<PAGE>
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [_]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Eli Lilly and Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
R. R. Donnelley and Sons
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
<PAGE>
LOGO
ELI LILLY AND COMPANY
LILLY CORPORATE CENTER
INDIANAPOLIS, INDIANA 46285
March 4, 1998
Dear Shareholder:
You are cordially invited to attend our Annual Meeting of Shareholders on
Monday, April 20, 1998. The meeting will be held at the Hilbert Circle Theatre,
45 Monument Circle, Indianapolis, Indiana, at 11:00 a.m. (Indianapolis time).
The Notice of Annual Meeting of Shareholders and the Proxy Statement
accompanying this letter describe the business we will consider at the meeting.
In particular, please note that management is requesting the shareholders to
approve three items in addition to the election of directors and ratification
of the Board of Directors' appointment of independent auditors. As our two-for-
one stock split this past September has greatly reduced the number of available
authorized shares of the Company's common stock, we recommend increasing the
number of authorized shares of common stock. Management also recommends that
the shareholders approve two important performance incentive programs for
officers and other employees: a new employee stock plan and an amended cash
bonus plan.
Your vote is very important. I urge you to sign, date, and return the
enclosed proxy in the envelope provided in order to be certain your shares are
represented at the meeting, even if you plan to attend the meeting.
I look forward to seeing you at the meeting.
/s/ Randall L. Tobias
Randall L. Tobias
Chairman of the Board and
Chief Executive Officer
<PAGE>
ELI LILLY AND COMPANY
----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
APRIL 20, 1998
The Annual Meeting of Shareholders of Eli Lilly and Company will be held at
the Hilbert Circle Theatre, 45 Monument Circle, Indianapolis, Indiana, on
Monday, April 20, 1998, at 11:00 a.m. (Indianapolis time), for the following
purposes:
1. To elect four directors of the Company, each for a three-year term;
2. To amend the Articles of Incorporation to increase the authorized number
of shares of common stock from 1,600,000,000 to 3,200,000,000 shares;
3. To approve the 1998 Lilly Stock Plan;
4. To approve the amended Eli Lilly and Company EVA Bonus Plan;
5. To ratify the appointment by the Board of Directors of Ernst & Young LLP
as principal independent auditors for the year 1998; and
6. To transact any other business properly before the Annual Meeting.
Shareholders of record at the close of business on February 13, 1998, will
be entitled to vote at the meeting and any adjournments thereof.
Attendance at the meeting will be limited to shareholders, those holding
proxies from shareholders, and invited guests from the media and financial
community. Admission to the meeting will be by Admittance Card or other
evidence of share ownership. If you plan to attend the meeting, please
complete and return the enclosed Request for Admittance Card and we will mail
you an Admittance Card and directions to the meeting. If you want to attend
the Annual Meeting but your shares are held in the name of a broker or other
nominee, please send proof of share ownership to the Corporate Secretary, DC
1093, Lilly Corporate Center, Indianapolis, Indiana 46285 to receive an
Admittance Card.
This Proxy Statement, proxy and the Company's Annual Report to Shareholders
are being mailed on or about March 4, 1998.
By order of the Board of Directors,
Daniel P. Carmichael
Secretary
March 4, 1998
Indianapolis, Indiana
- -------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT. PLEASE DATE, SIGN, AND MAIL PROMPTLY THE ENCLOSED
PROXY, FOR WHICH A RETURN ENVELOPE IS PROVIDED, EVEN IF YOU PLAN TO ATTEND THE
ANNUAL MEETING.
<PAGE>
ELI LILLY AND COMPANY
PROXY STATEMENT
----------------
ANNUAL MEETING OF SHAREHOLDERS
April 20, 1998
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of Eli Lilly and Company (the "Company") of proxies to be
voted at the Annual Meeting of Shareholders to be held on Monday, April 20,
1998, and at any adjournment thereof. The following is important information
in a question-and-answer format regarding the Annual Meeting and this Proxy
Statement.
Q: WHAT AM I VOTING ON?
. Election of four directors (Dr. Steven C. Beering, Dr. Franklyn G.
Prendergast, Mrs. Kathi P. Seifert and Mr. Randall L. Tobias)
. Increase of the authorized number of shares of common stock by amending
the Articles of Incorporation
. Approval of the 1998 Lilly Stock Plan
. Approval of the Eli Lilly and Company EVA Bonus Plan
. Ratification of Ernst & Young LLP as the Company's independent auditors
Q: WHO IS ENTITLED TO VOTE?
Shareholders as of the close of business on February 13, 1998 (the "Record
Date") are entitled to vote at the Annual Meeting. Each shareholder is
entitled to one vote for each share of common stock held on the Record Date.
Q: HOW DO I VOTE?
Sign and date each proxy you receive and return it in the prepaid envelope.
If you return your signed proxy but do not indicate your voting preferences,
we will vote FOR the five proposals on your behalf. You have the right to
revoke your proxy any time before the meeting by (1) notifying the Company's
Secretary, or (2) returning a later-dated proxy. You may also revoke your
proxy by voting in person at the meeting.
Q: WHAT DOES IT MEAN IF I GET MORE THAN ONE PROXY CARD?
It means you hold shares registered in more than one account. Sign and
return all proxies to ensure that all your shares are voted.
Q: WHO WILL COUNT THE VOTE?
Representatives of The Corporation Trust Company will tabulate the votes and
act as inspectors of election.
Q: WHAT CONSTITUTES A QUORUM?
A majority of the outstanding shares, present or represented by proxy,
constitutes a quorum for the Annual Meeting. As of the Record Date,
1,111,258,506 shares of Lilly common stock were issued and outstanding.
Proxies submitted by brokers that do not indicate a vote for some of the
proposals because the holders do not have discretionary voting authority and
have not received instructions from the beneficial owners on how to vote on
those proposals are called "broker non-votes."
<PAGE>
Q: HOW MANY VOTES ARE NEEDED FOR APPROVAL OF EACH ITEM?
There are differing vote requirements for the various proposals. Directors
will be elected by a plurality of the votes cast at the Annual Meeting,
meaning the four nominees receiving the most votes will be elected directors.
Only votes cast for a nominee will be counted, except that the accompanying
proxy will be voted for the four management nominees unless the proxy contains
instructions to the contrary. Abstentions, broker non-votes, and instructions
on the accompanying proxy to withhold authority to vote for one or more of the
nominees will result in those nominees receiving fewer votes. However, such
action will not reduce the number of votes otherwise received by the nominee.
The approvals of the 1998 Lilly Stock Plan and the EVA Bonus Plan each
require an affirmative vote of a majority of the shares present in person or
by proxy and entitled to vote at the Annual Meeting. For these proposals, an
abstention will have the same effect as a vote against the proposal. Broker
non-votes will not be voted for or against the proposals and will not be
counted as entitled to vote.
The amendment to the Articles of Incorporation requires an affirmative vote
of a majority of the shares outstanding and entitled to vote as of the Record
Date. Abstentions and broker non-votes will have the same effect as votes
against the proposal.
Finally, ratification of the auditors requires that the number of votes cast
for ratification exceed those cast against ratification. Abstentions and
broker non-votes will have no effect on this vote.
Q: WHO CAN ATTEND THE ANNUAL MEETING?
All shareholders as of the Record Date can attend. Eligible shareholders
must request an Admittance Card by returning the enclosed Request for
Admittance Card. If your shares are held in the name of a broker or other
nominee, please send proof of share ownership to the Company's Secretary, DC
1093, Lilly Corporate Center, Indianapolis, Indiana 46285 to receive an
Admittance Card.
Q: WHAT PERCENTAGE OF STOCK DO THE DIRECTORS AND OFFICERS OWN?
Together, they own approximately 0.193% of Lilly common stock as of February
6, 1998. (See page 8 for details.)
Q: WHO ARE THE LARGEST PRINCIPAL SHAREHOLDERS?
Lilly Endowment, Inc. owned 179,189,368 shares (or 16.119%) as of February
6, 1998. National City Bank, Indiana held 60,882,218 shares (or 5.477%), as of
February 6, 1998, in various fiduciary capacities. (See page 9 for details.)
Q: WHEN ARE SHAREHOLDER PROPOSALS FOR THE 1999 MEETING DUE?
The Company's 1999 Annual Meeting is scheduled for April 19, 1999. To be
considered for inclusion in next year's Proxy Statement, shareholder proposals
must be submitted in writing by November 4, 1998, to the Company's Secretary,
DC 1093, Lilly Corporate Center, Indianapolis, Indiana 46285. In addition, the
Company's By-laws provide that any shareholder wishing to nominate a candidate
for director or propose other business at the Annual Meeting must give the
Company written notice 90 days before the meeting, and the notice must provide
certain other information as described in the By-laws. Copies of the By-laws
are available to shareholders free of charge upon request to the Company's
Secretary.
2
<PAGE>
ITEM 1. ELECTION OF DIRECTORS
Under the Company's Articles of Incorporation, the Board is divided into
three classes with approximately one-third of the directors standing for
election each year for a three-year term. Nominees for election this year are:
Dr. Steven C. Beering, Dr. Franklyn G. Prendergast, Mrs. Kathi P. Seifert and
Mr. Randall L. Tobias. Each has consented to serve for an additional term.
If any director is unable to stand for election, the Board may, by
resolution, provide for a lesser number of directors or designate a
substitute. In the latter event, shares represented by proxies may be voted
for a substitute director.
BIOGRAPHICAL INFORMATION
Information as of January 31, 1998 regarding each director, including each
director nominated for election, is set forth on the following pages.
NOMINEES FOR DIRECTOR FOR THREE-YEAR TERMS ENDING IN 2001:
THE BOARD RECOMMENDS A VOTE FOR THE NOMINEES.
[PHOTO] STEVEN C. BEERING, M.D. Director since 1983
PRESIDENT, PURDUE UNIVERSITY Age 65
Dr. Beering has served as President of Purdue University since
1983. He served as Dean of the Indiana University School of
Medicine and Director of the Indiana University Medical Center
from 1974 until 1983. Dr. Beering is a fellow of the American
College of Physicians and the Royal Society of Medicine and a
member of the National Academy of Sciences Institute of
Medicine. He is a director of American United Life Insurance
Company; Arvin Industries, Inc.; Veridian Corporation; and
NIPSCO Industries, Inc. Dr. Beering is the past national
chairman of the Association of American Universities.
[PHOTO] FRANKLYN G. PRENDERGAST, M.D., PH.D. Director since 1995
EDMOND AND MARION GUGGENHEIM Age 52
PROFESSOR OF BIOCHEMISTRY AND MOLECULAR
BIOLOGY, MAYO MEDICAL SCHOOL AND
DIRECTOR, MAYO CANCER CENTER
Dr. Prendergast is the Edmond and Marion Guggenheim Professor
of Biochemistry and Molecular Biology at Mayo Medical School.
He also serves as the Director of the Mayo Cancer Center. Dr.
Prendergast has held several other teaching positions at the
Mayo Medical School since 1975. Dr. Prendergast serves on the
Board of Trustees of the Mayo Foundation.
3
<PAGE>
[PHOTO] KATHI P. SEIFERT Director since 1995
GROUP PRESIDENT, Age 48
NORTH AMERICAN PERSONAL CARE PRODUCTS,
KIMBERLY-CLARK CORPORATION
Mrs. Seifert is Group President, North American Personal Care
Products, for Kimberly-Clark Corporation, responsible for the
Infant Care, Child Care, Feminine Care, and Adult Care
Businesses as well as the U.S. and Canadian sales forces. She
joined Kimberly-Clark in 1978 and has served in several
capacities in connection with both the domestic and
international marketing of consumer products. Mrs. Seifert is
a director of the Aid Association for Lutherans and United
Health Group of Northeastern Wisconsin. She also is a member
of the Chancellor's Advisory Board of the University of
Wisconsin in Oshkosh.
[PHOTO] RANDALL L. TOBIAS Director since 1986
CHAIRMAN OF THE BOARD AND Age 55
CHIEF EXECUTIVE OFFICER
Mr. Tobias became Chairman of the Board and Chief Executive
Officer of the Company in 1993. Prior to assuming this
position, he served as Vice Chairman of the Board of AT&T from
1986 until 1993, and as Chairman and Chief Executive Officer
of AT&T International (an AT&T subsidiary) from 1991 to 1993.
Mr. Tobias is a director of Kimberly-Clark Corporation;
Knight-Ridder, Inc.; and Phillips Petroleum Company. He also
serves as Chairman of the Board of Trustees of Duke
University.
DIRECTORS CONTINUING IN OFFICE UNTIL 1999:
[PHOTO] ALFRED G. GILMAN, M.D., PH.D. Director since 1995
REGENTAL PROFESSOR AND CHAIRMAN, Age 56
DEPARTMENT OF PHARMACOLOGY, THE
UNIVERSITY OF TEXAS SOUTHWESTERN
MEDICAL CENTER AT DALLAS
Dr. Gilman has served as Professor and Chairman of the
Department of Pharmacology at The University of Texas
Southwestern Medical Center at Dallas since 1981. He has held
the Raymond and Ellen Willie Distinguished Chair in Molecular
Neuropharmacology at the University since 1987 and was named a
Regental Professor in 1995. Dr. Gilman was on the faculty of
the University of Virginia School of Medicine from 1971 until
1981, where he was named a Professor of Pharmacology in 1977.
He is a director of Regeneron Pharmaceuticals, Inc. Dr. Gilman
was a recipient of the Nobel Prize in Physiology or Medicine
in 1994.
[PHOTO] KAREN N. HORN, PH.D. Director since 1987
SENIOR MANAGING DIRECTOR AND Age 54
AND HEAD OF INTERNATIONAL PRIVATE
BANKING, BANKERS TRUST COMPANY
Mrs. Horn has served as the Senior Managing Director and Head
of International Private Banking at Bankers Trust Company
since 1996. Prior to joining Bankers Trust, she served as
Chairman of the Board, Bank One Cleveland, N.A.; President of
the Federal Reserve Bank of Cleveland; Treasurer of Bell of
Pennsylvania; and Vice President of First National Bank of
Boston. Mrs. Horn is a director of The British Petroleum
Company p.l.c.; Rubbermaid Incorporated; and TRW, Inc. She
also serves as a trustee of The Rockefeller Foundation and The
Cleveland Clinic Foundation.
4
<PAGE>
[PHOTO] J. CLAYBURN LA FORCE, JR., PH.D. Director since 1981
DEAN EMERITUS, THE JOHN E. ANDERSON Age 69
GRADUATE SCHOOL OF MANAGEMENT,
UNIVERSITY OF CALIFORNIA AT LOS ANGELES
Dr. La Force served as Dean of The John E. Anderson Graduate
School of Management of the University of California at Los
Angeles ("UCLA") from 1978 until he retired in 1993. He joined
the faculty of UCLA in 1962 and served as Chairman of the
Economics Department. Dr. La Force is a director of BlackRock
Funds; Imperial Credit Industries, Inc.; Payden & Rygel
Investment Trust; Provident Investment Council Mutual Funds;
Rockwell International Corporation; Jacobs Engineering Group,
Inc.; the Timken Company; and Motor Cargo Industries. He also
is chairman of the board of directors of the Foundation for
Research in Economics and Education.
