-----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, B/PDE1bdslDq/Bxs5j+TlZZjK+gs7mft2nWdOQw+NRupMgizlGUohRlB8mEALH3h 8RrGrdH6daPDotZYeQI81w== 0000908834-99-000063.txt : 19990301 0000908834-99-000063.hdr.sgml : 19990301 ACCESSION NUMBER: 0000908834-99-000063 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990226 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: 99551894 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, 1998 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] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of February 16, 1999 was $336,355,000. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of February 16, 1999. 22,772,474 shares of Class A Common Stock, without par value; 437,037 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, 1998 Part III: Items 10 Proxy Statement for Annual Meeting of through 13 Shareholders to be held April 22, 1999 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 $619.0 million in fiscal 1998. Lilly formulates, manufactures and markets 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 (1). The Company has only one reportable industry segment, and employs approximately 2,300 people. The Company has plants and sales offices in the U.S., Australia, Canada, China, Germany, Ireland, Malaysia, Mexico, Singapore, Taiwan and the United Kingdom. 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, manufacturing and marketing 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, 1996, 1997 and 1998. 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 lacquer and protective color for furniture, building products and kitchen cabinets; (ii) metal coatings, such as liquid and powder coatings used to finish building products, furniture, appliances and transportation equipment; and (iii) composites and glass coatings, such as gelcoats and specialty chemicals for transportation equipment, recreational vehicles and mirrors. Sales for the global paints and coatings market equal approximately $55 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 companies. To date, the effects of industry consolidation include a greater concentration of market share with fewer companies, a reduction in the number of competitors, and the creation of new synergies within the larger 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. Technological developments that reduce negative environmental effects are also 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. 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; composites and glass; and specialty. These four markets accounted for approximately 39%, 38%, 12% and 11% of the Company's fiscal 1998 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 coil coatings and a full range of decorative and functional powder coatings. The coil coatings process is considered one of the most environmentally safe, energy-efficient methods of applying coatings to metal substrates. Lilly's technical innovation has produced conventional and water- borne coil coatings formulated with proprietary resins that provide high durability, flexibility, corrosion resistance and chemical resistance. Powder coatings are experiencing growth because of their environmental desirability, as powder coatings have no solvent content. Lilly powder coatings are environmentally compliant and provide outstanding durability and performance for both interior and exterior applications. Metal coatings are manufactured at fourteen facilities in the U.S. and facilities in Canada and Germany. 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. Composites and Glass Coatings. The Company's composites include gelcoats and fiberglass reinforced plastic composites for boats, recreational vehicles, cultured marble vanity tops, custom van and truck components and personal watercraft. Lilly's glass coatings are well recognized globally. The Company's glass coatings provide mirror manufacturers with everything needed to convert glass into mirrors of premier quality. Glass coatings 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. Specialty. 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 facilities located in Australia, Canada and the United Kingdom. Distribution and Customers Lilly's technical sales force of approximately 700 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, were $149.3 million in fiscal year 1998, which represented 24% of consolidated sales. Information concerning the Company's net sales, operating income and assets in foreign countries and the United States for the three years ended November 30, 1998 is set forth in Note 9 in the Notes to Consolidated Financial Statements in the Company's 1998 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 liquid and powder coatings, gain market share. The pigment, usually an inorganic substance, provides the color. "Fillers" and "extender pigments" provide gloss and sheen control, while specialty chemicals known as additives, enhance the flow and application properties of the 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 less than 1% of net sales. The Company's largest single raw material cost is for titanium dioxide (TiO2), which is a white pigment, and accounts for approximately 30% of pigment usage in the 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 $20.6 million (3.3% of net sales), $18.7 million (3.1% of net sales), and $17.3 million (3.4% of net sales) for the fiscal years 1998, 1997 and 1996, respectively. Future research and development expenses as a percent of net sales are anticipated to remain at current levels with emphasis on new product development. The Company holds several patents and trademarks, and considers patent and trademark protection to be important, but no individual patent is currently material to the Company's business as a whole. The Company has patents and licenses for glass coatings which are material to that specific business; and new patents are continually being developed to sustain the Company's competitive advantage. Properties Lilly maintains 32 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, 1998, Lilly employed approximately 2,300 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 9% of the Company's total work force and operate through three separate unions at four 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, the EPA has issued various regulations that limit VOCs from industrial coatings. 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 government regulations. 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 1998, the Company's international sales, including U.S. exports accounted for approximately 24% of total sales, and this percentage may increase in the coming years. The Company's international operations subject it to the risks of doing business abroad, including currency fluctuations, various trade barriers, restrictions on the transfer of funds, greater difficulty in accounts receivable collection, burdens of complying with a wide variety of foreign laws, and, in certain parts of the world, economic, social, and political instability, any of which could have an adverse effect on the Company's financial position and results of operations. Year 2000 Issues There can be no assurance that the Company and its vendors, suppliers and customers will achieve Year 2000 readiness. Executive Officers of the Company The executive officers of the Company, the age of each, the positions and offices held by each during the last five years, and the period during which each has served in such positions and offices are as follows: Name of Executive Officer Age Positions and Offices Held - ----------------- --- -------------------------- Douglas W. Huemme 57 Director since 1990; Chairman, President and Chief Executive Officer of the Company since prior to 1994. Robert A. Taylor 44 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 prior to 1994 to April, 1994. Larry H. Dalton 51 Vice President - Manufacturing and Engineering since July, 1994; General Manager of the Company's Indianapolis Division from prior to 1994 to July, 1994. William C. Dorris 55 Director since 1989; Vice President - Corporate Development since July, 1994; General Manager of the Company's High Point Division, Templeton Division and Dallas Division from prior to 1994 to July, 1994 John C. Elbin 45 Vice President, Chief Financial Officer and Secretary since April, 1997 when he joined the Company; Senior Vice President of Express Scripts in 1996; Senior Vice President and Chief Financial Officer of Pet Incorporated from prior to 1994 to 1995. A. Barry Melnkovic 41 Vice President - Human Resources since April, 1996; Director, Corporate Employee & Labor Relations and Director Corporate Compensation and Benefits, Cummins Engine Company, Inc., from 1993 to 1996. Kenneth L. Mills 50 Corporate Accounting Director and Assistant Secretary since prior to 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. Item 2. Properties. The Company has 32 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 138,000 London, Ontario, Canada 103,000 Bowling Green, Kentucky 94,000 Moline, Illinois 76,000 Cornwall, Ontario, Canada 97,000 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 Guadalupe, Mexico 35,000 Seattle, Washington 30,000 Elkhart, Indiana 25,000 Dongguan, China 25,000 Selangor, Malaysia 20,000 Davie, Florida 14,000 Woodbridge, Connecticut 13,000 Ballinamore, Ireland 12,000 Abingdon, England 12,000 Wallenfels, West Germany 9,000 North Sydney, Australia 1,000 Singapore 1,000 All of these principal facilities noted above are owned directly or indirectly by the Company, except for leased facilities in Grand Rapids, Michigan; Gardena, California; Dongguan, China; Selangor, Malaysia; Abingdon, England; Singapore; and North Sydney Australia. Item 3. Legal Proceedings. The Company is involved in various litigation and other asserted and unasserted claims arising in the ordinary course of business, primarily relating to product warranty and clean-up costs at independently operated waste treatment/disposal sites previously used by the Company or the predecessors of businesses purchased by the Company. While the results of lawsuits or other proceedings against the Company cannot be predicted with certainty, management believes that uninsured and unreserved losses, if any, arising from these proceedings will not have a material adverse effect on the business or consolidated financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of fiscal 1998 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 1998 Annual Report to Shareholders and is included in Exhibit 13. There is no public trading market for the Company's Class B Common Stock. Item 6. Selected Financial Data. The information required by this item is incorporated by reference herein from the information included under the caption "Selected Financial Data" in the Company's 1998 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 1998 Annual Report to Shareholders and is included in Exhibit 13. