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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
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For the quarterly period ended March 31, 2000. | |
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
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For the transition period from _________________ to______________. |
Commission file number 1-15139
LANIER WORLDWIDE, INC.
Delaware | 59-2606737 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
2300 Parklake Drive, Atlanta, Georgia | 30345 | |||
(Address of Principal Executive Offices) |
Registrants Telephone Number, including Area Code 770-496-9500
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.
Indicate by check [X] 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 [ ]
Number of shares of common stock outstanding as of the close of business on April 28, 2000: 83,024,596
TABLE OF CONTENTS
PART I | ||||||
Item 1. | Financial Statements (Unaudited) | |||||
CONSOLIDATED BALANCE SHEETS | 3 | |||||
CONSOLIDATED STATEMENTS OF INCOME | 4 | |||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | 5 | |||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | 6 | |||||
Item 2. | Managements Discussion and Analysis of Financial Condition and | |||||
Results of Operations | 8 | |||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 | ||||
PART II | ||||||
Item 5. | Other Information | 16 | ||||
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME |
17 |
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Item 6. | Exhibits and Reports on Form 8-K | 18 | ||||
SIGNATURES | 18 |
2
PART I
Item 1. Financial Statements.
LANIER WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, | July 2, | |||||||||||
2000 | 1999 | |||||||||||
(Unaudited) | (Audited) | |||||||||||
(In thousands) | ||||||||||||
ASSETS | ||||||||||||
Current Assets | ||||||||||||
Cash and cash equivalents | $ | 10,318 | $ | 18,209 | ||||||||
Trade receivables | 307,270 | 348,604 | ||||||||||
Receivables from former parent company | 194,521 | |||||||||||
Inventories | 163,744 | 166,404 | ||||||||||
Prepaid expenses | 18,169 | 17,107 | ||||||||||
Deferred income taxes | 61,440 | 39,276 | ||||||||||
Total current assets | 560,941 | 784,121 | ||||||||||
Other Assets | ||||||||||||
Rental equipment, less allowance for depreciation ($213,597 at March 31, 2000 and $205,232 at July 2, 1999) | 129,989 | 140,718 | ||||||||||
Property, plant and equipment, less allowance for depreciation ($81,313 at March 31, 2000 and $76,053 at July 2, 1999) | 41,938 | 42,755 | ||||||||||
Notes receivable net | 218,078 | 203,657 | ||||||||||
Intangibles, less accumulated amortization ($43,636 at March 31, 2000 and $38,610 at July 2, 1999) | 116,556 | 125,504 | ||||||||||
Other | 36,586 | 40,953 | ||||||||||
Total other assets | 543,147 | 553,587 | ||||||||||
Total assets | $ | 1,104,088 | $ | 1,337,708 | ||||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||
Current Liabilities | ||||||||||||
Notes payable | $ | 58,643 | $ | 138,011 | ||||||||
Trade payables | 57,215 | 86,815 | ||||||||||
Retirement plan obligations | 43,913 | 38,964 | ||||||||||
Accrued compensation | 30,441 | 39,066 | ||||||||||
Accrued interest and sundry taxes | 19,878 | 21,772 | ||||||||||
Other accrued items | 29,023 | 33,610 | ||||||||||
Unearned service income | 55,407 | 57,898 | ||||||||||
Income taxes | 15,460 | |||||||||||
Long-term debt current portion | 58,653 | 2,582 | ||||||||||
Total current liabilities | 353,173 | 434,178 | ||||||||||
Other Liabilities | ||||||||||||
Deferred income taxes | 34,604 | 16,170 | ||||||||||
Long-term debt | 560,574 | 4,622 | ||||||||||
Stockholders Equity: | ||||||||||||
Preferred Stock, $.01 par value: authorized 25,000,000 shares; none issued Common Stock, $.01 par value, 500,000,000 shares authorized; issued 87,851,196 shares at March 31, 2000; and $1.00 par value, 1,000,000 shares authorized; issued and outstanding 41,893 shares at July 2, 1999 | 879 | 42 | ||||||||||
Additional paid-in capital | 202,313 | 329,679 | ||||||||||
Retained earnings | 7,809 | 586,556 | ||||||||||
Accumulated other comprehensive loss | (37,855 | ) | (33,539 | ) | ||||||||
Treasury stocks | (17,409 | ) | ||||||||||
Total stockholders equity | 155,737 | 882,738 | ||||||||||
Total liabilities and stockholders equity | $ | 1,104,088 | $ | 1,337,708 | ||||||||
3
LANIER WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter Ended | Nine Months Ended | ||||||||||||||||
March 31, 2000 | April 2, 1999 | March 31, 2000 | April 2, 1999 | ||||||||||||||
(In thousands except per share data) | |||||||||||||||||
Revenue | |||||||||||||||||
Product sales and rentals | $ | 172,310 | $ | 199,225 | $ | 540,333 | $ | 582,511 | |||||||||
Service income | 136,805 | 157,653 | 418,274 | 465,978 | |||||||||||||