[PHOTO] AUGUST M. WATANABE, M.D. Director since 1994
EXECUTIVE VICE PRESIDENT, Age 56
SCIENCE AND TECHNOLOGY
Dr. Watanabe has served as Executive Vice President, Science
and Technology, since 1996. Prior to joining the Company, he
was on the faculty of the Indiana University School of
Medicine from 1972 to 1990, serving as Professor and Chairman
of the Department of Medicine between 1983 and 1990. He joined
the Company in 1990 as Vice President of Lilly Research
Laboratories and was named Group Vice President of Lilly
Research Laboratories in 1992. He was appointed a Vice
President of the Company and elected to the Board of Directors
in 1994. He is a fellow of the American College of Physicians
and the American College of Cardiology and a director of the
Indiana University Foundation.
DIRECTORS CONTINUING IN OFFICE UNTIL 2000:
[PHOTO] EVAN BAYH Director since 1997
PARTNER, BAKER & DANIELS Age 42
Mr. Bayh became a partner in the law firm of Baker & Daniels,
Indianapolis, Indiana, in January 1997. From 1989 until 1997,
he served as Governor of the State of Indiana. Prior to being
elected Governor, Mr. Bayh served as Secretary of State for
Indiana from 1987 until 1989. Mr. Bayh is a director of Great
Lakes Chemical Corporation; Indianapolis Life Insurance
Company; Dominick's Finer Foods, Inc.; and Fortis, Inc. He
also serves as chairman of the National Education Goals Panel.
[PHOTO] CHARLES E. GOLDEN Director since 1996
EXECUTIVE VICE PRESIDENT Age 51
AND CHIEF FINANCIAL OFFICER
Mr. Golden joined the Company as Executive Vice President and
Chief Financial Officer in 1996. Prior to joining the Company,
he served as Vice President of General Motors Corporation
("GM"), and Chairman and Managing Director of Vauxhall Motors
Limited, a subsidiary of GM in the United Kingdom, from 1993
to 1996. Mr. Golden joined GM in 1970 and held a number of
executive positions in that company's domestic and
international operations. Mr. Golden is a director of Clarian
Health Partners and is a member of the U.S. advisory board of
INSEAD.
5
<PAGE>
KENNETH L. LAY, PH.D. Director since 1993
[PHOTO] CHAIRMAN OF THE BOARD AND Age 55
CHIEF EXECUTIVE OFFICER,
ENRON CORP.
Mr. Lay has served Enron Corp. as Chairman of the Board since
1986 and its Chief Executive Officer since 1985. He joined
Enron as President and Chief Operating Officer in 1985. Prior
to joining Enron, he served as Chairman and Chief Executive
Officer of Houston Natural Gas and as President, Chief
Operating Officer, and a director of Transco Energy Company.
Mr. Lay is a director of Compaq Computer Corporation and Trust
Company of the West.
SIDNEY TAUREL Director since 1991
[PHOTO] PRESIDENT AND CHIEF Age 49
OPERATING OFFICER
Mr. Taurel was elected President and Chief Operating Officer
of the Company in 1996. He joined the Company in 1971 and has
held management positions in the Company's operations in
Brazil and Europe. He served as President of Eli Lilly
International Corporation from 1986 until 1991, as Executive
Vice President of the Pharmaceutical Division from 1991 until
1993 and as Executive Vice President of the Company from 1993
until 1996. Mr. Taurel is Chairman of the Board of Directors
of Pharmaceutical Research and Manufacturers of America; a
director of both ITT Industries, Inc. and The McGraw-Hill
Companies, Inc.; and a member of the Board of Overseers of the
Columbia Business School.
ALVA O. WAY Director since 1980
[PHOTO] CHAIRMAN OF THE BOARD, IBJ Age 68
SCHRODER BANK & TRUST COMPANY
Mr. Way became Chairman of the Board of IBJ Schroder Bank &
Trust Company in 1986. He also serves as a director of and
consultant to Schroder p.l.c., London, and related companies.
Mr. Way previously served as President of both The Travelers
Corporation and American Express Company and served in
executive positions at General Electric Company. He is a
director of Gould, Inc.; The McGraw-Hill Companies, Inc.;
Ryder System, Inc.; and Schroder p.l.c. Mr. Way also serves as
a member of the Board of Fellows and Chancellor Emeritus of
Brown University.
During 1997 the Board of Directors held seven meetings. Each director
attended at least 75% of the aggregate of the total number of meetings of the
Board of Directors and the total number of meetings of all committees of the
Board of Directors on which the director served.
6
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
Members: Directors Way (Chair), Bayh, Beering and Prendergast
Number of Meetings in 1997: Three
Functions:
. Oversees internal controls, audits and compliance program
. Recommends independent auditors and oversees their activities
COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE
Members: Directors Beering (Chair), Horn, Lay and Way
Number of Meetings in 1997: Six
Functions:
.Establishes executive officers' compensation
. Administers Deferred Compensation Plan, certain stock plans and EVA
Bonus Plan
FINANCE COMMITTEE
Members: Directors Lay (Chair), Golden, Horn and Seifert
Number of Meetings in 1997: Two
Functions:
.Reviews current and long-range financial strategy and planning,
including budgets, dividends and borrowings
PUBLIC POLICY COMMITTEE
Members: Directors La Force (Chair), Bayh, Gilman, Seifert and Taurel
Number of Meetings in 1997: Three
Functions:
.Reviews policies, practices and procedures relating to social,
political, legal and economic issues affecting the Company
SCIENCE AND TECHNOLOGY COMMITTEE
Members: Directors Prendergast (Chair), Beering, Gilman, La Force, and
Watanabe
Number of Meetings in 1997: Three
Functions:
.Reviews and makes recommendations regarding Company's strategic
research goals and objectives
.Reviews new developments, technologies and trends in pharmaceutical
research and development
DIRECTORS AND CORPORATE GOVERNANCE COMMITTEE
Members: Directors Horn (Chair), Beering, La Force, Lay and Tobias (ex-
officio)
Number of Meetings in 1997: Two
Functions:
.Recommends candidates for membership on the Board and Board committees
.Considers candidates for the Board recommended by shareholders
.Considers matters of corporate governance
.Reviews and establishes compensation of non-employee directors
This Committee will consider a candidate for director proposed by a
shareholder. A candidate must be highly qualified and be both willing and
expressly interested in serving on the Board. A shareholder wishing to
propose a candidate for the Committee's consideration should forward the
candidate's name and information about the candidate's qualifications to
the Company's Secretary.
7
<PAGE>
COMMON STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the number of shares of Company common stock
beneficially owned by the directors, the Named Executive Officers listed on
page 11, and all directors and executive officers as a group, as of February
6, 1998.
<TABLE>
<CAPTION>
NAME OF INDIVIDUALS OR SHARES OWNED
IDENTITY OF GROUP BENEFICIALLY(1)
- ---------------------- ---------------
<S> <C>
Evan Bayh....................................................... 762
Steven C. Beering, M.D.......................................... 20,621
Alfred G. Gilman, M.D., Ph.D.................................... 3,670
Charles E. Golden............................................... 43,212(2)
Rebecca O. Goss................................................. 63,574(3)
Karen N. Horn, Ph.D............................................. 16,179
J. Clayburn La Force, Jr., Ph.D................................. 26,216
Kenneth L. Lay, Ph.D............................................ 43,703(4)
Franklyn G. Prendergast, M.D.................................... 7,538
Kathi P. Seifert................................................ 6,065
Sidney Taurel................................................... 315,331(5)
Randall L. Tobias............................................... 372,021(6)
August M. Watanabe, M.D......................................... 390,598(7)
Alva O. Way..................................................... 27,564(8)
All directors and executive officers as a group (28 persons).... 2,262,505
</TABLE>
- --------
(1) Unless otherwise indicated in a footnote, each person listed in the table
possesses sole voting and sole investment power with respect to the shares
shown in the table to be owned by that person. The shares shown do not
include the following shares that may be purchased pursuant to stock
options that are exercisable within 60 days of February 6, 1998: Ms. Goss,
148,800 shares; Mr. Taurel, 700,100 shares; Mr. Tobias, 1,075,000 shares;
Dr. Watanabe, 90,616 shares; and all directors and executive officers as a
group, 3,646,080 shares. The shares shown include, in the case of
employees of the Company, shares credited to the accounts of the employees
under The Lilly Employee Savings Plan ("Savings Plan") and, in case of
non-employee directors and Mr. Tobias, shares credited to the directors'
accounts under the Lilly Directors' Deferral Plan. No person listed in the
table owns more than .0344% of the outstanding common stock of the
Company. All directors and executive officers as a group own 0.1927% of
the outstanding common stock of the Company.
(2) The shares shown for Mr. Golden include 272 shares credited to his account
under the Savings Plan.
(3) The shares shown for Ms. Goss include 7,910 shares credited to her account
under the Savings Plan. Ms. Goss' children have sole voting power and sole
investment power with respect to 191 shares that are included in the
table.
(4) Mr. Lay has shared voting power and shared investment power with respect
to 20,220 shares that are included in the table and are owned by a family
partnership of which he is a partner.
(5) The shares shown for Mr. Taurel include 12,745 shares credited to his
account under the Savings Plan.
(6) Mr. Tobias' wife has sole voting power and sole investment power with
respect to 93,400 shares that are included in the table. In addition, she
has shared voting and investment power over 3,300 shares that are included
in the table and are owned by family trusts of which she is a trustee. Mr.
Tobias disclaims any beneficial interest in all of such shares. Mr. Tobias
has shared voting power and shared investment power with respect to 84,000
shares that are included in the table and are owned by three separate
foundations of which he is a director. The shares shown for Mr. Tobias
include 1,578 shares credited to his account under the Savings Plan.
(7) The shares shown for Dr. Watanabe include 3,517 shares credited to his
account under the Savings Plan.
(8) Mr. Way's wife owns 720 shares of those shown in the table, and he
disclaims any beneficial interest therein.
8
<PAGE>
PRINCIPAL HOLDERS OF COMMON STOCK
To the best of the Company's knowledge, and except as set out below, Lilly
Endowment, Inc., (the "Endowment") is the only beneficial owner of more than
5% of the outstanding shares of the Company's common stock. The following
table sets forth information regarding this ownership as of February 6, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY OWNED OF CLASS
---------------- ------------------ --------
<S> <C> <C>
Lilly Endowment, Inc............................. 179,189,368 16.119%
2801 North Meridian Street
Indianapolis, Indiana 46208
</TABLE>
The Endowment has sole voting and sole investment power with respect to
these shares. The Endowment may be deemed to be a parent of the Company as
that term is defined for purposes of the Securities Act of 1933. The Board of
Directors of the Endowment is composed of Mr. Thomas H. Lake, Honorary
Chairman; Mr. Thomas M. Lofton, Chairman; Otis R. Bowen, M.D.; Mrs. Mary K.
Lisher; Drs. William G. Enright, Earl B. Herr, Jr., and Herman B Wells; and
Messrs. Byron P. Hollett, Eli Lilly II, and Eugene F. Ratliff. Drs. Bowen,
Enright, and Herr and Messrs. Hollett, Lake, Lilly, Lofton, and Ratliff are
shareholders of the Company.
As of February 6, 1998, National City Bank of Indiana ("NCBI") held
60,882,218 shares of the Company's common stock (5.477% of the outstanding
shares) in various fiduciary capacities. Over half of the shares are held by
it as trustee under the Savings Plan, savings plans of affiliated companies,
and the employee stock ownership plan. In addition, NCBI holds such shares for
various parties in personal trusts, agency and custodial accounts, pension
accounts, estates, and guardianships. NCBI has sole voting power with respect
to 26,979,191 shares, shared voting power with respect to 193,950 shares, sole
investment power with respect to 5,016,021 shares, shared investment power
with respect to 12,902,820 shares, and the right to vote an additional
29,837,755 shares in the savings plans to the extent it is not instructed on
how to vote such shares by plan participants.
DIRECTORS' COMPENSATION
Employee directors receive no additional compensation for serving on the
Board or its Committees. Non-employee directors receive a retainer of $2,915
per month and $1,600 for each Board meeting attended. In addition, they are
paid $1,600 for each Committee or other meeting attended, if that meeting is
not held on the same day as a Board meeting. Directors are also reimbursed for
customary and usual travel expenses. The Company does not have a retirement
plan for non-employee directors.
Under the Lilly Directors' Deferral Plan, directors may elect to defer all
or part of their cash compensation in either a Deferred Compensation Account
or a Deferred Stock Account. Amounts in the Deferred Compensation Account earn
interest at 2% above the prime interest rate annually (as adjusted each
December). The aggregate amount of interest accrued for the participating
directors in 1997 was $166,050.
Compensation deferred in the Deferred Stock Account is credited in the form
of hypothetical shares of the Company's common stock based on the market price
of the stock at the time of the deferral. Hypothetical dividends are
"reinvested" into additional shares based on the market price of the stock on
the date dividends are paid. In addition, on the first business day in
December, the Company credits each non-employee director's Deferred Stock
Account with the lesser of 800 shares or the number of shares at the market
price on that date equaling the value of the director's total annual cash
compensation assuming he/she attended all regularly scheduled Board meetings.
In 1997, each non-employee director's Deferred Stock Account was credited with
662 shares. All shares in the Deferred Stock Accounts are hypothetical and are
not issued or transferred until the director resigns or dies. The shares
credited to all non-employee directors' Deferred Stock Accounts are included
in the share ownership table on page 8. At the director's election, upon
retirement or resignation from the Board, the Deferred Compensation Account
will be paid in a lump sum or in annual or monthly installments for up to 10
years, and the Deferred Stock Account will be paid in a lump sum or in annual
installments for up to 10 years.
9
<PAGE>
PERFORMANCE GRAPH
The following performance graph compares the cumulative total shareholder
return on the Company's common stock with Standard & Poor's 500 Stock Index and
the Peer Group* for the years 1993 through 1997. The graph is constructed on
the assumption that $100 was invested on December 31, 1992, in each of the
Company's common stock, the S&P 500 Stock Index, and the Peer Group common
stock.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN**
AMONG LILLY, S&P 500 STOCK INDEX, AND PEER GROUP
[PERFORMANCE GRAPH APPEARS HERE]
FISCAL YEARS ENDED DECEMBER 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1997
- --------------------------------------------------------------------------------
Lilly......................... $100.00 $102.41 $118.22 $208.87 $276.66 $534.92
- --------------------------------------------------------------------------------
S&P 500....................... 100.00 110.03 111.53 153.29 188.39 251.17
- --------------------------------------------------------------------------------
Peer Group 1.................. 100.00 91.63 103.49 165.13 209.94 341.00
- --------------------------------------------------------------------------------
Peer Group 2.................. 100.00 92.57 106.02 168.68 211.27 316.27
</TABLE>
* The Peer Group has been constructed by the Company as the industry index for
purposes of the performance graph and is composed of eleven companies in the
pharmaceutical industry used by the Company in 1997 to benchmark
compensation of executive officers. The eleven companies are: Abbott
Laboratories; American Home Products Corporation; Bristol-Myers Squibb
Company; Glaxo Holdings p.l.c.; Johnson & Johnson; Merck & Co.; Pfizer,
Inc.; Pharmacia & Upjohn, Inc.; Schering-Plough Corporation; SmithKline
Beecham p.l.c.; and Warner-Lambert Company. That Peer Group is identified on
the graph as Peer Group 1. Peer Group 2 appears on the graph as it was the
Peer Group of companies used by the Company for benchmarking executive
compensation prior to 1997. Peer Group 2 includes nine of the companies in
Peer Group 1, excluding Johnson & Johnson and Schering-Plough.