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company is subject to market risk in the form of interest rate risk and foreign currency risk. Both interest rate risk and foreign currency risk are immaterial to the Company. Item 8. Financial Statements and Supplementary Data. The consolidated financial statements of the Company are incorporated by reference from the Company's 1998 Annual Report to Shareholders and are included in Exhibit 13. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. No information is required to be disclosed under this item of this report pursuant to Instruction 1 to Item 304 of Regulation S-K. PART III Item 10. Directors and Executive Officers of the Company. The information required by this item with respect to directors of the Company is incorporated herein by reference from the section entitled "Proposal Number One, Election of Directors" of the Company's definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held April 22, 1999. 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 22, 1999. 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 22, 1999. 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 22, 1999. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)-1 The following items, included in the Company's 1998 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, 1998 and 1997 Consolidated Statements of Income and Retained Earnings -- Years ended November 30, 1998, 1997 and 1996 Consolidated Statements of Cash Flows -- Years ended November 30, 1998, 1997 and 1996 Notes to Consolidated Financial Statements -- November 30, 1998 (a)-2 The following financial statement schedule is filed as a part of this report. Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)-3 Exhibits. Exhibits Incorporated by Reference EXHIBIT INDEX Exhibit No. Description 2 Merger Agreement, dated March 4, 1996, by and among Lilly Industries, Inc., LP Acquisition Corporation and Guardsman Products, Inc. This exhibit is incorporated by reference to Exhibit 2 to Lilly Industries, Inc.'s Form 8-K Current Report filed with the SEC on April 22, 1996. 3.1 Restated Articles of Incorporation of Lilly Industries, Inc., as amended. This exhibit is incorporated by reference to Exhibit 3(a) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1996. 3.2 Restated By-Laws of Lilly Industries, Inc., as amended. This exhibit is incorporated by reference to Exhibit 3(b) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1993. 4.1 Indenture, dated November 10, 1997, between Lilly Industries, Inc. and Harris Trust and Savings Bank. This exhibit is incorporated by reference to Exhibit 4.1 to Lilly Industries, Inc.'s Registration Statement on Form S-4 filed with the Commission on December 5, 1997 (Commission No. 333-41587). 4.2 Credit Agreement, dated October 24, 1997, between Lilly Industries, Inc., the Lenders Signatory thereto, and NBD Bank, N.A. as Agent. This 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 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. *10.10 Lilly Industries, Inc. Retirement Plan (effective as of January 1, 1996) and Trust Agreement for Lilly Industries, Inc. Replacement Plan between Lilly Industries, Inc. and Bankers Trust Company of Des Moines, dated September 27, 1996. This exhibit is incorporated by reference to Exhibit 10(j) to Lilly Industries, Inc.'s Form 10-K Annual Report for the fiscal year ended November 30, 1996. *10.11 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Hugh M. Cates. This exhibit is incorporated by reference to Exhibit 10(1) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.12 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Larry H. Dalton. This exhibit is incorporated by reference to Exhibit 10(2) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.13 Change in Control Agreement, dated September 26, 1997, by and between Registrant and William C. Dorris. This exhibit is incorporated by reference to Exhibit 10(3) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.14 Change in Control Agreement, dated September 26, 1997, by and between Registrant and John C. Elbin. This exhibit is incorporated by reference to Exhibit 10(4) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.15 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Ned L. Fox. This exhibit is incorporated by reference to Exhibit 10(5) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.16 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Douglas W. Huemme. This exhibit is incorporated by reference to Exhibit 10(6) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.17 Change in Control Agreement, dated September 26, 1997, by and between Registrant and A. Barry Melnkovic. This exhibit is incorporated by reference to Exhibit 10(7) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.18 Change in Control Agreement, dated September 26, 1997, by and between Registrant and John D. Million. This exhibit is incorporated by reference to Exhibit 10(8) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.19 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Kenneth L. Mills. This exhibit is incorporated by reference to Exhibit 10(9) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.20 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Gary D. Missildine. This exhibit is incorporated by reference to Exhibit 10(10) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.21 Change in Control Agreement, dated September 5, 1997, by and between Registrant and Robert A. Taylor. This exhibit is incorporated by reference to Exhibit 10(11) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.22 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Keith C. Vander Hyde, Jr.. This exhibit is incorporated by reference to Exhibit 10(12) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. *10.23 Change in Control Agreement, dated September 26, 1997, by and between Registrant and Jay M. Wiegner. This exhibit is incorporated by reference to Exhibit 10(13) to Lilly Industries, Inc.'s Form 10-Q Quarterly Report for the fiscal quarter ended August 31, 1997. * Management contracts and compensatory plans required to be filed pursuant to Item 14(c) of Form 10-K. Exhibits Filed Herewith: 4.4 First Amendment to Credit Agreement among Lilly Industries, Inc., the Lenders Signatory thereto and NBD Bank, N.A., as agent, dated as of April 4, 1998. 13 Excerpts from the Lilly Industries, Inc. 1998 Annual Report. 21 List of Subsidiaries. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 23, 1999 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, 1999 - ----------------------- and Chief Executive Douglas W. Huemme Officer (2) Principal Financial Officer /s/ John C. Elbin Vice President, February 23, 1999 - ------------------------ Chief Financial Officer John C. Elbin and Secretary (3) Principal Accounting Officer /s/ Kenneth L. Mills Corporate Controller February 23, 1999 - ----------------------- and Kenneth L. Mills Assistant Secretary (4) A majority of the Board of Directors /s/ James M. Cornelius Director February 23, 1999 - --------------------------- James M. Cornelius /s/ William C. Dorris Director February 23, 1999 - --------------------------- William C. Dorris /s/ Paul K. Gaston Director February 23, 1999 - --------------------------- Paul K. Gaston /s/ Harry Morrison, Ph.D. Director February 23, 1999 - --------------------------- Harry Morrison, Ph.D. /s/ Norma J. Oman Director February 23, 1999 - --------------------------- Norma J. Oman /s/ John D. Peterson Director February 23, 1999 - --------------------------- John D. Peterson /s/ Thomas E. Reilly, Jr. Director February 23, 1999 - --------------------------- Thomas E. Reilly, Jr. /s/ Van P. Smith Director February 23, 1999 - --------------------------- Van P. Smith /s/ Robert A. Taylor Director February 23, 1999 - --------------------------- 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, 1998: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts receivable $2,139,000 $752,000 $-- $-- $910,000 (A) $1,981,000 ========== ======== === === ============ ========== Year ended November 30, 1997: Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts receivable $2,705,759 $538,000 $-- $-- $1,104,759 (A) $2,139,000 ========== ======== === === ============== ========== 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 ========== ======== === ======== ============ ==========