Finance income | 10,784 | 9,565 | 31,925 | 28,223 | |||||||||||||
319,899 | 366,443 | 990,532 | 1,076,712 | ||||||||||||||
Costs and Expenses | |||||||||||||||||
Cost of product sales and rentals | 127,778 | 136,121 | 387,475 | 381,927 | |||||||||||||
Cost of service | 79,481 | 89,112 | 232,381 | 262,185 | |||||||||||||
Selling and administrative expenses | 91,051 | 107,941 | 291,605 | 326,615 | |||||||||||||
Interest expense | 14,926 | 6,597 | 33,995 | 17,142 | |||||||||||||
Other net | 6,579 | 1,641 | 10,312 | 1,626 | |||||||||||||
319,815 | 341,412 | 955,768 | 989,495 | ||||||||||||||
Income before income taxes | 84 | 25,031 | 34,764 | 87,217 | |||||||||||||
Income taxes | 32 | 9,447 | 13,211 | 31,051 | |||||||||||||
Net Income | $ | 52 | $ | 15,584 | $ | 21,553 | $ | 56,166 | |||||||||
Weighted average number of shares outstanding | 83,025 | 85,877 | |||||||||||||||
Basic earnings per share | $ | 0.00 | $ | 0.25 | |||||||||||||
Weighted average number of shares outstanding assuming dilution | 83,356 | 86,202 | |||||||||||||||
Diluted earnings per share | $ | 0.00 | $ | 0.25 | |||||||||||||
4
LANIER WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For The Nine Months Ended | ||||||||||||
March 31, 2000 | April 2, 1999 | |||||||||||
(In thousands) | ||||||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 21,553 | $ | 56,166 | ||||||||
Adjustments to net income: | ||||||||||||
Depreciation | 75,781 | 90,505 | ||||||||||
Amortization | 5,089 | 6,341 | ||||||||||
Non-current deferred income taxes | 18,434 | (22,400 | ) | |||||||||
Changes in assets and liabilities: | ||||||||||||
Trade receivables | 37,114 | 26,871 | ||||||||||
Receivables from parent | 41,326 | (82,604 | ) | |||||||||
Inventories | 2,660 | 40,961 | ||||||||||
Prepaid expenses | (1,062 | ) | (13,251 | ) | ||||||||
Trade payables and accrued liabilities | (35,170 | ) | 11,956 | |||||||||
Unearned service income | (2,491 | ) | (32,851 | ) | ||||||||
Income taxes | (37,624 | ) | 27,404 | |||||||||
Other | (9,426 | ) | (1,490 | ) | ||||||||
Net cash provided by operating activities | 116,184 | 107,608 | ||||||||||
INVESTING ACTIVITIES: | ||||||||||||
Capital expenditures: | ||||||||||||
Divestitures and acquisition | 716 | (171,117 | ) | |||||||||
Property, plant and equipment | (14,921 | ) | (20,144 | ) | ||||||||
Rental equipment | (59,573 | ) | (53,535 | ) | ||||||||
Net cash used in investing activities | (73,778 | ) | (244,796 | ) | ||||||||
FINANCING ACTIVITIES: | ||||||||||||
Proceeds from borrowings | 737,544 | 222,145 | ||||||||||
Payments to parent | (573,634 | ) | ||||||||||
Repurchase of stock | (17,409 | ) | ||||||||||
Repayments of borrowings | (193,463 | ) | (106,738 | ) | ||||||||
Net cash (used in) provided by financing activities | (46,962 | ) | 115,407 | |||||||||
Effect of exchange rates on cash and cash equivalents | (3,335 | ) | 5,828 | |||||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (7,891 | ) | (15,953 | ) | ||||||||
Cash and cash equivalents at beginning of year | 18,209 | 87,096 | ||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 10,318 | $ | 71,143 | ||||||||
5
LANIER WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
Note A. Basis of Presentation
On October 22, 1999, the Board of Directors of Harris Corporation (Harris), the then sole stockholder of Lanier Worldwide, Inc. (Lanier), declared a pro rata distribution, effective 11:59 p.m., Atlanta time, on November 5, 1999 of one share of Lanier common stock (together with associated preferred stock purchase rights) for each share of Harris common stock held by stockholders of record of Harris at the close of business on November 1, 1999, to effectuate the spin-off (the Spin-off) of Lanier as a separate public company. The Lanier shares distributed constituted approximately 90% of the outstanding shares of Lanier common stock after the Spin-off. Harris retained approximately 10% of the outstanding shares of Lanier after the Spin-off.
The unaudited consolidated financial statements include the accounts of Lanier, and certain subsidiaries partially or wholly owned by Harris, that were transferred to Lanier prior to the Spin-off.
The consolidated balance sheet as of March 31, 2000, the consolidated statements of income for the quarter and nine months ended March 31, 2000 and the consolidated statement of cash flows for the nine months ended March 31, 2000 have not been audited but have been prepared in conformity with the accounting principles applied in the audited consolidated financial statements for the fiscal year ended July 2, 1999 contained in Laniers Registration Statement on Form 10, as amended (Registration Statement). In the opinion of management, the financial statements include all material adjustments necessary for a fair presentation. This Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes included in the Registration Statement.