** Total return assumes reinvestment of dividends.
10
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following Summary Compensation Table shows the compensation paid to Mr.
Tobias, who served as Chief Executive Officer of the Company during 1997, and
the four most highly compensated executive officers other than Mr. Tobias who
were serving as executive officers as of December 31, 1997. These five
individuals are the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(1)
--------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- --------------------- ----------
NUMBER OF
SECURITIES LONG-TERM
UNDERLYING INCENTIVE
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED OPTIONS PLAN ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION STOCK(3) GRANTED PAYOUT COMPENSATION
------------------ ---- ---------- ---------- ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Randall L. Tobias 1997 $1,200,000 $1,298,074(2) $180,891 225,000 $1,661,280(4) $72,004(5)
Chairman of the Board 1996 1,100,000 1,152,111 149,216 150,000 2,470,463 66,002
Chief Executive Officer 1995 984,000 983,167 42,170 300,000 1,697,988 59,040
Sidney Taurel 1997 860,000 650,778(2) 123,246 125,000 1,245,960(4) 51,602(5)
President and Chief 1996 786,700 578,667 123,148 75,000 1,313,625 47,202
Operating Officer 1995 660,000 520,300 76,134 150,000 902,875 39,600
August M. Watanabe, M.D. 1997 636,000 518,534(2) 20,856 60,000 899,860(4) 38,160(5)
Executive Vice
President, 1996 579,900 459,800 18,386 40,000 1,135,650 34,794
Science and Technology 1995 419,400 381,700 35,705 80,000 780,550 25,164
Charles E. Golden 1997 636,000 492,649(2) 5,797 60,000 824,872(4) 38,160(5)
Executive Vice
President 1996 497,600 945,371(6) 184,633(7) $801,625 100,000 -0- 9,000
and Chief Financial
Officer
Rebecca O. Goss 1997 413,880 299,985(2) 9,417 40,000 692,200(4) 24,833(5)
Vice President and 1996 329,880 267,127 5,491 20,000 872,925 19,973
General Counsel 1995 257,880 249,840 15,259 40,000 262,125 15,473
</TABLE>
- -------
(1) During the years indicated, stock appreciation rights were not granted.
(2) Amounts earned under the EVA Bonus Plan for 1997 and paid in 1998. An
additional amount was earned for 1997 but not paid in 1998. The additional
amount will be either paid in later years or forfeited, depending on the
extent to which future annual financial performance goals under the EVA
Bonus Plan are achieved.
(3) Mr. Golden was awarded 25,000 shares of restricted stock when he joined
the Company as a means of replacing a portion of certain equity-based
compensation he forfeited when he resigned from his previous employer to
become an Executive Vice President of the Company. Dividends will be paid
on the restricted stock awarded to Mr. Golden which was valued at
$1,740,625 at December 31, 1997. Dr. Watanabe has 32,000 shares of
restricted stock valued at $2,228,000 on December 31, 1997.
(4) Amounts paid in Company common stock (except for amounts paid in cash to
satisfy tax withholding requirements) in February 1998 under the
performance award program for the period January 1, 1996 through December
31, 1997.
(5) Company contribution to the named individual's account in the Savings
Plan.
(6) Mr. Golden's 1996 bonus was composed of $352,121 paid in cash under the
EVA Bonus Plan as described in footnote (2) and $593,250 paid in stock
(except for tax withholding amounts) under the performance award program
for the 1996 calendar year.
(7) Includes relocation expenses incurred as a result of Mr. Golden's move
from the United Kingdom to Indiana in 1996.
11
<PAGE>
Stock Option Grants
The following table provides information on options to purchase Company
common stock granted in 1997 to the Named Executive Officers under the 1994
Lilly Stock Plan.
OPTION SHARES GRANTED IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ----------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL OPTION
SECURITIES SHARES GRANTED TO EXERCISE OR GRANT DATE
UNDERLYING EMPLOYEES BASE PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED IN FISCAL YEAR PER SHARE(2) DATE VALUE(4)
---- --------------- ----------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Randall L. Tobias....... 225,000 3.76 $64.06 10/19/07(3) $3,506,805
Sidney Taurel........... 125,000 2.09 64.06 10/19/07(3) 1,948,225
August M. Watanabe,
M.D.................... 60,000 1.00 64.06 10/19/07(3) 935,148
Charles E. Golden....... 60,000 1.00 64.06 10/19/07(3) 935,148
Rebecca O. Goss......... 40,000 0.66 64.06 10/19/07(3) 623,432
</TABLE>
- --------
(1) Stock appreciation rights were not granted during 1997.
(2) Options are granted at the market price of Company common stock on the
date of grant.
(3) These options will become exercisable October 20, 2000.
(4) These values were established using the Black-Scholes stock option
valuation model. Assumptions used to calculate the grant date present
value of option shares granted during 1997 were in accordance with SFAS
123, as follows:
(a) Expected Volatility--The standard deviation of the continuously
compounded rates of return calculated on the average daily stock
price over a period of time immediately preceding the grant and equal
in length to the expected life. The volatility was 21.5%.
(b) Risk-Free Interest Rate--The rate available at the time the grant was
made on zero-coupon U.S. Government issues with a remaining term
equal to the expected life. The risk-free interest rate was 6.18%.
(c) Dividend Yield--The expected dividend yield was 3.14% based on the
historical dividend yield over a period of time immediately preceding
the grant date equal in length to the expected life of the grant.
(d) Expected Life--The expected life of the grant was seven years,
calculated based on the historical expected life of previous grants.
(e) Forfeiture Rate--Under SFAS 123, forfeitures may be estimated or
assumed to be zero. The forfeiture rate was assumed to be zero.
12
<PAGE>
Stock Option Exercises and Option Values
The following table contains information concerning stock options exercised
during 1997 and stock options unexercised at the end of 1997 with respect to
the Named Executive Officers.
AGGREGATED OPTION SHARES EXERCISED IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED,
NUMBER OF OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
SHARES END AT FISCAL YEAR-END(2)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Randall L. Tobias....... -0- -0- 1,200,000 1,125,000 $68,513,000 $39,843,187
Sidney Taurel........... 51,200 $ 1,578,368 788,800 575,000 43,644,832 19,995,062
August M. Watanabe,
M.D.................... 278,384 10,944,774 90,616 300,000 5,012,863 10,624,850
Charles E. Golden....... -0- -0- -0- 260,000 -0- 7,961,150
Rebecca O. Goss......... -0- -0- 148,800 160,000 8,313,119 5,371,200
</TABLE>
- --------
(1) Stock appreciation rights were not exercised during 1997 and no stock
appreciation rights were outstanding on December 31, 1997.
(2) Represents the amount by which the market price of the common stock of the
Company exceeded the exercise prices of unexercised options on December
31, 1997.
Long-Term Incentive Awards
The following table provides information on long-term performance awards
granted in 1997 to the Named Executive Officers under the 1994 Lilly Stock
Plan.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYMENTS
UNDER NON-STOCK PRICE
BASED PLANS(2)
PERFORMANCE --------------------------
NUMBER OF PERIOD MAXIMUM
SHARES UNTIL THRESHOLD TARGET #
NAME AWARDED(1) PAYOUT # SHARES # SHARES SHARES
- ---- ---------- ----------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Randall L. Tobias............. 28,000 2 years 18,700 28,000 56,000
Sidney Taurel................. 19,000 2 years 12,670 19,000 38,000
August M. Watanabe, M.D....... 9,000 2 years 6,000 9,000 18,000
Charles E. Golden............. 9,000 2 years 6,000 9,000 18,000
Rebecca O. Goss............... 5,600 2 years 3,740 5,600 11,200
</TABLE>
- --------
(1) Represents the targeted award amount payable in the year 2000 if earned
for the fiscal years 1998-1999 award period.
(2) Payouts are determined by the aggregate earnings per share ("EPS") level
for the award period. The target amount will be paid if 100% of the
targeted EPS is achieved; the threshold amount will be paid if at least
96.55% of the targeted EPS is achieved; and the maximum amount will be
paid if 110.87% or more of the targeted EPS is achieved. No payment will
be made unless at least 96.55% of the targeted EPS level is achieved.
13
<PAGE>
Compensation and Management Development Committee Report
The Compensation and Management Development Committee consists of four non-
employee directors. The Committee regularly reviews the Company's executive
compensation policies and practices and establishes the salaries of executive
officers. The Committee also administers the Deferred Compensation Plan, the
EVA Bonus Plan (the "EVA Plan") and the 1994 Lilly Stock Plan, the stock plan
covering executive officers and other members of management.
A. Executive Compensation Policy
The Committee's executive compensation policy is founded on principles that
guide the Company in establishing all its compensation programs. The Company
designs compensation programs to attract, retain and motivate highly talented
individuals at all levels of the organization. In addition, the programs are
designed to be cost-effective and to treat all employees fairly. To that end,
all programs, including those for executive officers, share these
characteristics:
. Compensation is based on the level of job responsibility, individual
performance, and Company performance. Members of senior management have
a greater portion of their pay based on Company performance than other
employees.
. Compensation also reflects the value of the job in the marketplace. To
retain its highly skilled work force, the Company strives to remain
competitive with the pay of other highly respected employers who compete
with the Company for talent.
. To align the interests of employees with those of shareholders, the
Company provides employees worldwide at all levels of the organization
the opportunity for equity ownership through various Company programs.
In addition, executive officers and other key employees worldwide have
the opportunity to build more substantial equity ownership through
Company stock plans.
. Compensation programs are developed and administered to foster the long-
term focus required for success in the research-based pharmaceutical
industry.
The Committee believes that the Company's executive compensation program
reflects the principles described above and provides executives strong
incentives to maximize Company performance and therefore enhance shareholder
value. The program consists of both annual and long-term components. The
Committee believes that the executive compensation program should be
considered as a whole in order to properly assess whether it is attaining its
objectives.
In establishing total compensation, the Committee considers various measures
of historical and projected Company performance, including sales, net income,
return on shareholders' equity, return on sales and assets, sales and net
income per employee, total market value and total shareholder return. These
data form the basis for the Committee's assessment of the overall performance
and prospects of the Company that underpins the Committee's judgment in
establishing total compensation ranges. In evaluating these factors the
Committee does not assign them relative weights or rankings; rather it makes a
subjective determination based on a collective consideration of all such
factors.
The Committee also compares the Company's total compensation package (and,
to the extent meaningful, the compensation of individual executive officers)
with those global pharmaceutical companies of comparable size and stature to
the Company that constitute the "Peer Group" for the Performance Graph on page
10. The Peer Group companies are identified in a footnote to the Performance
Graph. The Committee uses the Peer Group data primarily as benchmarks to
ensure that the executive compensation program as a whole is within the broad
middle range of comparative pay of the Peer Group companies. The Committee
does not target a specific position in the range of comparative data for each
individual or for each component of compensation. Individual amounts are
established in view of the comparative data and such other factors as level of
responsibility, prior experience and the Committee's subjective judgment as to
individual contribution. These factors are not assigned specific
14
<PAGE>
mathematical weights; rather, the Committee exercises its judgment and
discretion in the information it reviews and the analysis it considers.
The Company also retains independent compensation and benefits consultants
to assist in evaluating executive compensation programs. The use of
independent consultants provides additional assurance that the Company's
programs are reasonable and appropriate to the Company's objectives.
B. Components of Executive Compensation
Annual Cash Compensation. Annual cash compensation for 1997 consisted of two
components, base salary and a cash bonus under the EVA Plan.
Base salaries are determined with reference to Company and individual
performance for the previous year, internal relativity and market conditions,
including pay at the Peer Group companies and general inflationary trends.
Assessment of individual performance includes consideration of a person's
impact on financial performance as well as judgment, creativity, effectiveness
in developing subordinates and a diverse organization, and contributions to
improvement in the quality of the Company's products, services and operations.
As noted above, the Committee uses the Peer Group and other market data to
test for reasonableness and competitiveness of base salaries but also
exercises subjective judgment in view of the Company's compensation
objectives.
Cash bonuses for management are paid under the EVA Plan, a formula-based
plan that is based on the concept of Economic Value Added ("EVA")*. In basic
terms, EVA is after-tax operating profit less the annual total cost of
capital. Under the EVA Plan, the size of bonuses varies directly with the
amount by which after-tax operating profit exceeds the cost of capital. Thus,
the EVA Bonus Plan rewards managers who increase shareholder value by most
effectively deploying the capital contributed by the shareholders. The EVA
Plan places bonuses "at risk" in that if the Company fails to achieve the
target EVA, the bonuses earned can be reduced or even be negative, resulting
in a reduction of future years' bonuses. The EVA Plan is more fully described
below under the caption "Item 4. Proposal to Approve Amended EVA Bonus Plan."
The Committee determines the participants and sets the target bonus levels
prior to the beginning of the year. As to the executive officers, the
Committee's intent is to set target bonuses within the broad middle range of
Peer Group companies.
Long-Term Incentives. The Company employs two forms of long-term incentives
granted under the 1994 Lilly Stock Plan, performance awards and stock options.
These incentives foster the long-term focus necessary for continued success in
the research-based pharmaceutical business. They also provide individuals in
leadership roles the opportunity for substantial equity ownership to ensure
proper focus on shareholder value. Performance awards and stock options have
traditionally been granted broadly and deeply within the organization, with
over 2,000 management and professional employees now participating.
Performance awards provide recipients the opportunity to earn shares of
Company common stock annually if certain performance goals are achieved. The
awards, which are granted annually, are structured as a schedule of shares of
common stock based on the Company's achievement of specific cumulative
earnings-per-share ("EPS") levels over a two-year award period. Individual
award size varies depending on the recipient's level of responsibility.
Stock options are an important part of the Company's performance-based
compensation. Stock options provide a strong incentive to increase shareholder
value, since Company stock options have value only if the stock price
increases over time. The Company's 10-year options, granted at the market
price on the date of grant, ensure that employees are oriented to growth over
the long term and not simply to short-term profits. In addition, the options
encourage retention because they carry a three-year vesting period and, if not
exercised, may be forfeited if the employee leaves the Company before
retirement. The size of grants to executive officers in 1997 was based
primarily on the recipient's level of responsibility. The Committee also
considered the size of grants to individuals in previous years and internal
relativity.
- --------
* "EVA" is a trademark of Stern, Stewart & Company, a compensation and
benefits consulting firm.
15
<PAGE>
Adjustments for Extraordinary Events. Consistent with past practices, the
Committee adjusted the financial results on which awards were determined under
the 1996-97 performance awards to minimize or eliminate the effect on earnings
per share of accounting adjustments and other extraordinary non-operating
items. The purpose of the adjustments is to ensure that award payouts reflect
ongoing operating results and are not artificially inflated or deflated due to
one-time non-operating events. Adjustments were made to eliminate the
extraordinary income effect, and to eliminate or reduce the effect of
extraordinary charges, resulting from certain business development and
licensing arrangements, asset dispositions and asset writedowns during the
award period.
Deductibility Cap on Executive Compensation. Federal income tax law
disallows corporate deductibility for certain compensation paid in excess of
$1 million to the Named Executive Officers. "Performance-based compensation,"
as defined in the tax law, is not subject to the deductibility limitation
provided certain shareholder approval and other requirements are met. Stock
option and performance award compensation of the Named Executive Officers
under the 1994 Lilly Stock Plan qualifies as "performance-based compensation,"
and therefore is fully deductible. Stock options and performance award
compensation under the 1998 Plan (as described more fully below under the
caption "Item 3. Proposal to Approve The 1998 Lilly Stock Plan") will also
qualify for full deductibility if the plan is approved by the shareholders at
the 1998 Annual Meeting. Finally, the Board of Directors is submitting the EVA
Plan to a vote of the shareholders at the 1998 Annual Meeting in order to
assure full deductibility of EVA payments to the Named Executive Officers in
the future (as described under the caption "Item 4. Proposal to Approve
Amended EVA Bonus Plan").
