<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1997
REGISTRATION NO. 333-19377
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
LEXMARK INTERNATIONAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3074422
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
---------------
ONE LEXMARK CENTRE DRIVE
LEXINGTON, KENTUCKY 40550
(606) 232-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
VINCENT J. COLE, ESQ.
LEXMARK INTERNATIONAL GROUP, INC.
ONE LEXMARK CENTRE DRIVE
LEXINGTON, KENTUCKY 40550
(606) 232-2700
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C> <C>
PAUL S. BIRD, ESQ. DAVID B. HARMS, ESQ. KEITH F. HIGGINS, ESQ.
DEBEVOISE & PLIMPTON SULLIVAN & CROMWELL ROPES & GRAY
875 THIRD AVENUE 125 BROAD STREET ONE INTERNATIONAL PLACE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10004 BOSTON, MASSACHUSETTS 02110
(212) 909-6000 (212) 558-4000 (617) 951-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with a dividend or
interest reinvestment plans, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectuses: one to be
used in connection with a United States offering (the "U.S. Prospectus") and
one to be used in a concurrent international offering (the "International
Prospectus"). The U.S. Prospectus and the International Prospectus are
identical in all respects except that they contain different front, inside
front, and back cover pages and different descriptions of the plan of
distribution (contained under the caption "Underwriting" in both the U.S.
Prospectus and the International Prospectus), and the International Prospectus
also contains an additional section under the caption "Certain United States
Tax Consequences to Non-United States Holders". Pages for the International
Prospectus are separately designated.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 27, 1997
10,000,000 SHARES
LEXMARK INTERNATIONAL GROUP, INC.
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
----------
Of the 10,000,000 shares of Class A Common Stock offered, 8,000,000 shares
are being offered hereby in the United States and 2,000,000 shares are being
offered in a concurrent international offering outside the United States. The
public offering price and the aggregate underwriting discount per share will be
identical for both offerings. See "Underwriting".
All the shares of Class A Common Stock are being sold by the Selling
Stockholders. See "Selling Stockholders". The Company will not receive any of
the proceeds from the sale of the shares.
The last reported sale price of the Class A Common Stock, which is listed
under the symbol "LXK", on the New York Stock Exchange on January 23, 1997 was
$26 per share. See "Price Range of Class A Common Stock and Dividend Policy".
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) STOCKHOLDERS(2)
-------------- ------------ -------------------
<S> <C> <C> <C>
Per Share....................... $ $ $
Total(3)........................ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".
(2) Expenses of approximately $1,000,000 are payable by the Company in
connection with the offerings.
(3) The Selling Stockholders have granted the U.S. Underwriters an option for
30 days to purchase up to an additional 1,200,000 shares at the public
offering price per share, less the underwriting discount, solely to cover
over-allotments. The Selling Stockholders have granted the International
Underwriters a similar option with respect to an additional 300,000 shares
as part of the concurrent international offering. If such options are
exercised in full, the total initial public offering price, underwriting
discount and proceeds to Selling Stockholders will be $[ ],
$[ ] and $[ ], respectively. See "Underwriting".
----------
The shares offered hereby are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
shares will be ready for delivery in New York, New York, on or about February
[ ], 1997, against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
----------
The date of this Prospectus is , 1997.
<PAGE>
[COLOR PHOTOS OF SELECTED LEXMARK PRODUCTS]
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended ( the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission
Regional Offices located at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 7th
Floor, New York, New York 10048. Copies of such materials may also be obtained
upon written request from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C., 20549, at prescribed rates. The
Commission also maintains a Web Site at http://www.sec.gov. which contains
reports and other information regarding registrants that file electronically
with the Commission. In addition, such material may also be inspected and
copied at the offices of the New York Stock Exchange, Inc. (the "NYSE"), 20
Broad Street, New York, New York, 10005, on which the Class A Common Stock is
listed.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares (the "Shares") of its Class A
Common Stock, par value $.01 per share (the "Class A Common Stock"), being
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete; with respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. For further information with respect to the Company and the
Shares, reference is hereby made to the Registration Statement.
----------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, including portions incorporated therein of the
Company's definitive Proxy Statement dated March 22, 1996.
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996 and June 30, 1996 and the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996, as amended by the
Company's Quarterly Report on Form 10-Q/A filed with the Commission on
January 24, 1997.
3. The Company's Current Report on Form 8-K as filed with the Commission on
January 21, 1997.
4. All other documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offerings of the Shares.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents which are incorporated herein by reference, other than exhibits to
such information (unless such exhibits are specifically incorporated by
reference into such documents). Requests should be directed to the Company,
One Lexmark Centre Drive, Lexington, Kentucky 40550, Attention: Office of the
Secretary, telephone (606) 232-2700.
----------------
3
<PAGE>
Any statement contained in a document or a portion thereof which is
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
or portion thereof which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any statement so modified shall
not be deemed to constitute a part of this Prospectus except as so modified,
and any statement so superseded shall not be deemed to constitute part of this
Prospectus.
----------------
IN CONNECTION WITH THESE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS
A COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
related notes appearing elsewhere in this Prospectus. Lexmark International
Group, Inc. ("LIG") is a Delaware corporation that has as its only significant
asset all the outstanding common stock of Lexmark International, Inc., a
Delaware corporation ("Lexmark International"). Hereinafter, "the Company" and
"Lexmark" will refer to LIG, or to LIG and Lexmark International, including its
subsidiaries, as the context requires. Unless otherwise indicated, all
information set forth in this Prospectus assumes no exercise of the over-
allotment options to be granted to the Underwriters by the Selling
Stockholders. References herein to the "Common Stock" refer to the Company's
Class A Common Stock and its non-voting Class B Common Stock, par value $.01
per share (the "Class B Common Stock") and to the "IPO" refer to the Company's
initial public offering of Class A Common Stock on November 15, 1995.
THE COMPANY
Lexmark is a global developer, manufacturer and supplier of laser and inkjet
printers and associated consumable supplies for the office and home markets.
Lexmark also sells serial wire matrix printers for printing single and multi-
part forms by business users. In 1995, revenues from the sale of printers and
associated printer supplies increased 36% from 1994 and accounted for 69% of
total Company revenues of approximately $2.2 billion. In the first nine months
of 1996, revenues from the sale of printers and associated printer supplies
increased 25% from the prior year period and accounted for 75% of total Company
revenues of approximately $1.7 billion.
The Company's installed base of printers supports a large and profitable
printer supplies business. Because consumable supplies must be replaced on
average one to three times a year, depending on type of printer and usage,
demand for laser and inkjet print cartridges is increasing at a higher rate
than printer shipments. This is a relatively high margin, recurring business
that management expects to contribute to the stability of Lexmark's earnings
over time.
In addition to its core printer business, Lexmark develops, manufactures and
markets a broad line of other office imaging products which include supplies
for International Business Machines Corporation ("IBM") branded printers,
after-market supplies for original equipment manufacturer ("OEM") products, and
typewriters and typewriter supplies that are sold under the IBM trademark. In
1995, revenues from the sale of other office imaging products decreased 2% from
1994 and accounted for 23% of total Company revenues. In the first nine months
of 1996, revenues from the sale of other office imaging products increased 4%
from the prior year period primarily as a result of increased sales in the
after-market laser cartridge business and accounted for 23% of total Company
revenues.
Approximately half of the Company's 1996 revenues have been derived from
sales outside the United States. Revenues derived from international sales,
including exports from the United States, have grown from 45% of total revenues
in 1994 to 53% of total revenues for the nine months ended September 30, 1996.
Lexmark's products are sold in more than 100 countries in North and South
America, Europe, the Middle East, Africa, Asia, the Pacific Rim and the
Caribbean. The Company has approximately 6,700 employees worldwide.
PRINTERS AND ASSOCIATED SUPPLIES
Lexmark competes primarily in the markets for laser and color inkjet
printers--two of the fastest growing printer categories. Sales of laser and
color inkjet printers and their associated supplies together represented
approximately 82% and 85% of Lexmark's total printer and associated supplies
revenues in 1995 and for the first nine months of 1996, respectively.
5
<PAGE>
The Company's critical technology and manufacturing capabilities have allowed
Lexmark to effectively manage quality and to reduce its typical new product
introduction cycle times, for example, in the case of laser printers from 24
months to approximately 12 to 16 months. Management believes its cycle times
are among the fastest in the industry and that these capabilities have
contributed to the Company's success over the last several years.
LASER PRINTERS. Network laser printer growth is being driven by the office
migration from large mainframe computers to local area networks that link
various types of computers using a variety of protocols and operating systems.
This shift has created strong demand for office desktop laser printers with
network connectivity attributes. Laser printers that print at speeds of 7-30
pages per minute ("ppm") are referred to herein as "office desktop" or
"network" printers, while lower-speed (1-6 ppm) laser printers and inkjet
printers are referred to herein as "personal" printers. The Company's laser
printers primarily compete in the office desktop segment, which the Company
believes is one of the fastest growing segments of the laser printer market.
For further discussion of the evolving nature of laser printer classifications,
see "Business--Market Overview and Strategy--Printers and Associated Supplies".
Lexmark develops and owns most of the technology for its laser printers and
consumable supplies, which differentiates the Company from a number of its
major competitors, including Hewlett-Packard Company ("HP"), which purchase
their laser engines from a third party. Lexmark's integration of research and
development, manufacturing and marketing has enabled the Company to design
laser printers with features desired by specific customer groups and has
resulted in substantial market presence for Lexmark within certain industry
segments such as banking, retail/pharmacy and health care.
INKJET PRINTERS. The color inkjet printer market, the fastest growing segment
of the personal printer market, is expanding rapidly due to growth in personal
computers and home offices, and the development of easy-to-use color inkjet
technology with good quality color print capability at low prices. Based on
data from industry analysts, management believes that the inkjet market grew
from 4 million units in 1992 to 21 million units in 1995 and will continue to
grow substantially as a result of the increase in the number of personal
computers and as the inkjet market continues to shift from monochrome to color
and as inkjet printers continue to replace low-speed laser printers. Lexmark
introduced its first color inkjet printer using its own technology in 1994 and
has experienced strong sales growth through retail outlets. The Company has
increased its product distribution through retail outlets, with the number of
such outlets worldwide rising from approximately 5,000 retail outlets in 1995
to approximately 15,000 in 1996. The Company has made substantial capital
investments in its inkjet production capacity in 1995 and 1996 to address the
growing demand for its color inkjet printers.
SUPPLIES. The Company is currently the exclusive source for new print
cartridges for the laser and inkjet printers it manufactures. Management
expects that an increasing percentage of future Company earnings will come from
its consumable supplies business, due to the consumer's continual usage and
replacement of cartridges. In 1996, the Company has substantially expanded its
inkjet cartridge manufacturing capacity in both North America and Europe.
STRATEGY. Lexmark's laser printer strategy is to target fast growing segments
of the network printer market and to increase market share by providing high
quality, technologically advanced products at competitive prices. To promote
Lexmark brand awareness and market penetration, Lexmark will continue to
identify and focus on customer segments where Lexmark can differentiate itself
by supplying laser printers with features that meet specific customer needs and
represent the best total cost of printing solution. Management intends to
continue to develop and market products with more functions and capabilities
than comparably priced HP printers. The Company's inkjet printer
6
<PAGE>
strategy is to generate demand for the Lexmark color inkjet printer by offering
high-quality products at competitive prices to retail and OEM customers.
Management expects that the Company's associated printer supplies business will
continue to grow as its installed base of laser and inkjet printers increases.
OTHER OFFICE IMAGING PRODUCTS
The Company's other office imaging products category includes many mature
products such as supplies for IBM printers, typewriters and typewriter supplies
and other impact supplies that require little investment but provide a
significant source of cash flow. The Company introduced its first after-market
laser cartridges for the large installed base of laser printers sold by other
manufacturers in May 1995. Management believes that the potential for an after-
market laser cartridge business is significant. The Company's strategy for
other office imaging products is to focus on the after-market OEM laser
supplies opportunity while managing its mature businesses for cash flow.
KEYBOARDS AND OTHER
In the first quarter of 1996, the Company completed the phase-out of its
keyboard business. Keyboard sales accounted for 8% and 3%, respectively, of the
Company's revenue and gross profit for 1995.
IBM RELATIONSHIP
In 1991, IBM entered into numerous agreements with the Company to support the
Company's operations for a five-year term, including an IBM agreement not to
compete with the Company's products that expired on March 27, 1996. IBM
accounted for approximately 26%, 22%, 20% and 10% of the Company's consolidated
revenues in 1993, 1994, 1995 and the nine months ended September 30, 1996,
respectively. When keyboard sales to IBM are excluded, IBM accounted for
revenues of approximately 13%, 12%, 12% and 8% in 1993, 1994, 1995 and the nine
months ended September 30, 1996, respectively. The Company's keyboard business,
of which IBM represented approximately 95%, accounted for revenues of $219,
$201, $177 and $32 million for the years 1993, 1994, 1995 and the nine months
ended September 30, 1996, respectively. In the third quarter of 1995, the
Company entered into a profit sharing supplies agreement with IBM and a related
agreement for an extension of the IBM trademark agreement that allows the
Company to continue to use the IBM logo on certain existing printer supplies in
its other office imaging products line through March 31, 1999. Under these
agreements, Lexmark is required to share the profits from the Company's sale of
certain products bearing the IBM logo. The Company also entered into a royalty
agreement for an extension of the right to use the IBM logo on typewriters,
typewriter supplies and certain other IBM branded printer supplies through
March 27, 2001. Since March 27, 1996, IBM is no longer required to purchase its
desktop printers and typewriters from the Company. However, IBM subsequently
entered into an agreement with the Company to use its best efforts to buy its
printer and typewriter supplies from the Company through March 31, 1999. In
addition, IBM is no longer prohibited from competing with the Company's printer
business and in June 1996 introduced laser printer products that compete with
the Company's products. See "Risk Factors--Competition".
BACKGROUND
LIG was formed in 1990 by Clayton, Dubilier & Rice, Inc., a private
investment firm ("CD&R"), in connection with the acquisition (the
"Acquisition") of IBM Information Products Corporation (renamed Lexmark
International) from IBM. The Acquisition was completed in March 1991. Upon
completion of the Offerings (as defined herein), The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D Fund IV"), a private investment fund
managed by CD&R, will own 16,081,015 shares of Class A Common Stock
representing approximately 22% of the then outstanding shares of the Common
Stock (and approximately 20% on a fully diluted basis assuming the exercise of
all outstanding warrants and options).
7
<PAGE>
Since the Acquisition, Lexmark has made a successful transition from being a
division within a large corporation to an independent company with its own line
of Lexmark-branded products, its own sales and marketing relationships and more
efficient development and manufacturing processes. Important achievements since
the Acquisition include reducing cycle time for most new product announcements
by 30% to 50% and achieving a position of technological leadership for laser
printers while reducing debt from $940 million to $181 million. The Company's
principal executive offices are located at One Lexmark Centre Drive, Lexington,
Kentucky 40550. Telephone: (606) 232-2000.
THE OFFERINGS
The offering of 8,000,000 shares of Class A Common Stock being offered in the
United States (the "United States Offering") and the offering of 2,000,000
shares of Class A Common Stock being offered outside the United States (the
"International Offering") are referred to herein collectively as the
"Offerings". The closing of the International Offering is conditional upon the
closing of the United States Offering, and vice versa.
<TABLE>
<S> <C>
Class A Common Stock offered by the Selling Stockholders.... 10,000,000 shares
U.S. Offering.............................................. 8,000,000 shares
International Offering..................................... 2,000,000 shares
Class A Common Stock to be outstanding after the
Offerings(1)................................................ 70,383,366 shares
NYSE Symbol................................................. LXK
</TABLE>
- --------
(1) Based upon shares outstanding at December 31, 1996, including 169,763
shares of Class A Common Stock issued upon exercise of a warrant in
connection with the Offerings.
The Company will not receive any of the proceeds from the sale of Shares in
the Offerings. At the time of the Acquisition, the Company agreed to assume the
costs of the Offerings and to pay certain fees and expenses in connection with
the sale of Shares by the Selling Stockholders. See "Selling Stockholders".
RISK FACTORS
Prospective purchasers of the Class A Common Stock should consider carefully
the specific investment considerations set forth under "Risk Factors", as well
as the other information set forth in this Prospectus.
- --------
Lexmark,(TM) Optra,(TM) ValueWriter,(TM) WinWriter,(TM) MarkVision,(TM)
MarkNet(TM) and ExecJet(R) are registered trademarks of Lexmark International.
Windows(R) and Windows 95(R) are registered trademarks of Microsoft
Corporation. LaserJet(R) and HP(R) are registered trademarks of HP. Apple(R) is
a registered trademark of Apple Computer, Inc. ("Apple"). Canon(R) is a
registered trademark of Canon Kabushiki Kaisha. IBM(R) is a registered
trademark of IBM.
8
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT SHARE DATA)
The following table sets forth summary historical consolidated financial data
of the Company as of and for the fiscal years ended December 31, 1993, 1994 and
1995 and as of and for the nine months ended September 30, 1995 and 1996. The
summary historical financial data were derived from the Company's Consolidated
Financial Statements. Information as of and for the nine months ended September
30, 1995 and 1996 was derived from unaudited interim financial statements that
reflect, in the opinion of the Company, all adjustments, which include only
normal recurring adjustments, necessary for a fair presentation of the
financial data for such periods. Results for interim periods are not
necessarily indicative of results for the full year or for any future period.
See the Consolidated Financial Statements of the Company and the accompanying
notes thereto included elsewhere in this Prospectus, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1993 1994 1995(1) 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 1,675.7 $ 1,852.3 $ 2,157.8 $ 1,527.5 $ 1,690.7
Gross profit............ 568.3 553.5 669.9 466.8 528.5
Research and
development............ 111.7 101.0 116.1 87.2 92.1
Selling, general and
administrative......... 322.0 292.9 359.1 258.6 279.3
---------- ---------- ---------- ---------- ----------
Operating income before
option compensation
related to IPO and
amortization of
intangibles............ 134.6 159.6 194.7 121.0 157.1
Option compensation
related to IPO......... -- -- 60.6 -- --
Amortization of
intangibles(2)......... 64.0 44.7 25.6 20.3 5.1
---------- ---------- ---------- ---------- ----------
Operating income........ 70.6 114.9 108.5 100.7 152.0
Interest expense, net... 63.9 50.6 35.1 28.9 16.0
Amortization of deferred
financing costs and
other expense.......... 13.1 13.6 10.1 4.9 5.8
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
income taxes........... (6.4) 50.7 63.3 66.9 130.2
Earnings (loss) before
extraordinary item..... (9.4) 44.6 48.1 47.4 82.6
---------- ---------- ---------- ---------- ----------
Extraordinary loss(3)... -- -- (15.7) (15.7) --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)..... $ (9.4) $ 44.6 $ 32.4 $ 31.7 $ 82.6
========== ========== ========== ========== ==========
Earnings (loss) per
common share before
extraordinary item(4).. $ (0.34) $ (0.46) $ 0.64 $ 0.63 $ 1.09
Net earnings (loss) per
common share(4)........ $ (0.34) $ (0.46) $ 0.43 $ 0.42 $ 1.09
Shares used in per share
calculation(5)......... 61,458,241 61,430,896 74,932,103 75,081,946 75,560,844
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER
AS OF DECEMBER 31, 30,
------------------------ -----------------
1993 1994 1995 1995 1996
-------- ------ -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL POSITION DA-
TA:
Working capital.................... $ 293.6 $237.5 $ 227.7 $ 270.3 $ 294.6
Total assets....................... 1,215.0 960.9 1,142.9 1,036.5 1,182.0
Total long-term debt (including
current portion)................... 650.7 290.0 195.0 215.0 180.5
Redeemable senior preferred
stock(6)........................... 85.0 -- -- -- --
Stockholders' equity(6)............ 173.7 295.5 390.2 330.0 490.9
</TABLE>
- --------
(1) The Company recognized a non-cash compensation charge of $60.6 ($38.5 net
of tax benefit) in the fourth quarter of 1995 and will recognize additional
amounts totalling $2.2 ($1.4 net of tax benefit) in the years 1996-2000,
resulting from the vesting of certain of the Company's outstanding employee
stock options at the time of the IPO.
(2) Acquisition-related intangibles were fully amortized at March 31, 1996.
(3) Represents extraordinary after-tax loss caused by an early extinguishment
of debt related to the refinancing of the Company's term loan in April
1995.
(4) Earnings (loss) per common share are net of dividends of $11.5 and $11.8
paid on the Company's redeemable senior preferred stock in 1993 and 1994,
respectively. Earnings attributable to common stock in 1994 are also net of
a $61.3 preferred stock redemption premium related to the exchange of
redeemable senior preferred stock for Class A Common Stock on December 30,
1994. No senior preferred stock is currently outstanding.
(5) Earnings (loss) per common share is determined by dividing the net earnings
(loss) attributable to common stock by the weighted average number of
common shares outstanding. The earnings (loss) attributable to common stock
is determined by deducting preferred stock dividends and any preferred
stock redemption premium from net earnings (loss). The weighted average
number of common shares outstanding in each year from 1993 to 1994 has been
increased by 2,577,480 shares to give effect to the assumption that all
stock, including Class A Common Stock issued upon the exchange of
redeemable senior preferred stock described in note (4) above, and stock
options issued within one year of the filing of the IPO were outstanding
for all years presented, even though their impact is antidilutive. The
number of such shares assumed to be outstanding is calculated using the
treasury stock method based on the IPO price of $20 per share. Outstanding
options, warrants and other potentially dilutive securities not issued
within one year of the filing of the IPO have been given no effect in the
full years 1993 to 1994, as the result would be antidilutive.
(6) Redeemable senior preferred stock with a liquidation preference of $85.0
was exchanged for 9,750,000 shares of Class A Common Stock on December 30,
1994.
10
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following factors
relating to the Company and the Offerings, together with the information and
financial data set forth elsewhere in this Prospectus, prior to making an
investment decision.
COMPETITION
The markets for printers and associated supplies are highly competitive,
especially with respect to pricing and the introduction of new products and
features. The office desktop laser printer market is dominated by HP, which
has a widely recognized brand name and has been estimated to have an
approximate 70% market share. Several other large manufacturers such as Canon,
Inc. ("Canon") and Apple Computer Inc. ("Apple") also compete in the office
desktop laser printer market. In June 1996, IBM expanded its product offerings
in the printer market with products that compete with the Company's products.
The Company believes that IBM has the resources to compete aggressively. See
"--IBM Relationship" and "Business--IBM Relationship".
The Company's strategy is to target fast growing segments of the office
desktop printer market and to increase market share by providing high quality,
technologically advanced products at competitive prices. This strategy
requires that the Company continue to develop and market new and innovative
products at competitive prices. New product announcements by HP and the
Company's other principal competitors, however, can have and in the past have
had a material adverse effect on the Company's financial results. Such new
product announcements can quickly undermine any technological competitive edge
that one manufacturer may enjoy over another and set new market standards for
quality, speed and function. Knowledge in the marketplace about pending new
product announcements by the Company's competitors may also have a material
adverse effect on the Company inasmuch as purchasers of printers may defer
purchasing decisions until the announcement and subsequent testing of such new
products.
In recent years, the Company and its principal competitors, all of which
have significantly greater financial, marketing and technological resources
than the Company, have regularly lowered prices on printers and are expected
to continue to do so. The Company is vulnerable to these pricing pressures
which, if not mitigated by cost and expense reductions, may result in lower
profitability and could jeopardize the Company's ability to increase or
maintain market share and build an installed base of Lexmark printers. See
"Business--Competition--Printers and Associated Supplies". The Company expects
that, as it competes more successfully with its larger competitors, the
Company's increased market presence may attract more frequent challenges, both
legal and commercial, from its competitors, including claims of possible
intellectual property infringement.
HP is also the market leader in the personal color inkjet printer market
and, with Canon and Seiko Epson Corporation ("Epson"), has been estimated to
account for approximately 80% to 90% of worldwide personal color inkjet
printer sales. As with laser printers, if pricing pressures are not mitigated
by cost and expense reduction, the Company's ability to maintain or build
market share and its profitability could be adversely affected. In addition,
as a relatively new entrant to the retail marketplace with a less widely
recognized brand name, the Company must compete with HP, Canon and Epson for
retail shelf space for its inkjet printers. There can be no assurance that the
Company will be able to continue to penetrate the retail or OEM marketplace.
The Company has recently entered the market as a supplier of after-market
laser cartridges for laser printers utilizing certain models of Canon engines.
There is no assurance that the Company will be able to compete effectively for
a share of the after-market cartridge business for the installed base of
competitors' laser printers. The Company's decision to enter this market may
have an adverse effect on the Company's relations with certain of its
suppliers. See "--Key Supplies and Suppliers". Although Lexmark is currently
the exclusive supplier of new print cartridges for its laser printers, there
can be no assurance that other companies will not develop new compatible
cartridges for Lexmark laser
11
<PAGE>
printers. In addition, refill and remanufactured alternatives for the
Company's laser and inkjet cartridges are available from independent suppliers
and, although generally offering lower print quality, compete with the
Company's supplies business. See "Business--Competition".
IBM RELATIONSHIP
In connection with the Acquisition, IBM entered into numerous agreements
with the Company to support the Company's operations for a five-year term,
including an IBM agreement not to compete with the Company's products that
expired on March 27, 1996. IBM accounted for approximately 26%, 22%, 20% and
10% of the Company's consolidated revenues in 1993, 1994, 1995 and the nine
months ended September 30, 1996, respectively. When keyboard sales to IBM are
excluded, IBM accounted for revenues of approximately 13%, 12%, 12% and 8% in
1993, 1994, 1995 and the nine months ended September 30, 1996, respectively.
Although IBM has recently started competing with the Company in the office
desktop laser printer markets, the Company believes that IBM will continue to
be a significant customer. However, the Company expects that future revenue
and profitability attributable to sales to IBM will be significantly less than
they have been in the past. In addition, as a result of new agreements with
IBM which generally became effective on March 27, 1996, the Company's sales of
IBM-branded printer supplies, typewriters and typewriter supplies have been
less profitable. These new arrangements provide for the Company to pay IBM a
share of its profits on certain sales of IBM-branded products and to pay IBM
royalties for the use of its logo on typewriters, typewriter supplies and
other IBM-branded supplies. Since these new arrangements became effective, the
Company estimates that operating income has been reduced approximately $8
million to $9 million a quarter during 1996. See "Business--IBM Relationship".
CHANGING TECHNOLOGIES
To compete effectively in the printer and associated supplies markets, the
Company must continue to introduce new products and features that address the
needs and preferences of its target markets. The printer market is
characterized by short product development cycles that are driven by rapidly
changing technology and consumer preferences as well as declining product
prices. There can be no assurance that the Company will be able to continue to
introduce new competitively priced products, that the market will be receptive
to its new products or features or that its competitors will not introduce
advancements ahead of Lexmark. Furthermore, there can be no assurance that the
Company will have access to new competitive technology to permit it to
introduce new products and features for its target markets. In addition, the
Company must make strategic decisions from time to time as to which new
technologies will produce products in market segments that will experience the
greatest future growth. If the Company is not successful in continuing to
introduce new products in the growing segments of the market, there could be a
material adverse effect on the Company's business and financial results.
OTHER OFFICE IMAGING PRODUCTS
The Company's traditional other office imaging products business includes
consumable supplies for IBM and other OEM products, typewriters and typewriter
supplies. This business accounted for 28% of the Company's revenues in 1994
and accounted for 23% of the Company's revenues for both 1995 and for the nine
months ended September 30, 1996. Although the Company is less dependent on
revenue and profitability from its other office imaging products business than
it has been historically and intends to focus on the growing portions of that
market, such as the after-market laser cartridge supplies category, there is
no assurance that the Company will be able to compete in the after-market
supplies business effectively or that the declining market areas in its other
office imaging products business will not adversely affect the Company's
operating results.