Note B. Acquisition
In the first quarter of fiscal year 1999, Lanier acquired the Copying Systems Division of the Agfa-Gevaert Group, which is a member of the Bayer Group, Leverkusen, Germany (the Agfa Acquisition). The transaction was accounted for as a purchase. The purchase price, which is subject to adjustment, was $168.3 million in cash. The purchase price exceeded the fair value of net assets acquired by approximately $46 million, which is being amortized on a straight-line basis over 20 years. The results of the Agfa Acquisition are included in the accompanying unaudited consolidated financial statements from the date of acquisition.
Note C. Long-Term Debt
Retention of Indebtedness of Lanier Subsidiaries
In connection with the Spin-off, all intercompany accounts payable to Harris were eliminated and forgiven on November 5, 1999. Further, Lanier retained existing indebtedness totaling $146.5 million.
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LANIER WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Under the credit agreement governing the Credit Facility, Lanier has the right to maintain a total of $150 million of debt outside of the Credit Facility, of which $63.0 million was outstanding as of March 31, 2000. Additionally, Lanier has the right to securitize $100 million of European receivables under the facility noted below as well as the right to securitize $250 million of domestic trade and lease receivables. The proceeds of a domestic receivable securitization must be used to pay down the $250 million term loan.
Bank Credit Agreement
On October 20, 1999, Lanier entered into a $900 million credit facility with three lead agent banks (the Credit Facility). The $900 million Credit Facility consists of a $450 million five-year revolver, a $250 million two-year term loan and a $200 million 364-day revolver.
On November 4, 1999, the credit agreement was amended to add a syndicate of eighteen other banks. On that day, Lanier drew $590 million of debt, consisting of $250 million from the two-year loan and $340 million from the five-year revolver. Proceeds were used to make a $545 million cash payment to Harris, to pay Harris $22.8 million for the transfer of ownership in two subsidiaries which had $22.8 million of net cash, and for working capital needs.
In addition to the Credit Facility, Lanier has an existing European receivable securitization facility totaling $100 million, under which $23.8 million was outstanding as of March 31, 2000.
Note D. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss relates solely to foreign currency translation adjustments related to Laniers foreign subsidiaries.
Note E. Share Repurchase
On November 30, 1999, Laniers Board of Directors authorized the repurchase of up to eight million shares of Lanier common stock (the Share Repurchase Program). Shares purchased will be retained as treasury stock and are available for use under Laniers stock option plan and for other corporate purposes. Subject to restrictive covenants in Laniers credit facilities, the repurchases will be made from time to time at managements discretion in the open market or in privately negotiated transactions.
Pursuant to the Share Repurchase Program, in December 1999 Lanier purchased 4.8 million shares of Lanier common stock in open market transactions at a total cost of $17.4 million, or approximately $3.61 per share.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The consolidated balance sheet as of March 31, 2000, the consolidated statements of income for the third quarter and nine-month period ended March 31, 2000, and the consolidated statement of cash flows for the nine-month period ended March 31, 2000 have not been audited but have been prepared in conformity with the accounting principles applied in the audited consolidated financial statements for the fiscal year ended July 2, 1999 contained in Laniers Registration Statement. In the opinion of management, this information includes all material adjustments necessary for a fair presentation. This Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes included in the Registration Statement.
Forward-Looking Statements
This document contains forward-looking statements that reflect Laniers current assumptions and estimates of future performance and economic conditions. Such statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Lanier may make these statements directly in this document or incorporate such statements into this document by reference to other documents. Lanier may also include statements pertaining to periods following March 31, 2000. Many of these statements may be identified by words such as believes, expects, plans, anticipates, projects, estimates, should result or are expected to, or similar expressions. Any forward-looking statements are subject to risks and uncertainties that may cause actual results and future trends to differ materially from those projected, stated or implied by the forward-looking statements.
Laniers results and the accuracy of the forward-looking statements could be affected by, among other things: general economic conditions in the markets in which Lanier operates; economic developments that have a particularly adverse effect on one or more of the markets Lanier serves; the ability to execute managements internal operating plans; stability of key markets for office products and document management solutions; fluctuation in foreign currency exchange rates and the effectiveness of currency hedging program; and worldwide demand and product and service pricing for office products and document management solutions. Additional information concerning these risks and uncertainties is contained in the Registration Statement, as filed with the Securities and Exchange Commission. Caution should be taken not to place undue reliance on any forward-looking statements, since such statements speak only as of the date of the making of such statements. Lanier disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.
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Results of Operations
Lanier is reporting lower revenue and earnings for both the third quarter and first nine months of fiscal 2000 versus comparable periods in the prior fiscal year. Management believes the decline was principally attributable to: (i) competitive pricing pressures largely attributable to the industry-wide transition from analog to digital products; (ii) a reduction in service revenue primarily related to a decline in unit population within the core business; (iii) divestitures during the fourth quarter of fiscal 1999 of Laniers direct sales operation in France and its U.S.-based medical transcription business, which contributed a combined $10.9 million and $33.4 million of revenue for the third quarter and nine-month period ended April 2, 1999, respectively; and (iv) strengthening of the U.S. dollar against foreign currencies, primarily European, which decreased revenues by $10.6 million and $27.7 million in the third quarter and nine-month period ended March 31, 2000, respectively, calculated on a constant-rate basis.