C. Chief Executive Officer Compensation
The compensation of Mr. Tobias, Chairman of the Board and Chief Executive
Officer, consists of the same components as for other senior executives,
namely base salary, EVA bonus, performance awards and stock options.
In establishing Mr. Tobias' 1997 compensation, the Committee applied the
principles outlined above in the same manner as they were applied to the other
executives. The Committee reviewed Company performance relative to the Peer
Group companies, based on a number of factors including sales, earnings,
return on sales and assets, return on equity and total shareholder return. The
Committee did not assign these factors relative weights or rankings but rather
made a subjective determination after considering all such factors
collectively. The Committee also noted Mr. Tobias' success in 1996 in focusing
employees' efforts to improve operating results and in leading senior
management to develop a new strategic plan.
Mr. Tobias' base salary for 1997 was increased to $1,200,000. This salary
was within the middle range of Peer Group Chief Executive Officers. The
Committee believed this increase was appropriate in light of Mr. Tobias'
strong individual performance as described above.
The 1997 EVA Plan bonus target for Mr. Tobias was set at $1,000,000, the
same as the previous year. Bonus size was consistent with the goal of placing
a substantial proportion of Mr. Tobias' pay "at risk." The bonus was also
targeted to be within the broad middle range relative to other Chief Executive
Officers of Peer Group companies.
In October 1997, the Committee provided Mr. Tobias a performance award to be
earned over the two-year award period 1998-99. If earnings per share
performance targets are achieved, the award will pay out 28,000 shares of
Lilly common stock in the year 2000. In determining the size of the award, the
Committee considered Mr. Tobias' level of responsibility and internal
relativity. As with the awards to other senior executives, the award size for
Mr. Tobias was increased modestly to maintain competitiveness with other Peer
Group programs. However, the earnings-per-share hurdles for minimum, target,
and maximum payouts were increased over previous years. In light of activities
during the award period involving business development initiatives, the
Committee adjusted Mr. Tobias' payout under the 1996-97 performance award to
reduce the effect of the one-time accounting charges and to eliminate the
effect of extraordinary gains during the award period.
16
<PAGE>
In October 1997, the Committee also granted Mr. Tobias an option to purchase
225,000 shares of Company common stock at $64.06 per share, the market price
on the date of the grant. In determining the size of the grant, the Committee
considered Mr. Tobias' strong leadership as described above. The Committee
also took note of the number of option shares previously granted to Mr.
Tobias. The award size was consistent with the goal of placing a greater
portion of Mr. Tobias' total pay "at risk."
Compensation and Management Development Committee
Steven C. Beering, M.D., Chairperson
Karen N. Horn, Ph.D Kenneth L. Lay, Ph.D Alva O. Way
COMPENSATION COMMITTEE INTERLOCKS
Mr. Tobias served on the Compensation Committee of the Board of Directors of
Kimberly-Clark Corporation during 1997, during which time Mrs. Seifert, Group
President of Kimberly-Clark Corporation, served as a director of the Company.
RETIREMENT PLAN
The Pension Plan Table sets forth a range of annual retirement benefits
under The Lilly Retirement Plan ("Retirement Plan") for graduated levels of
average annual earnings (consisting of Salary, Bonus and Long-Term Incentive
Plan Payouts as set forth in the Summary Compensation Table on page 11) and
years of service for the life of a retired employee, assuming retirement at
age 65 with a 50% survivor income benefit. The amounts shown in the table are
not subject to deduction for social security benefits.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
EARNINGS
(HIGHEST 5 OF YEARS OF SERVICE
LAST 10 ---------------------------------------------------------------------
YEARS) 15 20 25 30 35 40 45
------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 750,000............. 154,795 206,380 257,980 309,585 361,185 361,185 364,960
1,000,000............. 207,450 276,600 345,760 414,910 484,060 484,060 486,595
1,500,000............. 312,775 417,030 521,300 625,560 729,815 729,815 729,895
2,000,000............. 418,100 557,465 696,845 836,210 975,575 975,575 975,575
2,500,000............. 523,425 697,900 872,385 1,046,860 1,221,335 1,221,335 1,221,335
3,000,000............. 628,750 838,335 1,047,925 1,257,510 1,467,095 1,467,095 1,467,095
3,500,000............. 734,075 978,765 1,223,470 1,468,160 1,712,855 1,712,855 1,712,855
4,000,000............. 839,400 1,119,200 1,399,010 1,678,810 1,958,610 1,958,610 1,958,610
4,500,000............. 944,725 1,259,635 1,574,555 1,889,460 2,204,370 2,204,370 2,204,370
5,000,000............. 1,050,051 1,400,070 1,750,095 2,100,115 2,450,130 2,450,130 2,450,130
5,280,000............. 1,109,033 1,478,710 1,848,400 2,218,075 2,587,755 2,587,755 2,587,755
</TABLE>
The years of service credited to the Named Executive Officers are Mr.
Tobias, 19 years; Mr. Taurel, 26 years; Ms. Goss, 20 years; Dr. Watanabe, 16
years; and Mr. Golden, 28 years. Mr. Golden's ultimate pension benefit from
the Retirement Plan will be reduced by the amount of the pension payments he
receives from his previous employer.
Section 415 of the Internal Revenue Code ("Code") generally places a limit
of $130,000 on the amount of annual pension benefits that may be paid at age
65 from a plan such as the Company's Retirement Plan. The Code also places a
$10,000 limit, subject to adjustment by the Internal Revenue Service, on
annual contributions by an employee to the Company's Savings Plan and, in
addition, imposes a combined limitation when an
17
<PAGE>
employee is covered by both types of plans. Under an unfunded plan adopted in
1975, however, the Company will make payments as permitted by the Code to any
employee who is a participant in the Retirement Plan or the Savings Plan in an
amount equal to the difference, if any, between the benefits that would have
been payable under such plans without regard to the limitations imposed by the
Code and the actual benefits payable under such plans as so limited.
CHANGE-IN-CONTROL SEVERANCE PAY ARRANGEMENTS
The Company has adopted a change-in-control severance pay program
("Program") covering most employees of the Company and its subsidiaries,
including the Company's executive officers. In general, the Program would
provide severance payments and benefits to eligible employees and executive
officers in the event of their termination of employment under certain
circumstances within fixed periods of time following a change in control. A
"change-in-control" would occur if 20% or more of the Company's voting stock
were acquired by an entity other than the Company, a subsidiary, an employee
benefit plan of the Company, or the Endowment. There are additional conditions
that could result in a change-in-control event. The Program is not subject to
amendment by the Board, whether prior to or following a change-in-control, in
any manner adverse to a participant without his or her prior written consent.
Under the portion of the Program covering the Named Executive Officers, each
would be entitled to severance payments and benefits in the event that his or
her employment is terminated following a change-in-control (i) without "cause"
by the Company; (ii) for "good reason" by the executive officer, each as is
defined in the Program; or (iii) for a limited period of time, for any reason
by the executive officer. In such case, the executive officer would be
entitled to a severance payment equal to three times his or her current annual
cash compensation. Additional benefits would include a pension supplement and
full and immediate vesting of all stock options and other equity incentives.
In the event that any payments made in connection with the change-in-control
would be subject to the excise tax imposed under Section 4999 of the Internal
Revenue Code as a result of the aggregate compensation payments and benefits
made to the individual, under the Program or otherwise, in connection with a
change-in-control, the Company is obligated to make whole the individual with
respect to such excise tax.
CERTAIN BUSINESS RELATIONSHIPS
During the past calendar year, the Company, in the normal course of
business, utilized the services of the law firm of Baker & Daniels, in which
Mr. Bayh is a partner. The Company plans to continue using the services of the
firm in 1998.
ITEM 2. PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION
TO INCREASE THE NUMBER OF SHARES OF AUTHORIZED COMMON STOCK
The Board of Directors recommends an amendment to the Articles of
Incorporation to increase the authorized common stock of the Company from the
presently authorized number of 1,600,000,000 shares to 3,200,000,000 shares.
The language in Article 4 of the existing Articles of Incorporation would be
amended as follows (new language underscored):
"The total number of shares which the Corporation shall have authority to
issue is 1,605,000,000 3,205,000,000 shares, consisting of 1,600,000,000
3,200,000,000 shares of Common Stock and 5,000,000 shares of Preferred
Stock. The Corporation's shares do not have any par or stated value, except
that, solely for the purpose of any statute or regulation imposing any tax
or fee based upon the capitalization of the Corporation, each of the
Corporation's shares shall be deemed to have a par value of $0.01 per
share."
In September 1997, the Company authorized a two-for-one stock split to be
effected in the form of a 100% stock dividend. The stock dividend was paid on
October 15, 1997. This reduced significantly the number of
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authorized but unissued shares of common stock available to the Company for
future use. As of February 13, 1998, there were 1,111,258,506 shares of common
stock issued and outstanding.
The proposed increase in the number of shares of authorized common stock
will ensure that shares can be issued if needed, in connection with stock
splits, stock dividends, acquisitions and other corporate purposes. The Board
of Directors believes that it is beneficial to the Company to have the
additional shares available for such purposes without delay or the necessity
of a special shareholders' meeting. The Company has no immediate plans,
arrangements, commitments or understandings with respect to the issuance of
any of the additional shares of common stock which would be authorized by the
proposed amendment.
No further action by the Company's shareholders would be necessary to issue
the additional shares of common stock unless required by applicable law or
regulatory agencies or by the rules of any stock exchange on which the
Company's securities may then be listed.
The holders of any of the additional shares of common stock issued in the
future would have the same rights and privileges as the holders of the shares
of common stock currently authorized and outstanding. Those rights do not
include preemptive rights with respect to the future issuance of any
additional shares.
As stated above, the Company has no immediate plans, arrangements,
commitments or understandings with respect to the issuance of any additional
shares of common stock which would be authorized by the proposed amendment.
However, the increased authorized shares could be used to make a takeover
attempt more difficult such as by using the shares to make a counter-offer for
the shares of the bidder or by selling shares to dilute the voting power of
the bidder. As of this date, the Board is unaware of any effort to accumulate
the Company's shares or to obtain control of the Company by means of a merger,
tender offer, solicitation in opposition to management or otherwise.
The current Articles contain other provisions that may be viewed as having
possible anti-takeover effects. Under these provisions the Company's Board of
Directors is divided into three classes, with approximately one-third of the
members of the Board nominated for election each year. Thus, two Annual
Meetings are necessary for a majority shareholder to replace a majority of
incumbent directors. In addition, directors may be removed only for cause and
only upon the affirmative vote of the holders of 80% of the outstanding voting
power of the Company. The current Articles further provide that, in certain
situations, the affirmative vote of the holders of 80% of the Company's
outstanding voting power is required to approve certain business transactions
(such as mergers or sales of assets) involving another entity that
beneficially owns 5% or more of the voting power of the Company. The current
Articles also provide that the Board, when evaluating such transactions,
shall, in connection with the exercise of its judgment in determining what is
in the best interest of the Company and its shareholders, give due
consideration to all relevant factors including the social and economic
effects on employees, customers, suppliers, and other constituents of the
Company and on the communities in which the Company operates or is located.
On July 18, 1988, the Company adopted a ten-year Shareholder Rights Plan.
Under the terms of the Plan, all shareholders of common stock received, for
each share owned, a preferred stock purchase right entitling them to purchase
from the Company one eight-hundredth of a share of Series A Participating
Preferred Stock at an exercise price of $40.625. The rights are not
exercisable until after the date on which the Company's right to redeem has
expired. The Company may redeem the right for $.00125 per right up to and
including the tenth business date after the date of a public announcement that
a person (the "Acquiring Person") has acquired ownership of stock having 20%
or more of the Company's general voting power (the "Stock Acquisition Date").
The Plan provides that if the Company is acquired in a business combination
transaction at any time after a Stock Acquisition Date, generally each holder
of a right will be entitled to purchase at the exercise price a number of the
acquiring company's shares having a market value of twice the exercise price.
The Plan also provides that in the event of certain other business
combinations, certain self-dealing transactions, or the acquisition by a
person of stock having 25% or more of the Company's general voting power,
generally each holder of a right will be entitled to purchase at the exercise
price a number of shares of the Company's common stock having a market
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value of twice the exercise price. Any rights beneficially owned by an
Acquiring Person shall not be entitled to the benefit of the adjustment with
respect to the number of shares described above.
The Company is not proposing any increase in the number of shares of
authorized preferred stock of which 5,000,000 shares are authorized but have
not been issued. A total of 1,400,000 shares of the preferred stock have been
designated as Series A Participating Preferred Stock and reserved for issuance
pursuant to the Shareholder Rights Plan discussed above. The Board (subject to
applicable law or rules of regulatory agencies and requirements of stock
exchanges) has the power to issue the existing preferred stock without further
shareholder approval, with such rights as the Board deems advisable, including
conversion rights, redemption rights, voting rights and liquidation rights.
The preferred stock could be issued to deter a takeover by establishing the
terms of the preferred stock so as to make the takeover substantially more
expensive. The preferred stock could also be issued with voting rights
intended to make acquisition of the Company more difficult.
THE BOARD RECOMMENDS A VOTE FOR AMENDING THE ARTICLES OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK.
ITEM 3. PROPOSAL TO APPROVE THE 1998 LILLY STOCK PLAN
Stock plans that allow employees to increase ownership of Company stock have
been an integral part of the Company's compensation programs for nearly 50
years. The Board believes that the shareholders have benefited from these
plans over the years as the plans enable the Company to attract and retain
employees who enhance the value of the Company and align the interests of
employees with those of shareholders through increased employee ownership of
the Company. Therefore, the Board of Directors has adopted, subject to
shareholder approval, the 1998 Lilly Stock Plan ("1998 Plan"). The Board
adopted the 1998 Plan at this time because approximately 1,300,000 shares of
the Company's common stock remain available for future grants under the stock
plan currently in effect, the 1994 Lilly Stock Plan ("1994 Plan"). The 1998
Plan, which is very similar to the 1994 Plan it will replace, will become
effective upon approval by the shareholders. Immediately after such approval,
the Board will terminate the 1994 Plan.
Under the 1998 Plan grants may be made to officers and any employees of the
Company selected by the Compensation and Management Development Committee of
the Board (the "Committee"), the Committee that will administer the Plan.
Currently approximately 31,200 employees, including 19 executive officers and
employee directors, are eligible to participate. The number of eligible
employees and grantees will vary from year to year.
The Committee that administers the 1998 Plan is composed entirely of non-
employee directors. The Committee is authorized to grant up to 55,000,000
shares of the Company's common stock ("Lilly Stock"), which represents less
than 5% of the Company's outstanding shares, in the form of stock options,
performance awards, and restricted stock. The number of shares available for
grant may be adjusted in the event of a stock split, stock dividend, spin-off
or other relevant change affecting Lilly Stock. The 1998 Plan, like the 1994
Plan, does not permit the grant of stock appreciation rights. The 1998 Plan
also maximizes the deductibility of certain grants under section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"). The 1998 Plan will
expire on the fifth anniversary of its effective date unless terminated
earlier by the Board.