Note A - Uncollectible accounts receivable charged off, net of recoveries. EX-4.4 2 FIRST AMENDMENT TO CREDIT AGREEMENT - -------------------------------------------------------------------------------- FIRST AMENDMENT TO CREDIT AGREEMENT - -------------------------------------------------------------------------------- among LILLY INDUSTRIES, INC. an Indiana corporation the Lenders Signatory Hereto and NBD Bank, N.A., as Agent - -------------------------------------------------------------------------------- Dated as of April 14, 1998 - -------------------------------------------------------------------------------- - 1 - TABLE OF CONTENTS PART I. AMENDATORY PROVISIONS............................................1 SECTION 1 Definitions............................. 1 1.1 Defined Terms................... 1 SECTION 3 Change in Circumstances................. 4 3.4. Funding Indemnification........... 4 PART II. CONTINUING EFFECT................................................ 4 PART III. INDEPENDENT CREDIT DECISION...................................... 5 PART IV. CONDITIONS PRECEDENT.............................................5 g - i - FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT made as of the 14th day of April, 1998, by and among LILLY INDUSTRIES, INC., an Indiana corporation (the "Borrower"), the LENDERS party hereto, and NBD BANK, N.A., a national banking association, as agent for the Lenders hereunder (in such capacity, the "Agent"); W I T N E S S E T H: WHEREAS, as of October 24, 1997, the parties hereto entered into a certain Credit Agreement (the "Agreement"); and WHEREAS, the Borrower has requested changes in the method in which the commitment fee and the incremental margin are calculated and in the calculation of break funding charges and the Lenders have consented to such changes subject to and as provided in this First Amendment; NOW, THEREFORE, in consideration of the premises, and the mutual promises herein contained, the parties agree that the Agreement shall be, and it hereby is, amended as provided herein and the parties further agree as follows: PART I. AMENDATORY PROVISIONS SECTION 1 Definitions 1.1 Defined Terms. Section 1.1 of the Agreement is hereby amended by substituting the following definitions in lieu of the like existing definitions: "Applicable Commitment Fee" means, on any date, the fee payable to the Agent for the pro rata benefit of the Lenders, which fee shall be based upon the Ratings in effect at the close of business on such date in accordance with the table set forth below: - 1 - Ratings Applicable Commitment Fee Level 1 BB or lower by S&P; 0.250% Ba2 or lower by Moody's Level 2 BB+ by S&P; 0.175% Ba1 by Moody's Level 3 BBB- by S&P; 0.150% Baa3 by Moody's Level 4 BBB by S&P; 0.125% Baa2 by Moody's Level 5 BBB+ or higher by S&P; 0.100% Baa1 or higher by Moody's For purposes of the foregoing, (a) if both S&P and Moody's shall not have in effect a Rating, then the Applicable Commitment Fee shall be determined based on the last applicable Level (subject to the last sentence of this definition), (b) if the Ratings shall fall within different Levels, the Applicable Commitment Fee shall be based upon the higher of the two Ratings, provided that if the split is more than one full Level, the average (or the higher of two intermediate Ratings) shall be used, and (c) if any Rating shall be changed (other than as a result of a change in the rating system of the applicable Rating Agency), such change shall be effective as of the date on which it is first announced by the Rating Agency making such change. If the rating system of any Rating Agency shall change, or if any Rating Agency shall cease to be in the business of rating corporate debt obligations or shall not have in effect a Rating, the parties hereto shall negotiate in good faith to amend this definition to reflect such changed rating system or the absence of such Rating, and pending the effectiveness of any such amendment the Applicable Commitment Fee shall be determined (y) by reference to the Rating from the other Rating Agency, or (z) based on the last applicable Level for a period of ninety (90) days and based on Level 1 as of the expiration of such ninety (90) day period in the event both Rating Agencies have so changed their rating systems, or have both ceased to be in the business of rating corporate debt obligations, or both shall not have in effect a Rating. "Applicable Margin" means, on any date, the incremental margin to be paid by Borrower on Loans hereunder, which margin shall be based upon the Ratings in effect at the close of business on such date in accordance with the table set forth below: - 2 - Ratings Applicable Margin ABR Loans Eurodollar Loans Level 1 BB or lower by S&P; 0% 0.75% Ba2 or lower by Moody's Level 2 BB+ by S&P; 0% 0.60% Ba1 by Moody's Level 3 BBB- by S&P; 0% 0.45% Baa3 by Moody's Level 4 BBB by S&P; 0% 0.35% Baa2 by Moody's Level 5 BBB+ or higher by S&P; 0% 0.30% Baa1 or higher by Moody's For purposes of the foregoing, (a) if both S&P and Moody's shall not have in effect a Rating, then the Applicable Commitment Fee shall be determined based on the last applicable Level (subject to the last sentence of this definition), (b) if the Ratings shall fall within different Levels, the Applicable Commitment Fee shall be based upon the higher of the two Ratings, provided that if the split is more than one full Level, the average (or the higher of two intermediate Ratings) shall be used, and (c) if any Rating shall be changed (other than as a result of a change in the rating system of the applicable Rating Agency), such change shall be effective as of the date on which it is first announced by the Rating Agency making such change. If the rating system of any Rating Agency shall change, or if any Rating Agency shall cease to be in the business of rating corporate debt obligations or shall not have in effect a Rating, the parties hereto shall negotiate in good faith to amend this definition to reflect such changed rating system or the absence of such Rating, and pending the effectiveness of any such amendment the Applicable Commitment Fee shall be determined (y) by reference to the Rating from the other Rating Agency, or (z) based on the last applicable Level for a period of ninety (90) days and based on Level 1 as of the expiration of such ninety (90) day period in the event both Rating Agencies have so changed their rating systems, or have both ceased to be in the business of rating corporate debt obligations, or both shall not have in effect a Rating. Section 1.1 of the Agreement is hereby further amended by adding the following definitions: "Moody's" means Moody's Investors Service, Inc. - 3 - "S&P" means Standard & Poor's Ratings Services, a division of McGraw-Hill Companies, Inc. "Rating Agencies" means Moody's and S&P. "Ratings" means the ratings from time to time established by the Rating Agencies for senior, unsecured, non-credit-enhanced long-term debt of the Borrower. SECTION 3 Change in Circumstances 3.4. Funding Indemnification. Section 3.4 of the Agreement is hereby amended by substituting the following sentence in lieu of the existing third (3rd) sentence of Section 3.4: In the event of a prepayment, the calculation of the cost owed to the Lenders under this Section 3.4 would be calculated using the following formula: Cost = PA x (OCF-RR) x D ------------------------ 360 where PA is the principal amount prepaid, OCF is the original Eurodollar Rate applicable to such prepayment, RR is the Eurodollar Base Rate determined by the Agent at the time of prepayment for an interest period substantially as similar as possible to the time remaining until expiration of the applicable Eurodollar Interest Period that is subject to the prepayment, and D is the number of days remaining in the applicable Eurodollar Interest Period that is subject to the prepayment. PART II. CONTINUING EFFECT Except as expressly modified herein: (a) All terms, conditions, representations, warranties and covenants contained in the Agreement shall remain the same and shall continue in full force and effect, interpreted, wherever possible, in a manner consistent with this First Amendment; provided, however, in the event of any irreconcilable inconsistency, this First Amendment shall control; (b) The representations and warranties contained in the Agreement shall survive this First Amendment in their original form as continuing representations and warranties of the Borrower; and - 4 - (c) Capitalized terms used in this First Amendment, and not specifically herein defined, shall have the meanings ascribed to them in the Agreement. In consideration hereof, the Borrower represents, warrants, covenants and agrees that: (aa) Each representation and warranty set forth in the Agreement, as hereby amended, remains true and correct as of the date hereof in all material respects, except to the extent that such representation and warranty is expressly intended to apply solely to an earlier date and except changes reflecting transactions permitted by the Agreement; (bb) There currently exists no offsets, counterclaims or defenses to the performance of the Obligations (such offsets, counterclaims or defenses, if any, being hereby expressly waived); (cc) There has not occurred any Default or Unmatured Default; and (dd) After giving effect to this First Amendment and any transactions contemplated hereby, no Default or Unmatured Default is or will be occasioned hereby or thereby. PART III. INDEPENDENT CREDIT DECISION Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender, based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this First Amendment. PART IV. CONDITIONS PRECEDENT Notwithstanding anything contained in this First Amendment to the contrary, the Lenders shall have no obligation under this First Amendment until each of the following conditions precedent have been fulfilled to the satisfaction of the Agent: (a) Each of the conditions set forth in Section 6.2 of the Agreement shall have been satisfied; (b) The Agent shall have received each of the following, in form and substance satisfactory to the Agent: (i) The Loan Documents, as amended, duly executed in the form approved by the Lenders; - 5 - (ii) A duly executed certificate of the Secretary or any Assistant Secretary of the Borrower (A) certifying as to attached copies of Resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of the Loan Documents, as amended, and any other documents provided for in this First Amendment to which the Borrower is a party, (B) certifying the names of the officer or officers authorized to sign, respectively, the Loan Documents, as amended, and any other documents provided for in this First Amendment to which the Borrower is a party, and containing a sample of the true signature of each such