Gross margin declined to 35.2% for the third quarter and 37.4% for the first nine months of fiscal 2000 from 38.5% and 40.2%, respectively, for the comparable periods in the prior fiscal year. Management believes the decline was principally attributable to competitive pressures which have impacted both product and service margins and, to a lesser extent, the strengthening of the Japanese yen versus the U.S. dollar. Further, management believes margin erosion will likely continue, at least for the duration of the industry transition to digital products, but cannot predict accurately the rate of margin erosion or when, if at all, margins will improve.
Revenue
Revenue for the third quarter of fiscal 2000 decreased $46.5 million, or 12.7%, to $319.9 million from $366.4 million for the third quarter of fiscal 1999. For the first nine months of fiscal 2000, revenue decreased $86.2 million, or 8.0%, to $990.5 million from $1,076.7 million for the comparable period in fiscal 1999. During the twelve months ended March 31, 2000, the U.S. dollar strengthened 11.0% against the Euro, which decreased Laniers reported revenue for the third quarter and first nine months of fiscal 2000 by $10.8 million and $29.0 million, respectively. Net of the currency translation effect of a strong U.S. dollar and the divestitures in fiscal 1999 of Laniers direct sales operations in France and its U.S.-based medical transcription business, third quarter revenue decreased $25.0 million or 6.8% from the prior years quarter. Management believes recurring revenues consisting of service and supplies were adversely impacted by a decline in the unit population within the core business as well as copiers losing page output to printers.
Product Sales and Rentals. Product sales and rentals revenue for the third quarter of fiscal 2000 decreased $26.9 million, or 13.5%, to $172.3 million from $199.2 million for the third quarter of fiscal 1999. For the first nine months of fiscal 2000, product sales and rentals revenue decreased $42.2 million, or 7.2%, to $540.3 million from $582.5 million for the comparable period in fiscal 1999. Calculated on a constant rate basis, the strengthening of the U.S. dollar versus foreign currencies, primarily European, reduced revenue by $6.2 million and $16.1 million for the third quarter and first nine months of fiscal 2000, respectively. Laniers divestiture in the fourth quarter of fiscal 1999 of its direct sales operations in France lowered revenue by $1.8 million and $6.9 million for the third quarter and first nine months of fiscal 2000, respectively. Net of the foregoing currency translation effect and divestitures, product sales and rentals revenue decreased $18.9 million, or 9.5% for the third quarter of fiscal 2000
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and decreased $19.2 million, or 3.3%, for the first nine months of fiscal 2000 versus comparable periods in the prior year. Management believes increased discounting as competitors attempt to maintain or increase their installed base and a greater market presence from manufacturers are the primary contributors to this decline.
Service Income. Service income for the third quarter of fiscal 2000 decreased $20.9 million, or 13.2%, to $136.8 million, from $157.7 million for the third quarter of fiscal 1999. For the first nine months of fiscal 2000, service income decreased $47.7 million, or 10.2%, to $418.3 million from $466.0 million for the comparable period in fiscal 1999. Laniers divestiture in the fourth quarter of fiscal 1999 of its direct sales operations in France and its medical transcription business lowered service income by $2.6 million and $6.5 million, respectively, for the third quarter of fiscal 2000 and $7.8 million and $18.8 million, respectively, for the first nine months of fiscal 2000. Calculated on a constant rate basis, the strengthening of the U.S. dollar against foreign currencies, primarily European, reduced revenue by $4.4 million and $11.6 million for the third quarter and first nine months of fiscal 2000, respectively. Net of the foregoing divestitures and currency translation effect, service income decreased $7.4 million, or 4.7%, for the third quarter of fiscal 2000 and $9.5 million, or 2.0%, for the first nine months of fiscal 2000, versus the comparable periods in fiscal 1999. Management believes the remainder of the decline was attributable to a combination of copiers losing page output to printers, pricing pressures associated with the industry transition to digital products and a lower machine population.
Finance Income. For the third quarter of fiscal 2000, finance income increased $1.2 million, or 12.5%, to $10.8 million from $9.6 million for the third quarter of fiscal 1999. For the first nine months of fiscal 2000, finance income increased $3.7 million, or 13.1%, to $31.9 million from $28.2 million for the comparable period in fiscal 1999. Management attributed this years increase to the companys continued emphasis of sales-type lease arrangements over operating lease programs.