The principal features of the Plan are summarized below. The Summary is
qualified in its entirety by reference to the full text of the 1998 Plan,
which is attached to this Proxy Statement as Exhibit A.
SHARES SUBJECT TO PLAN
Subject to adjustment as described below, a maximum of 55,000,000 shares of
Lilly Stock may be issued or transferred for grants under the 1998 Plan. The
shares may be unissued shares or treasury shares. In the event of a stock
split, stock dividend, spin-off or other relevant change affecting Lilly
Stock, the Committee may adjust
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the number of shares available for grants and the number of shares and price
under outstanding grants made before the event.
GRANTS UNDER THE 1998 PLAN
Stock Options. The Committee may grant nonqualified options, Incentive Stock
Options ("ISOs") and other forms of tax-favored stock options under the Code.
The Committee shall establish the option price, which may not be less than
100% of the fair market value of the stock on the date of grant. Options may
not be repriced. The term of the option and the period during which it may be
exercised are also established by the Committee, provided that the term may
not exceed 10 years. The option price may be satisfied in cash or, if
permitted by the Committee, by delivering to the Company previously-acquired
Lilly Stock having a fair market value equal to the option price. No grantee
may receive options for more than 1,500,000 shares under the 1998 Plan in any
period of any three consecutive calendar years.
Performance Awards. The Committee may grant performance awards under which
payment would be made in shares of Lilly Stock, cash, or both if the financial
performance of the Company or a subsidiary, division, or other unit of the
Company ("Business Unit") selected by the Committee meets certain financial
goals during an award period. A maximum of 18,000,000 shares may be issued
under the 1998 Plan in the form of performance awards. The financial goals are
established by the Committee at the beginning of the award period and are
limited to earnings per share; net income; divisional income; EVA; Market
Value Added ("MVA") or any of the foregoing before the effect of acquisitions,
divestitures, accounting changes, and restructuring and special charges. The
financial goals may also include total shareholder return or Lilly Stock price
goals. For a description of the concept of EVA, please refer to the discussion
under the caption "Item 4. Proposal to Approve Amended EVA Bonus Plan" in this
Proxy Statement. MVA is the difference between a company's fair market value,
as reflected primarily in its stock price, and the economic book value of
capital employed. The Committee also establishes the award period (four or
more consecutive fiscal quarters), the maximum payment value of an award and
the minimum financial performance required before a payment is made. Awards
may be denominated either in shares of Lilly Stock ("Stock Performance
Awards") or in dollar amounts ("Dollar Performance Awards"). The maximum
number of shares that may be received by an individual in payment of Stock
Performance Awards in any calendar year is 100,000. As to Dollar Performance
Awards, the maximum payment to an individual in any calendar year is
$4,000,000. The Committee can elect to pay cash in lieu of part or all of the
shares of Lilly Stock payable under an award, and such cash payment shall be
deemed a payment of shares (based on the market value of Lilly Stock on the
payment date) for purposes of determining compliance with the maximum payment
limitation for Stock Performance Awards. In order to receive payment, a
grantee must remain employed by the Company to the end of the award period,
except that the Committee may make complete or partial exceptions to that
rule. The Committee may impose additional conditions on a grantee's
entitlement to receive payment under a performance award.
At any time prior to payment, the Committee can adjust awards for the effect
of unforeseen events that have a substantial effect on the performance goals
and would otherwise make application of the performance goals unfair. However,
no adjustment may be made that would cause payment of the award to fail to be
fully deductible by the Company under section 162(m) of the Code.
Restricted Stock Grants. The Committee may also issue or transfer shares
under a restricted stock grant. A maximum of 2,000,000 shares may be issued
under the 1998 Plan in the form of restricted stock grants. The grant will set
forth a restriction period during which the grantee must remain employed by
the Company. The stock certificate will be held by the Company in escrow until
the restriction period lapses. If the grantee's employment terminates during
the period, the grant terminates and the shares are returned to the Company.
However, the Committee can provide complete or partial exceptions to that
requirement as it deems equitable. During the restriction period, the grantee
is entitled to vote the shares and receive dividends but cannot dispose of the
shares. Upon lapse of the restrictions, the stock certificate is delivered to
the grantee.
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U.S. FEDERAL INCOME TAX CONSEQUENCES OF STOCK OPTIONS
The grant of a stock option will not result in taxable income at the time of
grant for the grantee or the Company. The grantee will have no taxable income
upon exercising an ISO (except that the alternative minimum tax may apply),
and the Company will receive no deduction when an ISO is exercised. Upon
exercising a nonqualified stock option, the grantee will recognize ordinary
income in the amount by which the fair market value exceeds the option price;
the Company will be entitled to a deduction for the same amount. The treatment
to a grantee of a disposition of shares acquired through the exercise of an
option depends on how long the shares are held and on whether the shares were
acquired by exercising an ISO or a nonqualified stock option. Generally, there
will be no tax consequence to the Company when shares acquired under an option
are disposed of except that the Company may be entitled to a deduction if
shares acquired upon exercise of an ISO are disposed of before the applicable
ISO holding periods have been satisfied.
AUTHORITY OF COMMITTEE
The 1998 Plan will be administered and interpreted by the Committee, each
member of which must be a "non-employee" director within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934 and an "outside director"
within the meaning of section 162(m) of the Code. The Committee will select
persons to receive grants from among the eligible employees, determine the
type of grants and number of shares to be awarded to grantees, and set the
terms and conditions of the grants. The Committee may establish rules for
administration of the 1998 Plan.
OTHER INFORMATION
The Board may amend the 1998 Plan as it deems advisable, except that
shareholder approval is required for any amendment that would (i) allow the
repricing of stock options, (ii) allow the grant of stock options at an option
price below fair market value of Lilly Stock on the date of grant, (iii)
increase the number of shares authorized for issuance or transfer, or (iv)
increase any of the various maximum limits established for stock options,
performance awards, and restricted stock. The Committee may amend outstanding
grants consistent with the 1998 Plan if the amendment does not impair the
grantee's rights or upon the agreement of the grantee.
In the event of a Change-in-Control (as defined in Article 9 of the 1998
Plan), in order to preserve all of the Grantee's rights the following shall
occur, unless the Committee expressly provides otherwise in the grant
agreement: (i) any outstanding stock option not already exercisable shall
become immediately exercisable; (ii) any restriction periods on restricted
stock grants shall immediately lapse; and (iii) outstanding performance awards
will be vested and paid out on a prorated basis, based on the maximum award
opportunity and the number of months elapsed compared to the total number of
months in the award period.
The Committee has made no determinations as to any grants or awards under
the 1998 Plan. During 1997, performance awards were granted under the 1994
Plan to the Named Executive Officers as set forth in the table on page 13
entitled "Long-Term Incentive Plan Awards in Last Fiscal Year." In 1997, the
Committee granted the following performance awards under the 1994 Plan to the
following groups:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------
GROUP MINIMUM TARGET MAXIMUM
- ----- ------- ------- ---------
<S> <C> <C> <C>
Executive Officers (19 persons)....................... 0 111,350 222,700
Non-Executive Officer Employees....................... 0 875,775 1,751,550
</TABLE>
During 1997, stock options were granted under the 1994 Plan to the Named
Executive Officers as set forth in the table on page 12 entitled "Option
Shares Granted in Last Fiscal Year." Also during 1997, the Committee granted
stock options under the 1994 Plan for 311,000 shares to all executive officers
as a group at an exercise price of $64.06 per share and 5,154,040 shares to
non-executive officer employees as a group at an exercise price of $64.06 per
share. In 1997, the Committee granted a total of 22,000 shares of restricted
stock under the 1994 Plan to four employees, none of whom were executive
officers.
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The closing price of Lilly Stock on the New York Stock Exchange on February
13, 1998, was $63.6875 per share.
THE BOARD RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE 1998 LILLY STOCK
PLAN.
ITEM 4. PROPOSAL TO APPROVE AMENDED EVA BONUS PLAN
In 1995 the Board of Directors adopted a bonus plan, the Eli Lilly and
Company EVA Bonus Plan ("EVA Plan"), that provides incentive compensation to
selected employees based on a measure of "Economic Value Added" or "EVA" of
the Company. The purpose of the EVA Plan is to motivate performance through
bonus payments that will promote the maximization of shareholder value over
the long term by linking performance incentives to increases in shareholder
value. The EVA Plan ties bonus compensation to EVA as described below, and
thereby rewards employees for long-term, sustained improvement in shareholder
value.
The Board of Directors has amended the EVA Plan and is now submitting it to
shareholders for approval. The amended EVA Plan is substantially similar to
the current plan, but has been amended to maximize the tax deductibility of
payments made under the Plan under the Code. If approved by the shareholders,
the EVA Plan will replace the current plan, effective January 1, 1999. If the
EVA Plan is not approved by shareholders, the current plan will remain in
effect. Over 2,000 employees now participate in the EVA Plan.
Shareholder approval of the EVA Plan will allow payments made under the Plan
to be fully tax deductible as "performance-based" compensation under section
162(m) of the Code. As discussed on page 16 in the section entitled
"Deductibility Cap on Executive Compensation," section 162(m) disallows the
corporate tax deduction for certain compensation in excess of $1 million per
year paid to any Named Executive Officer. However, certain compensation,
including compensation based on the attainment of performance goals, is
excluded from this deduction limit if the material terms of the plan are
approved by the Company's shareholders.
PURPOSE OF THE EVA PLAN
The purpose of the EVA Plan is to motivate performance by linking bonuses to
improvements in the Company's EVA. EVA reflects the benefits and costs of
capital employment for the Company. Employees create economic value when the
operating profits from a business exceed the cost of the capital employed. A
feature of the EVA Plan is that the bonus is at risk of non-payment if certain
performance goals are not met. In fact, not only is there the possibility that
no bonus will be earned, but a portion of future bonus payments may be reduced
if specified performance goals are not met.
The principal features of the EVA Plan are summarized below. The EVA Plan
summary is qualified in its entirety by reference to the full text of the EVA
Plan, which is attached to this Proxy Statement as Exhibit B.
PRINCIPAL FEATURES OF THE EVA PLAN
The EVA Plan determines incentive compensation payments based upon the
actual performance of the Company in achieving improvement in EVA relative to
the established EVA targets. Improvement in EVA occurs when the ratio of net
after-tax operating profit to capital employed in the business increases over
time. EVA establishes a direct link between incentive compensation and return
earned on capital relative to a specified target return. EVA is defined under
the EVA Plan as the after-tax operating earnings of the Company for a plan
year in excess of the "capital charge." The "capital charge" is defined as the
net investment employed by the Company in operations and financing activities,
multiplied by the percentage calculated from the weighted average of the
Company's "cost of debt" and the "cost of equity" (each as defined in the EVA
Plan). Prior to the beginning of the plan year, the Committee may specify that
EVA will be determined before the effects of acquisitions, divestitures,
restructuring or changes in corporate capitalization, accounting changes,
and/or events that are treated as extraordinary items for accounting purposes.
23
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The EVA Plan is administered by the Compensation and Management Development
Committee of the Board. All employees of the Company and its subsidiaries are
eligible to participate in the EVA Plan, and the Committee will select from
among the eligible employees those who may participate for a particular plan
year. The Committee will make target bonus awards to each participant in the
EVA Plan for a plan year, determined by the Committee according to a schedule
that associates job responsibilities with a target bonus amount expressed as a
percentage of the participant's annual base salary in effect at the beginning
of the plan year. Prior to the beginning of each year, the Committee will
approve a target level of EVA performance for all participants for the plan
year. The target EVA for any plan year will be determined by adding (i) the
average of the prior year's actual EVA and the prior plan year's target EVA,
and (ii) an additional EVA amount determined by the Committee to insure a
minimum level of improvement in EVA. The actual bonus earned by a participant
under the EVA Plan is determined by adjusting the participant's target bonus
for the year upwards or downwards depending upon whether the actual EVA
surpasses or falls short of the target EVA. However, if actual EVA for any
plan year falls below a minimum acceptable level established by the Committee
at the beginning of the plan year, no bonuses will be earned by participants
for that plan year and the balance in the participant's bonus bank (as
described below) will be reduced.
After a bonus award for a participant has been determined under the EVA Plan
for a plan year, it will be credited to the participant's "bonus bank." The
amount of the bonus bank is increased or decreased for any plan year by the
amount of bonus determined for such year. The participant will be paid from
his bonus bank for such year up to the target bonus amount, plus one-third of
any remaining bank balance for such year and prior plan years. If the
available bonus bank balance is negative, no payment will occur. The maximum
amount of the bonus that may be paid to a participant subject to section
162(m) of the Code during any one calendar year is $5 million. Special rules
apply for the proration or forfeiture of bonuses and amounts payable from the
bonus bank upon termination of a participant's employment under various
circumstances (such as retirement, death, disability or misconduct). There are
also special rules relating to leaves of absence and demotions.
The EVA Plan may be amended at any time by the Board or the Committee, which
may seek shareholder approval of any such amendment to the extent deemed
necessary or advisable for purposes of complying with section 162(m) of the
Code or for any other reason. The EVA Plan, if approved, will remain in effect
until December 31, 2003.
It is not possible at this time to determine the bonuses that may become
payable under the EVA Plan for 1999, the first year of the amended plan's
operation. The EVA awards paid under the current EVA Plan for 1997 to the
Company's Named Executive Officers are as set forth on the Summary
Compensation Table on page 11. The aggregate EVA awards paid to all executive
officers as a group was $6,141,714 and approximately $57,188,811 for all non-
executive officer employees as a group.
THE BOARD RECOMMENDS THAT YOU VOTE FOR APPROVING THE AMENDED EVA BONUS PLAN.
ITEM 5. PROPOSAL TO RATIFY THE APPOINTMENT BY THE BOARD OF DIRECTORS
OF PRINCIPAL INDEPENDENT AUDITORS
The Board of Directors, on the recommendation of the Audit Committee, has
appointed the firm of Ernst & Young LLP as principal independent auditors for
the Company for the year 1998. In accordance with the By-laws of the Company,
this appointment will be submitted to the shareholders for ratification. Ernst
& Young served as the principal independent auditors for the Company in 1997.
Representatives of Ernst & Young are expected to be present at the Annual
Meeting and will be available to respond to appropriate questions. Those
representatives will have the opportunity to make a statement if they desire
to do so.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFYING THE
APPOINTMENT OF ERNST & YOUNG LLP AS PRINCIPAL INDEPENDENT AUDITORS FOR THE
YEAR 1998.
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OTHER MATTERS
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Securities and Exchange Commission rules relating to reporting of
changes of beneficial ownership of Company common stock, reports during the
last fiscal year relating to the following transactions of executive officers
of the Company were not timely filed due to inadvertence: One report for Ms.
Goss pertaining to gifts of stock; one report for Mr. Michael E. Hanson, a
retired executive, pertaining to a stock option exercise; two reports for Mr.
Tobias relating to sales of stock by a family trust for the benefit of his
children; and two reports for Dr. Watanabe pertaining to gifts of stock and a
stock option exercise, respectively. Upon discovery, all these oversights were
promptly corrected.
OTHER
The Company will pay all expenses in connection with solicitation of
proxies. The Company will pay brokers, nominees, fiduciaries or other
custodians their reasonable expenses for sending proxy material to, and
obtaining instructions from, persons for whom they hold stock of the Company.
