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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
For the Fiscal Year Ended December 31, 1998
OR
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File No.1-14050
LEXMARK INTERNATIONAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3074422
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Lexmark Centre Drive
740 New Circle Road NW
Lexington, Kentucky 40550
(Address of principal executive offices) (Zip Code)
(606) 232-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Class A common stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.___
As of March 12, 1999, there were outstanding 64,418,368 shares (excluding shares
held in treasury) of the registrant's Class A common stock, par value $.01,
which is the only class of voting common stock of the registrant, and there were
no shares outstanding of the registrant's Class B common stock, par value $.01.
As of that date, the aggregate market value of the shares of voting common stock
held by non-affiliates of the registrant (based on the closing price for the
Class A common stock on the New York Stock Exchange on March 12, 1999) was
approximately $5,564,136,536.
Documents Incorporated by Reference
Pages 25 through 52 of the Company's 1998 Annual Report to Stockholders have
been incorporated by reference in response to certain requirements of Part II of
this filing.
Certain information in the company's definitive Proxy Statement for the 1999
Annual Meeting of Stockholders, which was filed with the Securities and Exchange
Commission pursuant to Regulation 14A, not later than 120 days after the end of
the fiscal year, is incorporated by reference in Part III of this Form 10-K.
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<PAGE>
LEXMARK INTERNATIONAL GROUP, INC.
FORM 10-K
For the Year Ended December 31, 1998
Page of
Form 10-K
PART I
ITEM 1. BUSINESS..............................................................3
ITEM 2. PROPERTIES...........................................................14
ITEM 3. LEGAL PROCEEDINGS....................................................15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................16
ITEM 6. SELECTED FINANCIAL DATA.............................................16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................16
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK..........18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...........................................18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................19
ITEM 11. EXECUTIVE COMPENSATION..............................................21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....22
<PAGE>
Part I
Item 1. Business
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. 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.
General
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 dot matrix printers for printing single and multi-part forms
by business users. In addition, Lexmark develops, manufactures and markets a
broad line of other office imaging products which include supplies for IBM
branded printers, after-market supplies for original equipment manufacturer
("OEM") products, and typewriters and typewriter supplies that are sold under
the IBM trademark. The company operates in the office products industry segment.
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
printer cartridges is increasing at a higher rate than their associated printer
shipments. This is a relatively high margin, recurring business that management
expects to contribute to the stability of Lexmark's earnings over time.
Revenues derived from international sales, including exports from the United
States, make up slightly more than half of the company's consolidated revenues.
Lexmark's products are sold in over 150 countries in North and South America,
Europe, the Middle East, Africa, Asia, the Pacific Rim and the Caribbean. While
currency translation has significantly affected international revenues and cost
of revenues, it did not have a material impact on operating income through 1998.
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. 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. A summary of the company's revenues and long-lived
total assets by geographic area is found on page 40 of the company's 1998 Annual
Report to Stockholders.
Lexmark competes primarily in the markets for office desktop laser and color
inkjet printers--two of the fastest growing printer categories.
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 11-34 pages per minute
("ppm") are referred to herein as "office desktop" or "network" printers, while
lower-speed (1-10 ppm) laser printers and inkjet printers are referred to herein
as "personal" printers. With its Optra S laser printers, a majority of the
company's laser printers are office desktop printers,
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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 "Market Overview" and "Strategy".
Lexmark develops and owns most of the technology for its desktop laser printers
and consumable supplies, which differentiates the company from a number of its
major competitors, including Hewlett-Packard Company ("HP") which purchases its
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, automobile distribution and health care. 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.
The color inkjet printer market, the fastest growing segment of the personal
printer market, is expanding rapidly due to growth in personal computers at home
and in business and the development of easy-to-use color inkjet technology with
high quality color and black 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 40 million units in 1998 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
more than 15,000 in 1996, and remaining relatively constant during 1997 and
1998. The company's ability to increase or maintain its presence in the retail
marketplace with its branded products may be adversely affected as the company
becomes more successful in its sales and marketing efforts for OEM
opportunities. The company has made substantial capital investments in its
inkjet production capacity in 1995, 1996 and 1998 to address the growing demand
for its color inkjet printers.
The company is currently the exclusive source for new printer 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.
The company's other office imaging products include many mature products such as
supplies for IBM printers, typewriters and typewriter supplies and other impact
supplies that require little ongoing investment but provide a significant source
of cash flow. The company introduced after-market laser cartridges in May 1995
for the large installed base of a range of laser printers sold by other
manufacturers. Management believes that there is growth opportunity for the
after-market laser cartridge business. The company's strategy for other office
imaging products is to pursue the after-market OEM laser supplies opportunity
while at the same time managing the mature products for cash flow.
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Market Overview
In 1998, estimated industry-wide revenue for printer hardware in the 1-34 ppm
speed category, including network, personal and dot matrix, was approximately
$28 billion. Management believes, based on industry analysts' estimates, that
this market will in the aggregate continue to experience modest growth through
2002. 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 2-12 ppm $2,000-8,000 Better/Best (300-600 dpi) Office Plain
Mono Laser: 350-4,000 Best (1200 x 1200 dpi) Office Plain
Personal 1-10 ppm
Office Desktop/
Network 11-34 ppm
Color Inkjet 1-9 ppm 120-1,400 Better (300-1440 dpi) Home/Office Plain/Coated/
Specialty
Dot Matrix 2-8 ppm 100-1,800 Good (240-360 dpi) Office Plain/Multi Parts
</TABLE>
The laser printer market is categorized by print speeds. Office desktop or
network monochrome laser printers are those that print 11-34 ppm while low-speed
lasers typically print 1-10 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 product category is characterized by intense price
pressure and is vulnerable to replacement by low cost, color inkjet printers.
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* 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 herein 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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Based on the available market data, management believes that between 1991 and
1998 there was steady growth in overall shipments of network and personal laser
printers (1-34 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 1998 increased at a compound 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 also grew during the same
period but not as fast as the market growth within that category. Management
expects the market unit volume for low-speed laser printers to hold steady but
that the market for office desktop laser printers--which includes the company's
Optra S line of laser printers--will experience, on average, double-digit growth
through 2002.
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.
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. Lexmark's shipments of inkjet printers increased at or near
triple-digit rates annually from 1993 through 1996 and at double-digit rates for
1997 and 1998 which has enabled the company 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.
The market for dot 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.
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 photoconductors as well as
ink cartridges used in inkjet printers.
The principal supply product for laser printers is a laser cartridge, which
includes toner and a photoconductor. The principal supply product for inkjet
printers is an inkjet printer cartridge, which includes ink and a circuit
assembly. The principal supply product for Lexmark's dot 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.
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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In 1998, non-impact supplies were estimated to be an approximately $35 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
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 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 strategy is to
generate demand for Lexmark color inkjet printers by offering high-quality
products at competitive prices to retail, business 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 S 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 sales and marketing teams focus 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 sales and
marketing teams work with Lexmark's development teams to design features
requested by large account customers for specific functions. Lexmark has had
success in its large account sales and marketing teams' 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, Windows 98 and
Windows NT, 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
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product offerings in this market will also permit it to build brand recognition
in the retail channels. 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 more than 15,000 in 1996, and
remaining relatively constant during 1997 and 1998. The company's ability to
increase or maintain its presence in the retail marketplace with its branded
products may be adversely affected as the company becomes more successful in its
sales and marketing efforts for OEM opportunities.
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.
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 pursue the
after-market OEM supplies opportunity while managing its mature products for
cash flow. The company will continue to compete with other OEMs to provide
supplies for their installed bases of laser printers.
Products
The company's current product offerings consist primarily of the Lexmark Optra S
laser printer product line and Optra Color laser printers, the Optra E+ personal
laser printer, a wide range of inkjet printers, a family of network print
servers, typewriters and dot matrix printers. The company also designs,
manufactures and distributes a variety of printer cartridges for use in its
laser and inkjet printers as well as 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
-------- -------- ----------------
Office Desktop/Network
<S> <C> <C>
Mono Laser Optra S 1255/1625 $1,050-1,500
Optra S 1855 1,100-1,600
Optra S 2455 1,700-2,500
Optra Se 3455 2,100-3,000
Optra N 2,300-3,100
Optra K 1220 700-1,000
Color Laser Optra SC 1275 2,000-2,800
Optra Color 1200 6,000-8,000
Personal Laser Optra E+ 350-700
Color Inkjet Color Jetprinter 1000 & 1100 120-150
Color Jetprinter 3000 & 3200 150-250
Color Jetprinter 5700 249
Color Jetprinter 7200 & 5770 250-350
Optra Color 45 700-1,400
Dot Matrix 23XX 300-600
4227 1,300-1,800
</TABLE>
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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 S line, was introduced in 1997 and updated in
1998 and offers 10 products at various price ranges. The Optra S line includes
models at 12, 16, 18, 24 and 34 ppm and include 1,200 dpi printing, high
performance RISC processors and a wide range of paper handling options. The
Optra Color laser printers offer high quality business color printing at 12 ppm
black and 3 to 12 ppm color. Another standard feature of the 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 both internal and
external network print servers. These products provide a means to connect
virtually any printer to a local or wide area network. The company's current
product offerings are the MarkNet S series of internal print server cards and
the MarkNet Pro series of external print servers. Both are capable of
simultaneous support of multiple networking environments. The MarkNet Pro 3
provides direct network connection for multiple printers and can also connect an
external fax modem for printing incoming fax. The MarkNet Pro 1 provides direct
network connection for a single printer at a lower cost.
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
$120-$350 and offer sharp color printing, fast performance, compatibility with
leading software applications, and ease of installation and use. In 1998, the
company implemented a rebate program which offers $30-$70 rebates on inkjet
printers sold primarily through U.S. retailers. In addition, the company markets
color inkjet printers designed for business use ranging in price from $700 -
$1,400.
The company also markets five dot matrix printers in the $300-$1,800 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 printer cartridges for the printers it manufactures.
The company also offers a broad range of other office imaging products ,
including typewriters 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 also manufacturers and sells after-market laser cartridges
for laser printers sold by other manufacturers.
Marketing and Distribution
The company markets and distributes its laser printers primarily through its
well-established dealer network, which includes such dealers as Microage
Computers, Ameridata, Vanstar, Tech Data, Merisel, Ingram Micro, Computer 2000,
Northamber 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 sales and marketing teams whose mission is to
generate demand for Lexmark printers primarily among Fortune 1000 companies and
other large corporations globally. Sales and marketing teams have focused on
industry segments such as banking, retail/pharmacy, automobile distribution and
health care. Those teams, in conjunction with the company's development and
manufacturing teams, are able
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to design products to meet customer specifications for printing electronic
forms, media handling, duplex printing and other custom solutions. Almost all
customer orders solicited by these sales and marketing teams are filled through
dealers or resellers.
The company distributes its personal inkjet printers primarily through more than
15,000 retail outlets worldwide including office superstores such as Office Max
and Staples, computer superstores such as Computer City/Comp USA, consumer
electronics stores such as Circuit City and Best Buy, other large regional
chains and overseas stores such as Dixons, Carrefour, Harvey Norman and Vobis.
The company's ability to increase or maintain its presence in the retail
marketplace with its branded products may be adversely affected as the company
becomes more successful in its sales and marketing efforts for OEM
opportunities.
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 Asia 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. To the extent these efforts become successful, there may
be an adverse affect on the company's ability to increase or maintain its
presence in the retail marketplace with its branded products.
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 1998 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 through the company's internet web site and at office and computer
superstores, consumer electronics stores and mass merchandisers.
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 60%
to 65% market share. Several other large manufacturers such as Canon, Tektronix,
Xerox and IBM also compete in the laser printer market.
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 the company's 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.
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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 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 reductions, 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. The
company's ability to increase or maintain its presence in the retail marketplace
with its branded products may be adversely affected as the company becomes more
successful in its sales and marketing efforts for OEM opportunities.
Like certain of its competitors, the company is 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 participation in 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 printer 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. As the installed base of laser and inkjet printers
grows and ages, the company expects competitive refill and remanufacturing
activity to increase.
The market for other office imaging products is extremely competitive and the
impact segment of the supplies market is declining. Although the company has
rights to market certain IBM branded supplies until July 2002, 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 than it has been historically and intends to pursue 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 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 Turbon, GRC and NER.
Internationally, the company's primary competitors are Turbon, Armor and TBS in
Europe and Fullmark in the Far East.
11
<PAGE>
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, Canon and
Xerox.
The company believes the current number of competitors in the declining
worldwide office typewriter market is fewer than 10, down significantly from
over 40 in the mid-1980's. The two primary competitors in the U.S. market are
Nakajima 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 operates manufacturing control centers in Lexington, Kentucky and
Geneva Switzerland, and has manufacturing sites in Lexington, Boulder, Colorado,
Orleans, France and Sydney, Australia, all of which are ISO 9000 certified. The
company opened new manufacturing sites during 1996 in Rosyth, Scotland, which is
ISO 9000 certified, and Juarez, Mexico. The company plans to open a new
manufacturing site in the Philippines in late 1999. Most of the company's laser
and inkjet technologies are developed in Lexington and Boulder. 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 dot 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 new products 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
12
<PAGE>
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.
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 dot 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. It has even been able to achieve significant productivity
improvements 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 $159 million in 1998, $129 million in 1997 and $124 million in 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.
Large Customers
No customer has accounted for more than 10% of the company's consolidated
revenues since 1996.
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 December 31, 1998, the company had approximately 8,800 employees worldwide
of which 5,800 are located in the U.S. and the remaining 3,000 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.
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
13
<PAGE>
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 certain products upon certain "changes of control" of the company. 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
950 pending patent applications worldwide covering a range of subject matter.
The company has filed over 1,500 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.
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 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.
Item 2. Properties
The company's manufacturing and other material operations are conducted at the
facilities set forth below:
14
<PAGE>
<TABLE>
<CAPTION>
Location Square Feet Activities Status
-------- ----------- ---------- ------
<S> <C> <C> <C>
Lexington, KY 2,969,000 Headquarters, Manufacturing, Development,
Administrative, Distribution, Warehouse,
Marketing Owned
151,000 Warehouses, Development Leased(1)
Seymour, IN 588,000 Warehouse Leased(2)
Boulder, CO 332,000 Manufacturing, Development, Warehouse Leased(3)
Dietzenbach, Germany 35,000 Administrative, Warehouse Leased(4)
Juarez, Mexico 99,000 Manufacturing, Administrative Owned
Richmond Hill, Ontario 105,000 Administrative, Marketing, Warehouse Leased(5)
Orleans, France 452,000 Manufacturing, Administrative, Warehouse Owned
Ormes, France 192,000 Warehouse Leased(6)
Paris, France 48,000 Administrative, Marketing Leased(7)
Rosyth, Scotland 92,000 Manufacturing, Administrative Owned
Sydney, Australia 64,000 Manufacturing, Administrative, Warehouse,
Marketing Leased(8)
</TABLE>
- --------------------------------------------------
(1) Leases covering 151,000 square feet expire September 1999 and carry one-year
renewal options.
(2) Lease covering this property expires June 2005 and carries two five-year
renewal options.
(3) Lease covering 278,000 square feet expires May 2001 and carries three
five-year renewal options. Lease covering 54,000 square feet expires
December 1999 and carries a one-year renewal option.
(4) Leases covering this property expire September 2004 and there are no renewal
options.
(5) Lease covering this property expires August 2013 and carries two five-year
renewal options.
(6) Lease covering this property expires February 1999 and carries one
three-year renewal option.
(7) Leases covering this property expire December 2006 and there are no renewal
options.
(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.
Item 3. Legal Proceedings
The company is party to various litigation and other legal matters that are
being handled in the ordinary course of 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 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.
15
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II*
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Lexmark International Group's Class A common stock is traded on the New York
Stock Exchange under the symbol LXK. As of March 12, 1999, there were 1,247
holders of record of the Class A common stock and there were no holders of
record of the Class B common stock. Information regarding the market prices of
the company's Class A common stock appears on page 41 of the company's 1998
Annual Report to Stockholders.
The company has never declared or paid any cash dividends on the Class A common
stock and has no current plans to pay cash dividends on the Class A common
stock. The payment of any future cash dividends will be determined by the
company's 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 cash dividends on
the Class A common stock depends on the company's subsidiaries' ability to pay
cash dividends to the company.
Item 6. Selected Financial Data
Selected Financial Data for the company as set forth on page 52 of the company's
1998 Annual Report to Stockholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations as set forth on pages 44 through 51 of the company's 1998 Annual
Report to Stockholders is incorporated herein by reference.
Factors That May Affect Future Results and Information Concerning
Forward-Looking Statements
Statements contained in this Report which are not statements of historical fact
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
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 a number of factors
that could cause actual results to differ materially from estimates or
expectations reflected in such forward-looking statements, including, without
limitation, the factors set forth below:
~ The company has conducted a comprehensive review of its computer and
manufacturing equipment systems to identify the systems that could be affected
by the Year 2000 issue and has developed a comprehensive plan to address the
issues. However, the failure to timely discover and correct a material Year 2000
problem could result
16
<PAGE>
in an interruption in, or a failure of, normal business activities or
operations. Such failures could materially adversely affect the company's
operating results, liquidity and financial condition.
~ 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
increasingly competitive, especially with respect to pricing and the
introduction of new technologies and products offering improved features and
functionality. 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 are expected to
continue to do so. In particular, the inkjet printer market has experienced and
is expected to continue to experience significant printer price pressure from
the company's major competitors. Price reductions beyond expectations or the
inability to reduce costs, contain expenses or increase sales as currently
expected, as well as price protection measures, could result in lower
profitability and jeopardize the company's ability to grow or maintain its
market share.
~ The company's performance depends in part upon its ability to increase printer
and associated supplies manufacturing capacity in line with growing market
demands and to manage inventory levels to support the demands of new customers
as well as its established customer base. The company's future operating results
and its ability to effectively grow or maintain its market share may be
adversely affected if it is unable to address these issues on a timely basis.
~ The company markets and sells its products through several sales channels. The
company's future results may be adversely affected by any conflicts that might
arise between its various sales channels.
~ The life cycles of the company's products, as well as delays in product
development and manufacturing, variations in the cost of component parts, delays
in customer purchases of existing products in anticipation of new product
introductions by the company or its competitors and market acceptance of new
products and programs, may cause a buildup 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. The competitive
pressure to develop technology and products also could cause significant changes
in the level of the company's operating expenses.
~ Revenues derived from international sales, including exports from the United
States, make up over half of the company's revenues. 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, and the
company believes that international operations in new geographic markets will be
less profitable than operations in the U.S. and European markets as a result, in
part, of the higher investment levels for marketing, selling and distribution
required to enter these markets.
~ 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 company from obtaining
technology of others and could otherwise adversely affect its operating results,
cash flows, financial position or business, as could expenses incurred by the
company in enforcing its intellectual property rights against others.
~ Factors unrelated to the company's operating performance, including economic
and business conditions, both national and international; the potential impact
of the Year 2000 conversion on customers or suppliers; the loss of
17
<PAGE>
significant customers or suppliers; the outcome of pending and future litigation
or governmental proceedings; changes in and execution of the company's business
strategy; and the ability to retain and attract key personnel, could also
adversely affect the company's operating results. In addition, trading activity
in the company's common stock, particularly the trading of large blocks and
interday trading in the company's common stock, may affect the company's common
stock price.
While the company reassesses material trends and uncertainties affecting the
company's financial condition and results of operations in connection with its
preparation of its quarterly and annual reports, the company does not intend to
review or revise, in light of future events, any particular forward-looking
statement contained in this Report.
The information referred to above should be considered by investors when
reviewing any forward-looking statements contained in this Report, 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. The
important factors that could affect forward-looking statements are subject to
change, and the company does not intend to update the foregoing list of certain
important factors. 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.
Item 7a. Qualitative and Quantitative Disclosures About Market Risk
Qualitative and quantitative disclosures about market risk as set forth on page
51 of the company's 1998 Annual Report to Stockholders are incorporated herein
by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated Financial Statements of the company together with the report
thereon by PricewaterhouseCoopers LLP, independent accountants, as set forth on
pages 25 through 43 of the company's 1998 Annual Report to Stockholders are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
*Except as specifically incorporated by referenced herein, the company's 1998
Annual Report to Stockholders is not deemed to be filed as part of this Form
10-K.
18
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
Information required by Part III, Item 10 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders, which was filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later that 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K, except that the information with respect
to executive officers of the Registrant is presented below.
The executive officers of the company and their respective ages, positions and
years of service with the company are set forth below.
<TABLE>
<CAPTION>
Years With
Name of Individual Age Position The Company
- ------------------ --- -------- -----------
<S> <C> <C>
Marvin L. Mann 65 Chairman of the Board 8
Paul J. Curlander 46 President and Chief Executive Officer 8
Gary E. Morin 50 Vice President and Chief Financial Officer 3
Kathleen J. Affeldt 50 Vice President, Human Resources 8
Daniel P. Bork 47 Director of Taxes 2
Kurt M. Braun 38 Treasurer 7
Vincent J. Cole, Esq. 42 Vice President, General Counsel and Secretary 8
David L. Goodnight 46 Vice President and Corporate Controller 5
Clifford D. Gookin 41 Vice President, Corporate Strategy and Development 3
Thomas B. Lamb 41 Executive Vice President 3
Bernard V. Masson 51 Vice President 3
John C. Mitchell 51 Vice President 2
Paul A. Rooke 40 Vice President 8
Alfred A. Traversi 46 Executive Vice President 2
</TABLE>
Mr. Mann has been Chairman of the Board of the company since March 1991. From
March 1991 through May 1998 he has also served as Chief Executive Officer and
from March 1991 through February 1997 he also served as President of the
company. Prior to such time, Mr. Mann held numerous positions with IBM. During
his IBM career, Mr. Mann held a number of executive positions including
President of the Information Products Division, President of the Service Sector
division and President and Chief Executive Officer of the Satellite Business
Systems.
Dr. Curlander has been a Director of the company since February 1997. Since May
1998, Dr. Curlander has been President and Chief Executive Officer of the
company. From February 1997 to May 1998, Dr. Curlander was President and Chief
Operating Officer of the company, and from January 1995 to February 1997 he was
Executive Vice President, Operations of Lexmark International. In 1993, Dr.
Curlander became a Vice President of Lexmark International, and from 1991 to
1993 he was General Manager of Lexmark International's printer business.
19
<PAGE>
Mr. Morin has been Vice President and Chief Financial Officer of the company
since January 1996. Prior to joining the company, Mr. Morin held various
executive and senior management positions with Huffy Corporation, including most
recently, the position of Executive Vice President and Chief Operating Officer.
Ms. Affeldt has been Vice President of Human Resources since July 1996. Prior to
such time and since 1991, Ms. Affeldt served as Director of Human Resources.
Prior to 1991, Ms. Affeldt held various human resource management positions with
IBM.
Mr. Bork has been Director of Taxes of the company since he joined the company
in October 1996. Prior to joining the company, Mr. Bork was Director of Taxes
with Cray Research, Inc. Prior to his tenure at Cray Research, Inc., Mr. Bork
was with the accounting firm of Coopers & Lybrand, most recently serving as
Director of International Tax in Coopers & Lybrand's Minneapolis office.
Mr. Braun has been Treasurer of the company since August 1998. Mr. Braun served
as Director, Investor Relations from October 1995 until his appointment as
Treasurer, and as Manager of Currency Exposure from the time he joined the
company in 1992 up to his appointment as Director, Investor Relations. Prior to
joining the company, Mr. Braun held various financial positions with Cummins
Engine Co.
Mr. Cole has been Vice President and General Counsel of the company since July
1996 and Corporate Secretary since February 1996. Prior to such time, commencing
in March 1991, Mr. Cole served as Corporate Counsel and then Assistant General
Counsel. Prior to joining the company, Mr. Cole was associated with the law firm
of Cahill Gordon & Reindel.
Mr. Goodnight has been Vice President and Corporate Controller of the company
since May 1998 and served as Controller since February 1997. Prior to such time
and since January 1994, when he joined the company, Mr. Goodnight served as CFO
for the company's Business Printer Division. Prior to joining the company, Mr.
Goodnight held various controller positions with Calcomp, Inc.
Mr. Gookin has been Vice President, Corporate Strategy and Development of
Lexmark International since November 1995. Prior to joining the company, Mr.
Gookin served as managing director of the Mergers and Acquisition Group at
Rauscher Pierce Refsnes, Inc. Prior to 1991, Mr. Gookin held positions in the
Investment Banking Department of CS First Boston Corporation.