Gross Margin. Presented below is detailed information on gross margin:
First | First | |||||||||||||||||||||||
Third | Third | Change | Nine | Nine | Change | |||||||||||||||||||
Quarter | Quarter | (Percentage | Months | Months | (Percentage | |||||||||||||||||||
F2000 | F1999 | Points) | F2000 | F1999 | Points) | |||||||||||||||||||
Total Gross Margin | 35.2 | % | 38.5 | % | (3.3 | ) | 37.4 | % | 40.2 | % | (2.8 | ) | ||||||||||||
Product Sales & Rentals Gross Margin | 25.8 | % | 31.7 | % | (5.9 | ) | 28.3 | % | 34.4 | % | (6.1 | ) | ||||||||||||
Service Gross Margin | 41.9 | % | 43.5 | % | (1.6 | ) | 44.4 | % | 43.7 | % | 0.7 |
Total gross margin for the third quarter of fiscal 2000 decreased by $28.6 million, or 20.2%, to $112.6 million from $141.2 million for the third quarter of fiscal 1999. For the third quarter, $2.8 million of this decline was attributable to Laniers divestiture of its direct sales operations in France and its medical transcription business, $3.4 million arose from the currency translation effect from the strengthening of the U.S. dollar relative to foreign currencies, primarily European, calculated on a constant rate basis, and $2.4 million was the result of the strengthening
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of the Japanese yen relative to the U.S. dollar and Euro currencies. Management believes the remainder of the decline was principally attributable to ongoing price competition for unit placements.
Total gross margin for the first nine months of fiscal 2000 decreased by $61.9 million, or 14.3%, to $370.7 million from $432.6 million for the comparable period in the prior fiscal year. For the nine-month period, $7.8 million of the decrease was attributable to the divestitures discussed above, $9.1 million was due to currency translation effects and $7.7 million reflected the impact of the strengthening of the Japanese yen versus the U.S. dollar and Euro currencies. Management believes the remainder of the decline was principally attributable to ongoing price competition and a related decline in unit population.
Management believes the decreases in gross margin on product sales and rentals for the third quarter and first nine months of fiscal 2000 were principally attributable to ongoing price competition on both analog and digital product lines and the strengthening of the Japanese yen against the U.S. dollar and Euro currencies. Management believes the decrease in gross margin on service for the third quarter was primarily related to: (i) billing system conversion problems within the European countries; (ii) lower copy volume on cost per copy billing programs; (iii) continued competitive pricing pressures; and (iv) lower overall unit populations. Management believes the margin increase on service for the first nine months of fiscal 2000, was attributable to margin improvements in Laniers facilities management business and to restructuring of the worldwide service organization completed in the second half of fiscal year 1999 offset by the third quarter impacts outlined above.
Selling and Administrative Expenses. Selling and administrative expenses for the third quarter of fiscal 2000 decreased $16.9 million, or 15.7%, to $91.0 million from $107.9 million for the third quarter of fiscal 1999. For the first nine months of fiscal 2000, selling and administrative expenses decreased $35.0 million, or 10.7%, to $291.6 million from $326.6 million for the comparable period in the prior year. Management attributed the reduction to the restructuring program instituted and completed in fiscal 1999, and lower payments under the companys bonus and profit sharing plans.
Administrative expenses for the third quarter and for the first nine months of fiscal 1999 included a management fee allocation of $6.0 million and $19.0 million, respectively, for Laniers pro rata share of Harris overhead expenses. For the first four months of fiscal 2000, this allocation was reduced to $2.3 million, to reflect the level of expenses management expects to incur as an independent public company in fiscal 2000.
Interest Expense and Other. Interest expense for the third quarter of fiscal 2000 increased $8.3 million, to $14.9 million from $6.6 million for the third quarter of fiscal 1999. Other expense for the third quarter and first nine months of fiscal 2000 totaled $6.6 million and $10.3 million, respectively, compared to $1.6 million for both comparable periods in the prior fiscal year. Differences were principally attributable to interest income and currency gains on loans to Harris entities in fiscal year 1999 which were forgiven as part of the Spin-off.
Provision for Income Taxes. Laniers effective tax rate for the third quarter and first nine months of fiscal 2000 were 38.1% and 37.9%, respectively, versus 37.6% and 35.7% for comparable periods in the prior fiscal year, respectively. This years increase in the effective tax rate was primarily attributable to foreign losses for which Lanier was unable to recognize a tax benefit.
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Net Income. Net income for the third quarter of fiscal 2000 decreased to $52,000 from $15,584,000 for the third quarter of fiscal 1999. For the first nine months of fiscal 2000, net income decreased $34.6 million, or 61.6%, to $21.6 million from $56.2 million for the comparable period in the prior year. The decline is principally attributable to declines in revenue and gross margin, as described above, and the additional interest and other expenses incurred as a result of the Spin-off.
Earnings per Share. For the third quarter of fiscal 2000, basic and diluted earnings per share amounted to 0 cents. This amount was calculated based on 83,024,596 shares, the weighted average number of shares outstanding during the quarter, after giving effect to Laniers December 1999 purchase of 4,826,600 shares pursuant to the Share Repurchase Program. The weighted average number of diluted shares included a dilutive effect of 331,455 shares related to stock option and performance share programs.
Subsequent Events
Subsequent to quarter end, Lanier announced a worldwide restructuring program intended to improve its competitive position and lower its overall cost structure. In connection with this program, Lanier announced its intent to record a $25 $30 million pre-tax provision in the fourth quarter. This restructuring charge will be used primarily for severance costs and the costs of closing facilities and Lanier expects the elimination of 400 500 jobs worldwide, including currently open positions.
