FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year ended November 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-6953
LILLY INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
INDIANA 35-0471010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
733 South West Street
Indianapolis, Indiana 46225
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
317-687-6700
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Stock, without par value
Common Share Purchase Right
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 16, 1999 was $336,355,000.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 16, 1999.
22,772,474 shares of Class A Common Stock, without par value; 437,037 shares of
Class B Common Stock, without par value
DOCUMENTS INCORPORATED BY REFERENCE
Part II: Items 5 Annual Report to Shareholders for Fiscal
through 8 Year Ended November 30, 1998
Part III: Items 10 Proxy Statement for Annual Meeting of
through 13 Shareholders to be held April 22, 1999
<PAGE>
PART I
Lilly Industries, Inc.
Item 1. BUSINESS
Business Description
Lilly Industries, Inc. (referred to herein as "Lilly" or the "Company") was
founded in 1865, and incorporated under the laws of the State of Indiana on
December 5, 1888. The Company believes it is a leader in the industrial coatings
industry, one of the five largest industrial coatings manufacturers in North
America, and one of the 15 largest in the world based on net sales of $619.0
million in fiscal 1998. Lilly formulates, manufactures and markets coatings
primarily to original equipment manufacturers, enhancing the appearance of and
providing durability to products such as home and office furniture, cabinets,
appliances, building products, transportation, agricultural and construction
equipment, mirrors and a variety of metal and fiberglass reinforced surfaces. A
significant amount of the Company's sales represent coatings developed in
cooperation with its customers to meet their specific product requirements,
resulting in a number of primary supplier relationships with those customers.
Lilly also produces and sells household products, such as fabric protectors,
furniture care products and cleaning aids.
No one class of similar products (other than protective and decorative coatings)
accounted for 10% or more of consolidated revenues of the Company in any of the
last three fiscal years (1). The Company has only one reportable industry
segment, and employs approximately 2,300 people. The Company has plants and
sales offices in the U.S., Australia, Canada, China, Germany, Ireland, Malaysia,
Mexico, Singapore, Taiwan and the United Kingdom.
On April 8, 1996, the Company acquired all the outstanding shares of Guardsman
Products, Inc. ("GPI") for $235 million in cash. Like the Company, GPI was in
the business of formulating, manufacturing and marketing industrial coatings.
GPI also marketed various household furniture care and automotive after-market
products. With the acquisition of GPI, Lilly increased its fiscal 1996 net sales
by approximately 55% over fiscal 1995 net sales. The GPI acquisition
strengthened Lilly's market position by broadening customer base and product
lines. The acquisition increased Lilly's presence in industrial wood and metal
coatings, and provided it with important environmentally friendly water-borne
technologies. Lilly also gained a household products business focused on fabric
and stain protection products for household furniture. This business is
characterized by relatively high margins and the potential for new product
development, and adds a degree of diversification to the Company.
(1) References in this Form 10-K are references to the Company's fiscal years
ended November 30, 1996, 1997 and 1998.
<PAGE>
Industrial Coatings Industry
Coatings protect a wide range of manufactured goods from the effects of external
elements over the life of the product. In addition, coatings make products more
aesthetically pleasing to end-use customers. Lilly competes in three principal
industrial coatings markets: (i) wood coatings, such as lacquer and protective
color for furniture, building products and kitchen cabinets; (ii) metal
coatings, such as liquid and powder coatings used to finish building products,
furniture, appliances and transportation equipment; and (iii) composites and
glass coatings, such as gelcoats and specialty chemicals for transportation
equipment, recreational vehicles and mirrors.
Sales for the global paints and coatings market equal approximately $55 billion
annually, with annual sales for the domestic market equaling approximately $17
billion. Annual sales for the industrial coatings segment in which Lilly
participates are approximately $25 billion globally and $8.5 billion
domestically. The balance of the market consists primarily of architectural
coatings (primarily house paints), a market in which Lilly does not compete, and
specialty coatings, including maintenance coatings and traffic paints.
Industrial coatings is a mature and highly fragmented industry in the U.S.,
growing in-line with industrial production, and includes many small competitors.
Long term annual unit growth in the U.S. industrial coatings business is
projected between 1% and 2%, largely tied to fluctuations in general economic
cycles. Annual unit growth rate is projected between 1% and 2% in Europe and
between 4% and 6% in Asia. The North American industrial coatings industry is
divided among over 700 participants.
Due to its maturity and historically fragmented participant base, the coatings
industry is undergoing consolidation through mergers and acquisitions.
Consolidation of the coatings industry is being driven by several factors,
including (i) the need for growth in maturing markets; (ii) environmental costs
which, together with a more demanding global customer base, will make it
difficult for smaller manufacturers with limited financial resources to remain
independent; and (iii) the increasing technical and financial resources of the
larger companies. To date, the effects of industry consolidation include a
greater concentration of market share with fewer companies, a reduction in the
number of competitors, and the creation of new synergies within the larger
coatings companies, such as raw material purchasing power and manufacturing
economies of scale.
Competition
The industrial coatings industry is competitive, with more than 700 North
American manufacturers operating in numerous market segments. Manufacturers
include large international companies as well as small regional firms, and no
one manufacturer dominates. Competitive advantages include developing coatings
that meet specific customer requirements, pricing coatings competitively and
rapidly delivering quality products. Technological developments that reduce
negative environmental effects are also an important competitive factor.
Lilly is one of the top five industrial coatings manufacturers in North America,
one of the top 15 worldwide, and, with the acquisition of GPI, became the
largest supplier to the U.S. residential furniture market, serving virtually all
of the top 25 U.S. furniture manufacturers. While Lilly is among the top five
North American producers of industrial coatings, some competitors are generally
more diversified and have greater financial resources than the Company. Major
competitors include Akzo Nobel; Ferro Corporation; Morton International, Inc.;
The Sherwin-Williams Company; PPG Industries, Inc.; and The Valspar Corporation.
End Use Markets
The Company focuses on four end use markets: metal coatings; wood coatings;
composites and glass; and specialty. These four markets accounted for
approximately 39%, 38%, 12% and 11% of the Company's fiscal 1998 net sales,
respectively. The following provides a summary of these markets.
<PAGE>
Metal Coatings. The Company's metal coatings provide specialized coatings for
numerous applications such as appliances, building products and fixtures (such
as residential siding, aluminum gutters, and metal roofing), agricultural and
construction equipment, furniture, bicycles, digital satellite systems,
automotive trim and wheels, entry and garage doors, computers, window trim,
shelving, and playground equipment. These coatings include traditional liquid
coatings as well as coil coatings and a full range of decorative and functional
powder coatings. The coil coatings process is considered one of the most
environmentally safe, energy-efficient methods of applying coatings to metal
substrates. Lilly's technical innovation has produced conventional and water-
borne coil coatings formulated with proprietary resins that provide high
durability, flexibility, corrosion resistance and chemical resistance. Powder
coatings are experiencing growth because of their environmental desirability, as
powder coatings have no solvent content. Lilly powder coatings are
environmentally compliant and provide outstanding durability and performance for
both interior and exterior applications. Metal coatings are manufactured at
fourteen facilities in the U.S. and facilities in Canada and Germany.
Wood Coatings. Lilly's wood coatings provide a full range of custom-formulated
coatings designed to enhance the beauty of wood while providing maximum
durability for products such as residential and office furniture, building
products and kitchen cabinets. Wood coatings are manufactured at six U.S.
locations, as well as five foreign facilities located in Canada, China, Ireland,
Malaysia and Taiwan.
Composites and Glass Coatings. The Company's composites include gelcoats and
fiberglass reinforced plastic composites for boats, recreational vehicles,
cultured marble vanity tops, custom van and truck components and personal
watercraft. Lilly's glass coatings are well recognized globally. The Company's
glass coatings provide mirror manufacturers with everything needed to convert
glass into mirrors of premier quality. Glass coatings include patented silver
and copper plating solutions, as well as low-lead and lead-free coatings for
mirror-back protection, all of which meet the environmental and quality
performance standards of mirror manufacturers. Glass coatings are manufactured
at two facilities located in Connecticut, and foreign facilities located in
Canada and Germany.
Specialty. The Company also manufactures and distributes a wide variety of
household products consisting of four distinct businesses: Interior Care,
Consumer Products, Specialty Chemicals and WoodPro(R). The Interior Care
business provides fabric protection and furniture care products to consumers
through furniture stores, and is the world's largest supplier of retail-applied
fabric protection, Fabri-Coate(R). The Consumer Products business markets
several well-known brand name household specialty items, such as Guardsman(R)
Furniture Polish, Goof Off(R) remover, One-Wipe(R) dust clothes and Chip Clip(R)
snack closures. These products are sold through hardware, home center, paint,
mass merchant and grocery retailers. The Specialty Chemicals business
manufactures private-label automotive chemicals such as brake part cleaner, fuel
injector cleaner, and engine oil supplements for national automotive customers.
This division also serves as a private-label contractor in the chemical
packaging market. The WoodPro(R) business is a franchise group that offers
on-site repair and maintenance of wood and upholstered furnishings for the home
or office. These businesses operate from two facilities located in Michigan and
facilities located in Australia, Canada and the United Kingdom.
Distribution and Customers
Lilly's technical sales force of approximately 700 people market and sell its
industrial coatings directly to over 6,000 industrial customers throughout the
world. Most of the Company's customers are located throughout the United States
and Canada, with the remaining customers concentrated in Asia and Europe. The
Company is not dependent upon any single customer or few customers. The loss of
any single customer would not have a material adverse impact on the Company. No
single customer of the Company represented more than 5% of net sales.
International sales, including U.S. exports, were $149.3 million in fiscal year
1998, which represented 24% of consolidated sales. Information concerning the
Company's net sales, operating income and assets in foreign countries and the
United States for the three years ended November 30, 1998 is set forth in Note 9
in the Notes to Consolidated Financial Statements in the Company's 1998 Annual
Report to Shareholders. Note 9 is incorporated herein by reference.
<PAGE>
The Company has no significant order backlog. No material part of the business
is subject to re-negotiation of profit or termination of contracts or
subcontracts at the election of any governments. Historically, first quarter
operating results are below operating results for the second, third and fourth
quarters due to the lower demand for industrial production which typically
occurs in December.
Raw Materials
Raw materials are the largest single cost in the industrial coatings business,
representing about half of the selling price of most coatings. The typical
coating consists of pigments dispersed in a liquid known as the "vehicle," which
is usually composed of one or more polymers, and a solvent. The solvent helps
the coating spread over the substrate; the polymers form a film to hold the
coating in place after the solvent has evaporated and provides the unique
performance characteristics of the coating. Solvents are typically
petrochemical-based products that evaporate quickly. However, the use of
petrochemical-based solvents is declining as environmentally friendly
technologies, such as water-borne liquid and powder coatings, gain market share.
The pigment, usually an inorganic substance, provides the color. "Fillers" and
"extender pigments" provide gloss and sheen control, while specialty chemicals
known as additives, enhance the flow and application properties of the coating.
The Company manufactures its industrial coatings from a variety of polymers,
pigments, solvents and other chemicals, the bulk of which are obtained from
petrochemical feed stocks. In addition to petrochemicals, the Company uses both
silver and copper. Under normal conditions, all of these raw materials are
available on the open market, although prices and availability are subject to
fluctuation from time to time. Lilly, like most other companies in the coatings
industry, uses a variety of organic and inorganic materials in its products. No
single raw material cost currently accounts for over 4% of net sales and most
account for less than 1% of net sales.
The Company's largest single raw material cost is for titanium dioxide (TiO2),
which is a white pigment, and accounts for approximately 30% of pigment usage in
the coatings industry. The Company's annual expenditures for TiO2 total
approximately 4% of the Company's annual net sales.
Research and Development
Lilly's Corporate Technology Center, as well as laboratories at its major
facilities, emphasize the development of product finishes to meet specific
requirements of customers and the maintenance of quality throughout the
manufacturing process. They are also engaged in research directed toward
development of new products and new manufacturing and application techniques.
Research and development expenses were $20.6 million (3.3% of net sales), $18.7
million (3.1% of net sales), and $17.3 million (3.4% of net sales) for the
fiscal years 1998, 1997 and 1996, respectively. Future research and development
expenses as a percent of net sales are anticipated to remain at current levels
with emphasis on new product development.
The Company holds several patents and trademarks, and considers patent and
trademark protection to be important, but no individual patent is currently
material to the Company's business as a whole. The Company has patents and
licenses for glass coatings which are material to that specific business; and
new patents are continually being developed to sustain the Company's competitive
advantage.
Properties
Lilly maintains 32 principal facilities, of which 20 were located in the U.S.
See Item 2 - Properties. The plants range in size from approximately 260,000
square feet to approximately 9,000 square feet. The facilities vary in age and
are well maintained and adequate for their present uses. Utilization rates vary
from site to site depending on capacity, customers served and range of
production capabilities. The Company believes it can take advantage of special
situations (e.g., special orders, new customers, new technology) that may arise
during the course of an operating cycle by adding capacity through incremental
shifts. Each facility operates technical support centers to assist customers in
addressing both application and processing issues.
<PAGE>
Although the Company has traditionally located its domestic plants near its
customer base, the Company has begun to rely on larger, more efficient,
centralized plants in the U.S. With respect to its foreign operations, the
Company continues to adhere to its strategy of following, and being in close
proximity to, its customers as they open plants around the world.
Employees and Collective Bargaining Units
As of November 30, 1998, Lilly employed approximately 2,300 people. The coatings
industry is not heavily unionized and to the extent that there is unionization,
it is highly fragmented. Unionized workers account for approximately 9% of the
Company's total work force and operate through three separate unions at four
Lilly facilities. The Company believes that its relations with its employees are
good.