Mr. Lamb has been Executive Vice President of the company since May 1998. Prior
to such time, he was Vice President and President of the Imaging Solutions
Division of Lexmark International since August 1997. He served as Vice President
and General Manager of the Imaging Solutions Division from January 1996 up to
his appointment as division president. Prior to joining the company, Mr. Lamb
held various senior management positions with General Chemical Corporation,
including most recently, the position of Vice President and General Manager of
the Industrial Chemicals Division.
Mr. Masson has been Vice President and President of the Consumer Printer
Division of Lexmark International since August 1997. He served as Vice President
and General Manager of the Consumer Printer Division from December 1995 up to
his appointment as division president. Prior to joining the company, Mr. Masson
was Vice President and General Manager of DH Technology's DHPRINT unit, a
publicly-held manufacturer of specialty printers, primarily for the financial,
retail and gaming markets worldwide. Prior to 1992, Mr. Masson served as Senior
Vice President and General Manager - Plotter Division of Calcomp, Inc.
Mr. Mitchell has been Vice President and President of the Business Printer
Division of Lexmark International since August 1997. He served as Vice President
and General Manager of the Business Printer Division from the
20
<PAGE>
time he joined the company in January 1997 up to his appointment as division
president. Prior to joining the company, Mr. Mitchell held various executive and
senior management positions with Nabisco, including most recently, the position
of President - Planters and Lifesavers Companies.
Mr. Rooke has been Vice President and President of the Imaging Solutions
Division of Lexmark International since June 1998. He served as Vice President,
Worldwide Marketing for the Consumer Printer Division from September 1996 up to
his appointment as division president. Prior to such time, he held various
positions within Lexmark's printer divisions and became Vice President and
General Manager of Dot Matrix/Entry Laser Printers in 1994. Prior to joining the
company, Mr. Rooke held various positions with IBM.
Mr. Traversi has been Executive Vice President of the company since May 1998.
Prior to such time, he was President of Customer Services since October 1997. He
served as Vice President of Information Technology and Operations of Lexmark
International from the time he joined the company in October 1996 up to his
appointment as President of Customer Services. Prior to joining the company, Mr.
Traversi was Vice President - Operations Services with Taco Bell Corporation.
Prior to 1994, Mr. Traversi held various senior management positions with
Digital Equipment Corporation.
Item 11. Executive Compensation
Information required by Part III, Item 11 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders, which was filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later that 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by Part III, Item 12 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders, which was filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later that 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.
Item 13. Certain Relationships and Related Transactions
Information required by Part III, Item 13 of this Form 10-K is incorporated by
reference from the company's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders, which was filed with the Securities and Exchange
Commission, pursuant to Regulation 14A, not later that 120 days after the end of
the fiscal year, and of which information is hereby incorporated by reference
in, and made part of, this Form 10-K.
21
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1 Financial Statements: Pages In Annual Report
To Stockholders*
----------------------
Consolidated Statements of Earnings 25
Consolidated Statements of Financial Position 26
Consolidated Statements of Cash Flows 27
Consolidated Statements of Stockholders' Equity 28-29
Notes to Consolidated Financial Statements 30-42
Report of Independent Accountants 43
* These pages of the Company's 1998 Annual Report to Stockholders are
incorporated herein by reference.
(a)2 Financial Statement Schedules: Pages In Form 10-K
------------------
Report of Independent Accountants 23
For the years ended December 31, 1998, 1997, and 1996:
Schedule II - Valuation and Qualifying Accounts 24
All other schedules are omitted as the required information is inapplicable or
the information is presented in the Consolidated Financial Statements or related
notes.
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the board of directors of Lexmark International Group, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 11, 1999 appearing on page 43 of the 1998 Annual Report to
Stockholders of Lexmark International Group, Inc. and subsidiaries (which report
and consolidated financial statements are incorporated by reference in this
Annual Report on Form 10-K) also included an audit of the financial statement
schedule listed in item 14(a)(2) of this Form 10-K. In our opinion, the
financial statement schedule on page 24 of this Form 10-K presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Lexington, Kentucky
February 11, 1999
23
<PAGE>
LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1997 and 1998
(Dollars in Millions)
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
Additions
----------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and other End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- ---------- ---------- ----------
1996:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $27.1 $ 3.0 $ - $(12.1) $18.0
Inventory reserves 45.0 30.0 - (41.4) 33.6
Deferred tax assets valuation
allowance 77.2 0.8 - (45.7) 32.3
1997:
Allowance for doubtful accounts $18.0 $ 5.1 $ - $ (3.7) $19.4
Inventory reserves 33.6 26.5 - (20.5) 39.6
Deferred tax assets valuation
allowance 32.3 3.8 - (15.3) 20.8
1998
Allowance for doubtful accounts $19.4 $11.0 $ - $ (6.2) $24.2
Inventory reserves 39.6 35.1 - (36.5) 38.2
Deferred tax assets valuation
allowance 20.8 0.2 - (2.6) 18.4
</TABLE>
24
<PAGE>
Item 14(a)(3). Exhibits
Exhibits for the company are listed in the Index to Exhibits beginning on page
E-1.
(b) Reports on Form 8-K
None.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Lexington,
State of Kentucky, on March 23, 1999.
LEXMARK INTERNATIONAL GROUP, INC.
By /s/Paul J. Curlander
------------------------------
Name: Paul J. Curlander
Title President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the following capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Paul J. Curlander President and March 23, 1999
- ---------------------------- Chief Executive
Paul J. Curlander Officer (Principal
Executive Officer)
/s/ Marvin L. Mann Chairman of the Board March 23, 1999
- ----------------------------
Marvin L. Mann
/s/ Gary E. Morin Vice President/Chief March 23, 1999
- ---------------------------- Financial Officer
Gary E. Morin (Principal Financial
Officer)
/s/ David L. Goodnight Vice President and March 23, 1999
- ---------------------------- Corporate Controller
David L. Goodnight (Principal Accounting
Officer)
/s/ B. Charles Ames Director March 23, 1999
- ----------------------------
B. Charles Ames
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Frank T. Cary Director March 23, 1999
- ----------------------------
Frank T. Cary
/s/ William R. Fields Director March 23, 1999
- ----------------------------
William R. Fields
/s/ Ralph E. Gomory Director March 23, 1999
- ----------------------------
Ralph E. Gomory
/s/ Stephen R. Hardis Director March 23, 1999
- ----------------------------
Stephen R. Hardis
/s/ James F. Hardymon Director March 23, 1999
- ----------------------------
James F. Hardymon
/s/ Robert Holland, Jr. Director March 23, 1999
- ----------------------------
Robert Holland, Jr.
/s/ Michael J. Maples Director March 23, 1999
- ----------------------------
Michael J. Maples
/s/ Martin D. Walker Director March 23, 1999
- ----------------------------
Martin D. Walker
<PAGE>
Index to Exhibits
Number Description of Exhibits
- ------ -----------------------
3.1 Third Restated Certificate of Incorporation of Lexmark
International Group, Inc. (the "company"). (1)
3.2 Company By-Laws, as Amended and Restated as of October 26,
1995, and Amended by Amendment No. 1 dated as of February 13,
1997. (2)
4.1 Form of Lexmark International, Inc. ("International") 6.75%
Senior Notes due 2008. (3)
4.2 Indenture dated as of May 11, 1998 among International, as
Issuer, and the company, as Guarantor, to the Bank of New
York, as Trustee. (3)
4.3 Amended and Restated Rights Agreement, dated as of February
11, 1999, between the company and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent. (4)
4.4 Specimen of Class A common stock certificate. (1)
10.1 Supplies Agreement, dated August 14, 1995, between IBM and
International. (5)*
10.1A Category I Supplies Trademark Agreement, dated as of August
16, 1995 and effective as of March 27, 1996, between IBM and
International. (1)
10.2 Agreement, dated as of August 1, 1990, between IBM and
International, and Amendment thereto. (5)*
10.3 Agreement, dated as of May 31, 1990, between International
and Canon Inc., and Amendment thereto. (5)*
10.4 Agreement, dated as of March 26, 1991, between International
and Hewlett-Packard Company. (5)*
10.5 Patent Cross-License Agreement, effective October 1, 1996,
between Hewlett-Packard Company and International. (6)*
10.6 Amended and Restated Lease Agreement, dated as of January 1,
1991, between IBM and International, and First Amendment
thereto. (7)
10.7 Receivables Purchase Agreement, dated as of January 31, 1994,
among International, Delaware Funding Corporation and J.P.
Morgan Delaware, as Administrative Agent. (7)
10.8 Amended and Restated Purchase Agreement, dated as of March 31,
1998, between International, as Originator, and Lexmark
Receivables Corporation ("LRC"), as Buyer. (8)
10.9 Amendment to Amended and Restated Purchase Agreement, dated
as of November 30, 1998, between International, as Originator,
and LRC, as Buyer.
E-1
<PAGE>
10.10 Amended and Restated Receivables Purchase Agreement, dated as
of March 31, 1998, among International, as Servicer, LRC, as
Seller, Delaware Funding Corporation, as Buyer, and Morgan
Guaranty Trust Company of New York, as Administrative Agent.
(8)
10.11 Amendment to Amended and Restated Receivables Purchase
Agreement, dated as of November 30, 1998, among International,
as Servicer, LRC, as Seller, Delaware Funding Corporation, as
Buyer, and Morgan Guaranty Trust Company of New York, as
Administrative Agent.
10.12 Lexmark International Group, Inc. Stock Option Plan for
Executives and Senior Officers. (7) +
10.13 First Amendment to the Stock Option Plan for Executives and
Senior Officers, dated as of October 31, 1994. (1) +
10.14 Second Amendment to the Stock Option Plan for Executive and
Senior Officers, dated as of September 13, 1995. (1) +
10.15 Form of Management Stock Option Agreement, among the company,
International and Named Executive Officers (including a
schedule of Named Executive Officers, grant dates and number
of shares granted pursuant to options). (1) +
10.16 First Amendment to Management Stock Option Agreement, dated as
of October 31, 1994, between the company and Marvin L. Mann.
(1) +
10.17 Lexmark International Group, Inc. Stock Incentive Plan,
Amended and Restated Effective April 30, 1998. (8) +
10.18 Form of Non-Qualified Stock Option Agreement, pursuant to the
company's Stock Incentive Plan. (3) +
10.19 Lexmark International Group, Inc. Nonemployee Director Stock
Plan, Amended and Restated, Effective April 30, 1998. (3) +
10.20 Form of Non-Qualified Stock Option Agreement, pursuant to the
company's Nonemployee Director Stock Plan, Amended and
Restated effective April 30, 1998. (9) +
10.21 Employment Agreement, dated as of March 18, 1997, between
Marvin L. Mann and International. (10) +
10.22 Employment Agreement, dated as of March 18, 1997, between
Paul J. Curlander and International. (10) +
10.23 Form of Change in Control Agreement entered into as of April
30, 1998 among the company, International and certain officers
thereof. (9) +
10.24 Form of Indemnification Agreement entered into as of April 30,
1998 among the company, International and certain officers
thereof. (9) +
10.25 Employment Agreement, dated as of April 30, 1998, between
John C. Mitchell and International. +
E-2
<PAGE>
10.26 Employment Agreement, dated as of April 30, 1998, between
Thomas B. Lamb and International. +
10.27 Employment Agreement, dated as of April 30, 1998, between
Alfred A. Traversi and International. +
10.28 Employment Agreement, dated as of April 30, 1998, between
Gary E. Morin and International. (9) +
10.29 Credit Agreement, dated as of January 27, 1998, among the
company, as Parent Guarantor, International, as Borrower, the
Lenders party thereto, Fleet National Bank, as Documentation
Agent, Morgan Guaranty Trust Company of New York, as
Syndication Agent, and The Chase Manhattan Bank, as
Administrative Agent.
(10)
13 Sections of the company's 1998 Annual Report to Stockholders
incorporated by reference in this report.
21 Subsidiaries of the company as of December 31, 1999.
23 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney.
27 Financial Data Schedule.
- ----------
*Confidential treatment previously granted by the Securities and Exchange
Commission.
+ Indicates management contract or compensatory plan, contract or arrangement.
(1) Incorporated by reference to company's Form S-1 Registration
Statement, Amendment No. 1 (Registration No. 33-97218) filed
with the Commission on October 27, 1995.
(2) Incorporated by reference to the company's Annual Report on
Form 10-K for the fiscal year end December 31, 1996
(Commission File No. 1-14050).
(3) Incorporated by reference to the company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (Commission File
No. 1-14050).
(4) Incorporated by reference to the company's Amended
Registration Statement on Form 8-A filed with the
Commission on March 12, 1999 (Commission File No. 1-14050).
(5) Incorporated by reference to company's Form S-1 Registration
Statement, Amendment No. 2 (Registration No. 33-97218) filed
with the Commission on November 13, 1995.
(6) Incorporated by reference to company's Quarterly Report on
Form 10-Q/A for the quarter ended September 30, 1996
(Commission File No. 1-14050).
(7) Incorporated by reference to company's Form S-1 Registration
Statement, (Registration No. 33-97218)filed with the
Commission on September 22, 1995.
(8) Incorporated by reference to the company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 (Commission
File No. 1-14050).
(9) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998 (Commission
File No. 1-14050).
E-3
<PAGE>
(10) Incorporated by reference to the company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997
(Commission File No. 1-14050).
E-4
<PAGE>
EXHIBIT 10.9
Amendment to Amended and
Restated Purchase Agreement
<PAGE>
EXECUTION COPY
AMENDMENT
TO
AMENDED AND RESTATED
PURCHASE AGREEMENT
THIS AMENDMENT dated as of November 30, 1998 (the "Amendment")
---------
to the Amended and Restated Purchase Agreement, dated as of March 31, 1998 (the
"Agreement") is between LEXMARK INTERNATIONAL, INC., as originator (the
---------
"Originator") and LEXMARK RECEIVABLES CORPORATION, as buyer (the "Buyer").
---------- -----
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned to such terms in the Agreement.
RECITALS
WHEREAS, in accordance with the provisions of Section 7.6 of
the Agreement, the Originator and the Buyer wish to amend the Agreement in
certain respects as provided below, and the Administrative Agent is willing to
consent to such amendments upon the terms provided for herein;
NOW THEREFORE, in consideration of the premises and the
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Amendment to Schedule A to Exhibit K of the
-------------------------------------------------
Agreement. In connection with the amendments provided for by this Amendment, the
- ---------
calculation of Net Purchase Price of Receivables as set forth on Schedule A
hereto shall supersede the Schedule A to Exhibit K that is part of the
Agreement, and from and after the date of this Amendment all references to such
Schedule A to Exhibit K shall refer to the Schedule A attached to this
Amendment.
SECTION 2. Agreement in Full Force and Effect as Amended.
-------------------------------------------------
Except as specifically amended or waived hereby, all of the terms and conditions
of the Agreement shall remain in full force and effect. All references to the
Agreement in any other document or instrument shall be deemed to mean such
Agreement as amended by this Amendment. This Amendment shall not constitute a
novation of the Agreement, but shall constitute an amendment thereof. The
parties hereto agree to be bound by the terms and obligations of the Agreement,
as amended by this Amendment, as though the terms and obligations of the
Agreement were set forth herein.
SECTION 3. Effectiveness. The amendments provided for by this
-------------
Amendment shall become effective as of the date hereof, upon receipt by the
Administrative Agent of (i) counterparts of this Amendment, duly executed by
each of the parties hereto, together with the consent of the Administrative
Agent and (ii) notice that the conditions to effectiveness of the Amended and
Restated Receivables Purchase Agreement, as amended, have been satisfied.
<PAGE>
SECTION 4. Counterparts. This Amendment may be executed in any
------------
number of counterparts and by separate parties hereto on separate counterparts,
each of which when executed shall be deemed an original, but all such
counterparts taken together shall constitute one and the same instrument.
SECTION 5. Governing Law. THIS AMENDMENT SHALL BE
-------------
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to the Agreement to be duly executed by their respective authorized
officers as of the day and year first above written.
LEXMARK RECEIVABLES CORPORATION
By: /s/ Gary E. Morin
--------------------------------
Authorized Signatory
President
---------------------------------
Title
LEXMARK INTERNATIONAL, INC.
By: /s/ Gary E. Morin
--------------------------------
Authorized Signatory
Vice President and Chief Financial
Officer
---------------------------------
Title
Acknowledged and consented to:
November 30, 1998
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Administrative Agent
By: /s/ Robert S. Jones
-----------------------------
Authorized Signatory
Vice President
-----------------------------
Title
<PAGE>
SCHEDULE A
NET PURCHASE PRICE OF RECEIVABLES
A. Outstanding Balance of new Receivables
B. A x (12-month average Charge-off Ratio x 45 x 1.75)/360
C. A - B
D. (C x (Yield Rate x 45 x 1.75))/360
Yield Rate= LIBOR + 1.00%
E. C - D
F. (A x 1% x 45)/360
G. Purchase Price of new Receivables (E - F)
<PAGE>
EXHIBIT 10.11
Amendment to Amended and
Restated Receivables Purchase Agreement
<PAGE>
EXECUTION COPY
AMENDMENT
TO
AMENDED AND RESTATED
RECEIVABLES PURCHASE AGREEMENT
THIS AMENDMENT dated as of November 30, 1998 (the "Amendment")
---------
to the Amended and Restated Receivables Purchase Agreement, dated as of March
31, 1998 (the "Agreement") among LEXMARK INTERNATIONAL, INC., as servicer (the
---------
"Servicer"), LEXMARK RECEIVABLES CORPORATION, as seller (the "Seller"), DELAWARE
--------
FUNDING CORPORATION, as buyer (the "Buyer") and MORGAN GUARANTY TRUST COMPANY OF
-----
NEW YORK, as administrative agent (the "Administrative Agent"), is by and among
---------------------
the parties listed above. Capitalized terms used herein and not otherwise
defined shall have the meanings assigned to such terms in the Agreement.
RECITALS
WHEREAS, the Administrative Agent, the Servicer, the Seller
and the Buyer wish to amend the Agreement in certain respects as provided below,
and the APA Purchasers are willing to consent to such amendments upon the terms
provided for herein;
WHEREAS, pursuant to Section 9.06 of the Agreement, the
Administrative Agent, the Servicer, the Seller and the Buyer may, from time to
time, enter into agreements amending, modifying or supplementing the Agreement;
NOW THEREFORE, in consideration of the premises and the
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Amendments to Section 1.01 of the Agreement.
------------------------------------------------
Section 1.01 of the Agreement is hereby amended by deleting the definitions of
"Concentration Factor," "Dilution Ratio," "Expiration Date" and "Maximum Net
--------------------- --------------- --------------- -----------
Investment" in their entirety and replacing them, respectively, with the
- ----------
following:
"Concentration Factor" shall mean (i) for any Group A Obligor
---------------------
and its Subsidiaries, 10% of an amount equal to the Outstanding Balances of all
Eligible Receivables, (ii) for any Group B Obligor and its Subsidiaries, 3.75%
of an amount equal to the Outstanding Balances of all Eligible Receivables,
(iii) for any Group C Obligor and its Subsidiaries, 2.75% of an amount equal to
the Outstanding Balances of all Eligible Receivables, (iv) for any Group D
Obligor and its Subsidiaries, 2.5% of an amount equal to the Outstanding
Balances of all Eligible Receivables and (v) for any Obligor and its
Subsidiaries and Affiliates listed on Exhibit F hereto of an amount equal to the
Outstanding Balances of all Eligible Receivables; provided, however, that if
--------
Compaq Computer Corporation ceases to be a Special Obligor as provided on
Exhibit F hereto, then the Concentration Factors specified in (ii) and (iii)
<PAGE>
above shall be 5.0% and 3.33%, respectively.
"Dilution Ratio" shall mean, for any month, the ratio
----------------
(expressed as a percentage) of (i) the aggregate Dilution Factors of all
Receivables arising during such calendar month to (ii) the aggregate amount
invoiced with respect to all Receivables arising as of the last day of the third
month preceding such month.
"Expiration Date" shall mean the earliest of (i) November 29,
----------------
1999 as such date may be extended in the sole discretion of the Buyer pursuant
to the terms hereof, (ii) the date of termination of the commitment of the
Program LOC Bank under the Program Letter of Credit Reimbursement Agreement,
(iii) the date of termination of the commitment of the APA Lending Banks under
the APA Credit Agreement, (iv) the date of termination of the commitment of any
APA Purchaser under the Asset Purchase Agreement (unless other APA Purchaser(s)
or a replacement APA Purchaser accepts such terminating APA Purchaser's
commitment or unless the Maximum Purchase Commitment and the Net Investment (if
necessary) are reduced in an amount equal to the terminated commitment), and (v)
the day on which the Buyer delivers a Notice of Termination pursuant to Section
7.02 hereof or a Termination Event described in Section 7.01(j) hereof occurs.
"Maximum Net Investment" shall mean $125,000,000, unless
------------------------
otherwise increased with the consent of the Buyer or reduced as provided for in
Section 2.11(a) hereof; provided, however, that at all times on and after the
Expiration Date, the "Maximum Net Investment" shall mean the Net Investment.
SECTION 2. Amendments to Section 7.01(g) of the Agreement.
-------------------------------------------------
Section 7.01(g) of the Agreement is hereby deleted in its entirety and replaced
with the following representation:
(g) the Default Ratio, computed for the immediately preceding
month, shall exceed 6.0%; or the average of the Default Ratios for each of the
three immediately preceding months, shall exceed 5.0%; or the Charge-Off Ratio,
computed for the immediately preceding month, shall exceed 1.5%; or the average
of the Charge-Off Ratios, computed for each of the three immediately preceding
months, shall exceed 0.67%; or the Dilution Ratio, computed for the immediately
preceding month, shall exceed 20.0%; or the average of the Dilution Ratios,
computed for each of the three immediately preceding months shall exceed 15.0%;
or the Delinquency Ratio, computed for the immediately preceding month, shall
exceed 7.5%; or the average of the Delinquency Ratios, computed for each of the
three immediately preceding months shall exceed 5.0%; or
SECTION 3. Amendments to Section 5.03 of the Agreement.
------------------------------------------------
Section 5.03 of the Agreement is hereby amended by adding the following
additional covenant:
(k) Year 2000 Compliance. The Servicer has initiated a review
--------------------
and assessment of its internal computer applications in the
United States which are necessary for the origination,
collection, management or servicing of the Receivables (the
"Receivables System") in connection with making a
---------------------
determination about whether the Receivables System will be
able to perform properly date-sensitive functions for dates
before and after January 1, 2000 (that is, be "Year 2000
----------
Compliant"). The Servicer is taking action to ensure that the
---------
Receivables Systems will be Year 2000 Compliant.
2
<PAGE>
SECTION 4. Amendments to Section 6.01 of the Agreement.
------------------------------------------- Section
6.01 of the Agreement is hereby amended by adding the following:
(v) Year 2000 Covenant. The Servicer shall take all necessary
------------------
and reasonable actions to ensure that the Receivable System is
Year 2000 Compliant. On or before March 31, 1999, the Servicer
will promptly notify the Administrative Agent in the event
that the Servicer discovers any internal computer application
of the Servicer and its consolidated U.S. Subsidiaries that is
necessary for the origination, collection, management or
servicing of the Receivables will not be Year 2000 Compliant
on or before December 31, 1999. The Servicer will deliver
simultaneously with any quarterly or annual financial
statement or reports to be delivered under this Agreement, a
letter signed by an appropriate officer, to the effect that to
such officer's knowledge, after due inquiry, no material
events have occurred or problems exist with respect to the
Receivables System which would prevent or delay the Servicer's
plan to become Year 2000 Compliant or if any such material
events have occurred or problems exist.
SECTION 5. Amendment to Exhibit F of the Agreement. In
--------------------------------------------
connection with the amendments provided for by this Amendment, the attached List
of Special Obligors set forth on Exhibit F hereto shall supersede the Exhibit F
that is part of the Agreement, and from and after the date of this Amendment all
references to such Exhibit F shall refer to the Exhibit F attached to this
Amendment.
SECTION 6. Agreement in Full Force and Effect as Amended.
-------------------------------------------------
Except as specifically amended or waived hereby, all of the terms and conditions
of the Agreement shall remain in full force and effect. All references to the
Agreement in any other document or instrument shall be deemed to mean such
Agreement as amended by this Amendment. This Amendment shall not constitute a
novation of the Agreement, but shall constitute an amendment thereof. The
parties hereto agree to be bound by the terms and obligations of the Agreement,
as amended by this Amendment, as though the terms and obligations of the
Agreement were set forth herein.