The Company expects to solicit proxies primarily by mail, but directors,
officers and other employees of the Company may also solicit in person, by
telephone, by telefax or by mail. The Company may retain D.F. King & Co.,
Inc., to assist in the distribution and solicitation of proxies. If retained,
the firm may solicit proxies by personal interview, telephone, telefax and
mail. It is anticipated that the fee for those services will not exceed
$18,000 plus reimbursement of customary out-of-pocket expenses.
As of the date of this Proxy Statement, the management of the Company does
not know of any matters to be presented for consideration at the meeting other
than those described in this Proxy Statement. If any other matters properly
come before the meeting, the accompanying proxy confers discretionary
authority with respect to those matters, and the persons named in the
accompanying form of proxy intend to vote that proxy to the extent entitled in
accordance with their best judgment.
By order of the Board of Directors,
Daniel P. Carmichael
Secretary
March 4, 1998
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EXHIBIT A
1998
LILLY STOCK PLAN
The 1998 Lilly Stock Plan ("1998 Plan") authorizes the Compensation and
Management Development Committee ("Committee") to provide officers and other
employees of Eli Lilly and Company and its subsidiaries with certain rights to
acquire shares of Eli Lilly and Company common stock ("Lilly Stock"). The
Company believes that this incentive program will benefit the Company's
shareholders by allowing the Company to attract, motivate, and retain
employees and by providing those employees stock-based incentives to
contribute materially to the growth and success of the Company. For purposes
of the 1998 Plan, the term "Company" shall mean Eli Lilly and Company and its
subsidiaries, unless the context requires otherwise.
1. ADMINISTRATION.
The 1998 Plan shall be administered and interpreted by the Committee
consisting of not less than two persons appointed by the Board of Directors of
the Company from among its members. A person may serve on the Committee only
if he or she (i) is a "Non-employee Director" for purposes of Rule 16b-3 under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), and (ii)
satisfies the requirements of an "outside director" for purposes of Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Committee shall determine the fair market value of Lilly Stock for purposes of
the 1998 Plan. The Committee may, subject to the provisions of the 1998 Plan,
from time to time establish such rules and regulations and delegate such
authority to administer the 1998 Plan as it deems appropriate for the proper
administration of the Plan, except that no such delegation shall be made in
the case of awards intended to be qualified under Section 162(m) of the Code.
The decisions of the Committee or its authorized delegatees shall be final,
conclusive, and binding with respect to the interpretation and administration
of the 1998 Plan and any Grant made under it.
2. GRANTS.
Incentives under the 1998 Plan shall consist of incentive stock options or
other forms of tax-qualified stock options under the Code, nonqualified stock
options, performance awards, and restricted stock grants (collectively,
"Grants"). All Grants shall be subject to the terms and conditions set out
herein and to such other terms and conditions consistent with the 1998 Plan as
the Committee deems appropriate. The Committee shall approve the form and
provisions of each Grant. Grants under a particular section of the 1998 Plan
need not be uniform and Grants under two or more sections may be combined in
one instrument.
3. ELIGIBILITY FOR GRANTS.
Grants may be made to any employee of the Company, including a person who is
also a member of the Board of Directors ("Eligible Employee"). The Committee
shall select the persons to receive Grants ("Grantees") from among the
Eligible Employees and determine the number of shares subject to any
particular Grant.
4. SHARES AVAILABLE FOR GRANT.
(a) Shares Subject to Issuance or Transfer. Subject to adjustment as
provided in Section 4(b), the aggregate number of shares of Lilly Stock that
may be issued or transferred under the 1998 Plan is 55,000,000. The shares may
be authorized but unissued shares or treasury shares. The number of shares
available for Grants at any given time shall be 55,000,000, reduced by the
aggregate of all shares previously issued or transferred and of shares which
may become subject to issuance or transfer under then-outstanding Grants.
(b) Adjustment Provisions. If any subdivision or combination of shares of
Lilly Stock or any stock dividend, reorganization, recapitalization, or
consolidation or merger with Eli Lilly and Company as the
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surviving corporation occurs, or if additional shares or new or different
shares or other securities of the Company or any other issuer are distributed
with respect to the shares of Lilly Stock through a spin-off or other
extraordinary distribution, the Committee shall make such adjustments as it
determines appropriate in the number of shares of Lilly Stock that may be
issued or transferred in the future under Sections 4(a), 5(f), 6(f), and 7(e).
The Committee shall also adjust as it determines appropriate the number of
shares and Option Price in outstanding Grants made before the event.
5. STOCK OPTIONS.
The Committee may grant options qualifying as incentive stock options under
the Code ("Incentive Stock Options"), other forms of tax-favored stock options
under the Code, and nonqualified stock options (collectively, "Stock
Options"). The following provisions are applicable to Stock Options:
(a) Option Price. The Committee shall determine the price or prices at which
Lilly Stock may be purchased by the Grantee under a Stock Option ("Option
Price") which shall be not less than the fair market value of Lilly Stock on
the date the Stock Option is granted (the "Grant Date"). In the Committee's
discretion, the Grant Date of a Stock Option may be established as the date on
which Committee action approving the Stock Option is taken or any later date
specified by the Committee. Once established, the Option Price may not be
reduced except in the case of adjustments under Section 4(b).
(b) Option Exercise Period. The Committee shall determine the option
exercise period of each Stock Option. The period shall not exceed ten years
from the Grant Date.
(c) Exercise of Option. A Stock Option will be deemed exercised by a Grantee
upon delivery of (i) a notice of exercise to the Company or its representative
as designated by the Committee, and (ii) accompanying payment of the Option
Price if the Stock Option requires such payment at the time of exercise. The
notice of exercise, once delivered, shall be irrevocable.
(d) Satisfaction of Option Price. A Stock Option may require payment of the
Option Price upon exercise or may specify a period not to exceed 30 days
following exercise within which payment must be made ("Payment Period"). The
Grantee shall pay or cause to be paid the Option Price in cash, or with the
Committee's permission, by delivering (or providing adequate evidence of
ownership of) shares of Lilly Stock already owned by the Grantee and having a
fair market value on the date of exercise equal to the Option Price, or a
combination of cash and such shares. If the Grantee fails to pay the Option
Price within the Payment Period, the Committee shall have the right to take
whatever action it deems appropriate, including voiding the option exercise or
voiding that part of the Stock Option for which payment was not timely
received. The Company shall not deliver shares of Lilly Stock upon exercise of
a Stock Option until the Option Price and any required withholding tax are
fully paid.
(e) Share Withholding. With respect to any nonqualified option, the
Committee may, in its discretion and subject to such rules as the Committee
may adopt, permit or require the Grantee to satisfy, in whole or in part, any
withholding tax obligation which may arise in connection with the exercise of
the nonqualified option by having the Company withhold shares of Lilly Stock
having a fair market value equal to the amount of the withholding tax.
(f) Limits on Individual Grants. No individual Grantee may be granted Stock
Options under the 1998 Plan for more than 1,500,000 shares of Lilly Stock in
any period of three consecutive calendar years.
(g) Limits on Incentive Stock Options. The aggregate fair market value of
the stock covered by Incentive Stock Options granted under the 1998 Plan or
any other stock option plan of the Company or any subsidiary or parent of the
Company that become exercisable for the first time by any employee in any
calendar year shall not exceed $100,000. The aggregate fair market value will
be determined at the Grant Date. An Incentive Stock Option shall not be
granted to any Eligible Employee who, on the Grant Date, owns stock possessing
more than
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10% of the total combined voting power of all classes of stock of the Company
or any subsidiary or parent of the Company.
6. PERFORMANCE AWARDS.
The Committee may grant Performance Awards which shall be denominated at the
time of grant either in shares of Lilly Stock ("Stock Performance Awards") or
in dollar amounts ("Dollar Performance Awards"). Payment under a Stock
Performance Award or a Dollar Performance Award shall be made, at the
discretion of the Committee, in shares of Lilly Stock ("Performance Shares"),
or in cash or in any combination thereof, if the financial performance of the
Company or any subsidiary, division, or other unit of the Company ("Business
Unit") selected by the Committee meets certain financial goals established by
the Committee for the Award Period. The following provisions are applicable to
Performance Awards:
(a) Award Period. The Committee shall determine and include in the Grant the
period of time (which shall be four or more consecutive fiscal quarters) for
which a Performance Award is made ("Award Period"). Grants of Performance
Awards need not be uniform with respect to the length of the Award Period.
Award Periods for different Grants may overlap. A Performance Award may not be
granted for a given Award Period after one half ( 1/2) or more of such period
has elapsed, or in the case of an Award intended to be qualified under Section
162(m) of the Code, after 90 days or more of such period has elapsed.
(b) Performance Goals and Payment. Before a Grant is made, the Committee
shall establish objectives ("Performance Goals") that must be met by the
Business Unit during the Award Period as a condition to payment being made
under the Performance Award. The Performance Goals, which must be set out in
the Grant, are limited to earnings per share; divisional income; net income;
return on equity; economic value added (EVA); market value added (MVA); any of
the foregoing before the effect of acquisitions, divestitures, accounting
changes, and restructuring and special charges (determined according to
criteria established by the Committee at or within 90 days after the time of
grant); total shareholder return; or stock price goals. The Committee shall
also set forth in the Grant the number of Performance Shares or the amount of
payment to be made under a Performance Award if the Performance Goals are met
or exceeded, including the fixing of a maximum payment (subject to Section
6(f)).
(c) Computation of Payment. After an Award Period, the financial performance
of the Business Unit during the period shall be measured against the
Performance Goals. If the minimum Performance Goals are not met, no payment
shall be made under a Performance Award. If the minimum Performance Goals are
met or exceeded, prior to payment the Committee shall certify that fact in
writing and certify the number of Performance Shares or the amount of payment
to be made under a Performance Award in accordance with the grant for each
Grantee. The Committee, in its sole discretion, may elect to pay part or all
of the Performance Award in cash in lieu of issuing or transferring
Performance Shares. The cash payment shall be based on the fair market value
of Lilly Stock on the date of payment (subject to Section 6(f)). The Company
shall promptly notify each Grantee of the number of Performance Shares and the
amount of cash, if any, he or she is to receive.
(d) Revisions for Significant Events. At any time before payment is made,
the Committee may revise the Performance Goals and the computation of payment
if unusual events occur during an Award Period which have a substantial effect
on the Performance Goals and which in the judgment of the Committee make the
application of the Performance Goals unfair unless a revision is made;
provided, however, that no such revision shall be permissible with respect to
a Performance Award intended to qualify for exemption under under Section 162
(m) of the Code, except that the Committee (i) may provide in the terms of any
such Performance Award that revisions to the Performance Goals shall be made
on a non-discretionary basis upon the occurrence of one or more specific
objective events, the occurrence of which are substantially uncertain at the
time of grant, and (ii) may in its discretion make a revision with respect to
such Performance Award that results in a lesser payment than would have
occurred without the revision or in no payment at all.
(e) Requirement of Employment. To be entitled to receive payment under a
Performance Award, a Grantee must remain in the employment of the Company to
the end of the Award Period, except that the Committee may
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provide for partial or complete exceptions to this requirement as it deems
equitable in its sole discretion, consistent with maintaining the exemption
under Section 162(m) of the Code. The Committee may impose additional
conditions on the Grantee's entitlement to receive payment under a Performance
Award.
(f) Maximum Payments. (i) No individual may receive Performance Award
payments in respect of Stock Performance Awards in excess of 100,000 shares of
Lilly Stock in any calendar year or payments in respect of Dollar Performance
Awards in excess of $4,000,000 in any calendar year. For purposes of
determining the maximum payment under this subsection, payment in cash of all
or part of a Stock Performance Award will be deemed an issuance of the number
of shares with respect to which such cash payment is made. No individual may
receive both a Stock Performance Award and a Dollar Performance Award for the
same Award Period.
(ii) Not more than 18,000,000 shares of Lilly Stock may be issued or
transferred under the 1998 Plan in the form of Performance Awards.
7. RESTRICTED STOCK GRANTS.
The Committee may issue or transfer shares of Lilly Stock to a Grantee under
a Restricted Stock Grant. Upon the issuance or transfer, the Grantee shall be
entitled to vote the shares and to receive any dividends paid. The following
provisions are applicable to Restricted Stock Grants:
(a) Requirement of Employment. If the Grantee's employment terminates during
the period designated in the Grant as the "Restriction Period," the Restricted
Stock Grant terminates. However, the Committee may provide for partial or
complete exceptions to this requirement as it deems equitable.
(b) Restrictions on Transfer. During the Restriction Period, a Grantee may
not sell, assign, transfer, pledge, or otherwise dispose of the shares of
Lilly Stock except to a Successor Grantee under Section 10(a). Each
certificate for shares issued or transferred under a Restricted Stock Grant
shall be held in escrow by the Company until the expiration of the Restriction
Period.
(c) Withholding Tax. Before delivering the certificate for shares of Lilly
Stock to the Grantee, Lilly may require the Grantee to pay to the Company any
required withholding tax. The Committee may, in its discretion and subject to
such rules as the Committee may adopt, permit or require the Grantee to
satisfy, in whole or in part, any withholding tax requirement by having the
Company withhold shares of Lilly Stock from the Grant having a fair market
value equal to the amount of the withholding tax. In the event the Grantee
fails to pay the withholding tax within the time period specified in the
Grant, the Committee may take whatever action it deems appropriate, including
withholding or selling sufficient shares from the Grant to pay the tax and
assessing interest or late fees to the Grantee.
(d) Lapse of Restrictions. All restrictions imposed under the Restricted
Stock Grant shall lapse (i) upon the expiration of the Restriction Period if
all conditions stated in Sections 7(a), (b) and (c) have been met or (ii) as
provided under Section 9(a)(ii). The Grantee shall then be entitled to
delivery of the certificate.
(e) Total Number of Shares Granted. Not more than 2,000,000 shares of Lilly
Stock may be issued or transferred under the 1998 Plan in the form of
Restricted Stock Grants.
8. AMENDMENT AND TERMINATION OF THE 1998 PLAN.
(a) Amendment. The Company's Board of Directors may amend or terminate the
1998 Plan, but no amendment shall (i) allow the repricing of Stock Options;
(ii) allow the grant of Stock Options at an Option Price below the fair market
value of Lilly Stock on the Grant Date; (iii) increase the number of shares
authorized for issuance or transfer pursuant to Sections 4(a), 6(f)(ii), or
7(e); or (iv) increase the maximum limitations on Grants imposed under
Sections 5(f) or 6(f)(i), unless in any case such amendment receives approval
of the shareholders of the Company.
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(b) Termination of 1998 Plan. The 1998 Plan shall terminate on the fifth
anniversary of its effective date unless terminated earlier by the Board.
(c) Termination and Amendment of Outstanding Grants. A termination or
amendment of the 1998 Plan that occurs after a Grant is made shall not result
in the termination or amendment of the Grant unless the Grantee consents or
unless the Committee acts under Section 10(e). The termination of the 1998
Plan shall not impair the power and authority of the Committee or its
delegatees with respect to outstanding Grants. Whether or not the 1998 Plan
has terminated, an outstanding Grant may be terminated or amended under
Section 10(e) or may be amended (i) by agreement of the Company and the
Grantee consistent with the 1998 Plan or (ii) by action of the Committee
provided that the amendment is consistent with the 1998 Plan and is found by
the Committee not to impair the rights of the Grantee under the Grant.