After a strategic review of operations, Lanier has announced its intention to sell its voice products (dictation) business. The Robinson-Humphrey Company, LLC, an investment banking firm, has been retained to assist with the sale of the business.
Liquidity and Capital Resources
Laniers operations are funded by cash provided from operating activities and by financing provided under its $900 million Credit Facility and various other credit facilities. As of March 31, 2000, the Credit Facility and various other credit facilities had $614.9 million and $63.0 million outstanding, respectively. On April 10, 2000, Lanier paid $44 million of the $250 million term loan, reducing the total balance available under the Credit Facility to $856 million. The payment was funded by Laniers $50 million trade receivable securitization facility, of which $42.5 million was drawn on April 10, 2000. Given current conditions and pricing indicated, Lanier plans to enter into a $200 million domestic lease receivable securitization facility in the fourth quarter, the proceeds of which will be used to pay down the term loan. It is the companys intention to completely pay down the term loan before November 5, 2000. Once the term loan is repaid, Lanier will have a $650 million Credit Facility, a $50 million trade receivable securitization facility, a $200 million lease receivable securitization facility and various other credit facilities.
Analysis of Cash Flows
Net cash provided by operating activities for the first nine months of fiscal 2000 increased $9.0 million to $116.6 million from $107.6 million for the first nine months of fiscal 1999. The increase was offset by a one-time increase in accounts payable in fiscal 1999 resulting from a change in the mix of vendors as well as a change in negotiated payment terms with certain vendors, which contributed $12.0 million in the prior-year period. Further, inventory levels for the first nine months of fiscal 1999 declined by $41.0 million.
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For the first nine months of fiscal 2000, the following net changes in assets and liabilities impacted operating cash flow: (i) a decrease in trade receivables of $37.1 million primarily due to lower sales; (ii) $41.3 million used to settle intercompany accounts forgiven by Lanier in connection with the Spin-off; (iii) a decrease in payables of $35.2 million attributable to settling in the current fiscal year unusually high prior-year-end balances from trade vendors as a result of backlog of digital products during the fourth quarter of fiscal 1999; and (iv) a net use of cash of $19.2 million from net changes in income taxes primarily as a result of the Spin-off.
Capital expenditures for the first nine months of fiscal 2000 were $14.9 million for property, plant and equipment and $59.6 million for rental equipment, compared to $20.1 million and $53.5 million, respectively, for the comparable periods in the prior fiscal year. During the prior years first quarter, $168.3 million was used for the Agfa Acquisition.
Cash used in financing activities in the first nine months of fiscal 2000 was $47.0 million, compared to cash provided by financing activities of $115.4 million for the first nine months of 1999. The prior-year period reflects net borrowings used for the Agfa Acquisition. Proceeds from borrowings under credit facilities for the first nine months of fiscal 2000 totaled $737.5 million. This amount includes net borrowings of $590.0 million under the Credit Facility to fund $573.6 million of cash payments to Harris in connection with the Spin-off and $17.4 million for share repurchases pursuant to the Share Repurchase Program. The remainder of the borrowings were used to fund working capital requirements. Repayments under credit facilities in the first nine months of fiscal 2000 were $193.5 million, primarily due to refinancing short term working capital requirements.
Lanier has no material commitments other than supply agreements with vendors. Lanier will continue to make additional investments in facilities, equipment and computer equipment to support revenue requirements. Cash flow from operations, together with anticipated borrowing arrangements, is expected adequately to finance operating cash requirements and capital expenditures during this fiscal year. Lanier expects to fund future acquisitions, if any, and long-term growth primarily with cash flows from operations, borrowings under the Credit Facility and possible future issuance of equity or debt securities.
Credit Facility
Lanier has a $900 million Credit Facility with ABN AMRO Bank N.V., as administrative agent, SunTrust Bank, Atlanta, as syndication agent, and Wachovia Bank N.A., as document agent.
The Credit Facility consists of three tranches: a $200 million 364-day revolving debt facility, a $250 million 2-year term loan and a five-year revolving debt facility. Covenants, restrictions and rates are essentially the same for all three tranches of the Credit Facility.
At March 31, 2000, Lanier had total borrowings under the Credit Facility of $614.9 million. The maximum amount of $250 million was advanced under the term loan, $364.9 million was advanced under the five-year revolver and there were no borrowings under the 364-day revolver.
The Credit Facility contains financial covenants. In particular, the Credit Facility contains: (i) a covenant regarding maintenance of a leverage ratio, which is defined as total debt divided by EBITDA (earnings before
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interest, taxes, depreciation and amortization); (ii) an interest coverage covenant, which is defined as EBITDAR (earnings before interest, taxes, depreciation, amortization and rental expense) divided by interest and rental expense; and (iii) a minimum net worth covenant. The Credit Facility restricts Laniers ability to pay dividends or make other distributions and to redeem, purchase or otherwise acquire shares of its capital stock, and prohibits any such dividend, distribution, redemption, purchase or other acquisition during the existence of a default or event of default thereunder. The Credit Facility contains covenants limiting total acquisitions in any fiscal year to $150 million. This limit increases to $250 million upon repayment of the two-year term loan portion of the Credit Facility and $350 million upon achieving a senior unsecured debt rating of BBB or better by Standard & Poors Ratings Group or Baa or better by Moodys Investors Service, Inc.