SECTION 7. Effectiveness. The amendments provided for by this
-------------
Amendment shall become effective as of the date hereof, upon receipt by the
Administrative Agent of (i) counterparts of this Amendment, duly executed by
each of the parties hereto, (ii) an officer's certificate for each of the Seller
and the Servicer dated the date hereof in form and substance satisfactory to the
Administrative Agent, (iii) an opinion of counsel to the Seller and Servicer in
form and substance satisfactory to the Administrative Agent and (iv)
confirmation from S&P and Moody's that such Amendment would not result in a
downgrade of the rating of the Commercial Paper.
SECTION 8. Counterparts. This Amendment may be executed in any
------------
number of counterparts and by separate parties hereto on separate counterparts,
each of which when executed shall be deemed an original, but all such
counterparts taken together shall constitute one and the same instrument.
SECTION 9. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY
------------- AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to the Agreement to be duly executed by their respective authorized
officers as of the day and year first above written.
DELAWARE FUNDING CORPORATION
By: Morgan Guaranty Trust Company of New
York, as attorney-in-fact for
Delaware Funding Corporation
By: /s/ Robert S. Jones
-------------------------
Authorized Signatory
Vice President
-------------------------
Title:
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, as Administrative Agent
By: /s/ Robert S. Jones
-------------------------
Authorized Signatory
Vice President
-------------------------
Title:
LEXMARK RECEIVABLES CORPORATION
By: /s/ Gary E. Morin
-------------------------
Name: Gary E. Morin
Title: President
LEXMARK INTERNATIONAL, INC.
By: /s/ Gary E. Morin
-------------------------
Name: Gary E. Morin
Title: Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT F
to
Amended and Restated
Receivables Purchase Agreement
List of Special Obligors
Obligor Concentration Factor
------- --------------------
All Government Obligors, in 3%
the aggregate
Compaq Computer Corporation1 6.25%
- --------
1 If its unsecured short-term debt rating either (i) ceases to be rated "A-2" by
S&P or "P-2" by Moody's or (ii) is withdrawn by S&P or Moody's, Compaq Computer
Corporation shall no longer be a Special Obligor for purposes of this Agreement.
<PAGE>
EXHIBIT 10.25
Employment Agreement
John C. Mitchell
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT, dated as of April 30, 1998, among Lexmark
International, Inc., a Delaware corporation (the "Employer"), Lexmark
International Group, Inc., a Delaware corporation ("Group"), and John C.
Mitchell (the "Employee").
W I T N E S S E T H:
--------------------
WHEREAS, Employer, Group and Employee desire to enter into an
employment agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the parties hereto hereby agree as follows:
1. Term; Position and Responsibilities.
-----------------------------------
(a) Term of Employment. Unless the Employee's employment shall sooner
------------------
terminate pursuant to Section 6, the Employer shall employ the Employee for a
term commencing on April 30, 1998 and ending on February 28, 2001 (the "Initial
Term"), and the Employee's employment shall continue thereafter at will.
(b) Position and Responsibilities. The Employee will serve as Vice
-------------------------------
President and President Business Printer Division and in such other executive
capacity or capacities as may be determined from time to time by or under the
authority of the Board of Directors of the Employer ("Employer's Board"), and
the Employee will devote all of his skill, knowledge and working time (except
for reasonable vacation time and absence for sickness or similar disability) to
the conscientious performance of his duties. The Employee represents that he is
entering into this Agreement voluntarily and that his employment hereunder and
compliance by him with the terms and conditions of this Agreement will not
conflict with or result in the breach of any agreement to which he is a party or
by which he may be bound.
2. Base Salary. As compensation for the services to be performed by the
-----------
Employee hereunder, the Employer will pay the Employee an annual base salary of
$285,000 ($300,000 effective August 3, 1998) during the term of his employment
hereunder. The Employer will review the Employee's base salary from time to time
during the period of his employment hereunder and, in the discretion of the
Employer, may increase such base salary from time to time based upon the
performance of the Employee, the financial condition of the Employer, prevailing
industry salary scales and such other factors as the Employer shall consider
relevant. (The annual base salary payable to the Employee under this Section 2,
as the same may be increased from time to time, shall hereinafter be referred to
as the "Base Salary".) The Base Salary payable under this Section 2 shall be
reduced to the extent that the Employee elects to defer such Base Salary under
the terms of any deferred compensation or savings plan maintained or established
by the Employer or Group, provided that any such reduction of the Base Salary
--------
1
<PAGE>
shall not be taken into account for purposes of calculating the Base Amount (as
defined in Section 3). The Employer shall pay the Employee the Base Salary in
biweekly installments, or in such other installments as may be mutually agreed
upon by the Employer and the Employee.
3. Short-term Incentive Compensation. The Employee shall receive an
-----------------------------------
annual incentive bonus award (the "Annual Bonus") for each calendar year ending
during the term of the Employee's employment hereunder equal to:
(a) if the Operating Result (as defined below) for such year
is equal to or greater than the Maximum Operating Target (as defined
below) for such year, 125% of the amount of the Employee's Base Salary
paid to the Employee during the calendar year for which such bonus is
payable (such amount is hereinafter referred to as the "Base Amount");
(b) if the Operating Result for such year is greater than the
Operating Target but less than the Maximum Operating Target for such
year, 65% of the Base Amount plus, for each increase of 1/25 of the
difference between the Operating Target and the Maximum Operating
Target, an additional 2.40% of the Base Amount;
(c) if the Operating Result for such year is equal to 100% of
the Operating Target for such year, 65% of the Base Amount;
(d) if the Operating Result for such year is greater than the
Minimum Operating Target (as defined below) but less than the Operating
Target for such year, 30% of the Base Amount plus, for each increase of
1/20 of the difference between the Minimum Operating Target and the
Operating Target (100%), an additional 1.75% of the Base Amount; and
(e) if the Operating Result for such year is equal to the
Minimum Operating Target for such year, 30% of the Base Amount.
Notwithstanding the foregoing, the Employer may increase or decrease the amount
of the Annual Bonus based upon the Employer's judgment of Employee's overall
contribution to the Employer's business results.
No Annual Bonus shall be paid if the Operating Result is less than the Minimum
Operating Target for such year. The "Operating Target", the "Maximum Operating
Target" and the "Minimum Operating Target" in any year shall be jointly
established by the Chief Executive Officer of the Employer and Employer's Board.
The "Operating Result" for any year shall be equal to the annual financial
results for the components that make up the Operating Target as of December 31
in such year, using United States generally accepted accounting principles
consistently applied and taking into account such other factors as may be
approved by Employer's Board. The Annual Bonus, if any, shall be paid as soon as
2
<PAGE>
practicable after the close of the year for which the Annual Bonus is payable,
unless the Employee elects to defer such amounts under the terms of any deferred
compensation or savings plan maintained or established by the Employer or Group.
4. Employee Benefits. During the term of the Employee's employment
------------------
hereunder, employee benefits, including, but not limited to, life, medical,
dental and disability insurance, will be provided to the Employee in accordance
with programs at the Employer then available to executive employees. The
Employee shall also be entitled to participate in all of Employer's profit
sharing, pension, retirement, deferred compensation and savings plans, as the
same may be amended and in effect from time to time, at levels and having
interests commensurate with the Employee's then current period of service,
compensation and position.
5. Perquisites and Expenses.
------------------------
(a) General. During the term of the Employee's employment
-------
hereunder, the Employee shall be entitled to participate in any special benefit
or perquisite program available from time to time to executive employees of the
Employer on the terms and conditions then prevailing under such program.
(b) Business Travel, Lodging, etc. The Employer shall
----------------------------------
reimburse the Employee for reasonable travel, lodging and meal expenses incurred
by him in connection with his performance of services hereunder upon submission
of evidence, satisfactory to the Employer, of the incurrence and purpose of each
such expense.
6. Termination of Employment.
-------------------------
(a) Termination Due to Death or Disability. In the event that
--------------------------------------
the Employee's employment hereunder terminates due to death or is terminated by
the Employer due to the Employee's Disability (as defined below), no termination
benefits shall be payable to or in respect of the Employee except as provided in
Section 6(f)(ii). For purposes of this Agreement, "Disability" shall mean a
physical or mental disability that prevents the performance by the Employee of
his duties hereunder lasting (or likely to last, based on competent medical
evidence presented to Employer's Board) for a continuous period of six months or
longer. The reasoned and good faith judgment of Employer's Board as to the
Employee's Disability shall be final and shall be based on such competent
medical evidence as shall be presented to it by the Employee or by any physician
or group of physicians or other competent medical experts employed by the
Employee or the Employer to advise Employer's Board.
(b) Termination by the Employer for Cause. The Employee may be
-------------------------------------
terminated for Cause by the Employer. "Cause" shall mean (i) the willful failure
of the Employee substantially to perform his duties hereunder (other than any
such failure due to physical or mental illness) after a demand for substantial
performance is delivered to the Employee by the executive to which the Employee
reports or by Employer's Board, which notice identifies the manner in which such
executive or Employer's Board, as the case may be, believes that the Employee
3
<PAGE>
has not substantially performed his duties, (ii) the Employee's engaging in
willful and serious misconduct that is injurious to Group or Employer or any of
their subsidiaries, (iii) the Employee's regularly making a substantial, abusive
use of alcohol, drug, or similar substances, and such abuse in the Employer's
judgment has affected his ability to conduct the business of the Employer in a
proper and prudent manner, (iv) the Employee's conviction of, or entering a plea
of nolo contendere to, a crime that constitutes a felony, or (v) the willful and
---- ----------
material breach by the Employee of any of his obligations hereunder, or the
willful and material breach by the Employee of any written covenant or agreement
with the Employer or any of its affiliates not to disclose any information
pertaining to the Employer or any of its affiliates or not to compete or
interfere with the Employer or any of its affiliates.
(c) Termination by the Employer Without Cause. The Employee
------------------------------------------
may be terminated Without Cause by the Employer. A termination "Without Cause"
shall mean a termination of employment by the Employer other than due to death
or Disability as defined in Section 6(a) or Cause as defined in Section 6(b).
(d) Termination by the Employee. The Employee may terminate
----------------------------
his employment for "Good Reason". "Good Reason" shall mean a termination of
employment by the Employee within 30 days following (i) any assignment to the
Employee of any duties, functions or responsibilities that are significantly
different from, and result in a substantial diminution of, the duties, functions
or responsibilities that the Employee has on the date hereof or (ii) the failure
of the Employer to obtain the assumption of this Agreement by any successor as
contemplated by Section 12.
(e) Notice of Termination. Any termination by the Employer
---------------------
pursuant to Section 6(a), 6(b) or 6(c), or by the Employee pursuant to Section
6(d), shall be communicated by a written "Notice of Termination" addressed to
the other parties to this Agreement. A "Notice of Termination" shall mean a
notice stating that the Employee's employment hereunder has been or will be
terminated, indicating the specific termination provisions in this Agreement
relied upon and setting forth in reasonable detail the facts and circumstances
claimed to provide a basis for such termination of employment.
(f) Payments Upon Certain Terminations.
----------------------------------
(i) In the event of a termination of the Employee's
employment Without Cause or a termination by the Employee of his
employment for Good Reason, the Employer shall pay to the Employee (A)
(1) the greater of (x) his Base Salary, if any, for the period from the
Date of Termination (as defined below) through the last day of the
Initial Term, provided that Employer may, at any time, pay to the
Employee in a single lump sum an amount equal to the Base Salary
remaining to be paid to the Employee as of the date of such lump sum
payment and (y) an amount equal to one year's Base Salary, less (2) any
amounts paid or to be paid to the Employee under the terms of any
severance plan or program of Employer, if any, as in effect on the Date
of Termination, (B) the Annual Bonus with respect to a completed fiscal
4
<PAGE>
year to the extent not theretofore paid to the Employee and (C) a Pro
Rata Share of the Annual Bonus (as defined below) for the fiscal year
in which the Date of Termination occurred.
Employer shall also provide, in addition to the continuation of Base
Salary, continued employee benefits and vesting of Incentive Awards (as
defined under Group's Stock Incentive Plan, amended and restated April
30, 1998, as the same may be amended from time to time, the "SIP")
through the Initial Term. Any benefits payable to the Employee under
any otherwise applicable plans, policies and practices of Employer
shall not be limited by this provision.
(ii) If the Employee's employment shall terminate upon his
death or Disability or if Employer shall terminate the Employee's
employment for Cause, Employer shall pay the Employee his full Base
Salary through the Date of Termination, plus, in the case of
termination upon the Employee's death or Disability, a Pro Rata Share
of the Annual Bonus. Any benefits payable to or in respect of the
Employee under any otherwise applicable plans, policies and practices
of the Employer shall not be limited by this provision.
(iii) For purposes of this Section 6, the "Pro Rata Share of
the Annual Bonus" shall be calculated and paid as follows. If the
Employee is terminated prior to July 1 of any year, the Pro Rata Share
of the Annual Bonus (A) will be equal to the product of (1) the Annual
Bonus, calculated assuming that 100% of the Operating Target is
achieved in such year, and (2) a fraction equal to the number of full
months in such year prior to the Date of Termination over 12, and (B)
will be paid to the Employee within 30 days after the Date of
Termination. If the Employee is terminated on or after July 1 of any
year, the Pro Rata Share of the Annual Bonus (A) will be equal to the
product of (1) the Annual Bonus, calculated based on the actual
Operating Result for such year, and (2) a fraction equal to the number
of full months in such year prior to the Date of Termination over 12,
and (B) will be paid to the Employee within 90 days after the close of
the year in respect of which the Pro Rata Share of the Annual Bonus is
payable.
(g) Date of Termination. As used in this Agreement, the term
-------------------
"Date of Termination" shall mean (i) if the Employee's employment is terminated
by his death, the date of his death, (ii) if the Employee's employment is
terminated for Cause, the date on which Notice of Termination is given as
contemplated by Section 6(e), and (iii) if the Employee's employment is
terminated Without Cause, due to the Employee's Disability or by the Employee
for Good Reason, 30 days after the date on which Notice of Termination is given
as contemplated by Section 6(d) or, if no such Notice is given, 30 days after
the date of termination of employment.
(h) Condition to Payments. The Employer's obligation to make
---------------------
any payments hereunder shall be conditioned upon the Employer's receipt of an
appropriately signed "General Release and Covenant Not to Sue" in form and
5
<PAGE>
substance satisfactory to the Employer.
7. Unauthorized Disclosure. During and after the term of his employment
-----------------------
hereunder, the Employee shall not, without the written consent of Employer's
Board, the General Counsel of the Employer, or the Chief Executive Officer of
the Employer, disclose to any person (other than an employee or director of the
Employer or its affiliates, or a person to whom disclosure is reasonably
necessary or appropriate in connection with the performance by the Employee of
his duties as an executive of the Employer) any confidential or proprietary
information, knowledge or data that is not theretofore publicly known and in the
public domain obtained by him while in the employ of the Employer with respect
to the Employer or any of its subsidiaries or affiliates or with respect to any
products, improvements, formulas, recipes, designs, processes, customers,
methods of sales, distribution, operation or manufacture, sales, prices,
profits, costs, contracts, suppliers, business prospects, business methods,
techniques, research, plans, strategies, personnel, organization, trade secrets
or know-how of the Employer or any of its subsidiaries or affiliates
(collectively, "Proprietary Information"), except as may be required by law or
in connection with any judicial or administrative proceedings or inquiry.
8. Non-Competition. During the period of the Employee's employment and
---------------
thereafter for a period equal to the number of months providing the basis for
calculating any termination payments to the Employee under Section 6, if any
such payments are required, but in any event for at least 12 months, the
Employee shall not engage directly or indirectly in, become employed by, serve
as an agent or consultant to, or become a partner, principal or stockholder of,
any partnership, corporation or other entity which competes with a business that
represents 5% or more of the aggregate gross revenues of the Employer and its
subsidiaries and which is then engaged in such competition in any geographical
area in which the Employer or any of its subsidiaries is then engaged in such
business without first obtaining written approval from the Employer, provided
that the Employee's ownership of less than 1% of the issued and outstanding
stock of any corporation whose stock is traded on an established securities
market shall not constitute competition with the Employer. The Employer may
grant or deny such approval in its sole discretion.
9. Non-Interference. During the period of the Employee's employment and
----------------
thereafter for a period equal to the number of months providing the basis for
calculating any termination payments to the Employee under Section 6, if any
such payments are required, but in any event for at least 36 months, the
Employee will not, directly or indirectly, for his own account or the account of
any other person or entity, (a) employ in a business of the kind in which the
Employer is engaged on the date of such termination, or solicit or endeavor to
entice away from the Employer, or otherwise intentionally interfere with the
Employer's relationship with, any person or entity who or which is at the time
employed by or otherwise engaged to perform services for the Employer or (b)
intentionally interfere with the Employer's relationship with any person or
entity who or which is, or has been within the previous 36 months, a customer,
client or supplier of the Employer.
6
<PAGE>
10. Return of Documents. In the event of the termination of the
---------------------
Employee's employment for any reason, the Employee will deliver to the Employer
all non-personal documents and data of any nature pertaining to his work with
the Employer, and he will not take with him any documents or data of any
description or any reproduction thereof, or any documents containing or
pertaining to any Proprietary Information.
11. Forfeiture of Realized and Unrealized Gains on Incentive Awards for
-------------------------------------------------------------------
Breach of this Agreement. If the Employee violates any provision of Sections 7,
- ------------------------
8, 9 or 10 of this Agreement, and the Employee is no longer employed by the
Employer, whether or not the termination of employment occurs prior to or
subsequent to such violation, then (1) all Incentive Awards held by the Employee
shall terminate effective the date on which Employee violates this Agreement,
unless terminated sooner by operation of another term or condition of the SIP or
the Award Agreement (as defined in the SIP), and (2) any gain realized upon
receipt of an Incentive Award, or exercise of an Incentive Award that does not
require the payment of an exercise price, which gain shall be represented by the
closing market price on the date of receipt of such Incentive Award, or in the
case of an Incentive Award that requires the payment of an exercise price, the
gain represented by the closing market price on the date of exercise over the
exercise price, multiplied by the number of Incentive Awards, or options
exercised, without regard to any subsequent market price decrease or increase;
in each case within 18 months prior to termination of employment with Employer
and violation of Sections 7, 8, 9 or 10 of this Agreement, shall be paid by the
Employee to the Employer. The Employee agrees that the Employer has the right to
deduct from any amounts the Employer may owe the Employee from time to time
(including amounts owed to the Employee as wages or other compensation, fringe
benefits, or vacation pay, as well as any other amounts owed to the Employee by
the Employer), the amounts the Employee owes the Employer or Group.
12. Assumption of Agreement. The Employer will require any successor
------------------------
(by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Employer, by agreement in form and substance
reasonably satisfactory to the Employee, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Employer would be required to perform it if no such succession had taken place.
Failure of the Employer to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Employee to the greater of (x) compensation from the Employer in the same amount
and on the same terms as the Employee would be entitled hereunder if the
Employer terminated his employment Without Cause as contemplated by Section 6
and (y) amounts required to be paid to the Employee pursuant to the Change of
Control Agreement by and among Group, Employer and Employee dated as of April
30, 1998 (the "CIC Agreement"). For purposes of implementing the foregoing
clause (x), the date on which any such succession becomes effective shall be
deemed to be the Date of Termination, and for purposes of implementing clause
(y), the timing and amount of any payments required pursuant to the CIC
7
<PAGE>
Agreement shall be determined in accordance with the CIC Agreement.
13. Entire Agreement. Except as otherwise expressly provided herein,
----------------
this Agreement, the CIC Agreement and the Indemnification Agreement made and
entered into as of the 30th day of April, 1998 by and among Employer, Group and
Employee (the "Indemnification Agreement") constitute the entire agreement among
the parties hereto with respect to the subject matter hereof, and all promises,
representations, understandings, arrangements and prior agreements relating to
such subject matter (including those made to or with the Employee by any other
person or entity) are merged herein, in the CIC Agreement and in the
Indemnification Agreement and superseded hereby and thereby. To the extent that
the amount and timing of payments required to be made under this Agreement are
inconsistent with or different from the amount and timing of payments required
to be made pursuant to the CIC Agreement and/or the Indemnification Agreement,
the Employee shall be entitled to the most favorable benefits provided to the
Employee under the provisions of any such agreements.
14. Indemnification. The Employer agrees that it shall indemnify and
---------------
hold harmless the Employee to the fullest extent (a) permitted by Delaware law
from and against any and all liabilities, costs, claims and expenses arising out
of the employment of the Employee hereunder, except to the extent arising out of
or based upon the gross negligence or willful misconduct of the Employee and (b)
provided by the Indemnification Agreement.
15. No Mitigation. The Employee shall not be required to mitigate the
--------------
amount of any payment that the Employer becomes obligated to make in connection
with this Agreement, the CIC Agreement or the Indemnification Agreement, by
seeking other employment or otherwise.
16. Miscellaneous.
-------------
(a) Binding Effect. This Agreement shall be binding on and
---------------
inure to the benefit of the Employer and its successors and permitted assigns.
This Agreement shall also be binding on and inure to the benefit of the Employee
and his heirs, executors, administrators and legal representatives.
(b) Governing Law. This Agreement shall be governed by and
--------------
constructed in accordance with the laws of the State of Delaware without
reference to principles of conflict of laws.
(c) Taxes. The Employer may withhold from any payments made
-----
under the Agreement all federal, state, city or other applicable taxes or social
security governmental regulation or ruling.
(d) Amendments. No provisions of this Agreement may be
----------
modified, waived or discharged unless such modification, waiver or discharge is
approved by Employer's Board or General Counsel of the Employer and is agreed to
8
<PAGE>
in writing by the Employee and General Counsel of the Employer. No waiver by any
party hereto at any time of any breach by any other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No waiver of any
provision of this Agreement shall be implied from any course of dealing between
or among the parties hereto or from any failure by any party hereto to assert
its rights hereunder on any occasion or series of occasions.
(e) Reformation; Severability. If any provision of this
--------------------------
Agreement is held by a court or arbitrator to be unreasonable in scope or
duration or otherwise, the court or arbitrator shall, to the extent permitted by
law, reform such provision so that it is enforceable, and enforce the applicable
provision as so reformed. Reformation of any provision of this Agreement
pursuant to this subsection (e) shall not affect any other provision of this
Agreement or render this Agreement unenforceable or void.
(f) Notices. Any notice or other communication required or
-------
permitted to be delivered under this Agreement shall be (i) in writing, (ii)
delivered personally, by courier service or by certified or registered mail,
first-class postage prepaid and return receipt requested, (iii) deemed to have
been received on the date of delivery or on the third business day after the
mailing thereof, and (iv) addressed as follows (or to such other address as the
party entitled to notice shall hereafter designate in accordance with the terms
hereof):
(A) if to the Employer or Group, to it at:
One Lexmark Centre Drive
740 West New Circle Road
Lexington, Kentucky 40550
Attention: General Counsel
---------
(B) if to the Employee, to him at the address
listed on the signature page hereof.
(g) Survival. Sections 7, 8, 9,10 and 11 and, if the
--------
Employee's employment terminates in a manner giving rise to a payment under
Section 6(f), Section 6(f) shall survive the termination of the employment of
the Employee hereunder.
(h) Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
9
<PAGE>
(i) Headings. The section and other headings contained in this
--------
Agreement are for the convenience of the parties only and are not intended to be
a part hereof or to affect the meaning or interpretation hereof.
IN WITNESS WHEREOF, the Employer and Group have duly executed this
Agreement by their authorized representatives and the Employee has hereunto set
his hand, in each case effective as of the date first above written.
LEXMARK INTERNATIONAL, INC.
By: /s/ Paul J. Curlander
------------------------------
Paul J. Curlander
President and
Chief Executive Officer
LEXMARK INTERNATIONAL GROUP, INC.
By: /s/ Paul J. Curlander
------------------------------
Paul J. Curlander
President and
Chief Executive Officer
THE EMPLOYEE:
/s/ John C. Mitchell
-----------------------------------
Address:
10
<PAGE>
EXHIBIT 10.26
Employment Agreement
Thomas B. Lamb
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT, dated as of April 30, 1998, among Lexmark
International, Inc., a Delaware corporation (the "Employer"), Lexmark
International Group, Inc., a Delaware corporation ("Group"), and Thomas B.
Lamb (the "Employee").
W I T N E S S E T H:
--------------------
WHEREAS, Employer, Group and Employee desire to enter into an
employment agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the parties hereto hereby agree as follows:
1. Term; Position and Responsibilities.
-----------------------------------
(a) Term of Employment. Unless the Employee's employment shall sooner
------------------
terminate pursuant to Section 6, the Employer shall employ the Employee for a
term commencing on April 30, 1998 and ending on February 28, 2001 (the "Initial
Term"), and the Employee's employment shall continue thereafter at will.