9. CHANGE IN CONTROL.
(a) Effect on Grants. Unless the Committee shall otherwise expressly provide
in the agreement relating to a Grant, upon the occurrence of a Change in
Control (as defined below):
(i) In the case of Stock Options, each outstanding Stock Option that is not
then fully exercisable shall automatically become fully exercisable and shall
remain so for the period permitted in the agreement relating to the Grant;
(ii) The Restriction Period on all outstanding Restricted Stock Grants shall
automatically expire and all restrictions imposed under such Restricted Stock
Grants shall immediately lapse; and
(iii) Each Grantee of a Performance Award for an Award Period that has not
been completed at the time of the Change in Control shall be deemed to have
earned a minimum Performance Award equal to the product of (y) such Grantee's
maximum award opportunity for such Performance Award, and (z) a fraction, the
numerator of which is the number of full and partial months that have elapsed
since the beginning of such Award Period to the date on which the Change in
Control occurs, and the denominator of which is the total number of months in
such Award Period; provided, however, that nothing in this subsection shall
prejudice the right of the Grantee to receive a larger payment under such
Performance Award pursuant to the terms of the Award or under any other plan
of the Company.
(b) Change in Control. For purposes of the 1998 Plan, a Change in Control
shall mean the happening of any of the following events:
(i) The acquisition by any "person," as that term is used in Sections 13(d)
and 14(d) of the 1934 Act (other than (w) the Company, (x) any subsidiary of
the Company, (y) any employee benefit plan or employee stock plan of the
Company or a subsidiary of the Company or any trustee or fiduciary with
respect to any such plan when acting in that capacity, or (z) Lilly Endowment,
Inc.,) of "beneficial ownership," as defined in Rule 13d-3 under the 1934 Act,
directly or indirectly, of 20% or more of the shares of the Company's capital
stock the holders of which have general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors of the
Company (or which would have such voting power but for the application of the
Indiana Control Share Statute) ("Voting Stock");
(ii) the first day on which less than two-thirds of the total membership of
the Board of Directors of the Company shall be Continuing Directors (as that
term is defined in Article 13(f) of the Company's Articles of Incorporation);
(iii) approval by the shareholders of the Company of a merger, share
exchange, or consolidation of the Company (a "Transaction"), other than a
Transaction which would result in the Voting Stock of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the Voting Stock of the Company or such surviving
entity immediately after such Transaction; or
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(iv) approval by the shareholders of the Company of a complete liquidation
of the Company or a sale or disposition of all or substantially all the assets
of the Company.
10. GENERAL PROVISIONS.
(a) Prohibitions Against Transfer. (i) Except as provided in part (ii) of
this subparagraph, only a Grantee or his or her authorized legal
representative may exercise rights under a Grant. Such persons may not
transfer those rights. The rights under a Grant may not be disposed of by
transfer, alienation, pledge, encumbrance, assignment, or any other means,
whether voluntary, involuntary, or by operation of law, and any such attempted
disposition shall be void; provided, however, that when a Grantee dies, the
personal representative or other person entitled under a Grant under the 1998
Plan to succeed to the rights of the Grantee ("Successor Grantee") may
exercise the rights. A Successor Grantee must furnish proof satisfactory to
the Company of his or her right to receive the Grant under the Grantee's will
or under the applicable laws of descent and distribution.
(ii) Notwithstanding the foregoing, the Committee may, in its discretion and
subject to such limitations and conditions as the Committee deems appropriate,
grant non-qualified stock options on terms which permit the Grantee to
transfer all or part of the stock option, for estate or tax planning purposes
or for donative purposes, and without consideration, to a member of the
Grantee's immediate family (as defined by the Committee), a trust for the
exclusive benefit of such immediate family members, or a partnership,
corporation or limited liability company the equity interests of which are
owned exclusively by the Grantee and/or one or more members of his or her
immediate family. No such stock option or any other Grant shall be
transferable incident to divorce. Subsequent transfers of a stock option
transferred under this part (ii) shall be prohibited except for transfers to a
Successor Grantee upon the death of the transferee.
(b) Substitute Grants. The Committee may make a Grant to an employee of
another corporation who becomes an Eligible Employee by reason of a corporate
merger, consolidation, acquisition of stock or property, reorganization or
liquidation involving the Company in substitution for a stock option,
performance award, or restricted stock grant granted by such other corporation
("Substituted Stock Incentive"). The terms and conditions of the substitute
Grant may vary from the terms and conditions that would otherwise be required
by the 1998 Plan and from those of the Substituted Stock Incentives. The
Committee shall prescribe the exact provisions of the substitute Grants,
preserving where practical the provisions of the Substituted Stock Incentives.
The Committee shall also determine the number of shares of Lilly Stock to be
taken into account under Section 4.
(c) Subsidiaries. The term "subsidiary" means a corporation, limited
liability company or similar form of entity of which Eli Lilly and Company
owns directly or indirectly 50% or more of the voting power.
(d) Fractional Shares. Fractional shares shall not be issued or transferred
under a Grant, but the Committee may pay cash in lieu of a fraction or round
the fraction.
(e) Compliance with Law. The 1998 Plan, the exercise of Grants, and the
obligations of the Company to issue or transfer shares of Lilly Stock under
Grants shall be subject to all applicable laws and regulations and to
approvals by any governmental or regulatory agency as may be required. The
Committee may revoke any Grant if it is contrary to law or modify a Grant to
bring it into compliance with any valid and mandatory law or government
regulation. The Committee may also adopt rules regarding the withholding of
taxes on payment to Grantees.
(f) Ownership of Stock. A Grantee or Successor Grantee shall have no rights
as a shareholder of the Company with respect to any shares of Lilly Stock
covered by a Grant until the shares are issued or transferred to the Grantee
or Successor Grantee on the Company's books.
(g) No Right to Employment or to Future Grants. The 1998 Plan and the Grants
under it shall not confer upon any Grantee the right to continue in the
employment of the Company or affect in any way the right of the
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Company to terminate the employment of a Grantee at any time, with or without
notice or cause. The receipt of one or more Grants by a Grantee shall not
confer upon the Grantee any rights to future Grants.
(h) Foreign Jurisdictions. The Committee may adopt, amend, and terminate
such arrangements and make such Grants, not inconsistent with the intent of
the 1998 Plan, as it may deem necessary or desirable to make available tax or
other benefits of the laws of foreign jurisdictions to Grantees who are
subject to such laws. The terms and conditions of such foreign Grants may vary
from the terms and conditions that would otherwise be required by the 1998
Plan.
(i) Governing Law. The 1998 Plan and all Grants made under it shall be
governed by and interpreted in accordance with the laws of the State of
Indiana, regardless of the laws that might otherwise govern under applicable
Indiana conflict-of-laws principles.
(j) Effective Date of the 1998 Plan. The 1998 Plan shall become effective
upon its approval by the Company's shareholders at the annual meeting to be
held on April 20, 1998, or any adjournment of the meeting.
* * *
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EXHIBIT B
ELI LILLY AND COMPANY EVA BONUS PLAN
(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1999)
ARTICLE I
BONUS PLAN STATEMENT OF PURPOSE AND SUMMARY
1.1 The purpose of the Plan is to provide a system of bonus compensation for
selected employees of Eli Lilly and Company and subsidiaries which will
promote the maximization of shareholder value over the long term, by linking
performance incentives to increases in shareholder value. The Plan ties bonus
compensation to Economic Value Added ("EVA"), and thereby rewards employees
for long-term, sustained improvement in shareholder value. The Plan is
intended to satisfy the requirements for providing "performance-based"
compensation under Section 162(m) of the Internal Revenue Code.
1.2 EVA will be used as the performance measure of value creation. EVA
reflects the benefits and costs of capital employment. Employees create
economic value when the operating profits from a business exceed the cost of
the capital employed.
ARTICLE II
DEFINITIONS OF CERTAIN TERMS
Unless the context requires a different meaning, the following terms shall
have the following meanings:
2.1 "Company" means Eli Lilly and Company and its subsidiaries.
2.2 "Committee" means the Compensation and Management Development Committee,
the members of which shall be selected by the Board of Directors from among
its members. Each Committee member shall, at all times while serving, satisfy
the requirements of an "outside director" within the meaning of Section
162(m).
2.3 "Participant" means any employee of the Company designated by the
Committee as a participant in the Plan with respect to any Plan Year. In its
discretion, the Committee may designate Participants either on an individual
basis or by determining that all employees in specified job categories,
classification or levels shall be Participants.
2.4 "Plan" means this Eli Lilly and Company EVA Bonus Plan.
2.5 "Plan Year" means the applicable calendar year.
2.6 "Retirement" means the cessation of employment upon the attainment of at
least eighty age and service points, as determined by the provisions of The
Lilly Retirement Plan as amended from time to time, assuming eligibility to
participate in that plan.
2.7 "Disability" means the time at which a Participant becomes eligible for
a payment under The Lilly Extended Disability Plan, assuming eligibility to
participate in that plan.
2.8 "Section 162(m)" means Section 162(m) of the Internal Revenue Code of
1986, as amended.
2.9 "Section 162(m) Participant" means a Participant who, in the
determination of the Committee, is or may in the future become a "covered
employee" under Section 162(m).
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ARTICLE III
DEFINITION AND COMPONENTS OF EVA
The following terms set forth the calculation of EVA and the components of
calculating EVA. The calculation of EVA for a Plan Year is used in determining
the bonuses earned by Participants under the Plan, as set forth in Article IV.
3.1 "Economic Value Added" or "EVA" means the excess NOPAT that remains
after subtracting the Capital Charge.
3.2 "Net Operating Profit After Tax" or "NOPAT" means the after tax
operating earnings of the Company for the Plan Year. NOPAT is determined by
adding net sales plus other net income (excluding interest income from
operating cash) and subtracting the following: cost of goods sold, selling,
general and administrative expenses (excluding goodwill amortization and
interest expense), amortization of research and development, taxes (excluding
the tax benefit of interest expense) and amounts associated with discontinued
operations.
3.3 "Capital Charge" means the deemed opportunity cost of employing Capital
for the Company. The Capital Charge is calculated by multiplying Capital times
Cost of Capital (C*).
3.4 "Capital" means the net investment employed in the operations of the
Company produced by operations and financing activities. Capital is calculated
by adding together current assets (excluding operating cash), net property,
plant and equipment, gross goodwill, net intangibles, other assets, and
capitalized research and development, and the present value of operating
leases, and subtracting the following: non-interest bearing liabilities and
capital associated with discontinued operations.
3.5 "Cost of Capital" or "C*" is the percentage calculated from the weighted
average of Cost of Debt and Cost of Equity. Cost of Capital for each Plan Year
is determined by reference to the percentage calculated at the end of October
of the prior Plan Year.
3.6 "Cost of Debt" capital is the marginal long-term borrowing rate of the
Company times (one minus the tax rate).
3.7 "Cost of Equity" capital is the risk-free rate plus (beta times the
market risk premium). For this purpose, (i) "risk free rate" is the 30-year
U.S. Treasury Bond rate, (ii) "beta" represents the 5 year historical average
variation of the Company's earnings versus the S&P 500, and (iii) "market risk
premium" represents the average risk of an equity return versus a bond return.
ARTICLE IV
DEFINITION AND COMPUTATION OF THE EVA BONUS
Bonuses earned under the Plan for a Plan Year are determined based on a
comparison of actual EVA to the "Target EVA" for the year, which is
established as described below to ensure improvement in EVA from year to year.
The result of this comparison is adjusted by a "Leverage Factor" measuring the
volatility of industry returns. The factor produced is referred to as the
"Bonus Multiple," which is multiplied by the Participant's "Target Bonus"
amount established for the year to produce the actual bonus earned. This
amount, referred to as the "Declared Bonus," is credited to the Participant's
"Bonus Bank" balance and paid out in the manner provided below.
4.1 Target Bonus. The Target Bonus Awards will be determined by the
Committee on a basis that takes into consideration a Participant's salary
grade level, job responsibilities as well as past and expected future job
performance. Target Bonus Awards are expressed as a percentage of annual base
salary as in effect on the first
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day of the Plan Year. If a Participant moves from any salary grade level to a
G-6 or above salary grade level during a Plan Year, he/she will receive an
award that is pro-rated according to time based on the Target Bonus percentage
and base salary applicable to each such salary grade. The Target Bonus will be
based on the currency in which the highest portion of base pay is regularly
paid. The Committee shall determine the appropriate foreign exchange
conversion methodology in its discretion.
4.2 Declared Bonus. A Declared Bonus is the Target Bonus times the Bonus
Multiple.
4.3 Bonus Multiple. The Bonus Multiple is the difference (positive or
negative) between Actual EVA and Target EVA, divided by the Leverage Factor,
plus one.
4.4 Bonus Bank. All bonus payments are made from the Bonus Bank. Each
Participant's beginning Bonus Bank balance in his/her first year of
participation is zero. The Bonus Bank is increased or decreased for any plan
year by the amount of Declared Bonus. If the available Bonus Bank balance is
positive, the Participant will be paid from such balance up to the Target
Bonus amount, plus one third of any such balance that remains after
subtracting the Target Bonus from available Bonus Bank balance. If the
available Bonus Bank balance is negative, no payment will occur.
4.5 Target EVA. The Target EVA for each year will be calculated as follows:
Target EVA = [Prior Year's Actual EVA + Prior Year's Target EVA] + Expected
Improvement
2
4.6 Expected Improvement. The Expected Improvement is the additional EVA
amount determined by the Committee that is used to assure that a minimum level
of improvement is achieved in order to earn target awards.
4.7 Leverage Factor. The Leverage Factor determines the rate of change in
bonuses as EVA surpasses or falls short of Target EVA, determined by the
Committee from an evaluation of the long term volatility of industry returns.
4.8 Section 162(m) Requirements, Bonus Maximum. In the case of Section
162(m) Participants, all determinations necessary for computing Declared
Bonuses for a Plan Year, including establishment of all components of the EVA
calculation and of the Target Bonus percentages, shall be made by the
Committee not later than 90 days after the commencement of the Plan Year. As
and to the extent required by Section 162(m), the terms of a Declared Bonus
for a Section 162(m) Participant must state, in terms of an objective formula
or standard, the method of computing the amount of compensation payable to the
Section 162(m) Participant, and must preclude discretion to increase the
amount of compensation payable that would otherwise be due under the terms of
the award. Notwithstanding anything elsewhere in the Plan to the contrary, the
maximum amount of the Declared Bonus that may be paid from the Bonus Bank to a
Section 162(m) Participant during any one calendar year shall be $5 million.
4.9 Working Plan Example. Examples of the mechanics of the Plan are shown on
Schedule A.
ARTICLE V
PLAN ADMINISTRATION
5.1 Time of Payment. Payment from the Bonus Bank will be made before March 1
of the year following the Plan Year.
5.2 Certification of Results. Before any amount is paid under the Plan, the
Committee shall certify in writing the calculation of EVA for the Plan Year
and the satisfaction of all other material terms of the calculation of the
Declared Bonus.
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5.3 New Hires, Promotions. New hires or individuals promoted who are first
selected for participation by the Committee effective on a date other than
January 1 will participate on a pro-rata basis in their first year of
participation, based on the Declared Bonus determined for the Plan Year, pro-
rated for that period of the year during which the Participant was selected
for participation in the Plan. Any such Participant's Target Bonus Award will
be determined based on his or her annual base salary as in effect on the date
of hire or promotion, as applicable Notwithstanding the foregoing, in the case
of any Section 162(m) Participant who first becomes eligible to participate in
the Plan after January 1 of a Plan Year, such Participant's Declared Bonus may
be determined, at the discretion of the Committee exercised at the time such
participation begins, in a manner that complies with the requirements for
"performance-based compensation" under Section 162(m).