Environmental Regulation
The Company's operations are subject to numerous foreign, federal, state and
local environmental laws and regulations relating to protection of the
environment, employee health and safety, and the discharge, storage, treatment
and disposal of hazardous materials. In the United States, these laws include
the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund"), the Resource Conservation and Recovery Act, the Clean
Water Act, and the Clean Air Act. Certain operations of the Company use
pigments, resins and solvents that contain chemicals that are considered
hazardous under various environmental laws. Accordingly, management closely
monitors the Company's environmental performance at its facilities. Management
believes that the Company is in compliance in material respects with all
environmental laws and regulations.
CERCLA imposes joint and several liability, without regard to fault or the
legality of the original conduct, on certain classes of persons that are
considered to have contributed to the release of hazardous substances into the
environment. These persons include the owner and operator of the site where the
release occurred and companies that disposed or arranged for disposal of the
hazardous substances found at the site. The Company has been named as a
potentially responsible party ("PRP") by the United States Environmental
Protection Agency ("EPA") or similar state agencies with respect to several
inactive waste processing and/or disposal sites where clean-up costs have been
incurred or may be incurred. In addition to these sites, the Company is
currently investigating and remediating on-site disposal areas at certain of its
current and former facilities.
The Company continually assesses its environmental matters and establishes
reserves to provide for these matters as they arise. The Company's experience to
date leads it to believe that it will have continuing expenditures for
compliance with provisions regulating protection of the environment and
remediation efforts at waste and manufacturing sites. However, management
believes that such expenditures will not have a material adverse effect on
operating results or the financial position of the Company as a whole.
Under the Clean Air Act Amendments of 1990 ("CAAA"), the EPA is required to
regulate volatile organic compound ("VOC") emissions from a variety of consumer
and commercial products, including coatings. Accordingly, the EPA has issued
various regulations that limit VOCs from industrial coatings. Although the
Company cannot accurately assess the impact of these regulations prior to their
promulgation or implementation in final form, based on currently available
information, the Company believes that these regulations will not have a
material adverse effect on the operating results or the financial position of
the Company as a whole.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements which constitute forward
looking statements within the meaning of Section 27A of the Securities Act.
Discussions containing such forward looking statements may be found under the
captions "Management's Discussion and Analysis of Results of Operations and
Financial Condition ("MD&A"), and "Business," as well as elsewhere within this
Report. Forward looking statements include statements regarding the intent,
belief or current expectations of the Company, primarily with respect to the
future operating performance of the Company or related industry developments.
When used in this Report, terms such as "anticipate," "believe," "estimate,"
"expect," "intend," "indicate," "may be," "objective," "plan," "predict," and
"will be" are intended to identify such statements. Forward looking statements
are not guarantees of future performance and involve risks and uncertainties.
Forward looking statements are based upon management's expectations at the time
they are made. Actual results could differ materially from those projected in
the forward looking statements as a result of the risk factors set forth below
and the matters set forth in this Report generally, many of which are beyond the
control of the Company. The Company cautions the reader, however, that the
following list of factors may not be exhaustive.
<PAGE>
Sensitivity to General Economic and Industry Conditions
The Company's business, and the industrial coatings industry as a whole, is
cyclical in nature and affected by the general trends of the economy. In
particular, consumer behavior and confidence, the level of personal
discretionary spending, housing activity, interest rates, credit availability,
and demographics influence the Company's end use markets, such as the housing,
building products, construction and agricultural equipment, appliance, furniture
and automotive industries. During economic downturns, these industries tend to
experience declines, which in turn diminish demand for the Company's products.
Effects of Leverage
The Company's level of indebtedness will have several important effects on its
operations including (i) a substantial portion of the Company's cash flow from
operations will be dedicated to debt service obligations, (ii) the covenants
contained in the Company's revolving credit facility and senior notes may limit
the Company's ability to borrow additional funds, and (iii) the Company's
leveraged financial position may make the Company more vulnerable to economic
downturns and may limit its ability to withstand competitive pressures, and plan
for, or react to, changes in market conditions.
Environmental Matters
The operations of the Company, like those of other companies in the industrial
coatings industry, are subject to numerous foreign, federal, state and local
environmental laws and regulations. While the Company believes that it is
currently in material compliance with environmental requirements, any failure to
comply with such present and future requirements could subject the Company to
future liabilities. The imposition of more stringent environmental requirements,
or a determination that the Company is potentially responsible for site
remediation where contamination is not presently known could result in
expenditures for which no accrual has been made.
Mature Industry
The industrial coatings industry is a mature business in the U.S., growing in
line with industrial production. Long-term annual growth in the U.S. industrial
coatings industry is projected in the 1% to 2% range. To expand and remain
competitive, the Company will be required to continue (i) to develop coatings
that meet specific customer requirements, (ii) to price those coatings
competitively, and (iii) to deliver quality products on time. In addition, the
Company will also need to keep pace with technological developments to remain
competitive, particularly technological developments that relate to
environmental demands such as reductions of volatile organic compound emissions
imposed by government regulations.
Raw Materials
Over 50% of the Company's operating costs are typically attributable to the cost
of raw materials. The cost of these raw materials, most of which are derived
from petrochemical products, depends on numerous factors, including changes in
the economy, the level of foreign and domestic production, and the crude oil
supply and demand balance. A rise in the price of raw materials could materially
increase the Company's operating costs and thereby adversely affect its profit
margins.
International Operations
During fiscal 1998, the Company's international sales, including U.S. exports
accounted for approximately 24% of total sales, and this percentage may increase
in the coming years. The Company's international operations subject it to the
risks of doing business abroad, including currency fluctuations, various trade
barriers, restrictions on the transfer of funds, greater difficulty in accounts
receivable collection, burdens of complying with a wide variety of foreign laws,
and, in certain parts of the world, economic, social, and political instability,
any of which could have an adverse effect on the Company's financial position
and results of operations.
Year 2000 Issues
There can be no assurance that the Company and its vendors, suppliers and
customers will achieve Year 2000 readiness.
<PAGE>
Executive Officers of the Company
The executive officers of the Company, the age of each, the positions and
offices held by each during the last five years, and the period during which
each has served in such positions and offices are as follows:
Name of
Executive Officer Age Positions and Offices Held
- ----------------- --- --------------------------
Douglas W. Huemme 57 Director since 1990; Chairman,
President and Chief Executive
Officer of the Company since
prior to 1994.
Robert A. Taylor 44 Director since April, 1997;
Executive Vice President and
Chief Operating Officer since
February, 1997; Vice President
and General Manager, Wood
Coatings from April 1994 to
February, 1997; Vice President,
Specialty and Container Coatings,
AKZ0 Coatings, Inc. from prior to 1994 to
April, 1994.
Larry H. Dalton 51 Vice President - Manufacturing
and Engineering since July,
1994; General Manager of the
Company's Indianapolis Division
from prior to 1994 to
July, 1994.
William C. Dorris 55 Director since 1989; Vice
President - Corporate
Development since July, 1994;
General Manager of the
Company's High Point Division,
Templeton Division and Dallas Division
from prior to 1994 to July, 1994
John C. Elbin 45 Vice President, Chief Financial
Officer and Secretary since
April, 1997 when he joined the Company;
Senior Vice President of Express
Scripts in 1996; Senior Vice
President and Chief
Financial Officer of
Pet Incorporated from
prior to 1994 to 1995.
A. Barry Melnkovic 41 Vice President - Human
Resources since April, 1996;
Director, Corporate Employee &
Labor Relations and Director
Corporate Compensation and
Benefits, Cummins Engine
Company, Inc., from 1993
to 1996.
Kenneth L. Mills 50 Corporate Accounting Director
and Assistant Secretary since
prior to 1994.
Each executive officer will serve as such until his successor is chosen and
qualified. No family relationships exist among the Company's executive officers.
<PAGE>
Item 2. Properties.
The Company has 32 principal facilities. The locations and approximate square
footage at those facilities are as follows:
Location Square Feet
High Point, North Carolina (2 locations) 320,000
Indianapolis, Indiana 260,000
Grand Rapids, Michigan 165,000
Eschweiler, Germany 121,000
Fremont, Michigan 120,000
North Kansas City, Missouri 138,000
London, Ontario, Canada 103,000
Bowling Green, Kentucky 94,000
Moline, Illinois 76,000
Cornwall, Ontario, Canada 97,000
Kaohsiung Hsien, Taiwan, R.O.C. 64,000
Montebello, California 58,000
Charlotte, North Carolina 57,000
Rocky Hill, Connecticut 57,000
Gardena, California 52,000
Paulsboro, New Jersey 47,000
Dothan, Alabama 42,000
Dallas, Texas 36,000
Little Rock, Arkansas 35,000
Guadalupe, Mexico 35,000
Seattle, Washington 30,000
Elkhart, Indiana 25,000
Dongguan, China 25,000
Selangor, Malaysia 20,000
Davie, Florida 14,000
Woodbridge, Connecticut 13,000
Ballinamore, Ireland 12,000
Abingdon, England 12,000
Wallenfels, West Germany 9,000
North Sydney, Australia 1,000
Singapore 1,000
All of these principal facilities noted above are owned directly or indirectly
by the Company, except for leased facilities in Grand Rapids, Michigan; Gardena,
California; Dongguan, China; Selangor, Malaysia; Abingdon, England; Singapore;
and North Sydney Australia.
Item 3. Legal Proceedings.
The Company is involved in various litigation and other asserted and unasserted
claims arising in the ordinary course of business, primarily relating to product
warranty and clean-up costs at independently operated waste treatment/disposal
sites previously used by the Company or the predecessors of businesses purchased
by the Company. While the results of lawsuits or other proceedings against the
Company cannot be predicted with certainty, management believes that uninsured
and unreserved losses, if any, arising from these proceedings will not have a
material adverse effect on the business or consolidated financial position of
the Company.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of fiscal 1998 to a vote of
security holders through the solicitation of proxies or otherwise.
PART II
Item 5. Market for Company's Common Equity and Related
Stockholder Matters.
The information required by this item is incorporated by reference herein from
the information included under caption "Stock Trading and Dividend Information"
in the Company's 1998 Annual Report to Shareholders and is included in Exhibit
13. There is no public trading market for the Company's Class B Common Stock.
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference herein from
the information included under the caption "Selected Financial Data" in the
Company's 1998 Annual Report to Shareholders and is included in Exhibit 13.
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.
The information required by this item is incorporated by reference herein from
the information included under the caption "Management's Discussion and Analysis
of Results of Operations and Financial Condition" in the Company's 1998 Annual
Report to Shareholders and is included in Exhibit 13.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to market risk in the form of interest rate risk and
foreign currency risk. Both interest rate risk and foreign currency risk are
immaterial to the Company.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of the Company are incorporated by
reference from the Company's 1998 Annual Report to Shareholders and are included
in Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
No information is required to be disclosed under this item of this report
pursuant to Instruction 1 to Item 304 of Regulation S-K.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company.
The information required by this item with respect to directors of the Company
is incorporated herein by reference from the section entitled "Proposal Number
One, Election of Directors" of the Company's definitive Proxy Statement relating
to its Annual Meeting of Shareholders to be held April 22, 1999. See Part I, for
a list of the Company's executive officers, and their ages, positions and
offices.
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference from
the section entitled "Compensation of Executive Officers" of the Company's
definitive Proxy Statement relating to its Annual Meeting of Shareholders to be
held April 22, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this item is incorporated herein by reference from
the sections entitled "Share Ownership of Certain Beneficial Owners" and
"Proposal Number One, Election of Directors" of the Company's definitive Proxy
Statement relating to its Annual Meeting of Shareholders to be held April 22,
1999.
Item 13. Certain Relationships and Related Transactions.
The information required by this item, if any, is incorporated herein by
reference from the section entitled "Proposal Number One, Election of Directors"
of the Company's definitive Proxy statement relating to its Annual Meeting of
Shareholders to be held April 22, 1999.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)-1 The following items, included in the Company's 1998 Annual
Report to Shareholders, are incorporated herein by reference and
are included herein in Exhibit 13.
Report of Independent Auditors
Consolidated Balance Sheets -- November 30, 1998 and 1997
Consolidated Statements of Income and Retained Earnings -- Years
ended November 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -- Years ended November 30,
1998, 1997 and 1996
Notes to Consolidated Financial Statements -- November 30, 1998
(a)-2 The following financial statement schedule is filed as a
part of this report.
Schedule II
Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
<PAGE>
(a)-3 Exhibits.
Exhibits Incorporated by Reference
EXHIBIT INDEX
Exhibit No. Description
2 Merger Agreement, dated March 4, 1996, by and among
Lilly Industries, Inc., LP Acquisition Corporation and
Guardsman Products, Inc. This exhibit is incorporated
by reference to Exhibit 2 to Lilly Industries, Inc.'s
Form 8-K Current Report filed with the SEC on April 22,
1996.
3.1 Restated Articles of Incorporation of Lilly Industries,
Inc., as amended. This exhibit is incorporated by
reference to Exhibit 3(a) to Lilly Industries, Inc.'s
Form 10-K Annual Report for the fiscal year ended
November 30, 1996.
3.2 Restated By-Laws of Lilly Industries, Inc., as amended.
This exhibit is incorporated by reference to Exhibit
3(b) to Lilly Industries, Inc.'s Form 10-K Annual
Report for the fiscal year ended November 30, 1993.
4.1 Indenture, dated November 10, 1997, between Lilly
Industries, Inc. and Harris Trust and Savings Bank.
This exhibit is incorporated by reference to Exhibit
4.1 to Lilly Industries, Inc.'s Registration Statement
on Form S-4 filed with the Commission on December 5,
1997 (Commission No. 333-41587).