12
<PAGE>
KEY SUPPLIES AND SUPPLIERS
The Company procures a wide variety of components for the manufacture of its
products, some of which are sourced from preferred suppliers. The Company
generally must place commitments for its projected component needs
approximately three to six months in advance and may face capacity constraints
when there has been more demand for its printers and associated supplies than
initially projected. Certain finished products, certain print engines and
certain components of the Company's products are only available from one
supplier and should such products, print engines and components not be
available, there can be no assurance that production of the Company's products
would not be disrupted for significant periods of time or that certain of the
Company's products would be available. Such a disruption could interfere with
the Company's ability to manufacture and sell products and materially
adversely affect the Company's financial results. See "Business--Raw
Materials". In addition, the Company competes with certain of its major
suppliers in the after-market for laser cartridges for other OEM laser
printers. Such competition could adversely affect the Company's ability to
obtain products, print engines and components from these suppliers.
DEPENDENCE ON KEY PERSONNEL
As is typical of technology based companies, the Company is dependent on
certain key personnel, including senior members of its research and
development staff. The future success of the Company's research and
development efforts depends on its continuing ability to attract and retain
highly qualified technical personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The loss of the services of such key
personnel, or the inability to attract additional qualified personnel, could
have a material adverse effect on the Company's business.
INTERNATIONAL OPERATIONS
Revenues from international operations, including exports from the United
States, represent approximately half of consolidated revenues, with European
revenues accounting for about 70% of international revenues. While currency
translation has significantly affected international revenues and cost of
revenues, it did not have a material impact on operating income through 1995
or the first nine months of 1996. Although the Company manages its net
exposure to exchange rate fluctuations through operational hedges, such as
pricing actions and product sourcing changes, and financial instruments, such
as forward exchange contracts and currency options, there can be no assurances
that currency fluctuations will not have a material impact on operating income
in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Effect of Currency Exchange Rates and
Exchange Rate Risk Management". As the Company's international operations
continue to grow, more management effort will be required to focus on the
operation and expansion of the Company's global business and to manage the
cultural, language and legal differences inherent in international operations.
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in part on its ability to obtain patents,
copyrights and trademarks, maintain trade secret protection and operate
without infringing the proprietary rights of others.
As is typical in technology industries, the Company receives notices from
time to time by third parties claiming infringement of certain patent and/or
other intellectual property rights of others. As the Company competes more
successfully with its larger competitors, the Company's increased market
presence may attract more frequent legal challenges from its competitors,
including claims of intellectual property infringement and other intellectual
property disputes. If the Company were
13
<PAGE>
infringing the intellectual property rights of others and were unable to
obtain licenses to use the protected technology, the Company could incur
substantial costs to redesign its products or to defend against infringement
actions. The Company's inability to obtain such licenses on favorable terms or
a finding of infringement could have a material adverse effect on the Company.
In October 1996, the Company entered into a new patent cross-license agreement
with HP which resolved issues of patent infringement that had been raised by
both companies. See "Business--Intellectual Property".
In addition, the Company also relies on trade secrets, technical know-how
and other unpatented proprietary information relating to its product
development and manufacturing activities which it seeks to protect, in part,
through confidentiality agreements. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any such breach or that the Company's trade secrets and know-how will not
otherwise become known or independently discovered by others. See "Business--
Intellectual Property".
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
Part of the Company's business strategy is to expand its business through
the acquisition of related businesses. There can be no assurance that suitable
acquisitions can be accomplished on terms favorable to the Company. Further,
there can be no assurance that the Company will be able to operate profitably
any businesses or other assets it may acquire, effectively integrate the
operations of such acquisitions or otherwise achieve the intended benefits of
such acquisitions.
PRINCIPAL STOCKHOLDER
Upon completion of the Offerings, C&D Fund IV, a private investment fund
managed by CD&R, will own approximately 22% of the then outstanding Common
Stock (approximately 20% on a fully diluted basis assuming the exercise of all
outstanding warrants and options) and will retain the power to significantly
influence the Company's corporate policies, the persons constituting its
management and Board of Directors and the outcome of corporate actions
requiring stockholder approval. Immediately after the Offerings, four of the
Company's eleven directors will be principals of CD&R. See "Management--
Directors and Executive Officers" and "Certain Transactions and
Relationships".
CERTAIN PROVISIONS RELATING TO CHANGES IN CONTROL
Although the Offerings will not constitute a "change of control", several of
the patent cross-licenses that the Company considers to be material to its
business, including those that permit the Company to manufacture its current
design of laser and inkjet printers and after-market laser cartridges for OEM
printers, terminate as to future products upon certain "changes of control" of
the Company. Similarly, a trademark license agreement and other agreements
entered into by the Company with IBM permit IBM to terminate those agreements
upon certain "changes of control" of the Company. Although the definition of
"change of control" in the Company's cross-licenses and trademark license
agreement vary from agreement to agreement, generally in order for a "change
of control" to occur under such agreements either (a) more than 50% of the
voting stock of the Company must be acquired by an unaffiliated party which,
in some instances, must be engaged in the business of manufacturing or
marketing printers or related products or (b) a third party must obtain the
power to control or direct the affairs of the Company, either through the
ownership of voting stock or otherwise, except that a change of control can be
deemed to occur, in very limited circumstances, upon an acquisition of
substantially less than 50% of the Company's voting shares. Such provisions
could discourage potential acquirors from making a bid to acquire control of
the Company. See "Business--IBM Relationship" and "Business--Intellectual
Property".
14
<PAGE>
RESTRICTIONS IMPOSED BY LENDERS
The discretion of the Company's management with respect to certain business
matters is limited by covenants in the Company's senior credit facility and
other debt instruments. Such covenants include, among other things,
limitations on the acquisition of new businesses, the sale of assets, fixed
charge coverage ratios, the incurrence of additional debt and the payment of
dividends. For a discussion of how these covenants may affect the Company's
sources of liquidity and capital expenditure plans, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources".
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, approximately 31,139,652 shares of the
outstanding Class A Common Stock and (based upon shares outstanding at
December 31, 1996) approximately 2,446,523 shares of the outstanding Class B
Common Stock will constitute "restricted" securities, within the meaning of
Rule 144 under the Securities Act, that are not publicly traded. All of these
restricted outstanding shares are eligible for sale into the public market
pursuant to Rule 144 under the Securities Act, and approximately 28% of these
restricted shares are eligible for sale into the public market without regard
to the volume limit and certain other requirements of Rule 144. In addition,
upon completion of the Offerings, approximately 6,951,862 shares of Class A
Common Stock will be issuable upon the exercise of outstanding stock options
(vested and unvested) and 464,602 shares of Class A Common Stock will be
issuable upon exercise of the Keys Warrant. The holders of approximately
21,315,913 of such restricted shares of Class A Common Stock have agreed to
restrict public sales of such shares for 90 days after the date of this
Prospectus. Sales of substantial amounts of Class A Common Stock, or the
perception that such sales could occur at the expiration of such 90-day
period, may materially adversely affect the market price of the Class A Common
Stock prevailing from time to time. In addition, under the Registration and
Participation Agreement, dated as of March 27, 1991 (as amended, the
"Registration and Participation Agreement"), among the Company, C&D Fund IV
and original or certain other stockholders of the Company, the Company's
original or certain other stockholders have certain demand and "piggy-back"
registration rights in connection with future offerings of Class A Common
Stock which may be exercised after the expiration of the 90-day holdback
period. See "Shares Eligible for Future Sale" and "Underwriting".
DILUTION
Purchasers of Class A Common Stock in the Offerings will experience
immediate and substantial dilution in the net tangible book value of their
Class A Common Stock. At an initial public offering price of $25.75 per share,
based on net tangible book value as of September 30, 1996, purchasers of
shares in the Offerings will experience dilution in net tangible book value of
$19.01 per share.
15
<PAGE>
PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY
Since November 15, 1995, as part of the Company's IPO, the Class A Common
Stock has been traded on the NYSE under the symbol "LXK". The following table
sets forth the high and low reported sale prices for the Class A Common Stock
as quoted by the NYSE for the periods indicated.
<TABLE>
<CAPTION>
MARKET PRICE
-------------
HIGH LOW
------ ------
<S> <C> <C>
1995
Fourth Quarter (from November 15, 1995).................... $22.38 $15.50
1996
First Quarter.............................................. $23.25 $16.00
Second Quarter............................................. $23.13 $17.88
Third Quarter.............................................. $20.88 $13.38
Fourth Quarter............................................. $27.75 $18.88
1997
First Quarter (through January 23, 1997)................... $28.75 $24.13
</TABLE>
The last reported sale price for the Class A Common Stock by the NYSE on
January 23, 1997 was $26 per share. As of December 31, 1996, the Company had
approximately 70,213,603 million shares of Class A Common Stock outstanding
and 2,446,523 million shares of Class B Common Stock outstanding. As of
December 31, 1996, there were approximately 1,235 holders of record of the
Class A Common Stock, and five holders of record of the Class B Common Stock.
The Company has never declared or paid any dividends on the Class A Common
Stock and has no current plans to pay dividends on the Class A Common Stock.
The Company presently intends to retain earnings to support the growth of the
Company's business. The payment of any future dividends will be determined by
the Board of Directors in light of conditions then existing, including the
Company's earnings, financial condition and capital requirements, restrictions
in financing agreements, business conditions, certain corporate law
requirements and other factors.
The Company is a holding company and thus its ability to pay dividends on
the Class A Common Stock depends on the Company's subsidiaries' ability to pay
dividends to the Company. The Company's financing agreements generally
restrict the payment of dividends by the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".
16
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and cash equivalents,
short-term debt and capitalization of the Company as of September 30, 1996.
This table should be read in conjunction with the Consolidated Financial
Statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
(IN MILLIONS)
<S> <C>
CASH AND CASH EQUIVALENTS........................................ $ 55.7
======
SHORT-TERM DEBT:
Current portion of long-term debt.............................. $ --
======
LONG-TERM DEBT, LESS CURRENT PORTION:
Term loan...................................................... $ 55.0
Senior subordinated notes...................................... 120.0
Other.......................................................... 5.5
------
Total long-term debt......................................... 180.5
STOCKHOLDERS' EQUITY(1):
Preferred stock, $.01 par value, 1,600,000 shares authorized,
no
shares outstanding............................................ --
Class A common stock, $.01 par value, 160,000,000 shares autho-
rized,
66,228,065 outstanding........................................ 0.6
Class B common stock, $.01 par value, 10,000,000 shares autho-
rized,
5,888,623 outstanding......................................... 0.1
Additional paid-in capital..................................... 514.0
Retained earnings (deficit).................................... (25.4)
Accumulated translation adjustment............................. 1.6
------
Total stockholders' equity................................... 490.9
------
Total capitalization......................................... $671.4
======
</TABLE>
- --------
(1) On April 23, 1996, the Company's board of directors authorized the
repurchase of up to $50 million of its Class A Common Stock. The
repurchase authority allows the Company to selectively repurchase its
stock from time to time in the open market or in privately negotiated
transactions depending upon market price and other factors. As of December
31, 1996, the Company had not repurchased any of the stock. The amended
and restated credit agreements and the note and stock purchase agreement
have been amended to permit, among other things, the Company's repurchase
of up to $50 million of Common Stock.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT SHARE DATA)
The following table sets forth selected financial data of the Company on a
consolidated basis. The statement of operations data for the nine months ended
December 31, 1991 and the years ended December 31, 1992, 1993, 1994 and 1995
and the statement of financial position data as of December 31, 1991, 1992,
1993, 1994 and 1995 were derived from the audited Consolidated Financial
Statements of the Company. The statement of operations data for the nine
months ended September 30, 1995 and 1996, and the statement of financial
position data as of September 30, 1995 and 1996, were derived from the
unaudited consolidated financial statements of the Company and include, in the
opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results of operations and
financial position as of and for such periods. The results of operations for
the nine months are not necessarily indicative of the results to be expected
for the full year or for any future period.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30,
DEC. 31, ---------------------------------------------- ----------------------
1991(1) 1992 1993 1994 1995(2) 1995 1996
----------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 1,272.7 $ 1,763.9 $ 1,675.7 $ 1,852.3 $ 2,157.8 $ 1,527.5 $ 1,690.7
Cost of revenues........ 903.1 1,130.5 1,107.4 1,298.8 1,487.9 1,060.7 1,162.2
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit............ 369.6 633.4 568.3 553.5 669.9 466.8 528.5
Research and
development............. 97.5 135.7 111.7 101.0 116.1 87.2 92.1
Selling, general and
administrative......... 217.5 367.9 322.0 292.9 359.1 258.6 279.3
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income before
option compensation
related to IPO and
amortization of
intangibles............ 54.6 129.8 134.6 159.6 194.7 121.0 157.1
Option compensation
related to IPO......... -- -- -- -- 60.6 -- --
Amortization of
intangibles(3)......... 74.0 89.2 64.0 44.7 25.6 20.3 5.1
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss)(4).............. (19.4) 40.6 70.6 114.9 108.5 100.7 152.0
Interest expense, net... 68.8 70.7 63.9 50.6 35.1 28.9 16.0
Amortization of deferred
financing costs and
other expense.......... 21.5 16.5 13.1 13.6 10.1 4.9 5.8
Earnings (loss) before
income taxes........... (109.7) (46.6) (6.4) 50.7 63.3 66.9 130.2
Provision for income
taxes.................. 8.6 10.7 3.0 6.1 15.2 19.5 47. 6
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before
extraordinary item..... (118.3) (57.3) (9.4) 44.6 48.1 47.4 82.6
Extraordinary loss(5)... -- -- -- -- (15.7) (15.7) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss)..... $ (118.3) $ (57.3) $ (9.4) $ 44.6 $ 32.4 $ 31.7 $ 82.6
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per
common share before
extraordinary item(6) $ (2.08) $ (1.12) $ (0.34) $ (0.46) $ 0.64 $ 0.63 $ 1.09
Net earnings (loss) per
common share(6)........ $ (2.08) $ (1.12) $ (0.34) $ (0.46) $ 0.43 $ 0.42 $ 1.09
Shares used in per share
calculation(7)......... 60,932,581 61,419,631 61,458,241 61,430,896 74,932,103 75,081,946 75,560,844
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -----------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- ------ -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL
POSITION DATA:
Working capital......... $ 323.8 $ 347.5 $ 293.6 $237.5 $ 227.7 $ 270.3 $ 294.6
Total assets............ 1,617.2 1,440.2 1,215.0 960.9 1,142.9 1,036.5 1,182.0
Total long-term debt
(including current
portion)............... 891.6 759.2 650.7 290.0 195.0 215.0 180.5
Redeemable senior
preferred stock(8)..... 85.0 85.0 85.0 -- -- -- --
Stockholders'
equity(8).............. 270.4 197.4 173.7 295.5 390.2 330.0 490.9
</TABLE>
- --------
(1) The nine months ended December 31, 1991 reflects the Company's results of
operations from inception, March 27, 1991.
(2) The Company recognized a non-cash compensation charge of $60.6 ($38.5 net
of tax benefit) in the fourth quarter of 1995 and will recognize
additional amounts totalling $2.2 ($1.4 net of tax benefit) in the years
1996-2000, resulting from the vesting of certain of the Company's
outstanding employee stock options at the time of the IPO.
(3) Acquisition-related intangibles were fully amortized at March 31, 1996.
(4) Operating income in 1992 is net of a $40.0 provision related to the
Company's restructuring of its operations.
(5) Represents extraordinary after-tax loss caused by an early extinguishment
of debt related to the refinancing of the Company's term loan in April
1995.
(6) Earnings (loss) per common share are net of dividends of $8.7, $11.5,
$11.5 and $11.8 paid on the Company's redeemable senior preferred stock in
1991, 1992, 1993 and 1994, respectively. Earnings attributable to common
stock in 1994 are also net of a $61.3 preferred stock redemption premium
related to the exchange of redeemable senior preferred stock for Class A
Common Stock on December 30, 1994. No senior preferred stock is currently
outstanding.
(7) Earnings (loss) per common share is determined by dividing the earnings
(loss) attributable to common stock by the weighted average number of
common shares outstanding. The earnings (loss) attributable to common
stock is determined by deducting preferred stock dividends and preferred
stock redemption premium from net earnings (loss). The weighted average
number of common shares outstanding in each year from 1991 to 1994 has
been increased by 2,577,480 shares to give effect to the assumption that
all stock, including Class A Common Stock issued upon the exchange of
redeemable senior preferred stock for Class A Common Stock described in
note (6) above, and stock options issued within one year of the filing of
the IPO were outstanding for all years presented, even though their impact
is antidilutive. The number of such shares assumed to be outstanding is
calculated using the treasury stock method based on the IPO price of $20
per share. Outstanding options, warrants and other potentially dilutive
securities not issued within one year of the filing of the IPO have been
given no effect in the full years 1991 to 1994, as the result would be
antidilutive.
(8) Redeemable senior preferred stock with a liquidation preference of $85.0
was exchanged for 9,750,000 shares of Class A Common Stock on December 30,
1994.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company develops, manufactures and markets laser, inkjet and serial wire
matrix printers and associated consumable supplies for the office and home
markets. In addition to its core printer business, Lexmark develops,
manufactures and markets a broad line of other office imaging products which
include supplies for IBM branded printers, after-market supplies for other OEM
products, and typewriters and typewriter supplies that are sold under the IBM
trademark. Since the completion of the Acquisition in March 1991, the Company
has restructured itself to operate as an independent global company, a process
which has included internal reorganization, streamlining of operations,
reduction in operating expenses and changes in manufacturing processes. In
March 1996, the Company completed the transition out of its "keyboards and
other" product category which was composed of keyboards and notebook computer
products.
In the past few years, the worldwide printer industry has seen substantial
growth in demand for laser and inkjet printers as a result of increasing
penetration of personal computers into the office and home markets. During
this period the Company's own product mix has evolved, with its laser and
inkjet printers and associated supplies representing an increasingly larger
percentage of its sales volume and revenues, particularly as the increasing
base of installed Lexmark printers has generated additional revenues from
recurring sales of the Company's supplies for those printers (primarily laser
and inkjet cartridges). Revenues from Lexmark's sales of printers and
associated supplies increased 36% from 1994 to 1995 and 25% from the first
nine months of 1995 to the first nine months of 1996.
The following table sets forth, for the periods indicated, revenues for each
major product category (dollars in millions, unaudited):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------- -------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ---------------
% % % % %
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Printers and associated
supplies............... $ 849 51% $1,083 58% $1,478 69% $1,020 67% $1,275 75%
Other office imaging
products............... 585 35 513 28 501 23 368 24 382 23
Keyboards and other..... 242 14 256 14 179 8 140 9 34 2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total revenues.......... $1,676 100% $1,852 100% $2,158 100% $1,528 100% $1,691 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
TRENDS
The Company's revenues from printers and associated supplies, which is the
Company's core business, increased by 28% from 1993 to 1994, 36% from 1994 to
1995 and by 25% from the first nine months of 1995 to the first nine months of
1996. Most of this growth was derived from increasing sales of laser and
inkjet printers and printer cartridge supplies, offset in part by slowing
demand for wire matrix printers which depend on older impact-printing
technology. The Company's revenues from wire matrix printers and associated
supplies accounted for approximately 10% and 7% of total printer and
associated supplies revenues for the nine months ended September 30, 1995 and
1996, respectively.
The Company believes that its total revenue will continue to grow due to
overall market growth and increases in the Company's market share in both the
network and color inkjet segments. Management believes this growth will more
than offset expected declines in low-speed laser printer sales as the low-end
market shifts to inkjet technology products, reduced demand for wire matrix
impact printers, and the phase-out of the Company's keyboard product line.
20
<PAGE>
In recent years, the Company's growth rate in sales of printer units
generally exceeded the growth rate of its printer revenues due to price
pressures and the introduction of new lower priced products in both the laser
and inkjet printer markets. In the laser printer market, unit price pressure
is partially offset by the tendency of customers to move up to higher price
printer models with faster speeds, greater network connectivity and other new
features. In the inkjet printer market, advances in color inkjet technology
have resulted in lower prices for printers with sharper resolution and
improved performance. The greater affordability of color inkjet printers has
been an important factor in the recent growth of this market.
The Company manufactures and sells its own brand of supplies that are
designed to optimize the performance of its various printers. In the case of
its laser and inkjet printers, the Company is the exclusive source of new,
replacement printer cartridges. Supplies for the Company's printers generally
face significantly less competitive price pressure than the printer units, and
the Company expects greater sales of its supplies as the installed base of its
printers increases.
The markets for most of the Company's other office imaging products are
declining as non-impact printers replace typewriters and impact printers
currently in service. The Company believes this trend will continue, resulting
in a continued decline in revenues from these products. In addition, as a
result of the Company's new arrangement with IBM to share the profit on
supplies for some existing IBM-branded products and to pay a royalty on IBM-
branded typewriters and typewriter supplies and certain other IBM-branded
supplies, profitability from sales of those products has been reduced, and the
Company expects this trend to continue. Since these new arrangements became
effective, the Company estimates that operating income has been reduced
approximately $8 million to $9 million a quarter during 1996. The Company will
attempt to mitigate the effect of the decline in sales of typewriters and
impact printing supplies through the introduction of new supplies products for
non-impact technologies, such as after-market laser cartridges, where
management believes the market will grow.
The Company expects that its overall margins will remain relatively stable
as its associated printer supplies business becomes an increasingly larger
part of its business, offsetting the decline in the Company's other office
imaging products supplies business and the phase-out of its lower margin
keyboard business.
The Company's operations have been significantly impacted by a number of key
agreements with IBM which were negotiated as part of the Acquisition. In March
1996, the Company completed the phase-out of its keyboard product line.
Accordingly, the Company recorded a $15 million reserve in the third quarter
of 1995 for keyboard asset write-offs. Although the Company and IBM have
entered into a number of new agreements which provide for an ongoing
relationship in other areas, the Company expects that future revenue and
profit attributable to sales to IBM will materially decrease. See "Business--
IBM Relationship".
21
<PAGE>
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected in the Company's
Statements of Operations:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues............................ 100% 100% 100% 100% 100%
Cost of revenues.................... 66 70 69 69 69
------- ------- ------- ------ ------
Gross profit........................ 34 30 31 31 31
Research and development............ 7 6 5 6 5
Selling, general and
administrative...................... 19 16 17 17 17
------- ------- ------- ------ ------
Operating income before option
compensation related to IPO and
amortization of intangibles........ 8 8 9 8 9
Option compensation related to IPO.. -- -- 3 -- --
Amortization of intangibles......... 4 2 1 1 --
------- ------- ------- ------ ------
Operating income.................... 4% 6% 5% 7% 9%
======= ======= ======= ====== ======
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Consolidated revenues increased $163 million, or 11%, from 1995, with U.S.
sales up $20 million, or 2%, and international sales up $143 million, or 23%,
primarily due to more competitive products, improved marketing and more
effective sales efforts. Consolidated gross profit increased $62 million, or
13%, while gross profit as a percentage of revenues remained constant at 31%.
The transition out of the keyboard business was completed in March 1996 and,
excluding this business, revenues increased $269 million, or 19%, with United
States sales up $126 million, or 16%, and international sales up $143 million,
or 23%.
Printers and associated supplies revenues increased $255 million, or 25%,
principally due to higher volumes, with associated supplies revenues growing
at a faster rate than printer hardware revenues. The increase in hardware
volumes was primarily driven by increased inkjet sales, and increased laser
printer sales which experienced volume and market share growth in the 7-30 ppm
category. Associated supplies volumes increased due to the continued growth of
the Company's installed printer base. Revenues generated by these increased
volumes more than offset price reductions on certain printers. Gross profit
attributable to printers and associated supplies increased $81 million, or
26%, reflecting increased volumes of both printers and printer supplies.
Revenues from other office imaging products increased $14 million, or 4%,
primarily due to the growth of the aftermarket laser cartridge business which
more than offset the declines in the traditional IBM branded supplies
business. Sales of non-impact printing supplies to customers for printers
other than Lexmark's, which includes the after-market laser cartridges,
increased $32 million.
Consolidated operating income increased $51 million, or 51%, due to stronger
1996 sales volumes, cost and expense controls, lower amortization of
intangibles and the 1995 keyboard asset write-down reserve.
Total operating expenses increased $10 million, or 3%. Expenses as a
percentage of revenues were 22% for the first nine months of 1996 compared to
24% for the corresponding period of 1995, principally reflecting in 1996 lower
amortization of intangibles, stronger revenue growth, greater focus on expense
controls and in 1995 the keyboard asset write-down reserve.
22
<PAGE>
Earnings before income taxes increased $63 million, or 94%, principally due
to stronger operating performance and lower interest expense as a result of
lower debt levels and lower interest rates.
Net earnings increased $51 million, or 160%. Excluding the effect of the
extraordinary loss in 1995, net earnings increased $35 million, or 74%. The
income tax provision was approximately 37% of earnings before tax for the
first nine months of 1996 as compared to 29% in the same period of 1995. The
effective tax rate for 1995 reflected a change in circumstances that resulted
in a reduction in the valuation allowance for deferred tax assets. Net
earnings per share were $1.09 for the nine months ended September 30, 1996,
compared to $0.42 or $0.63 before extraordinary loss for the same period of
1995, an increase of 158% and 73%, respectively.
1995 COMPARED TO 1994
Consolidated revenues increased $306 million, or 16% from 1994, with U.S.
sales up $126 million, or 11%, and international sales up $180 million, or
25%, primarily due to more competitive products, improved marketing, more
effective sales efforts, and improved economic conditions in Europe. The
strengthening of European currencies in relation to the U.S. dollar
contributed approximately $61 million to the increase.
Consolidated gross profit increased $116 million, or 21% primarily due to
increased printer and associated supplies volumes. Gross profit as a
percentage of revenues increased slightly to 31% reflecting the improved
profitability in 1995 of the keyboards and other business as a result of
phasing out the notebook computer product line during 1994.
Printers and associated supplies revenues increased $395 million, or 36%,
principally due to higher volumes, with associated supplies revenues growing
at a faster rate than printer hardware revenues. The increase in hardware
volumes was primarily driven by increased inkjet sales, as a result of the
Company's entry into the low-end color inkjet market with the ExecJet IIc in
the third quarter of 1994, and increased laser printer sale which experienced
volume and market share growth in the 7-30 ppm category.
Gross profit attributable to printers and associated supplies increased $118
million, or 36%, reflecting increased volumes of both printers and associated
supplies. Gross profit as a percentage of revenues remained constant at 31%.
Revenues from other office imaging products decreased $12 million, or 2%,
due to lower typewriter and impact printing supplies volumes, reflecting the
continued decline of these markets, and lower sales to IBM. Sales of non-
impact printing supplies to customers for printers other than Lexmark's, which
includes the after-market laser cartridges, increased $24 million over 1994.
"Keyboards and other" revenues decreased $77 million, or 30%, principally
due to the Company's decision in the second half of 1994 to phase out its
notebook computer product line. In the third quarter of 1995, the Company
recorded a $15 million reserve for keyboard asset write-offs as a result of
the Company's decision to phase out its keyboard product line following the
expiration in March 1996 of the Company's keyboard agreement with IBM and
management's expectations that the keyboard industry will continue to
experience price declines resulting in low margins and a low return on assets.
Sales to IBM have accounted for substantially all of the Company's keyboard
sales, which totaled $219, $201, $177 and $32 million in 1993, 1994, 1995, and
for the nine months ended September 30, 1996.
Consolidated operating income decreased $6 million, or 6%. The $116 million
increase in gross profit was more than offset by a non-cash option
compensation charge of $61 million ($39 million net
23
<PAGE>
of tax benefit) recognized for certain of the Company's outstanding employee
stock options upon the consummation of the IPO, and an additional $61 million
increase in other operating expenses.
Operating expenses increased as a result of higher ongoing marketing and
selling expenses resulting from the expansion of retail and other channels in
the latter part of 1994 and higher research and development spending. These
increases were partially offset by lower amortization of intangibles acquired
in connection with the purchase of the Company. From its inception, the
Company's pre-tax earnings have been significantly impacted by the
amortization of intangibles. Unamortized intangibles related to the
Acquisition were approximately $5 million at December 31, 1995 and were fully
amortized by March 31, 1996.
Earnings before extraordinary item were $3 million, or 8%, higher
principally due to lower interest expense primarily as a result of lower
average debt balances. The decrease in interest expense was partially offset
by an increase in the provision for income taxes to approximately 24% of
earnings before tax in 1995 as compared to 12% in 1994, which benefited from
the utilization of loss carryforwards. Had the Company not incurred the non-
cash option compensation charge in 1995, earnings before extraordinary item
would have been $87 million.