officer, and (C) certifying as complete and correct as to attached copies of the Articles of Incorporation and By-Laws of the Borrower or certifying that such Articles of Incorporation or By-Laws have not been amended (except as shown) since the previous delivery thereof to the Agent; and (c) All legal matters incident to this First Amendment shall be reasonably satisfactory to the Agent and its counsel. IN WITNESS WHEREOF, the Borrower, the Agent and the Lenders have caused this First Amendment to be executed by their respective officers duly authorized as of the date first above written. [This space intentionally left blank] - 6 - SIGNATURE PAGE OF LILLY INDUSTRIES, INC. TO FIRST AMENDMENT TO CREDIT AGREEMENT LILLY INDUSTRIES, INC. By: /s/ John C. Elbin ---------------------------------------- John C. Elbin, Chief Financial Officer and Secretary - 7 - SIGNATURE PAGE OF NBD BANK, N.A., TO FIRST AMENDMENT TO CREDIT AGREEMENT NBD BANK, N.A., individually and as Agent By: /s/ Dennis L. Bassett ---------------------------- Its: Senior Vice President ---------------------------- - 8 - SIGNATURE PAGE OF BANK ONE, INDIANA, NA TO FIRST AMENDMENT TO CREDIT AGREEMENT BANK ONE, INDIANA, NA By: /s/ Brian D. Smith ---------------------------- Its: Vice President ---------------------------- - 9 - SIGNATURE PAGE OF FIRST UNION NATIONAL BANK TO FIRST AMENDMENT TO CREDIT AGREEMENT FIRST UNION NATIONAL BANK By: /s/ ---------------------------- Its: Senior Vice President ---------------------------- - 10 - SIGNATURE PAGE OF HARRIS TRUST AND SAVINGS BANK TO FIRST AMENDMENT TO CREDIT AGREEMENT HARRIS TRUST AND SAVINGS BANK By: /s/ Peter Krawchuk ---------------------------- Its: Vice President ---------------------------- - 11 - SIGNATURE PAGE OF KEYBANK NATIONAL ASSOCIATION TO FIRST AMENDMENT TO CREDIT AGREEMENT KEYBANK NATIONAL ASSOCIATION By: /s/ Frank J. Jancar ---------------------------- Its: Vice President ---------------------------- - 12 - SIGNATURE PAGE OF NATIONAL CITY BANK OF INDIANA TO FIRST AMENDMENT TO CREDIT AGREEMENT NATIONAL CITY BANK OF INDIANA By: /s/ Frank B. Meltzer ---------------------------- Its: Vice President ---------------------------- - 13 - SIGNATURE PAGE OF BANK OF AMERICA N.T. & S.A. TO FIRST AMENDMENT TO CREDIT AGREEMENT BANK OF AMERICA N.T. & S.A. By: /s/ Paul B. Higdon ----------------------------- Its: Managing Director ---------------------------- - 14 - EX-13 3 ANNUAL REPORT Selected Financial Data (1) (In thousands, except per share data)
Year Ended November 30 1998 1997 1996 (2) 1995 1994 1993 1992 - ------------------------------- -------- -------- -------- -------- -------- -------- -------- Operations Net sales $619,002 $601,296 $508,976 $328,345 $331,306 $284,325 $236,476 Cost of products sold 379,641 373,015 321,748 219,899 214,809 189,111 152,480 Gross margin percentage 38.7% 38.0% 36.8% 33.0% 35.2% 33.5% 35.5% Selling, general and administrative expenses 146,763 139,467 112,361 59,874 61,498 53,319 50,128 Research and development expenses 20,567 18,680 17,294 13,184 12,982 12,325 11,030 Operating income 72,031 70,134 57,573 35,388 42,017 29,570 22,838 Operating income percentage 11.6% 11.7% 11.3% 10.8% 12.7% 10.4% 9.7% Interest expense, net 16,919 18,967 13,938 1,487 2,465 1,568 1,245 Income taxes 22,867 23,068 11,039 13,510 16,350 11,784 9,201 Effective income tax rate 42.0% 45.1% 45.0% 40.0% 41.2% 42.2% 42.0% Net income 31,579 28,095 24,060 20,264 23,302 16,155 12,706 EBITDA(3) 91,389 92,120 73,233 43,435 51,082 36,394 29,944 EBITDA interest coverage(4) 5.4 4.9 5.3 29.2 20.7 23.2 24.1 Per Share Data(5) Net income, diluted 1.35 1.20 1.04 .88 1.00 .70 .55 Cash dividends .32 .32 .32 .31 .27 .24 .22 Book value 7.15 6.16 5.36 4.86 4.38 3.60 3.16 Price range of common stock 24 5/8-14 3/8 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 516,485 501,795 521,860 183,582 190,252 167,044 117,049 Working capital 50,071 52,126 50,579 35,505 41,604 33,270 27,131 Capital expenditures (6) 17,015 12,673 19,233 15,599 6,693 7,598 3,262 Depreciation 9,102 8,850 6,453 4,251 4,637 3,746 3,965 Amortization of intangibles 10,922 13,140 9,097 3,923 4,328 3,141 2,827 Total debt 203,700 224,171 261,561 28,229 35,110 44,101 14,642 EBITDA to total debt 44.9% 41.1% 28.0% 153.9% 145.5% 82.5% 204.5% Book value 165,575 142,439 121,889 109,374 99,424 81,128 70,125 Return on equity 20.5% 21.3% 20.8% 19.4% 25.8% 21.4% 17.6% Debt to total capitalization 55% 61% 68% 21% 26% 35% 17% Number of employees 2,291 2,116 2,140 1,148 1,182 1,176 1,072 Sales per employee 270 283 274 282 281 253 214 Operating income per employee 31 33 31 30 36 26 21 Average shares outstanding, diluted(7) 23,400 23,400 23,100 23,086 23,231 22,962 23,048
Year Ended November 30 1991 1990 1989 1988 Operations Net sales $220,508 $240,146 $219,713 $203,499 Cost of products sold 150,669 161,626 145,592 134,114 Gross margin percentage 31.7% 32.7% 33.7% 34.1% Selling, general and administrative expenses 46,921 50,404 44,113 42,516 Research and development expenses 10,606 10,814 9,708 8,980 Operating income 12,312 17,302 20,300 17,889 Operating income percentage 5.6% 7.2% 9.2% 8.8% Interest expense, net 2,254 2,573 1,111 582 Income taxes 4,417 6,850 8,399 7,550 Effective income tax rate 41.0% 40.6% 40.6% 40.9% Net income 6,357 10,022 12,574 11,284 EBITDA(3) 19,994 26,117 26,670 23,316 EBITDA interest coverage(4) 8.9 10.2 24.0 40.1 Per Share Data(5) Net income, diluted .27 .41 .51 .45 Cash dividends .21 .20 .17 .15 Book value 3.16 3.10 3.00 2.65 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 Other Data Total assets 127,342 125,371 129,025 101,357 Working capital 30,405 34,513 40,389 36,368 Capital expenditures (6) 1,928 3,968 2,486 2,930 Depreciation 4,038 4,021 3,387 3,133 Amortization of intangibles 2,928 2,651 1,199 767 Total debt 21,501 28,345 25,560 10,007 EBITDA to total debt 93.0% 92.1% 104.3% 233.0% Book value 74,187 73,185 74,482 65,987 Return on equity 8.6% 13.6% 17.9% 18.1% Debt to total capitalization 22% 28% 26% 13% Number of employees 1,140 1,230 1,350 1,750 Sales per employee 186 186 174 170 Operating income per employee 10 13 16 15 Average shares outstanding, diluted(7) 23,521 24,738 25,043 24,921
(1) This table of Selected Financial Data should be read in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition and the Company's consolidated financial statements included herein. (2) 1996 includes the effect of the acquisition of Guardsman Products, Inc. on April 8, 1996 and excludes the effect of a restructuring charge of $9,607 which reduced net income by $5,284 or $.23 per diluted share. (3) EBITDA represents earnings before interest, taxes, depreciation and amortization. (4) EBITDA interest coverage is determined by dividing EBITDA by interest expense. (5) Adjusted for all stock splits and stock dividends through November 30, 1998 inclusive. Prices are rounded to nearest 1/8. (6) Excludes effect of acquisitions. (7) Used to calculate net income per diluted share. Management's Discussion and Analysis of Results of Operations and Financial Condition Operating Results 1998 vs. 1997 Consolidated net sales increased 2.9% to a record $619.0 million for fiscal year 1998, despite a $10 million unfavorable impact from foreign currency translations. Sales benefited from the December, 1997 acquisition of Merckens Lackchemie GmbH & Company (See "German Acquisition"). The acquisition helped boost the Company's international sales, including U.S. exports, to $149.3 million during 1998, representing growth of 18.0% over 1997. During 1998, Lilly experienced volume growth in each of its end use markets. Sales to the Company's four primary end use markets (metal, wood, composites and glass, and specialty) represented 39%, 38%, 12% and 11% of 1998 consolidated sales, respectively. Selling prices for most of the Company's products remained stable during the year. Gross profit margin continued to improve in 1998, rising 0.7 percentage points over 1997 to 38.7%. Raw material costs continued to dominate the Company's cost structure. However, continued emphasis on supply chain management, as well as favorable pricing in certain commodity markets, produced a 1.1% reduction in raw material costs as a percentage of net sales. Improvements in raw material costs were partially mitigated by a slight increase in direct labor and overhead costs. The Company will continue to pursue improvement in gross margin by reducing the number of raw materials used in products, process re-engineering, company-wide purchasing opportunities and product re-formulations. As a percentage of sales, operating expenses increased 0.7 percentage points to 27.0%. Selling, general and administrative expenses, as a percentage of sales, increased from 23.2% to 23.7%, primarily due to increased marketing efforts. In addition, the Company made record expenditures on research and development, which rose 10.1% to $20.6 million. Net interest expense declined significantly during 1998, falling $2.0 million, reflecting the benefits of the Company's 1997 debt restructuring and lower average debt outstanding. Continued strong cash flow from operations allowed the Company to reduce average debt outstanding during 1998, while lower average market rates of interest reduced the cost of borrowing under the Company's variable rate debt facilities. The improvement in interest expense was partially offset by additional interest expense associated with borrowings to finance the Company's German Acquisition (See "Liquidity and Capital Resources" and "German Acquisition"). The Company's effective tax rate declined significantly to 42.0% during 1998, due primarily to implementation of international tax planning strategies. The effective tax rate remained above U.S. statutory rates, primarily due to the impact of non-deductible intangibles acquired as part of the Guardsman Products, Inc. ("GPI") acquisition and generally higher foreign tax rates. Operating Results 1997 vs. 1996 Consolidated net sales increased 18.1% to a record $601.3 million for fiscal year 1997. Sales benefited from the full-year inclusion of 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, composites and glass, and specialty) represented 39%, 38%, 12% and 11% of 1997 consolidated sales, respectively. International sales, including U.S. exports, grew 29.7% to a record $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 material items, 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 re-formulations. 