4.2 Credit Agreement, dated October 24, 1997, between Lilly
Industries, Inc., the Lenders Signatory thereto, and
NBD Bank, N.A. as Agent. This exhibit is incorporated
by reference to Exhibit 4.2 to Lilly Industries, Inc.'s
Registration Statement on Form S-4 filed with the
Commission on December 5, 1997 (Commission No.
333-41587).
4.3 Rights Agreement, dated January 12, 1996, between Lilly
Industries, Inc. and KeyCorp Shareholder Services, Inc.
as Rights Agent. This exhibit is incorporated by
reference to Exhibit 4 to Lilly Industries, Inc.'s Form
8-A filed with the SEC on January 23, 1996.
10.1 Registration Agreement, dated November 5, 1997, between
Lilly Industries, Inc. and Salomon Brothers, Inc.,
Lehman Brothers, Inc. and Schroder & Co., Inc. This
exhibit is incorporated by reference to Exhibit 10.1 to
Lilly Industries, Inc.'s Registration Statement on Form
S-4 filed with the Commission on December 5, 1997
(Commission No. 333-41587).
10.2 Form of Exchange Agent Agreement, dated December 22,
1997, between Lilly Industries, Inc. and Harris Trust
and Savings Bank. This exhibit is incorporated by
reference to Exhibit 10.2 to Lilly Industries, Inc.'s
Registration Statement on Form S-4 filed with the
Commission on December 5, 1997 (Commission No.
333-41587).
*10.3 Lilly Industries, Inc. Unfunded Supplemental Retirement
Plan (as in effect November 29, 1990). This exhibit is
incorporated by reference to Exhibit 10(b) to Lilly
Industries, Inc.'s Form 10-K Annual Report for the
fiscal year ended November 30, 1990.
*10.4 Lilly Industries, Inc. Unfunded Excess Benefit Plan.
This exhibit is incorporated by reference to Exhibit
10(c) to Lilly Industries, Inc.'s Form 10-K Annual
Report for the fiscal year ended November 30, 1989.
*10.5 Lilly Industries, Inc. Second Unfunded Supplemental
Retirement Plan (effective June 4, 1990). This exhibit
is incorporated by reference to Exhibit 10(f) to Lilly
Industries, Inc.'s Form 10-K Annual Report for the
fiscal year ended November 30, 1990.
*10.7 Lilly Industries, Inc. 1991 Director Stock Option Plan.
This exhibit is incorporated by reference to Exhibit
10(i) to Lilly Industries, Inc.'s Form 10-K Annual
Report for the fiscal year ended November 30, 1991.
<PAGE>
*10.8 Lilly Industries, Inc. 1992 Stock Option Plan. This
exhibit is incorporated by reference to Exhibit 10(j)
to Lilly Industries, Inc.'s Form 10-K Annual Report for
the fiscal year ended November 30, 1991. First
Amendment to Lilly Industries, Inc. 1992 Stock Option
Plan. This exhibit is incorporated by reference to
Exhibit 10.8 to Lilly Industries, Inc.'s Registration
Statement on Form S-4 filed with the Commission on
December 5, 1997 (Commission No. 333-41587).
*10.9 Lilly Industries, Inc. Executive Retirement Plan
(effective as of January 1, 1996). This exhibit is
incorporated by reference to Exhibit 10(i) to Lilly
Industries, Inc.'s Form 10-K Annual Report for the
fiscal year ended November 30, 1996.
*10.10 Lilly Industries, Inc. Retirement Plan (effective as of
January 1, 1996) and Trust Agreement for Lilly
Industries, Inc. Replacement Plan between Lilly
Industries, Inc. and Bankers Trust Company of Des
Moines, dated September 27, 1996. This exhibit is
incorporated by reference to Exhibit 10(j) to Lilly
Industries, Inc.'s Form 10-K Annual Report for the
fiscal year ended November 30, 1996.
*10.11 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and Hugh M. Cates. This
exhibit is incorporated by reference to Exhibit 10(1)
to Lilly Industries, Inc.'s Form 10-Q Quarterly Report
for the fiscal quarter ended August 31, 1997.
*10.12 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and Larry H. Dalton. This
exhibit is incorporated by reference to Exhibit 10(2)
to Lilly Industries, Inc.'s Form 10-Q Quarterly Report
for the fiscal quarter ended August 31, 1997.
*10.13 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and William C. Dorris. This
exhibit is incorporated by reference to Exhibit 10(3)
to Lilly Industries, Inc.'s Form 10-Q Quarterly Report
for the fiscal quarter ended August 31, 1997.
*10.14 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and John C. Elbin. This
exhibit is incorporated by reference to Exhibit 10(4)
to Lilly Industries, Inc.'s Form 10-Q Quarterly Report
for the fiscal quarter ended August 31, 1997.
*10.15 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and Ned L. Fox. This exhibit
is incorporated by reference to Exhibit 10(5) to Lilly
Industries, Inc.'s Form 10-Q Quarterly Report for the
fiscal quarter ended August 31, 1997.
*10.16 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and Douglas W. Huemme. This
exhibit is incorporated by reference to Exhibit 10(6)
to Lilly Industries, Inc.'s Form 10-Q Quarterly Report
for the fiscal quarter ended August 31, 1997.
<PAGE>
*10.17 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and A. Barry Melnkovic. This
exhibit is incorporated by reference to Exhibit 10(7)
to Lilly Industries, Inc.'s Form 10-Q Quarterly Report
for the fiscal quarter ended August 31, 1997.
*10.18 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and John D. Million. This
exhibit is incorporated by reference to Exhibit 10(8)
to Lilly Industries, Inc.'s Form 10-Q Quarterly Report
for the fiscal quarter ended August 31, 1997.
*10.19 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and Kenneth L. Mills. This
exhibit is incorporated by reference to Exhibit 10(9)
to Lilly Industries, Inc.'s Form 10-Q Quarterly Report
for the fiscal quarter ended August 31, 1997.
*10.20 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and Gary D. Missildine. This
exhibit is incorporated by reference to Exhibit 10(10)
to Lilly Industries, Inc.'s Form 10-Q Quarterly Report
for the fiscal quarter ended August 31, 1997.
*10.21 Change in Control Agreement, dated September 5, 1997,
by and between Registrant and Robert A. Taylor. This
exhibit is incorporated by reference to Exhibit 10(11)
to Lilly Industries, Inc.'s Form 10-Q Quarterly Report
for the fiscal quarter ended August 31, 1997.
*10.22 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and Keith C. Vander Hyde,
Jr.. This exhibit is incorporated by reference to
Exhibit 10(12) to Lilly Industries, Inc.'s Form 10-Q
Quarterly Report for the fiscal quarter ended August
31, 1997.
*10.23 Change in Control Agreement, dated September 26, 1997,
by and between Registrant and Jay M. Wiegner. This
exhibit is incorporated by reference to Exhibit 10(13)
to Lilly Industries, Inc.'s Form 10-Q Quarterly Report
for the fiscal quarter ended August 31, 1997.
* Management contracts and compensatory plans required to be filed
pursuant to Item 14(c) of Form 10-K.
<PAGE>
Exhibits Filed Herewith:
4.4 First Amendment to Credit Agreement among Lilly Industries, Inc.,
the Lenders Signatory thereto and NBD Bank, N.A., as agent,
dated as of April 4, 1998.
13 Excerpts from the Lilly Industries, Inc. 1998 Annual
Report.
21 List of Subsidiaries.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: February 23, 1999
LILLY INDUSTRIES, INC.
/s/ Douglas W. Huemme
Douglas W. Huemme,
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signature Title Date
(1) Principal Executive
Officer and Director
/s/ Douglas W. Huemme Chairman, President February 23, 1999
- ----------------------- and Chief Executive
Douglas W. Huemme Officer
(2) Principal
Financial Officer
/s/ John C. Elbin Vice President, February 23, 1999
- ------------------------ Chief Financial Officer
John C. Elbin and Secretary
(3) Principal
Accounting Officer
/s/ Kenneth L. Mills Corporate Controller February 23, 1999
- ----------------------- and
Kenneth L. Mills Assistant Secretary
<PAGE>
(4) A majority of the
Board of Directors
/s/ James M. Cornelius Director February 23, 1999
- ---------------------------
James M. Cornelius
/s/ William C. Dorris Director February 23, 1999
- ---------------------------
William C. Dorris
/s/ Paul K. Gaston Director February 23, 1999
- ---------------------------
Paul K. Gaston
/s/ Harry Morrison, Ph.D. Director February 23, 1999
- ---------------------------
Harry Morrison, Ph.D.
/s/ Norma J. Oman Director February 23, 1999
- ---------------------------
Norma J. Oman
/s/ John D. Peterson Director February 23, 1999
- ---------------------------
John D. Peterson
/s/ Thomas E. Reilly, Jr. Director February 23, 1999
- ---------------------------
Thomas E. Reilly, Jr.
/s/ Van P. Smith Director February 23, 1999
- ---------------------------
Van P. Smith
/s/ Robert A. Taylor Director February 23, 1999
- ---------------------------
Robert A. Taylor
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
LILLY INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------
Additions
Description Balance at (1) (2) (3) Deductions- Balance
Beginning Charged to Charged to Acquired in Describe at End of
of Period Costs and Other Accounts Business Period
Expenditures -Describe Combination
----------- ------------ -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended November 30, 1998:
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts receivable $2,139,000 $752,000 $-- $-- $910,000 (A) $1,981,000
========== ======== === === ============ ==========
Year ended November 30, 1997:
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts receivable $2,705,759 $538,000 $-- $-- $1,104,759 (A) $2,139,000
========== ======== === === ============== ==========
Year ended November 30, 1996:
Reserves and allowances
deducted from asset
accounts:
Allowance for doubtful
accounts receivable $2,050,922 $510,826 $-- $729,307 $585,296 (A) $2,705,759
========== ======== === ======== ============ ==========
</TABLE>
Note A - Uncollectible accounts receivable charged off, net of recoveries.
- --------------------------------------------------------------------------------
FIRST AMENDMENT TO CREDIT AGREEMENT
- --------------------------------------------------------------------------------
among
LILLY INDUSTRIES, INC.
an Indiana corporation
the Lenders Signatory Hereto
and
NBD Bank, N.A., as Agent
- --------------------------------------------------------------------------------
Dated as of April 14, 1998
- --------------------------------------------------------------------------------
- 1 -
<PAGE>
TABLE OF CONTENTS
PART I. AMENDATORY PROVISIONS............................................1
SECTION 1 Definitions............................. 1
1.1 Defined Terms................... 1
SECTION 3 Change in Circumstances................. 4
3.4. Funding Indemnification........... 4
PART II. CONTINUING EFFECT................................................ 4
PART III. INDEPENDENT CREDIT DECISION...................................... 5
PART IV. CONDITIONS PRECEDENT.............................................5 g
- i -
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT made as of the 14th day of April, 1998, by and
among LILLY INDUSTRIES, INC., an Indiana corporation (the "Borrower"), the
LENDERS party hereto, and NBD BANK, N.A., a national banking association, as
agent for the Lenders hereunder (in such capacity, the "Agent");
W I T N E S S E T H:
WHEREAS, as of October 24, 1997, the parties hereto entered into a
certain Credit Agreement (the "Agreement"); and
WHEREAS, the Borrower has requested changes in the method in which the
commitment fee and the incremental margin are calculated and in the calculation
of break funding charges and the Lenders have consented to such changes subject
to and as provided in this First Amendment;
NOW, THEREFORE, in consideration of the premises, and the mutual
promises herein contained, the parties agree that the Agreement shall be, and it
hereby is, amended as provided herein and the parties further agree as follows:
PART I. AMENDATORY PROVISIONS
SECTION 1
Definitions
1.1 Defined Terms.
Section 1.1 of the Agreement is hereby amended by substituting the
following definitions in lieu of the like existing definitions:
"Applicable Commitment Fee" means, on any date, the fee
payable to the Agent for the pro rata benefit of the Lenders, which fee
shall be based upon the Ratings in effect at the close of business on
such date in accordance with the table set forth below:
- 1 -
<PAGE>
Ratings Applicable Commitment Fee
Level 1 BB or lower by S&P; 0.250%
Ba2 or lower by Moody's
Level 2 BB+ by S&P; 0.175%
Ba1 by Moody's
Level 3 BBB- by S&P; 0.150%
Baa3 by Moody's
Level 4 BBB by S&P; 0.125%
Baa2 by Moody's
Level 5 BBB+ or higher by S&P; 0.100%
Baa1 or higher by Moody's
For purposes of the foregoing, (a) if both S&P and Moody's shall not
have in effect a Rating, then the Applicable Commitment Fee shall be
determined based on the last applicable Level (subject to the last
sentence of this definition), (b) if the Ratings shall fall within
different Levels, the Applicable Commitment Fee shall be based upon the
higher of the two Ratings, provided that if the split is more than one
full Level, the average (or the higher of two intermediate Ratings)
shall be used, and (c) if any Rating shall be changed (other than as a
result of a change in the rating system of the applicable Rating
Agency), such change shall be effective as of the date on which it is
first announced by the Rating Agency making such change. If the rating
system of any Rating Agency shall change, or if any Rating Agency shall
cease to be in the business of rating corporate debt obligations or
shall not have in effect a Rating, the parties hereto shall negotiate
in good faith to amend this definition to reflect such changed rating
system or the absence of such Rating, and pending the effectiveness of
any such amendment the Applicable Commitment Fee shall be determined
(y) by reference to the Rating from the other Rating Agency, or (z)
based on the last applicable Level for a period of ninety (90) days and
based on Level 1 as of the expiration of such ninety (90) day period in
the event both Rating Agencies have so changed their rating systems, or
have both ceased to be in the business of rating corporate debt
obligations, or both shall not have in effect a Rating.