Net earnings decreased $12 million, or 27%, due to an extraordinary charge
of $22 million ($16 million net of tax benefit) caused by an early
extinguishment of debt related to the Company's refinancing of its term loan.
This charge reflects the write-off of deferred financing costs of $5 million
and the mark to market of hedging instruments of $17 million related to the
extinguished debt. The refinancing resulted in more flexible credit terms and
lower interest rates.
Earnings per common and common equivalent share were significantly impacted
by unusual charges in 1995 and 1994. In 1995, net earnings were reduced by
both the non-cash option compensation charge incurred in connection with the
IPO and the extraordinary loss on extinguishment of debt. In 1994, a preferred
stock redemption premium reduced net earnings attributable to common stock by
$61 million. This premium was recognized as a result of the exchange of the
Company's senior redeemable preferred stock into Class A Common Stock in
December 1994.
1994 COMPARED TO 1993
Consolidated revenues increased $176 million, or 11%, from 1993, with U.S.
sales up $78 million, or 7%, and international sales up $98 million, or 16%,
primarily due to improved economic conditions in Europe beginning in the third
quarter of 1993. Currency translation contributed $9 million to the revenue
increase.
Consolidated gross profit decreased by $15 million, or 3%, primarily due to
sales declines of other office imaging products and keyboards and other
product lines including asset write-offs of approximately $19 million in 1994
related to the phase out of the notebook computer product line. These declines
more than offset improvements in printers and associated supplies gross
profit. As a result, gross profit as a percentage of revenue decreased to 30%
from 34%.
Printers and associated supplies revenues increased $234 million, or 28%,
principally due to higher volumes, with associated supplies revenues growing
at a faster rate than printer hardware revenues. Hardware volumes increased
27% primarily driven by increased inkjet sales, as a result of the Company's
entry into the low-end color inkjet market in the third quarter of 1994, and
increased laser printer sales. Associated supplies volumes increased due to
the continued growth of the Company's installed printer base. Gross profit
contribution from printers and associated supplies increased $69 million, or
26%, primarily as a result of higher volumes. Gross profit as a percentage of
revenues remained constant at 31%.
24
<PAGE>
Revenues from other office imaging products decreased $72 million, or 12%,
due to lower typewriter and impact printing supplies volumes, reflecting the
continued decline of these markets. These declines were partially offset by
increased sales of non-impact printing supplies. Gross profit contribution
from other office imaging products decreased $41 million, or 16%, as a result
of lower volumes and changes in product mix.
"Keyboards and other" revenues increased $14 million, or 6%, due to a $32
million increase in revenues attributable to the Company's notebook computer
product line, partially offset by lower keyboard revenues due to lower sales
volumes and prices.
The Company's operating income increased $44 million, or 63%, due to lower
operating expenses, partially offset by a $15 million decrease in gross
profit. The lower operating expenses were principally due to lower
amortization of intangibles and the benefits of restructuring the European
selling and administrative operations. Amortization of intangibles was lower
because of the Company's use of an accelerated amortization methodology that
allocates a greater percentage of the intangible's cost to the early years
when the Company realized the greatest benefit.
Net earnings were $54 million higher due to improved operating income and
lower interest expense primarily due to lower average debt balances. The
provision for income taxes represented approximately 12% of earnings before
taxes in 1994 primarily due to the utilization of loss carryforwards generated
in 1993 for which no tax benefit had previously been recognized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been cash generated by
operations, which totaled $176, $362, $307 and $11 million in 1993, 1994 and
1995 and the nine months ended September 30, 1996, respectively. Cash from
operations has been sufficient to allow the Company to repay significant
amounts of debt, fund the Company's working capital needs and finance its
capital expenditures during these periods. Cash from operations in 1995 and
1994 was unusually high. Cash from operations for 1995 was favorably impacted
by $30 million from the accounts receivable financing program and increases in
accounts payable and accrued liabilities of $148 million, primarily due to the
timing of payments. Cash generated by operations in 1994 was unusually high
primarily due to $70 million in proceeds from an accounts receivable financing
program initiated in February 1994, $42 million in higher earnings before
depreciation and amortization, lower working capital levels, $27 million
attributable to termination proceeds from certain IBM contracts, and an $18
million tax refund from the carryback of 1993 losses. The decrease in cash
provided by operating activities for the nine months ended September 30, 1996
primarily reflects higher working capital requirements in support of sales
growth. At September 30, 1996, trade accounts receivables and inventories were
higher, while accounts payable/accrued liabilities were lower, than at
December 31, 1995. Trade receivables were up principally due to higher
revenues while inventories have increased to support the higher sales volumes.
Accounts payable/accrued liabilities were down primarily due to timing of
payments.
Through its hedging programs, the Company attempts to insulate a portion of
the Company's foreign denominated cash flows from the impact of exchange rate
fluctuations. The Company utilizes interest rate/currency swaps and has
utilized interest rate caps to reduce its interest rate risks. Interest
expense incurred in connection with these instruments amounted to $11, $10, $8
and $1 million, respectively, for the years ended December 31, 1993, 1994, and
1995 and the nine months ended September 30, 1996.
In April 1995, the Company refinanced its $150 million term loan and $150
million revolving credit facility with a new $150 million term loan and a $250
million revolving credit facility. The new term loan is to be repaid in equal
quarterly installments of $12.5 million. Due to $95 million of prepayments
made
25
<PAGE>
by the Company during the third and fourth quarters of 1995, the next
scheduled payment will be due on December 31, 1997. Any unpaid borrowings
under the revolving credit facility are due at the maturity of the facility in
January 1999. At September 30, 1996, no amounts were outstanding under the
revolving credit facility. The revolving credit facility is available for
general corporate purposes, including acquisitions and share repurchases, and
is expected to be sufficient to meet the Company's working capital and capital
expenditure requirements. See "--Capital Expenditures".
Substantially all tangible and intangible assets of the Company (including
shares of capital stock of the Company's subsidiaries) serve as collateral for
the term loan, revolving credit facility and senior notes. The senior
subordinated notes are unsecured but are guaranteed by the Company and by the
domestic subsidiaries of Lexmark International. The credit agreements contain
customary default provisions, including a default upon a "change of control"
which includes the acquisition by one person or a related group of persons
(other than C&D Fund IV and IBM) of 25% or more of the Company's voting
securities unless C&D Fund IV owns a greater percentage of the Company's
voting securities than such person or related group. After the Offerings, C&D
Fund IV will hold approximately 23% of the Company's outstanding voting
securities. The senior subordinated note agreement allows the holder to put
the notes to Lexmark International at a make-whole premium upon the
acquisition, by a person or a related group of persons, of 20% of the
Company's voting securities and the cessation of control of the Company by C&D
Fund IV and certain other stockholders. The credit agreements also contain
certain net worth, leverage and fixed charge coverage restrictions and other
covenants which, among other things, restrict the payment of dividends on
common stock, incurrence of additional debt, investments and joint ventures,
repurchases of common stock, mergers or consolidations and sales of assets.
The senior subordinated note agreement contains customary default provisions
and similar covenants. The Company was in compliance with these requirements
as of September 30, 1996.
The Company has $120 million of senior subordinated notes outstanding,
payable in three annual installments of $40 million beginning in March 1999.
Under a registration rights agreement between the Company and the holders of
the senior subordinated notes, the Company may be required to register such
senior subordinated notes with the Commission at any time at the request of
persons holding approximately $35 million in aggregate principal amount of
such notes. Senior notes in the principal amount of $20 million were redeemed
in March 1996.
In October 1995, 50,000 shares of junior preferred stock owned by the
Company's savings plan were exchanged for 750,000 shares of Class A Common
Stock. The junior preferred stock was then retired.
In December 1994, 850,000 shares of redeemable preferred stock with a
liquidation value of $85 million were exchanged for 9,750,000 shares of Class
A Common Stock with an estimated fair market value of $146 million at the date
of exchange. The resulting premium of $61 million is reflected in the 1994
loss per share calculation. As a result of the exchange, the Company will
avoid dividend payments totalling $101 million through 2003.
The Company is party to an agreement to sell, on a limited recourse basis,
up to $100 million of its U.S. trade receivables under a revolving
arrangement. Proceeds from any such sales are available for general corporate
purposes. The initial proceeds of $70 million from this program were used to
prepay term debt. At September 30, 1996, proceeds from the sale of trade
receivables of approximately $81 million remained outstanding. The agreement,
which contains net worth and fixed charge coverage restrictions similar to,
but less restrictive than, those in the credit agreements, must be renewed
annually, and was renewed in June 1996 with substantially the same terms as
the previous agreement. This arrangement provides the Company with lower cost
funding than is currently available under its revolving credit facility.
26
<PAGE>
In January 1996, the Company entered into an agreement to sell up to 22
million deutsche marks of Germany trade receivables on a limited recourse
basis. At September 30, 1996, 22 million deutsche marks of receivables
(approximately $14 million at current exchange rates) were outstanding under
this program and, as collections reduce previously sold receivables, the
Company may replenish these new receivables.
On April 23, 1996, the Company's board of directors authorized the
repurchase of up to $50 million of its Class A Common Stock. The repurchase
authority allows the Company to selectively repurchase its stock from time to
time in the open market or in privately negotiated transactions depending upon
market price and other factors. The amended and restated credit agreements and
the note and stock purchase agreement were amended to permit, among other
things, the Company's repurchase of up to $50 million of Class A Common Stock.
As of the date of this Prospectus, the Company has not repurchased any of the
stock.
CAPITAL EXPENDITURES
Capital expenditures totaled $62, $58, $107 and $106 million in 1993, 1994,
1995 and for the nine months ended September 30, 1996, respectively. The
increase of $59 million in capital expenditures for the first nine months of
1996 over the same period in 1995 is primarily due to the Company's expansion
of its inkjet printer supplies manufacturing capacity, including the
conversion of a Lexington facility and the establishment of facilities in
Mexico and Scotland to manufacture inkjet cartridges. The 1996 capital
expenditures have been funded primarily through cash from operations. Capital
expenditures for 1997 are expected to be funded primarily through cash from
operations.
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
Revenues from international operations, including exports from the United
States, represent an increasing portion of the Company's consolidated revenues
and have grown from 45% of total revenues in 1994 to 53% of total revenues for
the nine months ended September 30, 1996, with European revenues accounting
for about 70% of international revenues. Substantially all foreign
subsidiaries maintain their accounting records in their local currencies.
Consequently, period-to-period comparability of results of operations is
affected by fluctuations in exchange rates. While currency translation has
significantly affected international revenues and cost of revenues, it did not
have a material impact on operating income for the years 1993-1995. For the
nine months ended September 30, 1996, currency translation effects on the
Company's operating income were slightly unfavorable. The Company attempts to
reduce its exposure to exchange rate fluctuations through the use of
operational hedges, such as pricing actions and product sourcing decisions.
Operating income from international revenue has improved during the last
three years primarily due to the restructuring plan initiated in 1992 related
to the manufacturing operations in France and the European distribution,
selling and administrative operations for which a $40 million provision was
recorded in 1992. While the profitability of the international operations has
improved, the Company believes that international operations are, and will
continue to be, less profitable than the domestic operations reflecting the
higher costs of doing business internationally due to such items as
importation costs, distribution, and selling and administrative expenses as a
percent of revenue.
The Company's exposure to exchange rate fluctuations generally cannot be
minimized solely through the use of operational hedges. Therefore, the Company
utilizes financial instruments such as forward exchange contracts and currency
options to reduce the impact of exchange rate fluctuations on firm and
anticipated cash flow exposures and certain assets and liabilities denominated
in currencies other than the functional currency. The Company does not
purchase currency related financial instruments for purposes other than
exchange rate risk management.
27
<PAGE>
TAX MATTERS
In 1995, the Company's effective tax rate was 24%, primarily due to the
favorable impact of research and development tax credits and the benefits of a
foreign sales corporation. In 1994, the Company's effective tax rate was 12%,
primarily due to the utilization of U.S. tax loss carryforwards for which no
benefit had previously been recognized. In 1993, the Company had a tax
provision of $3 million with respect to pre-tax losses of $6 million. The
Company's effective tax rate was negatively impacted in 1993 by U.S. and non-
U.S. tax losses, which provided no tax benefits in that year.
As of December 31, 1995, the Company had $4 million of alternative minimum
tax credits available to offset future U.S. federal income taxes on an
indefinite carryforward basis and research and development tax credit
carryforwards of $13 million which expire between 2007 and 2010. The Company
had non-U.S. tax loss carryforwards of $164 million, which expire between the
years 1996 and 2013 and for which no benefit had been recorded. A significant
portion of these non-U.S. tax loss carryforwards (approximately $130 million)
are not expected to provide a future benefit because they are attributable to
income of certain non-U.S. entities that are also taxable in the U.S.
INFLATION
The Company is subject to the effects of changing prices. The Company
operates in an industry where product prices are very competitive and subject
to downward price pressures. As a result, future increases in production costs
or raw material prices could have an adverse effect on the Company's business.
However, the Company actively manages its product costs and manufacturing
processes in an effort to minimize the impact on earnings of any such
increases.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. This statement is effective for the Company's 1996
financial statements. The Company's analysis of this new statement indicates
that it will not have a material effect on the Company's financial position or
results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which encourages, but does not
require, companies to measure the compensation cost of stock-based
compensation plans at the grant date based on the fair value of the stock-
based award. Companies may continue accounting for stock-based compensation
under APB Opinion 25, Accounting for Stock Issued to Employees, provided that
they disclose the pro forma effects on net income and earnings per share had
the new accounting requirements been applied. This statement is effective for
the Company's 1996 financial statements. The Company intends to continue
accounting for stock-based compensation awards under the provisions of APB 25.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers of Servicing of Financial Assets and Extinguishment
of Liabilities. This statement is effective for the Company's 1997 financial
statements. The Company's analysis of this new statement indicates that it
will not have a material effect on the Company's financial position or results
of operations.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Prospectus and in documents
incorporated herein by reference may be considered forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, including, without limitation, (i) the statements in "--Trends"
concerning (a) the Company's belief that its total revenue will continue to
grow due to overall market growth and increases in its market share and that
such growth will more than offset
28
<PAGE>
expected declines in sales of certain of its products, (b) the Company's
belief concerning the growth of the market for non-impact technologies and (c)
the Company's expectation that its overall margins will remain stable as its
associated printing supplies business becomes a larger part of its business,
offsetting the decline in sales of certain of the Company's other office
imaging products and the phase-out of its lower margin keyboard business, (ii)
the statements in "Prospectus Summary--The Company--Printers and Associated
Supplies" concerning the Company's belief about continuing substantial growth
in the market for inkjet printers in the future, (iii) the statements in
"Business--Market Overview and Strategy--Printers and Associated Supplies--
Market Overview" concerning the Company's belief about growth in the printer
hardware market, including double-digit growth in volume of certain product
categories such as office desktop laser printers and color inkjet printers,
(iv) the statements in "Business--Legal Proceedings" concerning the Company's
belief with respect to the possible effect of certain legal proceedings, and
current or future claims of intellectual property infringement on its
financial position or results of operations, (v) other statements as to
management's expectations and belief presented in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
(vi) variations in the foregoing statements whenever they appear in this
Prospectus and the documents incorporated herein by reference. Forward-looking
statements are made based upon management's current expectations and belief
concerning future developments and their potential effects upon the Company.
There can be no assurance that future developments affecting the Company will
be those anticipated by management. There are certain important factors that
could cause actual results to differ materially from estimates or expectations
reflected in such forward-looking statements including without limitation the
matters discussed in "Risk Factors" and the factors set forth below:
. The Company's future operating results may be adversely affected if it is
unable to continue to develop, manufacture and market products that meet
customers' needs. The markets for printers and associated supplies are
highly competitive, especially with respect to pricing and the
introduction of new products and features. The Company and its major
competitors, all of which have significantly greater financial, marketing
and technological resources than the Company, have regularly lowered
prices on their printers and may continue to do so. The inkjet printer
market has experienced and could continue to experience significant
printer price pressure from the Company's major competitors. Price
reductions beyond expectations or the inability to reduce costs, certain
expenses or increase sales as currently expected could result in lower
profitability and jeopardize the Company's ability to grow or maintain
its market share.
. The life cycles of the Company's products, as well as delays in product
development and manufacturing, variations in the cost of component parts
and delays in customer purchases of existing products in anticipation of
new product introductions by the Company or its competitors, may cause a
build up in the Company's inventories, make the transition from current
products to new products difficult and could adversely affect the
Company's future operating results. Further, some of the Company's newly
developed products replace or compete with some of the Company's existing
products.
. Revenues derived from international sales, including exports from the
United States, represent an increasing portion of the Company's
consolidated revenues and have grown from 45% of total revenues in 1994
to 53% of total revenues for the nine months ended September 30, 1996.
Accordingly, the Company's future results could be adversely affected by
a variety of factors, including foreign currency exchange rate
fluctuations, trade protection measures, changes in a specific country's
or region's political or economic conditions and unexpected changes in
regulatory requirements. Moreover, margins on international sales tend to
be lower than those on domestic sales.
. The Company's success depends in part on its ability to obtain patents,
copyrights and trademarks, maintain trade secret protection and operate
without infringing the proprietary rights of others. Current or future
claims of intellectual property infringement could prevent the
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<PAGE>
Company from obtaining technology of others and could otherwise adversely
affect its operating results, financial position or business.
. Factors unrelated to the Company's operating performance, including
economic and business conditions, both national and international; the
loss of significant customers; changes in business strategy; and the
ability to retain and attract key personnel.
While the Company reassesses material trends and uncertainties affecting the
Company's financial condition and results of operations, in connection with
its preparation of management's discussion and analysis of financial condition
and results of operations contained in its quarterly and annual reports, the
Company does not intend to review or revise any particular forward-looking
statement referenced in this Prospectus or incorporated herein by reference in
light of future events.
The information referred to above should be considered by investors when
reviewing any forward-looking statements contained in this Prospectus, in any
documents incorporated herein by reference, in any of the Company's public
filings or press releases or in any oral statements made by the Company or any
of its officers or other persons acting on its behalf. By means of this
cautionary note, the Company intends to avail itself of the safe harbor from
liability with respect to forward-looking statements that is provided by
Section 27A and Section 21E referred to above.
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<PAGE>
BUSINESS
Lexmark is a global developer, manufacturer and supplier of laser and inkjet
printers and associated consumable supplies for the office and home markets.
Lexmark also sells serial wire matrix printers for printing single and multi-
part forms by business users. In 1995, revenues from the sale of printers and
associated printer supplies increased 36% from the prior year and accounted
for 69% of total Company revenues of approximately $2.2 billion. In the first
nine months of 1996, revenues from the sale of printers and associated printer
supplies increased 25% from the prior year period and accounted for 75% of the
total Company revenues of approximately $1.7 billion.
The Company's installed base of printers supports a large and profitable
printer supplies business. Because consumable supplies must be replaced on
average one to three times a year, depending on type of printer and usage,
demand for laser and inkjet print cartridges is increasing at a higher rate
than printer shipments. Management expects this recurring and relatively high
margin business to contribute to the stability of Lexmark's earnings over
time.
In addition to its core printer business, Lexmark develops, manufactures and
markets a broad line of other office imaging products which include supplies
for IBM branded printers, aftermarket laser supplies for OEM products,
typewriters and typewriter supplies that are sold under the IBM trademark. In
1995, revenues from the sale of other office imaging products decreased 2%
from 1994 and accounted for 23% of total Company revenues. In the first nine
months of 1996, revenues from the sale of other office imaging products
increased 4% from the prior year period and accounted for 23% of total Company
revenues.
Approximately half of the Company's 1996 revenues have been derived from
sales outside the United States. Revenues derived from international sales,
including exports from the United States, have increased from 45% of total
revenues in 1994 to 53% of total revenues for the nine months ended September
30, 1996. Lexmark's products are sold in more than 100 countries in North and
South America, Europe, the Middle East, Africa, Asia, the Pacific Rim and the
Caribbean. The Company has approximately 6,700 employees worldwide.
PRINTERS AND ASSOCIATED SUPPLIES
Lexmark competes primarily in the markets for office desktop laser and color
inkjet printers--two of the fastest growing printer categories. Sales of
office desktop laser and color inkjet printers and their associated supplies
together represented approximately 82% and 85% of Lexmark's total printer and
associated supplies revenues in 1995 and for the first nine months of 1996,
respectively.
LASER PRINTERS. Network laser printer growth is being driven by the office
migration from large mainframe computers to local area networks that link
various types of computers using a variety of protocols and operating systems.
This shift has created strong demand for office desktop laser printers with
network connectivity attributes. With its Optra+ laser printers, a majority of
the Company's laser printers are office desktop printers, which the Company
believes will be one of the fastest growing segments of the laser printer
market. For further discussion of the evolving nature of laser printer
classifications, see "Business--Market Overview and Strategy--Printers and
Associated Supplies".
Lexmark develops and owns most of the technology for its laser printers and
consumable supplies which differentiates the Company from a number of its
major competitors, including HP, which purchase their laser engines from a
third party. Lexmark's integration of research and development, manufacturing
and marketing has enabled the Company to design laser printers with features
desired by specific customer groups and has resulted in substantial market
presence for Lexmark within certain industry segments such as banking,
retail/pharmacy and health care. The Company's critical technology and
manufacturing capabilities have also allowed Lexmark to effectively manage
quality
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and to reduce its typical new product introduction cycle times, for example,
in the case of laser printers from 24 months to approximately 12 to 16 months.
Management believes its cycle times are among the fastest in the industry and
that these capabilities have contributed to the Company's success over the
last several years.
INKJET PRINTERS. The color inkjet printer market, the fastest growing
segment of the personal printer market, is expanding rapidly due to growth in
personal computers and home offices, and the development of easy-to-use color
inkjet technology with good quality color print capability at low prices.
Based on data from industry analysts, management believes that the inkjet
market grew from 4 million units in 1992 to 21 million units in 1995 and will
continue to grow substantially as the inkjet market continues to shift from
monochrome to color and as inkjet printers continue to replace low-speed laser
printers. Lexmark introduced its first color inkjet printer using its own
technology in 1994 and has experienced strong sales growth through retail
outlets. The Company has increased its product distribution through retail
outlets, with the number of such outlets worldwide rising from approximately
5,000 retail outlets in 1995 to approximately 15,000 in 1996. The Company has
made substantial capital investments in its inkjet production capacity in 1995
and 1996 to address the growing demand for its color inkjet printers.
SUPPLIES. The Company is currently the exclusive source for new print
cartridges for the laser and inkjet printers it manufactures. Management
expects that an increasing percentage of future Company earnings will come
from its consumable supplies business, due to the consumer's continued usage
and replacement of cartridges. In 1996, the Company substantially expanded its
inkjet cartridge manufacturing capacity in both North America and Europe.
OTHER OFFICE IMAGING PRODUCTS
The Company's other office imaging products category includes many mature
products such as supplies for IBM printers, typewriters and typewriter
supplies and other impact supplies that require little investment but provide
a source of cash flow. In addition, the Company introduced after-market laser
cartridges for printers not manufactured by Lexmark. Management believes that
the potential for an after-market laser cartridge business is significant. The
Company's strategy for other office imaging products is to focus on the after-
market OEM laser supplies opportunity while managing its mature businesses for
cash flow.
KEYBOARDS AND OTHER
The Company historically manufactured keyboards primarily for IBM. Following
the expiration in March 1996 of the Company's keyboard agreement with IBM and
management's analysis of the long-term profitability of the keyboard industry,
the Company completed its transition out of the keyboard business by the end
of the first quarter of 1996. Keyboard sales accounted for 8% and 3%,
respectively, of the Company's revenue and gross profit for 1995.
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MARKET OVERVIEW AND STRATEGY
PRINTERS AND ASSOCIATED SUPPLIES
MARKET OVERVIEW
In 1995, estimated industry-wide revenue for printer hardware in the 1-30
ppm speed category, including network, personal and wire matrix, was
approximately $20 billion. Management believes, based on industry analysts'
estimates, that this market will in the aggregate continue to experience
modest growth through 1999. However, the Company believes that certain product
categories within this market that it has targeted, such as office desktop
laser printers and color inkjet printers, will experience double-digit growth
in volume. An overview of the printer markets in which the Company competes is
summarized below:
<TABLE>
<CAPTION>
U.S. PRIMARY PAPER
SPEED PRICE RANGE PRINT QUALITY MARKET MEDIA
--------- ------------- ------------------------ ------- -----------------
<S> <C> <C> <C> <C> <C>
Color Laser............. 2-5 ppm $5,000-10,000 Better/Best (300-600 dpi) Office Plain
Mono Laser.............. $ 400- 5,000 Best (1200 x 1200 dpi) Office Plain
Personal............... 1-6 ppm
Office Desktop/
Network............... 7-30 ppm
Inkjet
Mono................... 2-7 ppm $ 100- 400 Better (600 x 600 dpi) Home Plain/Coated
Color.................. 0.3-2 ppm $ 150- 3,000 Better (600 x 600 dpi) Home Plain/Coated
Wire Matrix............. 2-4 ppm $ 100- 500 Good (< 240 dpi) Office Plain/Multi Parts
</TABLE>
LASER PRINTERS. The laser printer market is categorized by print speeds.
Office desktop or network monochrome laser printers are those that print 7-30
ppm while low-speed lasers typically print 1-6 ppm*. Management believes that
the overall printer market is bifurcating into two principal segments: office
desktop printers suitable for an office environment and low-speed, lower cost
printers suitable for recreational and home office use by individuals.
In recent years, businesses have shifted from relying on large mainframe
computers to using local area networks ("LAN") that connect various types of
computers using a variety of protocols and operating systems. With this shift
has come the need for network printers that can communicate with, and adapt
to, the various configurations of the computers they serve. The ability to
process jobs quickly is also important. Most printers employed in the network
environment are office desktop printers with sophisticated software management
tools. Management expects network printers to continue to increase in speed
and that special features will proliferate to enhance network connectivity.
Low-speed laser printers are generally used as personal printers and are not
connected to networks. This segment is characterized by intense price pressure
and is vulnerable to replacement by low cost, color inkjet printers.
Based on the available market data, management believes that between 1991
and 1995 there was steady growth in overall shipments of network and personal
laser printers (1-30 ppm), although different segments of the market
experienced different growth rates. The Company's shipments of network and
personal laser printers taken as a whole during 1991 to 1995 increased at a
compound
- --------
* Data available from industry analysts as to the size of the laser and inkjet
printer market varies widely. The variance in laser printer market data is
caused in part by the rapid pace of change in laser printer speeds which
makes comparative analyses based on comparable product categories difficult
over a recent historical period. The Company bases its analysis of
historical market trends on the data available from several different
industry analysts. The ranges of printing speed used to define and
distinguish between laser printer categories described in this Prospectus
are based on the Company's own internal analysis of the laser printer
categories currently used by certain industry analysts to measure the laser
printer market.
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<PAGE>
annual rate, which management believes reflected the overall rate of growth of
the market as a whole. Within the office desktop network laser printer
category, Lexmark shipments increased at a rate which enabled the Company to
gain market share. Lexmark shipments of low-speed laser printers remained
essentially flat during the same period despite strong market growth within
that category. Management expects the market unit volume for low-speed laser
printers to grow moderately but that the market for office desktop laser
printers--which includes the Company's Optra+ line of laser printers--will
experience double-digit growth through 1999.
Laser printer unit growth in recent years has generally exceeded the growth
rate of laser printer revenues due to unit price pressure. This is partially
offset by the tendency for customers in the network segment of the market to
trade up to models with faster speeds, greater network connectivity, and other
new features. New models with such enhanced features generally sell at higher
price points and carry higher gross profit margins than the models they
replace.
INKJET PRINTERS. Growth in the market for inkjet printers, which are mainly
used as personal printers, reflects increased penetration of personal
computers for recreational and home office use. Strong market demand also
reflects the availability of low-cost technology capable of providing
customers with good quality printing at affordable prices. The recent
availability of color inkjet printers at affordable prices has caused
explosive industry growth since 1992. Starting from a relatively small base,
Lexmark's shipments of inkjet printers increased by 40% from 1992 to 1993,
100% from 1993 to 1994 and 345% from 1994 to 1995. In the first nine months of
1996, Lexmark shipments increased at a rate which the Company believes enabled
it to gain market share. Lexmark entered the color inkjet printer market with
its own technology in 1994.