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 GPI product lines, which target retail accounts rather than original equipment manufacturers. Net interest expense increased 36% during 1997 to $18.9 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 taxes. Environmental The Company's operations, like those of most companies in the coatings industry, are subject to regulations related to maintaining or improving the quality of the environment. Such regulations, along with the Company's own internal compliance efforts, have required, and will continue to require, ongoing expenditures. Spending for environmental compliance is not anticipated to be material to the Company's financial position. The Company has been notified that it is a potentially responsible party for clean-up costs with respect to several government investigations at independently operated waste disposal sites previously used by the Company. Management has accrued, as appropriate, for these environmental liabilities. Management believes the liabilities associated with these sites will not have a material adverse effect on its operating results or financial position. Year 2000 Readiness The Year 2000 issue ("Y2K" or "Y2K issue") is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs or any hardware that have date sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a temporary inability to process transactions or engage in normal manufacturing or other business activities. The Company is actively engaged in a company-wide effort to achieve Y2K readiness for both information technology ("IT") and non-information technology ("Non-IT") systems, and to determine the Y2K readiness of significant suppliers. The Company is focusing its efforts on IT systems, Non-IT systems and suppliers that, without Y2K readiness, could have a material adverse effect on the Company's operations. The Company's approach to addressing Y2K preparedness consists of the following: * Inventory - identification of items to be assessed for Y2K readiness. * Assessment - prioritizing the inventoried items, assessing their Y2K readiness and defining corrective actions and developing contingency plans. * Deployment - implementing corrective actions, verifying implementation and finalizing contingency plans. The Company's IT systems are comprised of business computer systems and technical infrastructure. In 1996, the Company determined that the IT systems supporting its business units could be inadequate to meet business requirements after 1999 and thus implemented a project to replace all critical IT systems. All critical IT systems have been inventoried and assessed, and replacement of non-conforming IT systems began during the fourth quarter of 1998. Deployment of all critical IT systems is expected to be completed during the third quarter of 1999. The Company's Non-IT systems are comprised of manufacturing and warehousing systems and facility support systems. A preliminary inventory and assessment of these Non-IT systems has been completed and deployment of these Non-IT systems is expected to be completed during the third quarter of 1999. The Company is in the process of contacting significant raw material and service suppliers regarding their Y2K readiness. The Company's supplier readiness program focuses on those suppliers considered essential for the prevention of a material disruption to the Company's business operation. The Company will make efforts to address third-party Y2K compliance issues noted from the inquires. However, there is no assurance that such third-parties will be Y2K compliant. Non-compliance by third-parties could have a material adverse impact on the Company's financial position and business operations. Deployment of the program is expected to be completed during the third quarter of 1999. The Company utilizes both internal and external resources in all phases of its Y2K readiness program. The Company estimates the total cost of resolving the Y2K issue to be approximately $5 million. Of this amount, the Company estimates $2 million will be spent during fiscal year 1999. Approximately 70% of total Y2K cost is comprised of equipment and software replacement costs with the balance being comprised of assessment and remediation costs. The Company expects all costs to be funded with operating cash flow. Y2K costs are expensed as incurred except for new systems and equipment, which are capitalized and charged to expense over the estimated useful life of the related asset. While the Company believes that its efforts to address Y2K issues will be successfully completed in a timely manner, the Company recognizes that failing to resolve Y2K issues could, in a reasonably likely worst case scenario, increase costs and limit the Company's ability to conduct business operations. The financial impact of such scenario can not be reasonably estimated. German Acquisition In December, 1997, the Company acquired Merckens Lackchemie GmbH and Company ("Merckens"), located in Eschweiler, Germany. This company supplies industrial coatings to customers throughout Europe. Product lines are complementary to Lilly's existing products. The purchase was made with cash and financed by an unsecured revolving line of credit denominated in Deutschemarks (See "Liquidity and Capital Resources"). Liquidity and Capital Resources During fiscal 1998, the Company entered into a five-year, Deutschemark-denominated $10 million revolving credit facility (the "DM Facility") to fund the purchase of Merckens. The DM facility is unsecured. Principal amounts available for borrowing under the DM Facility decline over the five-year term of the agreement. In addition, the Company continued to maintain a $175 million revolving credit facility ("Facility") and $100 million in senior notes ("Notes"). Both the Facility and the Notes are unsecured and require no principal amortization. The remaining terms on the Facility and Notes were four and nine years, respectively, as of November 30, 1998. Management expects to fund required debt service on all borrowings from operating cash flows. The Company reduced total debt by $20.5 million during 1998. Additional amounts available for borrowing under the Facility for acquisitions or general operating purposes totaled $81.3 million as of November 30, 1998. 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, 1998, the Company was party to one interest rate swap agreement with a notional principal amount of $50 million. The agreement effectively converts a portion of the Company's debt from a floating to a fixed interest rate, which was 6.88% as of November 30, 1998. Cash provided by operating activities declined by $4.1 million to $55.2 million during 1998, as higher net income was offset by the negative cash effects of changes in certain assets and liabilities. Cash used by investing activities increased by $17.9 million to $24.9 million during 1998. The increase was driven by the purchase of Merckens, as well as greater purchases of property and equipment, primarily related to ongoing consolidation of corporate and operating activities, foreign infrastructure investment, and expenditures related to achieving Y2K readiness. Future investing activities are expected to be financed from internal sources and existing credit facilities. Cash used by financing activities totaled $27.1 million for 1998, due principally to the $20.5 million reduction in debt and cash dividend payments of $7.4 million during 1998. 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 1998, the company generated EBITDA of $91.4 million, a decrease of $0.7 million. Interest Coverage improved to 5.4 times, due primarily to reduced interest expense associated with lower average borrowings and generally lower market rates of interest. Debt Capitalization improved 6.8 percentage points to 55.2% due to higher levels of net income retained in the business and lower levels of debt outstanding at year-end 1998. Forward-looking statements Statements in this annual report that are not strictly historical may be "forward-looking statements," which involve risks and uncertainties. Risk factors include general economic and industry conditions, effects of leverage, environmental matters, technological developments, product pricing, raw material cost changes, and international operations, among others, which are set forth in the Company's SEC filings. Consolidated Statements of Income and Retained Earnings (In thousands, except per share data)
Year ended November 30 1998 1997 1996 Net sales $ 619,002 $ 601,296 $ 508,976 Costs and expenses: Cost of products sold 379,641 373,015 321,748 Selling, general and administrative 146,763 139,467 112,361 Research and development 20,567 18,680 17,294 Restructuring charge - - 9,607 --------------------------------------- 546,971 531,162 461,010 --------------------------------------- Operating income 72,031 70,134 47,966 Other income (expense): Sundry income (expense) (666) (4) 110 Interest expense, net (16,919) (18,967) (13,938) --------------------------------------- (17,585) (18,971) (13,828) --------------------------------------- Income before income taxes 54,446 51,163 34,138 Income taxes 22,867 23,068 15,362 --------------------------------------- Net income 31,579 28,095 18,776 Retained earnings at beginning of year 83,745 62,990 51,446 --------------------------------------- 115,324 91,085 70,222 Deduct dividends paid ($.32 per share) 7,410 7,340 7,232 --------------------------------------- Retained earnings at end of year $ 107,914 $ 83,745 $ 62,990 ======================================= Net income per share: Basic $ 1.36 $ 1.22 $ .83 Diluted $ 1.35 $ 1.20 $ .81 See accompanying notes.