"Applicable Margin" means, on any date, the incremental margin
to be paid by Borrower on Loans hereunder, which margin shall be based
upon the Ratings in effect at the close of business on such date in
accordance with the table set forth below:
- 2 -
<PAGE>
Ratings Applicable Margin
ABR Loans Eurodollar
Loans
Level 1 BB or lower by S&P; 0% 0.75%
Ba2 or lower by Moody's
Level 2 BB+ by S&P; 0% 0.60%
Ba1 by Moody's
Level 3 BBB- by S&P; 0% 0.45%
Baa3 by Moody's
Level 4 BBB by S&P; 0% 0.35%
Baa2 by Moody's
Level 5 BBB+ or higher by S&P; 0% 0.30%
Baa1 or higher by Moody's
For purposes of the foregoing, (a) if both S&P and Moody's shall not
have in effect a Rating, then the Applicable Commitment Fee shall be
determined based on the last applicable Level (subject to the last
sentence of this definition), (b) if the Ratings shall fall within
different Levels, the Applicable Commitment Fee shall be based upon the
higher of the two Ratings, provided that if the split is more than one
full Level, the average (or the higher of two intermediate Ratings)
shall be used, and (c) if any Rating shall be changed (other than as a
result of a change in the rating system of the applicable Rating
Agency), such change shall be effective as of the date on which it is
first announced by the Rating Agency making such change. If the rating
system of any Rating Agency shall change, or if any Rating Agency shall
cease to be in the business of rating corporate debt obligations or
shall not have in effect a Rating, the parties hereto shall negotiate
in good faith to amend this definition to reflect such changed rating
system or the absence of such Rating, and pending the effectiveness of
any such amendment the Applicable Commitment Fee shall be determined
(y) by reference to the Rating from the other Rating Agency, or (z)
based on the last applicable Level for a period of ninety (90) days and
based on Level 1 as of the expiration of such ninety (90) day period in
the event both Rating Agencies have so changed their rating systems, or
have both ceased to be in the business of rating corporate debt
obligations, or both shall not have in effect a Rating.
Section 1.1 of the Agreement is hereby further amended by adding the
following definitions:
"Moody's" means Moody's Investors Service, Inc.
- 3 -
<PAGE>
"S&P" means Standard & Poor's Ratings Services, a division of
McGraw-Hill Companies, Inc.
"Rating Agencies" means Moody's and S&P.
"Ratings" means the ratings from time to time established by
the Rating Agencies for senior, unsecured, non-credit-enhanced
long-term debt of the Borrower.
SECTION 3
Change in Circumstances
3.4. Funding Indemnification. Section 3.4 of the Agreement is hereby
amended by substituting the following sentence in lieu of the existing third
(3rd) sentence of Section 3.4:
In the event of a prepayment, the calculation of the cost owed to the
Lenders under this Section 3.4 would be calculated using the following
formula:
Cost = PA x (OCF-RR) x D
------------------------
360
where PA is the principal amount prepaid, OCF is the original
Eurodollar Rate applicable to such prepayment, RR is the Eurodollar
Base Rate determined by the Agent at the time of prepayment for an
interest period substantially as similar as possible to the time
remaining until expiration of the applicable Eurodollar Interest Period
that is subject to the prepayment, and D is the number of days
remaining in the applicable Eurodollar Interest Period that is subject
to the prepayment.
PART II. CONTINUING EFFECT
Except as expressly modified herein:
(a) All terms, conditions, representations, warranties and
covenants contained in the Agreement shall remain the same and shall
continue in full force and effect, interpreted, wherever possible, in a
manner consistent with this First Amendment; provided, however, in the
event of any irreconcilable inconsistency, this First Amendment shall
control;
(b) The representations and warranties contained in the
Agreement shall survive this First Amendment in their original form as
continuing representations and warranties of the Borrower; and
- 4 -
<PAGE>
(c) Capitalized terms used in this First Amendment, and not
specifically herein defined, shall have the meanings ascribed to them
in the Agreement.
In consideration hereof, the Borrower represents, warrants, covenants and agrees
that:
(aa) Each representation and warranty set forth in the
Agreement, as hereby amended, remains true and correct as of the date
hereof in all material respects, except to the extent that such
representation and warranty is expressly intended to apply solely to an
earlier date and except changes reflecting transactions permitted by
the Agreement;
(bb) There currently exists no offsets, counterclaims or
defenses to the performance of the Obligations (such offsets,
counterclaims or defenses, if any, being hereby expressly waived);
(cc) There has not occurred any Default or Unmatured Default;
and
(dd) After giving effect to this First Amendment and any
transactions contemplated hereby, no Default or Unmatured Default is or
will be occasioned hereby or thereby.
PART III. INDEPENDENT CREDIT DECISION
Each Lender acknowledges that it has, independently and without
reliance upon the Agent or any other Lender, based on such documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this First Amendment.
PART IV. CONDITIONS PRECEDENT
Notwithstanding anything contained in this First Amendment to the
contrary, the Lenders shall have no obligation under this First Amendment until
each of the following conditions precedent have been fulfilled to the
satisfaction of the Agent:
(a) Each of the conditions set forth in Section 6.2 of the
Agreement shall have been satisfied;
(b) The Agent shall have received each of the following, in
form and substance satisfactory to the Agent:
(i) The Loan Documents, as amended, duly executed in
the form approved by the Lenders;
- 5 -
<PAGE>
(ii) A duly executed certificate of the Secretary or
any Assistant Secretary of the Borrower (A) certifying as to
attached copies of Resolutions of the Board of Directors of
the Borrower authorizing the execution, delivery and
performance of the Loan Documents, as amended, and any other
documents provided for in this First Amendment to which the
Borrower is a party, (B) certifying the names of the officer
or officers authorized to sign, respectively, the Loan
Documents, as amended, and any other documents provided for in
this First Amendment to which the Borrower is a party, and
containing a sample of the true signature of each such
officer, and (C) certifying as complete and correct as to
attached copies of the Articles of Incorporation and By-Laws
of the Borrower or certifying that such Articles of
Incorporation or By-Laws have not been amended (except as
shown) since the previous delivery thereof to the Agent; and
(c) All legal matters incident to this First Amendment shall
be reasonably satisfactory to the Agent and its counsel.
IN WITNESS WHEREOF, the Borrower, the Agent and the Lenders have caused
this First Amendment to be executed by their respective officers duly authorized
as of the date first above written.
[This space intentionally left blank]
- 6 -
<PAGE>
SIGNATURE PAGE OF
LILLY INDUSTRIES, INC.
TO
FIRST AMENDMENT TO
CREDIT AGREEMENT
LILLY INDUSTRIES, INC.
By: /s/ John C. Elbin
----------------------------------------
John C. Elbin, Chief Financial Officer
and Secretary
- 7 -
<PAGE>
SIGNATURE PAGE OF
NBD BANK, N.A.,
TO
FIRST AMENDMENT TO
CREDIT AGREEMENT
NBD BANK, N.A.,
individually and as Agent
By: /s/ Dennis L. Bassett
----------------------------
Its: Senior Vice President
----------------------------
- 8 -
<PAGE>
SIGNATURE PAGE OF
BANK ONE, INDIANA, NA
TO
FIRST AMENDMENT TO
CREDIT AGREEMENT
BANK ONE, INDIANA, NA
By: /s/ Brian D. Smith
----------------------------
Its: Vice President
----------------------------
- 9 -
<PAGE>
SIGNATURE PAGE OF
FIRST UNION NATIONAL BANK
TO
FIRST AMENDMENT TO
CREDIT AGREEMENT
FIRST UNION NATIONAL BANK
By: /s/
----------------------------
Its: Senior Vice President
----------------------------
- 10 -
<PAGE>
SIGNATURE PAGE OF
HARRIS TRUST AND SAVINGS BANK
TO
FIRST AMENDMENT TO
CREDIT AGREEMENT
HARRIS TRUST AND SAVINGS BANK
By: /s/ Peter Krawchuk
----------------------------
Its: Vice President
----------------------------
- 11 -
<PAGE>
SIGNATURE PAGE OF
KEYBANK NATIONAL ASSOCIATION
TO
FIRST AMENDMENT TO
CREDIT AGREEMENT
KEYBANK NATIONAL ASSOCIATION
By: /s/ Frank J. Jancar
----------------------------
Its: Vice President
----------------------------
- 12 -
<PAGE>
SIGNATURE PAGE OF
NATIONAL CITY BANK OF INDIANA
TO
FIRST AMENDMENT TO
CREDIT AGREEMENT
NATIONAL CITY BANK OF INDIANA
By: /s/ Frank B. Meltzer
----------------------------
Its: Vice President
----------------------------
- 13 -
<PAGE>
SIGNATURE PAGE OF
BANK OF AMERICA N.T. & S.A.
TO
FIRST AMENDMENT TO CREDIT AGREEMENT
BANK OF AMERICA N.T. & S.A.
By: /s/ Paul B. Higdon
-----------------------------
Its: Managing Director
----------------------------
- 14 -
Selected Financial Data (1)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended November 30 1998 1997 1996 (2) 1995 1994 1993 1992
- ------------------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations
Net sales $619,002 $601,296 $508,976 $328,345 $331,306 $284,325 $236,476
Cost of products sold 379,641 373,015 321,748 219,899 214,809 189,111 152,480
Gross margin percentage 38.7% 38.0% 36.8% 33.0% 35.2% 33.5% 35.5%
Selling, general and
administrative expenses 146,763 139,467 112,361 59,874 61,498 53,319 50,128
Research and development expenses 20,567 18,680 17,294 13,184 12,982 12,325 11,030
Operating income 72,031 70,134 57,573 35,388 42,017 29,570 22,838
Operating income percentage 11.6% 11.7% 11.3% 10.8% 12.7% 10.4% 9.7%
Interest expense, net 16,919 18,967 13,938 1,487 2,465 1,568 1,245
Income taxes 22,867 23,068 11,039 13,510 16,350 11,784 9,201
Effective income tax rate 42.0% 45.1% 45.0% 40.0% 41.2% 42.2% 42.0%
Net income 31,579 28,095 24,060 20,264 23,302 16,155 12,706
EBITDA(3) 91,389 92,120 73,233 43,435 51,082 36,394 29,944
EBITDA interest coverage(4) 5.4 4.9 5.3 29.2 20.7 23.2 24.1
Per Share Data(5)
Net income, diluted 1.35 1.20 1.04 .88 1.00 .70 .55
Cash dividends .32 .32 .32 .31 .27 .24 .22
Book value 7.15 6.16 5.36 4.86 4.38 3.60 3.16
Price range of common stock 24 5/8-14 3/8 24 1/8-16 3/4 19 3/4-12 1/4 15-11 18-11 3/4 15 7/8-9 3/8 9 3/4-5 5/8
Other Data
Total assets 516,485 501,795 521,860 183,582 190,252 167,044 117,049
Working capital 50,071 52,126 50,579 35,505 41,604 33,270 27,131
Capital expenditures (6) 17,015 12,673 19,233 15,599 6,693 7,598 3,262
Depreciation 9,102 8,850 6,453 4,251 4,637 3,746 3,965
Amortization of intangibles 10,922 13,140 9,097 3,923 4,328 3,141 2,827
Total debt 203,700 224,171 261,561 28,229 35,110 44,101 14,642
EBITDA to total debt 44.9% 41.1% 28.0% 153.9% 145.5% 82.5% 204.5%
Book value 165,575 142,439 121,889 109,374 99,424 81,128 70,125
Return on equity 20.5% 21.3% 20.8% 19.4% 25.8% 21.4% 17.6%
Debt to total capitalization 55% 61% 68% 21% 26% 35% 17%
Number of employees 2,291 2,116 2,140 1,148 1,182 1,176 1,072
Sales per employee 270 283 274 282 281 253 214
Operating income per employee 31 33 31 30 36 26 21
Average shares
outstanding, diluted(7) 23,400 23,400 23,100 23,086 23,231 22,962 23,048
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended November 30 1991 1990 1989 1988
<S> <C> <C> <C> <C>
Operations
Net sales $220,508 $240,146 $219,713 $203,499
Cost of products sold 150,669 161,626 145,592 134,114
Gross margin percentage 31.7% 32.7% 33.7% 34.1%
Selling, general and
administrative expenses 46,921 50,404 44,113 42,516
Research and development expenses 10,606 10,814 9,708 8,980
Operating income 12,312 17,302 20,300 17,889
Operating income percentage 5.6% 7.2% 9.2% 8.8%
Interest expense, net 2,254 2,573 1,111 582
Income taxes 4,417 6,850 8,399 7,550
Effective income tax rate 41.0% 40.6% 40.6% 40.9%
Net income 6,357 10,022 12,574 11,284
EBITDA(3) 19,994 26,117 26,670 23,316
EBITDA interest coverage(4) 8.9 10.2 24.0 40.1
Per Share Data(5)
Net income, diluted .27 .41 .51 .45
Cash dividends .21 .20 .17 .15
Book value 3.16 3.10 3.00 2.65
Price range of common stock 6 1/8-4 1/8 7 5/8-4 7 1/8-5 3/8 7 1/8-4 7/8
Other Data
Total assets 127,342 125,371 129,025 101,357
Working capital 30,405 34,513 40,389 36,368
Capital expenditures (6) 1,928 3,968 2,486 2,930
Depreciation 4,038 4,021 3,387 3,133
Amortization of intangibles 2,928 2,651 1,199 767
Total debt 21,501 28,345 25,560 10,007
EBITDA to total debt 93.0% 92.1% 104.3% 233.0%
Book value 74,187 73,185 74,482 65,987
Return on equity 8.6% 13.6% 17.9% 18.1%
Debt to total capitalization 22% 28% 26% 13%
Number of employees 1,140 1,230 1,350 1,750
Sales per employee 186 186 174 170
Operating income per employee 10 13 16 15
Average shares
outstanding, diluted(7) 23,521 24,738 25,043 24,921
</TABLE>
(1) This table of Selected Financial Data should be read in conjunction with
Management's Discussion and Analysis of Results of Operations and Financial
Condition and the Company's consolidated financial statements included
herein.