5.4 Termination of Employment, Demotions. If a Participant ceases employment
with the Company before the end of a Plan Year for reasons other than
Retirement, Disability or death, or is demoted to a non-global job level with
the Company during a Plan Year, the Participant shall receive no Declared
Bonus for that Plan Year, and his/her Bank Balance shall be forfeited. The
Committee may make complete or partial exceptions to this rule, in its sole
discretion. Notwithstanding the foregoing, with respect to the Declared Bonus
for a Section 162(m) Participant, any such termination of employment or
demotion shall result in payment of a bonus based on the Declared Bonus
determined for the Plan Year but pro-rated for the period of the year prior to
such event, subject to the Committee's discretion to forfeit all or any
portion of such bonus.
5.5 Leave of Absence. If a Participant takes an approved leave of absence
from employment during a Plan Year, the Participant will not be eligible for
the Declared Bonus for the Plan Year. The Committee may make complete or
partial exceptions to this rule, in whatever manner it deems appropriate. The
Participant will retain his Bonus Bank balance if he returns to employment
following the period of leave of absence. Notwithstanding the foregoing, with
respect to the Declared Bonus for a Section 162(m) Participant, any such leave
of absence shall result in payment of a bonus based on the Declared Bonus
determined for the Plan Year but pro-rated for the period of the year that the
Participant was actively employed by the Company, subject to the Committee's
discretion to forfeit all or any portion of such bonus.
5.6 Retirement, Disability or Death. If a Participant ceases employment with
the Company because of Retirement, Disability or death, the Participant or
personal representative, as the case may be, shall receive full payment of
his/her Bank Balance and a bonus based on the Declared Bonus determined for
the Plan Year but pro-rated for that period of the year during which the
Participant was an active employee of the Company.
5.7 Plan Participation. A Participant may not participate in this Plan for
any portion of a year for which he/she is entitled to receive payment under
the Eli Lilly and Company Contingent Compensation Plan, and shall be treated
in accordance with 5.3.
5.8 Forfeiture Events. Notwithstanding any other provision of this Plan to
the contrary, the Committee may, in its sole discretion, upon the occurrence
of a Forfeiture Event (as defined below), forfeit all or any portion of a
Participant's Declared Bonus and Bonus Bank balance and terminate such
Participant's future participation in the Plan. For purposes hereof, a
"Forfeiture Event" shall mean the occurrence of one or more of the following
events with respect to a Participant: (i) the termination or forced
resignation from employment of the Participant for "misconduct" (as defined in
the Company's Employee Information Handbook), (ii) any violation by the
Participant of the Guidelines of Company Policy (the "Redbook") that is
detrimental to the Company, (iii) any breach of a noncompetition,
nonsolicitation, nondisclosure or other restrictive covenant that may apply by
written agreement between the Company and the Participant or (iv)
Participant's having engaged in any other activity that, in the judgement of
the Committee, is detrimental to the business, affairs or reputation of the
Company (including, without limitation, engaging in any criminal activity).
B-4
<PAGE>
ARTICLE VI
GENERAL PROVISIONS
6.1 Withholding of Taxes. The Company shall have the right to withhold the
amount of taxes which in the sole determination of the Company are required to
be withheld under law with respect to any amount due or payable under the
Plan.
6.2 Expenses. All expenses and costs in connection with the adoption and
administration of the plan shall be borne by the Company.
6.3 No Prior Right or Offer, No Right to Future Participation. Participation
in the Plan for Plan Years is determined from year-to-year by the Committee in
its sole discretion. Except and until expressly granted pursuant to the Plan,
nothing in the Plan shall be deemed to give any employee any contractual or
other right to participate in the benefits of the Plan. No award to any such
Participant in any Plan Year shall be deemed to create a right to receive any
award or to participate in the benefits of the Plan in any subsequent Plan
Year.
6.4 Rights Personal to Employee. Any rights provided to an employee under
the Plan shall be personal to such employee, shall not be transferable, except
by will or pursuant to the laws of descent or distribution, and shall be
exercisable during his/her lifetime, only by such employee, or a court-
appointed guardian for the employee.
6.5 Non-Allocation of Award. In the event of a suspension of the Plan in any
Plan Year, as described in Section 11.1, no awards under the Plan for the Plan
Year during which such suspension occurs shall affect the calculation of
awards for any subsequent period in which the Plan is continued.
ARTICLE VII
LIMITATIONS
7.1 No Continued Employment. Neither the establishment of the Plan nor the
grant of an award thereunder shall be deemed to constitute an express or
implied contract of employment of any Participant for any period of time or in
any way abridge the rights of the Company to determine the terms and
conditions of employment or to terminate the employment of any employee with
or without notice or cause at any time.
7.2 No Vested Rights. Except as expressly provided herein, no employee or
other person shall have any claim of right (legal, equitable, or otherwise) to
any award, allocation, or distribution or any right, title, or vested interest
in any amounts in his/her Bonus Bank and no officer or employee of the Company
or any other person shall have any authority to make representations or
agreements to the contrary. No interest conferred herein to a Participant
shall be assignable or subject to claim by a Participant's creditors.
7.3 Non-alienation. Except as provided in Subsection 5.1, no Participant or
other person shall have any right or power, by draft, assignment, or
otherwise, to mortgage, pledge or otherwise encumber in advance any payment
under the Plan, and every attempted draft, assignment, or other disposition
thereof shall be absolutely void.
ARTICLE VIII
COMMITTEE AUTHORITY
8.1 Authority to Interpret and Administer. Except as otherwise expressly
provided herein, full power and authority to interpret and administer this
Plan shall be vested in the Committee. The Committee may from time to time
make such decisions and adopt such rules and regulations for implementing the
Plan as it deems
B-5
<PAGE>
appropriate for any Participant under the Plan. Except as to Participants who
are treated by the Company as executive officers of the Company for federal
securities law reporting purposes (including any Section 162(m) Participant),
the Committee may delegate in writing to officers or employees of the Company
the power and authority granted by this Section 8.1 to interpret and
administer this Plan. Any decision taken by the Committee or officer or
employee to whom authority has been delegated, arising out of or in connection
with the construction, administration, interpretation and effect of the Plan
shall be final, conclusive and binding upon all Participants and any person
claiming under or through Participants.
8.2 Adjustments for Significant Events. Prior to the beginning of a Plan
Year, the Committee may specify with respect to Declared Bonuses for the Plan
Year that EVA will be determined before the effects of acquisitions,
divestitures, restructurings or changes in corporate capitalization,
accounting changes, and/or events that are treated as extraordinary items for
accounting purposes; provided that such adjustments shall be made only to the
extent permitted by Section 162(m) in the case of Section 162(m) Participants.
8.3 Financial And Accounting Terms. Except as otherwise provided, financial
and accounting terms, including terms defined herein, shall be determined by
the Committee in accordance with generally accepted accounting principles and
as derived from the audited consolidated financial statements of the Company,
prepared in the ordinary course of business.
8.4 Section 162(m) Deferrals. To the extent that, notwithstanding the terms
of the Plan, the Company's tax deduction for remuneration in respect of the
payment of bonuses under the Plan to a Section 162(m) Participant would be
disallowed under Section 162(m) by reason of the fact that such Participant's
applicable employee remuneration, as defined in Section 162(m), either exceeds
or, if such bonus were paid, would exceed the $1,000,000 limitation in Section
162(m), any such excess (as determined by the Committee in its sole
discretion) shall be automatically deferred under the terms of The Lilly
Deferred Compensation Plan. Payment of any deferred amounts shall be made to
the Participant in the first year thereafter that the Company's tax deduction
in respect of the payment would not be disallowed under Section 162(m).
ARTICLE IX
NOTICE
9.1 Any notice to be given to the Company or Committee pursuant to the
provisions of the Plan shall be in writing and directed to Secretary, Eli
Lilly and Company, Lilly Corporate Center, Indianapolis, IN 46285.
ARTICLE X
EFFECTIVE DATE
10.1 This Plan, as amended and restated herein, shall be effective for the
Plan Year commencing January 1, 1999, subject to the approval of the Plan at
the Company's 1998 annual meeting of stockholders. The terms of this restated
plan shall apply to Declared Bonuses earned in 1999 and future years. All
Declared Bonuses earned in years prior to 1999 shall be payable in accordance
with the terms of the Plan as in effect for the year to which the Declared
Bonus relates. The final Plan Year of this Plan, unless amended by the Board
(or the Committee) and approved by the stockholders as provided in Article XI,
shall be the 2003 Plan Year.
ARTICLE XI
AMENDMENTS AND TERMINATION
11.1 This Plan may be amended, suspended or terminated at any time at the
discretion of the Board of Directors of Eli Lilly and Company, and may, except
for this Section 11.1, be amended at any time by the Committee. Solely to the
extent deemed necessary or advisable by the Board (or the Committee) for
purposes of complying with Section 162(m), the Board (or the Committee) may
seek the approval of any such amendment by the Company's stockholders. Any
such approval shall be by the affirmative votes of the stockholders of the
Company present, or represented, and entitled to vote at a meeting duly held
in accordance with applicable state law and the Articles of Incorporation and
By-Laws of the Company. The material terms of EVA must be disclosed to and
reapproved by the stockholders of the Company no later than the Company's
annual meeting of stockholders that occurs in the year 2003.
B-6
<PAGE>
ARTICLE XII
APPLICABLE LAW
12.1 This Plan shall be governed by and construed in accordance with the
provisions of the laws of the State of Indiana.
* * *
Schedule A
Year One
Target EVA = $150MM
Actual EVA = $200MM
Leverage Factor = $100MM
[GRID APPEARS HERE]
Declared Bonus
Actual EVA-Target EVA = $50MM
Bonus Multiple = 1 + (Actual EVA-Target EVA)/Leverage Factor
1.5 = 1 + 50/100
Target Bonus = $20,000
Declared Bonus = $30,000 (1.5 X $20,000)
Bonus Bank
<TABLE>
<S> <C>
Declared Bonus $30,000
Beginning Bank Balance $ 0
-------
Available Bank Balance $30,000
Target Bonus Paid $20,000*
-------
Remaining Balance $10,000
Pay 1/3 Remaining Balance $ 3,333*
-------
Ending Bank Balance $ 6,667
</TABLE>
*Total bonus paid = $20,000 + $3,333 = $23,333
EVA Target Reset (for year two) = ($200MM + $150MM)/2 + 0
= $175MM
B-7
<PAGE>
Schedule A (Cont.)
Year Two
Target EVA = $175MM
Actual EVA = $140MM
Leverage Factor = $100MM
[GRID APPEARS HERE]
Declared Bonus
Actual EVA-Target EVA = ($35MM)
Bonus Multiple = 1 + (Actual EVA-Target EVA)/Leverage Factor
0.65= 1 + (35)/100
Target Bonus = $20,000
Declared Bonus = $13,000 (0.65 X $20,000)
Bonus Bank
<TABLE>
<S> <C>
Declared Bonus $13,000
Beginning Bank Balance $ 6,667
-------
Available Bank Balance $19,667
Target Bonus Paid $19,667*
-------
(up to available balance)
Remaining Balance $ 0
Pay 1/3 Remaining Balance $ 0*
-------
Ending Bank Balance $ 0
</TABLE>
*Total bonus paid = $19,667 + $0 = $19,667
EVA Target Reset (for year three) = ($140MM + $175MM)/2 + 0
= $157.5MM
B-8
<PAGE>
LOGO
<PAGE>
[LOGO OF ELI LILLY]
ELI LILLY AND COMPANY
LILLY CORPORATE CENTER
INDIANAPOLIS, INDIANA 46285
March 4, 1998
Dear Savings Plan Participant:
It is my pleasure to provide you a meeting notice, proxy statement, and
voting instruction card for the 1998 Annual Meeting of Shareholders of Eli
Lilly and Company.
The proxy statement describes the business we will consider at the meeting.
As a participant in the savings plan, you may instruct the Trustee on how to
vote the number of shares of Company stock credited to your account under the
plan. As a member of the Lilly family, your participation in these matters is
very important. I urge you to sign, date, and return the enclosed voting
instruction card in the envelope provided in order to be certain the Trustee
is aware of your views on the matters to be presented at the meeting.
/s/ Randall L. Tobias
Randall L. Tobias
Chairman of the Board and
Chief Executive Officer
<PAGE>
PARTICIPANTS IN
THE LILLY EMPLOYEE SAVINGS PLAN
AND
PARTICIPANTS IN
THE SAVINGS PLAN FOR AFFILIATED COMPANIES
----------------
ANNUAL MEETING OF SHAREHOLDERS
APRIL 20, 1998
The Annual Meeting of Shareholders of Eli Lilly and Company will be held at
the Hilbert Circle Theatre, 45 Monument Circle, Indianapolis, Indiana, on
Monday, April 20, 1998, at 11:00 a.m. (Indianapolis time), for the following
purposes:
1. To elect four directors of the Company, each for a three-year term;
2. To amend the Articles of Incorporation to increase the authorized number
of shares of common stock from 1,600,000,000 to 3,200,000,000 shares;
3. To approve the 1998 Lilly Stock Plan;
4. To approve the amended Eli Lilly and Company EVA Bonus Plan;
5. To ratify the appointment by the Board of Directors of Ernst & Young LLP
as principal independent auditors for the year 1998; and
6. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Each participant in the above plans is permitted to instruct the Trustee on
how to vote the number of shares of Company common stock credited to the
participant's account under those plans. For that purpose, the enclosed voting
instruction card is being furnished to each participant in lieu of the proxy
referred to in the accompanying Proxy Statement.
Eli Lilly and Company
March 4, 1998
Indianapolis, Indiana
<PAGE>
PROXY
ELI LILLY AND COMPANY
The undersigned hereby appoints Ms. R.O. Goss, and Messrs S. Taurel and R.L.
Tobias, and each of them, as proxies of the undersigned, each with power to act
without the others and with full power of substitution, to vote all the shares
of common stock of ELI LILLY AND COMPANY held in the name of the undersigned at
the close of business on February 13, 1998, at the Annual Meeting of
Shareholders to be held on April 20, 1998, at 11:00 a.m. (Indianapolis time),
and at any adjournment thereof, with all the powers the undersigned would have
if personally present as follows:
. The Board of Directors recommends a vote FOR the following items.
(1) Election of Directors, each for a three year term
Nominees:
Dr. S.C. Beering
Dr. F.G. Prendergast FOR [_] WITHHOLD [_]
Mrs. K.P. Seifert AUTHORITY
Mr. R.L. Tobias All nominees To vote for
except as all nominees
listed below
INSTRUCTION: To withhold authority to vote for any individual nominee
write that nominee's name on the line below
------------------------------------------------
(2) Approval of amendment to Articles of Incorporation
FOR [_] AGAINST [_] ABSTAIN [_]
(3) Approval of the 1998 Lilly Stock Plan
FOR [_] AGAINST [_] ABSTAIN [_]
(4) Approval of the Eli Lilly and Company EVA Bonus Plan
FOR [_] AGAINST [_] ABSTAIN [_]
(5) Ratification of the appointment by the Board of Directors of Ernst & Young
LLP as principal independent auditors for 1998
FOR [_] AGAINST [_] ABSTAIN [_]
Please sign exactly as names appear hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
-----------
SEE REVERSE
SIDE
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. Fold and Detach here.
