interpretations. Under APB 25, because the exercise price of the Company's employee stock options is not less than fair market price of the share at the date of grant, no compensation expense is recognized in the financial statements. Pro forma information regarding net income and net income per share is required by SFAS 123 and has been determined as if the Company accounted for its employee stock options using the fair value method of that Statement. The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997 and 1996, respectively: risk-free interest rate of 5.8% and 6.0%; dividend yields of 1.9% for both years; volatility factors of the expected market price of the Company's Class A stock of .30 and .32; and a weighted-average expected life of options of 4 years. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information follows (in thousands, except per share data): 1997 1996 - ------------------------------------------------------------------ Net income: As reported $ 28,095 $ 18,776 Pro forma 27,608 18,439 Net income per share: As reported $ 1.20 $ .81 Pro forma 1.18 .79 Weighted-average fair value of options granted during the year $ 4.93 $ 3.71 Due to the required phase-in provisions, the effects of applying SFAS 123 to arrive at the above pro forma amounts may not be representative of pro forma net income or net income per share in future years. 9. Geographic Information ================================================================================ The Company maintains operations in the United States as well as Canada, the United Kingdom, Germany, Taiwan, Malaysia, China and Ireland. A summary of geographic data for the years ended November 30 is as follows (in thousands): 1997 1996 1995 - ------------------------------------------------------------------------------ Net sales to unaffiliated customers: United States $ 491,973 $ 423,753 $ 277,494 Foreign 109,323 85,223 50,851 --------------------------------------- Consolidated $ 601,296 $ 508,976 $ 328,345 ======================================= Income before income taxes: United States $ 48,779 $ 41,501 $ 25,943 Foreign 21,701 16,710 9,989 Interest expense (19,317) (14,466) (2,158) Restructuring charge -- (9,607) -- --------------------------------------- Consolidated $ 51,163 $ 34,138 $ 33,774 ======================================= Total assets: United States $ 453,456 $ 473,957 $ 158,338 Foreign 49,007 48,325 25,784 Eliminations (deductions) (668) (422) (540) --------------------------------------- Consolidated $ 501,795 $ 521,860 $ 183,582 ======================================= 10. Quarterly Results of Operations (Unaudited) Quarterly results of operations are summarized as follows (in thousands, except per share data): Quarter Ended 1997 Feb. 28 May 31 Aug. 31 Nov. 30 - ------------------------------------------------------------------------ Net sales $142,160 $154,238 $150,904 $153,994 Gross profit 52,048 59,193 57,072 59,968 Net income 4,710 7,401 7,679 8,305 Net income per share .20 .32 .33 .35 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 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Indianapolis, Indiana January 23, 1998 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/ John C. Elbin John C. Elbin Vice President, Chief Financial Officer and Secretary Investor Information ================================================================================ Form 10-K A copy of the Form 10-K, which is filed with the Securities and Exchange Commission, will be sent free to any shareholder upon written request. Write to: Mr. Kenneth L. Mills, Assistant Secretary Lilly Industries, Inc. 733 S. West Street Indianapolis, IN 46225 Registrar and Transfer Agent ================================================================================ Harris Trust and Savings Bank Attn: Shareholder Services 311 W. Monroe Street, 11th Floor P. O. Box A3504 Chicago, Illinois 60690-3504 (800) 942-5909 (312) 461-6001 Communications concerning shareholder records, including address changes, stock transfers, cash dividends or other service needs should be directed to Harris Trust and Savings Bank. Analyst Contacts ================================================================================ Security analyst inquiries are welcomed. Please call: John C. Elbin Chief Financial Officer (317) 687-6703 Annual Meeting ================================================================================ Thursday, April 23, 1998 10:00 A.M., EST Rooms 101 and 102 Indiana Convention Center & RCA Dome Indianapolis, Indiana The meeting notice and proxy materials were mailed to shareholders with their copies of this annual report. Lilly urges all shareholders to vote their proxies and thus participate in the decisions that will be made at the annual meeting. [RIGHT COLUMN OF PRIOR PAGE] 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: Harris Trust and Savings Bank Attn: Shareholder Services 311 W. Monroe Street, 11th Floor P. O. Box A3504 Chicago, Illinois 60690-3504 Stock Trading and Dividend Information ================================================================================ The Company's Class A stock is traded on the New York Stock Exchange under the symbol LI. Dividends are traditionally paid on the 1st business day of January, April, July and October to shareholders of record approximately three weeks prior. The following table sets