Growth in inkjet printer revenue has been slower than unit growth due to
rapidly declining prices. The greater affordability of color inkjet printers
has been an important factor in the explosive growth of this market.
WIRE MATRIX PRINTERS. The market for serial wire matrix printers has been
declining for several years and volumes are expected to continue to decline in
the future due in large part to replacement by inkjet printers with higher
print quality. Within the serial matrix printer market, however, the demand
for wire matrix printers that print single and multi-part forms--which
constitute the Company's principal product offering in this category--has
declined at a slower rate.
ASSOCIATED PRINTER SUPPLIES. Printer supplies products are defined by the
printing technology. Impact supplies are used in printers and typewriters that
put marks on paper through the use of some form of physical force, usually a
wire or hammer which applies force to a ribbon. The majority of impact
supplies are either fabric or film ribbons. Non-impact supplies are used in
printers that do not use force to put marks on paper. For example, the laser
printer uses electrophotography to place toner on paper. Non-impact supplies
include toner and photoconductor as well as ink cartridges used in inkjet
printers.
The principal supply product for laser printers is a laser cartridge, which
includes toner and photoconductor. The principal supply product for inkjet
printers is an inkjet print cartridge, which includes ink and a circuit
assembly. The principal supply product for Lexmark's serial matrix printers is
an inked fabric ribbon. As the installed base of Lexmark laser and inkjet
printers continues to grow, the market for their associated supplies will grow
as such supplies are continually purchased throughout the life of the
printers.
STRATEGY
Lexmark's laser printer strategy is to target fast growing industry segments
of the network printer market and to increase market share by providing high
quality, technologically advanced products at competitive prices. To promote
Lexmark brand awareness and market penetration, Lexmark will
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<PAGE>
continue to identify and focus on customer segments where Lexmark can
differentiate itself by supplying laser printers with features that meet
specific customer needs and represent the best total cost of printing
solution. Management intends to continue to develop and market products with
more function and capabilities than comparably priced HP printers. The
Company's inkjet printer strategy is to generate demand for the Lexmark color
inkjet printer by offering high-quality products at competitive prices to
retail and OEM customers. Management expects that the Company's associated
printer supplies business will continue to grow as its installed base of laser
and inkjet printers increases.
For the business customer, Lexmark expects to continue to offer an array of
advanced laser printer products with superior features and functions, higher
speeds and better print resolution at competitive prices. The Company believes
that it is well-positioned to take advantage of the growth potential of LAN
printers due to its development and ownership of both the software and
hardware features that provide network connectivity and management tools.
Lexmark has targeted the office desktop laser printer markets and, as it has
with the 1,200 dpi Optra+ family, intends to remain one of the few printer
companies that create industry-wide standards for laser printer performance.
Lexmark focuses continually on enhancing the network capability of its laser
printers by introducing new products, like its MarkVision printer management
utility, that enhance the ability of its printers to function efficiently in a
LAN environment and provide significant flexibility to the LAN user.
Lexmark's large account marketing team focuses on demand generation in
Fortune 1000 companies, other large corporations globally and specific
industries where Lexmark can differentiate itself by supplying high function
products with customized features to meet specific needs. These marketing
teams work with Lexmark's development teams to design features requested by
large account customers for specific functions. Lexmark has had recent success
in its large account marketing team's target markets, such as in the finance
sector (whose customers are served by Lexmark's duplex (double-sided printing)
and "flash memory" feature which permits instantaneous printing and updating
of forms in all locations). Another of the Company's strategies is to offer
its advanced network management software in products to enable these financial
institutions to more efficiently manage and control their network printing
activities. Lexmark expects that its marketing strategy focusing on
significant industry segments will promote Lexmark brand awareness and provide
a platform for greater penetration of the laser printer market through sales
by dealers and distributors.
For the office and home user, Lexmark focuses on manufacturing well-priced,
reliable, easy-to-use color inkjet printers. The Company expects that hardware
improvements in this market will result in faster printing and better print
quality. On the software side, the Company expects that enhanced compatibility
with standard PC operating systems, such as Microsoft Windows 95, and software
features that take advantage of the computing power of the PC for printing
functions will permit the Company to reduce manufacturing costs for the
printers and to produce a product that is easier to use. Lexmark believes that
its core product offerings in this market will also permit it to build brand
recognition in the retail channels.
On the manufacturing side, the Company is continually focusing on ways to
reduce costs and expand capacity while maintaining high quality. The Company
will also consider strategic acquisitions in the future to leverage its
technological expertise.
OTHER OFFICE IMAGING PRODUCTS
MARKET OVERVIEW
Other office imaging products include typewriters for office use and
associated supplies sold under the IBM name, impact supplies for Lexmark
printers that are no longer in production, supplies for IBM branded printers
and after-market printer supplies for other OEM printers. The markets for most
of the Company's other office imaging products are generally declining, other
than the market for after-market laser cartridges for other OEM printers,
which the Company believes is a market with significant growth potential.
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<PAGE>
In 1995, non-impact supplies were estimated to be an approximately $24
billion opportunity worldwide, compared to the impact supplies opportunity of
approximately $2 billion. Based on available industry data, the Company
estimates that worldwide impact supplies revenue will decline steadily in
future years, while non-impact supplies revenue will continue to grow.
Management expects that office typewriter market revenue will continue to
decline.
STRATEGY
In view of declining revenues and profit margins from sales of typewriters
and typewriter supplies and sales of other office imaging products for IBM
printers, the Company's strategy for other office imaging products is to focus
on the after-market OEM supplies opportunity while managing its mature
businesses for cash flow. The Company will continue to compete with other OEMs
to provide supplies for their installed bases of laser printers. The Company
may pursue selected acquisitions of other office imaging products companies.
Lexmark will make minimal further investment in impact supplies and
management expects profit margins on such products to decline as a result of
new agreements with IBM that generally became effective on March 27, 1996. As
a result of its high quality products, the Company benefits from customer
loyalty, which has historically permitted it to continue its premium pricing
strategy.
KEYBOARDS AND OTHER
The Company historically manufactured keyboards primarily for IBM. Following
the expiration in March 1996 of the Company's keyboard agreement with IBM and
management's expectation that the keyboard industry will continue to
experience price declines resulting in low margins and a low return on assets,
the Company completed its transition out of the keyboard business by the end
of the first quarter of 1996. Keyboard sales accounted for 8% and 3%,
respectively, of the Company's revenue and gross profit for 1995.
PRODUCTS
The Company's current product offerings consist primarily of the Lexmark
Optra+ laser printer product line and Optra C color laser printer, the Optra E
personal laser printer, a wide range of inkjet printers, a family of network
print servers, typewriters and serial wire matrix printers. The Company also
designs, manufactures and distributes a variety of print cartridges for use in
its laser and inkjet printers as well as approximately 1,200 other office
imaging products, including typewriter supplies and supplies for other
printers, including IBM printers.
Lexmark's main printer products are listed below:
<TABLE>
<CAPTION>
CATEGORY PRODUCTS U.S. PRICE RANGE
-------- -------- ----------------
<S> <C> <C>
OFFICE DESKTOP/NETWORK
Mono Laser 4039-10 Plus $1,150-1,250
Optra + $1,300-3,000
Optra N $2,400-2,600
Color Laser Optra C $7,000-7,500
PERSONAL LASER Optra E $ 500-750
COLOR INKJET Color Jetprinter 1020 & 2030 $ 150-200
Color Jetprinter 2050 & 2070 $ 250-400
Color Jetprinter 4079+ $2,650-3,000
WIRE MATRIX 23XX $ 300-500
4227 $ 1,300-1500
</TABLE>
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<PAGE>
The Company has upgraded and improved its laser printer product offerings
significantly since the Acquisition with the introduction of several models
adding functionality and performance at lower prices. The Company's current
network laser family, the Optra+ line, was enhanced in the second quarter of
1996 and offers four products at various price ranges. All four Optra+ models
are 16 ppm and include 1,200 dpi printing and high performance RISC
processors. Another standard feature of the Optra+ product line is MarkVision,
Lexmark's printer management program, which permits bi-directional
communication for status management between the user or LAN administrator and
the printer.
In addition to offering connectivity solutions and management tools as
features on its laser printers, Lexmark also designs and manufactures network
print servers. These products provide a means to connect a printer lacking its
own network adapter to a local area network. The Company's current product
offering is the MarkNet XLe, a multiprotocol server capable of supporting 18
different networking environments. MarkNet XLe offers enhancements to
Lexmark's previous product offerings at a lower price.
The Company currently markets a number of personal color inkjet printers for
individual home and office use. These printers generally retail in a range of
$150-$400 and offer sharp color printing, fast performance, compatibility with
leading software applications, and ease of installation and use.
The Company also markets five serial wire matrix printers in the $300-$1,500
price range for customers who print large volumes of multi-part forms.
The Company designs, manufactures and distributes a variety of cartridges
for use in its installed base of laser and inkjet printers. Lexmark is
currently the exclusive source for new print cartridges for the printers it
manufactures.
The Company's other office imaging products include over 1,200 products,
including typewriter products and products for IBM and other OEM printers
using both impact and non-impact technology. The Company continues to offer a
broad line of typewriters with the IBM logo, which remain the industry
leaders. The Company also provides a wide range of supplies for the large
installed base of IBM printers including toners, ribbons, photoconductors and
other printer accessories. Lexmark has also developed and recently introduced
after-market laser cartridges for laser printers sold by other manufacturers.
MARKETING AND DISTRIBUTION
PRINTERS AND ASSOCIATED SUPPLIES
The Company markets and distributes its laser printers primarily through its
well-established dealer network, which includes such dealers as Microage
Computers, Ameridata, Vanstar, Intelligent Electronics, Merisel, Ingram Micro
and Inacom. The Company's products are also sold through value-added
resellers, who offer custom solutions to specific markets.
The Company employs large account marketing teams whose mission is to
generate demand for Lexmark printers primarily among Fortune 1000 companies
and other large corporations globally. In recent years, marketing teams have
begun to focus on industry segments such as banking, retail/pharmacy and
health care. Those teams, in conjunction with the Company's development and
manufacturing teams, are able to design products to meet customer
specifications for printing electronic forms, media handling, duplex printing
and other custom solutions. The majority of customer orders solicited by these
marketing teams are filled through dealers or resellers.
The Company distributes its personal inkjet printers primarily through
approximately 15,000 retail outlets worldwide including office superstores
such as Office Depot and Staples, computer superstores such as Computer City,
consumer electronics stores such as Circuit City, Best Buy and Radio Shack,
mass merchandisers such as Wal-Mart, other large regional chains and overseas
stores such as Dixons, Carrefour and Vobis.
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<PAGE>
The Company's international sales are an important component of its
operations. The Company's sales and marketing activities in its global markets
are organized to meet the needs of the local jurisdictions and the size of
their markets. The Company's European marketing operation is structured
similarly to its domestic marketing activity. The Company's products are
available from major information technology resellers such as Northamber and
in large markets from key retailers such as Media Markt in Germany, Dixons in
the United Kingdom and Carrefour in France. Canadian marketing activities,
like those in the United States, focus on large account demand generation and
vertical markets, with orders filled through distributors and retailers. The
Company's Latin American and Asian Pacific markets are served through a
combination of Lexmark sales offices, strategic partnerships and distributors.
The Company also has sales and marketing efforts for OEM opportunities.
The Company's printer supplies and other office imaging products are
generally available at the customer's preferred point of purchase through
multiple channels of distribution. Although channel mix varies somewhat
depending on the geography, substantially all of the Company's supplies
products sold commercially in 1995 were sold through the Company's network of
Lexmark-authorized supplies distributors and resellers who sell directly to
end users or to independent office supply dealers. Lexmark's supplies are also
available at office and computer superstores.
Supplies for the European market are distributed from the Company's facility
near Orleans, France. The Lexington, Kentucky facility is the central
distribution point for all U.S. and other global supplies markets.
Supplies and other office imaging products are also sold selectively to a
few large end users, with the largest customer being IBM, and to OEMs for
resale under the OEM's brand name. See "--IBM Relationship".
COMPETITION
PRINTERS AND ASSOCIATED SUPPLIES
The markets for printers and associated supplies are highly competitive,
especially with respect to pricing and the introduction of new products and
features. The laser printer market is dominated by HP, which has a widely
recognized brand name and has been estimated to have an approximate 70% market
share. Several other large manufacturers such as Canon and Apple also compete
in the laser printer market. Since June 1996, IBM has been expanding its
product offerings in the printer market with products that compete with the
Company's products. The Company believes that IBM has the resources to be an
aggressive competitor. See "Business--IBM Relationship".
The Company's strategy is to target fast growing segments of the network
printer market and to increase market share by providing high quality,
technologically advanced products at competitive prices. This strategy
requires that the Company continue to develop and market new and innovative
products at competitive prices. New product announcements by HP and the
Company's other principal competitors, however, can have and in the past have
had a material adverse effect on the Company's financial results. Such new
product announcements can quickly undermine any technological competitive edge
that one manufacturer may enjoy over another and set new market standards for
quality, speed and function. Furthermore, knowledge in the marketplace about
pending new product announcements by the Company's competitors may also have a
material adverse effect on the Company inasmuch as purchasers of printers may
defer purchasing decisions until the announcement and subsequent testing of
such new products.
In recent years, the Company and its principal competitors, all of which
have significantly greater financial, marketing and technological resources
than the Company, have regularly lowered prices on printers and are expected
to continue to do so. The Company is vulnerable to these pricing pressures
which, if not mitigated by cost and expense reductions, may result in lower
profitability and could
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jeopardize the Company's ability to grow or maintain market share and build an
installed base of Lexmark printers. The Company expects that, as it competes
more successfully with its larger competitors, the Company's increased market
presence may attract more frequent challenges, both legal and commercial, from
its competitors, including claims of possible intellectual property
infringement.
HP is also the market leader in the personal color inkjet printer market
and, with Canon and Epson, has been estimated to account for approximately 80
to 90% of worldwide personal color inkjet printer sales. As with laser
printers, if pricing pressures are not mitigated by cost and expense
reduction, the Company's ability to maintain or build market share and its
profitability could be adversely affected. In addition, as a relatively new
entrant to the retail marketplace with a less widely recognized brand name,
the Company must compete with HP, Canon and Epson for retail shelf space for
its inkjet printers. There can be no assurance that the Company will be able
to continue to penetrate the retail marketplace.
The Company has recently entered the market as a supplier of after-market
laser cartridges for laser printers using certain models of Canon engines.
There is no assurance that the Company will be able to compete effectively for
a share of the after-market cartridge business for its competitors' base of
laser printers. The Company's decision to enter this market may have an
adverse effect on the Company's relations with certain of its suppliers.
Although Lexmark is currently the exclusive supplier of new print cartridges
for its laser printers, there can be no assurance that other companies will
not develop new compatible cartridges for Lexmark laser printers. In addition,
refill and remanufactured alternatives for the Company's cartridges are
available from independent suppliers and, although generally offering lower
print quality, compete with the Company's supplies business.
OTHER OFFICE IMAGING PRODUCTS
The market for other office imaging products is extremely competitive and
the impact segment of the supplies market is declining. Although the Company
has exclusive rights to market certain IBM branded supplies until April 1999,
there are more than 100 independent ribbon manufacturers and more than 25
independent toner manufacturers competing to provide compatible supplies for
IBM branded printing products. Independent manufacturers compete for the
after-market ribbon business under either their own brand, private label, or
both, using price, aggressive marketing programs, and flexible terms and
conditions to attract customers. Depending on the product, prices for
compatible products produced by independent manufacturers generally range from
15% to 70% below the Company's prices.
The Company is less dependent on revenue and profitability from its other
office imaging products business than it has been historically and intends to
focus on the growing portions of that market such as the after-market laser
cartridge supplies category. There is no assurance that the Company will be
able to compete in the after-market laser supplies business effectively or
that the declining market areas in its other office imaging products business
will not adversely affect the Company's operating results.
The Company does not expect any major new entrants into the ribbon market.
However, in response to the declining impact supplies opportunity, many
established competitors are investing in non-impact capacity and joining
forces through acquisitions on a worldwide basis. The Company's primary U.S.
competitors in the overall supplies market include Nu-kote, Turbon, GRC and
NER. Internationally, the Company's primary competitors are Turbon, Armor,
TBS, and Pelikan (acquired by Nu-kote) in Europe and Fullmark in the Far East.
The Company is increasing its efforts to provide laser supplies for other
OEM printers. As an after-market supplier in the all-in-one laser cartridge
business, the Company faces competition from both the OEMs and cartridge
remanufacturers. In order to become an effective worldwide supplier of after-
market cartridges, the Company will need to compete with HP and Canon.
39
<PAGE>
The Company believes the current number of competitors in the declining
worldwide office typewriter market is fewer than 17, down significantly from
over 40 in the mid-1980's. The four primary competitors in the U.S. market are
Canon, Brother, Panasonic and Swintec. The Company believes that it is
dominant in the U.S. office typewriter market. Remaining office typewriter
competitors with multiple product lines continue to shift focus to other
products in their portfolios (copier, fax, PC, multifunction, etc.). No
significant new office typewriter product announcements have been made by any
key competitor since 1993.
MANUFACTURING
The Company's manufacturing facilities are located in Lexington, Kentucky,
Boulder, Colorado, Orleans, France and Sydney, Australia, all of which are ISO
9000 certified. The Company opened new facilities during 1996 in Rosyth,
Scotland and Juarez, Mexico. Most of the Company's laser and inkjet
technologies are developed in Lexington. The Company's manufacturing strategy
is to keep processes that are technologically complex, proprietary in nature
and higher value added, such as the manufacture of inkjet cartridges, at the
Company's own facilities. Stable technology, labor intensive and non-strategic
operations, such as the manufacture of wire matrix printers, are typically
performed by lower-cost vendors.
Management believes that the Lexington manufacturing facility employs some
of the most modern techniques in the industry. In order to make its facility
capable of implementing new products with a shorter cycle time, the Company
revamped the Lexington facility from a fully automated plant to a more
flexible facility. Accordingly, the Company has the ability to adapt the plant
to the requirements of a new product and to adopt more efficient manufacturing
techniques as they are developed. The plant's electronic card assembly and
test facility with surface mount technologies also enhances the Company's
manufacturing capability.
The Company's development and manufacturing operations for laser printer
supplies which include toners, photoconductor drums, developers, charge rolls
and fuser rolls, are located in Boulder. The Company has made significant
capital investments in the Boulder facility to expand toner and photoconductor
drum processes.
RAW MATERIALS
The Company procures a wide variety of components used in the manufacturing
process, including semiconductors, electro-mechanical components and
assemblies, as well as raw materials, such as plastic resins. Although many of
these components are standard off-the-shelf parts that are available from
multiple sources, the Company often utilizes preferred supplier relationships
to better ensure more consistent quality, cost, and delivery. Typically, these
preferred suppliers maintain alternate processes and/or facilities to ensure
continuity of supply. The Company generally must place commitments for its
projected component needs approximately three to six months in advance. The
Company occasionally faces capacity constraints when there has been more
demand for its printers and associated supplies than initially projected.
Some components of the Company's products are only available from one
supplier, including certain custom chemicals, microprocessors, application
specific integrated circuits and other semiconductors. In addition, the
Company sources some printer engines and finished products from OEMs. Although
the Company purchases in anticipation of its future requirements, should these
components not be available from any one of these suppliers, there can be no
assurance that production of certain of the Company's products would not be
disrupted. Such a disruption could interfere with the Company's ability to
manufacture and sell products and materially adversely affect the Company's
business.
40
<PAGE>
RESEARCH AND DEVELOPMENT
The Company's research and development activity for the past four years has
focused on laser and inkjet printers and associated supplies and on network
connectivity products. The Company is selective in targeting its research and
development efforts. For example, anticipating the industry trend, the Company
minimized investing in wire matrix technology in 1991 and has instead devoted
its research and development resources to the faster growing markets for laser
and inkjet printers. The Company has been able to keep pace with product
development and improvement while spending less than its larger competitors on
research and development and has even been able to achieve significant
productivity and minimize research and development costs. In the case of
certain products, the Company may elect to purchase products and key
components from third party suppliers.
The Company is committed to being a technology leader in its targeted areas
and is actively engaged in the design and development of additional products
and enhancements to its existing products. Its engineering effort focuses on
laser, inkjet, and connectivity technologies as well as design features that
will increase efficiency and lower production costs. The process of developing
new technology products is complex and requires innovative designs that
anticipate customer needs and technological trends. Research and development
expenditures were $112 million in 1993, $101 million in 1994, $116 million in
1995 and $92 million during the first nine months of 1996. In addition, the
Company must make strategic decisions from time to time as to which new
technologies will produce products in market segments that will experience the
greatest future growth. There can be no assurance that the Company can
continue to develop the more technologically advanced products required to
remain competitive.
IBM RELATIONSHIP
In connection with the Acquisition, IBM entered into numerous agreements to
support the Company's operations for a five-year term. These agreements, which
expired on March 27, 1996, included a keyboard supply agreement (which
obligated IBM to acquire essentially all of its desktop keyboard requirements
from the Company), an internal use agreement (which obligated IBM to acquire
substantially all of its requirements for desktop printers, typewriters and
associated supplies from the Company), an IBM trademark license agreement
(which permitted the Company to use the IBM trademark on certain of its
products) and a non-competition agreement (pursuant to which IBM was
prohibited from competing with the Company's products). See "Certain
Transactions and Relationships--IBM".
The Company completed its transition out of the keyboard business by the end
of the first quarter of 1996 and entered into an agreement with IBM providing
for the orderly transition of the Company's keyboard business to IBM or other
vendors. Under this agreement with IBM, IBM paid the Company $36.5 million of
which $24 million related to amounts recorded by the Company through September
30, 1995, $6 million of profit recorded through March 1996, and $6.5 million
for the purchase of certain keyboard assets. The Company's keyboard business,
of which IBM represented approximately 95%, accounted for revenues of $219,
$201, $177 and $32 million for the years 1993, 1994, 1995 and the nine months
ended September 30, 1996, respectively. Under the original agreement with IBM,
the Company's keyboard business was guaranteed a minimum gross profit, and in
the years ended 1993, 1994, 1995 and the nine months ended September 30, 1996,
the keyboard business contributed $48, $28, $18 and $6 million, respectively,
toward the Company's consolidated gross profit.
Sales to IBM (excluding sales of keyboards) were $224, $215, $258 and $134
million for the years 1993, 1994, 1995, and the nine months ended September
30, 1996, respectively. The Company believes IBM will continue to be a
significant customer but that future revenue and profitability from IBM sales
will continue to decline as the Company's core printer and associated supplies
business represents a larger percentage of the Company's total business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Trends".
41
<PAGE>
In the third quarter of 1995, the Company entered into a profit sharing
supplies agreement with IBM and a related agreement for an extension of the
IBM trademark agreement that allows the Company to continue to use the IBM
logo on certain existing printer supplies in its other office imaging products
line through March 31, 1999. Under these agreements, Lexmark has been required
since April 1996 to share the profits from the Company's sale of certain
products bearing the IBM logo. The Company also entered into a royalty
agreement for an extension of the right to use the IBM logo on typewriters,
typewriter supplies and certain other IBM branded printer supplies through
March 27, 2001. Since these new arrangements became effective, the Company
estimates that operating income has been reduced approximately $8 million to
$9 million a quarter during 1996.
Since March 27, 1996, IBM is no longer required to purchase its desktop
printers and typewriters from the Company. However, IBM subsequently entered
into an agreement to use its best efforts to buy its printer and typewriter
supplies from the Company through March 31, 1999. In addition, since March 27,
1996, IBM is no longer prohibited from competing with the Company's printer
business, and in June 1996 IBM introduced laser printer products that compete
with the Company's products. See "Risk Factors--Competition".
Although the Company and IBM have entered into agreements providing for an
ongoing relationship, the Company expects that future revenue and profit
received from IBM will decline significantly and that such decline could have
a material adverse effect on the Company. However, the Company anticipated the
expiration of these agreements and has redeployed the resources previously
utilized on the declining keyboard and other businesses associated with the
majority of the IBM agreements to the Company's strategically important
businesses.
LARGE CUSTOMERS
No customer other than IBM has accounted for more than 10% of the Company's
consolidated revenues since 1993.
BACKLOG
The Company generally ships its products within 30 days of receiving orders
and therefore has a backlog of generally less than 30 days at any time, which
backlog the Company does not consider material to its business.
EMPLOYEES
As of September 1996, the Company had approximately 6,700 employees
worldwide of which 5,000 are located in the U.S. and the remaining 1,700 in
Europe, Canada, Latin America and Asia Pacific. None of the U.S. employees are
represented by any union. Employees in France, Germany and the Netherlands are
represented by Statutory Works Councils. Substantially all regular employees
have stock options. The Company's employees have been organized in employee
teams that are able to make rapid decisions and to implement those decisions
to achieve faster development and manufacturing cycle times.
42
<PAGE>
PROPERTIES
The Company's manufacturing and other material operations are conducted at
the facilities set forth below:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET ACTIVITIES STATUS
-------- ----------- ---------- ---------
<C> <C> <S> <C>
Lexington, KY......... 2,966,000 Headquarters, Manufacturing,
Development, Administrative,
Distribution, Warehouse,
Marketing Owned
265,000 Warehouses, Development Leased(1)
115,000 Warehouse Leased (1)
Manufacturing, Development,
Boulder, CO........... 332,000 Warehouse Leased(2)
Dietzenbach, Germany.. 49,000 Administrative, Warehouse Leased(3)
Juarez, Mexico........ 95,000 Manufacturing, Administrative Owned
Administrative, Marketing,
Markham, Ontario...... 47,000 Warehouse Leased(4)
Manufacturing, Administrative,
Orleans, France....... 452,000 Warehouse Owned
Ormes, France......... 192,000 Warehouse Leased(5)
Paris, France......... 30,000 Administrative, Marketing Leased(6)
Rosyth, Scotland...... 92,000 Manufacturing, Administrative Leased (7)
Sydney, Australia..... 64,000 Manufacturing, Administrative,
Warehouse, Marketing Leased(8)
</TABLE>
- --------
(1) Leases covering 151,000 square feet expire September 1997 and carry two
one-year renewal options. Lease covering 115,000 square feet expires
August 1998 and carries five three-year renewal options.
(2) Lease covering 278,000 square feet expires May 2001 and carries three
five-year renewal options. Lease covering 54,000 square feet expires
January 1998 and carries three one-year renewal options.
(3) Two leases covering this property expire September 2004 and there are no
renewal options.
(4) Lease covering this property expires September 2001 and carries two five-
year renewal options.
(5) Lease covering this property expires February 1999 and carries one three-
year renewal option.
(6) Leases covering this property expire December 2003 and there are no
renewal options.
(7) Lease covering this property expires in 2021 and includes an option to
purchase exercisable through March 2001.
(8) Lease covering this property expires March 2002 and carries one six-year
renewal option.
The Company believes its facilities are in good operating condition. Except
for the Juarez, Mexico facility, properties owned by the Company serve as
collateral for the Company's term loan, revolving credit facility and senior
notes. See "Management's Discussion and Analysis--Liquidity and Capital
Resources".
43
<PAGE>
INTELLECTUAL PROPERTY
The Company's intellectual property is one of its major assets and the
ownership of the technology used in its products is important to its
competitive position. The Company has about 120 patent cross-license
agreements of various types with various third parties. These license
agreements include agreements with, for example, Canon and HP. Most of these
license agreements provide cross-licenses to patents arising from patent
applications first filed by the parties to the agreements before certain dates
in the early 1990s, with the date varying from agreement to agreement. Each of
the IBM, Canon and HP cross-licenses grants worldwide, royalty-free, non-
exclusive rights to the Company to use the covered patents to manufacture
certain of its products. Certain of the Company's material license agreements,
including those that permit the Company to manufacture its current design of
laser and inkjet printers and after-market laser cartridges for certain OEM
printers, terminate as to future products upon certain "changes of control" of
the Company. See "Risk Factors--Certain Provisions Relating to Changes in
Control". The Company also holds a number of specific patent licenses obtained
from third parties to permit the production of particular features in
products.