Consolidated Balance Sheets (In thousands)
November 30 1998 1997 - ----------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 13,326 $ 10,079 Accounts receivable, less allowance for doubtful accounts (1998, $1,981; 1997,$2,139) 82,039 80,011 Inventories 50,796 45,704 Deferred income taxes 3,251 4,300 Other 2,620 6,580 ------- ------- Total current assets 152,032 146,674 Other assets: Goodwill, less amortization (1998,$21,547; 1997,$15,368) 214,960 220,897 Other intangibles, less amortization (1998,$22,621;1997,$17,963) 26,068 30,059 Deferred income taxes 8,838 7,722 Sundry 12,419 13,604 ------- ------- 262,285 272,282 Property and equipment: Land 11,845 8,035 Buildings 62,725 50,621 Equipment 87,787 78,432 Accumulated depreciation (60,189) (54,249) ------- ------- 102,168 82,839 ------- ------- $ 516,485 $ 501,795 ======= ======= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 66,156 $ 60,510 Salaries and payroll related items 21,624 20,814 Other 12,453 10,936 State and local taxes 855 1,212 Federal income taxes 873 1,076 ------- ------- Total current liabilities 101,961 94,548 Long-term debt 203,700 224,171 Other liabilities 45,249 40,637 Shareholders' equity: Capital stock, $.55 stated value per share: Class A (limited voting) - 27,825 shares issued (1997, 27,674 shares) 15,459 15,375 Class B (voting) - 540 shares issued 300 300 Additional capital 81,890 79,417 Retained earnings 107,914 83,745 Currency translation adjustments (4,096) (2,254) Cost of capital stock in treasury (35,892) (34,144) ------- ------- 165,575 142,439 ------- ------- $ 516,485 $501,795 ======= =======
See accompanying notes.
Consolidated Statements of Cash Flows (In thousands) Year ended November 30 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 31,579 $ 28,095 $ 18,776 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring charge - - 9,607 Depreciation 9,102 8,850 6,453 Amortization of intangibles 10,922 13,140 9,097 Deferred income taxes 209 4,085 2,094 Changes in operating assets and liabilities net of effects from acquired business: Accounts receivable (422) 4,581 (5,849) Inventories (2,574) 1,842 (7,086) Accounts payable and accrued expenses 5,985 2,933 7,825 Sundry 418 (4,226) (3,466) --------- --------- --------- Net cash provided by operating activities 55,219 59,300 37,451 Investing Activities Purchases of property and equipment (17,015) (12,673) (19,233) Payment for acquired business (11,253) -- (235,000) Sundry 3,367 5,716 4,590 --------- --------- --------- Net cash used by investing activities (24,901) (6,957) (249,643) Financing Activities Dividends paid (7,410) (7,340) (7,232) 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 (20,470) (136,590) (105,817) Sundry 809 (4,324) 1,171 --------- --------- --------- Net cash (used) provided by financing activities (27,071) (49,054) 198,722 --------- --------- --------- Increase (decrease) in cash and cash equivalents 3,247 3,289 (13,470) Cash and cash equivalents at beginning of year 10,079 6,790 20,260 --------- --------- --------- Cash and cash equivalents at end of year $ 13,326 $ 10,079 $ 6,790 ========= ========= =========
See accompanying notes. Notes to Consolidated Financial Statements November 30, 1998 1. Summary of Significant Accounting Policies Business: Lilly Industries, Inc. and its subsidiaries (the "Company") are principally in the business of formulating, manufacturing and marketing industrial coatings and specialty chemicals to 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. Reclassifications: Certain prior year amounts have been reclassified to conform with the current year presentation. Net Income Per Share: The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share", (SFAS 128) during the first quarter of 1998. SFAS 128 requires the calculation of both basic and diluted earnings per share. Per share amounts shown for periods prior to adoption have been restated to conform to the requirements of SFAS 128. Basic and diluted net income per share are computed by dividing net income as reported by the average number of shares outstanding as follows (in thousands): 1998 1997 1996 - -------------------------------------------------------------------------------- Basic Weighted-average common shares outstanding 23,160 22,940 22,600 Diluted Weighted-average common shares outstanding 23,160 22,940 22,600 Dilutive effect of stock options 240 460 500 ------ ------ ------ Average common shares outstanding assuming dilution 23,400 23,400 23,100 ====== ====== ====== 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 credit facilities 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 basic and diluted net income per share would be $.92 and $.90, respectively. The pro forma results include a restructuring charge of $9,607,000 which reduced net income by $5,284,000 or $.23 per share, both basic and diluted (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 were complete. Costs associated with the planned closure of former Lilly facilities of $7,827,000 and workforce reductions of $1,780,000 were recorded in 1996 as a restructuring charge of $9,607,000, which reduced net income by $5,284,000 or $.23 per share, both basic and diluted. Amounts paid or charged related to Lilly facilities were $365,000 and $7,462,000 during 1996 and 1997, respectively. Amounts paid or charged related to Lilly workforce reductions were $447,000 and $1,333,000 during 1996 and 1997, respectively. Costs associated with the planned closure of former Guardsman facilities of $6,532,000 and workforce reductions of $2,476,000 were recorded in the opening balance sheet of the combined entity at the acquisition date, April 8, 1996. Amounts paid or charged related to Guardsman facilities were $1,642,000 and $3,590,000 during 1996 and 1997, respectively. During 1997, the remaining $1,300,000 liability related to the Guardsman facilities was credited to goodwill. Amounts paid or charged related to Guardsman workforce reductions were $469,000 and $589,000 during 1996 and 1997, respectively. During 1997, the remaining $1,418,000 liability related to the Guardsman workforce was credited to goodwill. 4. Inventories The principal inventory classifications at November 30 are summarized as follows (in thousands): 1998 1997 ------- ------- Finished products $29,761 $26,361 Raw materials 27,411 27,019 ------- ------- 57,172 53,380 Less adjustment of certain inventories to last-in, first-out (LIFO) basis 6,376 7,676 ------- ------- $50,796 $45,704 ======= ======= Inventory cost is determined by the LIFO method of inventory valuation for approximately 64% and 68% of inventories at November 30, 1998 and 1997, 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. 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 are as follows (in thousands):
1998 1997 1996 -------- -------- -------- Defined benefit plans Service cost - benefits earned during the period $ 2,034 $ 2,099 $ 1,733 Interest cost on projected benefit obligation 5,653 5,484 4,594 Actual net gain on plan assets (11,830) (8,482) (9,056) Net amortization and deferral 3,236 1,012 3,104 -------- -------- -------- Net pension cost (benefit) (907) 113 375 Defined contribution plans 4,113 3,740 2,219 -------- -------- -------- Pension expense $ 3,206 $ 3,853 $ 2,594 ======== ======== ========
The expected long-term rates of return on assets used to compute the defined benefit plans'pension expense were 10.25% for 1998 and 9.25% for 1997 and 1996. 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): 1998 1997 -------- -------- Actuarial present value of benefit obligations: Vested $ 65,051 $ 60,141 Nonvested 4,216 4,767 -------- -------- Total accumulated benefit obligations $ 69,267 $ 64,908 ======== ======== Actuarial present value of projected benefit obligations for services rendered to date $(76,458) $(82,542) Plan assets at fair value 96,571 88,594 -------- -------- Excess of plan assets over projected benefit obligations 20,113 6,052 Unrecognized net gains (15,317) (4,277) Unrecognized prior service cost 4,813 5,274 Unrecognized transition obligation at December 1, 1985, net of amortization (933) (1,135) -------- -------- Net pension asset $ 8,676 $ 5,914 ======== ======== The discount rates used to measure benefit obligations were 6.75% and 7.0% in 1998 and 1997, respectively. The rates of increase in compensation levels used to measure benefit obligations were 4% and 5% during 1998 and 1997, respectively. Certain employees from one of the Company's German subsidiaries participate in a frozen defined benefit retirement plan. The liability related to such plan totaled $4,400,000 at November 30, 1998. Accumulated benefits for supplemental executive retirement plans totaled approximately $8,465,000 and $7,953,000 at November 30, 1998 and 1997, respectively. 