(2) 1996 includes the effect of the acquisition of Guardsman Products, Inc. on
April 8, 1996 and excludes the effect of a restructuring charge of $9,607
which reduced net income by $5,284 or $.23 per diluted share.
(3) EBITDA represents earnings before interest, taxes, depreciation and
amortization.
(4) EBITDA interest coverage is determined by dividing EBITDA by interest
expense.
(5) Adjusted for all stock splits and stock dividends through November 30, 1998
inclusive. Prices are rounded to nearest 1/8.
(6) Excludes effect of acquisitions.
(7) Used to calculate net income per diluted share.
<PAGE>
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Operating Results 1998 vs. 1997
Consolidated net sales increased 2.9% to a record $619.0 million for fiscal year
1998, despite a $10 million unfavorable impact from foreign currency
translations. Sales benefited from the December, 1997 acquisition of Merckens
Lackchemie GmbH & Company (See "German Acquisition"). The acquisition helped
boost the Company's international sales, including U.S. exports, to $149.3
million during 1998, representing growth of 18.0% over 1997. During 1998, Lilly
experienced volume growth in each of its end use markets. Sales to the
Company's four primary end use markets (metal, wood, composites and glass, and
specialty) represented 39%, 38%, 12% and 11% of 1998 consolidated sales,
respectively. Selling prices for most of the Company's products remained stable
during the year.
Gross profit margin continued to improve in 1998, rising 0.7 percentage
points over 1997 to 38.7%. Raw material costs continued to dominate the
Company's cost structure. However, continued emphasis on supply chain
management, as well as favorable pricing in certain commodity markets, produced
a 1.1% reduction in raw material costs as a percentage of net sales.
Improvements in raw material costs were partially mitigated by a slight increase
in direct labor and overhead costs. The Company will continue to pursue
improvement in gross margin by reducing the number of raw materials used in
products, process re-engineering, company-wide purchasing opportunities and
product re-formulations.
As a percentage of sales, operating expenses increased 0.7 percentage
points to 27.0%. Selling, general and administrative expenses, as a percentage
of sales, increased from 23.2% to 23.7%, primarily due to increased marketing
efforts. In addition, the Company made record expenditures on research and
development, which rose 10.1% to $20.6 million.
Net interest expense declined significantly during 1998, falling $2.0
million, reflecting the benefits of the Company's 1997 debt restructuring and
lower average debt outstanding. Continued strong cash flow from operations
allowed the Company to reduce average debt outstanding during 1998, while lower
average market rates of interest reduced the cost of borrowing under the
Company's variable rate debt facilities. The improvement in interest expense
was partially offset by additional interest expense associated with borrowings
to finance the Company's German Acquisition (See "Liquidity and Capital
Resources" and "German Acquisition").
The Company's effective tax rate declined significantly to 42.0% during
1998, due primarily to implementation of international tax planning strategies.
The effective tax rate remained above U.S. statutory rates, primarily due to the
impact of non-deductible intangibles acquired as part of the Guardsman Products,
Inc. ("GPI") acquisition and generally higher foreign tax rates.
Operating Results 1997 vs. 1996
Consolidated net sales increased 18.1% to a record $601.3 million for fiscal
year 1997. Sales benefited from the full-year inclusion of GPI, acquired in
April, 1996. During 1997, the Company experienced volume growth in each of its
end use markets. Sales to the Company's four primary end use markets (metal,
wood, composites and glass, and specialty) represented 39%, 38%, 12% and 11% of
1997 consolidated sales, respectively. International sales, including U.S.
exports, grew 29.7% to a record $126.5 million during 1997. This represented an
increase of 1.8 percentage points to 21.0% of sales. For the first time in the
Company's history, international sales exceeded 20% of total sales, despite the
negative impact of foreign exchange rate volatility in several of the Company's
overseas markets. Selling prices for most of the Company's products remained
stable during the year.
Gross profit margin continued to improve in 1997, rising 1.2 percentage
points over 1996 to 38.0%. Continued improvements in supply chain management,
including leveraging larger raw material order quantities and reducing the
number of raw material items, contributed to a 1.6 percentage point reduction in
raw material costs as a percentage of sales. The Company will continue to pursue
improvement in gross margin by reducing the number of raw material items,
process engineering, company-wide purchasing initiatives, and product
re-formulations. Direct labor and overhead costs increased slightly as a
percentage of sales during 1997.
Operating expenses totaled $158.1 million for 1997, an increase of $28.5
million, or 22.0%, over 1996 (excluding the restructuring charge reported during
1996). Increases in 1997 operating expenses were due primarily to the full-year
inclusion of GPI operations. As a percentage of sales, operating expenses
increased 0.8 percentage points to 26.3%. The increase primarily reflects higher
amortization expense associated with intangibles acquired in the GPI
transaction, as well as higher selling and marketing costs associated with
certain GPI product lines, which target retail accounts rather than original
equipment manufacturers.
Net interest expense increased 36% during 1997 to $18.9 million, primarily
due to the full-year inclusion of debt associated with the GPI acquisition. The
increase was partially mitigated by a reduction in interest-bearing borrowings
during 1997. Management anticipates that the restructuring of the Company's
debt capitalization during the fourth quarter of 1997 should contribute to a
slightly lower average interest rate on borrowings going forward. (See
"Liquidity and Capital Resources").
The Company's effective tax rate remained virtually unchanged for 1997 at
45.1%. The effective tax rate remained above U.S. statutory rates, primarily due
to the impact of non-deductible intangibles acquired as part of the GPI
acquisition, and generally higher foreign taxes.
Environmental
The Company's operations, like those of most companies in the coatings
industry, are subject to regulations related to maintaining or improving the
quality of the environment. Such regulations, along with the Company's own
internal compliance efforts, have required, and will continue to require,
ongoing expenditures. Spending for environmental compliance is not anticipated
to be material to the Company's financial position. The Company has been
notified that it is a potentially responsible party for clean-up costs with
respect to several government investigations at independently operated waste
disposal sites previously used by the Company. Management has accrued, as
appropriate, for these environmental liabilities. Management believes the
liabilities associated with these sites will not have a material adverse effect
on its operating results or financial position.
Year 2000 Readiness
The Year 2000 issue ("Y2K" or "Y2K issue") is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any computer programs or any hardware that have date sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a temporary inability to process transactions or
engage in normal manufacturing or other business activities.
The Company is actively engaged in a company-wide effort to achieve Y2K
readiness for both information technology ("IT") and non-information technology
("Non-IT") systems, and to determine the Y2K readiness of significant suppliers.
The Company is focusing its efforts on IT systems, Non-IT systems and suppliers
that, without Y2K readiness, could have a material adverse effect on the
Company's operations.
The Company's approach to addressing Y2K preparedness consists of the
following:
* Inventory - identification of items to be assessed for Y2K readiness.
* Assessment - prioritizing the inventoried items, assessing their Y2K
readiness and defining corrective actions and developing contingency plans.
* Deployment - implementing corrective actions, verifying implementation
and finalizing contingency plans.
The Company's IT systems are comprised of business computer systems and
technical infrastructure. In 1996, the Company determined that the IT systems
supporting its business units could be inadequate to meet business requirements
after 1999 and thus implemented a project to replace all critical IT systems.
All critical IT systems have been inventoried and assessed, and replacement of
non-conforming IT systems began during the fourth quarter of 1998. Deployment of
all critical IT systems is expected to be completed during the third quarter of
1999.
The Company's Non-IT systems are comprised of manufacturing and
warehousing systems and facility support systems. A preliminary inventory and
assessment of these Non-IT systems has been completed and deployment of these
Non-IT systems is expected to be completed during the third quarter of 1999.
The Company is in the process of contacting significant raw material and
service suppliers regarding their Y2K readiness. The Company's supplier
readiness program focuses on those suppliers considered essential for the
prevention of a material disruption to the Company's business operation. The
Company will make efforts to address third-party Y2K compliance issues noted
from the inquires. However, there is no assurance that such third-parties will
be Y2K compliant. Non-compliance by third-parties could have a material adverse
impact on the Company's financial position and business operations. Deployment
of the program is expected to be completed during the third quarter of 1999.
The Company utilizes both internal and external resources in all phases of
its Y2K readiness program. The Company estimates the total cost of resolving the
Y2K issue to be approximately $5 million. Of this amount, the Company estimates
$2 million will be spent during fiscal year 1999. Approximately 70% of total Y2K
cost is comprised of equipment and software replacement costs with the balance
being comprised of assessment and remediation costs. The Company expects all
costs to be funded with operating cash flow. Y2K costs are expensed as incurred
except for new systems and equipment, which are capitalized and charged to
expense over the estimated useful life of the related asset.
While the Company believes that its efforts to address Y2K issues will be
successfully completed in a timely manner, the Company recognizes that failing
to resolve Y2K issues could, in a reasonably likely worst case scenario,
increase costs and limit the Company's ability to conduct business operations.
The financial impact of such scenario can not be reasonably estimated.
German Acquisition
In December, 1997, the Company acquired Merckens Lackchemie GmbH and Company
("Merckens"), located in Eschweiler, Germany. This company supplies industrial
coatings to customers throughout Europe. Product lines are complementary to
Lilly's existing products. The purchase was made with cash and financed by an
unsecured revolving line of credit denominated in Deutschemarks (See "Liquidity
and Capital Resources").
Liquidity and Capital Resources
During fiscal 1998, the Company entered into a five-year,
Deutschemark-denominated $10 million revolving credit facility (the "DM
Facility") to fund the purchase of Merckens. The DM facility is unsecured.
Principal amounts available for borrowing under the DM Facility decline over the
five-year term of the agreement. In addition, the Company continued to maintain
a $175 million revolving credit facility ("Facility") and $100 million in senior
notes ("Notes"). Both the Facility and the Notes are unsecured and require no
principal amortization. The remaining terms on the Facility and Notes were four
and nine years, respectively, as of November 30, 1998. Management expects to
fund required debt service on all borrowings from operating cash flows.
The Company reduced total debt by $20.5 million during 1998. Additional
amounts available for borrowing under the Facility for acquisitions or general
operating purposes totaled $81.3 million as of November 30, 1998. Management
believes that funds available from internal and external sources are sufficient
to meet the liquidity needs of the Company during the next twelve months.
The Company manages exposure to interest rate movements primarily through
the issuance of fixed-rate debt securities and the use of interest rate swap
agreements. As of November 30, 1998, the Company was party to one interest rate
swap agreement with a notional principal amount of $50 million. The agreement
effectively converts a portion of the Company's debt from a floating to a fixed
interest rate, which was 6.88% as of November 30, 1998.
Cash provided by operating activities declined by $4.1 million to $55.2
million during 1998, as higher net income was offset by the negative cash
effects of changes in certain assets and liabilities. Cash used by investing
activities increased by $17.9 million to $24.9 million during 1998. The increase
was driven by the purchase of Merckens, as well as greater purchases of property
and equipment, primarily related to ongoing consolidation of corporate and
operating activities, foreign infrastructure investment, and expenditures
related to achieving Y2K readiness. Future investing activities are expected to
be financed from internal sources and existing credit facilities. Cash used by
financing activities totaled $27.1 million for 1998, due principally to the
$20.5 million reduction in debt and cash dividend payments of $7.4 million
during 1998.
The Company focuses on three key measures of liquidity and access to
capital markets: EBITDA (earnings before interest, taxes, depreciation and
amortization); Interest Coverage (EBITDA divided by interest expense); and Debt
Capitalization (debt divided by the sum of debt plus equity). For 1998, the
company generated EBITDA of $91.4 million, a decrease of $0.7 million. Interest
Coverage improved to 5.4 times, due primarily to reduced interest expense
associated with lower average borrowings and generally lower market rates of
interest. Debt Capitalization improved 6.8 percentage points to 55.2% due to
higher levels of net income retained in the business and lower levels of debt
outstanding at year-end 1998.
Forward-looking statements
Statements in this annual report that are not strictly historical may be
"forward-looking statements," which involve risks and uncertainties. Risk
factors include general economic and industry conditions, effects of leverage,
environmental matters, technological developments, product pricing, raw material
cost changes, and international operations, among others, which are set forth in
the Company's SEC filings.
<PAGE>
Consolidated Statements of Income and Retained Earnings
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended November 30 1998 1997 1996
<S> <C> <C> <C>
Net sales $ 619,002 $ 601,296 $ 508,976
Costs and expenses:
Cost of products sold 379,641 373,015 321,748
Selling, general and administrative 146,763 139,467 112,361
Research and development 20,567 18,680 17,294
Restructuring charge - - 9,607
---------------------------------------
546,971 531,162 461,010
---------------------------------------
Operating income 72,031 70,134 47,966
Other income (expense):
Sundry income (expense) (666) (4) 110
Interest expense, net (16,919) (18,967) (13,938)
---------------------------------------
(17,585) (18,971) (13,828)
---------------------------------------
Income before income taxes 54,446 51,163 34,138
Income taxes 22,867 23,068 15,362
---------------------------------------
Net income 31,579 28,095 18,776
Retained earnings at beginning of year 83,745 62,990 51,446
---------------------------------------
115,324 91,085 70,222
Deduct dividends paid ($.32 per share) 7,410 7,340 7,232
---------------------------------------
Retained earnings at end of year $ 107,914 $ 83,745 $ 62,990
=======================================
Net income per share:
Basic $ 1.36 $ 1.22 $ .83
Diluted $ 1.35 $ 1.20 $ .81
See accompanying notes.