(b) Position and Responsibilities. The Employee will serve as Executive
-----------------------------
Vice President and in such other executive capacity or capacities as may be
determined from time to time by or under the authority of the Board of Directors
of the Employer ("Employer's Board"), and the Employee will devote all of his
skill, knowledge and working time (except for reasonable vacation time and
absence for sickness or similar disability) to the conscientious performance of
his duties. The Employee represents that he is entering into this Agreement
voluntarily and that his employment hereunder and compliance by him with the
terms and conditions of this Agreement will not conflict with or result in the
breach of any agreement to which he is a party or by which he may be bound.
2. Base Salary. As compensation for the services to be performed by the
-----------
Employee hereunder, the Employer will pay the Employee an annual base salary of
$290,000 ($300,000 effective May 11, 1998) during the term of his employment
hereunder. The Employer will review the Employee's base salary from time to time
during the period of his employment hereunder and, in the discretion of the
Employer, may increase such base salary from time to time based upon the
performance of the Employee, the financial condition of the Employer, prevailing
industry salary scales and such other factors as the Employer shall consider
relevant. (The annual base salary payable to the Employee under this Section 2,
as the same may be increased from time to time, shall hereinafter be referred to
as the "Base Salary".) The Base Salary payable under this Section 2 shall be
reduced to the extent that the Employee elects to defer such Base Salary under
the terms of any deferred compensation or savings plan maintained or established
by the Employer or Group, provided that any such reduction of the Base Salary
--------
1
<PAGE>
shall not be taken into account for purposes of calculating the Base Amount (as
defined in Section 3). The Employer shall pay the Employee the Base Salary in
biweekly installments, or in such other installments as may be mutually agreed
upon by the Employer and the Employee.
3. Short-term Incentive Compensation. The Employee shall receive an
-----------------------------------
annual incentive bonus award (the "Annual Bonus") for each calendar year ending
during the term of the Employee's employment hereunder equal to:
(a) if the Operating Result (as defined below) for such year
is equal to or greater than the Maximum Operating Target (as defined
below) for such year, 140% of the amount of the Employee's Base Salary
paid to the Employee during the calendar year for which such bonus is
payable (such amount is hereinafter referred to as the "Base Amount");
(b) if the Operating Result for such year is greater than the
Operating Target but less than the Maximum Operating Target for such
year, 70% of the Base Amount plus, for each increase of 1/25 of the
difference between the Operating Target and the Maximum Operating
Target, an additional 2.80% of the Base Amount;
(c) if the Operating Result for such year is equal to 100% of
the Operating Target for such year, 70% of the Base Amount;
(d) if the Operating Result for such year is greater than the
Minimum Operating Target (as defined below) but less than the Operating
Target for such year, 30% of the Base Amount plus, for each increase of
1/20 of the difference between the Minimum Operating Target and the
Operating Target (100%), an additional 2.00% of the Base Amount; and
(e) if the Operating Result for such year is equal to the
Minimum Operating Target for such year, 30% of the Base Amount.
Notwithstanding the foregoing, the Employer may increase or decrease the amount
of the Annual Bonus based upon the Employer's judgment of Employee's overall
contribution to the Employer's business results.
No Annual Bonus shall be paid if the Operating Result is less than the Minimum
Operating Target for such year. The "Operating Target", the "Maximum Operating
Target" and the "Minimum Operating Target" in any year shall be jointly
established by the Chief Executive Officer of the Employer and Employer's Board.
The "Operating Result" for any year shall be equal to the annual financial
results for the components that make up the Operating Target as of December 31
in such year, using United States generally accepted accounting principles
consistently applied and taking into account such other factors as may be
approved by Employer's Board. The Annual Bonus, if any, shall be paid as soon as
practicable after the close of the year for which the Annual Bonus is payable,
2
<PAGE>
unless the Employee elects to defer such amounts under the terms of any deferred
compensation or savings plan maintained or established by the Employer or Group.
4. Employee Benefits. During the term of the Employee's employment
------------------
hereunder, employee benefits, including, but not limited to, life, medical,
dental and disability insurance, will be provided to the Employee in accordance
with programs at the Employer then available to executive employees. The
Employee shall also be entitled to participate in all of Employer's profit
sharing, pension, retirement, deferred compensation and savings plans, as the
same may be amended and in effect from time to time, at levels and having
interests commensurate with the Employee's then current period of service,
compensation and position.
5. Perquisites and Expenses.
------------------------
(a) General. During the term of the Employee's employment
-------
hereunder, the Employee shall be entitled to participate in any special benefit
or perquisite program available from time to time to executive employees of the
Employer on the terms and conditions then prevailing under such program.
(b) Business Travel, Lodging, etc. The Employer shall
----------------------------------
reimburse the Employee for reasonable travel, lodging and meal expenses incurred
by him in connection with his performance of services hereunder upon submission
of evidence, satisfactory to the Employer, of the incurrence and purpose of each
such expense.
6. Termination of Employment.
-------------------------
(a) Termination Due to Death or Disability. In the event that
--------------------------------------
the Employee's employment hereunder terminates due to death or is terminated by
the Employer due to the Employee's Disability (as defined below), no termination
benefits shall be payable to or in respect of the Employee except as provided in
Section 6(f)(ii). For purposes of this Agreement, "Disability" shall mean a
physical or mental disability that prevents the performance by the Employee of
his duties hereunder lasting (or likely to last, based on competent medical
evidence presented to Employer's Board) for a continuous period of six months or
longer. The reasoned and good faith judgment of Employer's Board as to the
Employee's Disability shall be final and shall be based on such competent
medical evidence as shall be presented to it by the Employee or by any physician
or group of physicians or other competent medical experts employed by the
Employee or the Employer to advise Employer's Board.
(b) Termination by the Employer for Cause. The Employee may be
-------------------------------------
terminated for Cause by the Employer. "Cause" shall mean (i) the willful failure
of the Employee substantially to perform his duties hereunder (other than any
such failure due to physical or mental illness) after a demand for substantial
performance is delivered to the Employee by the executive to which the Employee
reports or by Employer's Board, which notice identifies the manner in which such
3
<PAGE>
executive or Employer's Board, as the case may be, believes that the Employee
has not substantially performed his duties, (ii) the Employee's engaging in
willful and serious misconduct that is injurious to Group or Employer or any of
their subsidiaries, (iii) the Employee's regularly making a substantial, abusive
use of alcohol, drug, or similar substances, and such abuse in the Employer's
judgment has affected his ability to conduct the business of the Employer in a
proper and prudent manner, (iv) the Employee's conviction of, or entering a plea
of nolo contendere to, a crime that constitutes a felony, or (v) the willful and
material breach by the Employee of any of his obligations hereunder, or the
willful and material breach by the Employee of any written covenant or agreement
with the Employer or any of its affiliates not to disclose any information
pertaining to the Employer or any of its affiliates or not to compete or
interfere with the Employer or any of its affiliates.
(c) Termination by the Employer Without Cause. The Employee
------------------------------------------
may be terminated Without Cause by the Employer. A termination "Without Cause"
shall mean a termination of employment by the Employer other than due to death
or Disability as defined in Section 6(a) or Cause as defined in Section 6(b).
(d) Termination by the Employee. The Employee may terminate
----------------------------
his employment for "Good Reason". "Good Reason" shall mean a termination of
employment by the Employee within 30 days following (i) any assignment to the
Employee of any duties, functions or responsibilities that are significantly
different from, and result in a substantial diminution of, the duties, functions
or responsibilities that the Employee has on the date hereof or (ii) the failure
of the Employer to obtain the assumption of this Agreement by any successor as
contemplated by Section 12.
(e) Notice of Termination. Any termination by the Employer
----------------------
pursuant to Section 6(a), 6(b) or 6(c), or by the Employee pursuant to Section
6(d), shall be communicated by a written "Notice of Termination" addressed to
the other parties to this Agreement. A "Notice of Termination" shall mean a
notice stating that the Employee's employment hereunder has been or will be
terminated, indicating the specific termination provisions in this Agreement
relied upon and setting forth in reasonable detail the facts and circumstances
claimed to provide a basis for such termination of employment.
(f) Payments Upon Certain Terminations.
----------------------------------
(i) In the event of a termination of the Employee's
employment Without Cause or a termination by the Employee of his
employment for Good Reason, the Employer shall pay to the Employee (A)
(1) the greater of (x) his Base Salary, if any, for the period from the
Date of Termination (as defined below) through the last day of the
Initial Term, provided that Employer may, at any time, pay to the
Employee in a single lump sum an amount equal to the Base Salary
remaining to be paid to the Employee as of the date of such lump sum
payment and (y) an amount equal to one year's Base Salary, less (2) any
amounts paid or to be paid to the Employee under the terms of any
severance plan or program of Employer, if any, as in effect on the Date
of Termination, (B) the Annual Bonus with respect to a completed fiscal
4
<PAGE>
year to the extent not theretofore paid to the Employee and (C) a Pro
Rata Share of the Annual Bonus (as defined below) for the fiscal year
in which the Date of Termination occurred.
(ii) If the Employee's employment shall terminate upon his
death or Disability or if Employer shall terminate the Employee's
employment for Cause, Employer shall pay the Employee his full Base
Salary through the Date of Termination, plus, in the case of
termination upon the Employee's death or Disability, a Pro Rata Share
of the Annual Bonus. Any benefits payable to or in respect of the
Employee under any otherwise applicable plans, policies and practices
of the Employer shall not be limited by this provision.
(iii) For purposes of this Section 6, the "Pro Rata Share of
the Annual Bonus" shall be calculated and paid as follows. If the
Employee is terminated prior to July 1 of any year, the Pro Rata Share
of the Annual Bonus (A) will be equal to the product of (1) the Annual
Bonus, calculated assuming that 100% of the Operating Target is
achieved in such year, and (2) a fraction equal to the number of full
months in such year prior to the Date of Termination over 12, and (B)
will be paid to the Employee within 30 days after the Date of
Termination. If the Employee is terminated on or after July 1 of any
year, the Pro Rata Share of the Annual Bonus (A) will be equal to the
product of (1) the Annual Bonus, calculated based on the actual
Operating Result for such year, and (2) a fraction equal to the number
of full months in such year prior to the Date of Termination over 12,
and (B) will be paid to the Employee within 90 days after the close of
the year in respect of which the Pro Rata Share of the Annual Bonus is
payable.
(g) Date of Termination. As used in this Agreement, the term
-------------------
"Date of Termination" shall mean (i) if the Employee's employment is terminated
by his death, the date of his death, (ii) if the Employee's employment is
terminated for Cause, the date on which Notice of Termination is given as
contemplated by Section 6(e), and (iii) if the Employee's employment is
terminated Without Cause, due to the Employee's Disability or by the Employee
for Good Reason, 30 days after the date on which Notice of Termination is given
as contemplated by Section 6(d) or, if no such Notice is given, 30 days after
the date of termination of employment.
(h) Condition to Payments. The Employer's obligation to make
---------------------
any payments hereunder shall be conditioned upon the Employer's receipt of an
appropriately signed "General Release and Covenant Not to Sue" in form and
substance satisfactory to the Employer.
7. Unauthorized Disclosure. During and after the term of his employment
-----------------------
hereunder, the Employee shall not, without the written consent of Employer's
Board, the General Counsel of the Employer, or the Chief Executive Officer of
the Employer, disclose to any person (other than an employee or director of the
Employer or its affiliates, or a person to whom disclosure is reasonably
necessary or appropriate in connection with the performance by the Employee of
5
<PAGE>
his duties as an executive of the Employer) any confidential or proprietary
information, knowledge or data that is not theretofore publicly known and in the
public domain obtained by him while in the employ of the Employer with respect
to the Employer or any of its subsidiaries or affiliates or with respect to any
products, improvements, formulas, recipes, designs, processes, customers,
methods of sales, distribution, operation or manufacture, sales, prices,
profits, costs, contracts, suppliers, business prospects, business methods,
techniques, research, plans, strategies, personnel, organization, trade secrets
or know-how of the Employer or any of its subsidiaries or affiliates
(collectively, "Proprietary Information"), except as may be required by law or
in connection with any judicial or administrative proceedings or inquiry.
8. Non-Competition. During the period of the Employee's employment and
---------------
thereafter for a period equal to the number of months providing the basis for
calculating any termination payments to the Employee under Section 6, if any
such payments are required, but in any event for at least 12 months, the
Employee shall not engage directly or indirectly in, become employed by, serve
as an agent or consultant to, or become a partner, principal or stockholder of,
any partnership, corporation or other entity which competes with a business that
represents 5% or more of the aggregate gross revenues of the Employer and its
subsidiaries and which is then engaged in such competition in any geographical
area in which the Employer or any of its subsidiaries is then engaged in such
business without first obtaining written approval from the Employer, provided
that the Employee's ownership of less than 1% of the issued and outstanding
stock of any corporation whose stock is traded on an established securities
market shall not constitute competition with the Employer. The Employer may
grant or deny such approval in its sole discretion.
9. Non-Interference. During the period of the Employee's employment and
----------------
thereafter for a period equal to the number of months providing the basis for
calculating any termination payments to the Employee under Section 6, if any
such payments are required, but in any event for at least 36 months, the
Employee will not, directly or indirectly, for his own account or the account of
any other person or entity, (a) employ in a business of the kind in which the
Employer is engaged on the date of such termination, or solicit or endeavor to
entice away from the Employer, or otherwise intentionally interfere with the
Employer's relationship with, any person or entity who or which is at the time
employed by or otherwise engaged to perform services for the Employer or (b)
intentionally interfere with the Employer's relationship with any person or
entity who or which is, or has been within the previous 36 months, a customer,
client or supplier of the Employer.
10. Return of Documents. In the event of the termination of the
---------------------
Employee's employment for any reason, the Employee will deliver to the Employer
all non-personal documents and data of any nature pertaining to his work with
the Employer, and he will not take with him any documents or data of any
description or any reproduction thereof, or any documents containing or
pertaining to any Proprietary Information.
6
<PAGE>
11. Forfeiture of Realized and Unrealized Gains on Incentive Awards for
-------------------------------------------------------------------
Breach of this Agreement. If the Employee violates any provision of Sections 7,
- ------------------------
8, 9 or 10 of this Agreement, and the Employee is no longer employed by the
Employer, whether or not the termination of employment occurs prior to or
subsequent to such violation, then (1) all Incentive Awards held by the Employee
shall terminate effective the date on which Employee violates this Agreement,
unless terminated sooner by operation of another term or condition of the SIP or
the Award Agreement (as defined in the SIP), and (2) any gain realized upon
receipt of an Incentive Award, or exercise of an Incentive Award that does not
require the payment of an exercise price, which gain shall be represented by the
closing market price on the date of receipt of such Incentive Award, or in the
case of an Incentive Award that requires the payment of an exercise price, the
gain represented by the closing market price on the date of exercise over the
exercise price, multiplied by the number of Incentive Awards, or options
exercised, without regard to any subsequent market price decrease or increase;
in each case within 18 months prior to termination of employment with Employer
and violation of Sections 7, 8, 9 or 10 of this Agreement, shall be paid by the
Employee to the Employer. The Employee agrees that the Employer has the right to
deduct from any amounts the Employer may owe the Employee from time to time
(including amounts owed to the Employee as wages or other compensation, fringe
benefits, or vacation pay, as well as any other amounts owed to the Employee by
the Employer), the amounts the Employee owes the Employer or Group.
12. Assumption of Agreement. The Employer will require any successor
------------------------
(by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Employer, by agreement in form and substance
reasonably satisfactory to the Employee, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Employer would be required to perform it if no such succession had taken place.
Failure of the Employer to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Employee to the greater of (x) compensation from the Employer in the same amount
and on the same terms as the Employee would be entitled hereunder if the
Employer terminated his employment Without Cause as contemplated by Section 6
and (y) amounts required to be paid to the Employee pursuant to the Change of
Control Agreement by and among Group, Employer and Employee dated as of April
30, 1998 (the "CIC Agreement"). For purposes of implementing the foregoing
clause (x), the date on which any such succession becomes effective shall be
deemed to be the Date of Termination, and for purposes of implementing clause
(y), the timing and amount of any payments required pursuant to the CIC
Agreement shall be determined in accordance with the CIC Agreement.
13. Entire Agreement. Except as otherwise expressly provided herein,
----------------
this Agreement, the CIC Agreement and the Indemnification Agreement made and
entered into as of the 30th day of April, 1998 by and among Employer, Group and
Employee (the "Indemnification Agreement") constitute the entire agreement among
the parties hereto with respect to the subject matter hereof, and all promises,
representations, understandings, arrangements and prior agreements relating to
7
<PAGE>
such subject matter (including those made to or with the Employee by any other
person or entity) are merged herein, in the CIC Agreement and in the
Indemnification Agreement and superseded hereby and thereby. To the extent that
the amount and timing of payments required to be made under this Agreement are
inconsistent with or different from the amount and timing of payments required
to be made pursuant to the CIC Agreement and/or the Indemnification Agreement,
the Employee shall be entitled to the most favorable benefits provided to the
Employee under the provisions of any such agreements.
14. Indemnification. The Employer agrees that it shall indemnify and
---------------
hold harmless the Employee to the fullest extent (a) permitted by Delaware law
from and against any and all liabilities, costs, claims and expenses arising out
of the employment of the Employee hereunder, except to the extent arising out of
or based upon the gross negligence or willful misconduct of the Employee and (b)
provided by the Indemnification Agreement.
15. No Mitigation. The Employee shall not be required to mitigate the
--------------
amount of any payment that the Employer becomes obligated to make in connection
with this Agreement, the CIC Agreement or the Indemnification Agreement, by
seeking other employment or otherwise.
16. Miscellaneous.
-------------
(a) Binding Effect. This Agreement shall be binding on and
---------------
inure to the benefit of the Employer and its successors and permitted assigns.
This Agreement shall also be binding on and inure to the benefit of the Employee
and his heirs, executors, administrators and legal representatives.
(b) Governing Law. This Agreement shall be governed by and
--------------
constructed in accordance with the laws of the State of Delaware without
reference to principles of conflict of laws.
(c) Taxes. The Employer may withhold from any payments made
-----
under the Agreement all federal, state, city or other applicable taxes or social
security governmental regulation or ruling.
(d) Amendments. No provisions of this Agreement may be
----------
modified, waived or discharged unless such modification, waiver or discharge is
approved by Employer's Board or General Counsel of the Employer and is agreed to
in writing by the Employee and General Counsel of the Employer. No waiver by any
party hereto at any time of any breach by any other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No waiver of any
provision of this Agreement shall be implied from any course of dealing between
or among the parties hereto or from any failure by any party hereto to assert
8
<PAGE>
its rights hereunder on any occasion or series of occasions.
(e) Reformation; Severability. If any provision of this
--------------------------
Agreement is held by a court or arbitrator to be unreasonable in scope or
duration or otherwise, the court or arbitrator shall, to the extent permitted by
law, reform such provision so that it is enforceable, and enforce the applicable
provision as so reformed. Reformation of any provision of this Agreement
pursuant to this subsection (e) shall not affect any other provision of this
Agreement or render this Agreement unenforceable or void.
(f) Notices. Any notice or other communication required or
-------
permitted to be delivered under this Agreement shall be (i) in writing, (ii)
delivered personally, by courier service or by certified or registered mail,
first-class postage prepaid and return receipt requested, (iii) deemed to have
been received on the date of delivery or on the third business day after the
mailing thereof, and (iv) addressed as follows (or to such other address as the
party entitled to notice shall hereafter designate in accordance with the terms
hereof):
(A) if to the Employer or Group, to it at:
One Lexmark Centre Drive
740 West New Circle Road
Lexington, Kentucky 40550
Attention: General Counsel
---------
(B) if to the Employee, to him at the address
listed on the signature page hereof.
(g) Survival. Sections 7, 8, 9,10 and 11 and, if the
--------
Employee's employment terminates in a manner giving rise to a payment under
Section 6(f), Section 6(f) shall survive the termination of the employment of
the Employee hereunder.
(h) Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
9
<PAGE>
(i) Headings. The section and other headings contained in this
--------
Agreement are for the convenience of the parties only and are not intended to be
a part hereof or to affect the meaning or interpretation hereof.
IN WITNESS WHEREOF, the Employer and Group have duly executed this
Agreement by their authorized representatives and the Employee has hereunto set
his hand, in each case effective as of the date first above written.
LEXMARK INTERNATIONAL, INC.
By: /s/ Paul J. Curlander
------------------------------
Paul J. Curlander
President and
Chief Executive Officer
LEXMARK INTERNATIONAL GROUP, INC.
By: /s/ Paul J. Curlander
------------------------------
Paul J. Curlander
President and
Chief Executive Officer
THE EMPLOYEE:
/s/ Thomas B. Lamb
-----------------------------------
Address:
10
<PAGE>
EXHIBIT 10.27
Employment Agreement
Alfred A. Traversi
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT, dated as of April 30, 1998, among Lexmark
International, Inc., a Delaware corporation (the "Employer"), Lexmark
International Group, Inc., a Delaware corporation ("Group"), and Alfred A.
Traversi (the "Employee").
W I T N E S S E T H:
--------------------
WHEREAS, Employer, Group and Employee desire to enter into an
employment agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the parties hereto hereby agree as follows:
1. Term; Position and Responsibilities.
-----------------------------------
(a) Term of Employment. Unless the Employee's employment shall sooner
------------------
terminate pursuant to Section 6, the Employer shall employ the Employee for a
term commencing on April 30, 1998 and ending on February 28, 2001 (the "Initial
Term"), and the Employee's employment shall continue thereafter at will.
(b) Position and Responsibilities. The Employee will serve as Executive
-----------------------------
Vice President and in such other executive capacity or capacities as may be
determined from time to time by or under the authority of the Board of Directors
of the Employer ("Employer's Board"), and the Employee will devote all of his
skill, knowledge and working time (except for reasonable vacation time and
absence for sickness or similar disability) to the conscientious performance of
his duties. The Employee represents that he is entering into this Agreement
voluntarily and that his employment hereunder and compliance by him with the
terms and conditions of this Agreement will not conflict with or result in the
breach of any agreement to which he is a party or by which he may be bound.
2. Base Salary. As compensation for the services to be performed by the
-----------
Employee hereunder, the Employer will pay the Employee an annual base salary of
$250,000 ($300,000 effective May 11, 1998) during the term of his employment
hereunder. The Employer will review the Employee's base salary from time to time
during the period of his employment hereunder and, in the discretion of the
Employer, may increase such base salary from time to time based upon the
performance of the Employee, the financial condition of the Employer, prevailing
industry salary scales and such other factors as the Employer shall consider
relevant. (The annual base salary payable to the Employee under this Section 2,
as the same may be increased from time to time, shall hereinafter be referred to
as the "Base Salary".) The Base Salary payable under this Section 2 shall be
reduced to the extent that the Employee elects to defer such Base Salary under
the terms of any deferred compensation or savings plan maintained or established
by the Employer or Group, provided that any such reduction of the Base Salary
--------
1
<PAGE>
shall not be taken into account for purposes of calculating the Base Amount (as
defined in Section 3). The Employer shall pay the Employee the Base Salary in
biweekly installments, or in such other installments as may be mutually agreed
upon by the Employer and the Employee.
3. Short-term Incentive Compensation. The Employee shall receive an
-----------------------------------
annual incentive bonus award (the "Annual Bonus") for each calendar year ending
during the term of the Employee's employment hereunder equal to:
(a) if the Operating Result (as defined below) for such year
is equal to or greater than the Maximum Operating Target (as defined
below) for such year, 140% of the amount of the Employee's Base Salary
paid to the Employee during the calendar year for which such bonus is
payable (such amount is hereinafter referred to as the "Base Amount");
(b) if the Operating Result for such year is greater than the
Operating Target but less than the Maximum Operating Target for such
year, 70% of the Base Amount plus, for each increase of 1/25 of the
difference between the Operating Target and the Maximum Operating
Target, an additional 2.80% of the Base Amount;
(c) if the Operating Result for such year is equal to 100% of
the Operating Target for such year, 70% of the Base Amount;
(d) if the Operating Result for such year is greater than the
Minimum Operating Target (as defined below) but less than the Operating
Target for such year, 30% of the Base Amount plus, for each increase of
1/20 of the difference between the Minimum Operating Target and the
Operating Target (100%), an additional 2.00% of the Base Amount; and
(e) if the Operating Result for such year is equal to the
Minimum Operating Target for such year, 30% of the Base Amount.