6. Long-Term Debt Long-term debt consists of the following as of November 30 (in thousands): 1998 1997 ------------------------------------------------------ 7.75% Senior Unsecured Notes $100,000 $100,000 Revolving Credit Facility 93,700 124,000 German Credit Facility 10,000 - Other - 171 -------- -------- $203,700 $224,171 ======== ======== In February 1998, the Company obtained an unsecured Deutschemark-denominated revolving credit facility (the "German Facility") with a bank. Borrowings available under the German Facility are $10,000,000 until November 29, 1999, gradually decreasing to $2,350,000 on December 1, 2001. German Facility advances of greater than $60,000 bear interest, at the Company's option, at either (i) the money market rate of the bank's German affiliate, or (ii) the Frankfurt, Germany Interbank Offered Rate for DM deposits plus an interest rate margin ranging from .40% to .80%, depending on the Company's leverage. Other advances bear interest at the prime rate of the bank's German affiliate. The principal of the facility is due upon termination, February 2003. In November 1997, the Company restructured its long-term debt into a $175,000,000 revolving credit facility ("Facility") with a group of financial institutions and $100,000,000 of senior notes ("Notes"). The Notes were issued as a 144A private placement offering 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. The Facility bears interest, at the Company's option, at (i) the higher of the agent bank's prime rate (7.75% at November 30, 1998) 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 credit rating. A commitment fee ranging from 0.15% to 0.25%, depending upon the Company's credit rating, is payable on the unused portion of the Facility. In April 1996, the Company entered into a forty-four month amortizing interest rate swap agreement ("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 6.88% at November 30, 1998. The notional amount of the Swap was $50,000,000 at November 30, 1998. Interest of $12,369,000, $20,628,000 and $12,746,000 was paid in fiscal 1998, 1997 and 1996, respectively. The Company is subject to various debt covenants under the Facility, Notes and German Facility 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): 1998 1997 1996 -------------------------------------------------------------------- Current expense: Federal $12,757 $10,612 $ 7,204 Foreign 7,290 7,674 4,736 State 2,358 697 1,328 ------- ------- ------- 22,405 18,983 13,268 Deferred expense (credit): Federal 593 2,818 1,829 Foreign (139) 210 (119) State 8 1,057 384 ------- ------- ------- 462 4,085 2,094 ------- ------- ------- $22,867 $23,068 $15,362 ======= ======= ======= A reconciliation of the statutory U.S. federal rate to the effective income tax rate for the years ended November 30 is as follows:
1998 1997 1996 ----------------------------------------------------------------------------------- Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% Increase resulting from: Goodwill 3.6 3.9 4.1 State income taxes, net of federal income tax benefit 2.8 2.3 3.3 Foreign 1.8 2.2 1.3 Other items (1.2) 1.7 1.3 ---- ---- ---- Effective income tax rate 42.0% 45.1% 45.0% ==== ==== ====
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): 1998 1997 ----------------------------------------------------------------------- Deferred tax assets: Goodwill and intangibles $ 1,279 $ 1,426 Employee benefits 5,565 6,467 Accounts receivable, inventory and other 13,839 13,937 ------- ------- 20,683 21,830 Deferred tax liabilities: Property and equipment 5,526 7,709 Pension 3,068 2,099 ------- ------- 8,594 9,808 ------- ------- Net deferred tax assets $12,089 $12,022 ======= ======= 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 $16,000,000 at November 30, 1998. 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 $21,800,000, $20,500,000 and $20,177,000 were paid in 1998, 1997 and 1996, 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, 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 Class A exchanged for Class B - - 92 (92) Class B exchanged for Class A - - (9) 9 Acquisition for treasury - - 39 - Stock options exercised 151 - 37 12 ------ --- ----- --- Balance at November 30, 1998 27,825 540 5,082 111 ====== === ===== ===
Changes in the capital stock components of shareholders' equity 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, 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 Stock options exercised 84 - 1,820 1,018 Disqualifying disposition of stock options - - 653 - Acquisition for treasury - - - 730 ------- ----- ------- ------- Balance at November 30, 1998 $15,459 $ 300 $81,890 $35,892 ======= ===== ======= =======
Incentive stock option plans entitle certain directors, officers and other key employees to buy shares of Class A stock at prices not less than fair market value on the date of grant. The options vest and become exercisable ratably over a three-year period commencing two years after the date of grant and expire five or ten years after the date of grant. Certain options are granted with stock appreciation rights (SAR) and reload options. An SAR entitles the option holder to receive a cash payment equal to the difference between the option price and the current value of Class A stock. The reload option entitles the option holder to the same number of options exercised with an option price equal to the fair market value at the date of exercise. Shares reserved under these plans were 1,931,420 and 2,109,310 at November 30, 1998 and 1997, 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, 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 Grants 460,022 18.84 Exercised (151,233) 12.60 Terminated (37,975) 17.41 --------- ------- Balance at November 30, 1998 1,060,316 $ 15.72 ========= ======= 8. Capital Stock, continued At November 30, 1998 the range of exercise prices and weighted-average remaining contractual life of outstanding options were $12.25 - $21.63 and 5.4 years, respectively. At November 30, 1998 and 1997, the number of options exercisable was 340,000 and 279,000 respectively, and the weighted-average exercise price of those options was $13.49 and $12.93, respectively. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", (SFAS 123) became effective for the Company in 1997. SFAS 123 permits companies to continue to apply APB Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its plans. The Company has elected to follow APB 25 and related Interpretations. Under APB 25, because the exercise price of the Company's employee stock options is not less than fair market price of the share at the date of grant, no compensation expense is recognized in the financial statements. Pro forma information regarding net income and net income per share is required by SFAS 123 and has been determined as if the Company accounted for its employee stock options using the fair value method of that Statement. The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rate of 4.7%, 5.8%, and 6.0%; dividend yields of 1.9% for all years; volatility factors of the expected market price of the Company's Class A stock of .27, .30 and .32; and a weighted average expected life of options of 5.2 years, 4 years and 4 years. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information follows (in thousands except for per share amounts):
1998 1997 1996 - ----------------------------------------------------------------------------------------- Pro forma net income $30,924 $27,608 $18,439 Pro forma net income per share: Basic $ 1.34 $ 1.20 $ .81 Diluted 1.32 1.18 .79 Weighted-average fair value of options granted during the year $ 5.76 $ 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 the expected effects on 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, Ireland and Australia. A summary of geographic data for the years ended November 30 is as follows (in thousands):
1998 1997 1996 - ---------------------------------------------------------------------------------------------------- Net sales to unaffiliated customers: United States $488,703 $491,973 $423,753 Outside U.S., excluding U.S. exports 130,299 109,323 85,223 -------- -------- -------- Consolidated $619,002 $601,296 $508,976 ======== ======== ======== Operating income: United States $ 50,942 $ 51,150 $ 42,463 Outside U.S. 21,089 18,984 15,110 Restructuring charge - - (9,607) -------- -------- -------- Consolidated $ 72,031 $ 70,134 $ 47,966 ======== ======== ======== Total assets: United States $430,081 $453,456 $473,957 Outside U.S. 87,165 49,007 48,325 Eliminations (deductions) (761) (668) (422) -------- -------- -------- Consolidated $516,485 $501,795 $521,860 ======== ======== ========