Additionally, the Credit Facility contains covenants which, among other things, require production of financial statements, notice of material litigation and material governmental and environmental proceedings, compliance with laws and contractual obligations, payment of taxes, maintenance of insurance and Year 2000 compliance and limit the incurrence of additional indebtedness, mergers, consolidations and sales of assets, dividends, prepayment of other debt, investments and acquisitions, capital expenditures, sales and leaseback transactions and transactions with affiliates. Further, the Credit Facility restricts the cumulative dollar amount of share repurchases and dividends to 25% of the prior fiscal years net income. The Credit Facility also contains customary events of default, including payment defaults, inaccuracies of representations and warranties, violation of covenants and cross defaults to other indebtedness.
Indebtedness under the Credit Facility is guaranteed by Laniers domestic and foreign subsidiaries, and will be secured by a pledge of the capital stock of certain subsidiaries. Lanier may also incur additional indebtedness under the Credit Facility from time to time for general corporate purposes, including working capital, capital expenditures and future acquisitions.
Year 2000
Lanier previously recognized the material nature of the business issues surrounding computer processing of dates into and beyond the Year 2000 and began taking corrective action. Laniers efforts were focused on three basic aspects of its business operations: internal information technology (IT) systems, including sales order processing, contract management, financial systems and service management; internal non-IT systems, including office equipment and test equipment products; and material third-party relationships. Management believes Lanier has completed all of the activities within its control to ensure that Laniers systems are Year 2000 compliant, and Lanier has experienced no interruptions to normal operations due to the start of the Year 2000.
Year 2000 readiness costs were $11.5 million, approximately $500,000 of which were incurred in the current fiscal year. These costs were funded by cash from operations and generally were not incremental to existing IT budgets. Internal resources were re-deployed and timetables for implementation of replacement systems were accelerated. Lanier does not currently expect to apply any further funds to address Year 2000 issues.
As of the date of this filing, Lanier has not experienced any material disruptions of its internal computer systems or software applications, and has not experienced any problems with the computer systems or software applications of its third party vendors,
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suppliers or service providers. Management will continue to monitor these third parties to determine the impact, if any, on Laniers business and the actions to take, if any, in the event of non-compliance by any of these third parties. Based upon an assessment of compliance by third parties, there appears to be no material business risk posed by any such non-compliance. Moreover, Lanier generally believes that the vendors that supply products to Lanier for resale are responsible for the products Year 2000 functionality.
Euro Conversion
On January 1, 1999, certain member nations of the EMU adopted a common currency, the Euro. For a three-year transition period, both the Euro and individual participants currencies will remain in circulation. After January 1, 2002, the Euro will be the sole legal tender for EMU countries. The adoption of the Euro affects many financial systems and business applications as the commerce of these nations will be transacted in both the Euro and the existing national currency. Approximately 19% of Laniers revenue for the first nine months of fiscal 2000 were derived from EMU countries. For fiscal 1999, Lanier derived approximately 21% of its revenue from EMU countries.
Lanier is currently addressing Euro-related issues and its impact on information systems, currency exchange rate risk, taxation, contracts, competition, and pricing. To date, Lanier has not experienced an adverse impact or material expense related to the adoption of the Euro. All costs associated with the adoption of the Euro have been expensed as incurred. Lanier has completed the Euro-related information systems conversion for all information systems except for the European financial systems. Lanier has implemented the Euro-compliant version of the European financial systems; however, several manual billing processes remain which are on track to be fully automated by the second quarter of fiscal year 2001.
Seasonality
Laniers business is somewhat seasonal as a result of its sales incentive programs with the strongest revenue and profit occurring in the second and fourth quarters. The results of operations for any interim quarter are not necessarily indicative of results for a full year.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Impact of Foreign Exchange. Laniers international sales are generally denominated in the currency of the foreign entities, which exposes it to fluctuations in foreign currency exchange rates and to other material risks associated with international operations. Historically, earnings have not been adversely impacted by currency fluctuations. Currency risk associated with foreign investments has been mitigated by liabilities denominated in local functional currencies. In addition, Lanier utilizes exchange rate agreements, which provide limited protection against currency exchange risks. Factors that could impact the effectiveness of the hedging program include volatility of currency markets and the cost and availability of hedging instruments. A ten-percent adverse change in currency exchange rates for foreign currency derivatives held at March 31, 2000 would have an impact of approximately $3.8 million on the fair value of such instruments. This quantification of exposure to the market risk associated with foreign exchange financial instruments does not take into account the offsetting impact
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of changes in the fair value of foreign denominated assets, liabilities, and firm commitments.