Notwithstanding the foregoing, the Employer may increase or decrease the amount
of the Annual Bonus based upon the Employer's judgment of Employee's overall
contribution to the Employer's business results.
No Annual Bonus shall be paid if the Operating Result is less than the Minimum
Operating Target for such year. The "Operating Target", the "Maximum Operating
Target" and the "Minimum Operating Target" in any year shall be jointly
established by the Chief Executive Officer of the Employer and Employer's Board.
The "Operating Result" for any year shall be equal to the annual financial
results for the components that make up the Operating Target as of December 31
in such year, using United States generally accepted accounting principles
consistently applied and taking into account such other factors as may be
approved by Employer's Board. The Annual Bonus, if any, shall be paid as soon as
practicable after the close of the year for which the Annual Bonus is payable,
2
<PAGE>
unless the Employee elects to defer such amounts under the terms of any deferred
compensation or savings plan maintained or established by the Employer or Group.
4. Employee Benefits. During the term of the Employee's employment
------------------
hereunder, employee benefits, including, but not limited to, life, medical,
dental and disability insurance, will be provided to the Employee in accordance
with programs at the Employer then available to executive employees. The
Employee shall also be entitled to participate in all of Employer's profit
sharing, pension, retirement, deferred compensation and savings plans, as the
same may be amended and in effect from time to time, at levels and having
interests commensurate with the Employee's then current period of service,
compensation and position.
5. Perquisites and Expenses.
------------------------
(a) General. During the term of the Employee's employment
-------
hereunder, the Employee shall be entitled to participate in any special benefit
or perquisite program available from time to time to executive employees of the
Employer on the terms and conditions then prevailing under such program.
(b) Business Travel, Lodging, etc. The Employer shall
----------------------------------
reimburse the Employee for reasonable travel, lodging and meal expenses incurred
by him in connection with his performance of services hereunder upon submission
of evidence, satisfactory to the Employer, of the incurrence and purpose of each
such expense.
6. Termination of Employment.
-------------------------
(a) Termination Due to Death or Disability. In the event that
--------------------------------------
the Employee's employment hereunder terminates due to death or is terminated by
the Employer due to the Employee's Disability (as defined below), no termination
benefits shall be payable to or in respect of the Employee except as provided in
Section 6(f)(ii). For purposes of this Agreement, "Disability" shall mean a
physical or mental disability that prevents the performance by the Employee of
his duties hereunder lasting (or likely to last, based on competent medical
evidence presented to Employer's Board) for a continuous period of six months or
longer. The reasoned and good faith judgment of Employer's Board as to the
Employee's Disability shall be final and shall be based on such competent
medical evidence as shall be presented to it by the Employee or by any physician
or group of physicians or other competent medical experts employed by the
Employee or the Employer to advise Employer's Board.
(b) Termination by the Employer for Cause. The Employee may be
-------------------------------------
terminated for Cause by the Employer. "Cause" shall mean (i) the willful failure
of the Employee substantially to perform his duties hereunder (other than any
such failure due to physical or mental illness) after a demand for substantial
performance is delivered to the Employee by the executive to which the Employee
reports or by Employer's Board, which notice identifies the manner in which such
executive or Employer's Board, as the case may be, believes that the Employee
3
<PAGE>
has not substantially performed his duties, (ii) the Employee's engaging in
willful and serious misconduct that is injurious to Group or Employer or any of
their subsidiaries, (iii) the Employee's regularly making a substantial, abusive
use of alcohol, drug, or similar substances, and such abuse in the Employer's
judgment has affected his ability to conduct the business of the Employer in a
proper and prudent manner, (iv) the Employee's conviction of, or entering a plea
of nolo contendere to, a crime that constitutes a felony, or (v) the willful and
material breach by the Employee of any of his obligations hereunder, or the
willful and material breach by the Employee of any written covenant or agreement
with the Employer or any of its affiliates not to disclose any information
pertaining to the Employer or any of its affiliates or not to compete or
interfere with the Employer or any of its affiliates.
(c) Termination by the Employer Without Cause. The Employee
------------------------------------------
may be terminated Without Cause by the Employer. A termination "Without Cause"
shall mean a termination of employment by the Employer other than due to death
or Disability as defined in Section 6(a) or Cause as defined in Section 6(b).
(d) Termination by the Employee. The Employee may terminate
----------------------------
his employment for "Good Reason". "Good Reason" shall mean a termination of
employment by the Employee within 30 days following (i) any assignment to the
Employee of any duties, functions or responsibilities that are significantly
different from, and result in a substantial diminution of, the duties, functions
or responsibilities that the Employee has on the date hereof or (ii) the failure
of the Employer to obtain the assumption of this Agreement by any successor as
contemplated by Section 12.
(e) Notice of Termination. Any termination by the Employer
----------------------
pursuant to Section 6(a), 6(b) or 6(c), or by the Employee pursuant to Section
6(d), shall be communicated by a written "Notice of Termination" addressed to
the other parties to this Agreement. A "Notice of Termination" shall mean a
notice stating that the Employee's employment hereunder has been or will be
terminated, indicating the specific termination provisions in this Agreement
relied upon and setting forth in reasonable detail the facts and circumstances
claimed to provide a basis for such termination of employment.
(f) Payments Upon Certain Terminations.
----------------------------------
(i) In the event of a termination of the Employee's
employment Without Cause or a termination by the Employee of his
employment for Good Reason, the Employer shall pay to the Employee (A)
(1) the greater of (x) his Base Salary, if any, for the period from the
Date of Termination (as defined below) through the last day of the
Initial Term, provided that Employer may, at any time, pay to the
Employee in a single lump sum an amount equal to the Base Salary
remaining to be paid to the Employee as of the date of such lump sum
payment and (y) an amount equal to one year's Base Salary, less (2) any
amounts paid or to be paid to the Employee under the terms of any
severance plan or program of Employer, if any, as in effect on the Date
of Termination, (B) the Annual Bonus with respect to a completed fiscal
4
<PAGE>
year to the extent not theretofore paid to the Employee and (C) a Pro
Rata Share of the Annual Bonus (as defined below) for the fiscal year
in which the Date of Termination occurred.
(ii) If the Employee's employment shall terminate upon his
death or Disability or if Employer shall terminate the Employee's
employment for Cause, Employer shall pay the Employee his full Base
Salary through the Date of Termination, plus, in the case of
termination upon the Employee's death or Disability, a Pro Rata Share
of the Annual Bonus. Any benefits payable to or in respect of the
Employee under any otherwise applicable plans, policies and practices
of the Employer shall not be limited by this provision.
(iii) For purposes of this Section 6, the "Pro Rata Share of
the Annual Bonus" shall be calculated and paid as follows. If the
Employee is terminated prior to July 1 of any year, the Pro Rata Share
of the Annual Bonus (A) will be equal to the product of (1) the Annual
Bonus, calculated assuming that 100% of the Operating Target is
achieved in such year, and (2) a fraction equal to the number of full
months in such year prior to the Date of Termination over 12, and (B)
will be paid to the Employee within 30 days after the Date of
Termination. If the Employee is terminated on or after July 1 of any
year, the Pro Rata Share of the Annual Bonus (A) will be equal to the
product of (1) the Annual Bonus, calculated based on the actual
Operating Result for such year, and (2) a fraction equal to the number
of full months in such year prior to the Date of Termination over 12,
and (B) will be paid to the Employee within 90 days after the close of
the year in respect of which the Pro Rata Share of the Annual Bonus is
payable.
(g) Date of Termination. As used in this Agreement, the term
-------------------
"Date of Termination" shall mean (i) if the Employee's employment is terminated
by his death, the date of his death, (ii) if the Employee's employment is
terminated for Cause, the date on which Notice of Termination is given as
contemplated by Section 6(e), and (iii) if the Employee's employment is
terminated Without Cause, due to the Employee's Disability or by the Employee
for Good Reason, 30 days after the date on which Notice of Termination is given
as contemplated by Section 6(d) or, if no such Notice is given, 30 days after
the date of termination of employment.
(h) Condition to Payments. The Employer's obligation to make
---------------------
any payments hereunder shall be conditioned upon the Employer's receipt of an
appropriately signed "General Release and Covenant Not to Sue" in form and
substance satisfactory to the Employer.
7. Unauthorized Disclosure. During and after the term of his employment
-----------------------
hereunder, the Employee shall not, without the written consent of Employer's
Board, the General Counsel of the Employer, or the Chief Executive Officer of
the Employer, disclose to any person (other than an employee or director of the
Employer or its affiliates, or a person to whom disclosure is reasonably
necessary or appropriate in connection with the performance by the Employee of
5
<PAGE>
his duties as an executive of the Employer) any confidential or proprietary
information, knowledge or data that is not theretofore publicly known and in the
public domain obtained by him while in the employ of the Employer with respect
to the Employer or any of its subsidiaries or affiliates or with respect to any
products, improvements, formulas, recipes, designs, processes, customers,
methods of sales, distribution, operation or manufacture, sales, prices,
profits, costs, contracts, suppliers, business prospects, business methods,
techniques, research, plans, strategies, personnel, organization, trade secrets
or know-how of the Employer or any of its subsidiaries or affiliates
(collectively, "Proprietary Information"), except as may be required by law or
in connection with any judicial or administrative proceedings or inquiry.
8. Non-Competition. During the period of the Employee's employment and
---------------
thereafter for a period equal to the number of months providing the basis for
calculating any termination payments to the Employee under Section 6, if any
such payments are required, but in any event for at least 12 months, the
Employee shall not engage directly or indirectly in, become employed by, serve
as an agent or consultant to, or become a partner, principal or stockholder of,
any partnership, corporation or other entity which competes with a business that
represents 5% or more of the aggregate gross revenues of the Employer and its
subsidiaries and which is then engaged in such competition in any geographical
area in which the Employer or any of its subsidiaries is then engaged in such
business without first obtaining written approval from the Employer, provided
that the Employee's ownership of less than 1% of the issued and outstanding
stock of any corporation whose stock is traded on an established securities
market shall not constitute competition with the Employer. The Employer may
grant or deny such approval in its sole discretion.
9. Non-Interference. During the period of the Employee's employment and
----------------
thereafter for a period equal to the number of months providing the basis for
calculating any termination payments to the Employee under Section 6, if any
such payments are required, but in any event for at least 36 months, the
Employee will not, directly or indirectly, for his own account or the account of
any other person or entity, (a) employ in a business of the kind in which the
Employer is engaged on the date of such termination, or solicit or endeavor to
entice away from the Employer, or otherwise intentionally interfere with the
Employer's relationship with, any person or entity who or which is at the time
employed by or otherwise engaged to perform services for the Employer or (b)
intentionally interfere with the Employer's relationship with any person or
entity who or which is, or has been within the previous 36 months, a customer,
client or supplier of the Employer.
10. Return of Documents. In the event of the termination of the
---------------------
Employee's employment for any reason, the Employee will deliver to the Employer
all non-personal documents and data of any nature pertaining to his work with
the Employer, and he will not take with him any documents or data of any
description or any reproduction thereof, or any documents containing or
pertaining to any Proprietary Information.
6
<PAGE>
11. Forfeiture of Realized and Unrealized Gains on Incentive Awards for
-------------------------------------------------------------------
Breach of this Agreement. If the Employee violates any provision of Sections 7,
- ------------------------
8, 9 or 10 of this Agreement, and the Employee is no longer employed by the
Employer, whether or not the termination of employment occurs prior to or
subsequent to such violation, then (1) all Incentive Awards held by the Employee
shall terminate effective the date on which Employee violates this Agreement,
unless terminated sooner by operation of another term or condition of the SIP or
the Award Agreement (as defined in the SIP), and (2) any gain realized upon
receipt of an Incentive Award, or exercise of an Incentive Award that does not
require the payment of an exercise price, which gain shall be represented by the
closing market price on the date of receipt of such Incentive Award, or in the
case of an Incentive Award that requires the payment of an exercise price, the
gain represented by the closing market price on the date of exercise over the
exercise price, multiplied by the number of Incentive Awards, or options
exercised, without regard to any subsequent market price decrease or increase;
in each case within 18 months prior to termination of employment with Employer
and violation of Sections 7, 8, 9 or 10 of this Agreement, shall be paid by the
Employee to the Employer. The Employee agrees that the Employer has the right to
deduct from any amounts the Employer may owe the Employee from time to time
(including amounts owed to the Employee as wages or other compensation, fringe
benefits, or vacation pay, as well as any other amounts owed to the Employee by
the Employer), the amounts the Employee owes the Employer or Group.
12. Assumption of Agreement. The Employer will require any successor
------------------------
(by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Employer, by agreement in form and substance
reasonably satisfactory to the Employee, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Employer would be required to perform it if no such succession had taken place.
Failure of the Employer to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Employee to the greater of (x) compensation from the Employer in the same amount
and on the same terms as the Employee would be entitled hereunder if the
Employer terminated his employment Without Cause as contemplated by Section 6
and (y) amounts required to be paid to the Employee pursuant to the Change of
Control Agreement by and among Group, Employer and Employee dated as of April
30, 1998 (the "CIC Agreement"). For purposes of implementing the foregoing
clause (x), the date on which any such succession becomes effective shall be
deemed to be the Date of Termination, and for purposes of implementing clause
(y), the timing and amount of any payments required pursuant to the CIC
Agreement shall be determined in accordance with the CIC Agreement.
13. Entire Agreement. Except as otherwise expressly provided herein,
----------------
this Agreement, the CIC Agreement and the Indemnification Agreement made and
entered into as of the 30th day of April, 1998 by and among Employer, Group and
Employee (the "Indemnification Agreement") constitute the entire agreement among
the parties hereto with respect to the subject matter hereof, and all promises,
representations, understandings, arrangements and prior agreements relating to
7
<PAGE>
such subject matter (including those made to or with the Employee by any other
person or entity) are merged herein, in the CIC Agreement and in the
Indemnification Agreement and superseded hereby and thereby. To the extent that
the amount and timing of payments required to be made under this Agreement are
inconsistent with or different from the amount and timing of payments required
to be made pursuant to the CIC Agreement and/or the Indemnification Agreement,
the Employee shall be entitled to the most favorable benefits provided to the
Employee under the provisions of any such agreements.
14. Indemnification. The Employer agrees that it shall indemnify and
---------------
hold harmless the Employee to the fullest extent (a) permitted by Delaware law
from and against any and all liabilities, costs, claims and expenses arising out
of the employment of the Employee hereunder, except to the extent arising out of
or based upon the gross negligence or willful misconduct of the Employee and (b)
provided by the Indemnification Agreement.
15. No Mitigation. The Employee shall not be required to mitigate the
--------------
amount of any payment that the Employer becomes obligated to make in connection
with this Agreement, the CIC Agreement or the Indemnification Agreement, by
seeking other employment or otherwise.
16. Miscellaneous.
-------------
(a) Binding Effect. This Agreement shall be binding on and
---------------
inure to the benefit of the Employer and its successors and permitted assigns.
This Agreement shall also be binding on and inure to the benefit of the Employee
and his heirs, executors, administrators and legal representatives.
(b) Governing Law. This Agreement shall be governed by and
--------------
constructed in accordance with the laws of the State of Delaware without
reference to principles of conflict of laws.
(c) Taxes. The Employer may withhold from any payments made
-----
under the Agreement all federal, state, city or other applicable taxes or social
security governmental regulation or ruling.
(d) Amendments. No provisions of this Agreement may be
----------
modified, waived or discharged unless such modification, waiver or discharge is
approved by Employer's Board or General Counsel of the Employer and is agreed to
in writing by the Employee and General Counsel of the Employer. No waiver by any
party hereto at any time of any breach by any other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No waiver of any
provision of this Agreement shall be implied from any course of dealing between
or among the parties hereto or from any failure by any party hereto to assert
8
<PAGE>
its rights hereunder on any occasion or series of occasions.
(e) Reformation; Severability. If any provision of this
--------------------------
Agreement is held by a court or arbitrator to be unreasonable in scope or
duration or otherwise, the court or arbitrator shall, to the extent permitted by
law, reform such provision so that it is enforceable, and enforce the applicable
provision as so reformed. Reformation of any provision of this Agreement
pursuant to this subsection (e) shall not affect any other provision of this
Agreement or render this Agreement unenforceable or void.
(f) Notices. Any notice or other communication required or
-------
permitted to be delivered under this Agreement shall be (i) in writing, (ii)
delivered personally, by courier service or by certified or registered mail,
first-class postage prepaid and return receipt requested, (iii) deemed to have
been received on the date of delivery or on the third business day after the
mailing thereof, and (iv) addressed as follows (or to such other address as the
party entitled to notice shall hereafter designate in accordance with the terms
hereof):
(A) if to the Employer or Group, to it at:
One Lexmark Centre Drive
740 West New Circle Road
Lexington, Kentucky 40550
Attention: General Counsel
---------
(B) if to the Employee, to him at the address
listed on the signature page hereof.
(g) Survival. Sections 7, 8, 9,10 and 11 and, if the
--------
Employee's employment terminates in a manner giving rise to a payment under
Section 6(f), Section 6(f) shall survive the termination of the employment of
the Employee hereunder.
(h) Counterparts. This Agreement may be executed in
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
9
<PAGE>
(i) Headings. The section and other headings contained in this
--------
Agreement are for the convenience of the parties only and are not intended to be
a part hereof or to affect the meaning or interpretation hereof.
IN WITNESS WHEREOF, the Employer and Group have duly executed this
Agreement by their authorized representatives and the Employee has hereunto set
his hand, in each case effective as of the date first above written.
LEXMARK INTERNATIONAL, INC.
By: /s/ Paul J. Curlander
------------------------------
Paul J. Curlander
President and
Chief Executive Officer
LEXMARK INTERNATIONAL GROUP, INC.
By: /s/ Paul J. Curlander
------------------------------
Paul J. Curlander
President and
Chief Executive Officer
THE EMPLOYEE:
/s/ Alfred A. Traversi
-----------------------------------
Address:
<PAGE>
EXHIBIT 13
Sections of the Company's 1998 Annual Report to Stockholders
Incorporated by Reference in this Report
<PAGE>
Lexmark International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS For the years ended December 31, 1998, 1997
and 1996
(Dollars in Millions, Except Per Share Amounts)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $3,020.6 $2,493.5 $2,377.6
Cost of revenues 1,934.4 1,623.5 1,630.2
- ---------------------------------------------------------------------------------------------------
Gross profit 1,086.2 870.0 747.4
Research and development 158.5 128.9 123.9
Selling, general and administrative 544.9 466.5 388.0
Amortization of intangibles - - 5.1
- ---------------------------------------------------------------------------------------------------
Operating expenses 703.4 595.4 517.0
- ---------------------------------------------------------------------------------------------------
Operating income 382.8 274.6 230.4
Interest expense 11.0 10.8 20.9
Other 6.4 9.1 7.9
- ---------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary item 365.4 254.7 201.6
Provision for income taxes 122.4 91.7 73.8
- ---------------------------------------------------------------------------------------------------
Earnings before extraordinary item 243.0 163.0 127.8
Extraordinary loss on extinguishment of debt
(net of related tax benefit of $8.4 in 1997) - (14.0) -
- ---------------------------------------------------------------------------------------------------
Net earnings $ 243.0 $ 149.0 $ 127.8
Basic earnings per share:
Before extraordinary item $ 3.65 $ 2.29 $ 1.78
Extraordinary loss - (0.20) -
- ---------------------------------------------------------------------------------------------------
Net earnings per share $ 3.65 $ 2.09 $ 1.78
Diluted earnings per share:
Before extraordinary item $ 3.40 $ 2.17 $ 1.69
Extraordinary loss - (0.19) -
- ---------------------------------------------------------------------------------------------------
Net earnings per share $ 3.40 $ 1.98 $ 1.69
Shares used in per share calculation:
Basic 66,621,369 71,314,311 71,629,572
Diluted 71,400,890 75,168,776 75,665,734
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
Lexmark International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As of December 31, 1998 and 1997
(Dollars in Millions, Except Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 149.0 $ 43.0
Trade receivables, net of allowances of
$24.2 in 1998 and $19.4 in 1997 469.4 318.9
Inventories 333.0 353.8
Prepaid expenses and other current assets 68.6 60.4
- -------------------------------------------------------------------------------
Total current assets 1,020.0 776.1
Property, plant and equipment, net 430.5 409.6
Other assets 32.9 22.5
- -------------------------------------------------------------------------------
Total assets $1,483.4 $1,208.2
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 11.7 $ 18.0
Accounts payable 267.1 302.0
Accrued liabilities 326.9 227.5
- -------------------------------------------------------------------------------
Total current liabilities 605.7 547.5
Long-term debt 148.7 57.0
Other liabilities 150.9 103.0
- -------------------------------------------------------------------------------
Total liabilities 905.3 707.5
- -------------------------------------------------------------------------------
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;
65,491,131 and 67,539,935 outstanding in
1998 and 1997, respectively 0.8 0.7
Class B, 10,000,000 shares authorized;
0 and 410,537 outstanding in 1998 and
1997, respectively - -
Capital in excess of par 564.8 537.2
Retained earnings 411.8 168.8
Treasury stock, at cost; 10,072,833 and 6,438,114
shares in 1998 and 1997, respectively (370.3) (182.2)
Accumulated other comprehensive earnings (loss) (29.0) (23.8)
- --------------------------------------------------------------------------------
Total stockholders' equity 578.1 500.7
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,483.4 $1,208.2
- --------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
Lexmark International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(Dollars In Millions)
- ----------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $243.0 $149.0 $127.8
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 75.6 77.5 69.2
Extraordinary loss on extinguishment of debt - 22.4 -
Deferred taxes 3.0 40.7 12.3
Other non-cash charges to operations 26.5 24.6 22.6
- ------------------------------------------------------------------------------------------
348.1 314.2 231.9
Change in assets and liabilities:
Trade receivables (138.2) (47.5) (70.1)
Trade receivables programs (12.3) 33.3 (21.0)
Inventories 20.8 (82.8) 25.3
Accounts payable (34.9) 104.8 (12.4)
Accrued liabilities 99.4 5.5 (36.4)
Other assets and liabilities 6.1 (52.6) 0.7
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 289.0 274.9 118.0
Cash flows from investing activities:
Purchases of property, plant and equipment (101.7) (69.5) (145.0)
Proceeds from sales of property, plant and equipment 2.0 1.1 3.6
- ------------------------------------------------------------------------------------------
Net cash used for investing activities (99.7) (68.4) (141.4)
Cash flows from financing activities:
Increase (decrease) in short-term debt (6.3) 35.8 2.1
Proceeds from issuance of long-term debt, net
of issuance costs of $1.3 in 1998 297.2 0.2 5.7
Principal payments on long-term debt (207.0) (125.5) (38.0)
Charges related to extinguishment of debt - (22.4) -
Purchase of treasury stock (188.5) (182.2) -
Exercise of stock options and warrants 20.7 15.2 23.0
- ------------------------------------------------------------------------------------------
Net cash used for financing activities (83.9) (278.9) (7.2)
Effect of exchange rate changes on cash 0.6 (3.9) (0.6)
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 106.0 (76.3) (31.2)
Cash and cash equivalents - beginning of period 43.0 119.3 150.5
- ------------------------------------------------------------------------------------------
Cash and cash equivalents - end of period $149.0 $ 43.0 $119.3
- ------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
Lexmark International Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
(Dollars in Millions, Except Share Amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Class A Class B
Common Stock Common Stock
----------------------- -------------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 64,303,619 $0.6 5,888,623 $0.1
Comprehensive earnings
Net earnings
Other comprehensive earnings (loss):
Translation adjustment
Other comprehensive earnings (loss)
- --------------------------------------------------------------------------------------------------------------------
Comprehensive earnings
Conversion of Class B to Class A common stock 3,442,100 0.1 (3,442,100) (0.1)
Option compensation expense
Long-term incentive plan compensation
Net shares issued upon exercise of options 2,467,884
Tax benefit related to stock options and warrants
Cash received for payments on notes receivable for common stock
issued to management and certain other individuals
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 70,213,603 0.7 2,446,523 ----
Comprehensive earnings
Net earnings
Other comprehensive earnings (loss):
Translation adjustment
Other comprehensive earnings (loss)
- ------------------------------------------------------------------------------------------------------------------
Comprehensive earnings
Conversion of Class B to Class A common stock 2,035,986 (2,035,986)
Shares issued upon exercise of warrants 531,284
Option compensation expense
Long-term incentive plan compensation
Deferred stock plan compensation
Shares issued upon exercise of options 1,197,176
Tax benefit related to stock options and warrants
Treasury shares repurchased (6,438,114)
Cash received for payments on notes receivable for common stock
issued to management and certain other individuals
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 67,539,935 0.7 410,537 ----
Comprehensive earnings
Net earnings
Other comprehensive earnings (loss):
Minimum pension liability adjustment
(net of related tax benefit of $3.7)
Translation adjustment
Other comprehensive earnings (loss)
- ------------------------------------------------------------------------------------------------------------------
Comprehensive earnings
Conversion of Class B to Class A common stock 410,537 (410,537)
Long-term incentive plan compensation
Deferred stock plan compensation
Shares issued upon exercise of options 1,175,378 0.1
Tax benefit related to stock options
Treasury shares repurchased (3,647,600)
Treasury shares issued 12,881
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 65,491,131 $0.8 ---- $----
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Accumulated Other Comprehensive Earnings (Loss)
Retained ----------------------------------------------- Total
Capital in Earnings Treasury Minimum Translation Stockholders'
Excess of Par (Deficit) Stock Pension Liability Adjustment Total Equity
------------- --------- ----- ----------------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
$494.6 $(108.0) $---- $---- $2.9 $2.9 $390.2
127.8 127.8
(2.4) (2.4)
------
(2.4) (2.4)
- -----------------------------------------------------------------------------------------------------------
125.4
----
1.2 1.2
0.8 0.8
15.1 15.1
7.4 7.4
0.2 0.2
- -----------------------------------------------------------------------------------------------------------
519.3 19.8 ---- ---- 0.5 0.5 540.3
149.0 149.0
(24.3) (24.3)
-------
(24.3) (24.3)
- -----------------------------------------------------------------------------------------------------------
124.7
----
1.1 1.1
0.6 0.6
0.1 0.1
1.8 1.8
7.8 7.8
6.4 6.4
(182.2) (182.2)
0.1 0.1
- -----------------------------------------------------------------------------------------------------------
537.2 168.8 (182.2) ---- (23.8) (23.8) 500.7
243.0 243.0
(5.1) (5.1)
(0.1) (0.1)
-------
(5.2) (5.2)
- -----------------------------------------------------------------------------------------------------------
237.8
----
5.3 5.3
1.6 1.6
9.4 9.5
11.3 11.3
(188.5) (188.5)
0.4 0.4
- -----------------------------------------------------------------------------------------------------------
$564.8 $411.8 $(370.3) $(5.1) $(23.9) $(29.0) $578.1
- -----------------------------------------------------------------------------------------------------------
</TABLE>
29
<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. ("Group" and together with its
subsidiaries, the "company") is a global developer, manufacturer and supplier of
laser and inkjet printers and associated consumable supplies. The company also
sells dot matrix printers for printing single and multi-part forms by business
users. The company's printer business targets the office and home markets. In
addition, the company 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 other
original equipment manufacturer ("OEM") products, and typewriters and typewriter
supplies that are sold under the IBM trademark. The principal customers for the
company's products are dealers, retailers and distributors worldwide. The
company employs marketing teams which target large accounts to generate demand
in selected industries worldwide. The company's products are sold in over 150
countries in North and South America, Europe, the Middle East, Africa, Asia, the
Pacific Rim and the Caribbean.