forth the dividends paid per share of stock and the high and low prices in each of the quarters in the past two years ended November 30. Dividends Price Range Fiscal 1997 Per Share High Low - --------------------------------------------------------------- 1st quarter ended Feb. 28 $ .08 $20 $17 2nd quarter ended May 31 .08 21 16 3/4 3rd quarter ended Aug. 31 .08 24 1/8 19 3/4 4th quarter ended Nov. 30 .08 22 1/2 17 7/8 ----- $ .32 ===== Dividends Price Range Fiscal 1996 Per Share High Low - --------------------------------------------------------------- 1st quarter ended Feb. 29 $.08 $14 1/8 $12 1/4 2nd quarter ended May 31 .08 15 3/4 12 1/2 3rd quarter ended Aug. 31 .08 19 15 4th quarter ended Nov. 30 .08 19 3/4 16 1/4 ----- $.32 ===== At November 30, 1997 there were approximately 2,080 registered shareholders of Class A stock and 54 registered shareholders of Class B stock, which is reserved for employees of the Company. Locations [LEFT COLUMN] International ================================================================================ Australia Level 22, 201 Miller Street North Sydney, NSW 2080 Australia Canada 1915 Second Street West Cornwall, Ontario K6H 5T1 Canada 65 Duke Street London, Ontario N6J 2X3 Canada China Lot 3 Xintang District Administration Dalinshan, Dongguan Guangdon, China 511774 England 152 Milton Park Abingdon Oxfordshire OX14 4SD England Germany D-8649 Wallenfels/Ofr. Postfach 1126 Germany Friedensstrasse 40 D-52249 Eschweiler Germany Ireland Willowfield Road Ballinamore Co. Leitrim Ireland Malaysia Lot No. 4963, Jalan Teratai 51/2 Miles Meru Industrial Zone 41050 Klang Selangor Darul Ehsan Malaysia Singapore Level 36, Hong Leong Building 16 Raffles Quay 048581 Singapore Taiwan, R.O.C. No. 1 Kung Yeh First Road Zenwu Village Kaohsiung Hsien Taiwan, R.O.C. [MIDDLE COLUMN OF PRIOR PAGE] United States ================================================================================ Alabama 1771 Industrial Road Dothan, AL 36303 Arkansas 1900 E. 145th Street Little Rock, AR 72206 California 210 East Alondra Blvd. Gardena, CA 90248 901 West Union Street Montebello, CA 90640 Connecticut 145 Dividend Road Rocky Hill, CT 06067 15 Lunar Drive Woodbridge, CT 06525 Florida 2355 S.W. 66th Terrace Davie, FL 33317 Illinois 5400 23rd Avenue Moline, IL 61265 Indiana 28335 Clay Street Elkhart, IN 46517 546 W. Abbott Street Indianapolis, IN 46225 Kentucky 347 Central Avenue Bowling Green, KY 42101 Michigan 411 Darling Street, N. Fremont, MI 49412 4999 36th Street, SE Grand Rapids, MI 49512 Missouri 1136 Fayette N. Kansas City, MO 64116 New Jersey 1991 Nolte Drive Paulsboro, NJ 08066 [RIGHT COLUMN OF PRIOR PAGES North Carolina 10300 Claude Freeman Drive Charlotte, NC 28262 2147 Brevard Road High Point, NC 27263 1717 English Road High Point, NC 27262 Texas 2518 Chalk Hill Road Dallas, TX 75212 Washington 13535 Monster Road Seattle, WA 98178 Corporate Offices ================================================================================ 733 S. West Street Indianapolis, Indiana 46225 Corporate Technology Center 521 W. McCarty Street Indianapolis, Indiana 46225 EX-21 4 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 (Australia) Pty Ltd. Australia (Subsidiary of Lilly Industries (USA), Inc.) 4. Lilly Industries (Cornwall) Limited Ontario, Canada (Subsidiary of Lilly Industries (USA), Inc.) 5. Lilly Industries (Ireland) Limited Ireland 6. Lilly Industries (Malaysia) Sdn.Bhd. Malaysia 7. Lilly Industries (Mexico), S.A. de C.V. Mexico 8. Lilly Industries, Inc.(Canada) Ontario, Canada 9. Lilly Industries (Far East), Ltd. Taiwan 10. Lilly Industries (Thailand), Limited Thailand 11. London Laboratories GmbH Germany (Subsidiary of Lilly Industries (USA), Inc.) 12. London Laboratories Limited Ontario, Canada (Subsidiary of Lilly Industries (USA), Inc.) 13. Merckens Lackchemie GmbH and Company KG Germany (Subsidiary of London Laboratories, GmbH) 14. Dongguan Lilly Paint Industries, Ltd. Peoples Republic (Subsidiary of Lilly Industries (Asia), Limited) of China 15. G.C.I. Insurance Company, Limited Bermuda (Subsidiary of Lilly Industries (USA), Inc.) 16. Guardsman UK Limited United Kingdom (Subsidiary of Lilly Industries (USA), Inc.) 17. Guardsman Chemical International Virgin Islands (Subsidiary of Lilly Industries (USA), Inc. EX-23 5 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 23, 1998, included in the 1997 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 pertaining to the Lilly Employees' Stock Purchase Plan, the Lilly Industries, Inc. Stock Option Plan, the Lilly Industries, Inc. 1991 Director Stock Option Plan, and the Lilly Industries, Inc. Employee 401(k) Savings Plan, respectively, and 33-52958 and 333-32205 pertaining to the Lilly Industries, Inc. 1992 Stock Option plan and Form S-4 No. 333-41587 pertaining to the 7-3/4% Senior Notes due 2007, Series B) of our report dated January 23, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Lilly Industries, Inc. /s/ Ernst & Young LLP Indianapolis, Indiana February 26, 1998 EX-27 6 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, 1997 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-30-1997 NOV-30-1997 10,079 0 82,150 2,139 45,704 146,674 137,088 54,249 501,795 94,548 0 95,092 0 0 47,347 501,795 601,296 601,296 373,015 531,162 346 0 19,317 51,163 23,068 0 0 0 0 28,095 1.20 1.20
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