</TABLE>
<PAGE>
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
November 30 1998 1997
- -----------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 13,326 $ 10,079
Accounts receivable, less allowance
for doubtful accounts (1998, $1,981; 1997,$2,139) 82,039 80,011
Inventories 50,796 45,704
Deferred income taxes 3,251 4,300
Other 2,620 6,580
------- -------
Total current assets 152,032 146,674
Other assets:
Goodwill, less amortization (1998,$21,547; 1997,$15,368) 214,960 220,897
Other intangibles, less amortization
(1998,$22,621;1997,$17,963) 26,068 30,059
Deferred income taxes 8,838 7,722
Sundry 12,419 13,604
------- -------
262,285 272,282
Property and equipment:
Land 11,845 8,035
Buildings 62,725 50,621
Equipment 87,787 78,432
Accumulated depreciation (60,189) (54,249)
------- -------
102,168 82,839
------- -------
$ 516,485 $ 501,795
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 66,156 $ 60,510
Salaries and payroll related items 21,624 20,814
Other 12,453 10,936
State and local taxes 855 1,212
Federal income taxes 873 1,076
------- -------
Total current liabilities 101,961 94,548
Long-term debt 203,700 224,171
Other liabilities 45,249 40,637
Shareholders' equity:
Capital stock, $.55 stated value per share:
Class A (limited voting) - 27,825 shares
issued (1997, 27,674 shares) 15,459 15,375
Class B (voting) - 540 shares issued 300 300
Additional capital 81,890 79,417
Retained earnings 107,914 83,745
Currency translation adjustments (4,096) (2,254)
Cost of capital stock in treasury (35,892) (34,144)
------- -------
165,575 142,439
------- -------
$ 516,485 $501,795
======= =======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(In thousands)
Year ended November 30 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 31,579 $ 28,095 $ 18,776
Adjustments to reconcile net income
to net cash provided by operating activities:
Restructuring charge - - 9,607
Depreciation 9,102 8,850 6,453
Amortization of intangibles 10,922 13,140 9,097
Deferred income taxes 209 4,085 2,094
Changes in operating assets and liabilities
net of effects from acquired business:
Accounts receivable (422) 4,581 (5,849)
Inventories (2,574) 1,842 (7,086)
Accounts payable and accrued expenses 5,985 2,933 7,825
Sundry 418 (4,226) (3,466)
--------- --------- ---------
Net cash provided by operating activities 55,219 59,300 37,451
Investing Activities
Purchases of property and equipment (17,015) (12,673) (19,233)
Payment for acquired business (11,253) -- (235,000)
Sundry 3,367 5,716 4,590
--------- --------- ---------
Net cash used by investing activities (24,901) (6,957) (249,643)
Financing Activities
Dividends paid (7,410) (7,340) (7,232)
Proceeds from senior notes -- 99,200 --
Proceeds from short-term and long-term borrowings -- -- 310,600
Principal payments on short-term and long-term borrowings (20,470) (136,590) (105,817)
Sundry 809 (4,324) 1,171
--------- --------- ---------
Net cash (used) provided by financing activities (27,071) (49,054) 198,722
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 3,247 3,289 (13,470)
Cash and cash equivalents at beginning of year 10,079 6,790 20,260
--------- --------- ---------
Cash and cash equivalents at end of year $ 13,326 $ 10,079 $ 6,790
========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
Notes to Consolidated Financial Statements
November 30, 1998
1. Summary of Significant Accounting Policies
Business: Lilly Industries, Inc. and its subsidiaries (the "Company") are
principally in the business of formulating, manufacturing and marketing
industrial coatings and specialty chemicals to manufacturing companies. The
Company's products include wood coatings for furniture, building products and
cabinets; coil coatings for building products, appliances and transportation
equipment; specialty coatings for a variety of metal products and fiberglass
reinforced products; powder coatings for a variety of metal products; and glass
coatings for mirrors. The Company also sells various household products,
including fabric protectors, furniture care products and cleaning aids.
Consolidation and Use of Estimates: The consolidated financial statements
include the accounts of all subsidiaries after elimination of intercompany
accounts and transactions. Preparation of these statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents: Cash equivalents include time deposits and certificates of
deposit with original maturities of three months or less.
Inventories: Coatings inventories in the United States are stated at the lower
of cost, determined by the last-in, first-out (LIFO) method, or market. All
other inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
Intangible Assets: Goodwill, which represents the excess of cost over fair value
of net assets of purchased businesses, is amortized by the straight-line method
over periods ranging from 20 to 40 years. Other intangible assets consist of
noncompete agreements, customer lists and technology and are amortized by the
straight-line method over periods ranging from 5 to 20 years.
The Company periodically evaluates the value of intangible assets to
determine if an impairment has occurred. This evaluation is based on various
analyses including reviewing anticipated cash flows.
Property and Equipment: Property and equipment is recorded on the basis of cost
and includes expenditures for new facilities and items which substantially
increase the useful life of existing buildings and equipment. Depreciation is
based on estimated useful lives (ranging from 3 to 40 years) and computed
primarily by the straight-line method.
Interest-Rate Swap Agreements: The Company periodically enters into
interest-rate swap agreements to modify the interest characteristics of its
outstanding debt. Swap agreements involve the exchange of interest payments
based on a variable interest rate for interest payments based on a fixed
interest rate calculated by reference to a notional amount over the life of the
agreement. The notional amount of each swap agreement represents all or a
portion of the principal balance of a specific debt obligation. The differential
to be paid or received is accrued and recognized as an adjustment of interest
expense.
Reclassifications: Certain prior year amounts have been reclassified to conform
with the current year presentation.
Net Income Per Share: The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", (SFAS 128) during the first quarter of
1998. SFAS 128 requires the calculation of both basic and diluted earnings per
share. Per share amounts shown for periods prior to adoption have been restated
to conform to the requirements of SFAS 128.
<PAGE>
Basic and diluted net income per share are computed by dividing net income
as reported by the average number of shares outstanding as follows (in
thousands):
1998 1997 1996
- --------------------------------------------------------------------------------
Basic
Weighted-average common shares outstanding 23,160 22,940 22,600
Diluted
Weighted-average common shares outstanding 23,160 22,940 22,600
Dilutive effect of stock options 240 460 500
------ ------ ------
Average common shares outstanding assuming dilution 23,400 23,400 23,100
====== ====== ======
2. Acquisition
On April 8, 1996 the Company acquired for $235,000,000 in cash all the
outstanding shares of Guardsman Products, Inc. ("Guardsman"). To finance the
acquisition, the Company used credit facilities to fund the initial purchase of
shares, pay-off existing debt and pay related expenses. The acquisition was
recorded using the purchase method and the consolidated financial statements
include the results of operations of Guardsman since the date of acquisition.
The fair value of net assets acquired included $40,031,000 net working capital,
$50,246,000 noncurrent assets, $213,642,000 intangible assets, $28,549,000
long-term debt, and $40,370,000 noncurrent liabilities. Goodwill is being
amortized by the straight-line method over 40 years.
If the acquisition had occurred on December 1, 1995, pro forma net sales
and net income for the year ended November 30, 1996 would be $598,722,000 and
$20,767,000, respectively, and basic and diluted net income per share would be
$.92 and $.90, respectively. The pro forma results include a restructuring
charge of $9,607,000 which reduced net income by $5,284,000 or $.23 per share,
both basic and diluted (see Note 3). The pro forma consolidated results of
operations are not necessarily indicative of future results of operations or
actual results of operations that would have occurred had the purchase been made
at December 1, 1995.
3. Restructuring
In 1996, the Company adopted and commenced implementation of plans for the
consolidation of manufacturing facilities related to the acquisition of
Guardsman. These plans included the closure of both Lilly and Guardsman
facilities and workforce reductions totaling approximately 250 employees.
Closure costs included facility and equipment valuation adjustments, inventory
disposal costs, dismantling and maintenance costs, and termination benefits. The
primary employee groups affected included manufacturing, selling, administrative
and research and development personnel. As of November 30, 1997 the plans were
complete.
Costs associated with the planned closure of former Lilly facilities of
$7,827,000 and workforce reductions of $1,780,000 were recorded in 1996 as a
restructuring charge of $9,607,000, which reduced net income by $5,284,000 or
$.23 per share, both basic and diluted. Amounts paid or charged related to Lilly
facilities were $365,000 and $7,462,000 during 1996 and 1997, respectively.
Amounts paid or charged related to Lilly workforce reductions were $447,000 and
$1,333,000 during 1996 and 1997, respectively.
Costs associated with the planned closure of former Guardsman facilities of
$6,532,000 and workforce reductions of $2,476,000 were recorded in the opening
balance sheet of the combined entity at the acquisition date, April 8, 1996.
Amounts paid or charged related to Guardsman facilities were $1,642,000 and
$3,590,000 during 1996 and 1997, respectively. During 1997, the remaining
$1,300,000 liability related to the Guardsman facilities was credited to
goodwill. Amounts paid or charged related to Guardsman workforce reductions were
$469,000 and $589,000 during 1996 and 1997, respectively. During 1997, the
remaining $1,418,000 liability related to the Guardsman workforce was credited
to goodwill.
4. Inventories
The principal inventory classifications at November 30 are summarized as follows
(in thousands):
1998 1997
------- -------
Finished products $29,761 $26,361
Raw materials 27,411 27,019
------- -------
57,172 53,380
Less adjustment of certain inventories
to last-in, first-out (LIFO) basis 6,376 7,676
------- -------
$50,796 $45,704
======= =======
Inventory cost is determined by the LIFO method of inventory valuation for
approximately 64% and 68% of inventories at November 30, 1998 and 1997,
respectively.
5. Benefit Plans
The Company maintains defined benefit and defined contribution plans that cover
substantially all employees. Retirement benefits under the defined benefit plans
are based on final monthly compensation and years of service. Retirement
benefits under the defined contribution plans are based on employer and employee
contributions plus earnings to retirement. The plans' assets consist primarily
of common stock, fixed income securities and guaranteed insurance contracts. In
addition, unfunded supplemental executive retirement plans cover certain
employees in which benefits, determined by the Board of Directors, are payable
after retirement over periods ranging from 15 years to life of the participant.
The provision for defined benefit pension cost is determined using the
projected unit credit actuarial method. The Company's policy is to fund amounts
as are necessary on an actuarial basis to provide assets sufficient to meet the
benefits to be paid to plan members in accordance with the Employee Retirement
Income Security Act of 1974. Amounts contributed to union-sponsored pension
plans are based upon requirements of collective bargaining agreements. Company
contributions to the defined contribution plans are based on a percentage of
employee contributions.
The Guardsman defined benefit pension plans covering substantially all U.S.
employees were amended to freeze years of service at December 31, 1996 and
merged into the defined benefit plan maintained by the Company. Concurrently
with this amendment, these employees became participants in the Company's
defined contribution plans. The impact of the plan merger was recorded in
connection with the Guardsman acquisition. All 1996 amounts disclosed below
reflect the effect of freezing years of service for the Guardsman plans and
their merger into the Lilly plan.
The components of net pension cost for the defined benefit plans and
amounts charged to expense for the defined contribution plans for the years
ended November 30 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Defined benefit plans
Service cost - benefits earned during the period $ 2,034 $ 2,099 $ 1,733
Interest cost on projected benefit obligation 5,653 5,484 4,594
Actual net gain on plan assets (11,830) (8,482) (9,056)
Net amortization and deferral 3,236 1,012 3,104
-------- -------- --------
Net pension cost (benefit) (907) 113 375
Defined contribution plans 4,113 3,740 2,219
-------- -------- --------
Pension expense $ 3,206 $ 3,853 $ 2,594
======== ======== ========
</TABLE>
The expected long-term rates of return on assets used to compute the
defined benefit plans'pension expense were 10.25% for 1998 and 9.25% for 1997
and 1996.
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheets at November 30 for the Company's defined benefit
pension plans (in thousands):
1998 1997
-------- --------
Actuarial present value of benefit obligations:
Vested $ 65,051 $ 60,141
Nonvested 4,216 4,767
-------- --------
Total accumulated benefit obligations $ 69,267 $ 64,908
======== ========
Actuarial present value of projected benefit
obligations for services rendered to date $(76,458) $(82,542)
Plan assets at fair value 96,571 88,594
-------- --------
Excess of plan assets over projected
benefit obligations 20,113 6,052
Unrecognized net gains (15,317) (4,277)
Unrecognized prior service cost 4,813 5,274
Unrecognized transition obligation at
December 1, 1985, net of amortization (933) (1,135)
-------- --------
Net pension asset $ 8,676 $ 5,914
======== ========
The discount rates used to measure benefit obligations were 6.75% and 7.0%
in 1998 and 1997, respectively. The rates of increase in compensation levels
used to measure benefit obligations were 4% and 5% during 1998 and 1997,
respectively.
Certain employees from one of the Company's German subsidiaries
participate in a frozen defined benefit retirement plan. The liability related
to such plan totaled $4,400,000 at November 30, 1998.
Accumulated benefits for supplemental executive retirement plans totaled
approximately $8,465,000 and $7,953,000 at November 30, 1998 and 1997,
respectively.