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 Currency Translation:
Assets and liabilities of non-U.S. subsidiaries that operate in a local
currency environment 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 accumulated other
comprehensive earnings in stockholders' equity.
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 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 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.
Revenue Recognition:
Sales are recognized when products are shipped to customers. A
provision for estimated sales returns is recorded in the period in which related
sales are recognized.
30
<PAGE>
Advertising Costs:
The company expenses advertising costs when incurred. Advertising
expense was approximately $115.6 million, $113.4 million and $80.0 million in
1998, 1997 and 1996, respectively.
Income Taxes:
The company utilizes the liability method of accounting for income
taxes. This method 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.
Comprehensive Earnings:
Effective January 1, 1998 the company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, Reporting Comprehensive Income. This
statement requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in a financial statement. This
statement also requires that companies classify items of other comprehensive
earnings by their nature in a financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
certain marketable securities. This statement did not impact the results of
operations. The statements of financial position and stockholders' equity for
prior periods have been reclassified, as required.
Segment Reporting:
In 1998, the company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 supersedes SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS No. 131 applies
a "management approach" in which the internal organization that is used by
management for making operational decisions and evaluating performance is the
source for the company's segment reporting. The adoption of SFAS No. 131 did not
affect the results of operations or financial position.
3. INVENTORIES
Inventories consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------
<S> <C> <C>
Work in process $140.3 $211.2
Finished goods 192.7 142.6
- ---------------------------------------------------
$333.0 $353.8
- ---------------------------------------------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December
31:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
- ---------------------------------------------------
Land and improvements $ 16.3 $ 16.2
Buildings and improvements 192.3 171.9
Machinery and equipment 456.5 428.9
Information systems and furniture 128.9 124.4
- ---------------------------------------------------
794.0 741.4
Less accumulated depreciation 363.5 331.8
- ---------------------------------------------------
$430.5 $409.6
- ---------------------------------------------------
</TABLE>
Depreciation expense was $75.1 million, $76.8 million and $62.3 million
for 1998, 1997 and 1996, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------
<S> <C> <C>
Compensation $ 93.2 $ 58.7
Income taxes payable 18.2 9.5
Fixed assets 15.3 9.0
Warranty 33.5 30.6
Value added tax 12.4 6.6
Deferred revenue 43.5 27.8
Other 110.8 85.3
- ------------------------------------------------------
$326.9 $227.5
- ------------------------------------------------------
</TABLE>
6. DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------
<S> <C> <C>
Revolving credit facility refinanced $ - $20.0
Term loan refinanced - 37.0
Senior notes due May 2008, net of -
unamortized discount of $1.3 148.7
- -------------------------------------------------------
$148.7 $57.0
- -------------------------------------------------------
</TABLE>
31
<PAGE>
In January 1998, the company entered into a new $300.0 million
unsecured, revolving credit facility with a group of banks. Upon entering the
new agreement, the company repaid the amounts outstanding on its existing term
loan and revolving credit facility. The company had an interest rate/currency
swap hedging the term loan with a notional amount of $36.7 million that matured
in the first quarter of 1998. The effective interest rate on the term loan
(after giving effect to the interest rate/currency swap) was 6.7% at December
31, 1997.
The interest rate on the new credit facility ranges from 0.2% to 0.7%
above London Inter Bank Offered Rate (LIBOR), as adjusted under certain limited
circumstances, based upon the company's debt rating. In addition, the company
pays a facility fee on the $300.0 million of 0.1% to 0.3% based upon the
company's debt rating. The interest and facility fees are payable quarterly.
The $300.0 million credit agreement contains customary default
provisions, leverage and interest coverage restrictions and certain restrictions
on the incurrence of additional debt, liens, mergers or consolidations and
investments. Any amounts outstanding under the $300.0 million credit facility
are due upon the maturity of the facility on January 27, 2003.
In May 1998, Lexmark International, Inc. ("International"), a
wholly-owned subsidiary of Group, completed a public offering of $150.0 million
principal amount of 6.75% senior notes due May 15, 2008. The senior notes were
priced at 98.998%, to yield 6.89% to maturity. The senior notes are guaranteed
by Group and contain restrictions on liens, sale leaseback transactions, mergers
and sales of assets. A substantial portion of the net proceeds from the sale of
the senior notes was used to reduce existing debt outstanding under the
company's credit facility. There are no sinking fund requirements on the senior
notes and they may be redeemed at any time, at a redemption price as described
in the related indenture agreement, in whole or in part, at the option of
International.
In March 1997, the company prepaid its $120.0 million, 14.25% senior
subordinated notes due in 2001. The prepayment resulted in an extraordinary
charge of $22.4 million ($14.0 million net of tax benefit) caused by a
prepayment premium and other fees.
Interest expense of $0.0 million, $0.9 million and $1.2 million in
1998, 1997 and 1996, respectively, related to the swap discussed above,
previously outstanding interest rate/currency swaps and interest rate caps and
options hedging debt is included in interest expense in the statement of
earnings.
Total cash paid for interest amounted to $13.0 million, $13.2 million
and $24.2 million in 1998, 1997 and 1996, respectively.
7. STOCKHOLDERS' EQUITY
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, 1998, approximately 74,000,000 and 1,750,000 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
offerings to raise additional capital and for facilitating acquisitions.
As of December 31, 1997, the company's board of directors authorized
the repurchase of $200.0 million of its Class A common stock. In 1998, the
company's board of directors authorized the repurchase of up to an additional
$400.0 million of its Class A common stock. This total repurchase authority of
$600.0 million allows the company at management's discretion 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, 1998, the company had repurchased 10,085,714 shares at prices
ranging from $21.25 to $75.94 per share for an aggregate cost of approximately
$370.7 million.
In February 1998, the company's board of directors adopted a
stockholder rights plan (the "Rights Plan") which now provides existing
stockholders with the right to purchase one one-thousandth (0.001) of a share of
Series A Junior Participating preferred stock for each share
32
<PAGE>
of common stock held in the event of certain changes in the company's ownership.
The rights will expire on January 31, 2009, unless earlier redeemed by the
company.
The remaining warrants outstanding in connection with a technology
agreement with an unrelated party to purchase 634,365 shares of Class A common
stock at $6.67 per share were exercised in 1997.
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. Under
the employee plans, as of December 31, 1998 approximately 3,300,000 shares of
Class A common stock are reserved for future grants in the form of stock
options, stock appreciation rights, restricted stock, performance shares or
deferred stock units. Under the non-employee director plan, as of December 31,
1998 approximately 16,000 shares of Class A common stock are reserved for future
grants in the form of stock options and deferred stock units. As of December 31,
1998, awards under the programs have been limited to stock options, restricted
stock, performance shares and deferred stock units.
The company has granted approximately 200,000 shares of restricted
stock and deferred stock units as of December 31, 1998 with various vesting
periods. The cost of the awards, determined to be the fair market value of the
shares at the date of grant, is charged to compensation expense ratably over the
vesting periods. In addition, the company has awarded performance shares for
which specific goals must be attained by the end of the four year period 1997
through 2000 in order for the shares to be fully vested. Compensation expense is
estimated over the four year period based on the fair market value of the shares
during that period.
The exercise price of options awarded under stock option 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 the completion of three
years of service on the board of directors.
The company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans. Accordingly,
no compensation expense has been recognized for its stock-based compensation
plans other than for restricted stock, performance-based awards and deferred
stock units. Had compensation expense for the company's stock-based compensation
plans been determined based on the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under SFAS No. 123,
Accounting for Stock-Based Compensation, net earnings and earnings per share
would have been reduced to the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings - as reported $ 243.0 $ 149.0 $ 127.8
Net earnings - pro forma 236.5 145.1 125.0
- -------------------------------------------------------------------------
Basic EPS - as reported $ 3.65 $ 2.09 $ 1.78
Basic EPS - pro forma 3.55 2.04 1.74
- -------------------------------------------------------------------------
Diluted EPS - as reported $ 3.40 $ 1.98 $ 1.69
Diluted EPS - pro forma 3.31 1.93 1.65
- -------------------------------------------------------------------------
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield - - -
Expected stock price volatility 38% 44% 45%
Weighted average risk-free 5.5% 6.2% 5.8%
interest rate
Weighted average expected life of
options (years) 4.9 4.8 3.9
- ----------------------------------------------------------------------
</TABLE>
The weighted average fair value of options granted during 1998, 1997
and 1996 was $18.92, $11.84 and $7.67 per share, respectively.
The pro forma effects on net income for 1998, 1997 and 1996 are not
representative of the pro forma effect on net income in future years because
they do not take into consideration pro forma compensation expense related to
grants made prior to 1995.
33
<PAGE>
A summary of the status of the company's stock option plans as of
December 31, 1998, 1997 and 1996 and changes during the years then ended is
presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
- ---------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 9,428,781 $10.54
Granted 508,532 19.39
Exercised (2,664,363) 7.11
Forfeited or canceled (321,088) 14.81
- ---------------------------------------------------------------
Outstanding at December 31, 1996 6,951,862 12.31
Granted 1,355,755 25.67
Exercised (1,276,408) 7.82
Forfeited or canceled (239,284) 18.40
- ---------------------------------------------------------------
Outstanding at December 31, 1997 6,791,925 15.58
Granted 1,396,208 45.72
Exercised (1,265,805) 11.46
Forfeited or canceled (122,850) 25.74
- ---------------------------------------------------------------
Outstanding at December 31, 1998 6,799,478 $22.30
- ---------------------------------------------------------------
</TABLE>
As of December 31, 1998, 1997 and 1996 there were 3,484,133, 3,678,324
and 4,574,734 options exercisable, respectively.
The following tables summarize information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding
- ------------------------------------------------------------------------
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 6.67 to $19.75 2,435,517 3.7 years $ 9.24
20.00 to 36.44 3,021,329 7.4 22.30
39.06 to 88.38 1,342,632 9.2 46.03
- ------------------------------------------------------------------------
$ 6.67 to $88.38 6,799,478 6.4 $22.30
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
- ------------------------------------------------------
Number
Range of Exercisable Weighted-Average
Exercise Prices at 12/31/98 Exercise Price
- ------------------------------------------------------
<S> <C> <C> <C>
$ 6.67 to $19.75 2,160,420 $ 8.67
20.00 to 36.44 1,280,892 21.17
39.06 to 88.38 42,821 50.06
- ------------------------------------------------------
$ 6.67 to $88.38 3,484,133 $13.78
- ------------------------------------------------------
</TABLE>
9. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------
Currently payable:
<S> <C> <C> <C>
Federal $ 92.9 $37.8 $50.0
Non-U.S. 16.0 9.9 5.3
State and local 6.8 3.3 6.2
- ---------------------------------------------------------
115.7 51.0 61.5
Deferred payable:
Federal 1.9 34.1 12.0
Non-U.S. 2.9 2.6 0.1
State and local 1.9 4.0 0.2
- ---------------------------------------------------------
6.7 40.7 12.3
- ---------------------------------------------------------
Provision for income taxes $122.4 $91.7 $73.8
- ---------------------------------------------------------
</TABLE>
Earnings before income taxes were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
U.S. $278.2 $166.7 $129.6
Non-U.S. 87.2 88.0 72.0
- ---------------------------------------------------------
Earnings before income taxes $365.4 $254.7 $201.6
- ---------------------------------------------------------
</TABLE>
The company realized an income tax benefit from the exercise of certain
stock options and warrants in 1998, 1997 and 1996 of $11.3 million, $6.4 million
and $7.4 million, respectively. This benefit resulted in a decrease in current
income taxes payable and an increase in capital in excess of par.
The company and its subsidiaries are subject to tax examinations in
various U.S. and foreign jurisdictions. The company believes that adequate tax
payments have been made and accruals recorded for all years.
Significant components of deferred income taxes were as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Tax loss carryforwards $ 12.5 $ 14.9
Intangible assets 3.7 7.0
Unexercised stock options 0.4 6.4
Inventories 17.6 17.5
Valuation allowance (18.4) (20.8)
- -----------------------------------------------------
Total deferred tax assets 15.8 25.0
- -----------------------------------------------------
Deferred tax liabilities:
Prepaid expenses 2.2 3.1
Property, plant and equipment 29.0 19.9
Other 9.7 24.1
- -----------------------------------------------------
Total deferred tax liabilities 40.9 47.1
- -----------------------------------------------------
Net deferred tax liabilities $(25.1) $(22.1)
- -----------------------------------------------------
</TABLE>
34
<PAGE>
The net decrease in the total valuation allowance for the years ended
December 31, 1998 and 1997 was $2.4 million and $11.5 million, respectively. The
company has non-U.S. tax loss carryforwards of $34.2 million including $1.6
million which expire between the years 2000 and 2004. Of these non-U.S. tax loss
carryforwards, $11.3 million 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.
A reconciliation of the provision for income taxes using the U.S.
statutory rate and the company's effective tax rate was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------
Provision for income taxes at
<S> <C> <C> <C> <C> <C> <C>
statutory rate $127.9 35.0% $89.2 35.0% $70.5 35.0%
State and local income taxes, net of
federal tax benefit 8.7 2.4 7.3 2.9 6.4 3.2
Losses providing no tax benefit 1.2 0.3 5.8 2.3 45.1 22.3
Foreign tax differential (11.8) (3.2) - - - -
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets affecting
provision (2.4) (0.6) (11.5) (4.5) (44.9) (22.3)
Research and development credit (5.8) (1.6) (5.5) (2.2) (2.9) (1.4)
Foreign sales corporation (6.8) (1.9) (2.6) (1.0) (5.0) (2.5)
Other 11.4 3.1 9.0 3.5 4.6 2.3
- ---------------------------------------------------------------------------------------
Provision for income taxes $122.4 33.5% $91.7 36.0% $73.8 36.6%
- ---------------------------------------------------------------------------------------
</TABLE>
Cash paid for income taxes was $70.6 million, $36.3 million and $60.7
million in 1998, 1997 and 1996, respectively.
10. 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 $7.2 million, $5.6 million and $5.8
million) was $22.7 million, $16.0 million and $13.0 million in 1998, 1997 and
1996, respectively. Future minimum rentals under terms of non-cancelable
operating leases at December 31 are: 1999-$29.9 million; 2000-$22.0 million;
2001-$15.3 million; 2002-$10.6 million; 2003-$8.0 million and thereafter-$12.7
million.
35
<PAGE>
11. EMPLOYEE PENSION AND POSTRETIREMENT PLANS
In 1998, the company adopted SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. This statement revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans.
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
- ------------------------------------------------------------------------------------------------
1998 1997 1998 1997
---------------------- ----------------------
Change in Benefit Obligation
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $450.9 $369.9 $ 33.0 $ 27.1
Service cost 16.6 13.0 3.4 3.0
Interest cost 30.7 28.5 2.4 2.0
Contributions by plan participants 0.3 0.2 - -
Actuarial (gain) loss 43.7 53.6 1.7 1.3
Foreign currency exchange rate changes 1.8 (5.2) - -
Benefits paid (17.8) (9.4) (0.3) (0.4)
Plan amendments (23.1) - - -
Settlement/curtailment losses 0.4 0.3 - -
- -----------------------------------------------------------------------------------------------
Benefit obligation at end of year 503.5 450.9 40.2 33.0
- -----------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at beginning of year 442.8 377.7 - -
Actual return on plan assets 68.2 74.9 - -
Foreign currency exchange rate changes 1.5 (3.6) - -
Contributions by the employer 4.2 3.0 0.3 0.4
Contributions by plan participants 0.3 0.2 - -
Benefits paid (17.8) (9.4) (0.3) (0.4)
- -----------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 499.2 442.8 - -
- -----------------------------------------------------------------------------------------------
Funded status (4.3) (8.1) (40.2) (33.0)
Unrecognized loss 21.9 4.7 6.1 4.3
Unrecognized prior service cost (20.9) 0.8 - -
- -----------------------------------------------------------------------------------------------
Net amount recognized $ (3.3) $ 2.6) $(34.1) $(28.7)
- -----------------------------------------------------------------------------------------------
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 11.8 $ 11.1 $ - $ -
Accrued benefit liability (29.2) (16.8) (34.1) (28.7)
Intangible asset 5.3 - - -
Accumulated other comprehensive earnings 8.8 3.1 - -
- -----------------------------------------------------------------------------------------------
Net amount recognized $ (3.3) $(2.6) $(34.1) $(28.7)
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
- ----------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
---------------------------- --------------------------
Weighted-average assumptions as of
December 31:
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.5% 6.8% 7.4% 7.0% 7.2% 7.7%
Expected return on plan assets 9.6% 9.6% 9.6% - - -
Rate of compensation increase 4.1% 4.3% 4.9% - - -
Components of Net Periodic Benefit Cost
Service cost $ 16.6 $ 13.0 $ 17.5 $ 3.4 $ 3.0 $ 3.1
Interest cost 30.7 28.5 27.5 2.4 2.0 1.8
Expected return on plan assets (42.1) (35.7) (37.3) - - -
Amortization of prior service cost (1.4) 0.2 0.2 - - -
Amortization of net losses 0.4 0.1 0.4 - - 0.2
Settlement or curtailment losses 0.4 0.3 0.9 - - -
- ----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 4.6 $ 6.4 $ 9.2 $ 5.8 $ 5.0 $ 5.1
- ----------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $41.7 million, $39.7 million and $11.1
million, respectively, as of December 31, 1998, and $31.0 million, $25.1 million
and $9.9 million, respectively, as of December 31, 1997.
For measurement purposes, an 8.9% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate is
assumed to decrease gradually to 5% for 2009 and remain at that level
thereafter. Since the net employer costs for postretirement medical benefits
reach the preset caps within the next eight to ten years, a 1% increase or
decrease in trend has a de minimis effect on costs.
Related to the company's acquisition of the Information Products
Corporation from IBM in 1991, IBM agreed to pay for its pro rata share
(currently estimated at $70.8 million) of future postretirement benefits for all
the company U.S. employees based on relative years of service with IBM and the
company.
The company also sponsors 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
$5.5 million, $4.5 million and $4.4 million in 1998, 1997 and 1996,
respectively.
12. DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The company manages risk arising from fluctuations in interest rates
and currency exchange rates by using derivative financial instruments. The
company manages exposure to counterparty credit risk by entering into derivative
financial instruments with highly rated institutions that can be expected to
fully perform under the terms of such agreements. The company does not hold or
issue financial instruments for trading purposes. Where appropriate, the company
arranges master netting agreements.
Instruments used as hedges must be effective at reducing the risk
associated with the exposure being hedged and must be designated as a hedge at
the inception of the contract. Accordingly, changes in market values of hedge
instruments must be highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over the life of the
hedge contract. Any instrument not qualifying as a hedge or designated but
ineffective as a hedge is marked to market and recognized in earnings
immediately.
Interest Rate Risk Management: The company has, from time to time,
utilized 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. Interest differentials resulting from interest rate
swap agreements used to change the interest rate characteristics of debt are
recorded on an accrual basis as an adjustment to interest expense. 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. In the event of an early termination of an interest
rate swap agreement designated as a hedge, the gain or loss is deferred,
recorded in non-current assets or liabilities, and recognized as an adjustment
to interest or other expense over the remaining term of the contract.
For additional information related to derivative financial instruments
used to manage interest rate risk, see Notes 6 and 14.
Foreign Exchange Risk Management: 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 transactions. Contracts that do not qualify as
hedges for accounting purposes 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.
37
<PAGE>
Notional amounts at December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------
<S> <C> <C>
Forward contracts $ 265.8 $ 205.7
Options purchased 597.8 249.8
Options written (257.2) (104.9)
- ----------------------------------------------
</TABLE>
Forward contracts and purchased options are used to hedge actual and
anticipated purchases of inventory and are included in the statement of
financial position as current assets and accrued liabilities. These instruments
typically 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. In the event of an early termination of a
currency exchange agreement designated as a hedge, the gain or loss and any fees
paid continue to be deferred and are included in the settlement of the
underlying transaction.
The company purchases and writes 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 at fair value as current assets and accrued
liabilities, respectively.
Concentrations of Credit Risk: The company's main concentrations of
credit risk consist primarily of temporary cash investments and trade
receivables. Cash investments are made in a variety of high quality securities
with prudent diversification requirements. Credit risk related to trade
receivables is dispersed across a large number of customers located in various
geographic areas. The company 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).
13. 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>
1998 1997
Asset (Liability) Asset (Liability)
- ------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Non-derivatives:
<S> <C> <C> <C> <C>
Long-term debt (senior notes) $(148.7) $(150.5) $- $ -
Derivatives:
Prepaid expenses and other current assets 3.4 3.8 1.4 3.0
Other assets (liabilities) - (1.0) 0.4 (0.1)
- ------------------------------------------------------------------------------------------------
</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 values of the term loan and revolving credit
facility approximated their fair value given their variable rate interest
provisions. Derivative financial instruments which do not qualify for hedge
accounting and forward contracts are recorded in the statement of financial
position at their fair value. The fair value of the senior notes was 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.
38
<PAGE>
14. SALES OF RECEIVABLES
In November 1998, the company amended its agreement to sell its U.S.
trade receivables on a limited recourse basis. The maximum amount of U.S. trade
receivables to be sold was increased from $100.0 million to $125.0 million. As
collections reduce previously sold receivables, the company may replenish these
with new receivables. At both December 31, 1998 and 1997, U.S. trade receivables
of $100.0 million had been sold and, due to the revolving nature of the
agreement, $100.0 million also remained outstanding. The agreement, which
contains customary financial covenants, must be renewed annually, and is
expected to be renewed upon its expiration in November 1999. 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.