The Company holds approximately 1,400 patents worldwide and has
approximately 400 pending patent applications worldwide covering a range of
subject matter. The Company has filed over 500 worldwide patent applications
since its inception in 1991. The Company's patent strategy includes obtaining
patents on key features of new products which it develops and patenting a
range of inventions contained in new supply products such as toner and ink
cartridges for printers. Where appropriate, the Company seeks patents on
inventions flowing from its general research and development activities. While
no single patent or series of patents is material to the Company, the
Company's patent portfolio in the aggregate serves to protect its product
lines and offers the possibility of entering into license agreements with
others.
The Company designs its products to avoid infringing the intellectual
property rights of others. The Company's major competitors, such as HP and
Canon, have extensive, ongoing worldwide patenting programs. As is typical in
technology industries, disputes arise from time to time about whether the
Company's products infringe the patents or other intellectual property rights
of major competitors and others. As the Company competes more successfully
with its larger competitors, more frequent claims of infringement may be
asserted.
In October 1996, Lexmark International entered into an agreement with HP to
cross-license each other's patents filed prior to a specified date (the "HP
Agreement"). The HP Agreement generally gives both parties a worldwide non-
exclusive license under the licensed patents for the manufacture and sale of
printers, as well as accessories and consumable supplies designed for use with
each party's own printers. In addition, the HP Agreement resolves issues of
patent infringement that had been raised by both companies and does not
involve any royalty or other payment by either party.
The Company has trademark registrations or pending trademark applications
for the name LEXMARK in approximately 70 countries for various categories of
goods. The Company also owns a number of trademark applications and
registrations for product names, such as the OPTRA laser printer name.
Although the Company believes the LEXMARK trademark is material to its
business, it does not believe any other trademarks are material.
The Company holds worldwide copyrights in computer code, software and
publications of various types.
ENVIRONMENTAL AND REGULATORY MATTERS
The Company's operations, both domestically and internationally, are subject
to numerous laws and regulations, particularly relating to environmental
matters that impose limitations on the discharge
44
<PAGE>
of pollutants into the air, water and soil and establish standards for the
treatment, storage and disposal of solid and hazardous wastes. The Company is
also required to have permits from a number of governmental agencies in order
to conduct various aspects of its business. Compliance with these laws and
regulations has not had and is not expected to have a material effect on the
capital expenditures, earnings or competitive position of the Company. There
can be no assurance, however, that future changes in environmental laws or
regulations, or in the criteria required to obtain or maintain necessary
permits, will not have an adverse effect on the Company's operations.
LEGAL PROCEEDINGS
The Company is party to routine litigation incidental to the Company's
business. The Company does not believe that any legal proceedings to which it
is a party or to which any of its property is subject, including any such
routine litigation, will have a material adverse effect on the Company's
financial position or results of operations. As the Company competes more
successfully with its larger competitors, the Company's increased market
presence may attract more frequent legal challenges from its competitors,
including claims of possible intellectual property infringement. Although the
Company does not believe that the outcome of any current claims of
intellectual property infringement is likely to have a material adverse effect
on the Company's future operating results and financial condition, there can
be no assurance that such claims will not result in litigation. In addition,
there can be no assurance that any litigation that may result from the current
claims or any future claims by these parties or others would not have a
material adverse effect on the Company's business.
45
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their respective
ages, positions, principal occupations and years of service with the Company,
as of December 31, 1996, are set forth below.
<TABLE>
<CAPTION>
YEARS
WITH
NAME OF INDIVIDUAL THE
AGE POSITION AND PRINCIPAL OCCUPATION COMPANY
------------------ --- --------------------------------- -------
<C> <C> <S> <C>
Marvin L. Mann.............. 63 Chairman of the Board, President
and CEO 5
Kathleen J. Affeldt......... 48 Vice President, Human Resources 5
Vincent J. Cole, Esq........ 40 Vice President, General Counsel and
Secretary 5
Paul J. Curlander........... 44 Executive Vice President,
Operations 5
Daniel P. Bork.............. 45 Director of Taxes *
Terence P. Chin............. 41 Treasurer *
Clifford D. Gookin.......... 39 Vice President, Corporate
Development 1
Thomas B. Lamb.............. 38 Vice President and General Manager *
Albert L. Luedtke........... 51 Corporate Controller 5
Bernard V. Masson........... 49 Vice President and General Manager 1
John C. Mitchell............ 49 Vice President and General Manager *
Gary E. Morin............... 47 Vice President and Chief Financial
Officer 1
Donald C. Shropshire, Jr. .. 57 Vice President and General Manager 5
John A. Stanley............. 59 Vice President and President of
Lexmark Europe 5
Alfred A. Traversi.......... 44 Vice President, Information Systems *
and Operations
B. Charles Ames............. 71 Director, Principal of CD&R, and 5
general partner of Associates IV
Sir Roderick H. Carnegie.... 64 Director, Chairman of Hudson Conway 2
Ltd. (since 1987), Valiant
Consolidated Ltd. (since 1993),
Newcrest Mining Ltd. (since 1994)
and GEC Plessey Telecommunications
(since 1994)
Frank T. Cary............... 76 Director, Former Chief Executive 5
Officer and Chairman of IBM
William R. Fields........... 47 Director, Chairman and Chief *
Executive Officer of Blockbuster
Entertainment Group, a unit of
Viacom, Inc. Former Executive Vice
President of Wal-Mart, Inc., and
President and Chief Executive
Officer of Wal-Mart Stores division
Donald J. Gogel............. 47 Director, Co-President of CD&R, 5
Principal of CD&R and general
partner of Associates IV
Ralph E. Gomory............. 67 Director, Former Senior Vice 5
President for Science and
Technology at IBM
Stephen R. Hardis........... 61 Director, Chairman and Chief *
Executive Officer of Eaton
Corporation
Michael J. Maples........... 54 Director, former Executive Vice *
President of Worldwide Products
Group and member of the Office of
the President of Microsoft
Corporation
Andrall E. Pearson.......... 71 Director, Principal of CD&R and 5
general partner of Associates IV.
Former President and Chief
Operating Officer of PepsiCo., Inc.
and Professor of Business
Administration at Harvard Graduate
School of Business
Joseph L. Rice, III......... 64 Director, Chairman and Chief 5
Executive Officer of CD&R,
principal of CD&R and general
partner of Associates IV
</TABLE>
- --------
* Tenure with the Company is less than one year.
46
<PAGE>
CLASSES OF THE BOARD
The Third Restated Certificate of Incorporation divides the Board of
Directors into three classes. Of the eleven current members of the Board, four
(Sir Roderick and Messrs. Cary, Pearson and Rice) have been elected as Class I
directors with terms expiring at the time of the Annual Meeting of
Stockholders to be held in 1998; four (Messrs. Ames, Gogel, Gomory and Mann)
have been elected as Class II directors with terms expiring at the time of the
Annual Meeting of Stockholders to be held in 1999; and three (Messrs. Fields,
Hardis and Maples) have been elected as Class III directors with terms
expiring at the time of the Annual Meeting of Stockholders to be held in 1997.
At each succeeding Annual Meeting of Stockholders, the respective successors
of the directors whose terms are expiring shall be elected for terms expiring
at the Annual Meeting of Stockholders held in the third succeeding year.
47
<PAGE>
CERTAIN TRANSACTIONS AND RELATIONSHIPS
CD&R AND C&D FUND IV
C&D Fund IV, which is the Company's largest stockholder, is a private
investment fund managed by CD&R. Amounts contributed to C&D Fund IV by its
limited partners are invested at the discretion of the general partner in
equity or equity-related securities of entities formed to effect leveraged
buy-out transactions and in the equity of corporations where the infusion of
capital coupled with the provision of managerial assistance by CD&R can be
expected to generate returns on investments comparable to returns historically
achieved in leveraged buy-out transactions. The general partner of C&D Fund IV
is Clayton & Dubilier Associates IV Limited Partnership ("Associates IV"). B.
Charles Ames, Donald J. Gogel, Andrall E. Pearson and Joseph L. Rice, III,
each of whom is a principal of CD&R and a general partner of Associates IV,
serve as directors of the Company. See "Management--Directors and Executive
Officers". LIG was formed by CD&R to effect the Acquisition. C&D Fund IV
currently owns 21,956,931 shares of Class A Common Stock of which 5,875,916
shares are being offered hereby. See "Selling Stockholders".
The Company paid CD&R a fee of $500,000 during each of 1994, 1995 and 1996,
respectively, for advisory, management consulting and monitoring services and
it is expected that such fees will continue in the future. Under the terms of
the Company's lending arrangements, such fees must be determined by arms
length negotiation and must be reasonable. Under the Registration and
Participation Agreement, such fees may not exceed $1 million during any fiscal
year. None of the principals of CD&R who serve as directors of the Company
receive directors' fees. Two principals of CD&R serve as Class I directors and
two serve as Class II directors.
The Company paid fees to the law firm of Debevoise & Plimpton during 1996
for legal services rendered. Franci J. Blassberg, Esq., a member of Debevoise
& Plimpton, is married to Joseph L. Rice, III, a director of the Company and a
general partner of C&D Fund IV.
The Company has entered into an indemnification agreement with CD&R and C&D
Fund IV pursuant to which the Company has agreed, subject to certain
exceptions, to indemnify the members of its boards of directors, as well as
CD&R, C&D Fund IV and certain of their associates and affiliates (the
"Indemnitees"), to the fullest extent allowable under applicable Delaware law
and to indemnify the Indemnitees against any suits, claims, damages or
expenses which may be made against or incurred by them under applicable
securities laws in connection with offerings of securities of the Company,
including the Offerings, liabilities to third parties arising out of any
action or failure to act by the Company, and, except in cases of gross
negligence or intentional misconduct, the provision by CD&R of advisory,
management consulting and monitoring services.
MANAGEMENT LOANS
Shortly following the completion of the Acquisition, and from time to time
in the years following the Acquisition, executive officers, senior managers
and outside directors have purchased shares of Class A Common Stock from the
Company. Although the Company does not currently intend to make loans to
existing management in the future, in the past a portion of the purchase price
paid for the Class A Common Stock purchased by certain management and director
investors was financed by full-recourse loans from the Company to the
management investors at the Applicable Federal Rate (as defined in Section
1274(d) of the Internal Revenue Code of 1986, as amended, and the regulations
promulgated thereunder) then in effect. The Company may, however, make loans
to management from time to time in the future. Since January 1, 1994, Mr.
Mann, a director and an executive officer of the Company, Dr. Curlander, an
executive officer of the Company, Mr. Cary, a director of the Company, and Sir
Roderick Carnegie, a director of the Company, have had loans outstanding from
the Company. The largest aggregate amount of indebtedness outstanding on such
loans at any time since January 1,
48
<PAGE>
1994 for Messrs. Mann, Curlander and Cary and Sir Roderick Carnegie was
$131,703, $160,518, $43,407 and $80,602, respectively. As of December 31,
1996, Messrs. Mann, Curlander and Cary and Sir Roderick Carnegie owed $0, $0,
$0 and $37,467, respectively, on such loans.
CERTAIN INSTITUTIONAL INVESTORS
In connection with the Acquisition, each of Leeway & Co. and Mellon Bank,
N.A., as Trustee for First Plaza Group Trust (collectively, the "Institutional
Investors"), acquired 6,375,000 shares of the Company's Class A Common Stock
at a purchase price of $6.67 per share and 425,000 shares of its Senior
Cumulative Preferred Stock, par value $.01 per share, having a liquidation
preference of $100 per share, at a purchase price of $100 per share (the
"Senior Preferred Stock"). Dividends on the Senior Preferred Stock were
payable quarterly commencing in June 1991 at a rate of 13.50% per annum
through March 1994 and at a rate of 15.75% per annum thereafter. For 1992,
1993 and 1994, the Company paid dividends on the Senior Preferred Stock to the
Institutional Investors in the amount of $11.5, $11.5 and $11.8 million,
respectively. In December 1994, the Company exchanged all of the Senior
Preferred Stock for 9,750,000 shares of Class A Common Stock (the "Preferred
Stock Exchange"). For the Preferred Stock Exchange, the Class A Common Stock
was valued at $15 per share and resulted in an exchange premium to the
Institutional Investors valued at $61.3 million.
Leeway & Co. currently owns 8,029,941 shares of Class A Common Stock, of
which 2,148,900 shares are being offered hereby, and Mellon Bank, N.A., as
Trustee for First Plaza Group Trust, currently owns 6,738,941 shares of Class
A Common Stock, of which 1,803,414 shares are being offered hereby.
49
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
Selling Stockholders and their beneficial ownership of the Class A Common
Stock as of December 31, 1996 and as adjusted to reflect the sale of the Class
A Common Stock offered by the Selling Stockholders hereby, and other than as
noted below, includes information with respect to positions, offices or other
material relationships of the Selling Stockholders with the Company or any
predecessor or affiliate thereof, other than as a stockholder thereof, during
the past three years. For information with respect to material relationships
during the past three years between the Company and C&D Fund IV and the
Institutional Investors, see "Certain Transactions and Relationships". Unless
otherwise indicated, each Selling Stockholder named has sole voting and
dispositive power with respect to its shares.
The information presented in the preceding discussion and in the following
table assumes that the over-allotment options are exercised in full.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED SHARES
NAME AND ADDRESS OF BENEFICIAL PRIOR TO NUMBER OF BENEFICIALLY OWNED
OWNER OFFERINGS(1) SHARES AFTER OFFERINGS(1)
- ------------------------------ ------------------ --------- ------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
---------- ------- --------- ---------- -------
The Clayton & Dubilier Private
Equity
Fund IV Limited Partnership.. 21,956,931 29.96% 6,757,303 15,199,628 20.74%
<S> <C> <C> <C> <C> <C>
270 Greenwich Avenue
Greenwich, CT 06830
Leeway & Co.(2)............... 8,029,941 10.96% 2,471,235 5,558,706 7.58%
Mellon Bank, N.A., as trustee
for First
Plaza Group Trust(3).......... 6,738,941 9.19% 2,073,927 4,665,014 6.36%
One Mellon Bank Center
Pittsburgh, PA 15258
Keys Foundation(4)............ 634,365 * 195,227 439,138 *
Charles A. McNulty............ 7,500 * 2,308 5,192 *
2133 Rothbury Road
Lexington, KY 40515
</TABLE>
- -------
* Less than 1% of class.
- ---------------
(1) The percentage of the issued and outstanding shares of Common Stock of the
Company held by each individual or group has been calculated on the basis
of 73,294,491 shares which includes (i) 70,213,603 shares of Class A
Common Stock issued and outstanding (excluding treasury shares) on
December 31, 1996, (ii) 2,446,523 shares of Class A Common Stock issuable
upon conversion of all outstanding shares of Class B Common Stock and
(iii) 634,365 shares of Class A Common Stock issuable upon exercise of the
Keys Warrant.
(2) As nominee for the Long-Term investment trust, a trust for the benefit of
the AT&T and Lucent pension plans. The address is: Leeway & Co., State
Street Bank & Trust Co., Master Trust Division, One Enterprise Drive,
Solomon Willard Bldg., North Quincy, MA 02171.
(3) Mellon Bank, N.A., acts as the trustee (the "Trustee") for First Plaza
Group Trust ("FPGT"), a trust under and for the benefit of certain
employee benefit plans for General Motors Corporation ("GM") and its
subsidiaries. These shares may be deemed to be owned beneficially by
General Motors Investment Management Corporation ("GMIMCo"), a wholly-
owned subsidiary of GM. GMIMCo's principal business is providing
investment advice and investment management services with respect to the
assets of certain employee benefit plans of GM and its subsidiaries and
with respect to the assets of certain direct and indirect subsidiaries of
GM and associated entities. GMIMCo is serving as FPGT's investment manager
with respect to these shares and in that capacity it has the sole power to
direct the Trustee as to the voting and disposition of these shares.
Because of the Trustee's limited role, beneficial ownership of the shares
by the Trustee is disclaimed.
(4) Shares beneficially owned represents the number of shares of Class A
Common Stock that may be purchased pursuant to a warrant (the "Keys
Warrant") originally issued in April 1991 to Spectrum Sciences B.V.
("Spectrum") that remains exercisable for 634,365 shares of Class A Common
Stock, at an exercise price of $6.67 per share, in connection with a
license agreement relating to certain printer technology entered into by
the Company with Spectrum. The Keys Warrant was transferred by Spectrum to
Gemini Systems Corporation B.V. ("Gemini") in April 1991 and from Gemini
to Keys Foundation ("Keys") in 1992. The Company has been informed that
the Keys Warrant will be exercised with respect to 169,763 shares prior to
the completion of the Offerings and the shares issued upon exercise
thereof will be included in the Offerings (and that the Keys Warrant will
be exercised for an additional 25,464 shares of Class A Common Stock if
the Underwriters' over-allotment options are exercised.) The address for
Keys Foundation is: De Ruykertade 58a, Curacao, Netherlands Antilles.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, approximately 31,139,652 shares of the
outstanding Class A Common Stock and (based upon shares outstanding at
December 31, 1996) approximately 2,446,523 shares of the outstanding Class B
Common Stock will constitute "restricted" securities, within the meaning of
Rule 144 under the Securities Act, that are not publicly traded. All of these
restricted outstanding shares are eligible for sale into the public market
pursuant to Rule 144 under the Securities Act, and approximately 28% of these
restricted outstanding shares are eligible for sale into the public market
without regard to the volume limit and other requirements of Rule 144. In
addition, upon completion of the Offerings, approximately 6,951,862 shares of
Class A Common Stock will be issuable upon the exercise of outstanding stock
options (vested and unvested) and 464,602 shares of Class A Common Stock will
be issuable upon the exercise of the Keys Warrant.
"HOLDBACK" ARRANGEMENTS
The Selling Stockholders and the directors and executive officers (as
defined in Section 16 of the Exchange Act) of the Company who own Class A
Common Stock have each agreed not to enter into any agreement providing for,
or to effect, any public sale, distribution or other disposition of any shares
of Common Stock, including sales pursuant to Rule 144 or Rule 144A under the
Securities Act, or grant any public option for any such sale, or otherwise
cause the Company to register any securities of the Company, for a period of
90 days after the date of this Prospectus without the prior written consent of
Goldman, Sachs & Co. on behalf of the Underwriters, except for the shares of
Class A Common Stock offered in connection with the Offerings. After the
expiration of such 90-day period, such stockholders will in general be
entitled to dispose of their shares that are currently outstanding pursuant to
Rule 144 under the Securities Act and those who are not "affiliates" of the
Company may do so without regard to the volume limit and certain other
requirements of Rule 144.
REGISTRATION AND PARTICIPATION AGREEMENT
Pursuant to the terms of the Registration and Participation Agreement, as of
December 31, 1996, existing stockholders of the Company who will collectively
own approximately 31,774,017 shares of Class A Common Stock (including 634,365
shares issuable upon the exercise of the Keys Warrant) and 2,446,523 shares of
Class B Common Stock after the Offerings have certain registration rights with
respect to their shares of Common Stock. After the completion of the Offerings
and the expiration of the 90-day "holdback" period described above, the
holders of at least 12% of the Company's Registrable Securities (as defined in
the Registration and Participation Agreement), but in no event less than
2,925,000 shares, may request that the Company register some or all of their
shares of Common Stock. In addition, if the Company decides to register
additional shares of Common Stock (other than, among other limitations, shares
of Common Stock to be issued pursuant to employee benefit or option plans),
such existing stockholders are entitled to participate in such registration.
All the shares of Class A Common Stock offered by the Selling Stockholders
hereby are being registered pursuant to such registration rights. The
Registration and Participation Agreement requires the Company to pay all
expenses incurred by the Selling Stockholders with respect to the Offerings,
other than underwriting discounts and commissions, transfer taxes applicable
to the Class A Common Stock to be sold by the Selling Stockholders and certain
legal fees. As required under the Registration and Participation Agreement,
the Company has agreed to pay the fees and expenses of one law firm to
represent certain Selling Stockholders in connection with the Offerings. The
Company has agreed to indemnify the Selling Stockholders and the Underwriters
as to certain information included in this Prospectus, and each of the Selling
Stockholders has agreed to indemnify the Company, its directors, controlling
persons and officers who have signed the Registration Statement of which this
Prospectus is a part and the underwriters as to certain information relating
to such Selling Stockholder.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport to
be complete and is qualified in its entirety by reference to applicable
Delaware law and to the provisions of the Company's Third Restated Certificate
of Incorporation and By-laws, as amended and restated. Copies of the Third
Restated Certificate of Incorporation and By-laws have been filed as exhibits
to the Registration Statement of which this Prospectus forms a part.
The Company's authorized capital stock consists of 160,000,000 shares of
Class A Common Stock, par value $.01 per share, 10,000,000 shares of Class B
Common Stock, par value $.01 per share, and 1,600,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"). As of December 31, 1996,
the Company had outstanding 70,213,603 shares of Class A Common Stock and
2,446,523 shares of Class B Common Stock. As of December 31, 1996 there were
approximately 1,235 holders of record of Class A Common Stock and five holders
of record of Class B Common Stock.
CLASS A COMMON STOCK
VOTING RIGHTS
Each holder of shares of Class A Common Stock is entitled to one vote per
share on all matters to be voted on by stockholders. Holders of Class A Common
Stock are not entitled to cumulative votes in the election of directors.
DIVIDEND RIGHTS
The holders of Class A Common Stock are entitled to dividends and other
distributions if, as and when declared by the Board of Directors out of assets
legally available therefor, subject to the rights of any holder of preferred
stock, restrictions set forth in the Company's amended credit facility and
restrictions, if any, imposed by other indebtedness outstanding from time to
time. See "Dividend Policy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources". The holders of Class A Common Stock and Class B Common Stock are
entitled to equivalent per share dividends and distributions.
OTHER RIGHTS
Upon the liquidation, dissolution or winding up of the Company, the holders
of shares of Class A Common Stock would be entitled to share pro rata (on an
equal basis with the holders of the Class B Common Stock) in the distribution
of all of the Company's assets remaining available for distribution after
satisfaction of all its liabilities and the payment of the liquidation
preference of any outstanding preferred stock. The holders of Class A Common
Stock have no preemptive or other subscription rights to purchase shares of
the Company, nor are they entitled to the benefits of any sinking fund
provisions. No share of Class A Common Stock issued in connection with or
outstanding prior to the Offering is subject to any further call or
assessment.
EXCHANGE RIGHTS
In the event that a limited partnership (such as C&D Fund IV) makes a
distribution of shares of Class A Common Stock to its limited partners and,
following such distribution, one or more of its limited partners would then be
subject to limitations under the Bank Holding Company Act or other applicable
law on its ability to hold more than 5% of the voting stock of the Company,
such limited partnership is entitled to exchange a certain number of shares of
its Class A Common Stock into the same number of shares of Class B Common
Stock so as to permit it to distribute shares of Class B Common Stock to such
limited partners without exceeding the limitations under the Bank Holding
Company Act or such other law. This exchange right is only available to
limited partnerships under the limited circumstances outlined herein.
52
<PAGE>
CLASS B COMMON STOCK
The Class B Common Stock is identical to the Class A Common Stock in all
respects except that the holders of Class B Common Stock will have no right to
vote, except as required by law. Shares of Class B Common Stock automatically
convert into the same number of shares of Class A Common Stock upon the sale
or transfer by the holder thereof to a person who is not an affiliate of such
holder or who is not restricted by applicable law with respect to its
ownership of voting securities. To the extent permitted by law, each holder of
Class B Common Stock is entitled to convert any or all shares of Class B
Common Stock held into the same number of shares of Class A Common Stock
except that, other than in connection with a registered public offering of the
Class A Common Stock, the Equitable Life Assurance Society of the United
States ("Equitable") and certain of its affiliates are not entitled to convert
shares of Class B Common Stock into shares of Class A Common Stock except
pursuant to an automatic conversion in connection with a sale or transfer of
the Class B Common Stock. The Class B Common Stock may not be issued other
than in connection with an exchange of shares of Class A Common Stock. Because
shares of Class B Common Stock are issuable only upon the exchange of shares
of Class A Common Stock, the issuance of shares of Class B Common Stock would
not increase the total number of shares of Common Stock outstanding on such
date.
Following the Offerings, C&D Fund IV will hold 16,081,015 shares of Class A
Common Stock. C&D Fund IV has no present plans to make a distribution of
shares of Class A Common Stock held by it to any of its investors.
PREFERRED STOCK
The Board of Directors of the Company is authorized, without further
stockholder action, to issue any or all of the shares of authorized preferred
stock in one or more series and to fix and determine the designations, powers,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereon, of any series so
established, including voting powers, dividend rights, liquidation
preferences, redemption rights and conversion privileges. Although the Company
has no present intention to issue shares of preferred stock, the issuance of
shares of preferred stock or the issuance of rights to purchase such shares,
may have the effect of delaying, deferring or preventing a change in control
of the Company or any unsolicited acquisition proposal. For instance, the
issuance of a series of preferred stock might impede a business combination by
including class voting rights which would enable the holder to block such a
transaction or facilitate a business combination by including voting rights
which would provide a required percentage vote of the stockholders. In
addition, under certain circumstances, the issuance of preferred stock could
adversely affect the voting power of the holders of the Class A Common Stock.
Although the Board of Directors is required to make any determination to issue
such stock based on its judgment as to the best interests of the stockholders
of the Company, the Board of Directors could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a
majority, of the stockholders might believe to be in their best interest or in
which stockholders might receive a premium for their stock over the then
market price of such stock. The Board of Directors does not at present intend
to seek stockholder approval prior to any issuance of currently authorized
preferred stock, unless otherwise required by law.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services has been appointed as the transfer agent
and registrar for the shares of Common Stock.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
After consummation of the Offerings, the Company will have approximately
74,030,509 unissued and unreserved shares of Class A Common Stock. These
additional shares may be utilized for a
53
<PAGE>
variety of corporate purposes, including future public offerings to raise
additional capital and for facilitating corporate acquisitions. Except
pursuant to the stock option plans described herein, the Company does not
currently have any plans to issue additional shares of Common Stock. One of
the effects of unissued and unreserved shares of capital stock may be to
enable the Board of Directors to render more difficult or discourage an
attempt to obtain control of the Company by means of a merger, tender offer,
proxy contest or otherwise, and thereby to protect the continuity of the
Company's management. If, for example, the Board of Directors were to
determine that a takeover proposal was not in the Company's best interests,
such shares could be issued by the Board of Directors without stockholder
approval in one or more private transactions or other transactions that might
prevent or render more difficult or costly the completion of the takeover
transactions by diluting the voting or other rights of the proposed acquirer
or insurgent stockholder group, by creating a substantial voting block in
institutional or other hands that might undertake to support the position of
the incumbent Board of Directors, by effecting an acquisition that might
complicate or preclude the takeover, or otherwise.
CLASSIFIED BOARD OF DIRECTORS
The Third Restated Certificate of Incorporation divides the Board of
Directors into three classes, which are required to be as nearly equal in
number as possible. At each annual meeting of stockholders, only one class of
directors will come up for election and directors will be elected to succeed
those directors whose terms have expired. Each director elected at an Annual
Meeting of Stockholders will serve for a three-year term. The Company believes
that a classified Board of Directors will help assure the continuity and
stability of the Board of Directors and the Company's business strategies and
policies. Because a director serving on a classified board may only be removed
for cause, the classified board provision could increase the likelihood that,
in the event of a takeover of the Company, incumbent directors will retain
their positions until the expiration of their respective terms which would
make it more difficult for a potential acquiror to obtain control of the
Company. The By-Laws provide that vacancies on the Board of Directors may be
filled by the Board.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The By-Laws establish advance notice procedures with regard to stockholder
proposals and the nomination, other than by or at the direction of the Board
of Directors or a committee thereof, of candidates for election as directors.