<PAGE>
6. Long-Term Debt
Long-term debt consists of the following as of November 30 (in thousands):
1998 1997
------------------------------------------------------
7.75% Senior Unsecured Notes $100,000 $100,000
Revolving Credit Facility 93,700 124,000
German Credit Facility 10,000 -
Other - 171
-------- --------
$203,700 $224,171
======== ========
In February 1998, the Company obtained an unsecured
Deutschemark-denominated revolving credit facility (the "German
Facility") with a bank. Borrowings available under the German Facility
are $10,000,000 until November 29, 1999, gradually decreasing to
$2,350,000 on December 1, 2001. German Facility advances of greater
than $60,000 bear interest, at the Company's option, at either (i)
the money market rate of the bank's German affiliate, or (ii) the
Frankfurt, Germany Interbank Offered Rate for DM deposits plus an
interest rate margin ranging from .40% to .80%, depending on the
Company's leverage. Other advances bear interest at the prime rate of
the bank's German affiliate. The principal of the facility is due
upon termination, February 2003.
In November 1997, the Company restructured its long-term debt
into a $175,000,000 revolving credit facility ("Facility") with a
group of financial institutions and $100,000,000 of senior notes
("Notes"). The Notes were issued as a 144A private placement offering
with registration rights. The Facility is unsecured and provides for
borrowings under a revolving note.
Interest is payable upon maturity of each revolving advance,
but in no case less frequently than quarterly. The principal of the
Facility is due October, 2002. The Notes are unsecured. Interest is
payable on June 1 and December 1 of each year the Notes are
outstanding. The principal of the Notes is due December, 2007. The
Facility bears interest, at the Company's option, at (i) the higher
of the agent bank's prime rate (7.75% at November 30, 1998) or the
Federal Funds rate plus 0.50%, or (ii) the London Interbank Offered
Rate for U.S. Dollars plus 0.40% to 1.00%, depending upon the
Company's credit rating. A commitment fee ranging from 0.15% to
0.25%, depending upon the Company's credit rating, is payable on the
unused portion of the Facility.
In April 1996, the Company entered into a forty-four month
amortizing interest rate swap agreement ("Swap") with a notional
amount of $175,000,000. This agreement effectively converts a portion
of the revolving note from variable rate debt to fixed rate debt with
a rate of 6.88% at November 30, 1998. The notional amount of the Swap
was $50,000,000 at November 30, 1998.
Interest of $12,369,000, $20,628,000 and $12,746,000 was paid
in fiscal 1998, 1997 and 1996, respectively.
The Company is subject to various debt covenants under the
Facility, Notes and German Facility including affirmative and negative
covenants which require the maintenance of certain ratios for maximum
leverage, fixed charge coverage and interest coverage. Additionally,
such covenants place certain restrictions on the Company's ability to
engage in mergers and acquisitions and incur additional indebtedness.
<PAGE>
7. Income Taxes
Income tax expense for the years ended November 30 is comprised of the following
components (in thousands):
1998 1997 1996
--------------------------------------------------------------------
Current expense:
Federal $12,757 $10,612 $ 7,204
Foreign 7,290 7,674 4,736
State 2,358 697 1,328
------- ------- -------
22,405 18,983 13,268
Deferred expense (credit):
Federal 593 2,818 1,829
Foreign (139) 210 (119)
State 8 1,057 384
------- ------- -------
462 4,085 2,094
------- ------- -------
$22,867 $23,068 $15,362
======= ======= =======
A reconciliation of the statutory U.S. federal rate to the effective
income tax rate for the years ended November 30 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Increase resulting from:
Goodwill 3.6 3.9 4.1
State income taxes, net of
federal income tax benefit 2.8 2.3 3.3
Foreign 1.8 2.2 1.3
Other items (1.2) 1.7 1.3
---- ---- ----
Effective income tax rate 42.0% 45.1% 45.0%
==== ==== ====
</TABLE>
Deferred income taxes are recorded based upon differences between the
financial statement and tax basis of assets and liabilities.
The deferred tax assets and liabilities recorded on the balance sheet
at November 30 are as follows (in thousands):
1998 1997
-----------------------------------------------------------------------
Deferred tax assets:
Goodwill and intangibles $ 1,279 $ 1,426
Employee benefits 5,565 6,467
Accounts receivable, inventory and other 13,839 13,937
------- -------
20,683 21,830
Deferred tax liabilities:
Property and equipment 5,526 7,709
Pension 3,068 2,099
------- -------
8,594 9,808
------- -------
Net deferred tax assets $12,089 $12,022
======= =======
No provision has been made for U.S. federal income taxes on certain
undistributed earnings of foreign subsidiaries that the Company intends to
permanently invest or that may be remitted tax-free. The total of undistributed
earnings that would be subject to federal income tax if remitted under existing
law is approximately $16,000,000 at November 30, 1998. Determination of the
unrecognized deferred tax liability related to these earnings is not practicable
because of the complexities with its hypothetical calculation. Upon distribution
of these earnings, the Company will be subject to U.S. taxes and withholding
taxes payable to various foreign governments. A credit for foreign taxes already
paid would be available to reduce the U.S. tax liability.
Income taxes of $21,800,000, $20,500,000 and $20,177,000 were paid in 1998,
1997 and 1996, respectively.
<PAGE>
8. Capital Stock
The Company has two classes of common stock, Class A stock and Class B stock.
Authorized shares of Class A and Class B stock are 97,000,000 and 3,000,000,
respectively. The limited voting rights of Class A shareholders are equal to
voting rights of Class B shareholders only with regard to voting for merger,
consolidation or dissolution of the Company and voting and electing four
directors of the Company if there are ten or more directors and two directors if
there are nine or fewer directors. With respect to all rights other than voting,
Class A shareholders are the same as Class B shareholders.
The terms of the Class B stock, which is held only by employees, provide
that these shares be exchanged for Class A stock on a share-for-share basis when
the shareholder ceases to be an employee or decides to dispose of the shares.
Accordingly, 3,000,000 shares of authorized Class A stock are reserved for this
purpose.
On January 12, 1996, the Company's board of directors ("Board") declared a
dividend of one purchase right for each outstanding share of Class A and Class B
stock. In addition, one right is distributed for each share issued after January
26, 1996. Upon exercise, each right entitles holders to purchase from the
Company one share of stock at $55 per share, subject to certain adjustments. The
rights become exercisable when a person or group acquires beneficial ownership
of 15 percent or more of Class A stock or becomes the beneficial owner of an
amount of Class A stock (but not less than 10 percent) which the Board
determines to be substantial and not in the Company's best long-term interests
or following the announcement of a tender or exchange offer for 30% or more of
the Class A stock.
In the event a person acquires 15 percent or more of Class A stock, or is
determined by the Board to be a substantial owner whose ownership is not in the
Company's best long-term interests or an acquiring person engages in certain
self-dealing transactions, each holder will have the right to receive that
number of common shares having a market value of two times the exercise price of
the right. At any time after a person becomes an acquiring person, but before
such person acquires 50 percent or more of outstanding Class A stock, the Board
may exchange each right for one common share (subject to adjustment).
In the event the Company is involved in certain business combination
transactions, or 50 percent or more of the Company's consolidated assets or
earning power are sold, each holder will have the right to receive, upon
exercise at the then-current exercise price of the right, that number of shares
of common stock of the acquiring company having a market value of two times the
exercise price of the right.
The Company may redeem the rights at a price of $.01 per right at any time
prior to the time a person or group becomes an acquiring person as defined by
the rights agreement. The rights expire in January, 2006.
A summary of shares issued and held in treasury follows (in thousands):
<TABLE>
<CAPTION>
Capital Stock Capital Stock
Issued Held in Treasury
Class A Class B Class A Class B
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 1, 1995 26,903 540 4,754 187
Class A exchanged for Class B - - 78 (78)
Class B exchanged for Class A - - (54) 54
Stock options exercised 281 - 32 28
------ --- ----- ---
Balance at November 30, 1996 27,184 540 4,810 191
Class A exchanged for Class B - - 106 (106)
Class B exchanged for Class A - - (22) 22
Stock options exercised 490 - 29 75
------ --- ----- ---
Balance at November 30, 1997 27,674 540 4,923 182
Class A exchanged for Class B - - 92 (92)
Class B exchanged for Class A - - (9) 9
Acquisition for treasury - - 39 -
Stock options exercised 151 - 37 12
------ --- ----- ---
Balance at November 30, 1998 27,825 540 5,082 111
====== === ===== ===
</TABLE>
Changes in the capital stock components of shareholders' equity are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Cost of
Capital Stock Capital
(Stated Amount) Additional Stock in
Class A Class B Capital Treasury
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 1, 1995 $14,947 $ 300 $73,450 $31,057
Stock options exercised 156 - 1,828 968
Disqualifying disposition
of stock options - - 155 -
------ --- ----- ---
Balance at November 30, 1996 15,103 300 75,433 32,025
Stock options exercised 272 - 3,834 2,119
Disqualifying disposition
of stock options - - 150 -
------ --- ----- ---
Balance at November 30, 1997 15,375 300 79,417 34,144
Stock options exercised 84 - 1,820 1,018
Disqualifying disposition
of stock options - - 653 -
Acquisition for treasury - - - 730
------- ----- ------- -------
Balance at November 30, 1998 $15,459 $ 300 $81,890 $35,892
======= ===== ======= =======
</TABLE>
Incentive stock option plans entitle certain directors, officers and other
key employees to buy shares of Class A stock at prices not less than fair market
value on the date of grant. The options vest and become exercisable ratably over
a three-year period commencing two years after the date of grant and expire five
or ten years after the date of grant. Certain options are granted with stock
appreciation rights (SAR) and reload options. An SAR entitles the option holder
to receive a cash payment equal to the difference between the option price and
the current value of Class A stock. The reload option entitles the option holder
to the same number of options exercised with an option price equal to the fair
market value at the date of exercise. Shares reserved under these plans were
1,931,420 and 2,109,310 at November 30, 1998 and 1997, respectively.
A summary of stock option activity for the years ended November 30 follows:
Weighted
Average
Number of Exercise
Shares Price
- --------------------------------------------------------------------------------
Balance at December 1, 1995 1,198,880 $ 9.64
Grants 311,304 12.88
Exercised (280,962) 7.06
Terminated (16,932) 10.84
--------- -------
Balance at November 30, 1996 1,212,290 11.05
Grants 77,072 18.43
Exercised (489,610) 8.39
Terminated (10,250) 13.39
--------- -------
Balance at November 30, 1997 789,502 13.39
Grants 460,022 18.84
Exercised (151,233) 12.60
Terminated (37,975) 17.41
--------- -------
Balance at November 30, 1998 1,060,316 $ 15.72
========= =======
<PAGE>
8. Capital Stock, continued
At November 30, 1998 the range of exercise prices and weighted-average remaining
contractual life of outstanding options were $12.25 - $21.63 and 5.4 years,
respectively. At November 30, 1998 and 1997, the number of options exercisable
was 340,000 and 279,000 respectively, and the weighted-average exercise price of
those options was $13.49 and $12.93, respectively.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", (SFAS 123) became effective for the Company in 1997.
SFAS 123 permits companies to continue to apply APB Opinion 25, "Accounting for
Stock Issued to Employees" (APB 25) and related Interpretations in accounting
for its plans. The Company has elected to follow APB 25 and related
Interpretations. Under APB 25, because the exercise price of the Company's
employee stock options is not less than fair market price of the share at the
date of grant, no compensation expense is recognized in the financial
statements.
Pro forma information regarding net income and net income per share is
required by SFAS 123 and has been determined as if the Company accounted for its
employee stock options using the fair value method of that Statement.
The fair value of options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: risk-free interest rate of
4.7%, 5.8%, and 6.0%; dividend yields of 1.9% for all years; volatility factors
of the expected market price of the Company's Class A stock of .27, .30 and
.32; and a weighted average expected life of options of 5.2 years, 4 years and 4
years.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
Company's pro forma information follows (in thousands except for per share
amounts):
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $30,924 $27,608 $18,439
Pro forma net income per share:
Basic $ 1.34 $ 1.20 $ .81
Diluted 1.32 1.18 .79
Weighted-average fair value
of options granted during the year $ 5.76 $ 4.93 $ 3.71
</TABLE>
Due to the required phase-in provisions, the effects of applying SFAS 123
to arrive at the above pro forma amounts may not be representative of the
expected effects on pro forma net income or net income per share in future
years.
9. Geographic Information
The Company maintains operations in the United States as well as Canada, the
United Kingdom, Germany, Taiwan, Malaysia, China, Ireland and Australia. A
summary of geographic data for the years ended November 30 is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers:
<S> <C> <C> <C>
United States $488,703 $491,973 $423,753
Outside U.S., excluding U.S. exports 130,299 109,323 85,223
-------- -------- --------
Consolidated $619,002 $601,296 $508,976
======== ======== ========
Operating income:
United States $ 50,942 $ 51,150 $ 42,463
Outside U.S. 21,089 18,984 15,110
Restructuring charge - - (9,607)
-------- -------- --------
Consolidated $ 72,031 $ 70,134 $ 47,966
======== ======== ========
Total assets:
United States $430,081 $453,456 $473,957
Outside U.S. 87,165 49,007 48,325
Eliminations (deductions) (761) (668) (422)
-------- -------- --------
Consolidated $516,485 $501,795 $521,860
======== ======== ========
</TABLE>
10. Quarterly Results of Operations (Unaudited)
Quarterly results of operations are summarized as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Quarter Ended
1998 Feb. 28 May 31 Aug. 31 Nov. 30
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $143,334 $159,198 $159,345 $157,125
Gross profit 53,431 61,794 61,752 62,384
Net income 5,140 8,715 8,674 9,050
Net income per share
Basic .22 .38 .37 .39
Diluted .22 .37 .37 .39
Quarter Ended
1997 Feb. 28 May 31 Aug. 31 Nov. 30
-------------------------------------------------------------------------------------
Net sales $142,160 $154,238 $150,904 $153,994
Gross profit 52,048 59,193 57,072 59,968
Net income 4,710 7,401 7,679 8,305
Net income per share
Basic .21 .32 .33 .36
Diluted .20 .32 .33 .35
</TABLE>
Report of Independent Auditors
Shareholders and Board of Directors
Lilly Industries, Inc.
