Back to GetFilings.com
- --------------------------------------------------------------------------------
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
------------------- ---------------------
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.
- --------------------------------------------------------------------------------
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
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,
3
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.
4
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:
U.S. Primary Paper
Speed Price Range Print Quality Market Media
----- ----------- ------------- ------ -----
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
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.
- --------------------------------------------------------------
* 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.
5
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.
6
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
7
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:
Category Products U.S. Price Range
-------- -------- ----------------
Office Desktop/Network
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
8
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
9
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.
10
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
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
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
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
Location Square Feet Activities Status
-------- ----------- ---------- ------
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)
- --------------------------------------------------
(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
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
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
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
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.
Years With
Name of Individual Age Position The Company
- ------------------ --- -------- -----------
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
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
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
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
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
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
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)
(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:
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
24
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
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
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
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
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
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
(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