These procedures provide that notice of stockholder proposals and stockholder
nominations for the election of directors at an annual meeting must be in
writing and received by the Secretary of the Company no later than 60 days
prior to such annual meeting (or if less than 60 days' notice of a meeting of
stockholders is given, stockholder proposals and nominations must be delivered
to the Secretary of the Company no later than the close of business on the
seventh day following the day notice was mailed). Stockholder proposals and
nominations for the election of directors at a special meeting must be in
writing and received by the Secretary of the Company no later than the close
of business on the tenth day following the day on which notice of the meeting
was mailed or public disclosure of the date of the meeting was made, whichever
occurs first. The form of written notice of stockholder nominations must set
forth certain information with respect to each nominee who is not an incumbent
director.
54
<PAGE>
VALIDITY OF THE SHARES
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by Debevoise & Plimpton, New York, New York, and
for the Underwriters by Sullivan & Cromwell, New York, New York. Debevoise &
Plimpton also acts and may hereafter act as counsel to CD&R and its affiliates
and to the Company and its affiliates. Franci J. Blassberg, Esq., a member of
Debevoise & Plimpton, is married to Joseph L. Rice, III, a director of the
Company and a general partner of the general partner of C&D Fund IV.
EXPERTS
The consolidated statements of financial position as of December 31, 1994
and 1995 and the consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1995 included or incorporated by reference in this Prospectus have been
included or incorporated by reference herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
55
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS--as of December 31, 1994 and 1995 and for the years
ended December 31, 1993, 1994, and 1995
Report of Independent Accountants...................................... F-2
Consolidated Statements of Financial Position.......................... F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Cash Flows.................................. F-5
Consolidated Statements of Stockholders' Equity........................ F-6
Notes to Consolidated Financial Statements............................. F-7
UNAUDITED CONDENSED FINANCIAL STATEMENTS--as of September 30, 1996 and
for the nine months ended September 30, 1995 and 1996
Condensed Consolidated Statement of Financial Position................. F-22
Condensed Consolidated Statements of Operations........................ F-23
Condensed Consolidated Statements of Cash Flows........................ F-24
Notes to Condensed Consolidated Financial Statements................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the board of directors of Lexmark International Group, Inc.
We have audited the accompanying consolidated statements of financial
position of Lexmark International Group, Inc. and subsidiaries as of December
31, 1994 and 1995, and the related consolidated statements of operations, cash
flows and stockholders' equity for each of the three years in the period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 Lexmark
International Group, Inc. and subsidiaries as of December 31, 1994 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
January 29, 1996
F-2
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS OF DECEMBER 31, 1994 AND 1995
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 42.0 $ 150.5
Trade receivables, net of allowance of $19.4 in 1994 and
$27.1 in 1995............................................ 191.1 213.6
Inventories............................................... 279.0 296.3
Prepaid expenses and other current assets................. 45.6 55.3
------- --------
Total current assets.................................. 557.7 715.7
Property, plant and equipment, net.......................... 337.1 361.2
Intangible assets, net...................................... 30.3 5.4
Other assets................................................ 35.8 60.6
------- --------
Total assets.......................................... $ 960.9 $1,142.9
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ -- $ 20.0
Accounts payable.......................................... 138.3 209.6
Accrued liabilities....................................... 181.9 258.4
------- --------
Total current liabilities............................. 320.2 488.0
Long-term debt.............................................. 290.0 175.0
Other liabilities........................................... 55.2 89.7
------- --------
Total liabilities..................................... 665.4 752.7
------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 1,600,000 shares
authorized, no shares issued and outstanding............. -- --
Junior preferred stock, $100 liquidation preference,
50,000 shares authorized and outstanding in 1994......... 5.0 --
Common stock, $.01 par value:
Class A, 160,000,000 shares authorized; 60,387,105 and
64,303,619 outstanding................................. 0.6 0.6
Class B, 10,000,000 shares authorized; 8,250,000 and
5,888,623 outstanding.................................. 0.1 0.1
Capital in excess of par.................................. 430.2 494.6
Retained earnings (deficit)............................... (140.4) (108.0)
Accumulated translation adjustment........................ -- 2.9
------- --------
Total stockholders' equity............................ 295.5 390.2
------- --------
Total liabilities and stockholders' equity............ $ 960.9 $1,142.9
======= ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues (including revenues from IBM of
$438.6, $404.0 and $421.0,
respectively)............................ $1,675.7 $1,852.3 $2,157.8
Cost of revenues.......................... 1,107.4 1,298.8 1,487.9
---------- ---------- ----------
Gross profit............................ 568.3 553.5 669.9
Research and development.................. 111.7 101.0 116.1
Selling, general and administrative....... 322.0 292.9 359.1
Option compensation related to IPO........ -- -- 60.6
Amortization of intangibles............... 64.0 44.7 25.6
---------- ---------- ----------
Operating expenses...................... 497.7 438.6 561.4
---------- ---------- ----------
Operating income........................ 70.6 114.9 108.5
Interest expense.......................... 63.9 50.6 35.1
Amortization of deferred financing costs
and other................................ 13.1 13.6 10.1
---------- ---------- ----------
Earnings (loss) before income taxes..... (6.4) 50.7 63.3
Provision for income taxes................ 3.0 6.1 15.2
---------- ---------- ----------
Earnings (loss) before extraordinary
item................................... (9.4) 44.6 48.1
Extraordinary loss on extinguishment of
debt (net of related tax benefit of
$6.4).................................... -- -- (15.7)
---------- ---------- ----------
Net earnings (loss)..................... (9.4) 44.6 32.4
Preferred dividends....................... 11.5 11.8 --
Preferred stock redemption premium........ -- 61.3 --
---------- ---------- ----------
Net earnings (loss) attributable to com-
mon stock.............................. $ (20.9) $ (28.5) $ 32.4
========== ========== ==========
Earnings (loss) per common and common
equivalent share, primary and fully
diluted:
Before extraordinary item............... $ (0.34) $ (0.46) $ 0.64
Extraordinary loss...................... -- -- (0.21)
---------- ---------- ----------
Net earnings (loss)..................... $ (0.34) $ (0.46) $ 0.43
========== ========== ==========
Shares used in per share calculation...... 61,458,241 61,430,896 74,932,103
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1993 1994 1995
------- ------ -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................. $ (9.4) $ 44.6 $ 32.4
Adjustments to reconcile net earnings (loss) to net
cash
provided by operating activities:
Depreciation and amortization...................... 139.1 127.3 99.1
Option compensation related to IPO................. -- -- 60.6
Extraordinary loss................................. -- -- 15.7
Deferred taxes..................................... 14.6 -- (30.8)
Other non-cash charges to operations............... 47.7 54.2 45.5
Change in assets and liabilities:
Trade receivables................................ (15.5) (39.7) (52.5)
Trade receivables program-U.S.................... -- 70.0 30.0
Inventories...................................... 86.0 28.5 (17.3)
Accounts payable................................. (23.1) 17.0 71.3
Accrued liabilities.............................. (49.0) 29.2 76.5
Prepaid income taxes............................. (12.4) 18.0 --
Other assets and liabilities..................... (1.6) 12.8 (23.0)
------- ------ -------
Net cash provided by operating activities...... 176.4 361.9 307.5
------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment......... (62.4) (58.1) (106.8)
Proceeds from sale of long-term investments........ 7.6 2.2 6.6
------- ------ -------
Net cash used for investing activities......... (54.8) (55.9) (100.2)
------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term debt........................ (4.9) -- --
Proceeds from issuance of long-term debt, net of
issue
costs of $2.8..................................... -- -- 147.2
Principal payments on long-term debt............... (108.5) (360.7) (245.0)
Common stock transactions, net..................... 0.5 (0.1) --
Preferred dividends paid........................... (11.5) (9.5) (2.2)
------- ------ -------
Net cash used for financing activities......... (124.4) (370.3) (100.0)
------- ------ -------
Effect of exchange rate changes on cash.............. (2.4) 1.3 1.2
------- ------ -------
Net increase (decrease) in cash and cash equiva-
lents............................................... (5.2) (63.0) 108.5
Cash and cash equivalents--beginning of period....... 110.2 105.0 42.0
------- ------ -------
Cash and cash equivalents--end of period............. $ 105.0 $ 42.0 $ 150.5
======= ====== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNIOR CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------ ------------------ -------------------
RETAINED ACCUMULATED
CAPITAL IN EARNINGS TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT EXCESS OF PAR (DEFICIT) ADJUSTMENT TOTAL
--------- ------- ---------- ------ ---------- ------ ------------- --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER
31, 1992........... 50,000 $ 5.0 50,663,805 $0.5 8,250,000 $0.1 $368.2 $(175.6) $(0.8) $197.4
Issuance of common
stock less notes
receivable of $0.2
from management and
certain other
individuals........ 16,740 --
Dividends on
redeemable senior
preferred stock
($13.50 per
share)............. (11.5) (11.5)
Purchase of treasury
stock.............. (63,750) (0.6) (0.6)
Cash received for
payments on notes
receivable for
common stock issued
to management and
certain other
individuals........ 1.1 1.1
Translation
adjustment......... (3.3) (3.3)
Net loss............ (9.4) (9.4)
--------- ------ ---------- ---- ---------- ---- ------ ------- ----- ------
BALANCE AT DECEMBER
31, 1993........... 50,000 5.0 50,616,795 0.5 8,250,000 0.1 357.2 (185.0) (4.1) 173.7
Issuance of
9,750,000 shares of
Class A common
stock in exchange
for 850,000 shares
of redeemable
senior preferred
stock (net of $0.1
stock issuance
costs)............. 9,750,000 0.1 84.8 84.9
Issuance of common
stock less notes
receivable of
$0.4............... 39,060 --
Dividends on
redeemable senior
preferred stock
($13.88 per
share)............. (11.8) (11.8)
Purchase of treasury
stock.............. (18,750) (0.2) (0.2)
Cash received for
payments on notes
receivable for
common stock issued
to management and
certain other
individuals........ 0.2 0.2
Translation
adjustment......... 4.1 4.1
Net earnings........ 44.6 44.6
--------- ------ ---------- ---- ---------- ---- ------ ------- ----- ------
BALANCE AT DECEMBER
31, 1994........... 50,000 5.0 60,387,105 0.6 8,250,000 0.1 430.2 (140.4) -- 295.5
Issuance of common
stock less notes
receivable of
$0.1............... 3,600 --
Conversion of Class
B to Class A common
stock.............. 2,361,377 (2,361,377) --
Conversion of junior
preferred stock to
Class A common
stock.............. (50,000) (5.0) 750,000 5.0 --
Warrant exercise at
$6.67 per warrant.. 254,385 1.7 1.7
Option compensation
related to IPO..... 58.7 58.7
Long-term incentive
plan compensation.. 0.6 0.6
Shares issued upon
exercise of
options............ 692,588 --
Treasury shares
received from
option exercises... (439,956) (2.7) (2.7)
Treasury shares
issued upon
exercise of
options............ 294,520 0.9 0.9
Cash received for
payments on notes
receivable for
common stock issued
to management and
certain other
individuals........ 0.2 0.2
Translation
adjustment......... 2.9 2.9
Net earnings........ 32.4 32.4
--------- ------ ---------- ---- ---------- ---- ------ ------- ----- ------
BALANCE AT DECEMBER
31, 1995........... -- $ -- 64,303,619 $0.6 5,888,623 $0.1 $494.6 $(108.0) $ 2.9 $390.2
========= ====== ========== ==== ========== ==== ====== ======= ===== ======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
1. ORGANIZATION AND BUSINESS
Lexmark International Group, Inc. (formerly Lexmark Holding, Inc.) (together
with its subsidiaries, the "Company") was organized by a group of investors
led by Clayton, Dubilier & Rice, Inc. ("CD&R"), a private investment firm. On
March 27, 1991, the Company acquired 100% of the outstanding stock of IBM
Information Products Corporation ("IPC") from International Business Machines
Corporation ("IBM"). On November 15, 1995, the Company completed its initial
public offering of 19,692,110 shares of Class A common stock. All the shares
offered were sold by existing stockholders. As a result, the Company received
no proceeds from the sale of the shares. The Company's stock trades on the New
York Stock Exchange (symbol LXK).
The Company is a global developer, manufacturer and supplier of laser and
inkjet printers and associated consumable supplies for the office and home
markets. The Company also sells serial wire matrix printers. In addition to
its core printer business, the Company develops and manufactures a broad line
of other office imaging products, including supplies for original equipment
manufacturer products, typewriters and related consumable supplies and
computer keyboards. Computer keyboards have been manufactured principally for
IBM. However, the manufacture of these products will be discontinued in April
1996 (see Note 16). The principal customers for the Company's products are
North American and European dealers and retailers, and distributors worldwide.
In addition, the Company employs marketing teams which target large accounts
to generate demand in the financial services, healthcare, pharmacy and retail
industries.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of Lexmark International Group, Inc. and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Foreign Exchange: The functional currency for the Company's significant
foreign subsidiaries is the applicable local currency. For those subsidiaries,
assets and liabilities are translated into U.S. dollars at period-end exchange
rates. Income and expense accounts are translated at average exchange rates
prevailing during the period. Adjustments arising from the translation of
assets and liabilities are accumulated as a separate component of
stockholders' equity. The effects of translation of intercompany loans to
international subsidiaries which have been designated as long-term investments
are also included in this separate component of stockholders' equity.
The Company enters into foreign currency swaps, options, and forward
exchange contracts in its management of foreign currency exposures. Realized
and unrealized gains and losses on contracts that are designated as hedges are
recognized in earnings in the same period as the underlying hedged
transaction. Contracts that do not qualify as hedges for accounting purposes,
including the currency portion of interest rate/currency swaps, are marked to
market and the resulting gains and losses are recognized in current earnings.
The cash flows resulting from hedge contracts are classified as cash flows
from operating activities.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses
F-7
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
during the reporting period. Actual results could differ from those estimates.
Estimates are used when accounting for such items as the allowance for
doubtful accounts, inventory reserves, product warranty, depreciation,
employee benefit plans and taxes.
Cash Equivalents: All highly liquid investments with an original maturity of
three months or less at the Company's date of purchase are considered to be
cash equivalents.
Inventories: Inventories are stated at the lower of weighted average cost or
market. The Company considers all raw materials to be in production upon their
receipt.
Property, Plant and Equipment: Property, plant and equipment are stated at
cost, and depreciated over their estimated useful lives using the straight-
line method. Property, plant and equipment accounts are relieved of the cost
and related accumulated depreciation when assets are disposed of or otherwise
retired.
Intangible Assets: Intangible assets (including trademark, patent and
license, software license and non-competition agreements) are stated at cost
and are amortized on an accelerated basis over the estimated period of
economic benefit but not more than five years. Intangible assets are shown net
of accumulated amortization of $264.9 and $300.5 at December 31, 1994 and
1995, respectively.
Revenue Recognition: Sales are recognized when products are shipped to
customers.
Advertising Costs: The Company expenses advertising costs when incurred.
Advertising expense was approximately $43.0 in 1995.
Earnings (Loss) Per Common Share: Earnings (loss) per common share is
determined by dividing net earnings (loss) attributable to common stock by the
weighted average number of common shares, and when dilutive, common equivalent
shares, outstanding.
Net earnings (loss) attributable to common stock is determined by deducting
preferred stock dividends and the preferred stock redemption premium from net
earnings (loss). The weighted average number of common and common equivalent
shares outstanding have been increased by 2,577,480 shares in 1993 and 1994 to
give effect to the assumption that all stock and stock options, including the
effect of the exchange of redeemable senior preferred stock for Class A common
stock, issued within one year of the filing of the Company's initial public
offering were outstanding for all periods presented, even where their impact
is antidilutive. The number of such shares assumed to be outstanding was
calculated using the treasury stock method based on the initial public
offering price. Common equivalent shares and other potentially dilutive
securities include stock options, warrants and junior preferred stock. Primary
and fully diluted earnings per share do not differ by a material amount.
Reclassifications: Certain prior year amounts have been reclassified to
conform with the current year's presentation.
3. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Work in process................................................ $157.5 $167.7
Finished goods................................................. 121.5 128.6
------ ------
$279.0 $296.3
====== ======
</TABLE>
F-8
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Land and land improvements.................................... $ 13.6 $ 14.1
Buildings and improvements.................................... 148.6 154.4
Machinery and equipment....................................... 314.2 353.6
Information systems and furniture............................. 80.7 100.0
------ ------
557.1 622.1
Less accumulated depreciation................................. 220.0 260.9
------ ------
$337.1 $361.2
====== ======
</TABLE>
Depreciation expense was $65.5, $71.8 and $71.2 for 1993, 1994 and 1995,
respectively.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Compensation................................................... $ 50.5 $ 69.2
Income taxes payable........................................... 3.7 22.2
Fixed assets................................................... 8.1 29.6
Warranty....................................................... 20.5 21.8
Value added tax................................................ 18.1 16.8
Deferred revenue............................................... 17.8 9.8
Other.......................................................... 63.2 89.0
------ ------
$181.9 $258.4
====== ======
</TABLE>
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Term loan................................................... $150.0 $ 55.0
Senior notes, Series B, 12.125% interest rate, due in 1998.. 20.0 20.0
Senior subordinated notes, 14.25% interest rate, due in
2001....................................................... 120.0 120.0
------ ------
290.0 195.0
Less current portion........................................ -- (20.0)
------ ------
$290.0 $175.0
====== ======
</TABLE>
On April 21, 1995, the Company refinanced its $150.0 non-revolving term loan
and its $150.0 revolving credit facility prior to their maturity with a new
$150.0 non-revolving term loan and a $250.0 revolving credit facility held by
a group of banks. This early extinguishment of debt resulted in an
extraordinary charge of $22.1 ($15.7 net of tax benefit) caused by the write-
off of deferred financing costs of $4.9 and the mark to market of hedging
instruments related to the extinguished debt of $17.2. During the third and
fourth quarters of 1995, $95.0 of the term loan was prepaid.
Under the amended and restated credit agreement (as amended), interest on
the term loan and any amount outstanding under the revolving credit facility
is calculated using either of two methods at
F-9
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the option of the Company. The first method provides for a rate, based on the
Company's performance, ranging from 0.0% to 0.75% above the base rate, with
the base rate equal to the higher of the bank's prime rate or the federal
funds rate plus 0.5% per annum. The second method provides for a rate, based
on the Company's performance, ranging from 0.75% to 2.0% above adjusted LIBOR
(London Inter Bank Offered Rate). Principal payments on the term loan are due
quarterly, with the next scheduled payment due on December 31, 1997 with the
final payment due on December 31, 1998. Any amounts outstanding under the
revolving credit facility are due upon the maturity of the facility in January
1999. In certain situations, a portion of the proceeds from the sale of
assets, casualty events or debt financings must be used to repay the term
loan.
Although not required under the amended and restated credit agreement, the
Company was required under the terms of the original credit agreement to cap
the interest rate paid on a portion of the term loan at a rate of 13% or
below, and entered into interest rate/currency swaps to meet this requirement.
Because portions of the original U.S. dollar loan proceeds were recorded on
the books of foreign subsidiaries, or used by the U.S. parent company to fund
intercompany loans to foreign subsidiaries, currency swaps were used to
neutralize the effect of currency fluctuations. An interest rate/currency swap
with a notional amount of $36.7 continues and was marked to market at the time
the term loan was refinanced and redesignated as a hedge of the new facility.
The interest rate/currency swap matures on March 27, 1998. The effective rate
of interest on the term loan (after giving effect to the interest
rate/currency swap) was 7.1% at December 31, 1995.
The senior notes are held by financial institutions and require semi-annual
interest payments on March 27 and September 27 of each year. The notes may be
called by the Company upon a change in control and are redeemable without
penalty after March 26, 1996. It is management's intent to redeem these notes
in 1996.
The senior subordinated notes are held by financial institutions. Interest
is payable at the end of each calendar quarter through March 31, 2001.
Mandatory principal payments are due annually from March 31, 1999 through
March 31, 2001. In the event of a change in control, holders have the option
to require prepayment of the senior subordinated notes plus accrued interest
and a prepayment charge. The Company must offer to repurchase the senior
subordinated notes if cash proceeds from sales of assets exceed a specific
amount, as defined in the Note and Stock Purchase Agreement (as amended);
however, payment is subject to the full payment of all term loans and senior
notes. The Company executed an interest rate swap agreement related to these
notes on a notional amount of $40.0 through September 30, 1998 whereby the
Company receives a fixed rate of 5.4% and pays a variable rate equal to U.S.
LIBOR. The variable rate the Company pays on this swap is capped at 7.7%.
At December 31, 1995, the Company has unused lines of credit of $250.0. The
amended and restated credit agreement provides for the quarterly payment of a
commitment fee on all unused commitments ranging from 0.2% to 0.5% per annum,
based on the Company's performance.
Interest expense of $11.3, $10.3 and $7.7 in 1993, 1994 and 1995,
respectively, related to the swaps discussed above, previously outstanding
interest rate/currency swaps and interest rate caps and options is included in
interest expense in the statements of operations.
Substantially all tangible and intangible assets of the Company serve as
collateral for the term loan, revolving credit facility and senior notes. The
senior subordinated notes are unsecured but are guaranteed by the Company and
by the domestic subsidiaries of Lexmark International, Inc., a wholly owned
subsidiary of the Company. The credit agreements contain customary default
provisions,
F-10
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
including a default upon a "change of control" which includes the acquisition
by one person or a related group of persons other than Clayton & Dubilier
Private Equity Fund IV Limited Partnership (C&D Fund IV) and IBM of 25% or
more of the Company's voting securities, unless C&D Fund IV owns a greater
percentage of the Company's voting securities than such person or related
group. The senior subordinated note agreement allows the holder to put the
notes to Lexmark International, Inc. upon the acquisition, by a person or a
related group of persons, of 20% of the Company's voting securities and the
cessation of control of the Company by C&D Fund IV and certain other
stockholders. The credit agreements also contain certain net worth, leverage
and fixed charge coverage restrictions and other covenants which, among other
things, restrict the payment of dividends on common stock, incurrence of
additional debt, investments and joint ventures, repurchases of common stock,
mergers or consolidations and sales of assets.
The aggregate annual long-term debt payment requirements, including the
intended redemption of the senior notes in 1996, are as follows for the five
years ending December 31: 1996-$20.0; 1997-$5.0; 1998-$50.0; 1999-$40.0; 2000-
$40.0, and thereafter-$40.0.
Total cash paid for interest amounted to $63.1, $50.2 and $41.4 in 1993,
1994 and 1995, respectively.
7. STOCKHOLDERS' EQUITY
The consolidated financial statements reflect the Company's amendment of its
Certificate of Incorporation on October 26, 1995 which authorized 1,600,000
shares of $.01 par value preferred stock, 160,000,000 shares of $.01 par value
Class A common stock and 10,000,000 shares of $.01 par value Class B common
stock. In addition, the Company declared a 15-for-1 stock split of its Class A
and Class B common stock. The stock split was effected in the form of a stock
dividend. Accordingly, all references in the consolidated financial statements
to number of shares, average number of shares outstanding and related prices,
per share amounts and common stock option and warrant data have been restated
to reflect these changes.
The Company authorized and issued 850,000 shares of redeemable senior
preferred stock and 50,000 shares of junior preferred stock in connection with
the acquisition of IPC in 1991. The redeemable senior preferred stock was
canceled and exchanged for 9,750,000 shares of Class A common stock on
December 30, 1994. This was a non-cash exchange and thus, does not appear in
the statement of cash flows. The excess of the fair value of the common stock
issued to the holders of the redeemable senior preferred stock over the
carrying amount of the redeemable senior preferred stock has been subtracted
from net earnings in arriving at net loss attributable to common stock in the
calculation of net loss per common share in 1994. The junior preferred stock,
which was contributed to the Company's savings plan on March 27, 1991, was
exchanged for 750,000 shares of Class A common stock on October 25, 1995. The
junior preferred stock was then retired. This was a non-cash exchange and
thus, does not appear in the statement of cash flows.
The Class A common stock is voting and exchangeable for Class B common stock
in very limited circumstances. The Class B common stock is non-voting and is
convertible, subject to certain limitations, into Class A common stock.
At December 31, 1995, approximately 77,000,000 and 4,100,000 shares of Class
A and Class B common stock were unissued and unreserved. These shares are
available for a variety of general corporate purposes, including future public
offering to raise additional capital and for facilitating acquisitions.
F-11
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with a technology agreement with an unrelated party, the
Company has outstanding an exercisable warrant to purchase 634,365 shares of
Class A common stock at $6.67 per share. The warrant expires on March 27,
1998.
8. STOCK INCENTIVE PLANS
The Company has established various stock incentive plans to encourage
employees and non-employee directors to remain with the Company and to more
closely align their interests with those of the Company's stockholders.
In October 1995, the Company approved stock incentive plans for employees
and certain non-employee directors. Under the employee plan, approximately
4,400,000 shares of Class A common stock have been reserved for grant in the
form of stock options, stock appreciation rights, restricted stock,
performance shares or deferred stock units. Under the director plan,
approximately 150,000 shares of Class A common stock have been reserved for
grant in the form of stock options and deferred stock units. As of December
31, 1995, awards under the programs have been limited to stock options, of
which approximately 2,180,000 have been awarded, and approximately 110,000
performance shares which will be earned by certain members of executive
management if specific performance objectives are attained by the Company over
a three year period ending December 31, 1998.
The exercise price of options awarded under these plans is equal to the fair
market value of the underlying common stock on the date of grant. All options
expire ten years from the date of grant and become fully vested at the end of
five years based upon continued employment or three years of service on the
Board of Directors.
Outstanding options to purchase approximately 7,250,000 shares, of which
approximately 95% are exercisable at December 31, 1995, are outstanding under
prior plans. No further options will be granted under these prior plans. The
Company recognized a non-cash compensation charge of $60.6 ($38.5 net of tax
benefit) for certain of these outstanding stock options upon the consummation
of the initial public offering.
The following summarizes option activity under all stock incentive plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1993................. 8,157,420 $ 7.07
Granted........................................ 372,750 11.33
Canceled....................................... (482,160) 7.19
---------
Outstanding at December 31, 1994................. 8,048,010 7.26
Granted........................................ 2,609,007 19.14
Exercised...................................... (987,108) 7.09
Canceled....................................... (241,128) 8.20
---------
Outstanding at December 31, 1995................. 9,428,781 $10.54
</TABLE>
Approximately 2,360,000 shares are available for future awards under the
stock incentive plans at December 31, 1995.
F-12
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------ ----- ------
<S> <C> <C> <C>
Currently payable (refundable):
Federal.............................................. $(12.0) $ 2.1 $ 32.3
Non-U.S.............................................. 3.3 3.1 5.1
State and local...................................... (2.8) 0.9 8.6
------ ----- ------
(11.5) 6.1 46.0
Deferred payable (benefit):
Federal.............................................. 13.3 -- (23.9)
Non-U.S.............................................. (0.3) -- (0.4)
State and local...................................... 1.5 -- (6.5)
------ ----- ------
14.5 -- (30.8)
------ ----- ------
Provision for income taxes............................. $ 3.0 $ 6.1 $ 15.2
====== ===== ======
</TABLE>
Earnings (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------ ----- ------
<S> <C> <C> <C>
U.S.................................................... $(90.0) $36.7 $ 27.3
Non-U.S................................................ 83.6 14.0 36.0
------ ----- ------
Earnings (loss) before income taxes.................... $ (6.4) $50.7 $ 63.3
====== ===== ======
</TABLE>
The U.S. and non-U.S. earnings (loss) before income taxes reflect write-offs
of certain intercompany obligations owed to the U.S. totaling $159.3, $13.0
and $10.6, in 1993, 1994 and 1995, respectively.
Significant components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995
------- ------
<S> <C> <C>
Deferred tax assets:
Tax loss carryforwards.................................... $ 79.5 $ 61.6
Intangible assets......................................... 24.4 29.2
Foreign tax credits....................................... 4.8 --
Research and development tax credits...................... 16.4 13.2
Alternative minimum tax credits........................... 3.6 4.0
Unexercised stock options................................. -- 22.1
Inventory................................................. 5.5 16.3
Other..................................................... 2.3 --
Valuation allowance....................................... (110.8) (77.2)
------- ------
Total deferred tax assets............................... 25.7 69.2
------- ------
Deferred tax liabilities:
Prepaid expenses.......................................... 8.0 6.8
Property, plant and equipment............................. 17.6 19.0
Other..................................................... -- 12.5
------- ------
Total deferred tax liabilities.......................... 25.6 38.3
------- ------
Net deferred tax asset...................................... $ 0.1 $ 30.9
======= ======
</TABLE>
The net increase (decrease) in the total valuation allowance for the years
ended December 31, 1994 and 1995 was $9.8 and ($33.6), respectively.