10. Quarterly Results of Operations (Unaudited) Quarterly results of operations are summarized as follows (in thousands, except per share data):
Quarter Ended 1998 Feb. 28 May 31 Aug. 31 Nov. 30 ------------------------------------------------------------------------------------- Net sales $143,334 $159,198 $159,345 $157,125 Gross profit 53,431 61,794 61,752 62,384 Net income 5,140 8,715 8,674 9,050 Net income per share Basic .22 .38 .37 .39 Diluted .22 .37 .37 .39 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 Basic .21 .32 .33 .36 Diluted .20 .32 .33 .35
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Indianapolis, Indiana January 15, 1999 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 /s/ Kenneth L. Mills John C. Elbin Kenneth L. Mills Vice President, Chief Financial Officer Corporate Controller and and Secretary Assistant Secretary Investor Information Form 10-K - -------------------------------------------------------------------------------- A copy of the Form 10-K, which is filed with the Securities and Exchange Commission, will be sent free to any shareholder upon written request. Contact Kenneth L. Mills, Corporate Controller and Assistant Secretary, at Lilly Industries, Inc. 733 S. West Street Indianapolis, IN 46225; or E-mail: millsk@lillyindustries.com. Registrar and Transfer Agent - -------------------------------------------------------------------------------- Communications concerning shareholder records, including address changes, stock transfers, cash dividends or other service needs should be directed to Harris Trust and Savings Bank, Attn: Shareholder Services, 311 W. Monroe Street, 11th Floor, P. O. Box A3504 Chicago, Illinois 60690 (800) 942-5909 or (312) 461-6001. Dividend Reinvestment Plan - -------------------------------------------------------------------------------- A dividend reinvestment and voluntary stock purchase plan for Lilly Industries, Inc. shareholders permits purchase of the Company's Class A stock without payment of brokerage commission or service charge. Participants in this plan may have cash dividends on their shares automatically reinvested and, if they choose, invest by making optional cash payments. Additional information on the plan is available by writing or calling: Harris Trust and Savings Bank, Attn: Dividend Reinvestment 311 W. Monroe Street, 2nd Floor P. O. Box A3309 Chicago, Illinois 60690 (800) 942-5909. Analyst Contacts - -------------------------------------------------------------------------------- Security analyst inquiries are welcomed. Please call: John C. Elbin, Vice President, Chief Financial Officer, and Secretary (317) 687-6703. Annual Meeting - -------------------------------------------------------------------------------- The meeting notice and proxy materials were mailed to shareholders with their copies of this annual report. Lilly urges all shareholders to vote their proxies and thus participate in the decisions that will be made at the annual meeting. The meeting will be held on Thursday, April 22, 1999 at 10:00 A.M., EST, in rooms 101 and 102 at the Indiana Convention Center and RCA Dome in Indianapolis, Indiana. 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 1998 Per Share High Low -------------------------------------------------------------------- 1st quarter ended Feb. 28 $ .08 $ 20 5/8 $ 17 7/8 2nd quarter ended May 31 .08 22 3/4 17 3/4 3rd quarter ended Aug. 31 .08 24 5/8 18 1/2 4th quarter ended Nov. 30 .08 19 7/8 14 3/8 ------ $ .32 ====== 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 ====== At November 30, 1998 there were approximately 2,400 registered shareholders of Class A stock and 63 registered shareholders of Class B stock, which is reserved for employees of the Company. Locations International - ------------------------------------------- Australia 283 Alfred Street North Sydney, NSW 2060 Australia Canada 1915 Second Street West Cornwall, Ontario K6H 5T1 Canada 65 Duke Street London, Ontario N6J 2X3 Canada China Lot 3 Xintang District Administration Dalinshan, Dongguan Guangdon, China 511774 England 152 Milton Park Abingdon Oxfordshire OX14 4SD England Germany D-8649 Wallenfels Postfach 1126 Germany Friedensstrasse 40 D-52249 Eschweiler Germany Ireland Willowfield Road Ballinamore Co. Leitrim Ireland Malaysia Lot No. 4963, Jalan Teratai 51/2 Miles Meru Industrial Zone 41050 Klang Selangor Darul Ehsan Malaysia Mexico Ave. Central No. 223 Los Lermas, Guadalupe N.L. Mexico 67190 Singapore 09-09 International Building 360 Orchard Road Singapore Taiwan, R.O.C. No. 1 Kung Yeh First Road Zenwu Village Kaohsiung Hsien Taiwan, R.O.C. United States - ------------------------------------------- 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 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 Officers and Directors Officers - ------------------------------------------- Douglas W. Huemme, 57 Chairman, President and Chief Executive Officer Robert A. Taylor, 44 Executive Vice President and Chief Operating Officer Hugh M. Cates, 55 Vice President and General Manager, Wood Coatings Larry H. Dalton, 51 Vice President, Manufacturing and Engineering Alain DeBlandre, 42 Vice President and Managing Director - Europe William C. Dorris, 55 Vice President, Corporate Development John C. Elbin, 45 Vice President, Chief Financial Officer and Secretary Ned L. Fox, 57 Vice President, Supply Chain Management A. Barry Melnkovic, 41 Vice President, Human Resources John D. Million, 56 Vice President and Managing Director- Asia Pacific Kenneth L. Mills, 50 Corporate Controller and Assistant Secretary Gary D. Missildine, 57 Vice President and General Manager, Industrial Coatings Virgil E. Underwood, 47 Vice President and General Manager, Coil Coatings Keith C. Vander Hyde, Jr., 40 Vice President and General Manager, Specialty Jay M. Wiegner, 55 Vice President and General Manager, Composites and Glass Coatings Directors - ------------------------------------------- James M. Cornelius, Chairman, Guidant Corporation William C. Dorris, Vice President, Corporate Development Paul K. Gaston, Former Chairman, Guardsman Products, Inc. Douglas W. Huemme, Chairman, President and Chief Executive Officer Harry Morrison, Ph.D., Dean, School of Science Purdue University Norma J. Oman, President and Chief Executive Officer Meridian Insurance Group, Inc. John D. Peterson, Chairman, City Securities Corporation Thomas E. Reilly, Jr., Chairman and Chief Executive Officer Reilly Industries, Inc. Van P. Smith, Chairman, Ontario Corporation Robert A. Taylor, Executive Vice President and Chief Operating Officer [photo of Directors] EX-21 4 SUBSIDIARIES OF LILLY INDUSTRIES, INC. Exhibit 21
SUBSIDIARIES OF LILLY INDUSTRIES, INC. AS OF FEBRUARY 22, 1999 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. Merckens Lackchemie GmbH and Company KG Germany (Subsidiary of London Laboratories, GmbH) 13. Dongguan Lilly Paint Industries, Ltd. Peoples Republic of China (Subsidiary of Lilly Industries (Asia), Limited) 14. G.C.I. Insurance Company, Limited Bermuda (Subsidiary of Lilly Industries (USA), Inc.) 15. Lilly Industries (UK), LTD United Kingdom (Subsidiary of Lilly Industries (USA), Inc.) 16. Pinturas Dygo, S.A. de C.V. Mexico (Subsidiary of Lilly Industries (Mexico), S.A. de C.V.) 17. Lilly Technologies, Inc. Delaware 18. Lilly Industries, LLC. Indiana 19. Lilly Industries International, LTD Barbados
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 15, 1999, included in the 1998 Annual Report to Shareholders of Lilly Industries, Inc. Our audits also included the financial statement schedule of Lilly Industries, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We further consent to the incorporation by reference in Registration Statements (Form S-8 Nos. 2-59159, 2-76317, 33-52954, 33-52956 pertaining to the Lilly Employees' Stock Purchase Plan, the Lilly Industries, Inc. Stock Option Plan, the Lilly Industries, Inc. 1991 Director Stock Option Plan, and the Lilly Industries, Inc. Employee 401(k) Savings Plan, respectively, and 33-52958 and 333-32205 pertaining to the Lilly Industries, Inc. 1992 Stock Option plan) of our report dated January 15, 1999, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Lilly Industries, Inc. /s/ Ernst & Young LLP Indianapolis, Indiana February 26, 1999 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, 1998 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-30-1998 NOV-30-1998 13,326 0 84,020 1,981 50,796 152,032 162,357 60,189 516,485 101,961 0 97,649 0 0 67,926 516,485 619,002 619,002 379,641 546,971 666 0 16,919 54,446 22,867 0 0 0 0 31,579 1.36 1.35
-----END PRIVACY-ENHANCED MESSAGE-----