In March 1997, the company entered into three-year interest rate swaps
with a total notional amount of $60.0 million, whereby the company pays interest
at a fixed rate of approximately 6.5% and receives interest at a floating rate
equal to the three-month LIBOR. Since May 1998, the swaps serve as a hedge of
the receivables financings which are based on floating interest rates. Expense
of $0.5 million for 1998 related to these swaps is included in other expense in
the statement of earnings.
The company had an agreement to sell up to 22 million deutsche marks of
German trade receivables on a limited recourse basis. At December 31, 1997,
German trade receivables of 21.8 million deutsche marks ($12.3 million at
December 31, 1997 exchange rates) were sold and outstanding. During 1998, this
agreement was terminated.
During 1997, the company adopted SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
125 provides standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings and addresses programs such as
the company's trade receivables programs in the U.S. and Germany. With the
adoption of SFAS No. 125, the company continues to account for the transfers of
receivables as sale transactions. In response to SFAS No. 125 for purposes of
the U.S. program, the company formed and sells its receivables to a wholly owned
subsidiary, Lexmark Receivables Corporation ("LRC"), which then sells the
receivables to an unrelated third party. LRC is a separate legal entity with its
own separate creditors who, in a liquidation of LRC, would be entitled to be
satisfied out of LRC's assets prior to any value in LRC becoming available for
equity claims of an LRC stockholder.
In prior years, the company sold a portion of its non-U.S. trade
receivables on a recourse basis. Proceeds from these sales totaled $18.6 million
and $48.9 million in 1997 and 1996, respectively.
Expenses incurred under these programs totaling $6.6 million, $5.2
million and $5.4 million for 1998, 1997 and 1996 respectively, are included in
other expense in the statements of earnings.
15. EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
---------------------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Net earnings $ 243.0
Basic EPS
Net earnings available to common
stockholders 243.0 66,621,369 $ 3.65
Effect of Dilutive Securities
Long-term incentive plan
- 120,382
Stock options
- 4,659,139
-------- ----------
Diluted EPS
Net earnings available to common
stockholders plus assumed conversions $ 243.0 71,400,890 $ 3.40
---------------------------------------------------------
</TABLE>
Options to purchase an additional 4,500 shares of Class A common stock at prices
between $75.94 and $88.38 per share were outstanding at December 31, 1998 but
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price of the
common shares.
39
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
---------------------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Earnings before extraordinary item $ 163.0
Basic EPS
Earnings available to common
stockholders 163.0 71,314,311 $ 2.29
Effect of Dilutive Securities
Warrants - 324,238
Long-term incentive plan - 10,430
Stock options - 3,519,797
------- ----------
Diluted EPS
Earnings available to common
stockholders plus assumed conversions $ 163.0 75,168,776 $ 2.17
---------------------------------------------------------
</TABLE>
Options to purchase an additional 42,948 shares of Class A common stock at
prices between $32.56 and $36.44 per share were outstanding at December 31, 1997
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
---------------------------------------------------------
Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Net earnings $ 127.8
Basic EPS
Net earnings available to common
stockholders 127.8 71,629,572 $ 1.78
Effect of Dilutive Securities
Warrants 424,285
-
Long-term incentive plan 34,563
-
Stock options 3,577,314
-
------- ----------
Diluted EPS
Net earnings available to common
stockholders plus assumed conversions $ 127.8 75,665,734 $ 1.69
---------------------------------------------------------
</TABLE>
Options to purchase an additional 25,124 shares of Class A common stock at
prices between $24.75 and $26.75 per share were outstanding at December 31, 1996
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares.
16. INTERNATIONAL OPERATIONS
In 1998, the company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The company manufactures and sells a
variety of printers and associated supplies that have similar economic
characteristics as well as similar customers, production processes and
distribution methods and, therefore, continues to report one segment.
The following are revenues and long-lived asset information by
geographic area for and as of December 31:
<TABLE>
<CAPTION>
Revenues
----------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
United States $1,410.5 $1,109.6 $1,099.8
International 1,610.1 1,383.9 1,277.8
----------------------------------
Total $3,020.6 $2,493.5 $2,377.6
----------------------------------
</TABLE>
<TABLE>
<CAPTION>
Long-lived Asssets
------------------------
1998 1997
------------------------
<S> <C> <C>
United States $324.0 $320.6
International 106.5 89.0
------------------------
Total $430.5 $409.6
------------------------
</TABLE>
Revenues reported above are based on the countries to which the products are
shipped.
40
<PAGE>
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------
1998:
<S> <C> <C> <C> <C>
Revenues $ 672.1 $ 697.3 $ 743.8 $ 907.4
Gross profit 246.6 256.4 267.9 315.3
Operating income 77.9 85.3 91.4 128.2
Earnings before extraordinary item 49.5 53.8 57.8 81.9
Net earnings 49.5 53.8 57.8 81.9
Basic EPS* $ 0.73 $ 0.81 $ 0.87 $ 1.25
Diluted EPS* 0.69 0.75 0.81 1.16
Stock prices:
High $ 45.25 $ 64.19 $ 75.50 $102.00
Low 35.00 43.75 52.75 50.75
1997:
Revenues $583.4 $ 556.3 $ 618.3 $ 735.5
Gross profit 199.8 193.4 215.6 261.2
Operating income 55.7 57.5 67.0 94.4
Earnings before extraordinary item 30.7 34.3 41.0 57.0
Net earnings 16.7 34.3 41.0 57.0
Basic EPS before extraordinary item* $ 0.42 $ 0.48 $ 0.57 $ 0.83
Diluted EPS before extraordinary item* 0.40 0.45 0.54 0.78
Basic EPS* 0.23 0.48 0.57 0.83
Diluted EPS* 0.22 0.45 0.54 0.78
Stock prices:
High $ 29.63 $ 30.50 $ 36.31 $ 38.00
Low 22.00 19.13 26.88 29.56
- -------------------------------------------------------------------------------------------------------------
</TABLE>
*The sum of the quarterly earnings per share amounts do not equal the
year-to-date earnings per share due to changes in average share calculations.
This is in accordance with prescribed reporting requirements.
First quarter 1997 net earnings were reduced by an extraordinary charge
of $22.4 million ($14.0 million net of tax benefit) caused by an early
extinguishment of the company's senior subordinated notes.
41
<PAGE>
18. SUMMARIZED FINANCIAL INFORMATION
The following is consolidated summarized financial information of
International:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
Statement of Financial Position Data:
<S> <C> <C> <C>
Current assets $1,020.0 $ 776.1 $ 765.1
Noncurrent assets 463.4 432.1 456.4
Current liabilities 609.6 551.4 423.9
Noncurrent liabilities 299.6 160.0 259.9
Statement of Earnings Data:
Revenues $3,020.6 $2,493.5 $2,377.6
Gross profit 1,086.2 870.0 747.4
Earnings before extraordinary item 243.0 163.0 127.8
Net earnings 243.0 149.0 127.8
- -----------------------------------------------------------------------------
</TABLE>
Current liabilities at December 31, 1998, 1997 and 1996 include $3.9
million, $3.9 million and $2.6 million respectively, that is owed to Lexmark
International Group, Inc.
19. NEW ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP provides guidance on
accounting for the costs of computer software developed or obtained for internal
use, and requires that companies capitalize certain internal use software costs
once certain criteria are met. Currently, the company generally expenses the
costs of developing or obtaining internal-use software as incurred. This SOP is
required for financial statements for fiscal years beginning after December 15,
1998. The company will adopt SOP 98-1 as required on January 1, 1999, and does
not expect it to have a material impact on its consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement requires companies to record derivatives on the balance sheet as
assets and liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. This
statement is required for fiscal years beginning after June 15, 1999, with
earlier adoption encouraged. The company will adopt this accounting standard
effective January 1, 1999, and does not expect it to have a material impact on
its consolidated financial statements.
42
<PAGE>
MANAGEMENT'S REPORT ON
FINANCIAL STATEMENTS
The consolidated financial statements and related information included in this
Financial Report are the responsibility of management and have been reported in
conformity with generally accepted accounting principles. All other financial
data in this Annual Report have been presented on a basis consistent with the
information included in the consolidated financial statements. Lexmark
International Group, Inc. maintains a system of financial controls and
procedures, which includes the work of corporate auditors, which we believe
provides reasonable assurance that the financial records are reliable in all
material respects for preparing the consolidated financial statements and
maintaining accountability for assets. The concept of reasonable assurance is
based on the recognition that the cost of a system of financial controls must be
related to the benefits derived and that the balancing of those factors requires
estimates and judgment. This system of financial controls is reviewed, modified
and improved as changes occur in business conditions and operations, and as a
result of suggestions from the corporate auditors and PricewaterhouseCoopers
LLP.
The Finance and Audit Committee, composed of outside members of the Board of
Directors, meets periodically with management, the independent accountants and
the corporate auditors, for the purpose of monitoring their activities to ensure
that each is properly discharging its responsibilities. The Finance and Audit
Committee, independent accountants, and corporate auditors have free access to
one another to discuss their findings.
/s/ Paul J. Curlander
Paul J. Curlander
President and chief executive officer
/s/ Gary E. Morin
Gary E. Morin
Vice president and chief financial officer
REPORT OF INDEPENDENT ACCOUNTANTS
To the board of directors of Lexmark International Group, Inc.
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of earnings, cash flows and
stockholders' equity appearing on pages 25 through 42 of this annual report
present fairly, in all material respects, the consolidated financial position of
Lexmark International Group, Inc. and subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These consolidated financial
statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Lexington, Kentucky
February 11, 1999
43
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
Lexmark International Group, Inc. ("Group," and together with its subsidiaries,
the "company" or "Lexmark") is a global developer, manufacturer and supplier of
laser and inkjet printers and associated consumable supplies. The company also
sells dot matrix printers for printing single and multi-part forms by business
users. The company's printer business targets the office and home markets. In
addition 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 other original
equipment manufacturer ("OEM") products, and typewriters and typewriter supplies
that are sold under the IBM trademark.
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 home markets and the office migration to
local area networks from mainframes. During this period, the company's own
product mix has evolved, with its laser and inkjet printers and associated
supplies representing an increasing percentage of its sales volume and revenues,
particularly as the increasing base of installed Lexmark printers generates
additional revenues from recurring sales of supplies for those printers
(primarily laser and inkjet cartridges). Lexmark believes that its total
revenues will continue to grow due to overall market growth and increases in the
company's market share in both the network and color inkjet printer categories.
Management believes that this growth will more than offset reduced demand for
dot matrix impact printers, which depend on older impact-printing technology,
and declines in sales of IBM branded supplies for older models of IBM branded
impact and laser printers.
In recent years, the company's growth rate in sales of printer units has
generally exceeded the growth rate of its printer revenues due to selling price
reductions and the introduction of new lower priced products in both the laser
and inkjet printer markets. In the laser printer market, unit price reductions
are partially offset by the tendency of customers to move up to higher priced
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's other office imaging products includes many mature products such
as supplies for IBM printers, typewriters and other impact supplies that require
little ongoing investment but provide a significant source of cash flow. The
company expects that the market for these products and the profitability from
the sale of these products will continue to decline, but the company's strategy
is to mitigate these declines through the sale of new supplies for non-impact
technologies, such as after-market laser cartridges. Lexmark introduced its
first after-market laser cartridges in May 1995 for the large installed base of
a range of laser printers sold by other manufacturers. The company's strategy
for other office imaging products is to pursue the after-market OEM laser
supplies opportunity while managing the mature products for cash flow.
The company expects that its overall operating margins will remain relatively
stable as the associated printer supplies become an increasing part of its
business, offsetting the decline in the company's other office imaging products.
Although the company expects continuing declines in printer prices, it expects
to be able to reduce costs in line with price decreases.
In 1998, the company adopted Shareholder Value Add ("SVA") as an internal
corporate objective to align employees' interests with those of other
44
<PAGE>
shareholders. SVA is calculated by subtracting a capital charge from
consolidated operating income after taxes. The capital charge represents the
weighted average cost of debt and equity applied to average net assets. Rates
for the cost of debt and equity are fixed at the end of the third quarter in the
previous year and the weighted average cost of capital is variable with the
relative mixture of debt and equity comprising the capital structure.
During 1998, SVA increased by $89 million relative to 1997 to $170 million. The
relevant amounts used in the calculation of SVA for 1998 and 1997 respectively
were $383 million and $275 million for operating income, 33.5% and 36.0% for the
effective tax rate, $764 million and $737 million for the average net assets and
11.0% and 12.8% for the weighted average cost of capital.
In March 1998, a public offering of 7,704,577 shares of the company's Class A
common stock by certain of its stockholders was completed at a public offering
price of $45.00 per share. The company and current members of management chose
not to sell any shares in the offering and, therefore, did not receive any of
the proceeds from the sale of the shares.
In March 1998, the company repurchased an additional 2 million shares (the
"Repurchase Shares") from certain of the stockholders participating in the March
1998 offering at a price of $43.38 per share (which was equal to the net
proceeds per share received by the selling stockholders participating in the
offering) for an aggregate purchase price of approximately $87 million. See
"Liquidity and Capital Resources."
RESULTS OF OPERATIONS
1998 compared to 1997
Consolidated revenues in 1998 were $3,021 million, an increase of 21% over 1997.
Revenues were adversely affected by foreign currency exchange rates due to the
strengthening of the U.S. dollar. Without the currency translation effect,
year-to-year revenue growth would have been 23%. Total U.S. revenues increased
$301 million or 27% and international revenues including exports from the U.S.,
increased $226 million or 16%. Revenues from sales to all original equipment
manufacturers accounted for less than 10% of consolidated revenues in 1998.
The company's results were primarily driven by unit volume increases in printers
and strong growth of associated supplies. The company enhanced the Optra S
family of monochrome and color laser printers in 1998 and introduced the new
Optra Color 1200 and Optra Se 3455 models in the second and third quarters,
respectively. The company also made inkjet product announcements in 1998, with
the introduction of the 1100, 3200 and 5700 Color Jetprinters, along with the
Photo Jetprinter 5770. Printer volumes grew at double-digit rates and associated
printer supplies revenues increased during 1998 as compared to 1997 primarily
due to the continued growth of the company's installed printer base.
The color inkjet market, the fastest growing segment of the personal printer
market (printers in the 1-10 pages per minute ("ppm") category), expanded
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. Lexmark introduced its first color inkjet printer
using its own technology in 1994 and has experienced strong sales growth through
retail outlets. The company increased its product distribution through retail
outlets, with the number of such outlets worldwide rising from approximately
5,000 retail outlets in 1995 to more than 15,000 in 1996, and remaining
relatively constant during 1997 and 1998. The company's ability to increase or
maintain its presence in the retail marketplace with its branded products may be
adversely affected as the company becomes more successful in its sales and
marketing efforts for OEM opportunities. The company made additional capital
investments in its inkjet production capacity in 1998 to address the growing
demand for its color inkjet printers and associated supplies.
With the introduction of the Optra S laser printers, a majority of the company's
laser printers are office desktop printers (laser printers that print at speeds
of 11-34 ppm), which the company believes is one of the fastest growing segments
of the laser printer market. Office desktop 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.
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
printer cartridges is increasing at a higher rate than printer shipments. The
company expects this recurring and relatively high margin business to contribute
to the stability of the company's earnings over time.
45
<PAGE>
Consolidated gross profit was $1,086 million for 1998, an increase of 25% from
1997. This was mainly driven by improved printer margins reflecting lower costs
and growth in higher margin associated consumable supplies. Gross profit as a
percentage of revenues for 1998 increased to 36.0% from 34.9% in 1997.
Total operating expenses increased 18% for 1998 compared to 1997. The increased
operating expenses were principally due to higher sales and marketing expenses
in support of revenue growth and new product introductions. Operating expenses
as a percentage of revenues were 23.3% in 1998 compared to 23.9% in 1997.
Consolidated operating income was $383 million for 1998, an increase of 39% over
1997. This increase was due principally to improved printer margins reflecting
lower costs and growth in higher margin associated consumable supplies.
[GRAPH APPEARS HERE]
. OPERATING INCOME BEFORE AMORTIZATION
dollars in millions
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
After unusual item $159.6 $134.1 $235.5 $274.6 $382.8
Before unusual item 159.6 194.7 235.5 274.6 382.8
</TABLE>
The following table sets forth the percentage of total revenues represented by
certain items reflected in the company's statements of earnings.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 100% 100%
Cost of revenues 64% 65% 69% 69% 70%
- --------------------------------------------------------------- ---
Gross profit 36% 35% 31% 31% 30%
Research & development 5% 5 % 5% 5% 6%
Selling, general &
administrative 18% 19% 16% 17% 16%
Option compensation related to
IPO - - - 3% -
Amortization of intangibles - - - 1% 2%
- -------------------------------------------------------------------
Operating income 13% 11% 10% 5% 6%
- -------------------------------------------------------------------
</TABLE>
Earnings before income taxes and extraordinary item were $365 million, an
increase of 43% over 1997, principally due to the operating performance.
Earnings before extraordinary item were $243 million, an increase of 49% over
1997. The income tax provision was 33.5% of earnings before tax in 1998 as
compared to approximately 36% in 1997. The decrease in the income tax rate was
primarily due to the effect of lower tax rates on manufacturing activities in
certain countries.
Net earnings were $243 million, up 63% over 1997 net earnings. Net earnings for
1997 were affected by an extraordinary charge of $22 million ($14 million net of
tax benefit) caused by a prepayment premium and other fees associated with the
prepayment of the company's senior subordinated notes in the first quarter of
1997.
Basic net earnings per share were $3.65 for 1998 versus $2.29 in 1997 before the
extraordinary charge and $2.09 after the extraordinary charge, an increase of
60% and 75%, respectively. Diluted net earnings per share were $3.40 in 1998,
compared to $2.17 in 1997 before the extraordinary charge and $1.98 after the
extraordinary charge, an increase of 57% and 72%, respectively.
[GRAPH APPEARS HERE]
. EARNINGS PER SHARE
in dollars
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Diluted net earnings per share
<S> <C> <C> <C> <C> <C>
after unusual items $(0.46) $0.44 $1.69 $1.98 $3.40
Diluted net earnings per share
before unusual items 0.50 1.17 1.69 2.17 3.40
</TABLE>
1997 compared to 1996
Consolidated revenues in 1997 were $2,494 million, an increase of 5% over 1996.
Revenues were adversely affected by foreign currency exchange rates due to the
strengthening of the U.S. dollar. Without the currency translation effect,
year-to-year revenue growth would have been 10%. Excluding the keyboard products
in 1996, revenues for 1997 increased $149 million or 6% from 1996. The company's
keyboard product line was phased out by the end of the first quarter of 1996.
Total U.S. revenues increased slightly and international revenues including
exports from the U.S., increased $106 million or 8%.
46
<PAGE>
Consolidated gross profit was $870 million for 1997, an increase of 16% from
1996. This was mainly driven by improved printer margins and a richer mix of
supplies versus printer hardware. Gross profit as a percentage of revenues for
1997 increased to 34.9% from 31.4% in 1996. Gross profit attributable to
printers and associated supplies increased 24%, principally due to reductions in
product costs and growth in higher margin associated consumable supplies.
Total operating expenses increased 15% for 1997 compared to 1996. Expenses as a
percentage of revenues were 23.9% in 1997 compared to 21.5% (excluding the
amortization of intangibles) in 1996. These increases versus 1996 principally
reflect planned increases in marketing and sales expenses to launch new products
and provide continuing support for Lexmark's products in the marketplace.
Consolidated operating income was $275 million for 1997, an increase of 19% over
1996. This increase was due principally to product cost reductions, growth in
associated consumable supplies and the absence of amortization of intangibles,
which were fully amortized in the first quarter of 1996.
Earnings before income taxes and extraordinary item were $255 million, an
increase of 26% over 1996, principally due to the operating performance and
lower interest expense resulting from lower debt levels and lower interest
rates.
Earnings before extraordinary item were $163 million, an increase of 28% over
1996. The income tax provision was 36% of earnings before tax in 1997 as
compared to approximately 37% in 1996.
Net earnings were $149 million, up 17% over 1996 net earnings. Net earnings for
1997 were affected by an extraordinary charge of $22 million ($14 million net of
tax benefit) caused by a prepayment premium and other fees associated with the
prepayment of the company's senior subordinated notes in the first quarter of
1997.
Basic net earnings per share were $2.09 for 1997, or $2.29 before extraordinary
item, compared to $1.78 in 1996, an increase of 17% and 28%, respectively.
Diluted net earnings per share were $1.98 in 1997, or $2.17 before extraordinary
item, compared to $1.69 in 1996, an increase of 17% and 28%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Lexmark's primary source of liquidity has been cash generated by operations,
which totaled $289 million, $275 million and $118 million in 1998, 1997 and
1996, respectively. Cash from operations has been sufficient to allow the
company to fund its working capital needs and finance its capital expenditures
during these periods along with the repurchase of approximately $189 million and
approximately $182 million of its Class A common stock during 1998 and 1997,
respectively.
Cash flows from operating activities in 1998 increased slightly over 1997. In
1998, higher net earnings more than offset higher working capital requirements
in support of sales growth. In 1997, the increase in cash provided by operating
activities over 1996 was principally due to earnings before extraordinary loss,
the increase in amounts outstanding under the trade accounts receivables
programs, the increase of net deferred tax liabilities and favorable changes in
working capital accounts.
In January 1998, the company entered into a new $300 million unsecured,
revolving credit facility with a group of banks. Upon entering the new
agreement, the company repaid the amounts outstanding on its existing term loan
and revolving credit facility. The company had an interest rate/currency swap
hedging the term loan with a notional amount of approximately $37 million that
matured in the first quarter of 1998. The interest rate on the new credit
facility ranges from 0.2% to 0.7% above London Inter Bank Offered Rate (LIBOR),
as adjusted under certain limited circumstances, based upon the company's debt
rating. In addition, the company pays a facility fee on the $300 million of 0.1%
to 0.3% based upon the company's debt rating. The interest and facility fees are
payable quarterly. The $300 million credit agreement contains customary default
provisions, leverage and interest coverage restrictions and certain restrictions
on the incurrence of additional debt, liens, mergers or consolidations and
investments. Any amounts outstanding under the $300 million credit facility are
due upon the maturity of the facility on January 27, 2003.
In May 1998, Lexmark International, Inc. ("International"), a wholly-owned
subsidiary of Group completed a public offering of $150 million principal amount
of its 6.75% senior notes due
47
<PAGE>
May 15, 2008. The senior notes were priced at 98.998%, to yield 6.89% to
maturity. The senior notes are guaranteed by Group and contain restrictions on
liens, sale leaseback transactions, mergers and sales of assets. A substantial
portion of the net proceeds from the sale of the senior notes was used to reduce
existing debt outstanding under the company's credit facility. There are no
sinking fund requirements on the senior notes and they may be redeemed at any
time, at a redemption price as described in the related indenture agreement, in
whole or in part, at the option of International.
[GRAPH APPEARS HERE]
. CAPITAL STRUCTURE
in percent
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Equity 50.5% 66.7% 76.6% 87.0% 78.3%
Debt 49.5 33.3 23.4 13.0 21.7
</TABLE>
In November 1998, the company amended the agreement to sell its U.S. trade
receivables on a limited recourse basis. The maximum amount of U.S. trade
receivables to be sold was increased from $100 million to $125 million. As
collections reduce previously sold receivables, the company may replenish these
with new receivables. At both December 31, 1998 and 1997, U.S. trade receivables
of $100 million had been sold and, due to the revolving nature of the agreement,
$100 million also remained outstanding. The agreement, which contains customary
financial covenants, must be renewed annually, and is expected to be renewed
upon its expiration in November 1999. 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.
In March 1997, the company entered into three-year interest rate swaps with a
total notional amount of $60 million, whereby the company pays interest at a
fixed rate of approximately 6.5% and receives interest at a floating rate equal
to the three-month LIBOR. Since May 1998, the swaps serve as a hedge of the
receivables financings which are based on floating interest rates.
As of December 31, 1998, the company's board of directors authorized the
repurchase of up to $600 million of its Class A common stock. This repurchase
authority allows the company at management's discretion 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. During
1998, the company repurchased 3,647,600 shares of its Class A common stock
including the Repurchase Shares for approximately $189 million. As of December
31, 1998, the company had repurchased 10,085,714 shares at prices ranging from
$21.25 to $75.94 per share for an aggregate cost of approximately $371 million,
leaving approximately $229 million of share repurchase authority.