F-13
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the provision for income taxes using the U.S. statutory
rate and the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Provision for income taxes at statutory rate........... $ (2.2) $ 17.7 $ 22.2
State and local income taxes, net of federal tax bene-
fit................................................... (0.9) 0.6 1.4
Losses providing no tax benefit........................ 58.0 3.7 31.2
U.S. tax loss carryforward............................. -- (11.2) --
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets affecting
provision............................................. -- -- (33.6)
Research and development credit........................ -- -- (3.8)
Foreign sales corporation.............................. -- -- (2.3)
Non-U.S. income exempt from tax........................ (55.8) (5.0) (3.7)
Other.................................................. 3.9 0.3 3.8
------ ------ ------
Provision for income taxes............................. $ 3.0 $ 6.1 $ 15.2
====== ====== ======
</TABLE>
The Company utilizes the liability method of accounting for income taxes, as
set forth in SFAS No. 109, Accounting for Income Taxes. SFAS 109 requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
As of December 31, 1995, the Company has $4.0 of alternative minimum tax
credits available to offset future U.S. federal income taxes on an indefinite
carryforward basis and research and development tax credit carryforwards of
$13.2 which expire between 2007 and 2010. The Company has non-U.S. tax loss
carryforwards of $164.3 which expire between the years 1996 and 2013. A
significant portion of these non-U.S. tax loss carryforwards are not expected
to provide a future benefit because they are attributable to certain non-U.S.
entities that are also taxable in the U.S.
Cash paid for income taxes was $1.2, $4.9 and $24.1 in 1993, 1994 and 1995,
respectively.
10. EMPLOYEE PENSION PLANS
The Company and its subsidiaries have retirement plans covering
substantially all regular employees. The total pension expense of all defined
benefit plans is determined using the projected unit credit actuarial method.
In 1993, the Company recognized $2.7 of expense for special termination
benefits associated with an early retirement program offered to employees in
the U.S. In addition, certain of the Company's non-U.S. subsidiaries
recognized $2.4 and $0.1 for settlement and curtailment losses during 1993 and
1994, respectively.
Plan assets are invested in government securities and corporate debt and
equity securities. It is the Company's policy to fund amounts for pensions
sufficient to meet the minimum requirements prescribed by various government
regulations and such additional amounts as the Company may determine to be
appropriate.
The Company also sponsors various defined contribution plans for employees
in certain countries. Company contributions are based upon a percentage of
employees' contributions. The Company's expense under these plans amounted to
$2.0, $2.4 and $2.9 in 1993, 1994 and 1995, respectively.
F-14
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
U.S. Plans: Regular full-time and part-time employees in the U.S. are
covered by a noncontributory defined benefit plan, which is funded by Company
contributions to an irrevocable trust fund held for the sole benefit of
employees. Monthly retirement benefits generally represent the greater of a
fixed amount per year of service, or a percentage of career compensation.
Benefits become vested upon completion of five years of service. The Company
has a supplemental retirement plan for employees whose benefits under the
defined benefit plan are limited because of restrictions imposed by federal
tax laws.
Non-U.S. Plans: Most subsidiaries have retirement plans covering
substantially all employees funded through various fiduciary-type
arrangements. Retirement benefits are generally based on years of service and
compensation during a fixed number of years immediately prior to retirement.
Net periodic pension expense includes the following components:
<TABLE>
<CAPTION>
U.S. PLANS NON-U.S. PLANS
---------------------- -------------------
1993 1994 1995 1993 1994 1995
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Service cost..................... $ 12.3 $ 15.4 $ 12.3 $ 2.3 $ 1.8 $ 1.9
Interest cost.................... 16.2 17.9 20.3 3.5 3.3 4.5
Actual (gain) loss return on plan
assets.......................... (41.1) 16.9 (82.4) (5.1) (0.4) (4.9)
Net amortization and deferral.... 16.0 (44.9) 56.3 1.2 (2.7) 1.3
Settlement/curtailment losses.... 2.7 -- -- 2.4 0.1 --
------ ------ ------ ----- ----- -----
Net periodic pension expense..... $ 6.1 $ 5.3 $ 6.5 $ 4.3 $ 2.1 $ 2.8
====== ====== ====== ===== ===== =====
</TABLE>
The funded status at December 31 is as follows:
<TABLE>
<CAPTION>
NON-
U.S. PLANS U.S. PLANS
---------------- --------------
1994 1995 1994 1995
------- ------- ------ ------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obliga-
tions:
Vested benefit obligation.................. $ 156.3 $ 234.0 $ 38.3 $ 45.9
======= ======= ====== ======
Accumulated benefit obligation............. $ 187.3 $ 280.8 $ 46.3 $ 54.8
======= ======= ====== ======
Plan assets at fair value.................... $ 265.8 $ 337.1 $ 47.2 $ 53.9
Projected benefit obligation................. 229.5 327.8 55.7 66.9
------- ------- ------ ------
Plan assets in excess of (or less than)
projected benefit obligation................ 36.3 9.3 (8.5) (13.0)
Unrecognized net (gain) loss................. (16.5) 3.8 2.0 5.1
------- ------- ------ ------
Prepaid pension cost (pension liability)..... $ 19.8 $ 13.1 $ (6.5) $ (7.9)
======= ======= ====== ======
</TABLE>
Significant actuarial assumptions used to determine the projected benefit
obligation and to compute the expected long-term return on assets are as
follows:
<TABLE>
<CAPTION>
U.S. PLANS NON-U.S. PLANS
---------------- ----------------
1993 1994 1995 1993 1994 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate.............................. 7.0% 9.0% 7.0% 6.8% 7.4% 7.5%
Long-term rate of compensation increase.... 4.5% 6.5% 4.5% 4.5% 4.5% 4.8%
Expected long-term rate of return on plan
assets.................................... 10.0% 10.0% 10.0% 8.2% 8.0% 8.1%
</TABLE>
The actuarial assumptions for non-U.S. plans represent weighted averages
reflecting the combined assumptions for all non-U.S. plans.
F-15
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. OTHER POSTRETIREMENT BENEFIT PLANS
The Company and certain of its non-U.S. subsidiaries have medical, dental
and life insurance plans for retirees. Most retirees outside the U.S. are
covered by government-sponsored programs. The Company provides U.S. retirees
with medical benefits similar to those provided to full-time employees,
subject to certain maximums. The Company does not fund its plan for
postretirement medical benefits. All U.S. full-time employees who meet certain
years of service requirements are eligible for postretirement benefits. The
U.S. plan was amended in 1994 to add a cost sharing provision as the Company
continues its efforts to control costs. The Company recognized postretirement
benefit plan expenses of $0.8 in 1993 for special termination benefits in
connection with an early retirement program.
Net periodic U.S. postretirement benefit expense includes the following
components:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Service cost.............................................. $ 1.6 $ 1.9 $ 1.7
Interest cost............................................. 0.8 1.1 1.4
Special termination benefits.............................. 0.8 -- --
----- ----- -----
Net periodic U.S. postretirement benefit expense.......... $ 3.2 $ 3.0 $ 3.1
===== ===== =====
</TABLE>
The U.S. postretirement benefit liability at December 31 is as follows:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Active employees, not fully eligible for benefits............. $ 12.3 $ 19.6
Fully eligible active plan participants....................... 0.4 4.2
------ ------
Accumulated postretirement benefit obligation................. 12.7 23.8
Unrecognized net gain (loss).................................. 3.3 (4.7)
------ ------
Postretirement benefit liability.............................. $ 16.0 $ 19.1
====== ======
</TABLE>
Assumed medical cost inflation for 1996 is projected to be 10.3%. In 1996
and thereafter, the medical inflation rate is assumed to trend downward
slightly, by 0.8% each year, for an average annual medical cost increase over
the next five years of 8.5%. No medical inflation is assumed after 2000, by
which time medical costs are assumed to have doubled from 1991 levels. Since
the plan caps medical costs at twice the 1991 levels, the effect of a 1%
increase in the assumed medical inflation rate is not material. The assumed
discount rate for postretirement medical benefits is 7.2%, 9.2% and 7.2% for
1993, 1994 and 1995, respectively.
IBM agreed to pay for its pro rata share (currently estimated at $67.7) of
future postretirement benefits for all Company employees based on relative
years of service with IBM and the Company. Certain U.S. employees who were
within five years of retirement eligibility as of March 31, 1991 could elect
to take a leave of absence from IBM and work for the Company, return to IBM,
and retire as IBM employees when they become eligible. In such cases, IBM will
pay all postretirement and pension benefits for these employees, subject to
pension asset transfers back to IBM from the Company's pension plan.
12. COMMITMENTS
The Company is committed under operating leases (containing various renewal
options) for rental of office and manufacturing space and equipment. Rent
expense (net of rental income of $3.0, $5.1 and $5.6) was $12.9, $12.0 and
$9.9 in 1993, 1994 and 1995, respectively. Future minimum rentals
F-16
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
under terms of non-cancelable operating leases at December 31 are: 1996-$13.6;
1997-$11.9; 1998-$9.3; 1999-$7.4; 2000-$5.4; and thereafter-$24.7.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company operates internationally, giving rise to market risks from
changes in foreign exchange rates. The Company is also exposed to interest
rate risk on its borrowings. The Company utilizes derivative financial
instruments to reduce these risks, and does not hold or issue financial
instruments for trading purposes. The Company is exposed to credit-related
losses in the event of non-performance by counterparties to financial
instruments, but it does not expect any counterparties to fail to meet their
obligations given their high credit ratings. Where appropriate, the Company
arranges master netting agreements.
Interest Rate Risk Management: The Company utilizes interest rate swaps,
caps and options to maintain an appropriate balance between fixed and floating
rate debt in order to minimize the effect of changing interest rates on
earnings.
Interest rate swaps and interest rate/currency swaps are included in the
statement of financial position as accrued liabilities and other liabilities,
respectively. Premiums paid for interest rate cap and option agreements are
included in the statement of financial position as current assets and non-
current assets and are charged to interest expense over the terms of the
agreements or when written off, if the option expires unexercised. Amounts
receivable under cap agreements and gains realized on options are recognized
as reductions of interest expense over the terms of the agreements.
For additional information related to derivative financial instruments used
to manage interest rate risk, see Note 6.
Foreign Exchange Risk Management: The Company enters into various types of
foreign exchange contracts in managing its foreign exchange risk. Notional
amounts at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Forward contracts.......................................... $ 131.2 $ 208.3
Options purchased.......................................... 257.0 152.4
Options written............................................ (128.0) (76.2)
</TABLE>
Forward contracts and purchased options are used to hedge firm and
anticipated purchases of inventory and are included in the statement of
financial position as current assets and accrued liabilities. These
instruments have remaining terms of one year or less. Gains and losses
receiving hedge accounting treatment are recognized in earnings in the same
period as the underlying hedged transactions.
Hedging losses of $0.6 and $0.3 were deferred at December 31, 1994 and 1995,
respectively. The Company also purchased and wrote offsetting foreign currency
options, which do not qualify for hedge accounting treatment, for the purpose
of reducing the net cost of its hedging strategies. These instruments are
included in the statement of financial position as current assets and accrued
liabilities, respectively. Instruments which do not qualify for hedge
accounting treatment are marked to market, with the resulting gains and losses
included in earnings.
Concentrations of Credit Risk: The Company's main concentrations of credit
risk consist primarily of temporary cash investments and trade receivables.
Temporary cash investments are placed with various financial institutions.
Company guidelines have been established relating to the
F-17
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amount of deposits or investments that may be held by each financial
institution. IBM is the most significant trade customer of the Company (see
Note 16); otherwise, credit risk related to trade receivables is dispersed
across a large number of customers located in various geographic areas. The
Company also has off-balance sheet credit risk for the reimbursement from IBM
of its pro rata share of postretirement benefits to be paid by the Company.
(see Note 11).
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the carrying amounts and fair values of
financial instruments with fair values different than their carrying amounts
at December 31:
<TABLE>
<CAPTION>
1994 1995
ASSET (LIABILITY) ASSET (LIABILITY)
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NON-DERIVATIVES:
Long-term debt (senior and senior
subordinated notes)................. $ (140.0) $ (141.3) $ (140.0) $ (159.8)
DERIVATIVES:
Prepaid expenses and other current
assets.............................. 2.2 2.8 0.9 0.6
Other assets......................... 0.2 1.7 -- 0.1
Accrued liabilities.................. (0.2) (4.1) -- (0.1)
Other liabilities.................... (10.5) (28.7) (10.8) (12.7)
</TABLE>
The carrying amounts in the table are included in the statement of financial
position under the indicated captions. The amounts in the table are presented
net of amounts offset in accordance with FASB Interpretation No. 39,
Offsetting of Amounts Related to Certain Contracts.
Cash and cash equivalents and trade receivables are valued at their carrying
amounts as recorded in the statement of financial position, and are reasonable
estimates of fair value given the relatively short period to maturity for
these instruments. The carrying value of the term loan approximates its fair
value given its variable rate interest provisions. Derivative financial
instruments which do not qualify for hedge accounting are recorded in the
statement of financial position at their fair value. The fair value of the
senior and senior subordinated notes is estimated based on current rates
available to the Company for debt with similar characteristics. Fair values
for the Company's derivative financial instruments are based on quoted market
prices of comparable instruments or, if none are available, on pricing models
or formulas using current assumptions.
15. SALES OF RECEIVABLES
The Company entered into an agreement in 1994 (which was subsequently
amended), to sell up to $100.0 of U.S. trade receivables on a limited recourse
basis. As collections reduce previously sold receivables, the Company may
replenish these with new receivables. At December 31, 1995, U.S. trade
receivables of $100.0 had been sold and, due to the revolving nature of the
agreement, $100.0 also remain outstanding. The agreement, which contains net
worth and fixed charge coverage restrictions similar to, but less restrictive
than, those in the credit agreements, must be renewed annually, and is
expected to be renewed upon its expiration in June 1996. The risk the Company
bears from bad debt losses on U.S. trade receivables sold is limited to
approximately 10% of the outstanding balance of receivables sold. The Company
addresses this risk of loss in its allowance for doubtful accounts.
Receivables sold may not include amounts over 60 days past due or
concentrations over certain limits with any one customer.
F-18
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company sells a portion of its non-U.S. trade receivables on a recourse
basis. Proceeds from these sales totaled $106.8, $136.3 and $86.9 in 1993,
1994 and 1995, respectively. Approximately $16.7 and $5.5 remain uncollected
at December 31, 1994 and 1995, respectively. In addition, the Company sold
receivables to affiliates of IBM (a related party in 1993 and 1994) on a non-
recourse basis totaling $193.4 and $181.7 in 1993 and 1994, respectively.
Expenses incurred under these programs totaling $2.3, $3.0 and $3.5 for
1993, 1994, and 1995, respectively are included in other non-operating
expense.
16. MAJOR CUSTOMER
The Company transacts a significant amount of business with IBM, which prior
to 1995, was considered a related party due to its ownership interest in the
Company.
In August 1995, the Company concluded negotiations with IBM regarding IBM's
purchase of keyboards from the Company. As a result of these negotiations and
the Company's analysis of the long-term profitability of the keyboard
industry, the Company decided to phase out its keyboard product line by April
1996 and recorded a $15.0 reserve in the third quarter of 1995.
In August 1995, the Company entered into a profit sharing agreement for an
extension of the IBM trademark agreement that allows the Company to continue
to use the IBM logo on certain existing printer supplies in its other office
imaging products line through March 31, 1999. The Company also entered into a
royalty bearing agreement for an extension of the right to use the IBM logo on
typewriters and typewriter supplies through March 27, 2001.
The Company agreed to manufacture certain products (including computer
keyboards) for IBM through March 27, 1996, during which time IBM is required
to make support payments to the Company if certain levels of gross profit or
overhead absorption are not achieved. IBM also agreed to purchase spare parts
and supplies utilized in the maintenance of the Company's products and to
purchase from the Company all of its internal requirements for those types of
products manufactured by the Company. At December 31, 1994 and 1995, the total
amount due from IBM was $43.1 and $46.3, respectively.
IBM manufactured computer keyboards outside the U.S. and sold them to the
Company at prices that approximated the Company's costs to manufacture similar
products. The Company sold substantially all of these products back to IBM.
IBM also agreed to provide warranty services and extended maintenance, for a
fee, on some products sold by the Company through March 27, 1996. The Company
purchased inventory, products and various services from IBM totaling $169.1
and $167.2 in 1993 and 1994, respectively. At December 31, 1994, $22.4 was
payable to IBM.
At March 27, 1991, $135.0 of the purchase price of the Company was allocated
to prepaid expenses for marketing support and research and development that
IBM agreed to provide through March 31, 1996. In 1994, the Company negotiated
an agreement to terminate certain of IBM's remaining obligations under these
agreements in exchange for IBM returning $17.8 of the amounts prepaid by the
Company. At December 31, 1995, IBM had fulfilled its remaining obligations
under these agreements.
17. INTERNATIONAL OPERATIONS
The Company operates in the office products industry segment and
manufactures its products in the U.S., France and Australia and markets them
throughout the world. Intercompany sales are made
F-19
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
at transfer prices which approximate those charged to unaffiliated customers.
Summarized financial data by region follows:
<TABLE>
<CAPTION>
CONSOLIDATED
U.S. EUROPE OTHER INT'L. ELIMINATIONS TOTAL
-------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1993
Revenues:
Trade................. $1,068.1 $ 505.4 $102.2 $ -- $1,675.7
Intercompany.......... 202.6 -- -- (202.6) --
-------- ------- ------ ------- --------
$1,270.7 $ 505.4 $102.2 $(202.6) $1,675.7
Operating income
(loss)................. $ 102.4 $ (36.4) $ 0.6 $ 4.0 $ 70.6
Total assets............ $1,085.8 $ 282.7 $ 47.9 $(201.4) $1,215.0
1994
Revenues:
Trade................. $1,146.6 $ 576.5 $129.2 $ -- $1,852.3
Intercompany.......... 342.3 -- -- (342.3) --
-------- ------- ------ ------- --------
$1,488.9 $ 576.5 $129.2 $(342.3) $1,852.3
Operating income........ $ 86.5 $ 22.5 $ 3.4 $ 2.5 $ 114.9
Total assets............ $ 935.9 $ 272.8 $ 45.8 $(293.6) $ 960.9
1995
Revenues:
Trade................. $1,272.4 $ 734.9 $150.5 $ -- $2,157.8
Intercompany.......... 449.7 -- -- (449.7) --
-------- ------- ------ ------- --------
$1,722.1 $ 734.9 $150.5 $(449.7) $2,157.8
Operating income (1).... $ 65.8 $ 46.2 $ 2.3 $ (5.8) $ 108.5
Total assets............ $1,016.1 $ 319.8 $ 53.8 $(246.8) $1,142.9
</TABLE>
- --------
(1) Includes non-cash compensation charge of $45.7, $13.6 and $1.3 for the
U.S., Europe, and Other International, respectively.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1994:
Revenues..................... $436.3 $446.9 $446.9 $522.2
Gross profit................. 134.1 128.4 124.2 166.8
Operating income............. 23.8 23.7 22.3 45.1
Net earnings................. 3.8 7.9 6.5 26.4
Earnings (loss) per share.... $ 0.01 $ 0.07 $ 0.05 $ (0.61)
1995:
Revenues..................... $471.4 $541.4 $514.7 $630.3
Gross profit................. 151.8 161.7 153.3 203.1
Operating income............. 30.7 39.8 30.2 7.8
Earnings before extraordinary
item........................ 11.4 19.9 16.1 0.7
Net earnings................. 11.4 4.2 16.1 0.7
Earnings per share before ex-
traordinary item............ 0.15 0.27 0.21 0.01
Earnings per share........... $ 0.15 $ 0.06 $ 0.21 $ 0.01
</TABLE>
F-20
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the fourth quarter of 1994, earnings attributable to common stock were
reduced by a preferred stock redemption premium of $61.3 recognized as a
result of the exchange of the Company's senior redeemable preferred stock into
Class A common stock.
Second quarter 1995 net earnings were reduced by an extraordinary charge of
$22.1 ($15.7 net of tax) caused by an early extinguishment of debt related to
the refinancing of the Company's term loan.
Fourth quarter 1995 operating income and net earnings were reduced by a non-
cash compensation charge of $60.6 ($38.5 net of tax) recognized for certain of
the Company's outstanding employee stock options upon consummation of the
initial public offering.
19. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. This statement is effective for the Company's 1996
financial statements. The Company's analysis of this new statement indicates
that it will not have a material effect on the Company's financial position or
results of operations.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which encourages, but does not require, companies to measure the
compensation cost of stock-based compensation plans at the grant date based on
the fair value of the stock-based award. Companies may continue accounting for
stock-based compensation under APB Opinion 25, Accounting for Stock Issued to
Employees, provided the company discloses the pro forma effects on net income
and earnings per share had the new accounting requirements been applied. This
statement is effective for the Company's 1996 financial statements. The
Company intends to continue accounting for stock-based compensation awards
under the provisions of APB 25.
F-21
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS OF SEPTEMBER 30, 1996
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 55.7
Trade receivables, net of allowance of $20.1....................... 254.2
Inventories........................................................ 340.7
Prepaid expenses and other current assets.......................... 66.7
--------
Total current assets............................................. 717.3
Property, plant and equipment, net................................... 417.3
Other assets......................................................... 47.4
--------
Total assets..................................................... $1,182.0
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................. $ --
Accounts payable................................................... 198.9
Accrued liabilities................................................ 223.8
--------
Total current liabilities........................................ 422.7
Long-term debt....................................................... 180.5
Other liabilities.................................................... 87.9
--------
Total liabilities................................................ 691.1
--------
Stockholders' equity:
Preferred stock, $.01 par value, 1,600,000 shares authorized, no
shares issued and outstanding..................................... --
Common stock $.01 par value:
Class A, 160,000,000 shares authorized; 66,228,065 outstanding... 0.6
Class B, 10,000,000 shares authorized; 5,888,623 outstanding..... 0.1
Capital in excess of par........................................... 514.0
Retained earnings (deficit)........................................ (25.4)
Accumulated translation adjustment................................. 1.6
--------
Total stockholders' equity....................................... 490.9
--------
Total liabilities and stockholders' equity....................... $1,182.0
========
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Revenues.................................................. $1,527.5 $1,690.7
Cost of revenues.......................................... 1,060.7 1,162.2
-------- --------
Gross profit............................................ 466.8 528.5
Research and development.................................. 87.2 92.1
Selling, general and administrative....................... 258.6 279.3
Amortization of intangibles............................... 20.3 5.1
-------- --------
366.1 376.5
-------- --------
Operating income........................................ 100.7 152.0
Interest expense, net..................................... 28.9 16.0
Amortization of deferred financing costs and other........ 4.9 5.8
-------- --------
Earnings before income taxes and extraordinary item..... 66.9 130.2
Provision for income taxes................................ 19.5 47.6
-------- --------
Earnings before extraordinary item...................... 47.4 82.6
Extraordinary loss on extinguishment of debt (net of re-
lated tax benefit of $6.4)............................... (15.7) --
-------- --------
Net earnings............................................ $ 31.7 $ 82.6
======== ========
Earnings per common and common equivalent share, primary
and fully diluted:
Before extraordinary item............................... $ 0.63 $ 1.09
Extraordinary loss...................................... (0.21) --
-------- --------
Net earnings............................................ $ 0.42 $ 1.09
======== ========
<CAPTION>
75,081,946 75,560,844
Shares used in per share calculation...................... ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................. $ 31.7 $ 82.6
Adjustments to reconcile net earnings to net cash provided
by (used for)
operating activities:
Depreciation and amortization............................ 76.4 50.9
Extraordinary loss....................................... 15.7 --
Deferred taxes........................................... (2.7) (8.3)
Other non-cash charges to operations..................... 33.4 16.1
Change in assets and liabilities:
Trade receivables...................................... (41.9) (36.0)
Trade receivables program.............................. (20.0) (4.6)
Inventories............................................ (30.4) (44.4)
Accounts payable....................................... 54.0 (10.7)
Accrued liabilities.................................... 13.6 (34.6)
Other assets and liabilities........................... (9.0) 0.4
------- -------
Net cash provided by operating activities............ 120.8 11.4
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................. (47.6) (106.2)
Proceeds from sale of property, plant and equipment........ 1.1 3.3
------- -------
Net cash used for investing activities............... (46.5) (102.9)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt, net of issuance
costs of
$2.8 in 1995.............................................. 147.2 5.5
Principal payments on long-term debt....................... (225.0) (20.0)
Common stock transactions, net............................. 0.2 11.7
Preferred dividends paid................................... (2.2) --
------- -------
Net cash used for financing activities............... (79.8) (2.8)
------- -------
Effect of exchange rate changes on cash...................... 0.8 (0.5)
------- -------
Net decrease in cash and cash equivalents.................... (4.7) (94.8)
Cash and cash equivalents--beginning of period............... 42.0 150.5
------- -------
Cash and cash equivalents--end of period..................... $ 37.3 $ 55.7
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
F-24
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, in the
opinion of the Company's management, all adjustments (which comprise only
normal and recurring accruals) necessary for a fair presentation of the
interim financial results have been included. The results for the interim
periods are not necessarily indicative of results to be expected for the
entire year. These financial statements and notes should be read in
conjunction with the Company's audited annual consolidated financial
statements for the year ended December 31, 1995.
Net earnings per common and common equivalent share are computed by using
the weighted-average number of common shares and common equivalent shares
outstanding during each period. Common equivalent shares and other potentially
dilutive securities include stock options, warrants, and junior preferred
stock. Primary and fully diluted earnings per share do not differ by a
material amount.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
2. INVENTORIES
Inventories as of September 30, 1996 consist of the following:
<TABLE>
<CAPTION>
(DOLLARS
IN MILLIONS)
<S> <C>
Work in process.............................................. $191.2
Finished goods............................................... 149.5
------
$340.7
======
</TABLE>
3. STOCKHOLDERS' EQUITY AND LONG-TERM DEBT
On April 23, 1996, the Company's board of directors authorized the
repurchase of up to $50 million of its Class A common stock. The repurchase
authority allows the Company to selectively repurchase its stock from time to
time in the open market or in privately negotiated transactions depending upon
market price and other factors. As of September 30, 1996, the Company has not
repurchased any of the stock.
The amended and restated credit agreements and the note and stock purchase
agreement have been amended to permit, among other things, the Company's
repurchase of up to $50 million of common stock.
F-25
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Selling Stockholders have agreed to sell to each of the U.S. Underwriters
named below, and each of such U.S. Underwriters has severally agreed to
purchase from the Selling Stockholders, the respective number of shares of
Class A Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
OF CLASS
A
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co................................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
Morgan Stanley & Co. Incorporated..................................
Donaldson, Lufkin & Jenrette Securities Corporation................
Smith Barney Inc...................................................
---------
Total.............................................................. 8,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The U.S. Underwriters propose to offer the shares of Class A Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus, and in part to certain securities dealers
at such price less a concession of $[ ] per share. The U.S. Underwriters
may allow, and such dealers may reallow, a concession not in excess of $[ ]
per share to certain brokers and dealers. After the shares of Class A Common
Stock are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the U.S. Underwriters.