We have audited the accompanying consolidated balance sheets of Lilly
Industries, Inc. and subsidiaries as of November 30, 1998 and 1997, and the
related consolidated statements of income and retained earnings and cash flows
for each of the three years in the period ended November 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lilly
Industries, Inc. and subsidiaries at November 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended November 30, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
January 15, 1999
Responsibility for Financial Statements
- --------------------------------------------------------------------------------
The management of Lilly Industries, Inc. is responsible for the preparation of
the financial statements in the Annual Report and for the integrity and
objectivity of the information presented. The financial statements have been
prepared in conformity with generally accepted accounting principles and
necessarily include amounts which are estimates and judgments. The fairness of
the presentation in these statements of the Company's financial position,
results of operations and cash flows is reported on by the independent auditors.
To assist in carrying out the above responsibility, the Company has
internal systems which provide for selection of personnel, segregation of duties
and the maintenance of accounting policies, systems, procedures and related
controls.
Although no cost-effective system can insure the elimination of errors, the
Company's systems have been designed to provide reasonable but not absolute
assurances that assets are safeguarded, that policies and procedures are
followed, and that the financial records are adequate to permit the production
of reliable financial statements. The Audit Committee of the Board of Directors,
which is composed of directors who are not employees of the Company or its
subsidiaries, meets regularly with Company officers and independent auditors in
connection with the adequacy and integrity of the Company's financial reporting
and internal controls.
/s/ John C. Elbin /s/ Kenneth L. Mills
John C. Elbin Kenneth L. Mills
Vice President, Chief Financial Officer Corporate Controller and
and Secretary Assistant Secretary
<PAGE>
Investor Information
Form 10-K
- --------------------------------------------------------------------------------
A copy of the Form 10-K, which is filed with the Securities and Exchange
Commission, will be sent free to any shareholder upon written request. Contact
Kenneth L. Mills, Corporate Controller and Assistant Secretary, at Lilly
Industries, Inc. 733 S. West Street Indianapolis, IN 46225; or E-mail:
[email protected].
Registrar and Transfer Agent
- --------------------------------------------------------------------------------
Communications concerning shareholder records, including address changes, stock
transfers, cash dividends or other service needs should be directed to Harris
Trust and Savings Bank, Attn: Shareholder Services, 311 W. Monroe Street, 11th
Floor, P. O. Box A3504 Chicago, Illinois 60690 (800) 942-5909 or (312) 461-6001.
Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
A dividend reinvestment and voluntary stock purchase plan for Lilly Industries,
Inc. shareholders permits purchase of the Company's Class A stock without
payment of brokerage commission or service charge. Participants in this plan may
have cash dividends on their shares automatically reinvested and, if they
choose, invest by making optional cash payments. Additional information on the
plan is available by writing or calling: Harris Trust and Savings Bank, Attn:
Dividend Reinvestment 311 W. Monroe Street, 2nd Floor P. O. Box A3309 Chicago,
Illinois 60690 (800) 942-5909.
Analyst Contacts
- --------------------------------------------------------------------------------
Security analyst inquiries are welcomed. Please call: John C. Elbin, Vice
President, Chief Financial Officer, and Secretary (317) 687-6703.
Annual Meeting
- --------------------------------------------------------------------------------
The meeting notice and proxy materials were mailed to shareholders with their
copies of this annual report. Lilly urges all shareholders to vote their proxies
and thus participate in the decisions that will be made at the annual meeting.
The meeting will be held on Thursday, April 22, 1999 at 10:00 A.M., EST, in
rooms 101 and 102 at the Indiana Convention Center and RCA Dome in Indianapolis,
Indiana.
Stock Trading and Dividend Information
- --------------------------------------------------------------------------------
The Company's Class A stock is traded on the New York Stock Exchange under the
symbol LI. Dividends are traditionally paid on the 1st business day of January,
April, July and October to shareholders of record approximately three weeks
prior. The following table sets forth the dividends paid per share of stock and
the high and low prices in each of the quarters in the past two years ended
November 30.
Dividends Price Range
Fiscal 1998 Per Share High Low
--------------------------------------------------------------------
1st quarter ended Feb. 28 $ .08 $ 20 5/8 $ 17 7/8
2nd quarter ended May 31 .08 22 3/4 17 3/4
3rd quarter ended Aug. 31 .08 24 5/8 18 1/2
4th quarter ended Nov. 30 .08 19 7/8 14 3/8
------
$ .32
======
Dividends Price Range
Fiscal 1997 Per Share High Low
--------------------------------------------------------------------
1st quarter ended Feb. 28 $ .08 $ 20 $ 17
2nd quarter ended May 31 .08 21 16 3/4
3rd quarter ended Aug. 31 .08 24 1/8 19 3/4
4th quarter ended Nov. 30 .08 22 1/2 17 7/8
------
$ .32
======
<PAGE>
At November 30, 1998 there were approximately 2,400 registered shareholders
of Class A stock and 63 registered shareholders of Class B stock, which is
reserved for employees of the Company.
Locations
International
- -------------------------------------------
Australia
283 Alfred Street
North Sydney, NSW 2060
Australia
Canada
1915 Second Street West
Cornwall, Ontario K6H 5T1
Canada
65 Duke Street
London, Ontario N6J 2X3
Canada
China
Lot 3 Xintang
District Administration
Dalinshan, Dongguan
Guangdon, China 511774
England
152 Milton Park
Abingdon
Oxfordshire OX14 4SD
England
Germany
D-8649 Wallenfels
Postfach 1126
Germany
Friedensstrasse 40
D-52249 Eschweiler
Germany
Ireland
Willowfield Road
Ballinamore
Co. Leitrim
Ireland
Malaysia
Lot No. 4963, Jalan Teratai
51/2 Miles Meru Industrial Zone
41050 Klang
Selangor Darul Ehsan
Malaysia
Mexico
Ave. Central No. 223
Los Lermas, Guadalupe
N.L. Mexico 67190
<PAGE>
Singapore
09-09 International Building
360 Orchard Road
Singapore
Taiwan, R.O.C.
No. 1 Kung Yeh First Road
Zenwu Village
Kaohsiung Hsien
Taiwan, R.O.C.
United States
- -------------------------------------------
Alabama
1771 Industrial Road Dothan, AL 36303
Arkansas
1900 E. 145th Street Little Rock, AR 72206
California
210 East Alondra Blvd. Gardena, CA 90248
901 West Union Street Montebello, CA 90640
Connecticut
145 Dividend Road Rocky Hill, CT 06067
15 Lunar Drive Woodbridge, CT 06525
Florida
2355 S.W. 66th Terrace Davie, FL 33317
Illinois
5400 23rd Avenue Moline, IL 61265
Indiana
28335 Clay Street Elkhart, IN 46517
546 W. Abbott Street Indianapolis, IN 46225
Kentucky
347 Central Avenue Bowling Green, KY 42101
Michigan
411 Darling Street, N. Fremont, MI 49412
4999 36th Street, SE Grand Rapids, MI 49512
Missouri
1136 Fayette N. Kansas City, MO 64116
New Jersey
1991 Nolte Drive Paulsboro, NJ 08066
North Carolina
10300 Claude Freeman Drive Charlotte, NC 28262
2147 Brevard Road High Point, NC 27263
1717 English Road High Point, NC 27262
Texas
2518 Chalk Hill Road Dallas, TX 75212
Washington
13535 Monster Road Seattle, WA 98178
Corporate Offices
- -------------------------------------------
733 S. West Street
Indianapolis, Indiana 46225
Corporate Technology Center
521 W. McCarty Street
Indianapolis, Indiana 46225
<PAGE>
Officers and Directors
Officers
- -------------------------------------------
Douglas W. Huemme, 57
Chairman, President and
Chief Executive Officer
Robert A. Taylor, 44
Executive Vice President and
Chief Operating Officer
Hugh M. Cates, 55
Vice President and General Manager,
Wood Coatings
Larry H. Dalton, 51
Vice President,
Manufacturing and Engineering
Alain DeBlandre, 42
Vice President and Managing Director - Europe
William C. Dorris, 55
Vice President, Corporate Development
John C. Elbin, 45
Vice President, Chief Financial Officer and Secretary
Ned L. Fox, 57
Vice President, Supply Chain Management
A. Barry Melnkovic, 41
Vice President, Human Resources
John D. Million, 56
Vice President and Managing Director- Asia Pacific
Kenneth L. Mills, 50
Corporate Controller and
Assistant Secretary
Gary D. Missildine, 57
Vice President and General Manager,
Industrial Coatings
Virgil E. Underwood, 47
Vice President and General Manager,
Coil Coatings
Keith C. Vander Hyde, Jr., 40
Vice President and General Manager,
Specialty
Jay M. Wiegner, 55
Vice President and General Manager,
Composites and Glass Coatings
<PAGE>
Directors
- -------------------------------------------
James M. Cornelius,
Chairman, Guidant Corporation
William C. Dorris,
Vice President, Corporate Development
Paul K. Gaston,
Former Chairman, Guardsman Products, Inc.
Douglas W. Huemme,
Chairman, President and
Chief Executive Officer
Harry Morrison, Ph.D.,
Dean, School of Science
Purdue University
Norma J. Oman,
President and
Chief Executive Officer
Meridian Insurance Group, Inc.
John D. Peterson,
Chairman, City Securities Corporation
Thomas E. Reilly, Jr.,
Chairman and Chief Executive Officer
Reilly Industries, Inc.
Van P. Smith,
Chairman, Ontario Corporation
Robert A. Taylor,
Executive Vice President and
Chief Operating Officer
[photo of Directors]
Exhibit 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF LILLY INDUSTRIES, INC. AS OF FEBRUARY 22, 1999
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
<S> <C> <C>
1. Lilly Industries (USA), Inc. Indiana
2. Lilly Industries (Asia), Limited Hong Kong
3. Lilly Industries (Australia) Pty Ltd. Australia
(Subsidiary of Lilly Industries (USA), Inc.)
4. Lilly Industries (Cornwall) Limited Ontario, Canada
(Subsidiary of Lilly Industries (USA), Inc.)
5. Lilly Industries (Ireland) Limited Ireland
6. Lilly Industries (Malaysia) Sdn.Bhd. Malaysia
7. Lilly Industries (Mexico), S.A. de C.V. Mexico
8. Lilly Industries, Inc.(Canada) Ontario, Canada
9. Lilly Industries (Far East), Ltd. Taiwan
10. Lilly Industries (Thailand), Limited Thailand
11. London Laboratories GmbH Germany
(Subsidiary of Lilly Industries (USA), Inc.)
12. Merckens Lackchemie GmbH and Company KG Germany
(Subsidiary of London Laboratories, GmbH)
13. Dongguan Lilly Paint Industries, Ltd. Peoples Republic of China
(Subsidiary of Lilly Industries (Asia), Limited)
14. G.C.I. Insurance Company, Limited Bermuda
(Subsidiary of Lilly Industries (USA), Inc.)
15. Lilly Industries (UK), LTD United Kingdom
(Subsidiary of Lilly Industries (USA), Inc.)
16. Pinturas Dygo, S.A. de C.V. Mexico
(Subsidiary of Lilly Industries (Mexico),
S.A. de C.V.)
17. Lilly Technologies, Inc. Delaware
18. Lilly Industries, LLC. Indiana
19. Lilly Industries International, LTD Barbados
</TABLE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Lilly Industries, Inc. of our report dated January 15, 1999, included in the
1998 Annual Report to Shareholders of Lilly Industries, Inc.
Our audits also included the financial statement schedule of Lilly Industries,
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We further consent to the incorporation by reference in Registration Statements
(Form S-8 Nos. 2-59159, 2-76317, 33-52954, 33-52956 pertaining to the Lilly
Employees' Stock Purchase Plan, the Lilly Industries, Inc. Stock Option Plan,
the Lilly Industries, Inc. 1991 Director Stock Option Plan, and the Lilly
Industries, Inc. Employee 401(k) Savings Plan, respectively, and 33-52958 and
333-32205 pertaining to the Lilly Industries, Inc. 1992 Stock Option plan) of
our report dated January 15, 1999, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included in
this Annual Report (Form 10-K) of Lilly Industries, Inc.
/s/ Ernst & Young LLP
Indianapolis, Indiana
February 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED CONDENSED BALANCE SHEET OF LILLY INDUSTRIES, INC. AT NOVEMBER 30,
1998 AND THE CONSOLIDATED CONDENSED STATEMENT OF INCOME OF LILLY INDUSTRIES,
INC. FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> NOV-30-1998
<CASH> 13,326
<SECURITIES> 0
<RECEIVABLES> 84,020
<ALLOWANCES> 1,981
<INVENTORY> 50,796
<CURRENT-ASSETS> 152,032
<PP&E> 162,357
<DEPRECIATION> 60,189
<TOTAL-ASSETS> 516,485
<CURRENT-LIABILITIES> 101,961
<BONDS> 0
<COMMON> 97,649
0
0
<OTHER-SE> 67,926
<TOTAL-LIABILITY-AND-EQUITY> 516,485
<SALES> 619,002
<TOTAL-REVENUES> 619,002
<CGS> 379,641
<TOTAL-COSTS> 546,971
<OTHER-EXPENSES> 666
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,919
<INCOME-PRETAX> 54,446
<INCOME-TAX> 22,867
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,579
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.35
</TABLE>