CAPITAL EXPENDITURES
Capital expenditures totaled $102 million, $70 million and $145 million in 1998,
1997 and 1996, respectively. The 1998 capital expenditures were primarily in
support of new products and volume growth while the 1997 expenditures were
principally in support of new products. The 1996 expenditures were for expansion
of the inkjet printer products manufacturing capacity, which included the
conversion of a Lexington facility and the establishment of facilities in Mexico
and Scotland to manufacture inkjet cartridges. Looking forward to 1999, the
company expects capital expenditures to be between $140 and $160 million and
will include further expansion of printer and associated supplies manufacturing
capacity. The capital expenditures are expected to be funded primarily through
cash from operations.
48
<PAGE>
EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT
Revenues derived from international operations, including exports from the
United States, made up slightly more than half of the company's consolidated
revenues, with European revenues accounting for about 71% 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
1996 through 1998. 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.
[GRAPH APPEARS HERE]
. REVENUES BY GEOGRAPHIC AREA*
dollars in millions
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
U.S. $1,024 $1,112 $1,100 $1,110 $1,411
Europe 615 791 896 951 1,140
Other Intl. 214 255 382 433 470
</TABLE>
*Based on the countries to which the products are shipped.
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 actual and
anticipated cash flow exposures and certain assets and liabilities which arise
from transactions 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.
The company believes that international operations in new geographic markets
will be less profitable than operations in U.S. and European markets as a
result, in part, of the higher investment levels for marketing, selling and
distribution required to enter these markets. Although the current economic
conditions in some of the Asian and Latin American regions may adversely affect
the company's growth in those regions, management does not expect the impact
will result in the company's not being able to achieve its long-term operating
income growth objective.
TAX MATTERS
The company's effective tax rate was approximately 34%, 36%, and 37% for 1998,
1997, and 1996, respectively. The decrease in the income tax rate was primarily
due to the effect of lower tax rates on manufacturing activities in certain
countries.
The company and its subsidiaries are subject to tax examinations in various U.S.
and foreign jurisdictions. The company believes that adequate tax payments have
been made and accruals recorded for all years.
As of December 31, 1998, the company had non-U.S. tax loss carryforwards of $34
million, including $2 million which expire between the years 2000 and 2004.
Portions of these non-U.S. tax loss carryforwards (approximately $11 million)
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.
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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computers, software and other equipment
that fail to utilize the full four-digit representation of a year which would
cause date-sensitive software to recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculation causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities. In addition, equipment containing embedded
chips could malfunction as a
49
<PAGE>
result of this issue. If systems are not modified to be Year 2000 compliant,
such failures could occur and could materially affect the company's results of
operations, liquidity, and financial condition. In recent years, in order to
reduce costs associated with information processing and to improve access to
business information through common, integrated computing systems, the company
converted its major information technology systems to an enterprise resource
planning system. This system is Year 2000 compliant.
The company has conducted a comprehensive review of its computer and
manufacturing equipment systems to identify the systems that could be affected
by the Year 2000 Issue and has developed a comprehensive plan to address the
issues. This plan includes analyzing and identifying systems and equipment that
need to be replaced or upgraded as a result of the Year 2000 Issue. This review
was completed during 1998. Required replacements and upgrades of critical
systems and equipment were substantially complete and tested as of December 31,
1998. The Year 2000 Issue has not delayed implementation of any other planned
system projects; however, some planned system projects were accelerated to
replace non-compliant systems.
Almost all of the company's products are Year 2000 compliant. There are some
products that are not Year 2000 compliant but can be upgraded to become
compliant. A few products are not Year 2000 compliant and may never be Year 2000
compliant. The company does not expect costs associated with making its own
products compliant to be material.
The company has established communications with its significant suppliers,
customers and others with which it conducts business to help them identify their
own Year 2000 issues. If necessary modifications and conversions by the company
and those with which it conducts business are not completed timely, the Year
2000 Issue may have a material adverse effect on the company's results of
operations, liquidity, and financial position. The company is currently
evaluating and prioritizing the responses from suppliers to establish
contingency plans. For significant production suppliers, possible contingencies
include securing alternate sources or purchasing additional inventory prior to
January 2000. Services provided by various utility companies are vital to the
company, and the company is communicating with them about their plans and
progress in addressing the Year 2000 Issue. The company currently does not have
a contingency plan to address an interruption in utility service, although the
company is actively working with its utility suppliers to gain assurance of
uninterrupted service.
Costs
- -----
The total costs associated with the company's required modifications and
conversions to become Year 2000 compliant and to address Year 2000 non-compliant
products are not currently expected to be material to the company's results of
operations, liquidity and financial position and are being expensed as incurred.
The costs of the company's Year 2000 plan and the date on which the company
expects to complete the Year 2000 Issue modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
the company's current expectations.
Risks
- -----
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, including
utility companies and customers, the company is unable to conclude that the
consequences of Year 2000 failures will not have a material impact on the
company's results of operations, liquidity or financial position.
THE DISCUSSION AND ANALYSIS OF THE YEAR 2000 ISSUE INCLUDED HEREIN CONTAINS
FORWARD-LOOKING STATEMENTS AND ARE BASED ON MANAGEMENT'S BEST ESTIMATES OF
FUTURE EVENTS. RISKS RELATED TO COMPLETING THE COMPANY'S YEAR 2000 PLAN INCLUDE
THE AVAILABILITY OF RESOURCES, THE COMPANY'S
50
<PAGE>
ABILITY TO TIMELY DISCOVER AND CORRECT THE POTENTIAL YEAR 2000 SENSITIVE
PROBLEMS WHICH COULD HAVE A SERIOUS IMPACT ON THE COMPANY'S OPERATIONS, THE
ABILITY OF SUPPLIERS TO BRING THEIR SYSTEMS INTO YEAR 2000 COMPLIANCE, AND THE
COMPANY'S ABILITY TO IDENTIFY AND IMPLEMENT EFFECTIVE CONTINGENCY PLANS TO
ADDRESS YEAR 2000 FAILURES.
NEW ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP provides guidance on
accounting for the costs of computer software developed or obtained for internal
use, and requires that companies capitalize certain internal use software costs
once certain criteria are met. Currently, the company generally expenses the
costs of developing or obtaining internal-use software as incurred. This SOP is
required for financial statements for fiscal years beginning after December 15,
1998. The company will adopt SOP 98-1 as required on January 1, 1999, and does
not expect it to have a material impact on its consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement requires companies to record derivatives on
the balance sheet as assets and liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. This statement is required for fiscal years beginning
after June 15, 1999, with earlier adoption encouraged. The company will adopt
this accounting standard effective January 1, 1999, and does not expect it to
have a material impact on its consolidated financial statements.
MARKET RISK SENSITIVITY
The market risk inherent in the company's financial instruments and positions
represents the potential loss arising from adverse changes in interest rates and
foreign currency exchange rates.
Interest Rates
- --------------
At December 31, 1998, the fair value of the company's senior notes is estimated
at $151 million using quoted market prices and yields obtained through
independent pricing sources for the same or similar types of borrowing
arrangements, taking into consideration the underlying terms of the debt. Such
fair value exceeded the carrying value of debt at December 31, 1998 by
approximately $2 million. Market risk is estimated as the potential change in
fair value resulting from a hypothetical 10% adverse change in interest rates
and amounts to approximately $7 million at December 31, 1998.
The company has interest rate swaps that serve as a hedge of financings which
are based on floating interest rates. The fair value at December 31, 1998 was a
liability of $1 million. Market risk is estimated as the potential change in
fair value resulting from a hypothetical 10% adverse change in interest rates
and amounts to less than $1 million at December 31, 1998.
Foreign Currency Exchange Rates
- -------------------------------
The company employs a foreign currency hedging strategy to limit potential
losses in earnings or cash flows from adverse foreign currency exchange rate
movements. Foreign currency exposures arise from transactions denominated in a
currency other than the company's functional currency and from foreign
denominated revenues and profits translated into U.S. dollars. The primary
currencies to which the company is exposed include the French franc and other
European currencies, the Australian dollar and some Asian and South American
currencies. Exposures are hedged with foreign currency forward contracts, put
options, and call options with maturity dates of less than one year. The
potential loss in fair value at December 31, 1998 for such contracts resulting
from a hypothetical 10% adverse change in all foreign currency exchange rates is
approximately $19 million. This loss would be mitigated by corresponding gains
on the underlying exposures.
51
<PAGE>
Selected Financial Data
(Dollars in Millions, Except Share Data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statement of Earnings Data:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $3,020.6 $2,493.5 $2,377.6 $2,157.8 $1,852.3
Cost of revenues 1,934.4 1,623.5 1,630.2 1,487.9 1,298.8
- --------------------------------------------------------------------------------------------------------------------
Gross profit 1,086.2 870.0 747.4 669.9 553.5
Research and development 158.5 128.9 123.9 116.1 101.0
Selling, general and administrative 544.9 466.5 388.0 359.1 292.9
Option compensation related to IPO (1) - - - 60.6 -
Amortization of intangibles (2) - - 5.1 25.6 44.7
- --------------------------------------------------------------------------------------------------------------------
Operating income 382.8 274.6 230.4 108.5 114.9
Interest expense 11.0 10.8 20.9 35.1 50.6
Other 6.4 9.1 7.9 10.1 13.6
- --------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 365.4 254.7 201.6 63.3 50.7
Provision for income taxes 122.4 91.7 73.8 15.2 6.1
- --------------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 243.0 163.0 127.8 48.1 44.6
Extraordinary loss (3) - (14.0) - (15.7) -
- --------------------------------------------------------------------------------------------------------------------
Net earnings $ 243.0 $ 149.0 $ 127.8 $ 32.4 $ 44.6
Diluted earnings (loss) per common share before
extraordinary item (4) $ 3.40 $ 2.17 $ 1.69 $ 0.65 $ (0.46)
Diluted net earnings (loss) per common share (4) $ 3.40 $ 1.98 $ 1.69 $ 0.44 $ (0.46)
Shares used in per share calculation 71,400,890 75,168,776 75,665,734 74,200,279 61,430,896
Statement of Financial Position Data:
- --------------------------------------------------------------------------------------------------------------------
Working capital $ 414.3 $ 228.6 $ 343.8 $ 227.7 $ 237.5
Total assets 1,483.4 1,208.2 1,221.5 1,142.9 960.9
Total debt 160.4 75.0 165.3 195.0 290.0
Stockholders' equity 578.1 500.7 540.3 390.2 295.5
Other Key Data:
- --------------------------------------------------------------------------------------------------------------------
Operating income before amortization and
unusual item (5) $ 382.8 $ 274.6 $ 235.5 $ 194.7 $ 159.6
Diluted earnings per share before unusual items (6) $ 3.40 $ 2.17 $ 1.69 $ 1.17 $ 0.50
Cash from operations (7) 289.0 274.9 118.0 307.5 361.9
Capital expenditures 101.7 69.5 145.0 106.8 58.1
Shareholder Value Add (8) 170.4 81.5 - - -
Debt to total capital ratio 22% 13% 23% 33% 50%
Return on average equity before unusual items (9) 47% 30% 27% 25% 21%
Number of employees (10) 8,835 7,985 6,573 7,477 5,934
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The company recognized a non-cash compensation charge of $60.6 million
($38.5 million net of tax benefit) in the fourth quarter of 1995 for certain
of the company's outstanding employee stock options upon the consummation of
the initial public offerings.
(2) Acquisition-related intangibles were fully amortized by March 31, 1996.
(3) In 1997, represents extraordinary after-tax loss caused by the early
extinguishment of the company's senior subordinated notes and in 1995,
represents extraordinary after-tax loss caused by an early extinguishment of
debt related to the refinancing of the company's term loan.
(4) Earnings (loss) per common share are net of dividends of $11.8 million paid
on the company's redeemable senior preferred stock in 1994 . Earnings
attributable to common stock in 1994 are also net of a $61.3 million
preferred stock redemption premium related to the exchange of redeemable
senior preferred stock for Class A common stock on December 30, 1994.
(5) Unusual item in 1995 reflects the non-cash compensation charge discussed
in (1) above.
(6) Unusual item in 1997 represents the extraordinary after-tax loss discussed
in (3) above. Unusual items in 1995 includes the non-cash compensation
charge discussed in (1) above and the extraordinary after-tax loss discussed
in (3) above. The unusual item in 1994 represents the preferred stock
redemption premium discussed in (4) above.
(7) Cash flows from investing and financing activities, which are not
presented, are integral components of total cash flow activity.
(8) Shareholder Value Add measurement was initiated in 1997.
(9) Unusual item in 1997 represents the extraordinary loss discussed in (3)
above. Unusual items in 1995 includes the non-cash compensation charge
discussed in (1) above and the extraordinary after-tax loss discussed in
(3) above.
(10)Represents the number of full-time equivalent employees at December 31st of
each year.
52
<PAGE>
EXHIBIT 21
Subsidiaries of the Company as of December 31, 1998
<PAGE>
Exhibit 21
----------
Subsidiaries of
Lexmark International Group, Inc.
1. Lexmark International, Inc.
State of Incorporation - Delaware
2. Lexmark Receivables Corporation
State of Incorporation - Delaware
3. Lexmark International Technology S.A.
Country of Incorporation - Switzerland
<PAGE>
EXHIBIT 23
Consent of PricewaterhouseCoopers LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Lexmark International Group, Inc. on Form S-8 (File Nos. 33-99330 and 33-80879)
of our report dated February 11, 1999, on our audits of the consolidated
financial statements and financial statement schedule of Lexmark International
Group, Inc. as of December 31, 1998 and 1997, and for the years ended December
31, 1998, 1997, and 1996, which report is incorporated by reference in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ---------------------------------
Lexington, Kentucky
March 23, 1999
<PAGE>
EXHIBIT 24
Powers of Attorney
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an
officer, or both, of Lexmark International Group, Inc., a Delaware corporation
("Lexmark"), does hereby make, constitute and appoint Paul J. Curlander, Gary E.
Morin and Vincent J. Cole, the address of each of which is in care of Lexmark,
740 West New Circle Road, Lexington, Kentucky 40550, and each of them, the true
and lawful attorney for the undersigned, with full power of substitution and
revocation to each for the undersigned, and in the name, place and stead of the
undersigned, to sign in any and all capacities and to file or cause to be field,
an annual report on Form 10-K with the Securities and Exchange Commission,
pursuant to the Securities Exchange Act of 1934, as amended, and any and all
amendments to such Form 10-K, hereby giving to each of such attorneys full power
to do everything whatsoever required or necessary to be accomplished in and
about the premises as fully as the undersigned could do if personally present,
hereby ratifying and confirming all that such attorneys or substitutes or any of
them shall lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 15th day of
December, 1998.
/s/ B. Charles Ames
----------------------
B. Charles Ames
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an
officer, or both, of Lexmark International Group, Inc., a Delaware corporation
("Lexmark"), does hereby make, constitute and appoint Paul J. Curlander, Gary E.
Morin and Vincent J. Cole, the address of each of which is in care of Lexmark,
740 West New Circle Road, Lexington, Kentucky 40550, and each of them, the true
and lawful attorney for the undersigned, with full power of substitution and
revocation to each for the undersigned, and in the name, place and stead of the
undersigned, to sign in any and all capacities and to file or cause to be field,
an annual report on Form 10-K with the Securities and Exchange Commission,
pursuant to the Securities Exchange Act of 1934, as amended, and any and all
amendments to such Form 10-K, hereby giving to each of such attorneys full power
to do everything whatsoever required or necessary to be accomplished in and
about the premises as fully as the undersigned could do if personally present,
hereby ratifying and confirming all that such attorneys or substitutes or any of
them shall lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 15th day of
December, 1998.
/s/ Frank T. Cary
----------------------
Frank T. Cary
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an
officer, or both, of Lexmark International Group, Inc., a Delaware corporation
("Lexmark"), does hereby make, constitute and appoint Gary E. Morin and Vincent
J. Cole, the address of each of which is in care of Lexmark, 740 West New Circle
Road, Lexington, Kentucky 40550, and each of them, the true and lawful attorney
for the undersigned, with full power of substitution and revocation to each for
the undersigned, and in the name, place and stead of the undersigned, to sign in
any and all capacities and to file or cause to be field, an annual report on
Form 10-K with the Securities and Exchange Commission, pursuant to the
Securities Exchange Act of 1934, as amended, and any and all amendments to such
Form 10-K, hereby giving to each of such attorneys full power to do everything
whatsoever required or necessary to be accomplished in and about the premises as
fully as the undersigned could do if personally present, hereby ratifying and
confirming all that such attorneys or substitutes or any of them shall lawfully
do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 15th day of
December, 1998.
/s/ Paul J. Curlander
----------------------
Paul J. Curlander
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an
officer, or both, of Lexmark International Group, Inc., a Delaware corporation
("Lexmark"), does hereby make, constitute and appoint Paul J. Curlander, Gary E.
Morin and Vincent J. Cole, the address of each of which is in care of Lexmark,
740 West New Circle Road, Lexington, Kentucky 40550, and each of them, the true
and lawful attorney for the undersigned, with full power of substitution and
revocation to each for the undersigned, and in the name, place and stead of the
undersigned, to sign in any and all capacities and to file or cause to be field,
an annual report on Form 10-K with the Securities and Exchange Commission,
pursuant to the Securities Exchange Act of 1934, as amended, and any and all
amendments to such Form 10-K, hereby giving to each of such attorneys full power
to do everything whatsoever required or necessary to be accomplished in and
about the premises as fully as the undersigned could do if personally present,
hereby ratifying and confirming all that such attorneys or substitutes or any of
them shall lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 15th day of
December, 1998.
/s/ William R. Fields
----------------------
William R. Fields
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an
officer, or both, of Lexmark International Group, Inc., a Delaware corporation
("Lexmark"), does hereby make, constitute and appoint Paul J. Curlander, Gary E.
Morin and Vincent J. Cole, the address of each of which is in care of Lexmark,
740 West New Circle Road, Lexington, Kentucky 40550, and each of them, the true
and lawful attorney for the undersigned, with full power of substitution and
revocation to each for the undersigned, and in the name, place and stead of the
undersigned, to sign in any and all capacities and to file or cause to be field,
an annual report on Form 10-K with the Securities and Exchange Commission,
pursuant to the Securities Exchange Act of 1934, as amended, and any and all
amendments to such Form 10-K, hereby giving to each of such attorneys full power
to do everything whatsoever required or necessary to be accomplished in and
about the premises as fully as the undersigned could do if personally present,
hereby ratifying and confirming all that such attorneys or substitutes or any of
them shall lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 15th day of
December, 1998.
/s/ Ralph E. Gomory
----------------------
Ralph E. Gomory
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an
officer, or both, of Lexmark International Group, Inc., a Delaware corporation
("Lexmark"), does hereby make, constitute and appoint Paul J. Curlander, Gary E.
Morin and Vincent J. Cole, the address of each of which is in care of Lexmark,
740 West New Circle Road, Lexington, Kentucky 40550, and each of them, the true
and lawful attorney for the undersigned, with full power of substitution and
revocation to each for the undersigned, and in the name, place and stead of the
undersigned, to sign in any and all capacities and to file or cause to be field,
an annual report on Form 10-K with the Securities and Exchange Commission,
pursuant to the Securities Exchange Act of 1934, as amended, and any and all
amendments to such Form 10-K, hereby giving to each of such attorneys full power
to do everything whatsoever required or necessary to be accomplished in and
about the premises as fully as the undersigned could do if personally present,
hereby ratifying and confirming all that such attorneys or substitutes or any of
them shall lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 15th day of
December, 1998.
/s/ Stephen R. Hardis
----------------------
Stephen R. Hardis
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an
officer, or both, of Lexmark International Group, Inc., a Delaware corporation
("Lexmark"), does hereby make, constitute and appoint Paul J. Curlander, Gary E.
Morin and Vincent J. Cole, the address of each of which is in care of Lexmark,
740 West New Circle Road, Lexington, Kentucky 40550, and each of them, the true
and lawful attorney for the undersigned, with full power of substitution and
revocation to each for the undersigned, and in the name, place and stead of the
undersigned, to sign in any and all capacities and to file or cause to be field,
an annual report on Form 10-K with the Securities and Exchange Commission,
pursuant to the Securities Exchange Act of 1934, as amended, and any and all
amendments to such Form 10-K, hereby giving to each of such attorneys full power
to do everything whatsoever required or necessary to be accomplished in and
about the premises as fully as the undersigned could do if personally present,
hereby ratifying and confirming all that such attorneys or substitutes or any of
them shall lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 15th day of
December, 1998.
/s/ James F. Hardymon
----------------------
James F. Hardymon
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an
officer, or both, of Lexmark International Group, Inc., a Delaware corporation
("Lexmark"), does hereby make, constitute and appoint Paul J. Curlander, Gary E.
Morin and Vincent J. Cole, the address of each of which is in care of Lexmark,
740 West New Circle Road, Lexington, Kentucky 40550, and each of them, the true
and lawful attorney for the undersigned, with full power of substitution and
revocation to each for the undersigned, and in the name, place and stead of the
undersigned, to sign in any and all capacities and to file or cause to be field,
an annual report on Form 10-K with the Securities and Exchange Commission,
pursuant to the Securities Exchange Act of 1934, as amended, and any and all
amendments to such Form 10-K, hereby giving to each of such attorneys full power
to do everything whatsoever required or necessary to be accomplished in and
about the premises as fully as the undersigned could do if personally present,
hereby ratifying and confirming all that such attorneys or substitutes or any of
them shall lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 15th day of
December, 1998.
/s/ Robert Holland, Jr.
----------------------
Robert Holland, Jr.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an
officer, or both, of Lexmark International Group, Inc., a Delaware corporation
("Lexmark"), does hereby make, constitute and appoint Paul J. Curlander, Gary E.
Morin and Vincent J. Cole, the address of each of which is in care of Lexmark,
740 West New Circle Road, Lexington, Kentucky 40550, and each of them, the true
and lawful attorney for the undersigned, with full power of substitution and
revocation to each for the undersigned, and in the name, place and stead of the
undersigned, to sign in any and all capacities and to file or cause to be field,
an annual report on Form 10-K with the Securities and Exchange Commission,
pursuant to the Securities Exchange Act of 1934, as amended, and any and all
amendments to such Form 10-K, hereby giving to each of such attorneys full power
to do everything whatsoever required or necessary to be accomplished in and
about the premises as fully as the undersigned could do if personally present,
hereby ratifying and confirming all that such attorneys or substitutes or any of
them shall lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 15th day of
December, 1998.
/s/ Michael J. Maples
----------------------
Michael J. Maples
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an
officer, or both, of Lexmark International Group, Inc., a Delaware corporation
("Lexmark"), does hereby make, constitute and appoint Paul J. Curlander, Gary E.
Morin and Vincent J. Cole, the address of each of which is in care of Lexmark,
740 West New Circle Road, Lexington, Kentucky 40550, and each of them, the true
and lawful attorney for the undersigned, with full power of substitution and
revocation to each for the undersigned, and in the name, place and stead of the
undersigned, to sign in any and all capacities and to file or cause to be field,
an annual report on Form 10-K with the Securities and Exchange Commission,
pursuant to the Securities Exchange Act of 1934, as amended, and any and all
amendments to such Form 10-K, hereby giving to each of such attorneys full power
to do everything whatsoever required or necessary to be accomplished in and
about the premises as fully as the undersigned could do if personally present,
hereby ratifying and confirming all that such attorneys or substitutes or any of
them shall lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has set his hand this 15th day of
December, 1998.
/s/ Martin D. Walker
----------------------
Martin D. Walker
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an
officer, or both, of Lexmark International Group, Inc., a Delaware corporation
("Lexmark"), does hereby make, constitute and appoint Paul J. Curlander, Gary E.
Morin and Vincent J. Cole, the address of each of which is in care of Lexmark,
740 West New Circle Road, Lexington, Kentucky 40550, and each of them, the true
and lawful attorney for the undersigned, with full power of substitution and
revocation to each for the undersigned, and in the name, place and stead of the
undersigned, to sign in any and all capacities and to file or cause to be field,
an annual report on Form 10-K with the Securities and Exchange Commission,
pursuant to the Securities Exchange Act of 1934, as amended, and any and all
amendments to such Form 10-K, hereby giving to each of such attorneys full power
to do everything whatsoever required or necessary to be accomplished in and
about the premises as fully as the undersigned could do if personally present,
hereby ratifying and confirming all that such attorneys or substitutes or any of
them shall lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has set his hand this day of
December, 1998.
/s/ Marvin L. Mann
----------------------
Marvin L. Mann
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LEXMARK INTERNATIONAL GROUP, INC. FOR THE YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
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0
0
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