The Company and the Selling Stockholders have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters
of the International Offering (the "International Underwriters" and, together
with the U.S. Underwriters, the "Underwriters") providing for the concurrent
offer and sale of an aggregate of 2,000,000 shares of Class A Common Stock in
an international offering outside the United States. The public offering price
and underwriting discounts and commissions per share for the two offerings are
identical. The closing of the offering made hereby is a condition to the
closing of the International Offering, and vice versa. The several
International Underwriters are Goldman Sachs International, Merrill Lynch
International, Morgan Stanley & Co. International Limited and Morgan Grenfell
& Co. Limited.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of
the U.S. Underwriters named herein has agreed that, as a part of the
distribution of the shares offered hereby and subject to certain exceptions,
it will offer, sell or deliver the shares of Class A Common Stock, directly or
indirectly, only in the United States of America (including the States and the
District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (the "United States") and to U.S. persons, which
term shall mean, for purposes of this paragraph: (a) any individual who is a
resident of the United States or (b) any corporation, partnership or other
entity organized in or under the laws of the United States or any political
subdivision thereof and whose office most directly involved with the purchase
is located in the United States. Each of the International Underwriters has
agreed pursuant to the Agreement Between that, as a part of the distribution
of the shares offered in the International Offering, and subject to certain
exceptions, it will not, directly or indirectly, offer, sell or deliver shares
of Class A Common Stock in the United States or to any U.S. persons.
U-1
<PAGE>
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Class A Common Stock as may be mutually agreed. The price of any shares so
sold shall be the public offering price, less an amount not greater than the
selling concession.
The Selling Stockholders have granted the U.S. Underwriters an option
exercisable for 30 days after the date of this Prospectus to purchase up to an
aggregate of 1,200,000 additional shares of Class A Common Stock solely to
cover over-allotments, if any. If the U.S. Underwriters exercise their over-
allotment option, the U.S. Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares to be purchased by each of them, as shown in the
foregoing table, bears to the 8,000,000 shares of Class A Common Stock
initially offered hereby. The Selling Stockholders have granted the
International Underwriters a similar option exercisable for up to an aggregate
of 300,000 additional shares of Class A Common Stock.
The Company and the Selling Stockholders have each agreed, for a period of
90 days after the date of this Prospectus, not to file a registration
statement with respect to, enter into any agreement providing for, or effect,
any public sale, distribution or other disposition (including, without
limitation, any sale pursuant to Rule 144 or Rule 144A under the Securities
Act and any sale in a broker's transaction or through a market maker) of,
except as provided under the Underwriting Agreement and under the
International Underwriting Agreement, any Class A Common Stock, Class B Common
Stock or securities of the Company that are substantially similar to the Class
A Common Stock or Class B Common Stock, including but not limited to any
securities that are convertible into or exchangeable for, or that represent
the right to receive, Class A Common Stock, Class B Common Stock or any such
substantially similar securities (other than pursuant to employee benefit or
incentive plans existing on, or upon the conversion or exchange of convertible
or exchangeable securities outstanding as of, the date of this Prospectus),
without the prior written consent of Goldman, Sachs & Co. In addition, the
Selling Stockholders and certain other stockholders of the Company have
entered into "holdback" agreements with the Underwriters. See "Shares Eligible
for Future Sale".
The Class A Common Stock is traded on the New York Stock Exchange.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 3
Incorporation of Certain Documents by
Reference............................................................... 3
Prospectus Summary....................................................... 5
Risk Factors............................................................. 11
Price Range of Class A Common Stock
and Dividend Policy..................................................... 16
Capitalization........................................................... 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 31
Management............................................................... 46
Certain Transactions and Relationships................................... 48
Selling Stockholders..................................................... 50
Shares Eligible for Future Sale.......................................... 51
Description of Capital Stock............................................. 52
Validity of the Shares................................................... 55
Experts.................................................................. 55
Index to Consolidated Financial
Statements.............................................................. F-1
Underwriting............................................................. U-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10,000,000 SHARES
LEXMARK
INTERNATIONAL GROUP, INC.
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------
[LOGO] LEXMARK/(TM)/
---------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED JANUARY 27, 1997
10,000,000 SHARES
LEXMARK INTERNATIONAL GROUP, INC.
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------
Of the 10,000,000 shares of Class A Common Stock offered, 2,000,000 shares
are being offered hereby in an international offering outside the United States
and 8,000,000 shares are being offered in a concurrent offering in the United
States. The public offering price and the aggregate underwriting discount per
share will be identical for both offerings. See "Underwriting".
All the shares of Class A Common Stock are being sold by the Selling
Stockholders. See "Selling Stockholders". The Company will not receive any of
the proceeds from the sale of the shares.
The last reported sale price of the Class A Common Stock, which is listed
under the symbol "LXK", on the New York Stock Exchange on January 23, 1997 was
$26 per share. See "Price Range of Class A Common Stock and Dividend Policy".
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE CLASS A COMMON STOCK.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) STOCKHOLDERS(2)
-------------- ------------ -------------------
<S> <C> <C> <C>
Per Share....................... $ $ $
Total(3)........................ $ $ $
</TABLE>
- -----
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".
(2) Expenses of approximately $1,000,000 are payable by the Company in
connection with the offerings.
(3) The Selling Stockholders have granted the International Underwriters an
option for 30 days to purchase up to an additional 300,000 shares at the
public offering price per share, less the underwriting discount, solely to
cover over-allotments. The Selling Stockholders have granted the U.S.
Underwriters a similar option with respect to an additional 1,200,000
shares as part of the concurrent offering in the United States. If such
options are exercised in full, the total initial public offering price,
underwriting discount and proceeds to Selling Stockholders will be
$[ ], $[ ] and $[ ], respectively. See "Underwriting".
-----------
The shares offered hereby are offered severally by the International
Underwriters, as specified herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that the shares will be ready for delivery in New York, New York, on
or about February [ ], 1997, against payment therefor in immediately available
funds.
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO.
INTERNATIONAL
DEUTSCHE MORGAN GRENFELL
-----------
The date of this Prospectus is , 1997.
<PAGE>
CERTAIN UNITED STATES TAX
CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of certain United States Federal
income and estate tax consequences of the ownership and disposition of Class A
Common Stock by a person other than (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity created or organized
in the United States or under the laws of the United States or of any State or
(iii) an estate or trust whose income is includable in gross income for United
States Federal income tax purposes regardless of its source (referred to
hereafter as a "non-U.S. holder").
The discussion is based on provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), and administrative and judicial interpretations as of
the date hereof, all of which are subject to change, possibly with retroactive
effect. Furthermore, this discussion does not consider specific facts and
circumstances that may be relevant to a particular holder's tax position.
Prospective purchasers are urged to consult a tax adviser with respect to the
United States Federal income and estate tax consequences of owning and
disposing of Class A Common Stock, as well as any tax consequences under the
laws of any other taxing jurisdiction.
INCOME TAX
Dividends. Generally, dividends paid to a non-U.S. holder of Class A Common
Stock will be subject to U.S. Federal income tax. Except in the case of
dividends that are effectively connected with the holder's conduct of a trade
or business within the United States, this tax is imposed and withheld at the
rate of 30% of the amount of the dividend, unless reduced by an applicable
income tax treaty. Currently, dividends paid to an address in a foreign
country are presumed to be paid to a resident of such country in determining
the applicability of a treaty for such purposes.
However, under proposed United States Treasury regulations relating to
withholding of tax on non-U.S. holders, which by their terms would apply to
dividend and other payments made after December 31, 1997 (the "Proposed
Regulations"), a non-U.S. holder of Class A Common Stock who wishes to claim
the benefit of an applicable treaty would be required to satisfy certain
certification requirements. In addition, under the Proposed Regulations, in
the case of Class A Common Stock held by a foreign partnership, (x) the
certification requirements would generally be applied to the partners of the
partnership and (y) the partnership would be required to provide certain
information, including a United States taxpayer identification number. The
Proposed Regulations also provide look-through rules for tiered partnerships.
It is not certain whether, or in what form, the Proposed Regulations will be
adopted as final regulations.
Except as may be otherwise provided in an applicable income tax treaty,
dividends which are effectively connected with the non-U.S. holder's conduct
of a trade or business within the United States are subject to tax at ordinary
Federal income tax rates, which tax is not collected by withholding (except as
described below under "Backup Withholding and Information Reporting"). All or
part of any effectively connected dividends received by a foreign corporation
may also, under certain circumstances, be subject to an additional "branch
profits" tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. Non-U.S. holders of Class A Common Stock must
comply with certain certification and disclosure requirements to claim an
exception from withholding under the rules described in this paragraph.
A non-U.S. holder that is eligible for a reduced rate of U.S. withholding
tax pursuant to a tax treaty may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the United States
Internal Revenue Service.
Disposition of Class A Common Stock. Generally, non-U.S. holders will not be
subject to United States Federal income tax (or withholding thereof) in
respect of gain recognized on a disposition of [PAGE FOR INTERNATIONAL
PROSPECTUS]
X-1
<PAGE>
[PAGE FOR INTERNATIONAL PROSPECTUS]
Class A Common Stock unless (i) the gain is effectively connected with the
non-U.S. holder's conduct of a trade or business within the United States (in
which case the "branch profits" tax described above may also apply if the
holder is a foreign corporation); (ii) in the case of a non-U.S. holder who is
a non-resident alien individual and holds Class A Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year of the sale and certain other conditions are met; or (iii) the
Company is or has been a "United States real property holding corporation" for
Federal income tax purposes (which the Company does not believe it has been or
is currently) and the non-U.S. holder has held directly or constructively more
than 5% of the outstanding Class A Common Stock within the five-year period
ending on the date of the disposition.
ESTATE TAX
If an individual non-U.S. holder owns, or is treated as owning, Class A
Common Stock at the time of his or her death, such stock would be subject to
U.S. Federal estate tax imposed on the estates of non-resident aliens, in the
absence of a contrary provision contained in any applicable tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Dividends. Generally, dividends paid on Class A Common Stock to a non-U.S.
holder at an address outside the United States will be exempt from backup
withholding tax and U.S. information reporting requirements (but not from
regular withholding tax discussed above).
Broker Sales. Payments of proceeds from the sale of Class A Common Stock by
a non-U.S. holder made to or through a foreign office of a broker generally
will not be subject to information reporting or backup withholding. However,
certain foreign offices, including the foreign offices of a U.S. broker, are
subject to information reporting unless the holder certifies its non-U.S.
status under penalties of perjury or otherwise establishes its entitlement to
an exemption. Payments of proceeds from the sale of Class A Common Stock by a
non-U.S. holder to or through a U.S. office of a broker are currently subject
to both information reporting and backup withholding at a rate of 31% unless
the holder certifies its status as a non-U.S. holder under penalties of
perjury or otherwise establishes an exemption.
A non-U.S. holder may obtain a refund of any excess amounts withheld under
the backup withholding rules by filing the appropriate claim for refund with
the IRS.
VALIDITY OF THE SHARES
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by Debevoise & Plimpton, New York, New York, and
for the Underwriters by Sullivan & Cromwell, New York, New York. Debevoise &
Plimpton also acts and may hereafter act as counsel to CD&R and its affiliates
and to the Company and its affiliates. Franci J. Blassberg, Esq., a member of
Debevoise & Plimpton, is married to Joseph L. Rice, III, a director of the
Company and a general partner of the general partner of C&D Fund IV.
EXPERTS
The consolidated statements of financial position as of December 31, 1994
and 1995 and the consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1995 included or incorporated by reference in this Prospectus have been
included or incorporated by reference herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
X-2
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Selling Stockholders have agreed to sell to each of the International
Underwriters named below, and each of such International Underwriters has
severally agreed to purchase from the Selling Stockholders, the respective
number of shares of Class A Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
CLASS A
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman Sachs International.......................................
Merrill Lynch International.......................................
Morgan Stanley & Co. International Limited........................
Morgan Grenfell & Co. Limited.....................................
---------
Total............................................................ 2,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
International Underwriters are committed to take and pay for all of the shares
offered hereby, if any are taken.
The International Underwriters propose to offer the shares of Class A Common
Stock in part directly to the public at the initial public offering price set
forth on the cover page of this Prospectus, and in part to certain securities
dealers at such price less a concession of $[ ] per share. The
International Underwriters may allow, and such dealers may reallow, a
concession not in excess of $[ ] per share to certain brokers and dealers.
After the shares of Class A Common Stock are released for sale to the public,
the offering price and other selling terms may from time to time be varied by
the International Underwriters.
The Company and the Selling Stockholders have entered into an underwriting
agreement (the "U.S. Underwriting Agreement") with the underwriters of the
United States Offering (the "U.S. Underwriters" and, together with the
International Underwriters, the "Underwriters") providing for the concurrent
offer and sale of an aggregate of 8,000,000 shares of Class A Common Stock in
an offering in the United States. The public offering price and underwriting
discounts and commissions per share for the two offerings are identical. The
closing of the offering made hereby is a condition to the closing of the
United States Offering, and vice versa. The several U.S. Underwriters are
Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Smith Barney Inc.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of
the U.S. Underwriters named herein has agreed that, as a part of the
distribution of the shares offered hereby and subject to certain exceptions,
it will offer, sell or deliver the shares of Class A Common Stock, directly or
indirectly, only in the United States of America (including the States and the
District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (the "United States") and to U.S. persons, which
term shall mean, for purposes of this paragraph: (a) any individual who is a
resident of the United States or (b) any corporation, partnership or other
entity organized in or under the laws of the United States or any political
subdivision thereof and whose office most directly involved with the purchase
is located in the United States. Each of the International Underwriters has
agreed pursuant to the Agreement Between that, as a part of the distribution
of the shares offered in the International Offering, and subject to certain
exceptions, it will not, directly or indirectly, offer, sell or deliver shares
of Class A Common Stock in the United States or to any U.S. persons.
U-1
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Class A Common Stock as may be mutually agreed. The price of any shares so
sold shall be the public offering price, less an amount not greater than the
selling concession.
The Selling Stockholders have granted the International Underwriters an
option exercisable for 30 days after the date of this Prospectus to purchase
up to an aggregate of 300,000 additional shares of Class A Common Stock solely
to cover over-allotments, if any. If the International Underwriters exercise
their over-allotment option, the International Underwriters have severally
agreed, subject to certain conditions, to purchase approximately the same
percentage thereof that the number of shares to be purchased by each of them,
as shown in the foregoing table, bears to the 2,000,000 shares of Class A
Common Stock initially offered hereby. The Selling Stockholders have granted
the U.S. Underwriters a similar option exercisable for up to an aggregate of
1,200,000 additional shares of Class A Common Stock.
The Company and the Selling Stockholders have each agreed, for a period of
90 days after the date of this Prospectus, not to file a registration
statement with respect to, enter into any agreement providing for, or effect,
any public sale, distribution or other disposition (including, without
limitation, any sale pursuant to Rule 144 or Rule 144A under the Securities
Act and any sale in a broker's transaction or through a market maker) of,
except as provided under the Underwriting Agreement and under the U.S.
Underwriting Agreement, any Class A Common Stock, Class B Common Stock or
securities of the Company that are substantially similar to the Class A Common
Stock or Class B Common Stock, including but not limited to any securities
that are convertible into or exchangeable for, or that represent the right to
receive, Class A Common Stock, Class B Common Stock or any such substantially
similar securities (other than pursuant to employee benefit or incentive plans
existing on, or upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date of this Prospectus), without the prior
written consent of Goldman Sachs International. In addition, the Selling
Stockholders and certain other stockholders of the Company have entered into
"holdback" agreements with the Underwriters. See "Shares Eligible for Future
Sale".
Each International Underwriter has also agreed that (a) it has not offered
or sold and, prior to the expiry of the period of six months from the Closing
Date, will not offer or sell any shares of Class A Common Stock to persons in
the United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995 of Great Britain, (b) it has complied and will comply with
all applicable provisions of the Financial Services Act 1986 of Great Britain
with respect to anything done by it in relation to the shares of Class A
Common Stock in, from or otherwise involving the United Kingdom, and (c) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the shares
of Class A Common Stock to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 of Great Britain or is a person to whom such document
may otherwise lawfully be issued or passed on.
Buyers of shares of Class A Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practice of
the country of purchase in addition to the initial public offering price.
The Class A Common Stock is traded on the New York Stock Exchange.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
U-2
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 3
Incorporation of Certain Documents by
Reference............................................................... 3
Prospectus Summary....................................................... 5
Risk Factors............................................................. 11
Price Range of Class A Common Stock
and Dividend Policy..................................................... 16
Capitalization........................................................... 17
Selected Consolidated Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 31
Management............................................................... 46
Certain Transactions and Relationships................................... 48
Selling Stockholders..................................................... 50
Shares Eligible for Future Sale.......................................... 51
Description of Capital Stock............................................. 52
Certain United States Tax Consequences to Non-U.S. Holders...............
Validity of the Shares................................................... 57
Experts.................................................................. 57
Index to Consolidated Financial
Statements.............................................................. F-1
Underwriting............................................................. U-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10,000,000 SHARES
LEXMARK
INTERNATIONAL GROUP, INC.
CLASS A COMMON STOCK
(PAR VALUE $.01 PER SHARE)
---------------
[LOGO] LEXMARK/(TM)/
---------------
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO.
INTERNATIONAL
DEUTSCHE MORGAN GRENFELL
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses of the issuance and distribution of
the shares of Class A Common Stock being registered, including fees and
expenses previously incurred by the Company, other than any underwriting
compensation.
<TABLE>
<CAPTION>
<S> <C>
Registration fee......................................................$ 102,000
National Association of Securities Dealers, Inc. filing fee........$ 35,000
Accounting fees and expenses.......................................$ 100,000
Legal fees and expenses............................................$ 200,000
Printing and engraving.............................................$ 150,000
Transfer Agent's fees..............................................$ 3,000
Blue Sky fees and expenses (including counsel fees)................$ 10,000
Miscellaneous expenses.............................................$ 400,000
----------
Total............................................................$1,000,000
==========
</TABLE>
All of the above expenses of the Offering will be borne by the Company as
contemplated by the Registration and Participation Agreement entered into at
the time of the Acquisition.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation), by reason of the fact that such person was an officer or
director of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided that such officer or director acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe
his conduct was illegal. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation in the performance of his duty. Where an officer or director is
successful on the merits or otherwise in the defense of any action referred to
above, the corporation must indemnify him against the expenses which such
officer or director actually and reasonably incurred.
Article VI of the Company's By-Laws provides for indemnification by the
Company of its directors and officers to the full extent permitted by the
Delaware Law. Pursuant to Section 145 of the Delaware Law, the Company has
purchased insurance on behalf of its present and former directors and officers
against any liability asserted against or incurred by them in such capacity or
arising out of their status as such.
Pursuant to specific authority granted by Section 102 of the Delaware Law,
Article FIFTH of the Company's Third Restated Certificate of Incorporation
contains the following provision regarding limitation of liability of
directors and officers:
"(e) No director of the Corporation shall be liable to the Corporation or
its stockholders for monetary damages for breach of his or her fiduciary
duty as a director, provided that nothing
II-1
<PAGE>
contained in this Third Restated Certificate of Incorporation shall
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware or (iv) for any transaction from
which the director derived an improper personal benefit."
The Company has entered into an Indemnification Agreement with C&D Fund IV
(together with its respective affiliates, directors and officers, the
"Indemnitees"). Pursuant to the Indemnification Agreement and under the Third
Restated Certificate of Incorporation, the Company has agreed to indemnify the
members of the Company's Board of Directors to the fullest extent allowable
under applicable Delaware law. In addition, the Company has agreed to
indemnify the Indemnitees against any suits, claims, damages or expenses that
may be made against or incurred by them under applicable securities laws in
connection with offerings of securities of the Company. However, the Company
will not be obligated to indemnify any Indemnitee in the event that any such
suit, claim, damage or expense is based upon an untrue statement or agreements
related to such offerings of securities in reliance upon written information
furnished by such Indemnitee specifically for use in such documents, contracts
and agreements. See "Underwriting".
Reference is hereby made to Sections 9 and 10 of the Underwriting Agreements
filed as Exhibits 1.1 and 1.2 hereto, for certain indemnification
arrangements.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. (A) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
<C> <S>
+1.1 Form of Underwriting Agreement (U.S. Version).
+1.2 Form of Underwriting Agreement (International Version).
Form of Agreement between U.S. and International Underwriting
+1.3 Syndicates.
4.1 Third Restated Certificate of Incorporation of Lexmark International
Group, Inc. (the
"Company").(1)
4.2 By-Laws of the Company, as amended.(1)
4.3 Note and Stock Purchase Agreement, dated as of March 27, 1991, among
the Company, Lexmark International and The Equitable Life Assurance
Society of the United States and certain of its affiliates (the
"Equitable Investors").(2)
4.4 Amendment No. 1 to Note and Stock Purchase Agreement, dated as of
December 31, 1991 among the Company, Lexmark International, Inc.
("Lexmark International") and the Equitable Investors.(2)
4.5 Amendment No. 2 to Note and Stock Purchase Agreement, dated as of
December 21, 1992, among the Company, Lexmark International and the
Equitable Investors.(2)
4.6 Amendment No. 3 to Note and Stock Purchase Agreement, dated as of
December 31, 1993, among the Company, Lexmark International and the
Equitable Investors.(2)
4.7 Amendment No. 4 to Note and Stock Purchase Agreement, dated as of April
21, 1995, among the Company, Lexmark International and the Equitable
Investors.(2)
4.8 Amendment No. 5 to Note and Stock Purchase Agreement, dated as of
October 17, 1995, among the Company, Lexmark International and the
Equitable Investors.(3)
4.9 Amendment No. 6 to Note and Stock Purchase Agreement, dated as of April
3, 1996, among the Company, Lexmark International and the Equitable
Investors.(4)
4.10 Registration and Participation Agreement, dated as of March 27, 1991,
among the Company, The Clayton & Dubilier Private Equity Fund IV ("C&D
Fund IV") and the stockholders of the Company named therein.(2)
4.11 Amendment, Waiver and Consent Under Registration and Participation
Agreement, dated as of December 21, 1994, executed by C&D Fund IV,
Leeway & Co., Mellon Bank N.A., as Trustee for First Plaza Group Trust
("Mellon Bank", and with Leeway & Co., the "Institutional Investors")
and the Equitable Investors.(2)
4.12 Registration Agreement, dated as of March 27, 1991, among the Company,
Lexmark International, the Equitable Investors and the Institutional
Investors.(2)
4.13 Amendment No. 1 to Registration Agreement, dated as of December 31,
1991, among the Company, Lexmark International, the Equitable Investors
and the Institutional Investors.(2)
4.14 Securities Purchase Agreement, dated as of March 27, 1991, among the
Company and the Institutional Investors.(2)
4.15 Amendment No. 1 to Securities Purchase Agreement, dated as of March 27,
1991, among the Company and the Institutional Investors.(2)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
<C> <S>
4.16 Amendment No. 2 to Securities Purchase Agreement, dated as of December
21,
1992, among the Company and the Institutional Investors.(2)
4.17 Specimen of Class A Common Stock certificate.(1)
4.18 Warrant Agreement, dated as of April 1, 1991, among Lexmark
International, Spectrum Sciences B.V., a Netherlands corporation, and
the Company.(2)
4.19 Warrant No. 5, dated November 17, 1995, issued to Keys Foundation.(5)
+5 Opinion of Debevoise & Plimpton regarding the legality of the
securities being registered.
23.1 Consent of Coopers & Lybrand L.L.P.
+23.2 Consent of Debevoise & Plimpton (included in the Opinion of Debevoise &
Plimpton filed as Exhibit 5).
+24 Powers of Attorney.
+99 Lexmark International Group, Inc. Nonemployee Director Stock Plan,
Amended and Restated Effective December 12, 1996.
</TABLE>
- --------
(1) Incorporated herein by reference to the Company's Form S-1 Registration
Statement, Amendment No. 1 (Registration No. 33-97218) filed with the
Commission on October 27, 1995.
(2) Incorporated herein by reference to the Company's Form S-1 Registration
Statement (Registration No. 33-97218) filed with the Commission on
September 22, 1995.
(3) Incorporated herein by reference to the Company's Form S-1 Registration
Statement, Amendment No. 2 (Registration No. 33-97218) filed with the
Commission on November 13, 1995.
(4) Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q (File No. 1-14050) for the Quarterly Period ended March 31, 1996.
(5) Incorporated herein by reference to the Company's Annual Report on Form
10-K (File No. 1-14050) for the Fiscal Year ended December 31, 1995.
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statement Schedules (page S-1).
Financial statement schedules other than those listed above are omitted as
not required or not applicable or because the information is included in the
Financial Statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
II-4
<PAGE>
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective;
(2) For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; and
(3) For purposes of determining any liability under the Act, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT CERTIFIES
THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT NO. 1
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF LEXINGTON, STATE OF KENTUCKY, ON
JANUARY 27, 1997.
Lexmark International Group, Inc.
By /s/ Marvin L. Mann
---------------------
NAME: MARVIN L. MANN
TITLE: Chairman of the Board,
President & Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT NO. 1 TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE FOLLOWING CAPACITIES AND ON JANUARY 27, 1997.
SIGNATURE TITLE
/s/ Marvin L. Mann
___________________________
MARVIN L. MANN Chairman of the
Board/President/
Chief Executive
Officer (Principal
Executive Officer)
/s/ Gary E. Morin
___________________________
GARY E. MORIN Vice President/Chief
Financial Officer
(Principal
Financial Officer)
/s/ Albert L. Luedtke
___________________________
ALBERT L. LUEDTKE Corporate Controller
(Principal
Accounting Officer)
/s/ B. Charles Ames*
___________________________
(B. CHARLES AMES) Director
/s/ Roderick H. Carnegie*
___________________________
(RODERICK H. CARNEGIE) Director
/s/ Frank T. Cary*
___________________________
(FRANK T. CARY) Director
/s/ William R. Fields*
___________________________
(WILLIAM R. FIELDS) Director
II-6
<PAGE>
SIGNATURE TITLE
/s/ Donald J. Gogel*
___________________________
(DONALD J. GOGEL) Director
/s/ Ralph E. Gomory*
___________________________
(RALPH E. GOMORY) Director
/s/ Stephen R. Hardis*
___________________________
(STEPHEN R. HARDIS) Director
/s/ Michael J. Maples*
___________________________
(MICHAEL J. MAPLES) Director
/s/ Andrall E. Pearson*
___________________________
(ANDRALL E. PEARSON) Director
/s/ Joseph L. Rice, III*
___________________________
(JOSEPH L. RICE, III) Director
/s/ Vincent J. Cole
* By ________________________
VINCENT J. COLE
Attorney-in-Fact
II-7
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES*
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION SEQUENTIALLY
NUMBER OF SCHEDULES NUMBERED PAGE
- -------- ------------------------------- -------------
<S> <C> <C>
II. Valuation & Qualifying Accounts S-3
</TABLE>
- --------
* All other schedules are omitted as the required information is inapplicable
or the information is presented in the financial statements or related notes.
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audits of the consolidated financial statements of
Lexmark International Group, Inc. and subsidiaries as of December 31, 1994 and
1995, and for each of the years in the three year period ended December 31,
1995 which financial statements are included or incorporated by reference in
the Prospectus, we have also audited the financial statement schedule listed
in Item 16(b) herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
New York, New York
January 29, 1996
S-2
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1993:
Allowance for doubtful
accounts............. $ 13.3 $10.8 $ -- $(10.7) $ 13.4
Inventory reserves.... 29.5 8.6 -- (19.1) 19.0
Deferred tax assets
valuation
allowance 69.7 55.7 -- (24.4) 101.0
Restructuring re-
serve................ 40.0 -- -- (38.6) 1.4
1994:
Allowance for doubtful
accounts............. $ 13.4 $ 7.8 $ -- $ (1.8) $ 19.4
Inventory reserves.... 19.0 49.5 -- (32.5) 36.0
Deferred tax assets
valuation
allowance............ 101.0 13.7 -- (3.9) 110.8
Restructuring
reserve............... 1.4 -- -- (1.4) --
1995:
Allowance for doubtful
accounts............. $ 19.4 $13.2 $ -- $ (5.5) $ 27.1
Inventory reserves.... 36.0 36.9 -- (27.9) 45.0
Deferred tax assets
valuation
allowance............ 110.8 4.5 -- (38.1) 77.2
</TABLE>
S-3
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion and incorporation by reference in Amendment No.
1 to the registration statement on Form S-3 of our reports dated January 29,
1996, on our audits of the consolidated financial statements and financial
statement schedule of Lexmark International Group, Inc. and subsidiaries as of
December 31, 1994 and 1995, and for the years ended December 31, 1993, 1994
and 1995. We also consent to the reference to our firm under the caption
"Experts."
Coopers & Lybrand L.L.P.
Lexington, Kentucky
January 24, 1997