Historically, gains and losses resulting from currency rate fluctuations have not had a material effect on results of operations. However, Laniers risk exposure may increase as international sales increase in volume and geographic distribution. The impact of translating the assets and liabilities of international operations into U.S. dollars is included as a component of stockholder equity.
Interest Rate Risk. Lanier uses interest rate swap agreements to hedge its exposure to the change in interest rates on floating rate debt. A ten basis point adverse change in interest rates would have an impact of approximately $150,000 on the fair value of interest rate swaps to which Lanier was a party as of March 31, 2000.
PART II
Item 5. Other Information.
LANIER WORLDWIDE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
Introduction to Unaudited Pro Forma Consolidated Statements of Income
Lanier was acquired by Harris in 1983. The Spin-off was completed on November 5, 1999. Accordingly, Lanier has an operating history as an independent company for approximately five months. The historical unaudited consolidated statements of income contained in this 10-Q reflect periods during which we did not operate as an independent company, and certain assumptions were made in preparing the statements of income. Therefore, the historical unaudited consolidated statements of income may not necessarily reflect the consolidated results of operations that would have existed had Lanier been an independent company.
The following unaudited pro forma consolidated statements of income make adjustments to the historical unaudited consolidated statements of income for the nine months ended March 31, 2000, as if the Spin-off had occurred on July 2, 1999.
The unaudited pro forma consolidated statements of income should be read in conjunction with the historical unaudited Consolidated Financial Statements of Lanier and the Notes thereto contained elsewhere in this Form 10-Q and the audited Consolidated Financial Statements contained in Laniers Registration Statement. The pro forma consolidated statements of income are presented for informational purposes only and may not necessarily reflect the results of operations or what the results of operations would have been had Lanier operated as an independent company for the periods indicated.
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LANIER WORLDWIDE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Nine Months Ended March 31, 2000
Historical | Adjustments | Pro Forma | |||||||||||
(In thousands except per share amounts) | |||||||||||||
REVENUE | |||||||||||||
Product sales and rentals | $ | 540,333 | $ | 540,333 | |||||||||
Service income | 418,274 | 418,274 | |||||||||||
Finance income | 31,925 | 31,925 | |||||||||||
$ | 990,532 | $ | 990,532 | ||||||||||
COST AND EXPENSES | |||||||||||||
Cost of product sales and rentals | 387,475 | 387,475 | |||||||||||
Cost of service | 232,381 | 232,381 | |||||||||||
Selling and administrative expenses | 291,605 | 291,605 | |||||||||||
Interest | 33,995 | 12,408 | (A) | 46,403 | |||||||||
Other Net | 10,312 | 10,312 | |||||||||||
$ | 955,768 | $ | 12,408 | $ | 968,176 | ||||||||
Income before income tax | 34,764 | (12,408 | ) | 22,356 | |||||||||
Income taxes | 13,211 | (4,715 | )(B) | 8,496 | |||||||||
NET INCOME | $ | 21,553 | $ | (7,693 | ) | $ | 13,860 | ||||||
Basic earnings per share | $ | 0.25 | $ | (0.09 | ) | $ | 0.16 | (C) | |||||
Diluted earnings per share | $ | 0.25 | $ | (0.09 | ) | $ | 0.16 | (D) | |||||
Notes to Unaudited Pro Forma Consolidated Statement of Income
The following adjustments were made to Laniers historical consolidated income statement for the nine months ended March 31, 2000: |
(A) | Adjustment to interest expense to reflect additional long-term debt of Lanier using an annual estimated interest rate of 8.3% assuming $700 million of indebtedness net of cash for the period July 3, 1999 to November 5, 1999, the Spin-off date. | |
(B) | Adjustment for income tax provision related to pretax adjustments. | |
(C) | Basic earnings per share is computed based on 85,877,353 shares, which represents the weighted average number of Lanier shares outstanding for the nine months ended March 31, 2000 giving effect to Laniers repurchase of 4.8 million shares in December 1999 pursuant to its share repurchase program. | |
(D) | Diluted earnings per share is computed based on 86,201,814 shares, which represents the weighted average number of diluted shares for the nine months ended March 31, 2000. |
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ITEM 6. Exhibits and Reports on Form 8-K
(a) | Exhibits |
Exhibit Number | Description of Exhibits | |
10.1 | Credit and Security Agreement, dated as of March 31, 2000, among Lanier Trade Funding LLC, Lanier Worldwide, Inc., Lanier Collections Limited Partnership, Blue Ridge Asset Funding Corporation and Wachovia Bank, N.A. | |
10.2 | Performance Guaranty, dated as of March 31, 2000, by Lanier Worldwide, Inc., as Guarantor. | |
27.1 | Financial Data Schedules (For SEC use only). |
(b) Reports on
Form 8-K.
None.
SIGNATURES
Pursuant to the requirements 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.
LANIER WORLDWIDE, INC. | ||
Dated: May 11, 2000 | By:/s/ James A. MacLennan | |
James A. MacLennan Executive Vice President and Chief Financial Officer (Authorized Officer and Principal Financial Officer of the Registrant) |
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